Certified financials are very detailed, reviewed, and notated reports that are one step below a full audit. They can only be done by an enrolled agent (“EA”) or a certified public accountant (“CPA”). Quite a few companies that will require them will not even accept them from anyone other than a CPA, as they are, in theory and historically, the highest level of professionalism and ethics compared to certified bookkeepers and EAs.

Certified financials will include the balance sheet, work-in-progress (“WIP”) reports, and aging reports. This is not a complete list, as certified financials cover every financial aspect of a company. However, there are a few different levels of financial reports before reaching the certified financials.

First, why would a company need to acquire certified financials? The most common reason is for bonds and insurance. However, they are most often requested by surety companies, typically in the first or second quarter of the year if a bond is renewed or when a company initially requests a bond. For renewed bonds, surety companies will require certified financials to be provided every year or every other year.

Insurance companies needing certified financials can fall under general liability. To get general liability insurance, some insurance companies request certified financials so that they know the numbers for sales, labor, and subcontractors are legitimate and not just numbers that have been written down on a piece of paper. In fact, that’s ultimately what it comes down to for any company asking for financials. They want some type of expertise standing behind the financials.

Bonding is typically done by contractors doing large commercial jobs. It’s insurance for completing the job, getting the work done correctly, and not messing up anything else on that project. Generally, bonding won’t happen on projects under $100,000 and can go into millions of dollars.

Surety companies request these to ensure that they themselves are insured on the insurance they are issuing companies so that if something goes wrong, they can get back at least a minimum amount on the project; they will want to know the profitability of the company receiving the bond, meaning they want to know how many jobs a company is doing, the profitability of those jobs, how quickly the jobs are completed, and how much is being made on the billing schedule.

Sometimes, the request received won’t even be for fully certified financials. It could just be for a basic financial report. Standard reports are the first level of financials that a surety company can request. These reports include a profit and loss statement, accounts receivable report, balance sheet, cash flows, accounts payable report, and possibly a statement of cash.

These don’t need to come from an accountant, EA, or CPA; no one needs to back them up, and companies can provide these reports themselves, especially if they don’t have a bookkeeper and are doing the books themselves. The business can send those financials, and the surety company will be perfectly happy with that. These standard reports are usually good enough for general liability insurance, especially with lower-level situations, like small company general liability policies, and for more minor bond levels – generally below $500,000.

Once companies start getting into the more than $500,000 range of bonds, especially the $5 to $10 million a year income range, surety companies will ask for at least reviewed financials. To a surety company, money in the bank is basically a one-for-one guarantee; however, anything outside of money in the bank accounts, such as fixed assets, vehicles, and other similar items, they’ll start asking for at least reviewed financial reports.

Reviewed financials aren’t quite certified financials. Anyone can do this so long as they are a third party to the business supplying the financials. Any accountant or certified bookkeeper can do the financials and write a cover letter stating that the company isn’t hiding anything, they’re not doing anything themselves, an independent third party backs this up, and the bookkeeper or accountant puts their names on it.

There are also reviewed financials with notations that a surety company can request. Typically, certified bookkeepers won’t be able to provide these as most companies won’t accept them unless an EA or CPA completes them with some exam and certification to work on those types of notated reviews.

With notated financials, all of the same reports will still be provided, but the notations will include things like what the accounts receivable is at and why, what the aging looks like, how the company gets paid, how much money the company anticipates writing off, and pointing out high liabilities and their payment schedule on the liabilities, as well as more in-depth detail on any assets.

This gives surety and insurance companies more insight into the specific cash flow within the company applying for bonds or insurance.

As mentioned previously, some surety and insurance companies may also ask for work-in-progress (“WIP”) reports . These reports reflect the different jobs that the company has bidded out, the completion percentage of those jobs, the amount billed out so far, the amount of incurred expenses, how many more expenses are anticipated, and how much is left to be billed out. More significant bonds, especially those in the $3 to $5 million range, will require these.

Certified financials are the highest level of reviewed financials. They’re similar to reviewed financials but require a sign-off by an EA or CPA. The top-of-the-line for certified financials will be CPA-reviewed and won’t be able to be submitted by a certified bookkeeper or EA.

Depending on the level of bond or quote that’s being asked for, surety companies may waive the need for CPA-certified financials if the business applying for the bond reaches out to let them know that they work with a third-party accountant that’s an EA and provides the business supplies the surety company with the EA’s certification.

Typically, certified financials will be between 30 and 50 pages long, as any anomaly found within the books will be commented on with detailed explanations. Creating certified financials can be a long process, taking anywhere from several hours to a few weeks, depending on the company’s size. Even if the CPA or EA has a standard copy-and-paste template they’ve created and followed, it’s a lot of work. They’ll still need to properly review, notate, and certify every financial report provided.

If the CPA or EA creating the certified financials is someone who’s never done or seen the business’s books, they will be asking many questions to ensure that what they’re putting their name on is entirely accurate and in order.

While most surety and insurance companies won’t request higher than certified financials, there are those rare occasions when they request an actual audit, which can only be performed by CPAs. CPAs performing these audits must be a third party and cannot be affiliated with the business, such as a friend or family member.

A full audit will generally be a write-up of at least 50 pages and can be up to 200 pages. The level of financials requested by a surety or insurance company can also depend on the business’s history. A business with a long-term relationship with a surety or bond company may be more lax than with a newer business or a business they haven’t dealt with before. T

hat’s when they’ll be stricter on what it is they’re wanting, what it is that they’re requesting, and what it is that they need.

Bonds are an important aspect of business, especially with jobs outside of regular residential work, small residential installations, commercial service, or small commercial installations. For big commercial jobs such as building out plants, warehouses, and other structures, surety companies will want a guarantee that you’ve got this much money behind you to be able to pay for any damages that may happen if they occur, which is the ultimate goal of a bond.

This is especially true of companies doing big custom home installs because of the potential for destruction, so the surety company will need a guarantee that the business isn’t just licensed and insured but can cover anything up to the bond amount.

While these types of larger jobs can be very profitable and make the business a lot of money, many other back-end paperwork and headaches occur. There’s also the cost that needs to be taken into account. Providing financials to a surety or insurance company can be a pricey engagement. Less detailed reports can start around $750, but the price can grow to over $10,000 as the requirements get more involved.

The cost is dependent on factors such as how complex the business is, how well-kept the records are, and the experience and expertise of the CPA. It’s common for companies to factor in the actual cost of the bond but forget about the fees that are incurred for the financial preparation and documentation to be able to actually pull that bond when running pricing for these jobs and choosing the jobs they’ll bid on.

Here at Waterford Business Solutions, we’re very familiar with what is required in these situations and how these financials have to work. We frequently see and receive requests for financial reports, reviewed financials, or certified financials in March, April, May, and even a little into June, as that’s when most surety and insurance companies request updated reports or perform audits.

We work with different surety agents and companies and have personal knowledge of filing and working out certified financials every year for many clients.

If you need help or don’t understand what’s happening, don’t hesitate to contact us at 864-351-0852 or info@waterfordbusiness.com so we can help you better yourself and your business and ultimately master your finances!