When people hear the word “audit,” they tend to panic. However, in many sectors audits are just part and parcel of business. The insurance industry is one of these. When you begin your insurance policy, the carrier estimates your potential exposure to loss in terms of overall costs. At the end of the term, the company compares the estimate with the actual exposure and activity and adjusts your premium accordingly. In other words, the audit is a good thing as it ensures that what you pay is based on your actual activity.
Measures of Exposure
There are three common measures of exposure upon which your insurance is based. These include:
- Labor Costs: The total costs you accrue from labor, equipment and material that are provided, used and furnished to create or produce the product or service that you offer.
- Gross Sales: The total income you bring in for your services or goods. This takes into account deductions such as returned merchandise cost, freight charges (if you include freight as an itemized item upon invoicing) and any sales tax charged.
- Gross Payroll: This includes the money you pay out to employees and includes more than their weekly paychecks. It also accounts for commission, overtime, bonuses, personal time, holiday pay, vacation and sick time, and any housing costs for room and board that you offer your employees.
Preparing for Your Audit
When you know your audit is imminent, contact the auditor and request a list of everything you will need. Pull any records you can to help you create a good list of deductions. Make sure that any and all subcontractors have their own Certificate of Insurance, and that the policy dates are up to date and cover your policy term. It is often a good idea to keep doubles of these on file.
During the Audit
If time is of the essence, see if you can request the first appointment on a given day. This will mean you will not be waiting for the auditor to arrive, and the auditor will be fresh and ready to go. Make sure that he or she has plenty of clean and clear space to work. This will lessen errors and make the audit go faster.
Answer all questions the auditor asks, even if they seem irrelevant. Gross income, for example, may be used to determine the credibility of your payroll. The auditor does not want to take a long time. They get paid by the audit, so the longer you spend on back-and-forth, the less likely they are to be able to offer credits to help you out. Play ball with the auditor; you will be grateful in the end.
In the end, audits may be tedious, but they are necessary — and even beneficial. Take your time with them and make sure you have accounted for everything. Do you have any tips about preparing for audits? Leave us a comment and let’s hear your thoughts.