The Small Business Administration (SBA) has begun auditing First Draw and Second Draw Paycheck Protection Program (PPP) loan forgiveness applications. Companies that already received forgiveness for loans over $2 million are being audited and investigated by SBA on a rolling basis. All indications are that as SBA becomes nimbler at reviewing the data, they likely will expand these audits and investigations to those with loans of $1.5M or $1M.  

The notification of audit would typically go through the borrower’s bank so be alert for communication from your bank as the timeframe to respond and provide the necessary detail is limited to 15 days.

PPP loan borrowers have the burden of proof in establishing their eligibility for loan forgiveness. Companies should be prepared to produce an organized, comprehensive response to an SBA audit. Make certain to retain all communication from your lender, maintain all documentation necessary to establish the funds were used for payroll and other eligible expenses and preserve it for at least 6 years.

There are several potential reasons why the SBA may deny full forgiveness of a PPP loan: (A) the borrower was ineligible for the loan; (B) the borrower received funds in excess of what they were eligible for; (C) the borrower used the loan proceeds for unauthorized purposes; and/or (D) the borrower is deemed wholly ineligible for loan forgiveness by the lender and the lender has issued a full denial decision to SBA.

To alleviate your concerns, it is recommended that you have a professional assist in reviewing your records and assembling the necessary documentation. Better to be prepared to deal with the auditors if they come calling.