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The Coronavirus Aid, Relief, and Economic Security (CARES) Act – Good Faith Certification

SBA loan

By Rickard Jorgensen, FCII, ARM, ACIArb

The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently signed into law contains an important provision known as the Paycheck Protection Program (PPP) designed to provide relief to small businesses affected by the coronavirus pandemic. The PPP directs $349 billion towards job retention and business operating expenses designed to assist small businesses by providing a “forgivable” loan for up to 250 percent of the average monthly payroll costs with a cap of $10 million. The program will be administered by financial institutions enrolled in the U.S. Small Business Administration (SBA) 7(a) lender program.

According to the U.S. Bureau of Labor Statistics, insurance agencies and brokers employed over 393 thousand American workers as of May 2018, a significant portion of the professional workforce. Insurance agencies, including those still operating, can utilize this important legislation to keep their staff employed and agency profitable.

To qualify for the loan borrowers simply need to make a good faith certification that

  1. the loan is necessary due to uncertainty of current economic conditions makes the loan request necessary to support ongoing operations;
  2. the loan proceeds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
  3. the borrower does not have an application pending or received a loan since 2/15/2020 for a loan duplicative of the purpose and amounts applied for.

We have received a number of inquiries from CPA firms about services assisting client firms applying for a loan and acting as the “counsel of record” or assisting a client complete the form.
Without going into the minutia of the Act, I will focus upon insurance professional liability insurance coverage.

The CPAGold™ policy includes a comprehensive definition of Professional Services as follows:

Professional Services means services performed or advice given by you to others provided that the remuneration for such services or advice, or a portion thereof, inures to your benefit (unless, with your consent and knowledge, such services or advice are provided Pro Bono). Professional Services shall include your activities performed on behalf of any professional institute or society or duly constituted standards board, and activities performed involving the process of peer review.

There is no specific exclusion for these services and based upon the foregoing definition and subject to the full policy terms conditions, exclusions and limitations, acting as “authorized representative” would be considered part of the usual business consulting services provided to clients.

However, from a risk management perspective you would probably need to consider two things:

  1. Make sure that the information provided by your client (e.g., with regard to the Payroll/rent/fixed costs) are reasonable; and,
  2. Look upon this exercise like a comfort letter (or Third Party verification letter) that you provide to lenders and mortgage companies (see here). You may wish to develop a modified form of this letter for your clients; and,
  3. Make sure you have an appropriate engagement letter in place that will protect you in the event that the information provided is fair and accurate.

Finally, certain insurers use a definition of professional activities that lists the services provided.
For example, one professional liability insurer defines professional services as follows:

Professional services mean the following, as long as such services are performed by you with the knowledge and consent of the named insured:

1. Accountant and Consultant services;
2. Investment adviser services;
3. Bookkeeper, enrolled agent and tax preparer services;
4. service as a personal fiduciary;
5. service as an arbitrator, mediator or notary public;
6. service as a member of a formal accreditation, standards review or similar professional board or committee related only to the accounting profession; and
7. pro bono services in any of the above capacities.

The leading professional liability program for CPAs defines professional services as follows:

Professional Services means those services:

1. performed in the practice of public accountancy by you for others for remuneration that inures to the benefit of the Named Insured, including but not limited to consulting services and investment advisory services;
2. B. pro bono services rendered by those of you specified in paragraph A. and B. of the definition of You, if at the time such services were undertaken, a partner, officer or director of the Named Insured approved the rendering of such services without compensation;
3. performed by you for others:
4. as a personal fiduciary;
5. as a member of a formal accreditation, standards review or similar professional board or committee related only to the accounting profession; or
6. as an arbitrator, mediator or notary public.

Although these definitions may afford adequate coverage for the conventional services delivered by a CPA, they are limited to what is listed in the policy. If an activity falls beyond the scope of this list, there is no coverage. Consequently, if your firm’s professional liability policy includes this type of definition of professional services, you should contact your agent before offering any new services not addressed by the definitions.

However, Ralph Picardi, the risk management consulting to the CPAGold™ program, does have reservations about the CPAs completing the certification on behalf of a client or acting as an “authorized representative”.

The application process contains representations about future actions (e.g. hire back 90% of staff after the crisis ends) or legal conclusions (e.g. civil rights law) which cause concerns. Because representations in the form can only be made by the client, Ralph says this is fraught with problems that likely outweigh the small fee to be earned.

The AICPA just issued some guidance on this. Go here. Although the definition of “authorized representative” may include accountants, according to the AICPA, preparation of the form cannot be billed to the client. But the AICPA points out that CPAs have the option to assist clients to navigate more generally through the process BUT NOT PREPARE the form.

If you are offering the permitted advisory services to your client, a standard business consulting engagement letter may suffice. Or you may want to use something like this. If you are acting as an agent for the bank and receiving a fee you are entering another realm of risk as this impacts privity issues and questions about whether you should seek an engagement letter or agreement from the lender, which is beyond the scope of this post and require the input of counsel.  This (acting as an agent for a bank) service may also create a conflict with other services offered by the CPA.

Finally, the PPP section of the CARES Act also imposes certain parameters imposed and deadlines during the application process which the CPA should bring to the client’s attention and IN WRITING.  The CPA should also calendar those dates and follow the client’s application process carefully to avoid a claim for failure to advise or warn of the risk.

Contact Ralph on (866) 668 7475 to discuss this.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com