If a construction contractor is a regular user of surety bonds (performance, payment and bid bonds), one universal requirement at some point in the surety relationship is CPA prepared financial statements. There are three levels of CPA prepared financial statements for construction contractors. These three levels are:
With the compilation being the most basic, (and least expensive) level and audit being the most inclusive and most expensive level. For the vast majority of construction contractors, their surety partner will require a CPA review quality financial statement.
You are in construction so having a CPA that understands construction accounting is paramount to maintaining a viable surety relationship. Furthermore, a construction oriented CPA can become an integral part of your team. First thing, verify that your CPA is construction oriented. This means the CPA has many construction clients, and understands the reporting requirements of the surety industry, and can prepare a fully scheduled financial statement using the percentage of completion method (PCM) of income reporting. Construction and engineering contracts normally use the percentage of completion method for revenue recognition. Under the U.S. generally accepted accounting principles, the PCM is the preferred method for contract accounting.
Now you that you have engaged a construction oriented CPA, the next decision is to what quality of financial statement will the CPA prepare. A good place to start will be a discussion with your surety bond agent. Assuming you have chosen a surety bond specialist as your agent, that agent will have a discussion with your surety and discuss which level of statement will be required. The most common minimum requirement is a review quality statement. The cost of this statement will be significantly more than a compilation, but significantly less than a full audit. A review is conducted to provide limited assurance that there are no material modifications that should be made to the financial statements, and that the financial statements are prepared in conformity with the financial reporting framework.
A compiled financial statement may be fine for small contractors. The compilation is basically taking the contractors internally prepared financial statements and compiling it into a GAAP compliant format. The CPA makes no assurances as to the accuracy of the numbers and as such, can not be relied on by the surety when making large surety credit decisions.
A full audit is generally required of the largest construction contractors. A financial statement audit is the examination of an entity’s financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor will verify receivables, internal controls and provide a written opinion as to the accuracy of the financial statements.
Like finding the right surety bond agent, finding the right CPA is key to maintaining a predictable and advantageous surety relationship. Performance and payment bonds are a prequalification tool. Having the right tools in t he box can make all the difference in obtaining the level of bonding necessary to compete.
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