Professional accountants (Certified Public Accountants (CPAs) and Certified Construction Auditors (CCAs) can be a valuable resource in the Surety claims representative’s portfolio for a variety of scenarios. In this post, we examine the value that CPAs and CCAs can deliver in:
- the investigation of a Surety’s potential exposure
- the claims process
- contract completion and
- litigation support
Investigating Potential Exposure
CPAs and CCAs are trained in analytical and independent review of accounting and financial documents. These skills allow them to assist claims representatives in verifying the Principal’s financial records and reports and uncovering any potential unrecorded or falsely recorded transactions, which could change the Surety’s potential exposure or rights to subrogation.
The Claims Process
A professional accountant can examine underlying financial records to provide the claims representative with an accurate, unbiased statement of the financial position of the Principal as well as the status of contracts, subcontracts, contract payables and overhead burden. Often, the Principal views the professional accountant as a third-party investigator and therefore, a more open flow of information is possible. This transparency can be instrumental in uncovering information not reported in financial statements.
In our analytical investigations, we have discovered, for example, checks written but never sent to vendors, unsubstantiated deductive change orders to subcontractors and inappropriate credits taken against vendor invoices. When the professional accountant works closely with engineering/construction consultants to complete the Surety’s potential exposure report, the claims representative can make an informed decision about how projects will move forward and what actions the Surety should take to ensure success.
An accounting professional’s training in analytical and investigative work is valuable at this stage of the Surety’s involvement. Once the claims representative has decided on a course of action, a professional accountant can assist the Surety in the contract completion stage. In many instances, an accounting professional should monitor trust or escrow accounts to control the flow of contract funds. Additionally, the accounting professional can review accounts payable submitted to the Surety for payment or verify pay requests submitted to the owners. In our experience, when trust and escrow accounts are used in completion of projects, we have identified attempts by the Principal to pay non-bonded costs against bonded jobs and to overpay subcontractors and vendors. In many cases, we have seen that when the Surety is paying the bills, the Principal is not as interested in mitigating costs.
The Litigation Process
The professional accountant’s role in the litigation process includes many areas. Through the rights of subrogation, the Surety often finds itself in litigation in place of the Principal. In other cases, the Surety might find itself in litigation against the Principal. Calculating the total costs of change orders and other claim items often requires in-depth analysis of direct costs incurred by the Principal. A professional accountant can also assist in claims for lost profits due to breach of contract by the owner. When projects are delayed, extended overhead calculations require the professional accountant’s analytical skills. A professional accountant can also often help the Surety’s attorney discover and examine the work product, findings, and opinions of the opposing litigator’s experts.
Ultimately, Certified Public Accountants and Certified Construction Auditors play varied roles in assisting Surety claims representatives. Their analytical and investigative skills make them a valuable resource throughout the multiple stages of Surety involvement with distressed contractors. Working with professional accountants, Surety claims representatives can increase their confidence in their decisions, knowing those are based on the best information available. At VERTEX, our entire team of forensic accountants are either Certified Public Accountants, Certified Construction Auditors, or both.