North Carolina audit: Nonprofit did not ensure compliance with small business COVID loans

(The Center Square) – An audit of North Carolina’s COVID-19 Rapid Recovery Loan Program for businesses revealed the nonprofit tasked with administering the program did not ensure funds were spent as intended.

The performance audit by State Auditor Beth Wood centered on $83 million allocated to Golden Long-term Economic Advancement Foundation (Golden LEAF) by the North Carolina General Assembly in May 2020.

Under the North Carolina Pandemic Recovery Office (NCPRO), Golden LEAF contracted with the North Carolina Rural Economic Development Center to operate the COVID-19 Rapid Recovery Loan Program, which directed loans of up to $250,000 to 1,257 small businesses across 93 counties through September 2021.

The audit, which was released Wednesday, found Golden LEAF “did not design and implement procedures to ensure that COVID-19 Rapid Recovery Loan recipients used funds in accordance with the 2020 COVID-19 Recovery Act.”

As a result, “there was an increased risk that loan recipients could have misused the funds without the misuse being detected and corrected in a timely manner,” according to the report.

The lack of oversight also meant “Golden LEAF would be unable to recapture misused loan funds and provide the funds as loans to other small businesses” and “would be limited in its ability to know whether the loans were achieving legislatively intended results,” auditors wrote.

The 2020 COVID-19 Recovery Act required loan recipients to use funds only for employee compensation, mortgage, rent, utilities and other operating costs and expenses incurred from the pandemic. Golden LEAF required loan recipients to sign agreements that certified businesses would use the funds only as intended, would not receive other duplicative federal assistance and would repay loans if they did receive duplicate federal benefits.

“However, after the loans were distributed, Golden LEAF did not perform and does not have any plans to perform procedures to ensure loan recipients adhered to certifications made in the loan agreements,” auditors wrote.

Specifically, Golden LEAF did not require spending reports or supporting documentation, independently verify spending through supporting documents or ensure loan recipients did not receive other federal assistance.

The situation left Golden LEAF unable to comply with requirements in the Recovery Act to detect and correct misuse or to recapture misused funds, according to the report.

The report noted 99 businesses were on the loan program’s waiting list as of September.

Golden LEAF management told auditors the nonprofit failed to follow up with loan recipients because it was not contractually obligated to do so, did not have adequate staff for the work and “there was less risk of misuse because the program involved loans that required repayment.”

Golden LEAF CEO Scott Hamilton disagreed with the audit findings in a letter to Wood.

Hamilton argued the General Assembly and NCPRO agreed a provision in loan documents that required businesses to maintain a record of how the funds were spent satisfied the Recovery Act “provision establishing the method for determining compliance with the program.”

“This is consistent with ordinary practices of small businesses, which routinely maintain records regarding their expenses for tax or other purposes. The requirement also establishes a mechanism for the NC Pandemic Recovery Office and others to gain access to records to determine compliance with the Recovery Act and the CARES Act, if needed,” Hamilton wrote. “In contrast, requiring businesses to prepare and submit reports on the use of loan proceeds and to provide supporting documentation to a lender or other administering entity is very unusual in small business lending and would have been inconsistent with borrower expectations.”

The state auditor recommended Golden LEAF management monitor loan recipient spending, and the NCPRO should include a requirement to monitor in future contracts. The General Assembly also should ensure monitoring in future legislation for emergency relief funds, auditors wrote.

Hamilton wrote Golden LEAF has no plans to comply with the recommendation unless instructed otherwise by a higher authority.

“Golden LEAF disagrees with the recommendation that it monitor businesses’ use of loan proceeds in connection with this specific program,” he wrote. “Golden LEAF will forward the State Auditor’s recommendation to the NC General Assembly and the NC Pandemic Recovery Office and will conduct monitoring of businesses’ use of loan proceeds if directed to do so.”

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