Construction Accounting: Why Audited Financial Statements Matter
Sound, trustworthy financial statements are key to your construction accounting strategy. That’s why in today’s tough lending and bonding environment, the construction CPAs at Doeren Mayhew recommend every contractor at least consider investing in audited financial statements.
Financial Statements vs. Audited Financial Statements
Most contractors maintain an in-house construction accounting system to manage their financials. The documents your staff prepares through your in-house accounting system 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 construction CPA audits your financial statements, he or she will examine various accounting documents to check whether you’re following GAAP and, afterward, offer an opinion on your statements. When auditors issue an “unqualified” opinion, they agree with the methods your in-house team used to prepare your financial statements. If a “qualified” opinion is issued, it usually means auditors have 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 qualified opinion as well.)
Why Audited Financial Statements?
Who cares whether you’re in compliance with GAAP? Lenders and sureties do. Many of them 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 obtained interest rates on loans that were more than half a percentage point lower than those obtained by businesses without audited statements, according to recent studies. In addition, because of the extra steps external auditors take, 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 auditors will double-check that figure by looking at your receipts. Although audited financial statements can provide the benefits mentioned, they’re not something your construction business should leap into without foresight. In addition to requiring a financial investment, an outside construction audit will call for you and your employees to invest a substantial amount of time and energy toward its completion. You’ll need to gather and provide extensive documentation and even submit to interviews. If your lender or surety doesn’t require audited financial statements, talk about the issue with your construction CPA. There may be better options.
Providing Documentation for Auditors
If you decide to give a try to an external audit of your financial statements, you and pertinent staff members will meet with your auditors to establish a good working relationship and discuss timelines and responsibilities before the audit begins. From there, expect to provide documentation such as:
- The general ledger, up to date through the end of the period the audit covers
- Original source documentation (such as canceled checks, bank statements, vendors’ invoices)
- The schedule of accounts receivable
- The schedule of priced inventories
- The trial balance
- The schedule of fixed assets and depreciation taken on them
- The schedule of prepaid expenses
- Schedules of loans, trade payables, and other liabilities reconciled with the lenders’ and creditors’ records
- Schedules of all other accrued liabilities (for example, employees’ accrued vacation and sick time)
- Lease agreements, loan covenants and notes of all lenders
Documents specific to your construction accounting activity will also come into play. The auditor will look at financials regarding ongoing and upcoming projects and either confirm a certain percentage of the costs or test your entire job cost system. It’s important to both lenders and sureties that contractors engage auditors with expertise in the construction industry. Even if you’re not looking for financing or having bonding troubles, think about at least an occasional external audit of your financial statements. Getting one can shed a strong, objective light on your construction company’s financial health. Your construction CPA can explain more and help you make the right call. For assistance determining whether audited financial statements should be a part of your construction accounting strategy, contact a Doeren Mayhew construction CPA in Michigan, Houston or Ft. Lauderdale.