Do you need a contractor license to perform work in Tennessee? In general, a Tennessee contractor’s license is required before bidding or offering a price for projects $25,000 and up. This applies to general contractors along with subcontractors performing electrical, mechanical, plumbing, HVAC, and roofing work, and for masonry work of $100,000 or more.

There are several steps to becoming a licensed contractor that can be found on the Tennessee Department of Commerce & Insurance website. This article will focus on Step 2, which is obtaining a reviewed or audited financial statement prepared by a licensed independent accounting firm.

How do you know if you need a reviewed statement versus an audited statement? This depends on the monetary limit you are seeking for your license as well as if this is an initial application for your license or a renewal.

For an initial contractor license: A reviewed financial statement is appropriate for those seeking a license with a monetary limit of $3,000,000 or less. A monetary limit of more than $3,000,000 requires an audited financial statement.

For a renewal of a contractor license: Renewals of licenses with limits of $1,500,000 or less do not require a review; you may provide your own financial statement to the state. Renewals of more than $1,500,000 require a compilation from a CPA, although a review or audit is also acceptable.

• • Why would you elect to have an audit or a review instead of a compilation for a renewal? There are several reasons why your company may need an audit or review instead of a compilation, such as for bonding purposes or a requirement from a lender. This is company-specific and should be considered and verified before beginning the engagement to ensure you are getting the correct report for your company’s needs.

Additionally, financial statements submitted to the TN contractor’s board (TCB) must use generally accepted accounting principles (GAAP) and be current (balance sheet date within the last 12 months). This is something your CPA can help with to ensure you are using the correct reporting method and choosing a suitable date for the procedures.

How is the monetary limit determined? The TCB bases monetary limits on 10 times the lesser of both working capital and net worth. For example, to obtain a limit of $500,000, you would need to have both working capital and net worth of at least $50,000 on the financial statement. If you had working capital of $40,000 and net worth of $50,000, your monetary limit would be $400,000 (the lesser of the two values).

What is working capital? Working capital consists of current assets less current liabilities. “Current” means it will be used up or paid off within 12 months. Some examples of current assets include Cash, Accounts Receivable, Underbillings on work in progress, Inventory, etc. Current liabilities include Accounts Payable, Lines of Credit, Overbillings on work in progress, Current Portion of Long-Term Debt, etc. If you are unsure if a balance is current or not, your CPA can help you make that determination.

What is a reviewed financial statement? A reviewed financial statement is a balance sheet with footnotes that accompanies a report from your CPA that states that they have obtained limited assurance that there are no material modifications that should be made in order for the statement to be in accordance with GAAP. Reviewed financial statements may also include the income statement, statement of equity, and/or statement of cash flows – again, this is dependent on your company’s needs. Many initial licenses can be obtained with just the balance sheet and footnotes accompanying the review report.

What does a review consist of? A review consists of applying analytical procedures to your financial data and making inquiries of management. This means that we will look at your accounts analytically to determine if we think they are appropriate based on what we know about your company and the industry you work in. We may ask for supporting documentation for significant balances. We will also ask many questions of you so that we can obtain a better understanding of your company. Regardless of the size of the company or how long it’s been in business, these procedures tend to be relatively the same for all reviews.

What does an audit consist of? An audit is much more involved than a review. Instead of “limited” assurance, an audit seeks to obtain “reasonable” assurance that the financial statement is free of material misstatements. An audit consists of detailed testing of accounting records in addition to inquiries and analytical procedures.

Is the process the same for other states? No, the steps for obtaining a contractor license vary by state. You can find the requirements online on each state’s individual licensing board website. Stay tuned for another blog post coming soon that details the steps for obtaining a contractor license in North Carolina.

If you have any further questions about obtaining a compiled, reviewed, or audited financial statement for your TN contractor license, please reach out to someone in our Assurance department by phone or email and we will be happy to assist you.