Evaluating Financial Standing of a Potential Vendor

Question from a client: I have a ‘best practice’ question. In our Request for Proposals we ask the proponent to provide a brief financial history. I’m curious to know if there are any standards around this. I would guess that it would depend of the value of the project??? Do you think requesting copies of their financial statements for 3 years is excessive?

My answer (in this particular client case):

Many public sector organizations ask for 1-3yrs financial statements, however, few privately held firms are willing to provide them - partially due to the Freedom of Information Act and potential leakage - so you lose a number of competitors by requesting them. As well, especially after the downturn, financial statements are historical and not necessarily an indication of how they will perform in future...many strong 'blue chip' firms ended up requiring bailouts in the US!

Besides, we had an instance in government in 01(?) where we had the financials, the accountants pored over them, said 'this is a good company' and within the first year, the vendor went bankrupt and the contract fell apart...and it was a multi-million dollar contract with a firm that had been in the business for over 10 years.

What some people started doing to encourage vendors to respond, was requesting a letter from the bank or an auditor verifying length of time with the account, credit rating, etc. I've gone as far as requesting their ratios (therefore they aren't providing the actual financials, just their liquidity, asset to debt, etc ratios (from an auditor or 3rd party) that we compare to the industry standard (if available).

However, a practice that I've seen in the private sector was reserving the right to verify information through Dun&Bradstreet - requiring vendors to file their info with D&B and we need only get a 'report' from D&B (a 3rd party) - there's less issue around the FOI, no need to have financial experts do extensive analysis, and D&B is well recognized/standardized and are arm's length.