Secrets of Bonding #156: You Know About Financial Statements

Audit, Review, Compilation: You know the difference. With bonding companies, you need certain financial statements (FSs) at different times. But there is one FS you don’t know about, and it can be very helpful!

  • Audit: This is the highest level of CPA (Certified Public Accountant) presentation. The CPA provides a cover letter stating they have checked over the numbers and believe they are accurate.
  • Review: This is the middle level.  The CPA does some checking, but less than an audit.
  • Compilation: This report has a disclaimer letter.  It says the FS is the presentation of management – meaning the CPA does not vouch for the numbers.
  • Other than CPA prepared statements, you could run into one by a PA (Public Accountant,) or a bookkeeper.
  • There are also Internally Prepared statements produced directly by the customer, such as with Quickbooks.

Then there is this Secret One you probably don’t know about.  It can be a strategic help and will not be suggested by the accountant.  It’s up to you to get it!  We call it a “Confirmed Internal FS.”  

This document is an internal FS, such as Quickbooks, but with an important upgrade.  When obtaining a Confirmed Internal Report, the president or company owner is required to sign and date the company Balance Sheet (or maybe every page of the document) and write “Confirmed.”  This is an affirmative statement that the FS has been scrutinized.  It is a document with greater credibility, because someone is taking responsibility for it. (Read Secret #5 about the role confidence plays in bonding.)

Here is a real life example of how beneficial, how strategic, the Confirmed Internal FS can be.  This week we are issuing an $8 million P&P bond for an applicant with a 12/31 fiscal year-end. Obviously, the CPA report is not available yet (less than one month after the FYE). However, before issuing the bond, we must get a read on their financial picture.  How did the year turn out?

We can’t get the CPA report, but an internal FS is available.  These documents come off the client’s computer system. If the company doesn’t have an in-house accountant (many do not), the FS has low credibility unless it is reviewed and Confirmed by a responsible party / indemnitor.

Can underwriters base a decision on a Confirmed FS? That depends on whether the surety has the flexibility to give an approval in the absence of a CPA Audit or Review (many do not.)

Fortunately, we were able to proceed based on the confidence that the business owner reviewed and Confirmed the financial statement.  He signed his name and went on record, “You can rely on these numbers.” To us, that makes a big difference!

When flexibility and aggressive underwriting are needed, give us a call. We have in-house authority for Bid and Performance Bonds up to $10 million each, and guarantee a same day response.  Find out what you missing when it comes to surety bonds.  

KIS Surety Bonds, LLC is the exclusive surety underwriting department for Great Midwest Insurance Company an “A – 8” carrier licensed in all states plus D.C.  “steve@kisbonds.com” or call 856-304-7348.

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