Diversified Industrials

Stabilizing Businesses in Crisis and Navigating the CARES Act

In response to the unprecedented economic disruption caused by the COVID-19 pandemic, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The law is the single largest economic rescue package in American history. The CARES Act relief package includes over $2 trillion in government funding – in the form of direct payments, loans, loan guarantees, and grants – for individuals, small and large businesses, health care providers, and others.

Companies applying for federal aid must understand that the acceptance of taxpayer funds is accompanied by a higher burden of corporate accountability and leadership. In addition to government oversight, companies accepting these funds should expect heightened public scrutiny from voters, elected officials, investors, employees, and customers in the coming months. Businesses feeling the strain of economic contraction need to quickly determine if they qualify for government relief, how to apply for assistance, and what the ramifications of that decision will be. If early performance is an indicator, the process to obtain aid will be messy, political, and riddled with confusion.

The CARES Act and the accompanying oversight mechanisms are largely modeled after the Troubled Asset Relief Program (TARP), which Congress passed in 2008. TARP was the $700 billion stimulus bill to combat the sudden economic downturn that occurred after the financial meltdown caused by the collapse of the housing bubble. Many beneficiaries of stimulus dollars were eventually fined as a result of investigations led by the Special Inspector General (SIG) for TARP, who initiated 380 investigations that resulted in criminal convictions or civil fines.

The CARES Act created three new oversight bodies:

  • The Special IG for Pandemic Recovery (SIGPR), within the Department of Treasury, which has been authorized for five years, and given a $25 million budget and subpoena authority.
  • The Congressional Oversight Commission charged with overseeing the implementation of the $500 billion in relief funds. The Commission will hold hearings and produce reports every 30 days regarding the effectiveness of loans, loan guarantees, and investments made through Treasury’s Exchange Stabilization Fund.
  • The Pandemic Response Accountability Committee (PRAC), which has wide purview to develop a strategic plan for comprehensive oversight across federal agencies. PRAC will have an $80 million budget and a mandate to conduct audits reviews to identify waste, fraud, and abuse, and will regularly report to the public.

In addition, the U.S. House of Representatives announced the creation of the Select Committee on the Coronavirus Crisis, which will be led by Majority Whip Jim Clyburn (D-SC). According to the announcement, the Committee will oversee “all aspects” of the federal response to the pandemic, including the $2 trillion stimulus bill, identifying inefficiencies and profiteering, and will wield the power of subpoena.

Once funds from the CARES Act are distributed and put to work by companies, it is almost certain that both Congress and agency Inspector Generals will launch investigations into many recipients of the funds, requesting sensitive business documents that could be made public if there is a suspicion that beneficiaries of government aid misappropriated the funds or used them in a way that does not support the public good. Companies should prepare now to demonstrate transparency and integrity proactively to protect themselves from later investigations.

The question to ask yourself today is simple – “Are we ready to respond when questions are asked about our use of government funds?”

Your answer will be critical in avoiding the ramifications of the investigations and oversight that will come later.

Companies seeking government relief will need to do two things now:

  • Put internal systems in place to demonstrate accountability to be able to report on why funds were needed and how they were used; and
  • Develop strategies to mitigate reputational risk, including communications on accountability and transparency.

To demonstrate accountability and transparency, internal controls are essential. Smart control design will help a company understand the specific terms, conditions, and restrictions imposed by statute and regulation. Compliance with the loan’s contingencies, for example, must be documented and a company should have a robust action plan to guide the phased-in implementation of the needed controls. A company must also establish an effective tracking system to ensure that funds are spent in accordance with the law. These controls should be tested periodically to ensure effectiveness and remediation of any deficiencies should be addressed immediately.

While necessary, it is not sufficient to simply institute smart control mechanisms to govern the appropriate use of federal aid. A recipient of federal aid must also proactively tell their story to public officials, the media, investors, and employees so that they understand how the company is being a responsible steward of taxpayer funds and remains a good investment, for both public and private investors. One useful tool is the creation of a factbook that contains the wholistic narrative of a company’s values, commitment to transparency and accountability, and value to society. Moreover, a company should continually identify examples of how the government aid is being leveraged to benefit the US economy and the American worker. There is a wide array of digital and social tools available that can help a company get their story in front of key audiences and cultivate an atmosphere of trust and appreciation.

Together, smart controls and a proactive effort to define the value and integrity of the company in the public eye should help avoid costly missteps that lead to becoming a target of federal or congressional investigation.

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