A financial statement is the most important data source for the surety bond underwriter. Although there are a myriad of factors that influence the contract surety bonding underwriter’s judgment of a contractor’s qualifications (financial and otherwise), the financial statement is key. Much like the confection of a good cake, the end product being no better than the ingredients added to the mixing bowl, an “adequate” financial statement must contain values that represent the true condition of the principal that offers is.
“Veracity”, (ve·rac·i·ty) /vəˈrasədē/ noun meaning conformity to facts; accuracy. Ej., “officials expressed doubts concerning the veracity of the story”; synonyms: truthfulness, truth, accuracy, accurateness, correctness, exactness, precision, preciseness, realism, authenticity, faithfulness, fidelity. This is the key word when contemplating the worth of a financial statement. Obviously, principals that wish to maximize the level of contract surety bond capacity available to their firms seek to present their firms in the most positive light possible. The consequent conflict of interest is one of many reasons that internally prepared financial presentations are unacceptable for all but the smallest requests. So, how does a contractor “get there from here”? Retention of a certified public accountant (CPA) for the preparation of financial presentations acceptable to surety underwriters is the answer but ONLY if those statements are prepared to a standard that confirms the “veracity” of the contents. A CPA prepares financials to specific standards of service, of which there are three:
- Reviewed Statements
- Audited Statements
The difference between the levels of service are a reflection of the stringency of testing performed by the CPA to prove the veracity of the values therein. Do all performance bond requests require financial statements prepared to the strictest auditing procedures? No, however there are some limits to which most surety companies adhere regarding the amount of capacity that they will offer. A good guide is the following, however clearly understand that not ALL sureties have the same thresholds of risk tolerance.
- Contracts with a value under $250,000 – simple internally prepared statements with accompanying cash verifications (Tax returns may be requested to further evidence the figures on the internal spreadsheet.)
- Contracts with a value up to $300,000 to $400,000 – CPA-prepared compilations, cash verifications often required.
- Contracts with a value from $400,000 to approximately $1m – Reviewed financial statements required.
- Contracts with a value of $1mn and beyond – Financial statements prepared to full audit standards and generally for multiple years.
The preceding is of course subjective. Contractors with a significant history with a particular surety underwriter may be given “more rope” under less stringent standards than a principal with no established history. Also, there are surety companies that rely almost solely on the personal credit history (content and scoring) of the contracting firm’s owner(s). It’s helpful to keep these rough guidelines in mind when seeking a new surety relationship. It’s also important to be realistic about what levels of contract surety bonding will be available on informal statements. Delivery of less-than-professional statements or worse, presentations that purposefully misrepresent the principal’s financial condition will kill any interest that a surety might have in supporting the contractor’s needs.
Surety One, Inc. is a surety bond underwriter licensed in all fifty states, Puerto Rico, US Virgin Islands and Canada. Interested in discussing what we can do for you? Contact chief underwriter, Constantin Poindexter at Underwriting@SuretyOne.com or call (800) 373-2804 to discuss contract surety bonding or get a recommendation for a construction industry CPA.