As the economy continues to improve we continue to see contractors that want larger performance bond lines. Once a contractor wants to bid on projects in excess of $500k, most surety companies will require CPA prepared financial statements. Some contractors may run down tot he local CPA firm and about die when they gt a quote for a n audited financial statement. Just because the surety is requesting a CPA prepared financial statement it does not mean an audit. There are basically three levels of CPA prepared financial:
Compilation – Lowest Level of Assurance to the Surety
Many surety companies will not even accept a compilation when requiring CPA prepared statements. Those that will accept a compilation will generally limit the surety credit to under $1.5mm. Single job sizes will be constrained to under $1mm. The reason being, in the compilation the CPA is not expressing any opinion about the accuracy of the numbers presented. Compilations don’t require inquiries of management or analytical procedures.
Review – Limited Assurance
Between a compilation and an audit is a CPA review quality financial presentation. this is by far the most common level of CPA prepared financial statements required by the surety company. A high quality, fully scheduled review can support the bonding of all but the largest contractors. (Assuming the underlying numbers also support the bond program)
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures applied to the financial statements, along with and various inquiries made of the company’s management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may be performed.
Audit – Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice. As such, the surety company will have a great deal of faith in an audited financial statement. Furthermore, the CPA firm could be financially liable if it produced audited financial statements that were not accurate.
An audit generally includes review of internal controls, testing of selected transactions, and communication with third parties. The CPA issues an audit report where the CPA assures that the financial statements are fairly stated and free of material misstatements.