Nonprofits and businesses benefiting from a PPP could face surprise audits

Nonprofit and for-profit organizations that have received loans from the Paycheck Protection Program might unexpectedly find themselves faced with the “one-time audit” requirement for the first time, even though PPP loans are supposed to be exempt.

A single audit is an organization-wide audit of the financial statements and federal grants of a non-federal entity that spends $ 750,000 or more in federal funds in a single year. It is intended to provide assurance to the federal government that a non-federal entity has the right internal controls in place and generally complies with the requirements of a federal program like PPP. Whether or not the organization has previous experience of performing one-off audits, the process can be complicated and risky if not done correctly.

PPP is widely viewed as a program to help small businesses overcome the economic fallout from the COVID-19 pandemic by providing forgivable loans through the Small Business Administration and lenders. But the program has also been made available to nonprofits and other types of organizations that may never have undergone such audits in the past.

“We have a lot of people who have received a lot of federal funding,” said Lee Klumpp, a national insurance partner at BDO USA. “Billions of dollars have gone through the system and a lot of them are actually going to be audited once and have never been before.”

They may find themselves subject to such audits if they have received $ 750,000 from the federal government. “When you think about it, if you have an organization that receives more than $ 750,000 to exceed that threshold, then they need to have this compliance audit done,” Klumpp said. “A compliance audit not only examines internal controls and compliance related to requirements, but the subject of the audit is different. “

In a typical financial statement audit, auditors may review compliance with laws and regulations in terms of what is important to the financial statements, focusing primarily on the results of operations. In a single audit, they further examine the risk of material non-compliance with federal program requirements. “It could be something that’s more about compliance and not the numbers, and maybe no financial ramification, or it could,” Klumpp said. “If it’s important on the compliance side and in the financial statements, it could trigger a single audit.”

The paycheck protection program is supposed to be “out of scope” with a single audit, he noted. The SBA has publicly stated with the American Institute of CPA that PPP loans would not be subject to single audit requirements. However, the AICPA has also said that nonprofits that receive loans for economic disasters, a close cousin of PPP that was also introduced into the CARES law last year, are subject to the requirements.

“On the other hand, the SBA has informed us that loans to NFPs under the EIDL program are considered a program of direct loans made by the SBA to loan recipients,” AICPA said in a statement. . May 2020 alert. “Therefore, these loans are considered federal financial assistance and are subject to the single audit requirements of Uniform Guidance.”

In addition, the SBA said it plans to audit as a funding agency any PPP loan over $ 2 million. “The Treasury also said so in some of the remarks and information it released,” Klumpp said.

The Government Accountability Office has been monitoring PPP loan activity since the program began last year and has issued several reports on the program, using a risk-based approach to audit program costs. “It’s not subject to the one-time audit,” Klumpp said. “That said, much of the funding from the federal government for coronavirus relief went directly to state and city governments that would put the funds under audit. Various health and social services programs are audited. Safety and training programs and PPE are audited. Many federal programs will be audited. It will apply for profit and not for profit. If you receive more than $ 750,000, you will be subject to one-time checks. Many companies have not been subject to one-off audits in the past.

Some organizations may find themselves faced with a specific, less burdensome program audit that is not a full financial statement audit, but they must meet certain criteria.

“There are a bunch of rules that make it difficult for anyone to perform a program-specific audit in any situation,” Klumpp said. “You are only allowed to have one program. You cannot have multiple programs. We have a lot of health care clients who have not only received aid funds, but they also have other federal programs through the Department of Health and Human Services, or they may have programs through. through the Department of Justice or FEMA or Homeland Security, because of the things a hospital does as a first responder. They might have multiple programs that will keep them out of the single, program-specific audit option, but allow them to have a full-fledged single audit.

In addition to healthcare facilities, child care providers may also be subject to one-time audits. “Some daycares that are charitable organizations have received this money in the past for different programs that they run under the Department of Education or the HHS, but others cannot, and now they are receiving federal funding so to provide child care services for first responders, ”said Klumpp. “It’s not hard to get over $ 750,000 when we’re out as long as we’re out. The world turned upside down last March. If you get $ 120,000 per month in funding to provide child care services to first responders, you’ve already crossed the threshold.

Community groups that distribute food to the needy could also find themselves subject to one-time audits. “There is a church in my community that is linked to another community organization and the two together have worked very hard every Saturday to distribute boxes of food to families in need,” said Klumpp. “Some of this money comes from the federal government community agency. The other comes from a coalition of churches coming together to make a difference in the community. As a community organization that hadn’t really received federal funding before, it is now receiving federal funding because it was able to participate in one of the USDA’s food programs.

Volunteers wearing face masks shop at a Catholic Charities Brooklyn and Queens pop-up pantry in Brooklyn, New York.

Demetrius Freeman / Bloomberg

Nonprofits should also discuss preparing for the possibility of being audited with their accountants and ensure that they have the necessary documentation.

“The first thing organizations should do, whether they are nonprofit or for profit, if they haven’t already done so, is to have a conversation with their auditors or accountants to make sure that they understand what the requirements are. Klumpp said. “Keep and protect supporting documents. Make sure they have copies of any agreements they have signed. Make sure they have the remittances and documentation regarding payments to providers for the services they have received. They need all of this evidence to back it up. The other thing is to understand where the money comes from, what the source of these funds is, who is the funding agency. In a lot of cases, it’s really easy. Relief funds may come from HHS based on a calculation of the funding they received as a third party payer. But then you have to go out and figure out what the requirements are. “

He recommended that organizations consult a August 2020 Compliance Supplement from the White House Office of Management and Budget, where organizations can research specific federal assistance programs and learn about requirements. OMB subsequently issued a addendum in december which provides more COVID-specific information on programs such as the Provider Relief Fund, the Education Stabilization Fund, and the Coronavirus Relief Fund.

Training and education are also important for accountants to help their clients in these complex new areas. “Make sure you and your staff are properly trained,” Klumpp said. “Many CPA firms and others offer continuing education in these areas. AICPA’s Government Audit Quality Center has some great documents, and even a resource center, that people can use to get documents. There are a lot of tools there so people have to educate themselves. “

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