What Audit-Ready Classification Means (SIC & NAICS) | Governance Standard
Governed reference
Audit-ready classification means your SIC/NAICS assignment is not just a “best guess”—it is supported by a repeatable method, documented evidence, and clear boundaries, so another reviewer can understand (and defend) the same code decision later.
Plain-English test: If someone asked “Why this code?” you can point to the definition, show how the establishment’s dominant activity matches it, and document the proxy you used (revenue, shipments, payroll, hours, etc.).
What “Audit-Ready” Means
“Audit-ready” does not mean a government agency personally certified your code. It means your classification decision is evidence-based, repeatable, and traceable—with enough context to stand up in real-world review (banking, underwriting, procurement, compliance, internal controls, and longitudinal analytics).
Scope note: SICCODE.com provides governed reference guidance and expert review practices. We are not a government standards issuer and we do not make official code policy decisions.
If you are selecting a code for your own business, start here: How Do I Find My NAICS Code? • What Is a SIC Code? • SIC Codes vs NAICS Codes
Why Audit-Ready Classification Matters
Consistency across time
Without documentation, codes drift as teams change. Audit-ready practices preserve longitudinal integrity for reporting and analytics.
Eligibility & programs
In many workflows, the code drives thresholds and rules. When the code is wrong, eligibility and outcomes can change.
Risk grouping
Underwriting and compliance models often depend on industry grouping. Boundary errors create mispriced risk and noisy analytics.
The Audit-Ready Standard: 5 Checks
These five checks are the shortest path to a code decision that is explainable, repeatable, and defensible.
Classify the location, not the brand
Verify the official scope & wording
Check included vs excluded activities
Pick the largest share using a proxy
Record the “why” for reuse
If any step is missing, your decision may still be “reasonable,” but it will be harder to defend later.
What to document (minimum viable record)
- Chosen code: SIC/NAICS code and title
- Establishment description: what the location actually does (process, not marketing language)
- Proxy used: revenue, shipments, payroll, hours, headcount (choose one primary proxy)
- Boundary note: one sentence stating why look-alike codes were excluded
- Evidence pointer: where the proxy / activity description came from (source type)
Related references: What Is an Establishment in NAICS? • NAICS Included vs Excluded Activities • NAICS Classification Methodology
Acceptable Evidence Examples
Audit-ready does not require “perfect” data. It requires evidence that is reasonable, consistent, and documented.
| Evidence type | What it supports | Why it’s strong | When it’s weak |
|---|---|---|---|
| Revenue by line of business | Dominant activity (primary code) | Directly measures “largest share” | If lines don’t map to activities or are outdated |
| Value of shipments | Manufacturing dominance | Common proxy for production output | If shipments include resale or intercompany transfers |
| Payroll / hours / headcount | Activity weighting when revenue is unclear | Useful tie-breaker proxy | If labor allocation is estimated or not consistent |
| Operational description (process) | Definition match + boundary test | Explains “what the establishment does” | If it’s only marketing language (“solutions,” “platform,” etc.) |
| Website/service pages | Supporting context | Helpful when aligned with other proxies | If it lists everything and lacks dominant activity clarity |
Worked Examples: What Passes vs What Fails
Example that passes (audit-ready)
- Establishment: single location that produces baked goods on-site and sells direct-to-consumer
- Proxy: 72% of revenue from on-site production; 28% from resale items
- Boundary note: retail bakery resale codes excluded because dominant activity is production
- Record: saved proxy + date + scope note
This supports a repeatable decision because it states the dominant activity and why look-alikes were excluded.
Example that fails (not audit-ready)
- Establishment: “Food company” (no location-level detail)
- Proxy: none documented
- Reason given: “Closest sounding code”
- Boundary check: not performed
This is hard to defend because another reviewer cannot reproduce the decision.
Key idea: Audit-ready is about a defensible method. Two reviewers can still disagree on edge cases—but they should be able to see the same evidence and understand the reasoning.
Common Pitfalls
What causes the most misclassification
- Enterprise tagging: assigning one code to every location without establishment-level review
- Marketing language: choosing based on slogans instead of production/process
- Skipping boundaries: not checking included/excluded scope notes
- No proxy: “dominant activity” claimed but not measured
- No recency check: using older code logic without reviewing versioning context
Governance reference: NAICS Data Governance & Versioning
Defensible Workflow You Can Reuse
This workflow is designed to be simple enough for everyday use and structured enough for repeatable governance.
What does the location do?
Lookup candidates
Confirm scope wording
Pick the dominant activity
Code + proxy + boundary note
Practical starting points: NAICS Code Lookup Directory • How Do I Find My NAICS Code?
FAQ
- Does “audit-ready” mean the government approved my code?
No. Audit-ready means your decision is supported by a repeatable method, documented evidence, and boundary checks—so it can be reviewed and defended later. - What’s the minimum I should document?
Code + establishment description + proxy used (revenue/shipments/payroll/hours) + a short boundary note + an evidence pointer. - Is a “51% rule” required?
Not always. In real operations, the primary code is the largest share (plurality) of measurable output. The key is documenting the proxy and why the selected activity is dominant. - What’s the #1 cause of bad codes?
Treating NAICS/SIC as a company-wide tag instead of an establishment-level assignment.
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