Note:
This report of the Illinois Workers’ Compensation Commissions’ Self-Insurers Security Fund (Fund) should be read in conjunction with the FY16 financial statements of the Fund and the auditor’s report dated January 4, 2018.
In FY16, the auditors issued an adverse opinion on the Fund’s financial statements due to the Commission having an inadequate process to determine the claims liabilities of the Fund, and because the proper accounting treatment for the insolvent self-insurer security collected by the State of Illinois is not determinable due to two different irreconcilable interpretations of the Worker’s Compensation Act. Because of the adverse auditor opinion of the Fund’s financial statements for the year ended June 30, 2016, the audit reports for the year ended prior to June 30, 2016 should not be relied upon without considering the auditor’s report dated January 4, 2018.
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REPORT DIGEST
WORKERS’ COMPENSATION COMMISSION
FINANCIAL AUDIT AND COMPLIANCE EXAMINATION
For the Two Years Ended: June 30, 2007
Summary of Findings: Total this audit 7 Total last audit 9 Repeated from last audit 5
Release Date: March 26, 2009
State of Illinois Office of the Auditor General WILLIAM G. HOLLAND AUDITOR GENERAL
To obtain a copy of the Report contact: Office of the Auditor General Attn: Records Manager Iles Park Plaza 740 E. Ash Street Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887
This Report Digest and the Full Report are available on the worldwide web at |
SYNOPSIS
¨ The Commission had major internal control weaknesses over its Rate adjustment Fund.
¨ The Commission was not in compliance with the Fiscal Control and Internal Auditing Act. ¨ Property and equipment were not adequately reported in the Commission’s records. ¨ The Commission had not established a formal System Development Methodology or Change Control Procedures. ¨ The Commission had not established adequate security policies to control computer operations.
{Expenditures and Activity Measures are summarized on the reverse page.} |
ILLINOIS WORKERS’ COMPENSATION COMMISSION
FINANCIAL AUDIT AND COMPLIANCE ATTESTATION EXAMINATION
For The Two Years Ended June 30, 2007
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EXPENDITURE STATISTICS |
FY 2007 |
FY 2006 |
FY 2005 |
|
· Total Expenditures (All Appropriated Funds)...................................................... |
$16,168,676 |
$15,793,074 |
$14,880,598 |
|
|
|
|
|
|
OPERATIONS TOTAL............................. |
$16,168,676 |
$15,793,074 |
$14,880,598 |
|
% of Total Expenditures.................... |
100% |
100% |
100% |
|
|
|
|
|
|
Personal Services................................ |
$9,369,063 |
$9,305,107 |
$9,028,576 |
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% of Operations Expenditures......... |
57.9% |
58.9% |
60.7% |
|
Average No. of Employees.............. |
179 |
174 |
165 |
|
|
|
|
|
|
Other Payroll Costs (FICA, Retirement)......................................... |
$1,775,105 |
$1,443,200 |
$2,211,545 |
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% of Operations Expenditures......... |
11.0% |
9.1% |
14.8% |
|
|
|
|
|
|
Contractual Services........................... |
$549,528 |
$576,323 |
$621,547 |
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% of Operations Expenditures......... |
3.4% |
3.7% |
4.2% |
|
|
|
|
|
|
All Other Operations Items................. |
$4,474,980 |
$4,468,444 |
$3,018,930 |
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% of Operations Expenditures......... |
27.7% |
28.3% |
20.3% |
|
|
|
|
|
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· Cost of Property and Equipment............ |
$2,358,196 |
$2,225,532 |
$1,736,486 |
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SELECTED ACTIVITY MEASURES (Not Examined) |
FY 2007 |
FY 2006 |
FY 2005 |
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Workers’ Compensation Case Load Volume: |
|
|
|
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· Cases Pending at Beginning of Year |
104,590 |
109,791 |
114,222 |
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· Add: New Cases (+ reinstated) |
58,436 |
59,258 |
61,046 |
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· Total Cases to be Processed |
163,026 |
169,049 |
175,268 |
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· Less: Cases Closed |
(60,681) |
(64,459) |
(65,477) |
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· Cases Pending at Year End |
102,345 |
104,590 |
109,791 |
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COMMISSION CHAIRMAN |
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During Audit Period: Dennis R. Ruth (2/22/03-10/2/08); Jerry Jutila (10/3/08-11/6/08); Amy J. Masters, Acting (11/21/08-Current) |
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Currently: Amy J. Masters, Acting |
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Rate Adjustment Fund Operations has major internal control weaknesses
Payment discrepancy problems
Failure to make payments
Appropriate documentation did not exist
Review of 30 years of case history
Process identified a large number of cases and a significant dollar amount
Financial reporting liabilities estimated to be between $18-$22 million
Commission states RAF payments improperly administered
Auditor recommendations
The Commission concurs with the finding and recommendations
The Commission did not file required certifications and internal audits were not performed
Property and equipment were not adequately reported in the Commission’s records
Certain equipment items selected for testing could not be located
Equipment observed could not be traced to property records
Failure to establish formal System Development or Change Control Procedures
Failure to establish adequate security policies over its computer environment
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FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
NEED TO IMPROVE INTERNAL CONTROLS OVER RATE ADJUSTMENT FUND OPERATIONS
The Commission had major internal control weaknesses over its Rate Adjustment Fund (RAF).
The RAF was created in 1975 to provide annual cost of living adjustments to persons who had received awards for permanent total disabilities or to the survivors of fatally injured workers. These awards are usually paid over many years to eligible recipients and are funded by assessments on employers.
The Commission discovered payment discrepancy problems during the current compliance examination and conducted reviews of all RAF cases, their histories, and payments to identify potential cases that may have been eligible for payments from this Fund. Our examination of 25 cases disclosed that no RAF payments had been made to eligible recipients in eight cases, two of which were not eligible until fiscal year 2009 (32%); that in nine cases (36%) payments had been made in the wrong amount; and that in eight cases (32%) no further RAF payments were required. This examination indicated appropriate documentation did not exist, nor were there adequate internal controls to determine if or when payments had correctly been provided.
Initially, the Commission compiled 30 years of case and payment history that provided the potential number of RAF cases that were paid and not paid and the set-up calculation to provide if all payments were made to all potentially eligible persons for the longest amount of time the person may be owed benefits. This process identified a large number of cases and a significant dollar amount. This model served as a starting point to determine an accounting and statistical model for a 30-year projection of liability.
Over the past year, the Commission continued to research cases and developed a statistical model based on their experience of back claims in order to refine their potential liability estimates for financial reporting to the Illinois Office of the State Comptroller (IOC). The Commission’s model has shown that estimated liabilities could be in the range of $9,000,000 to $14,000,000. The (IOC) reviewed the Commission’s information and questioned parts of this methodology.
At the close of our fieldwork in February 2009, the Commission was working with the Illinois Office of the Comptroller to better estimate this financial reporting liability, which was in the range of $18 - $22 million. Commission management states they have a known liability of $3.5 million for back claims as of June 30, 2008.
Commission officials stated RAF payments were improperly administered due to a lack of internal controls and monitoring of the Fund. Policies and procedures regarding this fund were not adequately documented and furthermore, eligibility was not determined by those with the education and training to make the proper decision. Many decisions were made by data entry employees without any assistance by the legal department or the Arbitrators who rendered the decisions. Cases were also not tracked if the case was appealed outside the Commission to the Circuit, Appellate or Supreme Court. Further, discrepancies were found in payment records. The Rate Adjustment Fund was insolvent from Fiscal Years 1981-1983 and then again from Fiscal Years 1987-1996. Subsequent efforts to make-up missed payments or underpayments were not documented in Commission files. (Finding 1, pages 11-13)
We recommended internal controls and monitoring of the RAF be strengthened to ensure proper payments are made to eligible recipients; that the Commission should determine and pay any outstanding amounts due to eligible claimants; that the Commission consult with the Office of the Attorney General to determine if legal issues exist; and that the Commission establish procedures for recording related liabilities and disclosing contingent liabilities annually to the Office of the State Comptroller.
Commission officials concurred with this finding and stated that several significant steps to correct a 30-year-old program had already been taken. The Commission plans to work with Legal Counsel and the Attorney General to better determine who may be eligible for back payments. The Commission also plans to implement policies and rules as well as pursue statutes that will be needed to manage the program.
NONCOMPLIANCE WITH THE FISCAL CONTROL AND INTERNAL AUDITING ACT
The Commission was not in compliance with the Fiscal Control and Internal Auditing Act (FCIAA).
In the previous engagement, the Commission did not file the FCIAA certification for fiscal years 2004 and 2005 and did not perform any internal audits. In the current engagement it was also noted that FCIAA certifications for fiscal years 2006 and 2007 were not filed and that no internal audits were performed. (Finding 2, page 14) This finding was first reported in 2001.
Commission officials concurred with our recommendation to comply with the requirements of the Fiscal Control and Internal Auditing Act. Commission officials stated they had reached an agreement with the Illinois Office of Internal Audits for assistance. (For previous agency responses, see Digest Footnote #1.)
INADEQUATE PROPERTY CONTROL RECORDS
Property and equipment were not adequately reported in the Commission’s records. The Commission’s property and equipment balance was $2,358,196 as of June 30, 2007.
The following exceptions were noted:
- The Commission did not conduct a complete physical inventory in 2007 and did not submit a Certification of Inventory to the Department of Central Management Services.
- Nine of 35 equipment items tested, totaling $4,820, could not be located because updated property records did not exist; 13 of 35 equipment items tested, totaling $9,896, were not tagged; 3 of 35 equipment items tested, totaling $2,231, appeared to be obsolete and should have been removed from the property records; and 1 of 35 items tested, ($425) was not in the location noted in the property records.
-Eleven of 30 equipment items physically observed at the Commission’s offices could not be traced to property records; 3 of 30 equipment items observed were not in the location noted in the property records; and 2 of 30 items were not in use but still listed in property control records. (Finding 4, pages 16-17) This finding has been repeated since 2003.
Commission officials agreed with our recommendation to update property records and maintain them in accordance with statutory requirements. Commission officials stated they had purchased a new software system and assigned inventory control to a staff person. (For previous agency responses, see Digest Footnote #2.)
LACK OF SYSTEM DEVELOPMENT AND CHANGE CONTROL STANDARDS
The Commission had not established a formal System Development Methodology or Change Control Procedures. The Commission had thirteen computer applications that were critical for completing its mission. However, there was no formal methodology to assist in the planning, development, testing, implementation and modification of computer applications. (Finding 6, page 20) This finding has been repeated since 2001.
Commission officials agreed with our recommendation to develop and implement a formal systems development methodology to assist in planning, developing, testing and implementing new system developments or modifications to existing systems. (For previous agency responses, see Digest Footnote #3.) COMPUTER SECURITY ADMINISTRATION DEFICIENCIES
The Commission had not established adequate security policies to control computer operations.
The Commission had not established adequate security policies over its computer environment. The Commission relied on its mainframe and local area network to meet its mission. The current computer policy was outdated and did not provide details with regards to computer operations at the Commission. (Finding 7, page 21-22) This finding has been repeated since 2003.
The Commission agreed with our recommendation to establish comprehensive policies and procedures that outline general security provisions, appropriate use of computer resources, backup and care of data, and other appropriate policies to help ensure that effective controls exist. (For previous agency responses, see Digest Footnote #4.)
OTHER FINDINGS
The remaining findings dealt with performance evaluations and the Illinois Vehicle Code. We will review the progress toward implementation of all finding recommendations during our next compliance examination.
AUDITORS’ OPINION
Our auditors state the financial statements present fairly, in all material respects, the respective financial position of the Self-Insurers’ Security Fund of the State of Illinois Workers’ Compensation Commission, as of June 30, 2007, and the changes in financial position and cash flows, where applicable, thereof for the year then ended.
___________________________________ WILLIAM G. HOLLAND, Auditor General
WGH:KMC:drh SPECIAL ASSISTANT AUDITORS
Our special assistant auditors for this audit were Martin & Shadid, P.C.
DIGEST FOOTNOTES
#1 – FAILURE TO FILE FCIAA CERTIFICATION - Previous Agency Responses (Since 2001)
2005: “The Commission concurs with this recommendation and will submit a request for additional headcount for an internal auditor position. In addition, the agency director will submit the certification required under FCIAA.”
#2 – INADEQUATE PROPERTY CONTROL RECORDS – Previous Agency Responses (Since 2003)
2005: “The Commission concurs with this recommendation. We will continue to maintain and upgrade our property system. We plan to purchase a bar scanner and software to expedite the physical inventory process.”
#3 – LACK OF SYSTEM DEVELOPMENT AND CHANGE CONTROL STANDARDS – Previous Agency Responses (Since 2001)
2005: “The Commission concurs with this recommendation. We intend to make every effort to comply with this recommendation.”
#4 – COMPUTER SECURITY ADMINISTRATION DEFICIENCIES – Previous Agency Responses (Since 2003)
2005: “The Commission concurs with this recommendation, and will comply.” |