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How to get financing without an audit


The coronavirus pandemic is tightening cash flow for many industries. As a result, you may need to draw on credit lines, alter loan payment terms, or obtain additional funding. Lenders and regulators may ask you to provide additional information of your financial position, or some form of alternate reporting to meet bank covenants and reporting obligations.

This acute need to show your financial position comes as getting an audit becomes more challenging than ever.

The COVID-19 outbreak has disrupted businesses no matter their size or industry. Businesses have closed head offices and operating branches, and told their staff to work from home. Provincial governments have mandated the closure of non-essential businesses. The federal government has restricted the movement of people.

During this business disruption, auditors and their clients often cannot access key financial records. And while the paperless audit has come a long way, its advance is not complete. Both auditor and client need remote access to go fully paperless, and some businesses don't have reliable remote access. In addition, inventory counts and other procedures related to an audit are best done in person.

To satisfy lenders, regulators, and other third parties on the state of your finances, consider these options until the current crisis passes and an audit can be completed.

What to do when an audit is not an option

  • Cash flow projection
  • Review of financial statements
  • Internally prepared financial statements or a compilation engagement, called a Notice to Reader, prepared by your accountant
  • Specified assurance or procedures on critical financial elements

Cash flow projection

A cash flow projection is future-oriented financial information prepared using assumptions that reflect your company's planned courses of action for the period covered given management's judgment as to the most probable set of economic conditions together with various scenarios referred to as hypotheses.

Given the current uncertainty around the length of business interruption, the projections may contemplate several scenarios about business closure. Management's scenarios can also incorporate a projection based on return to business as usual. This projection can incorporate historical results or anticipated revenue from new contracts that were in place before the disruption–or it can use both.

What to include in a cash flow projection

To gain the confidence of lenders and regulators, a cash flow projection needs to consider the impact of COVID-19 and how you are responding. These are the top factors to consider in your cash flow projection:

  • Potential lost or deferred revenue from the shutdown of operations
  • Working capital strategies
  • Expense management
  • Temporary layoffs
  • Government incentives (e.g., wage subsidies)
  • Income tax incentives
  • New financing initiatives
  • Deferral of principal payments on loans

A cash flow projection certainly helps a lender or regulator assess your company's financial situation. But it also helps you stress-test your business. This holds especially true during this critical time, as you consider next steps in the short-term and prepare for the long term when business returns to normal.

Review of financial statements

In contrast to an audit, a review of financial statements is based primarily on enquiries and analysis. A ‘review engagement' is generally more feasible than an audit when both the client and the auditor are working remotely. The auditor's conclusion provides limited assurance to enhance the confidence of users of a business' financial statements.

Notice to reader

If an audit of financial statements cannot be performed, you may consider compiling historical financial statements from general ledger or trial balance information. The resulting communication, or report, is referred to as a Notice to Reader and clearly outlines that BDO has not performed an audit or a review engagement of the financial statements and express no assurance on them.

Specified assurance on critical financial elements

When a full scope audit is not a current option, a business can also narrow the focus to a financial review of specific parts of the business. This reporting comes in a few main types.

Audit or review report on a single financial statement or element

Instead of getting an audit on a full set of financial statements, you may consider an audit or review report on a single financial statement or of a specific element, account or item of a financial statement.

This information can provide lenders or regulators the assurance they need on specific financial statement balances. An audit or review of elements of financial statements can cover:

  • Certain assets that the lender holds as collateral
  • Accounts receivable
  • Working capital
  • Elements of a company's income statement

Reports on the results of applying specified auditing procedures

During a sudden downturn, some lenders or regulators want to assess a company's ability to meet their short-term obligations. To do this, you might request specified audit procedures on financial information and a report on the results.

The report, which provides you no assurance, allows you to work with your auditor to define procedures you consider appropriate. In this way it differs from an audit or review of a single financial statement or element, where your auditor performs procedures they consider as necessary to express their opinion or conclusion). These specified auditing procedures can cover:

  • The company's working capital
  • Revenue contracts
  • Assets that the lender holds as collateral
  • The company's calculation of debt covenants

Reporting on compliance with agreements, specified authorities, or their provisions

A business may have requirements to comply with provisions of an agreement or provisions required by a specified authority that may be either financial or non-financial in nature. Examples of compliance requirements are:

  • An company's requirement under a lending agreement to report that it has accurately calculated the aging of its accounts receivable listing supporting its funding
  • An company's requirement to meet certain loan covenants

Discuss alternatives with your BDO advisor

Your BDO advisor can discuss a plan with you that is tailored to the needs of your business. The plan may include one or more of the options above. None of these options replaces the eventual need for an audit of your financial statements. But relevant information can be provided to help lenders, regulators or other interested third parties make critical decisions. Early and regular discussions are recommended.

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