How to Handle an Audit of Your PPP Loan Spending

If you received a Paycheck Protection Program (PPP) loan during the COVID-19 pandemic, you may be subject to an audit by the Small Business Administration (SBA) to verify that the funds were used appropriately. While this can seem daunting, being prepared can help the process go smoothly.

Who Will Be Audited?

The SBA has stated that all PPP loans over $2 million will automatically be audited. Smaller loans may also be randomly audited or receive further scrutiny if issues or discrepancies are identified. So while larger loans are more likely to get audited, it’s important for all recipients to retain thorough documentation[1].

What Will the Audit Cover?

The SBA audit will verify:

Borrower eligibility for the PPP loan
The accuracy of the loan amount received
That funds were used for permitted expenses like payroll, rent, mortgage interest, etc.
Compliance with other program rules regarding number of employees, compensation caps, etc.

Auditors will request supporting documents like payroll records, bank statements, invoices, and tax filings to validate your entries. Failing to provide documentation or properly track expenses can result in partial or full denial of loan forgiveness[2].

How to Prepare for a PPP Loan Audit

Follow these tips to prepare for a smooth audit process:

Organize documentation – Keep thorough records of all documents submitted with your original loan application and forgiveness paperwork. These should match the figures you reported.
Track spending – Carefully log eligible expenses covered by the PPP funds. At least 60% must go toward payroll.
Retain receipts – Maintain invoices, bank/payroll records, rent checks, etc. to validate your reported spending.
Perform self-audit – Review your own records with an eye for discrepancies before the SBA does.
Seek expertise – Consult legal and accounting professionals to ensure full compliance.

Having clean, well-organized records makes responding to auditor requests easier. It also reduces the chances of denial and demonstrates good faith efforts to follow program rules[3].

Responding to a PPP Loan Audit

If you receive notice of an SBA audit, stay calm and take these steps:

Notify your lender immediately and request details about the review scope.
Thoroughly gather and organize all documentation that could be relevant.
Review records yourself for potential issues or gaps that need explanation.
Respond to all requests clearly, completely, and by stated deadlines.
Ask your lender questions if you need help understanding requests.
Consider consulting legal counsel to protect your interests.

Cooperating fully shows good faith and reduces further scrutiny. If violations or ineligibility are still found, you can file an appeal within 30 days[4].

Maintaining Compliance After the Audit

Even if your PPP loan is fully forgiven, the SBA retains the right to investigate for up to six years. So continue keeping detailed records that prove compliance and appropriate spending in case of further review[5].

Audits aim to verify borrowers used emergency funds properly and avoid fraud or abuse. While daunting, being transparent and prepared can help demonstrate good intentions. Consult experts like lawyers or accountants if you have questions or need support handling an audit or appeal.

Helpful Resources:

Handling an audit can be stressful, but staying organized and transparent will demonstrate your compliance. Reach out for help from professionals like lawyers or accountants if you have any questions.