As the federal government distributes $659 billion in forgivable loans to small businesses as part of the Paycheck Protection Program (PPP), it’s important that forensic accountants know the risks involved with the new program, how to spot criminals who are trying to take money illegally, and how to mitigate potential fraud, according to a recent report by the AICPA’s Forensic and Litigation Services (FLS) Fraud Task Force.
David Zweighaft, CPA/CFF, chair of the FLS Fraud Task Force and managing director of RSZ Forensic Accounting & Consulting Services in New York, said it has been very frustrating to hear that “inappropriate players are kind of muscling in” to take the money from small businesses that desperately need the help.
Zweighaft and C.J. Skender, CPA, an adjunct/clinical professor at Duke University and the University of North Carolina at Chapel Hill, who was not part of the task force, shared tips on how accountants can spot and combat this type of fraud:
Know your customer
Accountants need to be diligent and know who is requesting money earmarked by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. While some lenders do not require borrowers to be an existing customer, lenders are still required to meet all regulatory know-your-customer (KYC) criteria.
The challenge is lenders are being pressured to close loans under tight deadlines, which doesn’t give forensic accountants much time to review the companies, according to the task force.
One way accountants can quickly investigate a company is to use an employer identification number (EIN) “to get a sense of whether the applicant business is one of many entities owned by a larger entity or possibly a public company,” Zweighaft said. “These don't take a great deal of research to determine.”
Those businesses could include franchise restaurants or large car dealerships, as well as portfolio companies, private-equity firms, hedge funds, and foreign companies.
“They don’t necessarily need to reach into the same till that smaller mom-and-pop companies are reaching out for,” Zweighaft said. “These are what I would consider the ineligible entities that are applying for these funds.”
Some companies try to disguise their actual ownership, usually through layers of limited liability companies (LLCs), and “that in and of itself should raise red flags,” Zweighaft said.
When deadlines are tight, some lenders and accountants have to do quick research and make judgment calls about clients they’re not familiar with.
“That's when the risk [rises] a little bit because, ‘Oh, my God, this potential client came out of the woodwork. Should we consider taking them on and working with them, or should we hold back and not do it?’” Skender said. “From the banker’s perspective, that's going to be a crucial judgment call.”
The task force recommends lenders and accountants consider how to quickly verify supporting documentation to ensure that the information does not reflect inflated payroll or employee counts.
Beware of bad actors
Accountants should be on the lookout for three types of bad actors — identity thieves, foreign-based criminals, and money launderers — according to the task force’s report.
Identity thieves in particular are known for trying to penetrate the stimulus program by posing as valid business owners in order to submit bogus applications to lenders to get money. In some cases, they can use a business owner’s name, address, Social Security number, and EIN. Using that information, they submit their applications early, usually before the legitimate business has done so.
“You apply and, lo and behold, your business’s name is already in the processing queue,” Zweighaft said. “Your legitimate application will be kicked out, and then you have a number of other problems because your identity has been compromised [and] your credit rating has been impacted.”
Depending on when this type of fraud is discovered, the victimized businesses may be required to certify how funds were used and may be subject to criminal penalties, according to the task force.
Foreign-based criminals may also submit fraudulent applications early in the process, and any funds they get will quickly be transferred abroad, making it impossible for the U.S. government to recover the stolen money. Money launderers are known to commingle funds from criminal enterprises to exploit weaknesses in the program, according to the task force.
At some point in an accountant’s career, he or she will be faced with an ethical dilemma, according to Skender, and the PPP is a prime time for that to happen.
One potential ethical dilemma could arise when a client gives an accountant information that the accountant knows to be false, Zweighaft said.
“That puts you in an ethical bind because you want to see your client get the funding in order to stay in business, but on the other hand, you don’t want to be associated with anything that is potentially illegal or is a misrepresentation,” he said.
Accountants should make sure borrowers are aware that submitting false information in a loan application is a violation of the False Claims Act and the CARES Act, and could lead to criminal charges. Clients need to know that the loans will be audited to assure compliance with the intended purpose of maintaining employment.
Skender advises his students and fellow CPAs to always do the right thing. “Whenever something doesn’t feel right, investigate it further,” he said.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page or subscribe to our email alerts for breaking PPP news.
— Kelly Hinchcliffe is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpe-cima.com.