Secrets of Bonding #107: Surety vs. Fidelity, The Cage Match

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Surety. Fidelity.

They’re both bonds, they come from the same family, but can they get along?cage-match2

To some, this timeless battle is mere entertainment, a Cage Match for the ages.  We’d like to put this question to rest once and for all. Which is more important? Which is more beneficial? Do companies need both?

A surety bond is a guarantee of performance. For example, the state of New Jersey is guaranteed that a construction company will faithfully perform its building contract. 

A fidelity bond protects a business from acts of employee dishonesty. 

Which is More Important?
One could argue that fidelity is more important because EVERY company would benefit by avoiding the impact of employee theft / dishonesty.  Companies have been ruined by such crimes. Examples:

Worker nets $400,000 in refunds. After mastering the furniture company’s phone and mail-order system, Suraj S. started issuing himself refunds for purchases made by customers. Suraj would cover up his rampant refunding by altering inventory records. In less than a year, he stole almost $400,000. 

Security expert finds — and exploits — $1 million hole in company’s internal controls. It’s not an unheard of scenario: A company hires a former “professional” thief as a theft-prevention specialist because of real-life expertise in the security field. In this case, a former embezzler, Barry W., was hired at (name withheld), Inc., as a “theft-prevention specialist.” Rather than protection, Barry ended up writing himself checks on company stock — signed with a signature stamp of a co-worker — cashing the checks, then destroying the canceled checks that were returned to the company. He made false entries in the company’s books to cover his actions. Before being caught he stole a staggering $1,138,334!

For contractors that depend on public works contracts, surety bonds (bid, performance, payment) are essential.  The company cannot survive without them. However, they may survive without a fidelity bond.

Should a Company Have Both?
Let’s stay with the construction company example, but this is true for all firms that have cash flow running through their accounting department. Fidelity bond underwriters know it is often the trusted employee who commits the act of theft. It is simply because they are in the best position to steal. It is not uncommon for a theft scenario to reach astronomical levels as it drags on for years, undetected. 

cage_match

Added Bonus
Does having a fidelity bond help a company qualify for a surety bond or vice versa?

The underwriting of fidelity bonds includes an evaluation of internal controls, such as money handling procedures, monthly account reconciliations and annual audits.  The issuance of surety bonds involves the analysis of accounting procedures, financial performance, quality of management, operating history, and many other factors. Having the appropriate fidelity controls in place, and actually having a fidelity bond, are pluses for the surety underwriter.  We may conclude that surety bond clients are natural candidates for a fidelity bond, and the opposite is also true for those companies that need surety bonds in order to operate. It helps both ways.

There you have it: Surety and Fidelity can co-exist in harmony at last, each proud of the role it plays.  Bonding Pros can help you with either one or both.  We know how to keep peace in the family.

Call us now: 856-304-7348   We’re always available including evenings and weekends!

 

Services not available in all states including Idaho.

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