Here is article #47 re-published, timely comments for contractors with a 12/31 fiscal year-end.
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When it comes to Bid and Performance Bonds everyone knows that financial statement numbers are important. But before surety underwriters get to them, they evaluate the method of financial presentation, its quality and credibility.
- Is a CPA needed or can a PA or Tax Preparer be used?
- Audits are expensive. Can contractors avoid the cost?
- Are there times when you can’t you use the same accounting method for tax and financial reporting?
There are a number of variables to consider. Let’s go over what to use and when.
Accounting Professionals
A CPA is a Certified Public Accountant. These people are the premiere accounting professionals. Bonding companies expect contractors to have a CPA prepared fiscal year-end (FYE) financial statement if individual bonds will be in the range of $1 million or more.
Below a CPA is a PA, Public Accountant, and then there are bookkeepers and tax preparers. Accounting professionals with lower credentials should only be used by contractors with small bond needs.
Accounting Methods
There are four accounting methods. Any can be used for tax purposes, but banks and bonding companies are more selective.
- Accrual Method – probably the most common for construction companies. May be acceptable for all bonding situations.
- Percentage of Completion – more sophisticated than Accrual. Often used by larger contractors.
- Completed Contract – used by contractors that have multi-year projects such as road and bridge builders.
- Cash Method – acceptable for tax purposes, but not for financial reporting to banks or sureties.
Financial Presentation
The presentation can vary greatly. This too, is an important element. Surety underwriters expect to make a number of financial evaluations. If the presentation is inadequate, they will not have info they need (schedules, notes and other elements).
Audit – the accountant’s cover letter states an “unqualified opinion” meaning they vouch for the accuracy of the report without reservation. This is the most expensive presentation and is required when bonds and bank credit are in high amounts ($2 – 5 million and above).
Review – This report includes some “review” and verification by the preparer, but less than an Audit. Review reports are required by bonding companies starting with projects around $1 million.
Compilation – This is merely a typing job by the accounting firm, using the numbers provided by the client. They make no verifications with outsiders and may not even double check the arithmetic. Normally this is acceptable for clients needing bonds below $1 million.
QuickBooks – Financial Statements produced from the client’s computer may be adequate for small bonding lines, or to provide a mid-year update. “Internal” financial statements are not used as primary underwriting info for sizable obligations.
Learn a little more about accounting methods: http://www.inc.com/encyclopedia/accounting-methods.html
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