Impact of loan covenant violations on your audit or review

Banks and other lenders are under a lot of pressure from their auditors and regulators.  That means your clients will be under more pressure from lenders.  Checking for compliance with loan covenants is getting more important.

Read a great post from Nonprofit GPS (written by Henry & Horne, LLP in Arizona) discussing covenants.  Good discussion.  Read their post and come back for my additional thoughts.

If your client violates a covenant, it gets messy real fast.  Blow a covenant and the loan is callable.  Callable makes the entire loan balance current.   Current classification probably blows up working capital and the current ratio.  As Nonprofit GPS points out, that looks really bad to donors and foundations. 

More serious consequence is whether the organization can refinance the loan if the lender were to actually call the loan.  (By the way, I have seen a lender call a loan.)   In the current environment that could be difficult.  If not obvious that the loan could be refinanced, then you are in the area of going concern and have to walk through those issues. 

So, in the current environment a single loan covenant violation (without a waiver from the lender) can quickly lead to serious going concern issues.

P.S.  Covenant issues should be addressed on reviews as well.  That is a huge risk for even a review.  Also, SSARS 19 discusses going concern in both the compilation and review sections (starting in paragraphs 2.40 and 3.47).

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