Most surety professionals agree an experienced CPA firm plays a role in their underwriting process and affects the amount of surety credit a contractor obtains. However, as the surety underwriting process has evolved, so has the CPA’s role.
Traditionally, a surety requires at least one CPA-prepared financial statement at the fiscal year end date, and in most cases also requires an interim CPA-prepared report. Sureties also set standards for the format and content of these statements and the supporting schedules.
Today, it is important for a contractor’s CPA firm to provide more than just the usual accounting services, as these additional services can enhance a contractor’s ability to obtain increased bonding limits.
Internal Cost Controls and Accounting Systems
Sureties are more concerned than ever with a contractor’s internal cost controls and accounting systems. Having timely, meaningful cost and financial data is an important part of running a construction company in today’s business environment. Access to accurate information can identify potential problems on jobs, assist in cash flow management and improve a contractor’s bidding practices.
Many CPA firms offer guidance and assistance in researching, installing and maintaining these systems. In fact, many firms are aligned with some of the top construction accounting and job cost control software companies to assist with these products. A contractor requiring improved controls can work directly with these CPA firms to choose the system that works best. Better cost controls and accounting systems typically result in improved financial performance over time.
Accounting and Tax Law
Another area in which construction accountants can assist in maximizing bonding facilities for contractors is their knowledge of current and proposed accounting and tax law changes. Numerous changes from both the accounting industry and the Internal Revenue Service have affected bonded contractors. SAS 112, SAS 103, FAS 157, FAS 159, FIN 48 and the current proposal on FIN 5 are just a few of the more recent pronouncements that impact the construction industry.
The most common example is FIN 46R, an accounting pronouncement on the consolidation of variable interest entities. Top construction accountants became aware of this proposal before it was adopted, advised their clients of its details and worked with their clients and surety underwriters to prepare them for the results.
Today, numerous other pronouncements are causing confusion and unwarranted reactions from both contractors and sureties. By working with an up-to-date CPA firm, contractors can review the potential impact on their businesses and on any third-party user of their financials. Further, understanding changes in tax codes and reviewing how tax accounting differs from Generally Accepted Accounting Principles (GAAP) can help contractors avoid the common pitfall of sacrificing profits on a GAAP financial statement for reduction or deferral of taxes.
Financial Planning
As contractors grow and adopt new business plans, sureties request more detailed financial planning and budgeting as part of the underwriting process. They look for the compilation and use of historical data to support the projections. Many contractors now involve their accounting firms in this process.
Construction accountants have the advantage of seeing many different construction firms and comparing the positive and negative aspects of how these firms operate. Using that knowledge in the planning and budgeting process can lead to the discovery of incorrect assumptions or inaccurate data included in a budget or plan.
For example, the equipment cost allocations used in a contractor’s bidding practices may not be supported by the historical equipment allocation data. Properly allocating these costs at the time of bid should improve overall job profitability and assist in getting increased surety support.
With a contractor’s continued growth comes an expectation from the surety industry that its financial and accounting staff will improve commensurate with the company’s needs. Eventually, a growing construction firm will need a controller or chief financial officer to run the accounting department and manage the internal accounting function. When this time comes, a construction CPA firm is an excellent resource in the hiring process.
Promote Surety Relationships
A CPA firm that specializes in the construction industry can provide more than just accounting services. Recognizing that these services are not without cost, a contractor must consider both short-term and long-term benefits. With better internal financial reporting and more profitable business plans and budgets, a contractor promotes better surety relationships and long-term growth in its surety capacity, which in turn should outweigh the costs of these services.
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Friday, September 3, 2010