Contractor Financial Statements: Where Sureties and Bonding Agents Focus
The following article was first published on Whittlesey’s Insights page. It is reposted here with permission.
Having a strong CPA firm as a business partner can be beneficial for construction contractors.
Aside from year-end tax preparation, CPAs can assist with financial information required by sureties and bonding agents.
It is important to keep in mind that sureties and bonding agents focus on several areas of a contractor’s financial statements.
Level of Service
Depending on the size of the bond, a contractor may be required to submit CPA-reported financial statements.
Smaller bonds may require compiled or reviewed financial statements, and larger bonds may require reviewed or audited financial statements.
Interim financial statements may also be required, depending on the terms of the bond.
The interim financial statements are typically compiled or reviewed but may be required to be audited.
Additionally, personal financial statements of the owners/individual guarantors may also be required.
The notes are a required part of a contractor’s financial statements for reviewed and audited financial statements and may or may not be required for compiled financial statements.
The notes include valuable information for sureties, including the contractor’s accounting policies over revenue recognition, contract assets and liabilities, the use of estimates, and unapproved change orders, among other accounting policies.
Required disclosures also include disclosure of any contingent liabilities and events subsequent to the balance sheet date that are important for the reader of the financial statements to know, which the surety will use to assess potential risk.
Contractors can also make optional disclosures on items such as backlog, which can show a stronger position going into the following year.
The financial statements, including the required footnotes, are the responsibility of management; however, CPAs can assist in the preparation of the financial statements to ensure all required disclosures are made.
Although not a required part of a contractor’s basic financial statements, most sureties and bonding agents will want to see schedules of contracts in progress and completed contracts for the year.
This allows sureties to look at each contract to determine profitability and compare estimates to prior periods on long-term contracts.
It is important for contractors to make sure these schedules are presented correctly and review internal controls over long-term contracts, so these schedules and related accounting estimates made by management are as accurate as possible.
The typical formula for working capital is current assets minus current liabilities.
However, sureties may exclude or discount certain assets from the formula, including receivables aged over 90 days, inventories that haven’t been turned over in the past year, officer loans, and related party receivables.
Therefore, it is crucial to have strong internal controls over accounts receivables, collections, and inventory management.
CPA’s can perform a review of your internal controls and make suggestions on how to improve operations over these areas, resulting in more favorable working capital.
About the author: Gregg Lionetti is a Whittlesey assurance manager, with over a decade of public accounting experience. He focuses his practice on closely-held companies, particularly in construction, manufacturing, distribution and service industries.
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