A Fraud Examiner's Recommendations for PPP Loan Verification
By Leah Wietholter, MBA, CFE, PI
Reports indicate most banks have completed the loan processing for the most recent Paycheck Protection Program and that Congress may create another round of funding. Whether this is the case or not, I am providing recommendations from a fraud examiner’s standpoint regarding the documentation to support the current PPP loans.
While the interim final rule from the Small Business Administration regarding the Paycheck Protection Program states the SBA will hold harmless lenders who rely upon representations made by the borrowers, the lenders must still perform certain underwriting duties including:
Obtaining the PPP loan application on which the borrower certifies specific representations;
Obtaining information supporting that the borrower paid salaries and taxes related to the employees for whom the loan is being requested; and
Confirming the dollar amount of the average monthly payroll costs for the prior calendar year by reviewing payroll documentation.
As a fraud examiner, the quality of the review in item number three is of great importance to ensure that even during the most unusual and desperate times, the businesses who need this help the most are not harmed by those looking to claim government funds by fraudulent pretenses. While the guidelines for the lender responsibilities are not specific and are open to various interpretations, there are simple best practices to verify the loan request amounts.
Based on the representations the borrower must make on the application and the interim final rule, the best supporting documentation to keep in your customer loan files are those items which have been previously submitted to the IRS. Figure 1 at the end of this report is a summary chart of the steps to ensure you have relied upon the best information given the circumstances and requirements.
Recommended Documentation to Request from Borrowers with Employees and Payroll
2019 Payroll Reporting Forms:
W3
941s - all four quarters
State and local tax assessment forms - all four quarters - in Oklahoma this would be the OES-3
2019 Payroll Report
02/15/2020 YTD Payroll Report
Optional: W2s
Recommended Process for Verifying Borrowers with Employees and Payroll
Verify that the amounts on lines 3 or 5 of the W3 matches the sum of 941s line 5a and the sum of wages paid on the state and local tax assessment forms.
In some cases, the borrower may provide a copy of all the W2s they issued. If this happens, the sum of line 3 or 5 of all the W2s should match the total on line 3 or 5 of the W3.
Using just one data source has a higher risk of false documentation if someone was trying to falsely claim these funds. Please note that it is not uncommon for there to be errors in the reporting, so you will want to use the amounts that do reconcile across the forms.
Verify that the “Total Gross Wages” on the 2019 Payroll Report matches the total wages on the tax filing forms listed in #1. The 2019 Payroll Report is one of the easiest places to verify the amount the borrower is requesting; however, you will want to make sure that the report you are relying upon for this information matches the tax forms filed with the IRS.
After matching the 2019 Payroll Report to the tax filings, it can then be used to verify payroll costs including health insurance premiums and employer retirement contributions. The 2019 Payroll Report is also a good place to identify the employees who were paid more than $100,000 in 2019 for the corresponding adjustment.
Recommended Documentation to Request from Sole Proprietors or those without Payroll Records
2019:
Schedule C
K-1s to identify distributions
1099s
Bank Statements
Recommended Process for Verifying Sole Proprietors or those without Payroll
I have read other experts’ recommendations for calculating and supporting loan requests for sole proprietors or businesses who do not have payroll records. From a fraud examiner’s perspective, I recommend using the tax returns for established businesses and/or transactions evidenced from bank records to support the loan amount.
I would not recommend relying upon profit and loss statements generated by the borrower. There is an increased risk of fraud in doing so, and this recommendation is in line with those provided for businesses with payroll records.
Workman Forensics is providing due diligence support services to lenders through the following options:
We provide an Excel macro to walk your staff through the verification steps and to generate supporting documentation for your files.
We will also perform the due diligence process for you:
Banking staff will securely upload documents. If the banking staff can make sure that a fairly standard set of documents are received by customers, our side will go more smoothly.
We will then review the documentation to ensure that the documentation reconciles to the loan amounts requested.
We will provide the lender with a summary chart showing whether or not the supporting documentation supports the loan requests.
For more information on these services, please contact our Forensic Accounting Manager, Megan Brown, CPA, PI, at services@workmanforensics.com or 918.574.6616 x1002.