Audit Reveals Major Problems, Questionable Spending in CA Workers Comp Fund

According to Insurance Commissioner Steve Poizner, as a result of an audit of California’s state-chartered workers’ compensation fund over several months, uncovered was “serious structural and operational issues” and questionable spending involving hundreds of millions of dollars. 
 
The State Compensation Insurance Fund, which provides workers' comp insurance to 220,000 employers in California, suffers from weak management and lacks key positions such as chief financial officer, chief operating officer and chief investment officer, according to the audit. Poizner said key steps to reform management at the fund were under way. 
 
"Fortunately, we have identified important issues, communicated our recommendations, and we expect that the State Fund will continue to work to make necessary reforms,” he said in a statement. “As SCIF's regulator, I will continue to monitor their activities and work with them." 
 
The audit found potential conflicts of interest involving more than $140 million in group administrative fees paid to Western Insurance Administrators between November 2003 and November 2006. The company is controlled by Frank DelRe, who was a SCIF board member at that time. It also found a potential conflict in payments of more than $125 million to associations with which a second former board member, Kent Dagg, had business interests. 
 
Group administrative fees paid to associations were incorrectly classified as legal and auditing fees in SCIF's financial statements, misleading users of the financial statements. Other key findings of the audit, conducted by RSM McGladrey Inc., an international business consulting and accounting firm, include: 
 
-SCIF paid $19.5 million in penalties from January 2007 to July 2007 due to late payments on medical and indemnity bills; 
 
-The fund maintains a significant reliance on information technology vendors, including approximately 200 outside information technology consultants, at a cost of approximately $321 million since 2004; 
 
-IT internal control deficiencies were noted in IT governance, logical security, and computer operations; 
 
-SCIF allowed inappropriate access of lower level employees into IT systems, such as the organization's Oracle payments system; 
 
-The fund paid invoices without a purchase order or contract; 
 
-There are more than 2,000 fleet vehicles for a total of 8,000 employees. In spite of the significant cost of acquisition and maintenance of this vehicle fleet, SCIF has not performed an audit of fleet management since 2003; 
 
-The fund has not performed adequate background checks on IT vendors to ensure their legitimacy. During the examination, background research was performed on certain SCIF vendors, which revealed that one vendor, while working as an insurance lobbyist, was convicted of a felony in 1993; 
 
-SCIF engaged in inappropriate business practices that allowed additional expenditures to be made to vendors that were outside of the board-approved budgetary process. This practice allowed SCIF to purchase goods or services, and make charitable contributions, which were neither known nor approved by the board; 
 
-The fund has no established procedure to ensure that company-issued equipment, property or records are returned upon an employee's termination or resignation. Due to this lack of controls, terminated employees may still have access to SCIF systems; and 
 
-Oversight of the group administration fees was severely inadequate. In some cases, little to no safety services, or any other services, were provided to the members of the associations being paid these administrative fees. Although the standard contracts authorized SCIF to audit the use of these fees, no audits were ever performed. Furthe