Providing accurate financial reporting is integral to every business, especially construction contractors. As contractors grow and their businesses evolve, they may be required to provide financial statements to various internal and external stakeholders. These users often include customers, bonding underwriters, state licensing boards, lenders and investors. The users may require a contractor to engage a certified public accountant (“CPA”) who can provide assurance over the financial reporting.
Often, the users of the financial statements will determine the type of assurance engagement required based on their reporting requirements or the amount of risk posed. Having your CPA work with the users of your financial statements to determine the type of assurance engagement needed and the timing of any reporting requirements is essential to ensure you meet their needs in a timely and cost-effective manner. In addition to current users, construction contractors should think about potential future users. Considering future users is especially important if the contractor has plans that include needing access to additional capital, increasing bonding limits, entering new states or even buying a business.
Three Levels of Financial Statement Assurance
A CPA typically provides three levels of financial statement assurance services.
1. Compiled Financial Statements
In a compilation engagement, the CPA presents a report on their letterhead without providing any assurance as to whether there are material modifications the contractor should make to their financial statements for them to be compliant under U.S. generally accepted accounting principles (“U.S. GAAP”). Within a compilation engagement, the CPA does not perform any work on the underlying financial data and disclosures. Compiled financial statements allow a construction contractor the option to present financial statements with or without footnotes. This engagement provides the least amount of assurance of the three.
2. Reviewed Financial Statements
In a review engagement, the CPA presents a report on their letterhead, providing limited assurance as to whether the construction contractor should make any material modifications to their financial statements for them to be U.S. GAAP compliant. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. Reviewed financial statements are required to present footnotes.
3. Audited Financial Statements
The objective of an audit is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes an opinion as to whether the financial statements are U.S. GAAP compliant. Reasonable assurance is a high level of assurance but is not absolute assurance. An audit involves examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Audited financial statements are required to present footnotes. Of the three engagements, this provides the highest level of assurance and is typically the most expensive type of engagement.