Documents and records required to complete a workers compensation audit.

If you’ve ever been through a worker’s compensation audit you will certainly recall the list of documents the auditor asked you to compile and make available for their review. It’s not optional! The requirement to provide documents and records for review is a part of the workers compensation policy. In this blog we’ll explore the type of records you need to be ready to provide for review and answer a few questions that are common for this topic.

The purpose of document and record review, as conducted in a workers compensation audit, are to determine premium generating exposure for the workers compensation policy being audited.

Here’s a listing of the type of records you will be asked to provide with a little detail to consider about each:

Journals – A common definition of this term is a record of financial transactions shown in date order by transaction. You’ll find journals hasten back to a time when accounting was accomplished in a manual manner. Journals would be broken down into individual topics that would include Sales Journals where sales transactions would be recorded; Purchase Journals where individual purchases made by the company would be recorded; Cash Receipts and Cash Disbursement Journals would be used to track cash transactions. Accounting transactions like these would be manually written in one of these types of journals prior to being posted to accounts found in the general ledger.

Ledgers – Ledgers are made up of a series of accounts. A typical general ledger may include asset accounts; liability accounts; equity, revenue and expense accounts. Financial reports, such as income statements, trial balance and balance sheets, will be generated from the ledger level of summarized journal information. While journals provide transaction details, ledgers provide summarized categories of that information. Again, you will typically find ledgers used in manual accounting methods.

Contracts – Certain contracts may be reviewed as they may include ratable policy exposure.

Registers – Think of journals. Registers are normally a grouping of similar transaction types as used in accounting. A check register may also be considered a cash disbursement journal. Get the idea? It’s a listing of transactions. A listing of cash being sent out.

Payroll Records – This is a big one! Of course payroll records must be reviewed. Payroll records may be in the form of a register or journal listing each employee and compensation disbursed to that employee. These records will typically include the hours worked, overtime hours, rate of pay per hour, rate of pay for overtime or premium time paid. These records may include bonus paid and or other type of compensation for work provided to the employee. Payroll records may be subdivided into categories by location, state, job function and any other additional tracking information that the employer may find useful from a management function.

Disbursement Records – These will typically fall under some form of cash disbursement journal. These records will often include payments made to sub contractors, independent contractors and others whose relationship with the employer may create a ratable exposure for the workers compensation insurance company.

Computer Programs – Of course most small business accounting functions are today performed by use of a computer program. When you take a look, you’ll find that wording found in the workers compensation policy language will include computer programs, used to store and retrieve accounting information, as part of the required accounting records needed to complete the audit.

Tax Documents – Tax documents are used to verify that the information being provided for use in an audit, is in fact, accurate. You may ask why tax documents? Think about it…it’s one thing to lie to someone conducting a workers comp audit but entirely something else to lie to the government! Actually, to provide false documents or to lie about the information you are providing to a workers comp auditor may constitute the act of committing insurance fraud. Sure mistakes do happen, but when those “mistakes” are made on purpose, with the intent to secure a lower premium, they cross over into the realm of fraud. What tax documents may you be asked to provide:

  • 941 Form – This is a federal tax form prepared to report your employee payroll along with taxes withheld for those employees to the government.
  • State Wage and Contribution Form – This is a report used to report employee payroll along with state taxes withheld to the state in question.
  • Schedule C – For an individual or sole proprietor, an auditor may ask to review your IRS Schedule C. This is a form is used to report a profit or loss from a business if you operate as an individual or sole proprietor. On the form you will find a section where income is reported and a section where expenses are reported. Under the expense section you’ll find items like commissions paid, contract labor and wages paid. This is just another place where an auditor looks to identify and verify workers compensation ratable exposure.

Certificates of Insurance – We can’t talk about this topic without mentioning one of the most important documents that an employer may be asked to provide. Certificates of insurance are used to show that another company, one who the employer conducted business with, in fact had a workers compensation policy in place. This is especially important for those employers in the construction trades. Most uninsured subcontractors will be considered statutory employees of the hiring employer. Translated into english, this means the auditor conducting the hiring contractor’s workers comp audit will pick up any amount paid to the uninsured subcontractor and include that as ratable exposure on the hiring employers audit.  Be careful here because these situations can often lead to unexpected high addition premium audits.  A valid certificate of insurance will show the auditor that the subcontractor did have workers compensation coverage in place so the hiring employer will then not charged.  Be sure to check out the special certificate of insurance section found on our website for more detail information about this proof of coverage documents.

Keep in mind that when an auditor asks you to provide these documents they are doing so to discover and verify ratable exposure used to determine the ultimate premium you will pay for your workers compensation policy. Don’t forget that ratable exposure means much more than payroll. The actual term is remuneration. Payroll is only a part of the more general remuneration category.

We often encounter employers who have had a bad experience working with a workers comp auditor. Of course the best survival plan of having an audit conducted on your business is to be prepared, be aware and walk away with no surprises!

I hope this post has been helpful. And thanks for reading!

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