REPORT OF INTERNAL AUDIT

Transcription

1 REPORT OF INTERNAL AUDIT PRESENTED TO AUDIT/TASK: #09-02, Workers Compensation AUDIT CLIENT: Department of Finance and Administration AUDIT DATE: October 27, 2008 REPORT DATE: March 10, 2009 AUDITOR: Steven Rehn CIA, CFSA INTRODUCTION In accordance with Boise Municipal Code Title 1, Chapter 9; and in response to the request of members of the City Council, the Office of Internal Audit undertook a review of the City of Boise s Workers Compensation program, as well as the supporting activities associated with the administration of that program. Workers Compensation laws in Idaho require employers to maintain insurance in order to pay claims arising from work-related illness or injury. State statute created and empowered the Idaho Industrial Commission to regulate workers compensation activities in Idaho, and the companies that are licensed to issue workers compensation policies in the State. The City s program falls under the Industrial Commission s regulatory framework. As allowed in Idaho State Statute Title 72, Chapter 3, Section , the City of Boise elected to self-insure for Workers Compensation beginning in This election must be approved by the Industrial Commission, and is based on specific criteria that must be met in order to attain self-insured status. In order to self-insure, the City of Boise is generally required to: (1) Maintain average annual payrolls of at least $4,000,000;

2 (2) Deposit either collateral or a bond with the Idaho State Treasurer, varying in size according to annual payrolls, in an amount sufficient to ensure payment of claims under the law currently approximately $600,000; (3) Maintain a resident claims adjuster within the State; (4) Pay and / or settle qualifying claims similar to a surety; and, (5) Comply with all rules and regulations of the Industrial Commission. The City s philosophy relative to Workers Compensation claims is to administer them in a fair and expeditious manner, paying those where the City is deemed to be liable, and resisting payment for those where the City is not responsible. The program is administered with a small in-house staff that is affiliated with the Risk Management function; claims management and claims processing responsibilities have been contracted out to a specialty service-provider. Actuarial studies are used to anticipate claims expense; and have, over the last three fiscal years, projected the annual claims expenditures to be approximately $1,297,000 on average. Since the City elected to selfinsure, projected expenditures and the reserves that were set aside to cover those expenditures have been sufficient to cover actual claims experience in all but two years when relatively small deficit spending situations aggregating to approximately $67,000 materialized. Surplus funds had accumulated for those years that experienced underspending. These surpluses were more than sufficient to compensate for the small deficits that occurred. 2

3 SCOPE AND METHODOLOGIES Internal Audit established the scope of the review to include operations, compliance, and associated financial activities in the aforementioned area that occurred during the most recent two fiscal years; beginning October 1, 2006, and ending September 30, Where it was deemed to be necessary to gain additional insight into operations, activity outside of the defined timeframe was incorporated into the scope of the review. The objectives of the audit were established as follows: Timely and accurate reporting and tracking of work-related injuries; and submission of claims to the third-party claims adjuster; Oversight and monitoring of third-party claims adjuster activities; Funding activities (set-asides in trust / reserve account); Operating bank account controls and activities; and, Compliance with key regulatory requirements for employers / self-insurers. Internal Audit utilized methodologies consisting of observations, interviews, detail testing, and analysis in order to achieve its identified objectives. All activities were planned and conducted in a fashion that was deemed to be adequate to support the Audit Findings, and the general comments contained within this report. 3

4 EVALUATION AND COMMENTS Overall, it appears that the City has developed and implemented a protocol that results in the efficient and effective handling and payment of Workers Compensation claims. Claims-related expenditures are reasonably anticipated and are timely funded; City staff members assigned to the function are actively involved in the claims administration process, and are exercising appropriate oversight; and, the third-party claims adjuster appears to be successfully fulfilling its role in the timely and accurate processing and payment of claims. An acceptable level of compliance with the governing rules and regulations is being achieved as well. Based on the work performed, and consistent with established guidelines for grading its projects, Internal Audit believes a grade of High Satisfactory most accurately portrays the current operation of this function. This grade is defined as: No significant weaknesses or deficiencies were noted during the audit. If any issues were noted, they were clearly insignificant or inconsequential. The audited area displays a high degree of control and management oversight is effective Audit did note one issue that appeared to be in need of procedural improvement. However, given the context and the compensating control framework that was in place, it does not appear that this issue posed anything more than a relatively minor operational risk to the function. That issue is detailed in the Findings and Recommendations section of the report immediately below. Audit also apprised management of an observation pertaining to records storage practices by the third-party claims adjuster. That issue was left to management s discretion as to follow-up and resolution. 4

5 FINDINGS AND RECOMMENDATIONS 1. FINDING: Operating Account Reconciliations The City s third-party claims adjuster effects payment of all qualifying claims from a bank account that is maintained and funded by the City. Reconciliations for the Workers Comp account are performed by a City staff member assigned to the program. That individual is responsible for reconciling the bank statement for the account, as well as for making deposits to replenish the account and maintain the targeted funding level of $75,000. Signature authority is reserved to designated employees of the third-party claims adjuster, and to the City s Treasurer only. A reasonably effective segregation of duties appears to be in place. Reconciliations are performed on a monthly basis however, they do not appear to be subject to supervisory review at the current time. Supervisory oversight is a key component of an effective internal control environment; and can serve to identify such things as stale entries or questionable reconciling items in bank accounts. The lack of such review results in a somewhat weakened control environment; and also increases the risk that errors, or other irregular transactions could go undetected. RECOMMENDATION: Internal Audit recommends that a procedure for ensuring regular supervisory review of the bank account reconciliations be put into place, and that evidence of that review is documented on account statements / account registers. MANAGEMENT RESPONSE: The Worker's Compensation Administrator will review/approve the monthly bank reconciliation completed by the Senior Accounting Specialist and document the review by initialing the reconciliation. The Assistant Risk Manager will complete and document the bank reconciliation review in the event the Worker's Compensation Administrator is not available. 5

6 CONCLUDING COMMENTS REPORT OF AUDIT Going forward, the City s Risk Management function will soon be implementing a new software application which should result in additional gains in efficiencies. Incident recognition, logging, tracking, and reporting will likely be more automated; and the handoff of information to Safety Services for incident follow-up will be facilitated. The City s ability to mitigate both risk and expense should be enhanced as a result. Internal Audit would like to express its appreciation for to members of the City s Risk Management Division for their assistance in the completion of this project. MANAGEMENT PARTICIPANTS Kent Rock, Risk Manager / Treasurer for the City of Boise Corey Pence, Safety Manager / Assistant Risk Manager for the City of Boise Jasen Carrier, Workers Compensation Administrator / Health Programs Administrator for the City of Boise 6