- Updated May 18, 2023
A business audit examines a company’s financial records at the end of each year to make sure they’re accurate. They do this through a systematic review of your business transactions and income. A business inspection is similar but involves examining, testing, and gauging your materials, items, or systems. Essentially, audits function as compliance assessments, while inspections function as a checklist of compliance tasks.
Business insurance helps to protect a company’s financial assets and intellectual and physical property from lawsuits, property damage, income loss, injuries, and more. There are many types of business insurance, including liability insurance, property insurance, and worker’s compensation insurance.
Commercial liability insurance coverage is a business insurance that functions as a broad umbrella covering general business risks. Commercial property insurance is a sort of fallback if your business’ inventory and physical assets experience damage relating to specific events such as fire, flooding, burst pipes, weather, theft, vandalism, etc. Lastly, worker’s compensation insurance is designed to compensate employees if medical expenses, lost wages, and rehabilitation costs are incurred.
A business insurance audit helps verify your coverage needs based on any changes your company has recently undergone. Expansion, downsizing, changes in inventory, and other adjustments to your operations may change the amount of coverage you need or the premiums you should pay. Therefore, an audit is a valuable asset for both you and your insurance provider.
Most of the time, business audits occur less frequently than inspections. They typically focus on one or more regulations, internal policies, or other compliance drivers. A third party almost always performs them to ensure they are impartial when looking for regulation and policy compliance. This individual could come from the business’ corporate department, an external company, or the insurance providers. In the case of a business insurance audit, it’s usually the latter.
Unlike audits, the company’s employees at the facility level typically perform business inspections. These inspections are a recurring event that is, for the most part, a checklist of tasks to ensure that the company fully complies with all necessary rules and regulations. Inspections may check for compliance so that the company will score higher on an eventual third-party audit.
While both audits and inspections seem like a hassle for the business and its owners, they are essential. Business insurance inspections and audits aren’t just for the insurance providers. They also benefit the companies and their owners by verifying that vital procedures occur as intended. These inspections and audits make sure that the company is paying the right amount for coverage. They also verify that the company has enough coverage while considering the potential risks and liabilities that specific business faces. As a result, companies can better protect their business operations by undergoing routine business insurance inspections and audits.
There are six main types of insurance audits and inspections:
An objective evaluation of a company’s financial statements to confirm accuracy and compliance with generally accepted accounting principles.
Evaluates a business’ activities on a day-to-day basis and a broader scale.
Makes sure a business complies with all external laws, rules, regulations, and internal guidelines.
Allows companies to self-select an audit team to check their financial documents and data.
Inspects a business’ information technology infrastructure, policies, security, and information.
Examines a business’ systems, processes, and products to ensure a high-quality standard of operation.
Getting notified about an incoming business insurance audit can spark fear in the heart of any business owner. It can still be highly nerve-racking even if they haven’t intentionally done anything wrong. Still, making sure that you adequately prepare can do a lot to help reduce this anxiety.
You should first hire an independent insurance agent with which to discuss the situation alongside your business accountant. They can help you review the details of whichever type of audit or inspection will occur so that you will know precisely what you’ll need to do.
Before preparation starts, knowing what kind of inspection or audit will occur is essential. Each type of audit or inspection will be similar but will require different pieces of documentation. For example, the most common type of business insurance audit is a general liability insurance audit.
Once you know what type of audit or inspection it will be and what documents you’ll need, organizing them beforehand is crucial. Have all subcontractors working for you not covered by your worker’s compensation insurance send copies of their insurance certificates to prove that they are covered separately. If, for some reason, they are unable to do so, then an additional premium assessment may be needed based on how much you paid them. Review all records and ensure you finish everything you need to complete.
Another thing that you should do before the audit or inspection takes place is familiarize yourself with what the process should look like. While the process may vary slightly based on the type of inspection or audit that is taking place, there is a general structure that most of them adhere to.
The most common type of business insurance audit is a general liability insurance audit. At the beginning of the year, a payment is made for general liability coverage. If an audit is requested at the end of the year, an auditor will be sent to review your business’s payroll and other documents to ensure the payment is accurate. In addition, they will likely look at your business’s gross sales, job duties of employees and independent contractors, and any changes from the previous year.
Even if you don’t intentionally do anything wrong during a business insurance audit or inspection, it’s common to have some anxiety about the situation. This is often because business owners fear that they have unknowingly made a mistake that will end badly for them. To help avoid that, here are some of the most common issues found in business insurance inspections and audits.
If one of the four mistakes above has been made during a business insurance inspection or audit, there are steps to take to fix it.
A few things could cause a business owner to miscalculate payroll estimates. For example, they may have deducted the wrong amount of tax withholding or employee benefits, sent a retroactive payment to the wrong person, paid the wrong amount of PTO vs. unpaid time off, paid an old rate after a raise, paid for the wrong number of hours, missing a first paycheck, etc.
An employee misclassification most often occurs due to a misunderstanding or a misapplication of a legal standard. In recent years, the most common example of this is employees being classified as independent contractors incorrectly or classifying common law employees as statutory.
Outdated insurance coverage can be a more complex issue than it seems. It doesn’t just happen when you fail to renew the policy when scheduled. Insurance can become outdated when your business implements new technology, employment-related liabilities aren’t handled strategically, incremental changes aren’t factored in, past mistakes go unnoticed, and recent regulatory updates aren’t kept up with.
Inaccurate records are the easiest mistake to make. All it takes is a simple filing error, typo, or misplaced document. Suppose any of these errors occur during your insurance audit or inspection. In that case, the best thing to do is contact your accountant and independent insurance agent and seek advice, or contact your insurance provider and explain what happened.
One of the most important things for a business owner to do is make sure they have a complete and up-to-date understanding of their insurance regulations and that they are compliant with them. Insurance compliance regulations are designed to help protect businesses in the event of liabilities, unexpected complications, or unforeseen expenses.
If these regulations are violated, the insurance provider may be limited in the protection and assistance they can provide when needed. Not only that, but a failure to comply opens up the business to the risk of being held liable for detrimental legal situations. If the insurance provider cannot help, that will negatively impact a company’s finances.
When it’s time for your business to receive an audit, the insurance provider will send an agent to review your business’s audit reports and financial records to ensure they are accurate. The agent will investigate your business to make sure that all information is correct. In doing so, the agent will determine two main things: what you should be paying for your coverage and what kind and how much coverage you should receive based on your finances and potential risks.
A business insurance audit’s primary purpose is to ensure that your business pays the appropriate amount of money for your coverage. Based on what the insurance agent finds throughout the audit, they may adjust the premium based on the company’s actual payroll, revenue, and expenses rather than previous estimations. This will make the rate more accurate, whether it costs more or less than it was previously.
The most important thing to ensure your insurance inspection or audit goes smoothly is understanding what you need to do before it begins. Contact an independent insurance agent to consult. Discuss with the agent and your accountant what records you will need to collect. These will typically include payroll information, receipts, employee records and classifications, and any payments you’ve made to independent contractors or subcontractors.
Do your best to ensure that the necessary documents stay organized and that you can present them promptly and accurately. This will reduce the chances of an error disrupting the process. Even if you make an error during the audit, it is best to deal with it as soon as possible. Contact both your accountant or consultant and your insurance provider so that you can work out what to be do to rectify the situation.