Smart Tax Planning

The rapid rollout of the Paycheck Protection Program raises fraud risk, government watchdog finds

Key Points
  • The Small Business Administration processed $512 billion in PPP loans to small businesses as of June 12. The loans are forgivable if borrowers devote at least 60% of the proceeds to payroll.
  • Because the SBA and Treasury Department rolled the program out so quickly, little underwriting was required from lenders, according to a report from the Government Accountability Office, a federal watchdog.
  • The SBA has said it would review loans of more than $2 million – which could entail reviewing eligibility for the loan and whether the proceeds were used properly – but as of June 15 the agency hasn’t told the GAO how it would undertake this.
The administrator of the Small Business Administration, Jovita Carranza, looks on during the daily briefing on the coronavirus outbreak.
Mandel Ngan | AFP | Getty Images

The speedy rollout of the Paycheck Protection Program put cash into the hands of business owners — and it may have also paved the way for fraud.

Those were the findings from a new report by the Government Accountability Office. The congressional watchdog released a 400-page report outlining its observations of the CARES Act and how the $2 trillion bill distributed emergency funding to Americans.

The Small Business Administration had processed $512 billion in 4.6 million guaranteed PPP loans as of June 12. The proceeds were designed to cover up to eight weeks of payroll expenses, utilities, mortgage interest and rent.

Borrowers, who now have 24 weeks to use the funding, are eligible for forgiveness if they use at least 60% of the proceeds on payroll costs. They may get partial forgiveness if they fall short of that amount.

Government Accountability Office finds flaws in federal response to Covid-19
Government Accountability Office finds flaws in federal response to Covid-19

"SBA's PPP is the largest of these programs and one of the first to be implemented," the GAO said in its report on Thursday.

"However, the limited safeguards and lack of timely and complete guidance and oversight planning have increased the likelihood that borrowers may misuse or improperly receive loan proceeds," the watchdog wrote.

The GAO recommended that the SBA develop and implement plans to identify and respond to risks in the program to ensure its integrity, achieve effectiveness and address potential fraud. 

"SBA neither agreed nor disagreed, but GAO believes implementation of its recommendation is essential," the watchdog said.

The agency responded to the report late on Thursday.

"Unfortunately, the report minimizes the historic work that SBA has undertaken to implement the CARES Act and mischaracterizes SBA's engagement with GAO," wrote Carol Wilkerson, a spokeswoman for the SBA, in an email.  "The PPP has been a historic success of an unprecedented scale."

"While providing emergency economic relief to millions of small businesses nationwide,  SBA made senior officials available for interviews with GAO and produced hundreds of pages of documents to GAO," Wilkerson wrote. 

Limited lender review

A man walks his dog past a placard stating "ALL SMALL BUSINESS IS ESSENTIAL" outside Atilis Gym on May 20, 2020 in Bellmawr, New Jersey.
Mark Makela | Getty Images

Since borrowers needed money fast — the first $349 billion PPP allotment ran out in less than two weeks —the SBA streamlined the program and allowed lenders to rely on borrower certifications when they applied in order to determine the qualifying loan amount.

"To streamline the process, SBA required minimal loan underwriting from lenders — limited to actions such as confirming receipt of borrower certifications and supporting payroll documentation — leaving the program more susceptible to fraudulent applications," the GAO said.

It didn't help that the program was still developing even while underway.

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The SBA had delivered 18 interim final rules and 17 updates to its "frequently asked questions," as of June 15, the GAO found.

Those releases addressed key issues, including eligibility, figuring out payroll costs and loan forgiveness.

In the trenches, CPAs and their business owner clients grappled with ensuring that they were using the funding correctly to maximize forgiveness. Confusion and uncertainty abounded.

A need for oversight now


The SBA and Treasury Department had said that loans exceeding $2 million — roughly 30,000 loans, or 21% of the approved dollar amount as of June 12 — would face additional review.

These reviews may cover whether a borrower was eligible for the loan and the amount was calculated correctly, as well as whether the proceeds were used appropriately and the borrower is eligible for forgiveness in the amount claimed, the GAO said.

As of June 15, the SBA has not provided further details on how it would undertake this review for loans of more than $2 million, the GAO said.

Nor has the agency shared information on oversight plans for the more than 4 million loans that were disbursed under that amount, the watchdog said.

"Because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved," the GAO said.

"In addition, the lack of clear guidance has increased the likelihood that borrowers may misuse loan proceeds or be surprised they do not qualify for loan forgiveness."