Why are Insurance Audits Important?

26. July 2018 11:28 by Megan Kunis in

An insurance audit is when an insurance company checks on the payroll or revenues of a customer or policyholder, to ensure that the policy reflects accurate rating information. Audits are common with all Worker's Compensation policies, many general liability policies, as well as some marine policies and other kinds of insurance.

Here's why audits are important: insurance policies are rated based on many different metrics, many of which we just do not know at the beginning of a policy term. For example, if a rating metric for a development is the number of acres in the development, that number won't change.  If the grading metric is gross revenues or gross payrolls, we don't know the true revenue or payroll until after the policy is over. The audit helps the insurance company to rate insurance policies most accurately.

Imagine you have a business that typically generates $1 million in revenues.  If you tell your broker that your business does only a half million dollars in revenues you may get a one year break in your insurance costs. The audit, however, is the mechanism insurance companies use to keep you honest.

The rating metric that drives Worker's Compensation costs is payroll. This makes sense: the more employees working at a place, the higher the payroll; this ties to the greater the exposure for somebody to file a claim.

Underestimating Payroll or Gross Revenues

Underestimating payroll or revenues for an insurance program carries some risks. Suppose a business does $1 million in sales and the general liability is based on that rating metric. To save money the business owner tells the insurance company their sales are only $500,000. Let's say the insurance costs $5,000 under these assumptions; you'd think the business saved $5,000. But when the audit uncovers the fact that the business does $1 million in sales, last year's policy cost is adjusted retroactively by $5,000 to get up to $10,000 in this example. (The additional $5,000 is due right away because it's for last year's policy.) Further, the insurance company has seen this tactic once or twice before.  In the interest of collecting a proper amount of premium for the new year, the insurance company will also update the estimated sales for that policy year to $1 million resulting in an additional $5,000 charge. This is the double whammy scenario: the insurance company collects the retroactive premium, as well as adjusts the current policy to reflect the reality: in this case resulting in a total $10,000 additional charge on what was budgeted as a $5,000 insurance cost.  This isn't good for cash flow or for relationships between risk partners. Underwriters don’t have a great sense of humor when it comes to mis-reported rating metrics.

We counsel our customers to be as accurate as possible or slightly underestimate projections so that audit adjustment is minimized, and premiums are paid as revenues and payrolls are accounted for.

A new trend in workers compensation is rendering these audits nearly obsolete. Worker's Compensation charged through a payroll service company allows Worker's Compensation expenses to tie almost exactly 2 labor expenses.

The Good that Comes from Audits

Not all is bad about audits. When sales come in below true expectations, most policies provide for return premiums under these circumstances. Some surplus and excess policies do not make such allowances, however, so it is important to discuss projected revenues and payroll with your professional agent or broker.

The audit exercise is typically a simple process of providing evidence of sales (income statement or tax reports) or payroll (941s and similar tax forms). However, we know it isn’t something anybody wakes up in the morning looking forward to doing. Thus, occasionsionally businesses don't get around to completing audits for their insurance company partners right away. The standard recourse is effective, but a nuisance: when an audit is not completed they generate an "assumed audit". Here the insurance company simply assumes that your payroll or revenues increased by 50% or more, generating a huge bill for the retroactive policy as well as a huge bill for the new policy. When an audit is not completed in a timely fashion the insurance companies leverage is often this giant bill. This is when the accounts payable folks get over to the bookkeeper to get that audit done. We work with our customers on expediting such events, but encourage prompt completion of any audit to avoid such unpleasantries.

In the contracting environment where a general contractor engages several types of subcontractors, the auditor will charge for costs of uninsured sub contractors much differently from insured subcontractors. When an uninsured contractor causes a loss, the general contractor's insurance may be responsible for covering a loss, therefore the attendant charge will be included for his policy.  Certificates of insurance properly organize and document insurance of subcontractors to reduce the effects of an audit on the general contractor's insurance program. See our separate blog on certificates of insurance

Be Prepared

Don't let an audit surprise you or catch you off guard. Here, we try to advise you in a way that results in the best possible insurance program while protecting your cash flow and budget. Don't hesitate to call or contact us if we can assist with achieving these common business objectives.

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The most common mistakes when managing personal finances

18. July 2018 11:30 by Megan Kunis in

The ability to manage money competently is especially valuable quality in the conditions of financial crisis, when the purchasing power of the population is shrinking, inflation is rising, and currency exchange rates are completely unpredictable. Below are the common mistakes related to money affairs along with financial planning advice to help manage your own finances properly.

The budget is the most basic thing in financial planning. It is therefore especially important to be careful when compiling the budget. To start you have to draw up your own budget for the next month and only after it you may make a yearly budget.

As the basis takes your monthly income, subtract from it such regular expenses as the cost of housing, transportation, and then select 20-30% on savings or mortgage loan payment.

The rest can be spent on living: restaurants, entertainment, etc. If you are afraid of spending too much, limit yourself in weekly expenses by having a certain amount of ready cash.

"When people borrow, they think that they should return it as soon as possible," said Sofia Bera, a certified financial planner and founder of Gen Y Planning company. And at its repayment spend all that earn. But it's not quite rationally ".

If you don't have money on a rainy day, in case of an emergency (e.g. emergency of car repairs) you have to pay by credit card or get into new debts. Keep on account of at least $1000 in case of unexpected expenses. And gradually increase the "airbag" to an amount equal to your income for up to three-six months.

"Usually when people plan to invest, they only think about profit and they don't think that loss's possible", says Harold Evensky, the President of the financial management company Evensky & Katz. He said that sometimes people do not do basic mathematical calculations.

For example, forgetting that if in one year they lost 50%, and the following year they received 50% of the profits, they did not return to the starting point and lost 25% savings. Therefore, think about the consequences. Get ready to any options. And of course, it would be wiser to invest in several different investment objects.

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Tips to avoid liability risks in your CPA practice

11. December 2017 17:20 by Jason Kelley in

CPAs face a huge amount of responsibility, and with responsibility comes risk. We can make sincere mistakes, or a client may allege that we made a mistake and should have foreseen potential pitfalls. On top of all that is an ever-changing mountain of financial and tax regulations which CPAs are expected to constantly stay on top of.

The AICPA recommends and certain states mandate that accounting professionals and firms carry professional liability insurance, but a firm can still find itself wasting time in court even with insurance. Accounting firms should thus identify which areas often pose the biggest liability risks and know how they can reduce risk.

Know what you know

Accountants as a profession are transitioning into true financial professionals, willing to offer clients useful advice on how to get the most out of their assets.

But there is a dangerous downside to this trend. CPAs who have learned to do additional financial work in one field may decide that they can give advice in a separate field, often out of a desire to help clients and an unwillingness to admit that they do not know everything. And if a CPA performs a service for the first time and gets used later, their lack of professional expertise can be held against them.

It is commonly said that the wisest men in the world are those who know just how ignorant they are, and CPAs should remember that. Instead of thinking that you can just learn what the client wants you to do on the fly, do not hesitate to recommend other, more specialized accountancies. You will reduce the risk of making a mistake and facing a potential lawsuit and your client will appreciate your firm’s honesty.

Cybersecurity and the Cloud

Accountants hold huge amounts of personal and financial information as part of their profession, information which criminals and hackers would love to obtain. The consequences of a data breach are not just embarrassment and lost reputation. Clients will look to sue, and small accounting firms cannot count on being protected from hackers by the shield of obscurity.

There are plenty of guides out there on how accountants can improve their cybersecurity. Basic measures such as not using Microsoft XP or Vista or purchasing cybersecurity protection programs will do a great deal to deter hackers who will search for easier targets. Cybersecurity training is also important so that employees can be aware of threats such as phishing, malware, and even basic concepts such as that Nigerian prince is not actually going to send you a million dollars.

The importance of cybersecurity and data protection takes on a further dimension when the growing popularity of cloud computing is factored. While storing data on the cloud can be cheaper and allow for increased scalability, security breaches with cloud vendors have occurred. Accounting firms should thus do their due diligence and select a cloud vendor with a good security reputation and inform clients that their information will be stored on the cloud. If your clients are concerned, it is better for them to be aired out now than after a data breach.

The Importance of Engagement Letters and Writing

Accountants have to remember that even if they did everything right, they are still at risk of being sued. A client whose financial situation suddenly gets worse can easily decide that you could have done something to prevent it even if that is not the case.

And if the client’s argument can get past a motion for summary judgment, accountants can find themselves stuck with the expenses both in time and money of a court case for years. Do not forget that it can be easy for a lawyer to spin a story to some jury about how the evil financial mogul defrauded the poor common American.

It is important for these reasons for accountants to document everything and not just that which is required by professional standards. Engagement letters, in particular, are an important documentation tool. They define what services the accountant provide, what responsibilities the accountant and the client share, and any limitations. Most importantly, accountants should provide only the services described in the engagement letter and do not try to push the boundaries. If an accountant wants to provide additional services, draft a new engagement letter.

Accountants may hesitate about providing letters to established clients. They fear that it would indicate a lack of faith and that they could potentially lose a client by doing so. But the downside of a lost client is trivial compared to the downside of a long and expensive trial.

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Real Time Fund Accounting

17. October 2017 12:53 by Junita Jackson in

 

Profit-oriented businesses and non-profit organizations use two different accounting methods to track, record, and report their financial performances depending on their purposes and goals: the traditional business accounting system and the Fund Accounting method.

Traditional business accounting – used by business entities, such as a partnership, a corporation or a limited liability company (LLC) – focuses on the ability of the entity to generate profit, providing information on how much money was earned, how much was spent and how much was left over in a given time. Traditional business accounting also measures the finances of an entity as a whole. Businesses using this method prepare balance sheets that list the company’s owner’s equity (comprised of assets and liabilities), as well as income statements that list the company’s revenues, gains, expenses and losses every quarter.

On the other hand, fund accounting – used mainly by non-business entities, such as government agencies, non-profit organizations, churches, hospitals, and colleges and universities – breaks down an organization into a series of independent and self-balancing funds, making sure that the money earned, received and spent are all properly allotted for their specific purposes. Non-profits, having no owners, do not use balance sheets and income statements. Instead, they compile “statements of financial position” that focus only on assets and liabilities, as well as statements of activities each quarter.

Benefits of Fund Accounting

Generally Accepted Accounting Principles (GAAP), a set of accounting guidelines, rules, principles and standards used in the US, require non-business entities and government institutions to use fund accounting. Fund accounting offers many advantages and listed below are some its benefits for non-profit entities:

  1. Clear allocation and management of funds – Fund accounting allows organizations to appropriately allocate and manage the revenue they receive from different resources, such as tax payments, donations, grants, loans, and other public and private sources, into specific projects or goals. For example, the finances of a municipal government must be segregated into different funds like public works, recreation, and other services.
  2. Better tracking of restrictions – Because the revenue received by organizations and government institutions must be separated into their specific purposes in accordance with laws, regulations and restrictions, fund accounting helps these entities better monitor the restrictions attached with the revenue. In the same example above, tax payments from the citizens that the municipal government receives may only be used to fund certain public services.
  3. Transparency in evaluating performance goals – Fund accounting identifies the sources of the revenue and records the organization’s debts and assets. This makes it easier for people like fund administrators, managers, donors or taxpayers to evaluate the performance of an organization by emphasizing its strengths, weaknesses, and efficiency in turning revenue into expenses in relation to its goals and objectives.

Shifting to Real Time Fund Accounting

Like all the other sectors, the accounting industry has evolved over the decades to keep up with the changes that come with the advancements in information technology. Modern accounting firms and tech-savvy accounting professionals now heavily rely on advanced technologies and cloud-based solutions that provide quick and efficient results, allowing them to monitor and manage finances without the long wait times and turnarounds.

Speed and reliability are essentials in the world of accounting not just for profit-oriented entities but also for non-profit institutions. Taxpayers, funders, and donors are expecting more transparency and efficiency in financial reporting, demand for the capability to transfer information in real-time instead of relying on conventional financial reporting methods.

With real-time reporting in financial systems or real-time accounting, non-profits are able to see their financial data live, which allows them to make decisions and adjustments faster than before and enable a more streamlined monthly close process. It also provides crucial financial information that is always up-to-date, increasing accuracy and reducing the room for errors.

To help non-profit entities keep up with these demands and changes while still maintaining its focus on more important non-profit activities, Maxfinancials Accounting offers fund accounting outsourcing services that are tailored to the specific needs of the organization.

Armed with a cost-efficient and secure technology infrastructure, Maxfinancials Accounting’s team of highly qualified experts and Certified Public Accountants (CPAs) will serve as your fund accounting department without the burden of additional training and operational costs of an in-house team.

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5 Simple Ways To Create A Balance Sheet

12. September 2017 19:21 by Junita Jackson in

First things first: what is a balance sheet? A balance sheet is an essential way to evaluate a business’ financial health and can be calculated every month, quarter or half-year to create a snapshot of a company’s net worth.

In this article, we will be discussing how to calculate an annual balance sheet for a business. Creating an annual balance sheet will help you evaluate the equilibrium between your company’s assets against its liabilities, to determine the overall financial strength and value of your business. For an example of a full balance sheet, scroll down to see the example at the end.

1. Understand the Basic Equation

The following equation is a simplified representation of what a Balance Sheet calculates: the total sum of your company’s assets equals the value of the company’s liabilities and owner’s equity.

Assets = Liabilities + Owner’s Equity

As with any math equation, you can play around with the equation to isolate one category. Most business owners and investors use the following equation to calculate the value of the company’s equity.

Owner’s Equity = Assets – Liabilities

2. Calculate Assets

Assets, money, investments, and products the business owns that can be converted into cash: These are what put companies in the financial positive. A thriving company should have assets that are greater than the sum of its liabilities; this creates value in the company’s equity or stock and opens up opportunities for financing.

It’s important to list your assets by their liquidity—the facility by which they can be turned into cash—starting with cash itself and moving into long-term investments at the end of the list. For the purpose of an annual balance sheet, you can separate your list between “Current Assets,” anything that can be converted into cash within a year or less, and “Fixed Assets,” long-term possessions that can be sold or that retain value down the line, minus depreciation.

“Current Assets” may include:

  • Cash: All money in checking or savings accounts
  • Securities: Investments, stocks, bonds, etc.
  • Accounts Receivable: Money owed to the business by a client or customer
  • Inventory: Any products or materials that have already been created or acquired for the purpose of sale
  • Prepaid Insurance: Any payments made in advance for business insurance coverage or services (this tends to be paid in advance for the year).

“Fixed Assets” may include:

  • Supplies: Important objects used for business operations (manufacturing equipment, computers, office furniture, company cars, etc.)
  • Property: Any office building or land owned by the business
  • Intangible Assets: Intellectual property such as patents, copyrights, trademarks and other company rights that retain intrinsic value

3. Determine Liabilities

Liabilities are the negative part of the equation; these include operational costs, debt and material expenses. Generally speaking, the lower your liabilities, the greater the value of your company (and equity) can be. “Current Liabilities” include cash spent, as well as any debts that must be paid out within one year, while “Fixed Liabilities” refer to bills due anytime after one year.

“Current Liabilities” may include:

  • Accounts Payable: Money owed by a business to its suppliers or partners
  • Business Credit Cards: Company credit card bills due
  • Operating Line of Credit: Any money owed to a bank that has extended the business an operating line of credit
  • Taxes Owed: Any federal and state taxes owed for one year
  • Wages and Payroll: Employee compensation, including wages, medical insurance, etc.
  • Unearned Revenue: Any revenue garnered from a service or product that has yet to be delivered to the customer or client

“Fixed Liabilities” may include:

  • Long-Term Mortgages: Property or building mortgage expenses
  • Bonds payable: Long-term bonds owed to the government, as well as any interest paid on the bond (this interest is often semi-annual and can be added to “Current Liabilities”)
  • Pension Benefit Obligations: The total amount of money the company owes to employee pension plans up to the current date
  • Shareholder’s Loan: A form of financing provided by shareholders
  • Car Loan: Any long-term car loans on company vehicles (plus insurances costs)

4. Equity Valuation

Owner’s Equity = Assets – Liabilities

The value of your assets minus your liabilities will result in an estimation of the value of your company’s capital. If this equation results in a negative net worth, this can be dangerous for a small business; it will make it difficult for to secure financing, which can be troubling for a company whose expenses are already eclipsing its profits.

If, however, a company has positive equity, this means that business owners have the option of acquiring capital by selling part of their business through equity, stocks and/or dividends.

In a sole proprietorship, this is called the “Owner’s Equity”; in a corporation, this is called “Stockholder’s Equity,” and it can include common stock, preferred stock, paid-in capital, retained earnings, etc.

“Equity” may include:

  • Opening Balance Equity: The initial investment into the company
  • Capital Stock: The common and preferred stock a company issues
  • Dividends Paid: Profits paid out to shareholders by a company (applies to corporations)
  • Owner’s Draw: Portion of the revenue used by company’s owner (applies to sole proprietorships)
  • Retained Earnings: The sum of a company’s consecutive earnings since it began

Having an Income Statement will assist you in filling out this section since it helps you determine the opening balance equity and the retained earnings.

5. Consider All Applications

When you put it all together, a balance sheet will probably look something like this:

balance sheet example
 

A solid balance sheet is an essential financial statement and part of a complete financial report. It can be used to secure financing or take a snapshot of a company’s current financial state, but it can also be used to evaluate the worth of your company over time. While accounting software like QuickBooks can easily generate balance sheets and other financial statements, it’s good to know the process to ensure your calculations are accurate.

Comparing your “Current Assets” minus “Current Liabilities” on a yearly basis will paint a picture of your company’s annual growth and expenses, which may have room for improvement. Calculating “Fixed Assets” minus “Fixed Liabilities” can provide a more long-term view of the company’s value over time and its ability to pay back long-term debts or expenses built up over many years.

Remember, the expenses of different companies may vary greatly, so don’t forget the assets and liabilities that are specific to your industry or area. For more help with balance sheets and other financial statements, see our infographic on financial reporting.

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