Agent or advisor? It matters for CARES Act-related services
The rules surrounding the Payroll Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) are evolving. It is very clear that accountants will play a critical role in the loan application process. From a risk management standpoint, there are a few things to bear in mind.
Some CPA firms are struggling with defining their role — consultant verses agent.
Agents act on the behalf of the client as their representative. They complete and submit applications, expedite the approval process, represent clients with prospective lenders, sign loan applications and closing documents, and do the other things agents normally do.
The Small Business Administration defines agents as a “loan packager, accountant, attorney, consultant, engineer, architect, appraiser, or any other party that receives compensation from representing an Applicant for an SBA disaster loan.” That definition covers a lot of ground.
Consultants, or advisors, as most CPA firms refer to themselves, more passively assist clients in the process. They provide guidance, information and services that are not specifically related to the PPP loan application. The SBA says an applicant’s “accountant for the preparation of financial statements or tax returns required by the Applicant in the normal course of business and not related to the loan application” is not an agent.
Under the PPP rules, agents get a percentage of the loan’s amount — and it comes directly from the participating lender’s fees. Agents also must complete the SBA’s Fee Disclosure and Compensation Agreement.
Consultants (advisors) can charge their normal rates, but it cannot come from the PPP loan proceeds. Accordingly, they need to be especially vigilant with engagements when advising clients on a PPP loan application or other relief guidance, not only to avoid any perceived liability if a loan application is denied, but more importantly to faithfully discharge their professional responsibility as trusted advisors on accounting, attest and other services.
Risk mitigation sample language
In light of these distinctions, we know that some CPA firms are primarily opting to act as consultants (advisors) rather than agents.
There is risk in either choice. It may in some cases be more prudent to act as an agent, but to do so conservatively. To mitigate risk, firms may require the client to (i) verify the accuracy of the application information, (ii) submit the application, and (iii) sign the loan documents as their own representative. Otherwise, there is a risk as an agent of running afoul of the fee rules, as well as an increase in liability exposure. The result could include having to return any fees paid to the accountants as a consultant, not getting paid the fee due an agent, suffering reputational damage in both the eyes of the client and the SBA, and possibly client litigation if the loan application is denied.
Assisting clients with the PPP loan application is considered to be a nonattest service. However, auditors should be careful, when helping clients submit applications, not to act in a management capacity; otherwise independence could be impaired.
Some guidance to manage risk management so far in this dynamic environment is to do the following. Guidance is available through the AICPA and firm legal advisors, and this information should not be construed as legal advice.
It is recommended that firms develop a separate engagement letter with language that specifies:
Clients take responsibility for providing accurate and complete information, and submitting the application. Although the accountants may have access to a lot of the required data, it may not be verified or complete as of the time of the application. It is recommended that a provision along the lines of the following should be included in engagement letters:
- “Client represents that the information provided will be accurate and complete to the best of its knowledge. will not audit or otherwise verify the data submitted, although may ask for clarification if the information appears to be incorrect, inconsistent, or incomplete. Services do not include any procedures designed to discover fraud, defalcations, or other irregularities, should any exist.”
- “Client is responsible for the proper recording of transactions in the books, the safeguarding of assets, and for the accuracy of the financial, payroll, and other records. Client has final responsibility for the submission. Accordingly, Client should carefully review the application before submitting it.”
Engagement letters should also make it clear that there is no guarantee that PPP loans will be approved. Language similar to the following can be inserted into PPP loan related engagement letters:
- "The approval of any loan is at the Client financial institution’s sole discretion. Client is solely responsible for providing to potential lenders information demonstrating Client’s eligibility for a loan. does not guarantee or represent that Client’s application(s) for a loan will be approved, or that Client qualifies for any available loan forgiveness or otherwise. In no event will have any liability to Client with respect to the services provided to Client, except to the extent of gross negligence or intentional misconduct."
Finally (although it should go without saying), these are very trying and unprecedented times. Anxiety is running high. Rules are changing and new ones are being created. Uncertainty about the future is abundant. Thoroughness often gives way to speed with varying reports of funds running out and business owners in desperate need.
Nonetheless, a client’s failure to obtain a PPP loan, an SBA Economic Injury Disaster Loan (EDIL) or other COVID-19-related financial relief may impact the reputation of CPA firms — unless they practice risk management in their engagement language and services delivered. As trusted advisors, you owe it to your future firm and hard-working team to be especially vigilant with clients and your professional responsibility.