Finding 31380 (2022-002)

2022-002: Debt Covenant Compliance Federal Program: Community Facilities Loans and Grants Cluster: Community Facilities Loans and Grants Assistance Listing Number: 10.766 Federal Agency: U.S. Department of Agriculture Pass-through Agency: N/A Award Number: N/A Award Year: 2022 Compliance Requirement: Special Tests and Provisions Questioned Costs: None Criteria: Section 4.6 of the USDA's Community Facilities Loan Agreement stipulates that the borrower must maintain a debt service coverage ratio of at least 1.25. Additionally, Section 5(j) of the Community Facilities Loan Resolution Agreement stipulates that the Hospital will not modify or amend its organizational documents, including any articles of incorporation or bylaws without the written consent of the government. Section 4.3 of the USDA's Loan Guarantee Agreement stipulates that the borrower must maintain certain financial reporting covenants, such as debt service coverage ratio of at least 1.25 days cash on hand in excess of 65 days, and obtaining an audited fiscal year-end financial statement audited by independent certified public accountants withing one hundred, ten days subsequent to year end. Condition and Context: The Hospital did not maintain a debt service coverage ratio of at least 1.25 or days cash on hand in excess of 65 days, as of September 30, 2022. Additionally, the Hospital amended its bylaws in September 2022 without written consent of the government. The Hospital?s audited financial statements as of September 30, 2022, were issued subsequent to one hundred, ten days following September 30, 2022. Effect: The Hospital has failed to comply with the debt covenants and subsequently received waivers from the financial institution and federal grantor. Cause: The Hospital did not have sufficient internal controls in place to monitor ongoing compliance with the loan agreement. Recommendation: We recommend that management implement procedures to ensure that all grant and loan agreements are reviewed on an ongoing basis and that compliance requirements are recorded and tracked to ensure ongoing compliance. View of Responsible Officials: Management agrees with this finding and has implemented controls to monitor ongoing compliance with both financial and non-financial covenants. Additionally, when management became aware of the non-compliance, it notified the financial institution and federal grantor and received waivers.