REPORT DIGEST

ILLINOIS WORKERS’ COMPENSATION
COMMISSION SELF-INSURERS SECURITY FUND


FINANCIAL AUDIT
FOR THE YEAR ENDED JUNE 30, 2020

Release Date:  April 7, 2022

FINDINGS THIS AUDIT:  2

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  1 -- 0 -- 1
Category 2:  1 -- 0 -- 1
Category 3:  0 -- 0 -- 0
TOTAL:  2 -- 0 -- 2

FINDINGS LAST AUDIT: 1

Category 1: Findings that are material
weaknesses in internal control and/or
a qualification on compliance with
State laws and regulations (material
noncompliance).
Category 2: Findings that are
significant deficiencies in internal
control and noncompliance with State
laws and regulations.
Category 3: Findings that have no
internal control issues but are in
noncompliance with State laws and
regulations.

State of Illinois, Office of the
Auditor General
FRANK J. MAUTINO, AUDITOR GENERAL

To obtain a copy of the Report
contact:
Office of the Auditor General, Iles
Park Plaza, 740 E. Ash Street,
Springfield, IL 62703
(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are
also available on the worldwide web at
www.auditor.illinois.gov

SYNOPSIS

• (21-01) The Commission lacked
sufficient internal control over
financial reporting such that the
Commission failed to prepare complete
and accurate financial statements for
the Self-Insurers Security Fund.

EMPHASIS OF MATTER

As discussed in Note 17 to the
financial statements, Fund 940 has a
total net position (deficit) of
($5,777,630) as of June 30, 2020.
This deficit, which is presented on an
accrual basis, is the excess of total
liabilities and deferred inflows of
resources over total assets and
deferred outflows of resources.
Management of the Commission stated
that, subject to approval by the Self-
Insurers Advisory Board (Board)
established within the Commission,
future assessments will be used to
meet Fund 940’s obligations in the
future (Independent Auditor’s Report
on page 4 and Note 17 on page 48).

FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS

FAILURE TO PREPARE COMPLETE AND
ACCURATE FINANCIAL STATEMENTS

The Illinois Workers’ Compensation
Commission (Commission) lacked
sufficient internal control over
financial reporting such that the
Commission failed to prepare complete
and accurate financial statements for
the Self-Insurers Security Fund
(Fund).

After receiving the Commission’s final
draft financial statements (which
means the Commission’s management does
not expect any adjustments will need
to be made for the Fund’s financial
statements to present in conformity
with generally accepted accounting
principles (GAAP)) on September 22,
2020, we noted several errors and
omissions.  Some of the more
significant matters identified during
our initial testing included the
following:

• The Fund’s claims with unearned
security deposits reported on the
financial statements compared to the
underlying records had a variance of
$586,481, which Commission management
had been unable to reconcile.

• The Fund’s benefits expense account
included $778,108 from 13 claims that
had been paid before the Fund took
over the claim.

• The Fund had not accounted for a
prepayment to a third-party processor
for claims associated with one
insolvent self-insurer, as cash of
$403,022 had been sent to the
processor with, at that time, an
unknown amount of this balance
consumed by payments to or for
claimants as of June 30, 2020.

• The Fund’s general journal did not
balance, with an unreconciled
difference between the total debits
and total credits of $40,004.

In response to these problems and the
generally poor condition of the
Commission’s books and underlying
supporting documentation, we discussed
these matters with Commission
management on November 23, 2020.  In
response to these known issues and to
help identify and fix other unknown
errors, Commission management agreed
to review each of the underlying
transactions for the Fund throughout
Fiscal Year 2020, prepare correcting
journal entries to address any
problems, and prepare revised draft
financial statements for us no later
than December 31, 2020.  In the end,
Commission management was unable to
identify and fix the problems within
the Fund’s financial statements.
In response to Commission management’s
inability to identify the errors
within the Fund’s financial
statements, the Auditor General’s
staff first attempted to balance the
Fund’s cash transactions with records
from the Comptroller’s Office
beginning in January 2021.  After
working closely with officials at both
the Commission and the Comptroller’s
Office, the Auditor General’s staff
was able to balance the Fund’s cash
transactions by the end of May 2021.
During this process, some of the more
significant problems found included
the following:

• The Fund’s security deposits and
unearned security deposits accounts
are comprised of several sub-accounts
which consist of security collected
from either the company or its surety
that is used to extinguish the
company’s self-insurance claims, with
any remaining balance ultimately being
returned to the initial contributor
(1) when the risk the self-insurer
will not fulfill its obligations
passes or (2) one year after its last
claim has been paid, provided the
claim application filing period has
expired.  Accounting problems noted
within these sub-accounts included the
following:

– As a claimant’s workers’
compensation costs are paid which are
also eligible for reimbursement by an
excess insurer, the Commission charged
these costs to the company’s account,
which was improper as neither the
company nor its surety were
responsible for the costs.  Rather,
the Commission should have recognized
this activity as the sole
responsibility of the Fund, which had
to disburse a cash outflow to the
claimant and collect a cash inflow
from the excess insurer.

– The Commission did not properly
allocate interest earned among the
Fund itself and the various sub-
accounts with positive cash balances
comprising the total security deposits
and unearned security deposits
accounts.

– On January 21, 2020, the State
Comptroller and the State Treasurer,
in consultation with the Governor’s
Office of Management and Budget,
processed a $2,000,000 interfund loan
from the Fund to the Health Insurance
Reserve Fund in accordance with the
State Finance Act (30 ILCS 105/5h.5).
Commission management did not
identify, and therefore they did not
notify the parties processing the
loan, that the value of the interfund
loan exceeded the Fund’s available
cash balance by approximately $781,429
on January 21, 2020.  By failing to
note this situation and report it to
the appropriate parties, the State
used cash it holds in a trustee
capacity to finance its own
obligations. At the end of each month
from January 2020 through June 2020,
this borrowing in excess of the Fund’s
available cash balance fluctuated
between $781,489 and $1,081,107.

• The Commission did not comply with
the requirements of the State Officers
and Employees Money Disposition Act
(30 ILCS 230/2) to keep “a detailed
itemized account of all moneys
received … showing the date of
receipt, the payor, and purpose and
amount, and the date and manner of
disbursement” as the Commission did
not record the actual date receipts
were received.

After balancing the cash accounts, the
Auditor General’s staff then attempted
to recreate the Fund’s Fiscal Year
2020 GAAP-basis journal entries from
December 2021 through February 2022.
During this process, some of the more
significant problems included:

• The Commission did not segregate
excess insurance recoveries from any
administrative fee reimbursements
allowed for under some of the excess
insurance agreements in force.  As
such, the Fund’s own source revenues
were not segregated from excess
insurance transactions.

• The Commission’s design of its
internal controls over its financial
reporting for the Fund was inadequate.
While the Commission has developed
many internal spreadsheets to help
track transactions and accounts, the
following issues contributed to
confusion and difficulty with
preparing GAAP-basis journal entries:

– The Commission lacks a centralized
general ledger with appropriate sub-
ledgers to track its accounts
receivable and claims payments across
the various sub-accounts which
comprise the entirety of the Fund’s
financial reporting entity.

– In general, the Commission has too
many different accounting tools,
records, and internal spreadsheets
being prepared by many different
people across the Commission who do
not always have sufficient knowledge
and experience with GAAP-basis
accounting to enable complete and
accurate financial reporting.

• The Commission did not always ensure
its transactions for other funds were
segregated from the Fund’s
transactions.  We identified several
unrecorded interfund reimbursements
which will need to be processed to
correct both current period and prior
period errors.

• While it was difficult to determine
exactly as the Commission did not
record the date when a receipt was
received as required by the State
Officers and Employees Money
Disposition Act (30 ILCS 230/2), it
appears a significant delay exists
between when deposited receipts are
recognized by the State Treasurer’s
Office in the Commission’s clearing
accounts and when the Commission
orders the related cash into the Fund.
After a Treasurer’s Draft is received
acknowledging a receipt has cleared
the bank, the Commission must move the
collected cash from its clearing
account to the Fund by preparing a
Receipts Deposit Transmittal form
(Form C-64) and submitting it to the
Comptroller’s Office.  These delays
limit the Fund’s ability to use the
cash, earn interest income on the
cash, and increase the complexity of
tracing out which cash receipts were
associated with what Form C-64 and
balancing the Fund’s cash and cash on
hand accounts.

We reviewed these GAAP-basis journal
entries, ultimately using them to
prepare adjusting journal entries to
propose to the Commission’s management
to correct the Fund’s Fiscal Year 2020
financial statements.  The net effect
of these errors were:

Statement of Net Position (Deficit),
June 30, 2020
Net Differences
Assets	   $ (112,310)
Deferred Outflows	483
Liabilities   428,284
Deferred Inflows   (20,677)
Ending Net Position   (295,780)

Statement of Revenues, Expenses, and
Changes in Net Position (Deficit), For
the Fiscal Year Ended June 30, 2020
Net Differences
Opening Net Position	$ (434,742)
     Revenues  	(1,532,937)
     Expenses	  1,671,900
Ending Net Position  (295,779)



Statement of Cash Flows, For the
Fiscal Year Ended June 30, 2020
	Net Differences
Opening Balance	$  (67)
     Operating:
          Net Inflows   (315,620)
          Net Outflows
          391,589
     Noncapital Financing:
          Net Outflows	   900
     Investing:
          Net Inflows   293,508
          Net Outflows	  (370,369)
Ending Balance  (59)
(Finding 1, pages 51-57)

We recommended the Commission take
corrective action by appointing a
person with the skills, knowledge, and
experience to prepare, on an ongoing
basis throughout the fiscal year, the
books and records of the Fund based
upon source documentation flowing from
the Commission’s different areas and
staff responsible for operating the
self-insurance program.  Further, we
recommended the Commission design and
implement as simple of an internal
control structure as possible which
streamlines the collection of
accounting data across multiple
spreadsheets and paper records, while
allowing for the recording of
accounting data across sub-ledgers for
different entities’ claims and
accounts receivable activity.
Finally, we recommended the Commission
ensure all transactions are timely and
correctly posted to the appropriate
sub-accounts based on appropriate
supporting documents, which is then
timely reviewed by a supervisor with
sufficient skills, knowledge, and
experience to identify and promptly
correct any errors.

Commission officials agreed with our
recommendation.

OTHER FINDING

The remaining finding pertains to
census data reconciliations.  We will
review the Commission’s progress
towards the implementation of our
recommendation in our next financial
audit.

AUDITOR’S OPINION

The auditors stated the financial
statements of the Fund as of and for
the year ended June 30, 2020, are
fairly stated in all material
respects.

This financial audit was conducted by
Roth&Co.

JANE CLARK
Division Director

This report is transmitted in
accordance with Section 3-14 of the
Illinois State Auditing Act.

FRANK J. MAUTINO
Auditor General

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