Meredith Merriweather, CPA is the CFO of Trego Bikes and Trikes (TBT), a manufacturer of Bicycles ranging from tricycles to high-end racing bikes. The company has good market penetration and has seen a very stable demand for its bikes over the last few years. TBT sells its products to retailers across the United States, who in turn sell the bikes to the end user. In late January of 2020, TBT’s management team started to worry about the potential impact that COVID-19 would have on the business. While there had not been any decrease in orders of their bikes as of yet, they were still concerned and met weekly to discuss the latest news surrounding the impact that the pandemic was having on other businesses. Like other businesses, they modified their operations to include social distancing of their employees and required all employees to use masks while at work. As a result, they expected to be able to maintain the normal production schedule for their products.

In March of 2020, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. That act included the creation of a $669 billion business loan program implemented by the Small Business Administration (SBA). The Paycheck Protection Program (PPP) was created to help small businesses that were struggling due to the pandemic. The PPP program allowed entities to apply for low-interest private loans to pay for their payroll, payroll related costs, interest, rent, and utilities. Each qualifying business could apply for a loan equal to 2.5 times their average monthly payroll costs. By keeping the number of employees and payroll dollars stable over the period the loan proceeds were used, the loan would be forgiven.

The CEO of TBT asked Meredith to research the PPP program and see if the company would qualify for a loan. Meredith thought this was a great idea thinking, a forgivable loan, who would have ever thought that possible. How great! She called her banker, got the application, and gathered all the required data together. Based on her calculation, Meredith determined that TBT would qualify for a $1.8 million loan. The only caveat to obtaining the loan was a requirement for the borrower to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”1 At that point in the year TBT sales were still strong, but all the members of the management team were very concerned that they would subsequently drop off and other debt would be hard to come by. There was a huge amount of uncertainty surrounding how the pandemic would affect them. No other guidance was provided by the SBA as to what current “economic uncertainty” actually meant. The banker told Meredith that TBT qualified from the banks read of the SBA’s loan guidance.

Meredith relayed the good news to the CEO along with the information on the certification requirement. The CEO authorized her to apply for the loan right away as the media was reporting that available PPP funds were likely to run out quickly. TBT’s application was processed by the bank quickly and the loan was funded on April 20th of 2020.

On April 23, 2020, the SBA issued additional guidance surrounding the certification of loan need. This guidance indicated that companies making this certification needed to take into account both their current business activity and liquidity. This new guidance was not very informative and upon the review of both TBT’s management team and that of their bank, neither entity was concerned that it somehow would make TBT ineligible for the loan. The SBA subsequently stated that they would be auditing all loans in excess of $2 million partially to ensure the economic need of the
loan. While not specifically stated, any loan made in an amount less than $2 million would be assumed to have met the economic need threshold.

TBT made sure to keep track of how the funds were spent and made sure to spend those specific funds for TBT payroll, payroll-related costs, interest, rent, and utilities as required by the provisions of the PPP loan. The SBA started accepting loan forgiveness applications in August. By that time, TBT was projecting that 2020 might end up being their best year ever. Demand for their products started to swell in May and continued to increase every month since. TBT ended up needing to hire more personnel to try and keep up with demand. Moreover, sale of bikes continued to increase in 2020 as many folks had lost their job and had free time to ride and exercising outdoors was one of the activities permitted during the shutdowns due to the spread of the coronavirus.

Meredith was uncertain about what to do. By all accounts TBT had met the PPP loan requirements and she firmly believed that they also qualified for loan forgiveness under the terms of the program. However, she felt a little guilty about asking to have the loan forgiven, as in hindsight TBT had not really needed the loan. She wasn’t sure that asking for loan forgiveness was the right thing to do.

Meredith spoke to the banker about her concerns, and the banker stated that the loan did not require any testing of any sort, or proof that the company’s concerns over economic uncertainty at the time the loan was funded actually resulted in a negative economic event. The banker assured her that TBT could apply for loan forgiveness and that the SBA would approve it. The forgiveness application focuses solely on how PPP funds are spent (verifying they were spent on qualifying expenses). It does not ask anything regarding the need for the loan.

Questions

1. As the CFO of TBT, Meredith was aware of her leadership obligations and the opportunity to positively influence the accounting function starting with the controller through the entry-level accounting staff. What would she do to be a transformational leader in that regard?
2. Assume Meredith decides to ask for a meeting with the CEO to discuss the matter of applying for loan forgiveness. Before doing so, she sits down and reflects on the values that should guide her actions. Discuss how Meredith might go about influencing the actions of TBT.
3. Describe the reasons and rationalizations Meredith is likely to hear from the CEO to apply for loan forgiveness and how Meredith might respond to them.
4. What levers can Meredith use to counteract the opposing viewpoint of the CEO?