Many commercial contractors have experienced the stress caused by a surety requiring them to obtain a financial statement prepared by a certified public accountant (CPA).
CPA-prepared financial statements provide the surety with a greater level of confidence when making underwriting decisions. By requiring financial statements to be prepared or reviewed by an independent, qualified accounting professional, the surety gains the benefit of an objective assessment of the contractor’s financial reporting processes. CPA involvement helps standardize the presentation of financial information in accordance with Generally Accepted Accounting Principles (GAAP) and may provide varying levels of assurance regarding the accuracy and reliability of the contractor’s financial data, depending on the type of engagement performed.
Faced with the prospect of losing a project due to bonding requirements, contractors often choose their CPA based on the speed with which a financial statement can be produced, and not necessarily the accountant’s experience and expertise in GAAP and construction-specific accounting. However, construction accounting is highly specialized, requiring judgment in areas such as revenue recognition, work-in-progress reporting, underbillings, overbillings, and contract cost allocations. As a result, errors or misclassifications can occur during the preparation process, potentially resulting in financial statements that fail to meet the surety’s underwriting requirements and are deemed unreliable for underwriting purposes. In this case, the contractors has spent thousands of dollars and hours of their time for an unusable statement and even, possibly, a declined bond.
Halli Williams, CPA Audit Manager for CBIZ CPAs, P.C., and Kelly Kimmel, AVP, Underwriting at Old Republic Surety, address the key questions around engaging the right CPA to prepare the financial statement to support your surety program.
How do I select a CPA?
The accountant who prepares your taxes may not be your best option for obtaining a GAAP-compliant financial year-end statement. Instead:
- Request a recommendation from your current accountant.
- Ask for a recommendation from your surety agent or underwriter. Often these will be your end users of the statement, and they’ll have a good idea of what they want to see — as well as examples of accounting firms that have provided acceptable statements.
- Visit the CFMA Website’s Service Provider Directory. The CFMA (Construction Financial Management Association) is a construction-oriented accounting organization. CPAs who are active in the CFMA community are generally experienced in providing the type of statement you need.
- Consult your trusted peers. Other industry professionals can fill you in on the CPA firms they’ve used.
When interviewing a CPA, ask them to provide a high-level description of the type of construction clients they work with and how the CPA ensures it is up to date on the most recent GAAP standards.
What are the types of statements that my surety might require?
There are different levels of statements that you can request from the CPA. The level you need is dependent upon what the surety requires; check with the surety to ensure you provide the correct type. Briefly, these include the following:
- Compilation: The “lowest level” of financial statement a CPA will prepare. The CPA conducts no detailed testing or inquiries into the data provided by the contractor unless it determines the firm’s initial responses are questionable. (Generally speaking, sureties put little weight on the information included in compilation statements and treat them much like internal statements or tax returns.)
- Review: Here, CPAs make inquiries into the numbers provided by the contractor and analyze the data. During their review, they identify and discuss needed adjustments with the contractor to create a GAAP-compliant statement. Depending on the region, a reviewed statement with full disclosures and schedules will cover bonding requirements for most midsize construction companies.
- Audit: This is the highest level of assurance a CPA can provide, in which they conduct a much deeper investigation into the data provided by the construction firm.
What schedules or disclosures will my surety ask for?
A complete statement provides the surety much of the information it needs to analyze your firm’s overall financial health. Ideally, a complete statement includes the following:
- Cover Letter from the CPA
- Balance Sheet, performed on a cost-to-cost basis
- Income Statement (costs broken down directly in the statement or in an additional schedule within the notes section)
- Statement of Changes to Equity Position (detailed account of contributions and distributions of leaders)
- Cash Flow Statement
- Notes and Schedules (including a summary of significant accounting policies, breakout and age of receivables, and other notable information)
What should I expect to pay?
CPA-prepared Cost-to-Cost Financial Statements are labor intensive and require employees with expertise in the construction industry to complete. Fees can range widely, but the average beginning costs of each level of statement are $2,000+ for Compilation; $15,000+ for Review; and $30,000+ for an Audit.
When should I start the process of engaging a CPA?
Best practices include engaging a CPA as early as possible, even prior to the start of the financial cycle.
How long does it take to get a CPA-prepared statement?
A guide to estimated time frames can be found here.
For more information about CPA-prepared statements, check out these articles:
Your Underwriter Says You Need a CPA-Prepared Statement. What Now? Part I
Your Underwriter Says You Need a CPA-Prepared Statement. What Now? Part II
Your Underwriter Says You Need a CPA-Prepared Statement. What Now? Part III
