A Pittsburgh steel fabrication S-Corp had 4 years of bookkeeping errors. With a bank covenant review approaching, the errors would have triggered a technical default on a $2.8M loan.
01The Situation
A new CFO reviewing the books identified anomalies in the depreciation schedule, assets were being depreciated using incorrect useful lives, overstating asset values. When we ran a full diagnostic, the errors extended to inventory valuation, unamortized loan fees, and an operating lease that should have been capitalized under ASC 842.
Together, these four errors overstated equity by $284,400. At corrected figures, the debt-to-equity ratio would have been 2.7:1, above the 2.5:1 covenant threshold, triggering technical default on the $2.8M term loan.
02What We Did
We corrected each error category independently and tracked the cumulative equity impact. Depreciation schedules rebuilt using manufacturer-specified useful lives. Inventory revalued with correct FIFO. Loan fees spread over the loan term. Operating lease capitalized with right-of-use asset recorded.
With all corrections applied, the true debt-to-equity ratio was 2.42:1, within the covenant limit. We prepared a restatement memo for the bank review team. The covenant review proceeded without issue.
03Client Impact
The $284K in combined errors would have breached the bank covenant and triggered a default process on a $2.8M loan. Correcting it in 10 days was not just accounting work, it was protecting the business.
Breakdown
| Error Category | Amount | Impact | Correction Made | Status |
|---|---|---|---|---|
| Depreciation understated | $124,000 | Assets overstated | Corrected schedules filed | |
| Inventory overvalued | $86,400 | Working capital overstated | FIFO correctly applied | |
| Loan fees not amortized | $42,800 | Debt understated | Properly amortized | |
| Lease classification error | $31,200 | Off-balance sheet obligation | Capitalized per ASC 842 | |
| TOTAL | $284,400 | D/E materially affected | All corrected |
What changed
4-Year Restatement Completed in 10 Days
All error categories corrected. Depreciation, inventory, loan fees, and lease all properly stated.
Technical Bank Default Prevented
Corrected D/E ratio: 2.42:1, within 2.5:1 covenant. Bank review passed without issue.
ASC 842 Lease Capitalization Implemented
Operating lease properly classified. $31,200 obligation now on balance sheet.
Clean Books for Future Reviews
Corrected books filed. All future periods start from a clean baseline.
The $284K in combined errors would have breached the bank covenant and triggered a default process on a $2.8M loan. Correcting it in 10 days was not just accounting work, it was protecting the business.
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