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 Richard
Jenkins
Policy Document Systems Manager
California State Compensation Insurance Fund
Ah, the good old days. You put a nickel
in the jar and helped yourself to a newspaper.
Even today, you put in your six quarters
and the stack of papers is at your disposal. You could pull out two or
three, but you don’t, right?
For many employers, this is how they report
their workers’ comp exposure to their carrier. A form (the jar) is
sent to the employer asking for amount of payroll exposure over a given
period (the newspaper), and asking for the appropriate premium amount
based upon that payroll (the nickel).
But we are not selling newspapers and not
talking nickels.
The importance of collecting the right amount
of premium for the properly underwritten risk is a whole different ballgame.
Some have estimated that as much as 40 percent of the data provided in
these solicited forms is erroneous. It could be the payroll amount that’s
incorrect, the identified exposure or classi-fication could be wrong,
or a combination.
Some mistakes are honest, others less so.
Getting the correct information, along with the correct premium, is critical
not only for the individual carrier but for the workers’ compensation
industry as a whole. For upon this information, coupled with claims and
other statistics, future rates are determined. So we must go forward and
audit.
Mamma, don’t let your babies grow up
to be auditors. They’re the ones you see in the office scurrying
around trying to fill an entire week of office work into one in-office
day. Or you see them on the street, laptop slung over the shoulder or
being dragged along in a luggage cart, always focused on the next encounter.
These poor souls are always the away team,
rarely getting home field advantage. And many times they are the only
personal contact a policyholder has with its insurer. Auditors are a captive
audience for policyholders with a bone to pick about rates, claims adjusting,
even the ugly calendars they get every year. And these poor ambassadors
do not get diplomatic immunity. We must help them in other ways.
Getting more bang for the buck
Some things can be done before the audit even takes place. Pre-audit or
pre-coverage field inspections are a good tool to confirm that what was
written on the policy application, or on the payroll report, is accurate.
An auditor has enough to do reconciling payroll journals to state quarterlies
and employees to job descriptions without having to completely re-underwrite
the policy. Remember, we want to get the auditor out alive. Having to
reclassify everyone from “Attorneys-All Employees” to “Dynamite
Manufacturing-NOC” while at the employer’s location is not conducive
to our auditor’s health. And it’s better to collect the appropriate
premium amount up front in the payroll report than to bill for it after
the fact.
Another way to maximize the auditor’s
efficiency is the audit selection process. Although we may want to audit
all of our policies to guarantee everyone is paying the appropriate premium,
for some policies it just isn’t cost effective. A well-developed
selection process helps “thin the herd” and allows the auditor
to focus on those accounts that warrant attention. Some of the selection
criteria currently deployed include:
Premium size: No physical audit for accounts
below a certain premium threshold absent other audit-generating criteria.
Premium/payroll variance: High one year, low the next.
Premium/payroll allocation: High in clerical classification but low (or
none) under governing classification.
High claim frequency vs. low premium/payroll: Particularly claims reported
on zero-payroll policies.
Industry/exposure: High-risk industries such as construction, temporary
help agencies, taxicab companies, postal employees, etc.
Cancelled policies: Especially policies cancelled for causal reasons,
i.e. non-payment, bounced check, bankruptcy, etc.
Prior audit results: Did last year’s audit produce a large adjustment?
Just a peek, or a dragnet?
Once you’ve determined the need for an audit, the next step is to
determine which type of audit will satisfy the situation. Not all audits
require the physical presence of both parties in the same room, yet some
accounts may require even greater scrutiny than normal. The below audit
types range from an almost casual glance at an account, down to a veritable
dragnet:
Self-audit: Best for small accounts that, even if you did make an
adjustment, really wouldn’t have been worth the time and money to
do a physical audit. Consist of having the policyholder fill out and return
an annual statement. Some verification can be done, like comparing to
previous years or accessing the policyholder’s state/federal quarterlies
(not public in all states).
Telephone/mail-in audit: For slightly larger accounts or where more
information is needed. The policyholder can mail or fax payroll sources
such as ledger information, payroll journals, cancelled checks along with
state/federal quarterlies for verification. Allows for dialogue between
policyholder and auditor.
Online audit: A variation of the preceding two audit types. Best
suited for smaller policyholders. Doesn’t require the auditor to
be physically present in the policyholder’s or bookkeeper’s
office.
Physical audit: Your basic meat-and-potatoes audit. “Vini.
Vidi. Vici,” as they say. The auditor meets with the policyholder,
or the policyholder’s bookkeeper, and the fun begins. Due to the
time and resource commitment, this should be reserved for accounts that
merit attention.
Quarterly or interim audits: Remember that dragnet mentioned earlier?
This type of audit should be reserved for “special” accounts
where the need for more frequent “interaction” is felt necessary.
These might include the credit risks, the mendacious, or the more risky
exposures.
Outsourced audits: Bring in the mercenaries! When you haven’t
got time to fight all the battles that lay before you, this may be the
solution. There are many good companies that provide this service, and
they can perform all of the previously discussed types of audits. But
for cost effectiveness, you probably would want to use them only for the
latter two.
Getting the troops
Misery loves company, so make sure your auditors have plenty of company.
For some this can be challenging since payroll expenses are a big part
of the budget you’re usually being told to cut. But you need the
appropriate amount of staff to handle the workload.
Outsourcing audits has been previously raised, but some problems come
with it. For instance, you lose control over the method and means by which
the audit is being produced. And you hand over an opportunity to make
contact with a customer to someone who’s only interested in getting
the audit done and moving on. This is not the best customer relations
tool.
Here are some other staffing ideas to help
supply meet demand:
Permanent/full-time employees: These are the mainstays of your
auditing staff. If you had a steady, predictable workload throughout the
year, staffing would be a cinch. But as we all know, audit inventories
fluctuate. So you keep enough permanent auditors on hand to conduct most
audits, but not so many that they’re organizing poker games in the
office in November. For the extreme peaks, there are alternatives.
Part-time employees: These are a great resource, particularly if you
fill such positions with previous full-time employees who no longer want
to work full time but do want to work. You still maintain control of audit
process, the auditor does it the company way, and you can use them on
an “as needed” basis.
Temporary help agencies: Yes, the words “temporary help agency”
can make a grown auditor cry. But they are a labor source and some do
provide auditors. This is similar to outsourcing in that you lose some
control over how you want the audit conducted. These folks come pre-trained,
but not necessarily as trained as you’d like them to be.
Leased employees: This is a bit more permanent than the temporary
help solution. You could spend the time training these employees to perform
the audits in the manner you deem appropriate. The main difference between
leased staff and permanent staff is that technically you are not the employer.
As such, you don’t pay the employee benefits or taxes you would for
permanent staff. When you no longer have need for their services, you
send them away. Of course you can’t expect them to be the best ambassadors
for your company given this relationship, now can you?
Getting the most out of your audit staff
is critical in today’s business environment. More and more we are
turning to technology to help us out. It seems like just yesterday audits
were being done with a hand calculator and a spreadsheet. Now the first
thing an auditor asks is “Where can I plug in?”
New technologies are making their way into
the mainstream, such as online payroll reporting and other payroll reporting
software. These may help to provide more timely receipt of premium payments
and payroll information, but at the end of the year we will still find
ourselves scheduling those audits.
So ask an auditor to lunch sometime. Don’t
worry, they’ll be too busy to accept but will appreciate the sentiment.
Richard Jenkins can be reached
at rajenkins@scif.com or (415)
565-1294.
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