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.
ILLINOIS WORKERS’ COMPENSATION COMMISSION
Financial Audit and Compliance Examination
For the Year(s) Ended June 30, 2011
Release Date: February 28, 2012
Summary of Findings:
Total this audit: 7
Total last audit: 10
Repeated from last audit: 6
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, 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
• The Commission did not have adequate control over financial reporting for the Self-Insurers’ Security Fund.
• The Commission had major internal control weaknesses over its Rate Adjustment Fund and Second Injury Fund.
• The Commission did not have adequate controls in place to ensure that settlements for noncompliance with insurance requirements were properly documented and monitored.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INADEQUATE CONTROL OVER FINANCIAL REPORTING
The Illinois Workers’ Compensation Commission – Self Insurers’ Security Fund (SISF) did not have adequate controls over financial reporting to allow management and employees to prevent or detect errors or misstatements in the financial reporting process and ensure proper reporting in accordance with Generally Accepted Accounting Principles.
In our fiscal year 2009 report we noted the Commission had several financial reporting issues, including improper revenue recognition, unrecorded liability adjustments for unpaid claims, and liabilities not properly classified. We noted that the Commission addressed all these issues. However, a new reporting issue was noted regarding improper revenue recognition from the proceeds of security deposits.
During fiscal year 2011, $10 million was transferred from the SISF fund to the General Revenue Fund. Because the transfer is to be repaid to the SISF fund, the transfer should have been recorded as an interfund loan receivable by SISF, instead of an interfund transfer and reported separately in the financial statements. (Finding 1, pages 13-14) This finding was first reported in 2009.
We recommended management review its policies, procedures, and internal controls over financial reporting and provide adequate oversight to ensure the accuracy of information. (For previous Commission response, see Digest Footnote #1)
The Commission agreed with this recommendation.
INADEQUATE CONTROLS OVER THE RATE ADJUSTMENT FUND AND SECOND INJURY FUND
The Commission had major internal control weaknesses over it Rate Adjustment Fund and Second Injury Fund programs.
The Rate Adjustment Fund (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 survivor of fatally injured workers. In previous years, the Commission discovered payment discrepancies and conducted a review of all RAF cases.
The Commission and the Office of the Comptroller estimated a potential liability for back claims ranging from $18 to $22 million.
We noted the following problems with the RAF:
The Second Injury Fund (SIF) pays benefits to workers who are injured a second time after incurring the complete loss or use of a second member (arm, leg, foot, hand, or eye). Benefits are usually paid over many years to eligible recipients and are funded by assessments on employers.
The Commission did not have adequate procedures to timely terminate SIF benefit payments. In two cases where eligibility had ended during fiscal year 2011 because of death, payments continued to be made for seven months and two months. One overpayment was $24,266 and in addition, overpayments associated with RAF totaled $744. The second overpayment case was for $96. (Finding 2, pages 15-18) This finding was first reported in 2007.
We recommended the Commission strengthen controls and procedures over RAF and SIF programs. (For previous Commission response, see Digest Footnote # 2)
The Commission agreed with our recommendations.
INADEQUATE CONTROLS OVER INJURED WORKERS BENEFIT FUND
The Commission did not have adequate controls to ensure that settlements for noncompliance with insurance requirements of the Workers’ Compensation Act (ACT) were properly documented and monitored.
The Commission, through its Insurance Compliance Department (ICD), administers the Injured Workers Benefit Fund. The Fund receives and records monies from fees and fines assessed for noncompliance with the Act.
The ICD investigates employers for noncompliance with the requirement to maintain insurance. Employers found noncompliant are penalized up to $500 per day for noncompliance or a minimum of $10,000 if an order is issued by the Commission. The ICD determines the penalty amount and settles with the uninsured employer.
In our review of 25 cases, settlements ranged between $500 and $250,000. However, the case files did not contain documentation on how settlements were reached, the amount of penalty reduction, or the extent a reduction can be made on the penalty initially assessed.
In two of the cases, we noted no activity from the time of the settlement date. It was later determined these files were misplaced. In another case, we could not determine whether a renegotiation had occurred due to lack of file documentation. (Finding 6, pages 25-27)
We recommended the Commission establish formal policies and procedures to provide guidelines for negotiation and settlement for uninsured employers and to properly maintain case files.
The Commission agreed with our recommendations.
The remaining findings dealt with the Fiscal Control and Internal Auditing Act, inadequate control over revenues, refunds and receivables, performance evaluations, and controls over State property. We will review progress toward implementation of all our finding recommendations during our next audit.
Our auditors state that the financial statements present fairly, in all material respects, the financial position of the Self-Insurers’ Security Fund as of June 30, 2011, and its changes in financial position and cash flows for the year then ended.
WILLIAM G. HOLLAND
SPECIAL ASSISTANT AUDITORS
E.C. Ortiz & Co., LLP were our Special Assistant Auditors for this engagement.
#1 – INADEQUATE CONTROL OVER FINANCIAL REPORTING
2009: The IWCC agrees with this recommendation.
The Commission has implemented the appropriate Accounting Standards Board Rules in regards to Measurements Focus and Basis of Accounting. We note that we have been using a consistent methodology over several years and implementing the changes affect the fund balances for the current but do not change the cash flow or actual amount of funds in the accounts over a multi-year period. The Commission has corrected the ledgers and GAAP Reports for this fund in FY 09 and will continue to implement the new accounting rules.
Additionally, the Commission has hired professional staff with a CPA license which should contribute to better financial statements. Finally, accounting staff will be sent to accounting/auditing/budgeting classes which should also help ensure familiarity and compliance with current accounting rules.
#2 – INADEQUATE CONTROLS OVER THE RATE ADJUSTMENT FUND PROGRAM
2009: The Commission agrees with the recommendation. The Commission is currently using multiple databases and spreadsheets to track its work. The Commission is working to build a database which will incorporate many checks and balances, and provide automatic terminations, suspensions and provide standardized calculations, which we believe will minimize the errors.