UPDATED – CARES Act Loan Recipients Must Take Care to Avoid Potentially Fraudulent Acts by Richard Fechter, JD, CFE, CAMS

Posted on April 16, 2020 by Richard Fechter

The CARES Act provides billions of dollars in much-needed financial assistance to millions of U.S. businesses and not-for-profit organizations struggling to survive the economic realities of the COVID-19 pandemic. To apply for and obtain government-backed loans, eligible entities must take special care to understand and abide by all the specific rules applicable to each financial-assistance program. It is also critical that they certify as fact certain representations to qualify for loans and potential forgiveness of borrowed amounts. When borrowers certify facts or make representations to lenders that are knowingly false, their actions could be construed as bank fraud or a violation of the False Claims Act.

The Paycheck Protection Program (PPP) introduced by the CARES Act allows eligible small businesses, including independent contractors, sole proprietorships, partnerships and even nonprofits, to immediately receive up to $10 million is SBA-backed loans to maintain their workforce and keep their entities operating through the crisis period. Moreover, when borrowers use those funds to pay workers and other operating expenses specifically enumerated under the PPP, they may qualify for forgiveness of up to 100 percent of the loan principal.

In the rush to get loan proceeds into the hands of those who need them most, the SBA has relaxed many of the traditional documentation requirements borrowers must meet. For example, borrowers are not required to provide financial records supporting their abilities to repay loans or other financial records that lenders generally require as part of their underwriting process.  In fact, many banks and lenders have established special PPP portals on their websites to accept and process initial loan applications based on minimal information requirements from applicants. However, all lenders do require that borrowers personally validate and certify the information they submit is accurate, including a statement verifying that a loan is necessary to maintain ongoing operations in the current uncertain economic environment.

To substantiate these good-faith representations, loan applicants should consider working with their accountants to review their company’s liquidity and reductions to revenues and net operating income that could impact its ongoing operations. Some analyses that would be helpful include: (1) conducting a cash flow analysis, (2) preparing proforma income statements demonstrating projected future revenue and profitability with and without COVID-19 impact, and (3) quantifying the actual losses and identifying the causal connection losses have to their inability to pay salaries and other allowable operating costs as a result of the current crisis.

Moreover, loan recipients who expect 100 percent of amounts borrowed to be forgiven will need to demonstrate they complied with applicable rules and used at least 60 percent of the loan proceeds for payroll costs, including certain employee benefits. Some of the ways borrowers can comply with these requirements, ensure accurate recordkeeping, and qualify for 100 percent loan forgiveness is to consult with accounting professionals to implement best practices needed to be able to provide their lender with the required support showing that the loan proceeds were used for appropriate purposes.

About the Author: Richard S. Fechter, CFE, JD, CAMS, is an associate director with Berkowitz Pollack Brant’s Forensic and Advisory Services practice, where he conducts forensic accounting investigations and provides expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or