CPAs bolster construction contractors' financial reporting, address risks

By Shannon Crawford posted 01-24-2017 03:58 PM

Construction-oriented certified public accountants (CPAs) have an advantage in helping contractors produce accurate, timely financial reports and address a wide range of risks, says Emilio F. Alvarez, founder and Managing Partner of NASBP Associate E.F. Alvarez & Co.

The primary issue a construction-oriented CPA can address to help contractors is accuracy, which includes the use of the proper revenue-recognition method, the appropriate representation of underbillings and overbillings, and a conservative approach to revenue recognition on claims, says Alvarez, who serves on the NASBP CPA Advisory Council.

The next issue is timeliness, because sureties view timely reporting as a sign of health and late reporting as a sign of trouble, Alvarez says. In addition, construction-oriented CPAs focus on answering as many underwriting questions as possible in the footnotes of financial statements, covering such matters as risk, backlog of work, tax exposure even on pass-through entities, lines of credit and their covenants and debt, he says.

The top risk issue that a construction-oriented CPA can help a contractor address is cash flow, with priorities also including contract terms, large insurance deductibles, cost-shifting, concentration of credit, large bid spreads and bonding of subcontractors, Alvarez says.

Overbillings and underbillings also represent major risk issues, with underbillings a particular concern on jobs in an advanced stage of completion – a scenario in which analysis helps determine whether a cost overrun is occurring, he says.

Another crucial area of risk analysis is the estimate a contractor provides when giving a price on a bid, he says.

CPAs also examine whether construction contractors are correctly handling wage determinations under the Davis-Bacon Act, which requires that contracts for federal construction projects and federally assisted construction of more than $2,000 include a proper listing of wage rates and fringe benefits for all worker classifications.

“The key to the whole [audit] process is to have a knowledgeable analytical review,” Alvarez says. Although it is “not an absolute certainty that any CPA is going to detect fraud, a clear analysis of the system of internal controls is necessary,” and an “understanding of how the players in the field operate is a big help in detecting fraud,” because knowledge of the construction industry helps a CPA interpret the results, he says.

A vetting process can help a contractor ensure that it selects a CPA with a strong understanding of construction, Alvarez says. Seeking CPAs known to sureties and surety professionals is a “big step” toward having a CPA with the appropriate expertise, he says.

“Ideally, the contractor should seek a CPA that occasionally teaches construction accounting and taxation,” he says.

Such CPAs also tend to be members of construction-related associations, while a CPA having few construction contractors as clients is “an indication the training is not there,” he says.