By: Brett Krantz & Melissa Yasinow

The COVID-19 pandemic has caused small business throughout the country to take a hard look at their books. Some have done so to apply for the Small Business Administration’s Payroll Protection Program (PPP), which has recently been replenished with another $310 billion, and others simply want to make sure that all expenses are justified and to see where costs can be cut. For many small businesses, particularly family-owned businesses with the proverbial “trusted bookkeeper,” this deep dive has turned up an unfortunate and unexpected result: financial malfeasance.

Although this discovery may feel like it could not have come at a worse time, employers should not despair. Employers still have options and can take steps to protect their rights, as well as their bottom lines.

First, employers should review their insurance policies. Many business insurance policies cover embezzlement and defalcation. These policies, however, may require you to take specific actions once you discover the misappropriation of funds, such as filing police reports and providing timely notice. Although unearthing fraud, particularly by a trusted team member, can be a shock, employers should act quickly to fully understand and recoup their losses.

Employers should also make sure that all withholdings have been paid. If wages were paid but taxes were not properly withheld, then there could be penalties for the employer, and significant tax implications for innocent employees, down the road.

Also, for those small businesses that have applied for, or are in the process of applying for, the PPP, the application should still be valid so long as it is based in good faith on previously filed tax forms, specifically Forms 940 and 941. Employers, however, should be aware of the potential PPP loan forgiveness consequences of terminating this “trusted bookkeeper.”

Under the PPP, the loan’s principal is forgivable if the employer, within an eight-week period from loan origination date, spends the loan on payroll and other permissible expenses, such as mortgage debt interest, rent and/or utilities. However, if an employer lays off employees or reduces their pay during that eight-week period, then the amount of the loan that is forgivable may be proportionately reduced.

If an employer feels that they have no choice but to terminate this defalcating employee during the eight-week post-origination period, then the PPP does have some flexibility to maximize forgiveness. In the forgiveness formula, employers must calculate the average number of full-time employees during the eight weeks after loan origination, divided by the average number of full-time employees during a specific pre‑coronavirus period. For this denominator, employers may choose between Feb. 15, 2019 and June 30, 2019, or between Jan. 1, 2020 and Feb. 29, 2020. By being able to choose which pre‑coronavirus period is more advantageous, employers can limit their exposure should they need to terminate an employee. Moreover, given that the PPP loan is for a two year term at 1% interest, any unforgiveable portion would be on more favorable terms than is available in the general market.

Finally, although it may seem cliché in a pandemic, no one should ever let a good crisis go to waste. COVID‑19 may have helped uncover the fraud, but it did not create it. During this unprecedented time, businesses can use this experience as an opportunity to improve their operations and financial systems. If you would like more information on how your business can improve its procedures and respond to employee misconduct during COVID-19, please contact Brett Krantz ( or 216.736.7238) or Melissa Yasinow ( or 216.736.7205).