A construction business often needs or wants year-end financial statements prepared by an outside CPA firm. There are a few reasons for this. In some cases, the business’s loaning bank requires these statements. Another common motivation is that there are absentee owners of the company that require this. In construction, it is common for bonding companies to require a certain level of assurance provided by an outside CPA firm.
That may leave you asking, “What constitutes a set of financial statements, and what are the different levels of assurance that an outside CPA can provide?”
Under Generally Accepted Financial Statements (GAAP), a complete set of financial statements includes the balance sheet, the income statement, the cash flow statement, and footnote disclosures. In addition, construction companies typically include supplemental schedules of jobs in progress and jobs completed during the year. The balance sheet reports the assets, liabilities, and equity of the company as of the year-end date. The income statement reports the revenues and expenses of the company over a period of time (generally for the year-end), and the cash flow statement reports the sources and uses of cash during the same time period. The footnote disclosures provide details about the company and its accounting policies, as well as detailed information about related party transactions and loan terms.
There are four levels of financial statement engagements that an outside CPA firm may provide construction companies:
- Audited financial statements: This is the most comprehensive, and most expensive, level of service that can be provided. The CPA firm considers the company’s internal controls, does detailed testing of certain transactions, verifies certain balances with outside parties, and provides a report that provides positive assurance that the financial statements are fairly presented.
- Reviewed financial statements: In a review engagement, the CPA firm performs inquiry and analytical procedures only rather than doing detailed testing. The review report states that the CPA firm is not aware of any material modifications that should be made to the financial statements.
- Compiled financial statements: In a compilation engagement, the CPA firm provides no assurance at all as to whether the financial statements are fairly presented; rather, the CPA firm is engaged only to put the company’s financial information into the format of financial statements. Unlike an audit or review, compiled financial statements may be shortened to exclude the cash flow statement and the footnote disclosures if management so elects.
- Prepared financial statements: A preparation engagement is similar to a compilation engagement, except the main difference is that the CPA firm does not even issue a report, and the CPA firm’s name does not appear at all on these prepared financial statements. Preparation engagements would be most useful in instances where there is no third party requirement for financial statements. In practice, prepared financial statements are not very common.
The level of service that your company needs will likely vary depending on who the user(s) of the financial statements are. For example, bonding companies often require a higher level of assurance, like a Review or an Audit, from construction organizations. If you’re interested in discussing which level of service is the right fit for your company, please contact us.