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OFFICE OF
INSPECTOR GENERAL
DEPARTM ENT OF THE TREASURY
WASHINGTON, D.C. 20220
`
March 31, 2021
OIG-21-025
MEMORANDUM FOR JOHN TREVOR NORRIS
ACTING ASSISTANT SECRETARY FOR MANAGEMENT
FROM:
Deborah L. Harker /s/
Assistant Inspector General for Audit
SUBJECT:
Interim Audit Update – Air Carrier and Contractor
Certifications for Payroll Support Program
On April 13, 2020, we initiated an audit of “Air Carrier Worker Support”
certifications under Title IV, Subtitle B, of the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act). 1
1 P. L. 116-136 (March 27, 2020).
Section 4113 (d) of Subtitle B assigned the
Department of the Treasury (Treasury) Office of Inspector General (OIG) with
responsibility to audit the certifications required to be submitted by non-241
carriers and contractors.2
2 Air carriers that are not required to report salaries and wages to the Department of Transportation
(DOT) under 14 CFR Part 241, “Uniform System of Accounts and Reports for Large Certificated Air
Carriers” defines “Air carrier, large certificated”.
The objective of our audit is to assess the accuracy,
completeness, and sufficiency of air carriers’ and contractors’
(applicants/recipients) “sworn” financial statements or other data used to certify
the wages, salaries, benefits, and other compensation amounts submitted and
approved by Treasury. The scope of our audit includes, but is not limited to,
certified applications submitted by non-241 passenger and air cargo carriers and
contractors, financial statements, tax returns, and other documentation provided to
Treasury during the period March 30, 2020 through April 27, 2020 under the
Payroll Support Program (PSP1) established by the CARES Act.
As part of our work to date, we reviewed (1) Title IV, Subtitle B, Air Carrier Worker
Support of the CARES Act; (2) Treasury’s Guidelines and Application Procedures
for Payroll Support to Air Carriers and Contractors under Division A, Title IV,
Subtitle B of the Coronavirus Aid, Relief and Economic Security Act; (3) Treasury’s
Q&A: Payroll Support to Air Carriers and Contractors; and (4) the Payroll Support
Program Agreement; and interviewed Treasury officials and employees responsible
for implementing PSP1 payments. We selected a non-statistical sample of 5
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passenger air carriers, 4 cargo air carriers, and 7 contractors for audit.3
3 There are 611 PSP1 recipients that include passenger and cargo air carriers (241 and non-241 air
carriers) and contractors. For passenger air carriers, our selection was made from a universe of
non-241 carriers with an invoice date of April 20, 2020. We divided this universe into five tiers
based on payment amount and selected the carrier with the highest payment amount in each tier for
our sample. For cargo air carriers and contractors, our selection was made from a universe of
non-241 cargo air carriers and contractors with an invoice date as of July 14, 2020. We divided the
cargo air carriers into four tiers based on payment amount and contractors into five tiers based on
payment amount. We selected the cargo air carrier and contractor with the highest payment amount
from each tier.
Of the 16
air carriers and contractors selected, as of the date of this interim report, we
reviewed documentation to support requested payroll support amounts for 7
recipients (5 passenger carriers, 1 cargo carrier, and 1 contractor). For each of
these seven recipients, we (1) reviewed the Payroll Support Application Form for
Air Carriers and Contractors submitted to Treasury; (2) reviewed “sworn” financial
statements and documents4
4 The audit team reviewed documentation including, but not limited to, general ledgers, payroll
registers, trial balances, human resource records, organizational charts, income statements, and
furlough records.
to support the requested payroll assistance amount on
each of their applications; and (3) interviewed as well as corresponded with
recipients’ representatives responsible for the completion and submission of
“sworn” financial statements.
Based on our audit work to date, we have identified pervasive issues with the
calculation of payroll amounts reported to Treasury by non-241 passenger air
carriers and contractors. These payroll amounts impacted the accuracy of recipient
award amounts. We notified Treasury of these matters in December 2020, and
according to management, Treasury implemented a number of measures in its
Payroll Support Program Extension5
5 Under Title IV, Subtitle A, Airline Worker Support Extension of the Consolidated Appropriations
Act, 2021 (P. L. 116-260), additional financial assistance was provided for the continuation of
payment of employee wages, salaries, and benefits to (1) passenger air carriers, in an aggregate
amount up to $15 billion; and (2) contractors, in an aggregate amount up to $1 billion.
(PSP2) application process to identify and
correct PSP1 award amounts. However, due to the systemic nature of our finding
and upcoming payments to be issued under PSP2, we are sharing our initial
findings and recommendations prior to the completion of all audit work. We believe
this interim reporting is important for your consideration prior to making additional
payments to non-241 passenger air carriers and contractors under PSP2. As we
receive confirmation from Treasury that award amounts have been corrected, we
will resume work on our audit of non-241 passenger air carriers and contractors
certifications.
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Background
Title IV, Subtitle B, of the CARES Act, Air Carrier Worker Support, requires
Treasury to provide financial assistance to passenger and cargo air carriers and
respective contractors that must exclusively be used for the continuation of
payments of employees’ wages, salaries, and benefits. Financial assistance is to be
provided to:
(1) passenger air carriers, in an aggregate amount up to
$25 billion;
(2) cargo air carriers, in the aggregate amount up to
$4 billion; and
(3) contractors, in an aggregate amount up to $3 billion.
Section 4113 of Subtitle B, Procedures for Providing Payroll Support, requires that
Treasury shall provide financial assistance to passenger air carriers that report
salaries and benefits to the Department of Transportation (DOT) (referred to as 241
carriers)6
6 14 CFR, Part 241 “Uniform System of Accounts and Reports for Large Certificated Air Carriers”
defines “Air carrier, large certificated” as an air carrier holding a certificate issued under 49 U.S.C
41102, as amended, that: (1) operates aircraft designed to have a maximum passenger capacity of
more than 18,000 pounds; or (2) conducts operations where one or both terminals of a flight stage
are outside the 50 states of the United States, the District of Columbia, the Commonwealth of
Puerto Rico and the U.S. Virgin Islands. These air carriers are required to report financial information
to DOT Sec. 407 states, “(a) The [National Transportation Safety] Board is empowered to require
annual, monthly, periodical, and special reports from any air carrier; to prescribe the manner and
form in which such reports shall be made; and to require from any air carrier specific answers to all
questions upon which the Board may deem information to be necessary. Such reports shall be under
oath whenever the Board so requires. The Board may also require any air carrier to file with it a true
copy of each or any contract, agreement, understanding, or arrangement, between such air carrier
and any other carrier or person, in relation to any traffic affected by the provisions of this Act.”
, in an amount equal to the salaries and benefits reported to DOT for the
period April 1, 2019 through September 30, 2019. For air carriers that do not
report such data to DOT (referred to as non-241 carriers) and contractors, financial
assistance is required to be in an amount that the air carrier or contractor certifies
using sworn financial statements or other appropriate data as the amount of
wages, salaries, benefits, and other compensation paid to employees during the
period of April 1, 2019 through September 30, 2019. To be eligible for payments,
air carriers and contractors must enter into agreements with the Treasury Secretary
certifying they meet certain required assurances and terms and conditions.
On March 30, 2020 Treasury posted the Guidelines and Application Procedures for
Payroll Support to Air Carriers and Contractors, which included the PSP Application
for PSP1 on its website, and as part of the application, recipients were required to
submit a summary of salaries and wages, benefits, and other compensation (Table
1) on a monthly basis for the period of April 2019 through September 2019. The
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amounts submitted on the application were considered “sworn” financial
statements. In addition, on April 20, 2020, Treasury published a sample Payroll
Support Program Agreement on its website which provided definitions and terms
and conditions for participation in PSP1. Treasury required applicants to submit
completed PSP1 applications by April 27, 2020. After Treasury reviewed and
approved an application, both parties were required to sign the PSP Agreement.
Table 1. Payroll Support Application Awardable Amounts Table
Source: Payroll Support Application Form for Air Carriers and Contractors, March 30, 2020
Treasury Office of Inspector General Finding
We identified two recurring issues in the 7 recipients where we completed our
testing. The issues found impacted the payment amounts issued to all non-241
passenger and cargo air carrier and contractor PSP1 recipients. Specifically,
employer-side payroll taxes and corporate officer compensation were included in
the awardable amounts of salaries and wages and benefits on applications. Six
recipients included either employer-side payroll taxes or corporate officer
compensation in calculating the awardable amount section of their PSP Application
and one recipient included both employer-side payroll taxes and corporate officer
compensation in its calculation of the awardable amount. According to the CARES
Act, PSP Application, and Payroll Support Program Agreement, neither
employer-side payroll taxes nor corporate officer compensation are permitted to be
included as part of the awardable amounts. The inclusion of employer-side payroll
taxes and corporate officer pay in the awardable amount calculation resulted in an
overstatement of the “requested amount” per passenger and cargo air carrier and
contractors on the PSP Application. The range of overstatement in the seven air
carriers and contractors reviewed ranges between approximately $47,000
(1.49 percent of the requested amount) and $10.4 million (6.55 percent of the
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requested amount). Therefore, each of these recipients requested and received
more financial assistance than allowed per the CARES Act.
Furthermore, because the total amount requested by all passenger air carrier and
contractor applicants under PSP1 exceeded the total available financial assistance
($25 billion and $3 billion, respectively), Treasury applied a pro rata rate to all
passenger air carrier and contractor applicants’ awardable amounts. The pro rata
rates were determined based on the amount by which the total requested financial
assistance in each group (passenger air carrier and contractor) exceeded the total
available amount. Passenger air carriers and contractors submitting unallowable
employer-side payroll taxes and corporate officer compensation as part of their
application resulted in Treasury reducing the pro rata rate below the amount it
would have been if the application amounts had been correct. This may have
resulted in incorrect payments to all non-241 passenger air carriers and
contractors.
Corporate Officer Compensation
According to the PSP Application, “The maximum potential amount of payroll
assistance that may be awarded to an applicant is equal to the compensation paid
by the applicant to its employees from April 1, 2019, through
September 30, 2019, as determined by the Treasury Department in its sole
discretion, referred to as the “awardable amount.” Compensation includes salaries,
wages, bonuses, and similar payments. In completing the table below, amounts
must reflect ONLY employees as defined in the Act and the Guidelines.” Both the
CARES Act and the PSP Application define an employee as an individual, other
than a corporate officer, who is employed by an air carrier or a contractor. The
definition states that recipients are to exclude corporate officers in the
determination of what is considered an employee. However, the two documents do
not specifically define “corporate officer,” which left the interpretation open to
each recipient. The PSP Agreement, published on April 20, 2020, subsequently
defined “corporate officer” as the recipient’s president; any vice president in charge
of a principal business unit, division, or function (such as sales, administration or
finance); any other officer who performs a policy-making function; or any other
person who performs similar policy making functions for the recipient. Executive
officers of subsidiaries or parents of the recipient may be deemed corporate officers
of the recipient if they perform such policy-making functions for the recipient.
When we inquired as to why corporate officer compensation was included on
applications, recipient representatives in our sample provided various reasons.
Some representatives noted that Treasury’s guidance was not clear on the
definition of corporate officers and they did not consider individuals with a title of
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“Vice President” as a corporate officer while others inadvertently included
corporate officer compensation in error.
Employer-side Payroll Tax
The CARES Act defines awardable amounts to be the amount of wages, salaries,
benefits, and other compensation paid to employees during the period of
April 1, 2019 through September 30, 2019. The PSP Application further clarifies
this as, “remuneration paid by the applicant to its employees for personal services
and includes salaries, wages, overtime pay, cost-of-living differentials, and other
similar compensation, as distinguished from per diem allowances or reimbursement
for expenses incurred by personnel for the benefit of the applicant.” While the
CARES Act and PSP Application do not explicitly state that the recipient should
exclude employer-side payroll taxes, it does state that only wages, salaries and
benefits are allowable. In the PSP Agreement, Treasury management subsequently
defined the terms wages, salary, and benefit as “excluding any Federal, state, or
local payroll taxes paid by the Recipient.”
In our review of documentation and in discussions with recipient representatives in
our sample, several companies informed us that employer-side payroll taxes were
included in applications because the application did not explicitly state that
employer-side payroll taxes were not allowable. In one case, a contractor
accidently rolled employer-side payroll taxes into the requested amount. This
contractor was unaware that the employer-side payroll taxes were rolled into
benefit amounts in the application until conducting a review of documents
requested under audit.
Treasury Review of PSP Applications
In the review of PSP Applications, Treasury did not perform a review of non-241 air
carriers and contractors’ awardable amount calculation specifically to ensure that
applicants excluded employer-side payroll taxes and corporate officer compensation
as defined within the agreement. Treasury distributed financial assistance to
non-241 applicants without the recalculation of the awardable amounts as certified
by applicants.
When asked why Treasury approved applications that included corporate officer
compensation and employer-side payroll taxes in awardable amounts, Treasury
officials stated they gave applicants different opportunities to understand that the
definition of employees did not include corporate officers. Additionally, Treasury’s
application review process did not include verification of each applicant’s requested
amounts against source documents that could have been submitted to Treasury by
each applicant, such as general ledgers, payroll registers, and trial balances.
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Instead, to confirm the awardable amounts submitted by applicants, Treasury
performed a comparison between the Form IRS-9417
7 Employers use IRS Form 941 to 1) Report income taxes, Social Security tax, or Medicare tax
withheld from employee’s paychecks and 2) pay the employer’s portion of Social Security or
Medicare tax. Employers also report salaries and wages on IRS Form 941.
“wages, tips, and other
compensation” and the requested amount per the PSP Application for April 1, 2019
through September 30, 2019, excluding benefits. If the test resulted in a variance
in salaries and wages that exceeded 20 percent, Treasury would perform outreach
to the applicant to question the variance. The outreach email for variances
exceeding 20 percent would notify the applicant that they "may have included a
substantial amount of employee compensation that was not included as employee
compensation on [their] IRS Form 941.” This email also notified the applicant that
Treasury would halt all payments to the applicant until the applicant either submits
a revised calculation or confirms to Treasury that they only included employees,
and no independent contractors. If the test resulted in a variance in salaries and
wages between 5 percent and 20 percent, Treasury would reach out to the
applicant to remind them that certain ineligible expenses may not be included. This
outreach email would notify the applicant that they may have “included employee
compensation that was not included on [the] IRS Form 941.” Treasury sent out
two different versions of the emails mentioned above, one in May 2020 and
another in July 2020. The May 2020 version did not mention the exclusion of
corporate officers; however, the July 2020 version notified applicants that
“calculations should exclude compensation of corporate officers.” Only 1 of the 7
air carriers and contractors that we reviewed received the July 2020 version of the
email.
We re-performed the test described by Treasury for the seven non-241 air carriers
and contractors in question, and found that 5 of the 7 fell into the 5 percent to 20
percent category. One applicant fell into the over 20 percent category and one
applicant was at an overall 4 percent variance barely under the 5 percent threshold.
Even though six of the air carriers and contractors would have required follow-up
by Treasury, the review and follow-up process implemented by Treasury did not
detect the inclusion of the two identified types of prohibited items in any of the
seven applicants.
Treasury OIG Recommendation
We have reason to believe these issues are pervasive throughout payments to
non-241 PSP1 recipients. Accordingly, we recommend that Treasury management
(1) review payments issued under PSP1 to ensure awarded amounts are allowable
per the CARES Act and Treasury guidance; and (2) remedy the incorrect amounts
awarded under PSP1.
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Management’s Response
In a written response, Treasury management acknowledged that the seven
recipients audited impermissibly included employer-side payroll taxes or corporate
officer compensation in their calculation of the “awardable amount” on their PSP1
application. Management stated that this violated the program terms and conditions
and is inconsistent with Treasury’s public guidance, resulting in an overstatement
of requested PSP1 amounts. Management noted that they have taken remedial
actions requiring all PSP1 applicants that applied for PSP2 to include a certification
whether their PSP1 amounts included employer-side payroll taxes or corporate
officer compensation. Companies that included those amounts, and are due to
receive additional funds under PSP1, PSP2, or PSP3,8
8 Under Title VII, Subtitle C, Section 7301 Air Transportation Payroll Support Program Extension of
the American Rescue Plan Act of 2021 (P. L. 117-2), an additional $15 billion in financial assistance
was provided for the continuation of payment of employee wages, salaries, and benefits to entities
that participated in PSP2.
will have those payments
reduced to offset ineligible expenses. Additionally, Treasury is requiring all aviation
contractors that received PSP1 awards to provide detailed certifications regarding
the calculations of requested amounts. Any contractor recipient that fails to
validate their PSP1 calculations will have further disbursements withheld and
Treasury will reduce further payments to offset any overpayment for
misstatements of awardable amounts. Management expressed that they are
committed to working with Treasury OIG to protect the integrity of the PSP and
other CARES Act programs. Management’s response is included, in its entirety, as
attachment 1.
OIG Comment
Management’s written response meets the intent of our recommendations with
respect to planned corrective actions to remediate potential overpayments to
passenger air carriers and contractors under PSP1 that are eligible to receive
additional funding under PSP1, PSP2 or PSP3. However, the response did not
provide planned corrective actions to address potential overpayments to cargo air
carriers that may not receive additional funds under PSP1 and are not eligible for
funding under PSP2 and PSP3. Furthermore, the response did not address the
review of passenger air carriers and contractors that received PSP1 funding and
may not receive additional funding under PSP1, PSP2, or PSP3. Accordingly, we
followed up with management officials who stated that Treasury is in the process
of identifying cases of potential overstatements in award amounts for PSP1
recipients that would not receive future payments from Treasury. This universe
includes PSP1 applicants that (1) did not apply to PSP2; (2) were not eligible for
PSP2 funding; or (3) did not have additional payments pending [under PSP1]. In all,
this includes all cargo air carriers and some passenger air carriers and contractors.
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To remedy the issue of overstatements in award amounts to these recipients,
management is setting up a portal that will include definitions of employer-side
payroll taxes and corporate officers. Recipients will be required to use the portal to
identify any errors in their original application submitted to Treasury for PSP1
funding. For any errors identified, Treasury will take recoupment action as
appropriate. If recipients fail to provide the requested information, Treasury has
remedies available under the PSP Agreement to address non-compliance. While
management did not have an expected completion date for launching the portal, we
were informed that it is nearing completion as of the date of this report.
Overall, management’s planned corrective actions, both written and communicated
in our follow-up, meets the intent of our recommendations. Management will need
to include specific actions to address each audit recommendation with expected
implementation dates, in the Joint Audit Management Enterprise System (JAMES),
Treasury’s audit recommendation tracking system.
*****
We conducted this performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objective. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions based on our
audit objective.
We assessed internal controls and compliance with laws and regulations necessary
to satisfy the audit objective. In particular, we assessed the internal control
component Control Activities and its underlying principles “Design Control
Activities” and “Implement Control Activities.” As summarized in this report, we
noted a deficiency in Treasury’s internal controls surrounding the review of
application data and calculation of award amounts. Because our review was limited
to this internal control component and underlying principles, it may not have
disclosed all internal control deficiencies that may have existed at the time of this
audit.
We appreciate the courtesies and assistance provided by your staff. Should you
have any questions regarding this memorandum, please contact me at
(202) 486-1420 or Eileen Kao, Audit Director, at (202) 607-9519.
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cc:
Treasury
Treasury Secretary
Deputy Secretary
Treasury Audit Liaison
Office of Strategic Planning and Performance Improvement
Office of the Deputy Chief Financial Officer, Risk and Control Group
Office of Management and Budget
OIG Budget Examiner
United States Senate
Committee on Homeland Security and Governmental Affairs
Committee on Finance
Committee on Appropriations
Committee on the Budget
United States House of Representatives
Committee on Oversight and Reform
Committee on Financial Services
OIG 21-025
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Attachment 1: Management Response
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