When trying to grow their companies, business owners often find themselves having to convince others of the viability of their plans. As a contractor, you’re no different. Whether you need financing from your bank, greater bonding capacity from your surety or just the strategic support of your managers, you’ve got to make your case. Something that can really help: audited financial statements.
Most contractors maintain an in-house accounting system to manage their financials. The documents your staff prepares are called “internally prepared financial statements.”
In many cases, internal financials are perfectly functional for the day-to-day operational needs of a construction company. But they often don’t follow every reporting standard prescribed under Generally Accepted Accounting Principles (GAAP).
When an external CPA audits your financial statements, he or she will examine and test various accounting documents to verify whether you’re following GAAP and, afterward, offer an opinion on your statements. If the auditor issues an “unmodified” opinion, he or she agrees with the methods your in-house team used to prepare the statements.
If a “modified” opinion is issued, it usually means the auditor has identified one or more GAAP reporting methods that your construction company hasn’t followed. This doesn’t mean your financial statements are inaccurate; it just signifies that you didn’t prepare them according to GAAP. (There may be other reasons for a modified opinion, as well.)
More money, fewer mistakes
Many lenders and sureties require contractors to provide audited financial statements before they’ll approve loans or bonding. Some local and state governments also provide increased work and project award capacity to construction companies with audited statements.
You may even save money. Businesses with audited statements may obtain lower interest rates on loans. And, because of the extra steps an external auditor takes, audited financial statements are more likely to be free of reporting mistakes, such as data entry errors, than are internally prepared statements. For example, if your balance sheet shows that you bought a crane for $100,000, your auditor will double-check that figure by looking at your receipts/invoices.
A variety of documentation
If you decide to try an external audit of your financial statements, you and pertinent staff members will meet with your auditor to establish a good working relationship and discuss timelines and responsibilities before the audit begins.
From there, expect to provide documentation such as a detail general ledger, up to date through the end of the period the audit covers, and the original source documentation (such as canceled checks, bank statements, vendors’ invoices) for areas being tested. You may also need to provide lease agreements, loan covenants and notes of all lenders. In addition, your CPA may ask for a variety of schedules (and supporting documents), including a schedule of:
• Accounts receivable,
• Priced inventories,
• Fixed assets and depreciation taken on them,
• Prepaid expenses,
• Loans, trade payables, and other liabilities reconciled with the lenders’ and creditors’ records, and
• Other accrued liabilities (for example, employees’ accrued vacation and sick time).
Construction-specific documents will also come into play. The auditor will look at ongoing and upcoming projects and either confirm a certain percentage of the costs or test your entire job cost system. He or she will also test estimates for accuracy and completeness. It’s important to both lenders and sureties that contractors engage auditors with expertise in the construction industry.
As you can see from the wealth of information being collected, audited financial statements are powerful stuff. And, to reiterate, it’s particularly important to have a reputable CPA firm with experience in the construction industry perform your audit.
For more information, please contact Jonathan Mangels, CPA, Partner.