Your NC License Increase Needs an AUP, Not a Review

The call usually goes the same way. A contractor is sitting on a Limited license, a $900,000 job has come across his desk, and somebody told him a license increase needs “audited financials.” He has a quote for an audit and it costs more than the job’s margin would justify, so he is thinking about turning the work down.

He probably does not need an audit. North Carolina also accepts an agreed-upon procedures report, and for most contractors that is a materially smaller engagement.

The three tiers

Your license limitation is set by financial responsibility, and the Board gives you more than one way to demonstrate it.

Working capital is calculated the plain way: total current assets minus total current liabilities.

Note the third column. The bond is a genuine alternative, not a consolation prize, and for some contractors it is the cheaper door. More on that below.

The part almost everyone gets wrong

For Intermediate and Unlimited, the Board wants one of two things:

“an agreed-upon procedures report on a form provided by the Board or an audited financial statement prepared by a certified public accountant or an independent accountant who is engaged in the public practice of accountancy”

Read that again, because of what is missing. A review will not satisfy it. Neither will a compilation.

This trips people up because reviews are the normal currency everywhere else in a contractor’s financial life. Your surety will often take a review. Your bank will frequently take a review. So contractors assume the license board sits somewhere on that same ladder, between a compilation and an audit.

It does not. The Board set up its own lane. Either the agreed-upon procedures report on its form, or a full audit.

Why you were told “audited financials”

The confusion is not someone being careless. It is built into how the rules are structured.

The increase-in-limitation rule, .0504, lists among its required items an audited financial statement prepared in accordance with Rule .0204 of the Chapter. Read it literally and stop there, and the answer is an audit. The agreed-upon procedures route lives one level down, in that cross-reference to .0204, which is where both acceptable options actually appear.

So when a banker, a bonding agent, or an accountant tells you the Board requires audited financials, they are quoting real text. They just stopped reading at the first rule.

What an AUP actually is

An agreed-upon procedures engagement is performed under the AICPA attestation standards, specifically AT-C 215. The accountant performs a defined list of procedures and reports exactly what was found.

What makes it different from an audit is what it does not contain. There is no opinion and no conclusion. The report does not say your financial statements are fairly stated. It says: here are the procedures I performed, and here is precisely what I found when I performed them. The Board reads the findings and draws its own conclusion about whether you clear the working capital bar.

That narrower scope is the whole reason it costs less and moves faster than an audit. An audit requires the accountant to gather enough evidence to support an opinion on the statements as a whole. An AUP requires the accountant to perform the listed procedures carefully and report honestly. Both demand independence. Only one demands the full evidentiary apparatus.

It is also why an AUP does not travel well. The procedures exist to answer the Board’s question, not your surety’s. SSAE 19 removed the old requirement that these reports carry a restriction on use, so handing it to someone else is not the problem. Relevance is. If your surety wants reviewed statements, a report built around the Board’s procedures is not a substitute, and the reverse holds too.

Use the Board’s form

The rule does not simply call for an agreed-upon procedures report. It calls for one on a form provided by the Board.

That matters because it inverts how these engagements normally run. Ordinarily the practitioner and the client settle on the procedures. Here the Board’s document governs. Get the current version of the form directly from the Board and put it in your accountant’s hands before any work starts, rather than letting a CPA who has not done North Carolina license work assume they are designing the procedures themselves.

The rules that get applications bounced

Beyond the engagement itself, a handful of mechanical requirements sink applications that are substantively fine:

It has to be GAAP. Financial statements submitted to the Board must conform to United States generally accepted accounting principles. This is the one that catches small contractors, because plenty of them keep tax-basis books and have never needed anything else. The rule allows a few narrow departures, including how current and noncurrent items are classified on a personal financial statement, and not consolidating a related entity that would otherwise be consolidated under ASC 810. Tax-basis books are not among the exceptions. If that is what you have, converting them is part of the job, and it needs to happen before the engagement rather than during it.

Twelve months, measured from the statement date. The report cannot be older than twelve months. Read that as running from the date of the financial statements, not the date your accountant signs off. A December 31 balance sheet with an AUP finished in April leaves roughly eight usable months, not twelve.

The name has to match exactly. The report and the application both have to carry the name of the business exactly as it appears on the previously issued license. Not your DBA, not a shortened version, not the name with the entity suffix dropped. If you converted entity type or changed names and never updated the Board, fix that first.

If you go the audit route, it needs the full package. An unqualified opinion, a classified balance sheet, and notes to the financial statements. A classified balance sheet is the one that separates current from noncurrent, which is the whole point, because current is what the working capital calculation runs on.

Prepared by a CPA or an independent accountant in public practice. Your in-house bookkeeper cannot produce it, and neither can you.

The third door nobody mentions

If the working capital is not there, the surety bond route lets you skip the financial statement entirely. $175,000 for Limited, $500,000 for Intermediate, $1,000,000 for Unlimited.

Whether that beats an AUP is arithmetic, and it depends on facts specific to you. The bond has to be continuous, with proof submitted at application and again with each annual renewal, so it is a recurring cost and it consumes bonding capacity you might rather point at actual jobs. The AUP is a one-time professional fee. Renewal ordinarily just requires attesting that you still maintain financial responsibility, with an audited statement required only if the Board determines a licensee is insolvent, financially unstable, or unable to meet its obligations.

The honest version: if your working capital is comfortably over the line, do the AUP. If it is marginal, or if it swings hard depending on where you are in a billing cycle, have a real conversation about the bond before you spend money proving a number that might not hold.

Working capital is a balance sheet number

Here is the part that sits underneath all of it.

Working capital comes off your balance sheet. Current assets minus current liabilities. Which means a license increase is not really an attest problem, it is a bookkeeping problem that becomes visible when somebody official finally looks.

Contractors fail this test for reasons that have nothing to do with being unprofitable:

• Underbillings sitting uncounted. Work performed and not yet invoiced is a current asset, and if your books do not recognize it, your working capital is understated. This is exactly what a WIP schedule surfaces.
• Overbillings treated as earned revenue. The mirror image, and this one cuts the other way. Money collected ahead of the work is a current liability, and leaving it in revenue instead of recording the liability inflates working capital. The contractor clears the threshold on paper and fails the moment it is corrected.
• Retainage parked in the wrong bucket. Contractors classify current versus noncurrent on the operating cycle rather than a strict twelve months, so retainage receivable is generally a current asset even when collection runs well past a year. Burying it in a noncurrent bucket quietly removes working capital you genuinely have. The real exposure runs the other direction: retainage you are unlikely to ever collect, still carried at full value.
• Shareholder balances and debt in the wrong place. A due-from-shareholder balance is rarely a current asset in substance, and treating it as one props up the exact number the Board is trying to measure. On the other side, a line of credit due on demand is current, and a term note has a current portion and a long-term portion that plenty of contractor balance sheets never split.
• Personal and business still tangled. If the company balance sheet carries the truck you use for everything and the card you use for groceries, nobody can calculate anything meaningful from it.

An AUP does not fix any of that. It measures it. If the books are wrong, the procedures will faithfully report a number you do not want. That is the sequence contractors get backwards: they book the engagement first, discover the balance sheet will not support the tier, and have paid for the privilege of finding out.

Look at the balance sheet before you commission anything. If current assets minus current liabilities does not clear the threshold with room to spare, the work to do first is cleanup, not attestation.

If you are on a Limited license

Good news that nobody volunteers: at the Limited tier the rule does not require CPA involvement at all, unless a bankruptcy trigger applies. You are demonstrating current assets that exceed current liabilities by at least $17,000, or a total net worth of at least $80,000, or you are posting the $175,000 bond instead.

That is not the same as anything goes. The GAAP requirement and the twelve-month rule apply to any financial statement you put in front of the Board, whoever prepared it. What changes at Limited is who has to prepare it, not the standard it has to meet. Ask the Board what it wants to see for the working capital test rather than assuming.

The bankruptcy exception reaches further than most people expect, so read it carefully. It applies if the applicant or any owner, principal, or qualifier is in bankruptcy, or has been in bankruptcy within five years prior to the filing of the application. Two things there catch people out. It is not limited to the company, so one owner’s personal filing four years ago pulls the whole application into the requirement. And it is not only past bankruptcies, it covers being in one now.

It is also not only an application issue. A licensee in bankruptcy has to provide the agreed-upon procedures report, or an audited financial statement with a classified balance sheet, as part of any renewal application, at any tier.

If the trigger applies, you are back to the same two options as the higher tiers. If it does not, and an accountant quotes you an attest engagement for a Limited license, ask why. You may not need one, and we would rather tell you that than sell you something.

What to actually do

1. Pull your most recent balance sheet and calculate current assets minus current liabilities. Compare it to the tier you want.
2. Check what basis your books are on. If they are tax basis, a GAAP conversion comes before the engagement, not during it.
3. If you clear the threshold comfortably, get the AUP done on the Board’s form and get the application in well inside the twelve months, which runs from the balance sheet date rather than the day the report is signed.
4. If it is close or seasonal, price the surety bond alternative before you commit to the engagement.
5. If it is not close, the project is a cleanup, and the classification problems above are usually where the missing working capital has been hiding.
6. Check the name on your license against the name that will appear on the report, and fix any mismatch with the Board first.

The governing rule is 21 NCAC 12A .0204, and the increase-in-limitation rule is .0504. Figures, forms, and requirements change, and the Board is the authority on its own rules, so confirm the current thresholds and pull the current version of the form directly from the Licensing Board before relying on anything here. Be especially careful with older material still circulating online: plenty of it shows project caps of $500,000 and $1,000,000, and some of it claims a compilation or a review will satisfy the Board. Neither matches the Board’s current requirements.

We perform agreed-upon procedures engagements for North Carolina contractors working through a license increase, and we will tell you before we start whether your balance sheet is going to support the tier you are after. If it will not, that conversation is free and considerably cheaper than the alternative. Book a discovery call, or read more about our assurance work.