Addressing Surety Concerns About Your Financial Statements

By Steve Carter, CPA Principal

What is happening when a surety questions the accuracy or timely delivery of your financial statements or criticizes the content and consistent presentation? Why all the fuss?

Like many important things in life, a critical need can present itself when there is little or no time to adequately meet that need. You suddenly find yourself in a position to act and produce on a task that you knew was important, but thought you could get by using shortcuts.

Having quality financial statements at the ready can be key to avoiding this situation for your contracting business.

Over my many years of working with sureties on behalf of existing and potential contactor clients, I’ve gained the ability to tell you what impact your financial statements have on the surety. And if they have an impact upon the surety, I can guarantee you that those statements have an impact upon your business, your reputation, and your profitability.

Aspects of your accounting system and financial statement preparation and presentation that sureties closely scrutinize: If your business can meet or exceed the expectations of your surety, you are well on your way to building and maintaining a company that is highly regarded and profitable.

    1. Internally prepared financial statements
      When you are seeking a bond, often times the surety will first want to see your most recent internally prepared financials. Here is what they are looking for:

      • Do you have them? – it is not going to be a good answer, nor a very good start, if you tell the surety you need time to prepare them. You may get some time to do so, but probably not very much. Make sure you have the systems in place that can routinely and accurately prepare current, timely, and relevant financial statements.
      • Consistency – do they look like your year-end statements? The form, style, and content need to be somewhat consistent with your year-end statements. Your surety will compare these statements with your year-end statements right off the bat.
      • Job cost schedules – do you have up-to-date construction in progress schedule affecting all open jobs that can support the amounts in your internal financial statements? If you do, and they are at the ready, you have scored big points already.
      •  More on job cost schedules – they need to be prepared under the percentage of completion method. Review them closely before you hand them out. Are they accurately prepared? Is the math correct? What are your margins looking like? Are the jobs sizes and estimated profitability consistent with your history? Are your jobs getting larger or smaller? Are you significantly under or over billed? Be prepared to support what you are representing within these schedules. Consider writing a narrative to explain the more significant jobs shown, discussing key variables, specific job attributes, and assumptions and key estimates used.


  1. Year-end CPA prepared financial statements
    If you routinely need bonding throughout the year, having a complete set of annual financial statements in the hands of your insurance agent and surety is a must. This could be the single most important document you need to consistently provide. These statements drive the entire underwriting and risk analysis process. These are the factors a surety assesses when evaluating your financial statements:

    • Your CPA – does the surety recognize the name? Is the CPA or CPA firm known as a construction industry specialist? Sureties will check out your CPA. I have received many calls from sureties, asking me if I know this CPA firm or a particular CPA. The questions then go on from there: “What is this Firm’s reputation?”, “How many contracting clients do they have, and what types?”, “Have you ever seen their work?”  If you use a CPA not known in the industry, your financial statements have immediately taken a credibility hit.
    • Report date and timeliness – when did the CPA sign and issue your report? Is the date within 60-90 days of your year-end? Longer? You do not want your statements to be completed too long after your year-end. The longer they are delayed, the more the surety thinks there are problems, and/or that your Company just cannot produce the needed information in a timely manner. I have also had the opposite reaction from a surety who asked my opinion on a set of statements where the CPA dated the review report January 8th for a December 31st year end. Is the report date within 15 days of your year-end? Eight days to close the books, and issue a full set of financials? The surety still shakes their head in serious skepticism as to how accurate those statements could really be when not enough time was allowed to assess whether or not all costs incurred on jobs in progress have been recognized. What we have found is that a report date that is within a two to four month time frame from your year end is very acceptable.
    • Compiled or reviewed with complete footnotes – most sureties require reviewed financial statements, which contain a statement of cash flows and footnote disclosures. This is what I refer to as a complete set of statements. Key and critical elements are schedules of completed jobs and jobs in process included as supplemental information. The statements should be prepared under U.S. generally accepted accounting principles.
    • Footnotes –Sureties read the footnotes. Again, I can tell you many stories about sureties who have called me up, read a footnote or three, and asked me what I thought. Often times I am being asked the question because the footnote is talking about something that is frankly off the wall, or a treatment for some transaction or accounting method that just doesn’t make sense, and the surety then says – “I have never seen this before! What are they doing, and what are they up to?” This is not good, as again the credibility of your financial statements is being questioned.

Your financial statements are key to your relationship with your surety, they have a direct impact on how rapidly and at what cost you can meet your bonding requirements. Our philosophy here at Abbott, Stringham & Lynch is very simple: “high quality financial reporting which is accurate, complete and timely is not a cost, it is an investment.”