A physical worker's comp audit, also known as a field audit, takes place at your business and is usually conducted within 60 days of the expiration date on your insurance policy. The auditor will usually have 30 days to complete the audit, and the results will determine your premium costs for the next billing period.
Because initial worker's compensation policies are based on your business classification and estimated number and type of employees it is vital that you prepare in advance for your business physical audit.
Many new businesses focus on accident and loss prevention as a means of lowering their worker's comp costs and neglect their records. A physical audit will focus mainly on your payroll records, so you should have your payroll expert or other knowledgeable person on hand when the auditor is scheduled to arrive.
A physical audit is usually performed at the place of business but may take place at another location such as an accountant's office. If you have any general questions you should contact your insurance carrier before the audit appointment.
Records to Prepare
It is vital that you or your representative gather all pertinent records in advance and have them in an easily managed order. Records should be clear and concise and a database that can sort various categories and line items is ideal. While your insurance company will give you a list of required documents when they notify you of the physical audit; if not ask for a summary well in advance of the audit date. Here are the typical records the auditor will need to see:
Sort the above data into organized folders so that all employee W-2 forms, overtime, and pay stubs are together and subcontractor information such as payments and insurance certificates is in a separate place. Your organization will make the audit run smoothly and lessen the chance of errors.
Ideally your payroll database will sort the required categories. Payroll is called remuneration in reference to audits because that's what they base your premium on. The specific categories may vary in your state but in general the auditor will need access to:
Certain payroll costs won't be included in the audit. Again, these may vary by state but the standard items of exclusion are:
- Reimbursed business expenses
- Uniform allowances
- Discounts on goods purchased from the business
- Tips and similar gratuities received by employees
- Pay for active military duty
- Severance pay
What to Expect During the Audit
You or your representative should be available to the auditor throughout the audit. Only give the auditor material as they request it, and don't volunteer information unless asked specific questions. It is vital that all information is accurate, as giving a worker's compensation auditor false information can lead to fraud charges. Here are some typical types of fraud auditor often encounter:
- Providing false job descriptions
- Providing phony tax returns or other
- Providing phony financial reports
- Underreporting payroll
- Providing falsified certificates of insurance for subcontractors
- Concealing the fact that the business has hired subcontractors
Auditor Errors to Watch for
To err is human, and it's not inconceivable that your auditor may make one or more mistakes on your physical audit. You will be given the opportunity to review the auditor's work before they leave your business and you should do so carefully. Never sign off on an incomplete worksheet, and ask for a copy of their worksheets before they leave. Here are some common audit errors to look for: