The What & Why You Received An Audit
Business conditions are liable to a multitude of changes that might impact the growth of a business. Small businesses should be able to handle changes in government regulations, personnel shifts, and technological advances. These small changes often change a company’s exposure to liability lawsuits. The general liability auditing determines if the company’s policy is adequate and if adjustments in its premiums, deductibles, and coverage are required to accommodate any changes in the business.
General Liability Auditing
Most of the data required during an audit come from the federal payroll tax returns. The company’s payroll information is vital when it comes to establishing how much risk the company is exposed to.
The auditor also checks if the company has proper employee classification concerning which area of expertise each employee is based. Classifying each employee depending on the jobs they do means that all the employees are exposed to different levels of risk and, therefore, should be insured in the same manner.
General Liability audits are supposed to inform the business owner about the company’s changes that might affect its liability. It also confirms the adequacy of business insurance that covers the company.
Preparing for a general inspection is easy. You should dig out the business insurance documentation and payroll data, which will help the auditor to determine if the current policy provides adequate protection against risks.
There are two types of liability audits. They include a sales-based inspection and a payroll-based review, which are discussed in detail down below.
Payroll-Based Audits
A payroll audit analyses the company’s payroll to ensure accurate documentation that can easily portray each employee’s exposure to risk. An auditor examines tax withholding, wages, and employee pay rates.
A proper payroll review should be conducted at least once every year to ensure that the process is up to date.
A payroll-based review is one that requires particular company documentation. It requires the company’s accountants to provide an accurate payroll breakdown in adherence to the federal payroll tax returns.
While preparing payroll-based audits, some of the vital documentation required includes source documents that have proof of all the transactions conducted by the company during the policy period and verification documents from the revenues office.
Apart from the insurance implications of a payroll review, the findings of this review can also be used in preventing payroll fraud while even weeding out ghost employees in the system.
The review is also meant to verify that the tax withholding is accurate and are compliant to the employment rules and regulations.
Sales Based Insurance Audits
When conducting a sales-based insurance review, some of the critical documents required by insurance providers include source documents and verification documents.
This type of inspection will require the business owner to provide sales information from the policy period. Some of the source documents needed during this review include sales journals, general ledgers, and income statements.
Verification documents include; federal tax returns, state sales tax returns, and income statements depicting the profits and losses in the business.
How to Prepare for a General Insurance Audit
Below are some of the critical factors that you need to consider when you are preparing for a liability review by your insurer:
1. Determine each employee’s class code and separate the payrolls
Each employee should be classified to depict the total risk exposure when they are at work. For instance, a construction worker has high liability as compared to an office clerk.
Some employees also participate in both upper and low-risk jobs, thus requiring the employer to split the payrolls to get the exact amount needed to be insured.
2. Check the payroll and sales estimates in the current policy.
This is done to ensure that the company remains on track in terms of the last policy. This helps small business owners to keep track of all the record all the payrolls throughout the year to avoid large review bills.
The estimate given at the beginning of one’s policy can be adjusted to suit the changes that have occurred in the business during the policy period.
3. Collect insurance certificates from all the subcontractors you use.
Collecting insurance certificates from the subcontractors you have used will allow the auditors to assess the extent of liability the company is exposed to under such operations.
4. Simplify the auditor’s job.
In most cases, an insurance provider will inform the small business owner before sending an auditor. Therefore, it is both time and cost-effective to have all the required documentation ready for the review.
In some cases, business owners often appoint an employee with a proper understanding of the company’s financials to assist with the audits.
Bottom Line
One of the critical areas of running a small business or company that should not be neglected entirely is the general insurance auditing. Failure to comply with the company’s review reports might lead to falling short of its bottom line.
Insurance companies are legally allowed to estimate the extent of liability and thus calculate even higher premiums if business owners refuse to conduct liability audits.
The goal of a review is to bring awareness to situations that can affect your insurance premiums.
These include changes in employee wages, taking up new clients, or shifting the business dynamic to more high-risk clients.
