When Does a Contractor Need Reviewed Financial Statements?

A construction contractor may need reviewed financial statements when a surety, bank, lender, owner, investor, or other stakeholder wants financial statements accompanied by limited assurance from an independent CPA.

A review provides more assurance than a compilation, but less than an audit.

The right level of service depends on:

who will use the financial statements;
what they require;
the size and complexity of the contractor;
the contractor's bonding and banking relationships; and
the level of assurance needed.

The most important first step is simple:

Ask the financial statement user exactly what they require before engaging the CPA.

What Is a Financial Statement Review?

A financial statement review is an engagement performed by an independent CPA that provides limited assurance on the financial statements.

The CPA primarily performs procedures such as:

inquiries;
analytical procedures;
investigation of unusual relationships or fluctuations; and
other procedures considered necessary based on the results of the review.

The CPA then issues a review report.

A review does not provide the same level of assurance as an audit.

What Does Limited Assurance Mean?

In a review engagement, the CPA provides limited assurance that the CPA is not aware of material modifications that should be made to the financial statements for them to conform with the applicable financial reporting framework.

That is different from an audit, where the CPA obtains reasonable assurance and expresses an opinion on the financial statements.

A review is not simply a smaller audit.

It is a different level of service with a different objective.

Why Might a Surety Require a Review?

Sureties may request reviewed financial statements as a contractor's bonding needs increase.

A review can provide the surety with additional confidence in the contractor's financial reporting while requiring less extensive procedures than an audit.

The surety may use reviewed financial statements to evaluate areas such as:

working capital;
net worth;
liquidity;
leverage;
profitability;
WIP;
backlog;
overbillings;
underbillings; and
job-margin trends.

Does Every Bonding Company Require a Review?

No.

Bonding requirements vary.

A surety may accept:

internally prepared statements;
a CPA compilation;
reviewed financial statements; or
audited financial statements.

The required level may change as the contractor grows.

For example, a contractor may initially qualify using internal financial statements but later encounter a review requirement when:

pursuing larger projects;
increasing aggregate bonding capacity;
entering new markets; or
materially increasing backlog.

Banks May Also Require Reviewed Financial Statements

Banks and lenders may require reviewed financial statements in connection with:

lines of credit;
term loans;
equipment financing;
acquisitions;
covenant compliance; or
larger borrowing relationships.

The requirement may appear directly in a loan agreement.

Contractors should understand those reporting requirements before year-end so there is sufficient time to complete the engagement.

Reviewed Statements May Support a Line of Credit

Construction businesses often use lines of credit to manage timing differences between:

payroll;
materials;
subcontractor payments;
billings;
collections; and
retainage.

A bank may request reviewed statements to evaluate the contractor's:

financial position;
profitability;
working capital;
leverage; and
ability to repay.

That makes reliable WIP and job costing especially important.

Owners or Investors May Request a Review

Reviewed financial statements may also be useful when a contractor has:

multiple owners;
minority investors;
outside investors;
succession planning;
ownership transactions; or
other stakeholders who want greater credibility around financial reporting.

The review can provide independent CPA involvement without requiring a full audit.

A Customer or Contract May Require Reviewed Statements

In some cases, contractors may encounter financial statement requirements through:

customer qualification processes;
public or private project requirements;
joint ventures;
vendor approval processes; or
other contractual arrangements.

Those requirements should be identified before the reporting deadline.

Review vs. Compilation

A compilation provides no assurance.

A review provides limited assurance.

That distinction matters.

In a compilation, the CPA assists management in presenting financial information in financial statement form but does not perform procedures designed to provide assurance.

In a review, the CPA performs inquiry and analytical procedures and issues a report providing limited assurance.

If the stakeholder specifically requires a review, a compilation generally will not satisfy that requirement.

Review vs. Audit

An audit provides a higher level of assurance than a review.

An audit typically includes more extensive procedures such as:

risk assessment;
understanding internal controls;
substantive testing;
confirmations;
inspection of supporting documentation; and
other audit procedures.

A review is narrower in scope.

That generally means less time and cost than an audit, but also less assurance.

How Do Contractors Know Which Level They Need?

Ask the intended users.

For example:

Surety: Do you require compiled, reviewed, or audited financial statements?

Bank: What assurance level is required under our loan agreement?

Owner or investor: What level of independent CPA involvement is expected?

Do not assume.

A contractor can waste both time and money by purchasing the wrong level of service.

Why Contractors Should Ask Before Year-End

Waiting until after year-end can create problems.

Suppose the contractor expects to provide compiled statements.

In February, the surety says:

“We need reviewed financial statements this year.”

Now the contractor may need to:

engage the CPA;
finalize the year-end close;
clean up reconciliations;
complete WIP;
resolve accounting issues; and
meet a bonding deadline

all at once.

An early conversation can prevent that.

Reviewed Financial Statements Still Depend on Management's Records

A CPA review does not replace the contractor's accounting process.

Management still needs to maintain:

accurate books;
reconciled balance-sheet accounts;
reliable WIP;
support for significant balances;
complete debt information; and
appropriate financial statement disclosures.

Weak accounting records can make even a review engagement difficult.

WIP Is Especially Important for Contractor Reviews

For construction contractors, WIP is often a critical component of financial reporting.

The CPA may need to understand:

contract values;
costs incurred;
estimated total cost;
percentage complete;
earned revenue;
billings;
overbillings;
underbillings;
backlog; and
gross-margin changes.

A poorly prepared WIP schedule can delay the review.

Cost-to-Complete Estimates Need to Be Supportable

Because WIP may rely heavily on project estimates, management should be able to support:

estimated labor;
material needs;
subcontractor commitments;
equipment costs;
change orders;
remaining project costs; and
expected final margin.

The CPA may ask additional questions when:

margins change materially;
projects are significantly underbilled;
large margin gains appear; or
expected costs seem inconsistent with project progress.

Margin Fade May Draw Attention

Suppose a project begins with an expected margin of:

20%

and ends the year at:

11%

Management should understand why.

Possible causes may include:

labor overruns;
material increases;
rework;
change orders;
project delays;
subcontractor issues; or
inaccurate cost-to-complete estimates.

Overbillings and Underbillings Need Explanation

Large overbilling or underbilling balances may also require analysis.

For example, the CPA may ask:

Why is this project significantly underbilled?
Is there a pending change order?
Has the related work been approved?
Is billing delayed?
Is the balance collectible?
Why is this job heavily overbilled?
What future costs remain?

Reliable explanations improve the review process.

The Balance Sheet Matters as Much as the Income Statement

Contractors sometimes focus primarily on revenue and net income.

Stakeholders may care just as much about:

cash;
receivables;
retainage;
underbillings;
payables;
debt;
overbillings;
working capital; and
equity.

A profitable contractor can still have weak liquidity.

Reviewed financial statements help present the full financial position.

Reviews Require Independence

A CPA performing a financial statement review must be independent.

That can become important when the same CPA firm also provides:

bookkeeping;
accounting assistance;
tax services; or
advisory services.

Certain services may be permissible while maintaining independence, but the CPA must evaluate the specific facts and applicable professional standards.

Contractors should discuss the service mix with their CPA before the engagement begins.

How Long Does a Contractor Review Take?

There is no universal timeline.

Timing depends on:

company size;
number of active jobs;
WIP quality;
complexity;
accounting readiness;
number of adjusting entries;
responsiveness; and
financial statement requirements.

A contractor with reconciled books and a reliable WIP schedule will generally be easier to review than one still closing the year months later.

What Can Delay a Review?

Common delays include:

unreconciled bank accounts;
incomplete WIP;
stale cost-to-complete estimates;
missing debt information;
unresolved change orders;
unexplained underbillings;
missing lease information;
incomplete related-party data; and
financial records that do not tie together.

Many of these issues can be addressed before year-end.

What Should Contractors Prepare?

A review engagement may require information such as:

trial balance;
general ledger;
bank reconciliations;
accounts receivable aging;
accounts payable aging;
WIP schedule;
completed-job schedules;
debt schedules;
lease information;
fixed-asset schedules;
payroll information;
major contracts;
change-order information;
related-party balances; and
other supporting documentation.

The exact request depends on the company and engagement.

Monthly Accounting Makes Year-End Easier

A contractor that waits until year-end to reconcile accounts, update WIP, and investigate project margins may face a difficult close.

A stronger approach is to maintain those processes monthly.

That can make reviewed financial statement preparation more efficient and produce better information for management throughout the year.

When Might a Compilation Be Enough?

A compilation may be appropriate when:

the stakeholder does not require assurance;
the contractor primarily needs professionally presented financial statements; and
the intended users accept a compilation.

The contractor should confirm this directly with the user of the statements.

When Might an Audit Be Required Instead?

An audit may be required when:

a surety requires reasonable assurance;
a lender requires audited financial statements;
an investor requests an audit;
a contract mandates one; or
the contractor's size and risk profile justify a higher level of assurance.

The correct service should match the requirement.

A Practical Decision Framework

Ask four questions:

1. Who needs the financial statements?

Surety, bank, lender, investor, owner, customer, or another party?

2. What level do they require?

Internal, compilation, review, or audit?

3. When are they due?

Know the deadline before year-end.

4. Is the accounting ready?

Are reconciliations, WIP, debt schedules, and supporting records current?

Answering those questions early can prevent a year-end scramble.

Common Mistakes

Common contractor financial reporting mistakes include:

assuming the surety will accept a compilation;
engaging the CPA before confirming the requirement;
waiting until after year-end to ask;
believing a review is the same as an audit;
preparing WIP only at year-end;
failing to maintain support for cost-to-complete estimates;
ignoring large underbillings; and
treating reviewed statements as a one-time compliance exercise.

The right planning starts before the reporting deadline.

The Bottom Line

A contractor may need reviewed financial statements when a:

surety

bank

lender

owner

investor

other stakeholder

requires financial statements accompanied by limited assurance from an independent CPA.

A review sits between a compilation and an audit in terms of assurance.

The right level depends on what the financial statement user requires.

Before engaging a CPA, confirm:

who will use the statements

what assurance level they require

and

when the reporting is due.

That helps contractors avoid unnecessary cost, missed deadlines, and surprises that could affect bonding or financing.

How Bilotta & Company Can Help

Bilotta & Company, CPAs, LLC provides financial statement audits, reviews, and compilations for construction contractors.

Our construction assurance work is designed to connect year-end reporting with the underlying financial realities of the business, including:

WIP

job costing

revenue recognition

working capital

bonding

and

banking.

For contractors that also need stronger financial processes throughout the year, our Contractor Compass® Financial Stewardship program helps build the monthly accounting, WIP, forecasting, and reporting infrastructure that supports reliable year-end financial statements.

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This article is provided for general educational purposes and should not be considered accounting, legal, bonding, lending, or financial advice for a specific contractor. Financial statement requirements vary by surety, lender, contract, and other intended users.