Dol Ui U.S. Letter

Source document: Dol Ui U.S. Letter; document type: inspector-general-sigpr-reports.

Full text

SPECIAL REPORT:
DELAWARE UNEMPLOYMENT
COMPENSATION FUND
FINANCIAL MANAGEMENT WITHIN
THE DELAWARE DEPARTMENT OF LABOR
DIVISION OF UNEMPLOYMENT INSURANCE

Dear members of the Delaware public,
One of the primary audit engagements overseen by the Office of Auditor of Accounts is the
Annual Comprehensive Financial Report (ACFR) – financial statements on all State of Delaware
funds, departments, organizations, bureaus, boards commissions, elected offices, and legal
entities. The ACFR is important not only for transparency about the use of public money, but as a
tool used to analyze our state’s financial position for bond financing and to maintain our
credibility with creditors and federal oversight agencies. Every detail published in the ACFR has
far-reaching consequences for our State. My office released the ACFR for fiscal year 2023 on
March 26, 2024, with this accompanying special report.
This year, the Independent Auditors’ Report includes an unprecedented disclaimer of
opinion related to the Delaware Unemployment Compensation Fund (DUCF). To my
office’s knowledge, the Delaware ACFR has never before included a disclaimer opinion.
The DUCF is managed by the Delaware Department of Labor Division of Unemployment
Insurance (DOLUI). As of June 30, 2023, the DUCF reported cash assets of approximately $390
million consisting of contributions from the federal government and businesses of all sizes who
hire Delawareans. The firm hired to prepare the Independent Auditors’ Report,
CliftonLarsonAllen LLP (CLA), has determined that this fund is not auditable for fiscal year
2023. Simply put, DOLUI was unable to provide detailed accounting records of any kind to
allow CLA to reach an opinion. The enclosed special report provides details on AOA’s
inquiry into how this happened, and our suggestions for a path forward.
Our inquiry revealed several factors contributing to this result. DOLUI management failed to
ensure accounting work was performed in a timely manner. State agencies, like Division of
Accounting, were slow to respond when the scope of the problems within DOLUI became clear.
These failures represent not only an unacceptable lack of adherence to the State’s established
accounting policies, but more importantly demonstrate an absence of accountability in a
program that Delaware employers fund, and Delawareans rely on.
The breadth of the consequences to our State from publishing a disclaimer of opinion within the
ACFR are not yet known. What I hope is made clear in the special report is that this was an
avoidable outcome. The large increase in benefits and beneficiaries throughout the Covid-19
pandemic strained the resources of Delaware’s unemployment system, as it did unemployment
programs across the country. Regardless, this does not excuse the failures of management that
followed.
I truly believe that here in Delaware, we are small enough to get this right. When AOA was
presented with evidence of problems, we acted. I believe this report offers a clear direction
forward. DOLUI must immediately put itself on a path to rectify the problems with fiscal year
2023, but also ensure that it is never in a similar position again. This will require changes with
not only the way DOLUI operates, but also all oversight of state accounting practices.

Our office will continue to monitor this situation and keep you informed as efforts to solve these
problems are underway. I want to thank the Department of Labor for their cooperation and
assistance in this inquiry, and thank our highly qualified, nonpartisan auditors, who do this
important work every day to keep our government transparent.

Thank you,

Lydia E. York

Delaware State Auditor of Accounts

OVERVIEW
On March 20, 2024, CliftonLarsonAllen, LLP (CLA) issued its opinions on the State of
Delaware Annual Comprehensive Financial Report (ACFR)* as of and for the year ended June
30, 2023. CLA included a disclaimer of opinion* in its Independent Auditors’ Report on the
ACFR and the basis for the disclaimer:
Basis for Disclaimer of Opinions on Business-type Activities and
Unemployment Fund

The State’s Department of Labor was unable to provide sufficient appropriate
audit evidence for the balances and financial activity of the account balances of
the unemployment fund. The State’s records do not permit us, nor is it practical to
extend or apply other auditing procedures, to obtain sufficient appropriate audit
evidence to conclude that the account balances and related cash flows in the
business-type activities and unemployment fund were free from material
misstatement. As a result of these matters we were unable to determine whether
further audit adjustments may have been necessary in respect to the
unemployment fund account balances, and the elements making up the statement
of activities and cash flows.
In context, CLA determined the Delaware Unemployment Compensation Fund (DUCF) to be
unauditable, even though its financial statements are presented. The Department of Labor,
Division of Unemployment Insurance (DOLUI) was unable to provide detailed accounting
records for the financial statement captions of the DUCF in the Statements of Net Position,
Activities, and Cash Flows*, for the fiscal year ended June 30, 2023.
Prior to this opinion being issued, the Delaware Office of Auditor of Accounts (AOA) was made
aware of significant deficiencies in internal controls within DOLUI. We began our inquiry on
January 9, 2024.
This report outlines AOA’s observations of circumstances and identifies correlations about
contributing factors that led up to the disclaimer event. The report presents our observations in
the course of inquiry and recommendations for a path forward.

*Defined in definitions page at the conclusion of this document.

Delaware Unemployment Compensation Fund - Background
The DUCF is a proprietary fund* managed by DOLUI containing employer and grant
contributions to Delaware’s unemployment insurance program. Thousands of Delaware
employers contribute to this fund, which pays out unemployment benefits to Delawareans every
week. As of June 30, 2023, this fund had cash assets of approximately $390 million.
The DOLUI DUCF is audited at the ACFR Proprietary Fund level by CLA. Unlike the financial
statements for the Delaware State Lottery and the Delaware Department of Transportation,
which are both proprietary funds, DOLUI DUCF does not produce basic audited financial
statements with note disclosures in accordance with Government Auditing Standards*.
Since at least fiscal year 2020, Department of Labor leadership has enlisted the Delaware
Department of Finance (DOF) and Division of Accounting (DOA) to compile a trial balance* in
accordance with United States Generally Accepted Accounting Principles*. This includes
creating accrual basis* entries for the DOLUI provided cash basis* trial balance.
We consider DOF to be an extension of DOLUI for the preparation of financial statements for
the ACFR. Since DOF is part of the internal control structure for DOLUI, it has a duty to fully
disclose relevant information that has a material effect on financial statements. When taken as a
whole, DOLUI management shall ensure a complete reflection of any fiscal year’s financial
statements.
Recent ACFR History
CLA, the independent contractor hired to complete the audit of the ACFR, issued findings* on
the financial reporting of DOLUI for each fiscal year since 2020. The findings are in the State of
Delaware’s Federal Uniform Guidance audit for each year, and are classified as either material
weaknesses* or significant deficiencies* in internal controls* over financial reporting during
fiscal years 2020-2022. The findings for each year include:
2020-01 – Audit Adjustments – Material Weaknesses: Material misstatements
which required adjustment and were identified after the records were provided
for audit. These included entries related to various accounts including
Intergovernmental Receivables, Claims Payable, Due to Other Governments, and
Federal Grant Revenue.
2020-02 and 2021-01 – UI Cash – Significant Deficiencies: DOL’s reconciled
book balance on the bank reconciliation did not agree to the balance recorded in
the general ledger.
2022-01 – Account Reconciliations – Material Weaknesses: DOL did not have
control properly implemented to ensure that accounts were reconciled timely, and
balances were recorded accurately.

2022-02 – Allowance for Doubtful Accounts – Significant Deficiencies: DOL
did not have a documented methodology or understanding of the methodology
used in determining the allowance for doubtful accounts for accounts receivable
and taxes receivable.
The Department of Labor, Department of Finance, and Division of Accounting were aware of
these findings as they were published. In response, the Division of Accounting instituted a
Corrective Action Plan* for DOLUI with a planned completion date of June 30, 2021. Through
the course of our inquiry, AOA found that the Plan ultimately did not rectify the root causes of
the ACFR findings.
An outside CPA firm was brought in to assist DOLUI in April 2023. AOA was notified of that
firm’s concerns with significant internal control deficiencies in January 2024.
Internal Systems
While most State entities use the centralized First State Financials System (FSF)* to record
financial transactions, DOLUI employs several separate and disconnected systems. These
include Microsoft Dynamics, which manages accounting trial balances, and Mainframe, the
database for recording transactions between DOLUI and Delaware employers. Additionally,
DOLUI manages activity across multiple bank accounts and a U.S. Department of Labor-held
trust fund. None of these systems are integrated with each other or with FSF, leaving DOLUI
solely responsible for maintaining databases outside of the State of Delaware Information
Technology Network.
Furthermore, within DOLUI, internal procedures dictate that lower-level accounting staff must
maintain records of daily tax collections and benefit payments in a Microsoft Excel spreadsheet.
To incorporate these records, staff are expected to compile monthly proposed accounting journal
entries*, which are then presented to management for review before being entered into Microsoft
Dynamics.
Separately, the DOA has been responsible for generating year-end closing entries* for Accounts
Payable and Accounts Receivable for DUCF since at least 2020. However, these entries were not
shared with DOLUI management and therefore were not entered into Microsoft Dynamics. As a
result, the trial balance of DUCF did not agree with the financial statements presented in the
State's ACFR for fiscal year ending June 30, 2022. This left two independent CPA firms hired to
assist DOLUI in 2023 with incomplete records from the previous year. Consequently, the
beginning balances for the fiscal year starting on July 1, 2022, were inaccurately reported.
Accounting Problems Within the Unemployment Division
Serious accounting issues within the Unemployment Division had been mounting over the years
as highlighted in the 2020-22 ACFRs. However, the situation worsened in 2023. Throughout the
year, the DOLUI Director hired several new managers tasked with overseeing accounting
activities related to the DUCF. Unfortunately, these new hires did not receive proper training in
their accounting oversight job functions. Consequently, in April and June of 2023, respectively,

the Santora CPA Group and Belfint, Lyons & Shuman, P.A. were contracted to provide
accounting services within the Division.
During this time, accounting staff within the Division continued preparing monthly accounting
journal entries. These entries outlined activities reflected in bank statements, consolidating daily
transactions such as employer contributions, grants received, employee claims, and employer
refunds. These transactions amounted to tens of millions of dollars monthly. According to the
protocols outlined in DOLUI internal procedures, the entries required review, approval, and
official entry by management, which did not occur.
AOA learned that despite management receiving the proposed journal entries, management
failed to conduct the required review. Consequently, no accounting journal entries for DUCF
were officially recorded in any database for the entirety of fiscal year 2023 through December
31, 2023, for fiscal year 2024.
Management contributed to a critical accounting situation in the months and years preceding the
current fiscal year. Firstly, they neglected to adhere to established policies and procedures
designed to govern accounting activities within DOLUI. DOLUI policies outline the necessary
steps for staff to generate valid accounting entries, but AOA determined the lack of proper
oversight resulted in the breakdown of control activities. Secondly, although external CPA firms
were eventually enlisted to aid with accounting functions, AOA maintains that management did
not adequately supervise the daily operations of these vendors. With closer monitoring, the
extent of the issues within DOLUI might have been discernible earlier.
Chain of Events – ACFR Delayed
In December 2023, Santora CPA Group made DOLUI leadership aware of multiple deficiencies
in the Division’s internal control structure that the firm had observed in its nine months of work.
This information was formalized in a letter received by DOLUI, which met with all concerned
parties. DOA requested an ACFR filing extension. In addition, DOA contracted with CPA firm
BDO to address the identified deficiencies and develop an auditable trial balance with a purchase
order for $500,000.
AOA planned an inquiry designed to gain an understanding of DOLUI’s internal controls,
processes and procedures to form recommendations. AOA arrived onsite to begin the inquiry on
January 9, 2024. After arriving at DOLUI, AOA auditors observed that DOLUI management was
preoccupied with a long-term project to modernize its systems, resulting in limited availability to
engage with AOA representatives.
AOA monitored the progress of each independent accounting firm as they worked to create a
functional trial balance for the DOLUI for the fiscal year ending June 30, 2023. Additionally,
AOA auditors conducted a trial balance simulation using journal entries prepared by DOLUI
staff. AOA’s data was then compared with data from CPA firms Santora and BDO. AOA
determined that the CPA firms had relied on summary data generated from bank statements and
Mainframe system to generate journal entries for a simulated trial balance. The result of this
exercise was that none of the CPA firms were able to start with a beginning balance that equaled

the prior year’s financial statements as reported in the ACFR. In addition, none of the CPA firms
were able to obtain detailed information that supported the summary reports from Mainframe or
details of daily deposits and disbursements from all bank accounts held.
BDO completed its own version of the cash-basis trial balance of DOLUI on February 27 and
presented it to DOA. DOA performed its work regarding year-end adjustments to complete a
full-accrual basis of accounting and submitted it to CLA on March 5, 2024.
On March 7, 2024, CLA determined the DOLUI DUCF unauditable.

Key Observations
AOA asserts that DOLUI’s internal controls over accounting and financial reporting are not
effective. Unless there is remediation to provide details supporting the financial statements,
Delaware risks continued disclaimer opinions on the State’s ACFR. AOA found multiple factors
contributing to the current inability to audit the DUCF:
1. The ACFRs for fiscal years 2020, 2021, and 2022 each had findings classified as material
weaknesses and significant deficiencies directly related to DOLUI’s internal controls.
While a Corrective Action Plan (CAP) was prepared in 2021, the plans to implement the
CAPs, including defining milestones, setting target dates, and establishing a method of
monitoring was not fully followed through to ensure that management’s objectives were
met.

2. DOLUI has a unique fiscal structure that is entirely disconnected from the First State
Financials System. Therefore, the accounting deficiencies within DOLUI cannot be
observed by oversight entities like AOA or DOA. Additionally, communication between
DOLUI and DOA regarding year-end closing reports and journal entries did not take
place.

3. Management contributed to a deterioration in business operations by not following
internal accounting procedures, and by fiscal year 2023, internal accounting work within
the Division had stopped entirely.

Recommendations
1. AOA recommends that immediate action is necessary in the form of a Corrective
Action Plan so that records can be audited for fiscal year 2023 and years going
forward. In AOA’s view, this plan must cover areas including, but not limited to:

a. Moving forward, all daily accounting reports must match daily employer
contributions and benefit payments. All monthly accounting journal entries must
be reviewed and entered into a database. Supporting documents must be filed for
all entries, and cumulative receipts and disbursements must be filed so those
records are reconcilable and available for audit.

b. All information in existing DOLUI databases must be inspected with the
assistance of IT specialists. This information must be evaluated for accuracy.

c. All banking information and financial activity must be accounted for in detail for
fiscal years 2023 and 2024.

d. Data for all contributing employers, benefit claimants, and combined wage claims
reported in other states should be reviewed for accuracy. Refunds should
subsequently be paid out if appropriate.

2. Lacking established mechanisms to integrate the fiscal structure of DOLUI with FSF
to ensure seamless data flow and enhance oversight capabilities, DOLUI should
continually foster open and transparent communication channels between it and
oversight entities, particularly AOA and DOA.

3. DOLUI should establish robust internal controls as a part of their basic day-to-day
operations. DOA should establish a monthly monitoring requirement to ensure
accounting work within DOLUI continues.
AOA will continue to identify and evaluate current internal controls over each unit of DOLUI to
see how information flows to management. AOA also plans to observe the Corrective Action
Plan for the DOLUI DUCF program to determine if the records for fiscal year 2024 are auditable
or require another disclaimer of opinion on the ACFR.
The risks associated with a disclaimer opinion on a portion of the State's ACFR are numerous
and can have significant implications for various stakeholders. Addressing the underlying issues
and improving financial reporting practices is essential to mitigate these risks ensuring the public
trust and credibility.

Accrual Basis – Revenues or expenses recognized when earned or incurred, as opposed to when
they are received or paid.
Annual Comprehensive Financial Report (ACFR) – The financial statements of all State of
Delaware funds, departments, organizations, bureaus, boards commissions, elected offices,
and legal entities. Refer to 29 Del. C. §2906.
Cash Basis - Revenues or expenses recognized when received or paid.
Corrective Action Plan – Management’s official response correcting audit findings.
Disclaimer Of Opinion – A statement issued by independent external auditors saying that they
cannot express an opinion on financial statements.
Federal Uniform Guidance – A government-wide framework for grants management that
provides an authoritative set of rules and requirements for federal awards.
Findings – Conditions reported from auditors to management which raise concerns about the
operations of the entity.
First State Financials System – The accounting system of the State of Delaware.
Generally Accepted Accounting Principles – The default accounting standards used by
companies and governmental organizations in the United States.
Government Auditing Standards – Standards for auditing laid out by the United States
Government Accountability Office.
Internal Controls – Policies and procedures governing financial and performance operations.
Journal Entries – Records of transactions, either economic or non-economic, intended for input
into a trial balance.
Material Weaknesses – A deficiency or deficiencies in internal controls that greatly increases
the likelihood of serious error in a financial statement.
Proprietary Fund – A fund separate from the Delaware General Fund that is reported in a
similar fashion to a business operating in the private sector.
Significant Deficiencies – A deficiency or deficiencies in internal controls that slightly increases
the likelihood of serious error in a financial statement.
Statements Of Net Position, Activities, And Cash Flows – Basic financial statements that
auditors review to express an opinion.
Trial Balance – An internal financial statement listing the account balances of all the general
ledger accounts.
Year-End Closing Entries – Official records of the position of financial accounts at the end of
the fiscal year.

File and source

File

REPORT_DE-Auditor-of-Accounts_DOL-Unemployment-Insurance-special-report-unauditable_2024-03.pdf

Size

5,200,199 bytes

SHA-256

a3b02fb88b7fc5d101985bbcb10b22322981680d919d34091cf76c597d011b93

Our copy

REPORT_DE-Auditor-of-Accounts_DOL-Unemployment-Insurance-special-report-unauditable_2024-03.pdf

Original

auditor.delaware.gov