REPORT DIGEST ILLINOIS WORKERS’ COMPENSATION COMMISSION SELF-INSURERS SECURITY FUND FINANCIAL AUDIT FOR THE YEAR ENDED JUNE 30, 2017 Release Date: March 12, 2019 FINDINGS THIS AUDIT: 1 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 1 -- 0 -- 1 Category 2: 0 -- 0 -- 0 Category 3: 0 -- 0 -- 0 TOTAL: 1 -- 0 -- 1 FINDINGS LAST AUDIT: 3 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 INTRODUCTION This digest covers the financial audit of the Self-Insurers Security Fund as of and for the year ended June 30, 2017, at the Illinois Workers’ Compensation Commission. The Commission’s compliance examination for the two years ended June 30, 2017, will be issued in a separate report at a later date. SYNOPSIS • (18-01) The Commission failed to ensure its draft financial statements of the Self- Insurers Security Fund provided to us were both complete and properly presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). EMPHASIS OF MATTERS • As discussed in Note 15 to the financial statements, the Self-Insurers Security Fund had a total net position (deficit) of ($3,428,465) as of June 30, 2017. • During our audit, we noted the Self- Insurers Administrative Fund’s expenses have exceeded revenues recognized for a significant period of time. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS INADEQUATE CONTROL OVER FINANCIAL REPORTING The Illinois Workers’ Compensation Commission (Commission) failed to ensure its draft financial statements of the Self- Insurers Security Fund (Fund) provided to us were both complete and properly presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). During testing, we noted the following: • The Commission improperly reported the Fund’s deficit of ($3,428,465) at June 30, 2017, as negative restricted net position. Commission management corrected this error by charging the deficit to unrestricted net position in the Fund’s final financial statements. • The Commission did not record the Fund’s net pension liability or related flows. Commission management corrected this error by posting an adjusting entry at July 1, 2017, which decreased the Fund’s net position by $269,419, increased the Fund’s net pension liability by $448,131, increased the Fund’s deferred outflows of resources related to pensions by $260,741, and increased the Fund’s deferred inflows of resources related to pensions by $109,029 in the Fund’s final financial statements. • The Commission did not ensure its internal records supporting the Fund’s financial statements were complete and accurate. We noted the following errors during our audit, which were corrected by Commission management in the Fund’s final financial statements: — We found certain cash in-transit amounts, totaling $51,714, were also recorded as excess insurance receivables, which resulted in an overstatement of the Fund’s assets. — We noted Fiscal Year 2016 assessment revenue was recognized in Fiscal Year 2017, totaling $76,154. — We identified an overpayment of the benefit claims expense and security deposits drawn revenue accounts, totaling $180,579, due to an incomplete reconciliation of benefit claims. • During testing, we noted the Commission has not sought judgment in circuit court against six self-insurers who collectively owe $4,037 dating back to Fiscal Year 2009. Further, the Commission had not developed a reasonable estimation of uncollectible assessments receivable. (Finding 1, pages 50-53) We recommended the Commission ensure its staff members involved in preparing and reviewing financial activity reported in accordance with U.S. GAAP have sufficient training and knowledge to prevent, or detect and correct, misstatements on a timely basis. Additionally, we recommended the Commission implement controls to identify and review recently released GASB guidance, at least on an annual basis, for any impact on the Fund’s financial reporting process. In addition, we recommended the Commission implement controls to ensure transactions are properly recorded within the correct fiscal period and all accounts reconcile and balance with each other. Finally, we recommended the Commission ensure assessments receivable are pursued in accordance with the Act and an allowance for uncollectible accounts is developed. Commission officials agreed with the recommendations. We will review the Commission’s progress towards the implementation of our recommendations in our next financial audit. EMPHASIS OF MATTERS As discussed in the Independent Auditors Report (pages 4-7), the Self-Insurers Security Fund had a total net position (deficit) of ($3,428,465) as of June 30, 2017. 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 Illinois Workers’ Compensation Commission stated that, subject to approval by the Self-Insurers Security Board, future assessments will be used to meet the Self- Insurers Security Fund’s obligations in the future. Further, the State of Illinois’ self- insurance program administered by the Illinois Workers’ Compensation Commission consists of two funds: the Self-Insurers Administration Fund and the Self-Insurers Security Fund. Pursuant to the Workers’ Compensation Act (820 ILCS 305/4a-4 and 820 ILCS 305/4a-6.1), the Self-Insurers Administration Fund collects a $500 application fee from each private self- insurer applying for or seeking renewal of the self-insurance privilege, which is available only for paying the salaries and benefits of the employees and the operating costs of the Self-Insurers Advisory Board within the Illinois Workers’ Compensation Commission. During our audit, we noted the Self-Insurers Administration Fund’s expenses have exceeded revenues recognized for a significant period of time. According to the Illinois Workers’ Compensation Commission’s unaudited accrual basis financial reports filed with the Office of the State Comptroller, the Self-Insurers Administration Fund’s net loss was $157 thousand, $132 thousand, and $86 thousand during Fiscal Year 2015, Fiscal Year 2016 and Fiscal Year 2017, respectively. Without operational changes and/or a legislative remedy, the continuing negative trend will eventually consume the Self-Insurers Administration Fund’s remaining net position, which the Illinois Workers’ Compensation Commission’s unaudited accrual basis financial reports filed with the Office of the State Comptroller reported was $304 thousand at June 30, 2017. AUDITOR’S OPINION The auditors stated the financial statements of the Self-Insurers Security Fund as of and for the year ended June 30, 2017, are fairly stated in all material respects. This financial audit was conducted by E. C. Ortiz & Co., LLP. 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 FJM:djn