STATE OF NEW MEXICO OFFICE OF SUPERINTENDENT OF INSURANCE

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1 STATE OF NEW MEXICO OFFICE OF SUPERINTENDENT OF INSURANCE SUPERINTENDENT OF INSURANCE John G. Franchini - (505) DEPUTY SUPERINTENDENT Robert Doucette - (505) September 22, 2017 The Honorable Tim Keller New Mexico Office of the State Auditor 2540 Camino Edward Ortiz, Suite A Santa Fe, NM Via Electronic Delivery State Auditor Keller: Upon separation from the Public Regulation Commission (PRC), the OSI took the budgeting policies as followed within the Department of Insurance to establish our budget, fund systems, and accounting practices within the SHARE system. During the last two years, the Office of Superintendent of Insurance (OSI) reported concerns regarding the Insurance Fraud Fund and associated accounting practices. OSI requested that your office conduct an additional review during our annual financial audit. Based on the concerns shared with your office, OSI also commissioned an external review, the results of which are contained in the enclosed report from McHard Accounting Consulting LLC (MAC), dated September 15, MAC shares concerns in the report over the recording and tracking of expenditures from the Insurance Fraud Fund and that the current practices open OSI to a risk of improper handling of restricted resources. OSI has reviewed the concerns and recommendations from the MAC auditor and is working to implement the changes suggested including a separation of records for restricted resources and general fund budget spending. To continue an in-depth review of the complex funds for which OSI is entrusted, OSI will be issuing a Request for Proposals to seek bids for an external auditor to conduct further test work and investigation into our accounting records and the Insurance Fraud Fund. OSI will provide the Office of the State Auditor a copy of the final report upon completion and looks forward to your support as we implement changes to keep our office fiscally sound and accountable. Sincerely, John G. Franchini Superintendent of Insurance Enclosure Mailing Address: P.O. Box 1689, Santa Fe, NM Physical Address: 1120 Paseo de Peralta, Room 428, Santa Fe, NM Main Phone: (505) Main Fax: (505) Toll Free: (855) 4 - ASK - OSI

2 McHard Accounting Consulting LLC 933 San Mateo Blvd NE, Suite , Albuquerque, NM / Phone 877/ Fax September 15, 2017 Matthew Mcwethy Robert Caswell Investigations 8100 vyyoming NE Albuquerque, NM Troy Davis Office of the Superintendent of Insurance PO Box 1689 Santa Fe, NM VIA HAND DELIVERY ONLY Re: Insurance Fraud Fund Dear Mr. McWethy and Mr. Davis, McHard Accounting Consulting LLC was engaged by Robert Caswell Investigations, who was engaged by the Office of the Superintendent of Insurance ("OSI"),, serious financial issues were discovered involving the Insurance Fraud Fund.., this letter is issued separately to highlight serious concerns, as described below. Background The Insurance Fraud Fund ("Fraud Fund") is created by the statute known as the Insurance Fraud Act (the "Act") (NMSA A-16c-1). The purpose of the Act "is to permit the full utilization of the expertise of the superintendent of insurance to investigate and detect insurance fraud more effectively, to halt insurance fraud and to work with state, local and federal law enforcement and regulatory agencies against the commission of insurance fraud." (NMSA c-2B) The Act creates the Fraud Fund; specifically stating "all fees collected pursuant to the provisions of the Insurance Fraud Act shall be deposited in the fund and are subject to appropriation for use in paying the expenses incurred by the superintendent in carrying out the provisions of the Insurance Fraud Act. Interest on the fund shall be credited to the fund. The fund is a continuing, nonreverting fund." (NMSA A-16C-14A) Per the Act, the Insurance Fraud Fund will be funded through fee revenue. Fees are collected from authorized insurers "in an amount not less than two hundred dollars ($200) and not exceeding one-tenth of one percent of the correctly reported direct written premiums on policies written in New Mexico by the authorized insurers." (NMSA A-16C-14B)

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