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Secrets of Bonding 107: Surety Vs Fidelity, The Cage Match

by Steven Golia

posted in Business

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Surety. Fidelity.
They're both bonds, they come from the same family, but can they get along?
To some, this timeless battle is mere entertainment, a Cage Match for the ages. We'd like to put this question to rest once and for all. Which is more important? Which is more beneficial? Do companies need both?
A surety bond is a guarantee of performance. For example, the state of New Jersey is guaranteed that a construction company will faithfully perform its building contract.
A fidelity bond protects a business from acts of employee dishonesty.
Worker nets $400,000 in refunds. After mastering the furniture company's phone and mail-order system, Suraj started issuing himself refunds for purchases made by customers. Suraj would cover up his rampant refunding by altering inventory records. In less than a year, he stole almost $400,000.
Security expert finds - and exploits - $1 million hole in company's internal controls. It's not an unheard of scenario: A company hires a former "professional" thief as a theft-prevention specialist because of real-life expertise in the security field. In this case, a former embezzler, Barry, was hired at (name withheld) as a "theft-prevention specialist." Rather than protection, Barry ended up writing himself checks on company stock - signed with a signature stamp of a co-worker - cashing the checks, then destroying the canceled checks that were returned to the company. He made false entries in the company's books to cover his actions. Before he was caught, Barry stole a staggering $1,138,334!
Which is More Important?
One could argue that fidelity is more important because EVERY company would benefit by avoiding the impact of employee theft / dishonesty. Companies have been ruined by such crimes.
For contractors that depend on acquiring public works contracts, surety bonds (Bid, Performance, Payment) are essential. The company cannot survive without them. However, they may survive without a fidelity bond.
Should a Company Have Both?
Let's stay with the construction company example, but this is true for all firms that have cash flow running through their accounting department. Fidelity bond underwriters know it is often the trusted employee who commits the act of theft. It is simply because they are in the best position to steal. It is not uncommon for a theft scenario to reach astronomical levels as it drags on for years, undetected.
Added Bonus
Does having a fidelity bond help a company qualify for a surety bond? The underwriting of fidelity bonds revolves around internal controls, such as money handling procedures, monthly account reconciliations and annual audits. The issuance of surety bonds involves the analysis of accounting procedures, financial performance, quality of management, operating history, and many other factors. Having the appropriate fidelity controls in place, and actually having a fidelity bond, are plusses for the surety underwriter. We may conclude that surety bond clients are natural candidates for a fidelity bond, and the opposite is true for those companies that need surety bonds in order to operate.
There you have it: surety and fidelity can co-exist in harmony at last, each proud of the role it plays. Bonding professionals can help you with either one or both. We know how to keep peace in the family.
About the Author: Steve Golia is an experienced provider of bid and performance bonds for contractors. For more than 30 years he has specialized in solving bond problems for contractors, and helping them when others failed.
The experts at Bonding Pros have the underwriting talent and market access you need. This is coupled with spectacular service and great accessibility.
Contact us today and discuss how you start a new bonding relationship for your company, or increase your current bonding capacity. Call 856-304-7348.
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