Why Do Audits Cost So Much?

SAMSUNG

David B. Liptz CPA, ACI has over 25 years’ experience working with captive insurance companies.  Mr. Liptz regularly speaks, consults and discusses captive insurance tax and audit issues with captive owners and others that work within the captive insurance industry.  Mr. Liptz also represents taxpayers before the IRS and other regulatory bodies. Mr. Liptz was named in the 2015 Captive review Power 50 as one of the most influential figures in the captive industry and in 2016 recognized as a Top 20 Leader and Pioneer in Enterprise Risk Industry. DLiptz@hkgcpa.com

All United States and most international jurisdictions require a captive to be audited.  However, most captive owners are unaware of the cost and process involved or the benefits of this mandatory procedure. This is the first in a series of blog posts that will provide the reader with an explanation of the costs and benefits of an annual audit for their captive.

“Getting audited is much like getting a root canal. Getting an audit may feel like a painful experience, but it is in your best interest in the long run”

What should you expect from an audit?

A financial audit is an experience one can compare to a root canal; it can be painful, uncomfortable and take a lot of time.  But, once completed, your business, — like your teeth — should be in better condition.

An audit provides added value in a number of ways and it offers the peace of mind your organization needs to succeed. First and foremost, through an audit, you obtain an opinion that your financial statements can be relied upon as required by regulators and to make informed decisions.

But it’s worth noting that there is also an instructive aspect to an audit in the sense that it can identify opportunities for improvement.  Best practice recommendations from your auditor can be incorporated to promote an efficient approach in the area of compliance, improved internal control, and efficiencies across the business.

Why do audits cost so much?

While all business owners want to cut costs, they certainly don’t want to become so Scrooge-like that they harm their company by purchasing a sub-standard service.  The annual audit is one such product.

An audit is not a rote accounting service.  Auditors must comply with numerous standards promulgated by “governing organizations.”  The most prominent is the Auditing Standards Board, whose rules and regulations number in the thousands of pages.  Additionally, the accountant must read and analyze each captive document, a review that includes all insurance and pooling policies, bank records and actuarial reports.  Finally, the increased use of related party transactions, sophisticated investments, and consolidations of related investment entities add to the complexity.

The annual audit is a time consuming and labor intensive process.  But also remember one very important point: you get what you pay for.  To place this is more colloquial terms, “if you don’t want to pay for a professional, wait until you have to fix the cost of the amateur’s work.”

 

About F. Hale Stewart JD, LL.M

F. Hale Stewart, Esq. is a partner at The Hale Stewart Law Firm.