Unemployment claims crush leads to audit questions: Harmon

FRANKFORT, Ky. (WTVQ/Press Release) – Auditor Mike Harmon’s office has completed its annual audit of the Commonwealth of Kentucky’s Comprehensive Annual Financial Report and issued a qualified opinion on the Unemployment Insurance (UI) Fund, also known as the Unemployment Compensation Fund, because of the UI internal control environment and the unknown amount owed to those who filed for unemployment benefits during Fiscal Year 2020.

“We’ve seen numerous stories about our friends and neighbors who have been displaced from their jobs and filed for unemployment benefits to help them and their families make ends meet,” said Auditor Harmon. “What our office found during our CAFR audit is that the Office of Unemployment Insurance is unable to accurately determine the amount of claims still outstanding for the fiscal year that ended on June 30, and a large backlog of claims remain unresolved.”

The Comprehensive Annual Financial Report (CAFR) of Kentucky is required under KRS 48.800(3), which directs the Kentucky Finance and Administration Cabinet to submit a complete report of the financial transactions of the preceding year and of the financial condition of the Commonwealth of Kentucky as of the end of the fiscal year.

The role of the Office of the Auditor of Public Accounts is to express an opinion as to whether these financial statements are free of material misstatements based on our audit.

An unmodified opinion is commonly referred to as a “clean audit” and expresses the auditor’s opinion that the financial statements are presented fairly in all material respects.

A qualified opinion is an auditor’s opinion that the financials are fairly presented, with the exception of a specified area, in this case the Business Type Activities and the Unemployment Compensation Fund.

All other units of the Commonwealth received unmodified audit opinions.

In the opinion letter to the Finance and Administration Cabinet Secretary, Auditor Harmon wrote: “The Kentucky Office of Unemployment Insurance had poor internal controls over benefit payments which increased the risk of fraud and undetected material misstatements. During the fourth quarter of fiscal year 2020, the Office of Unemployment Insurance, in an effort to expedite unemployment benefit payments, eliminated key internal controls that were in place to reduce the risk of improper payments. As a result, payments were paid to claimants without verification of eligibility. A significant backlog of unprocessed claims existed at year end and as of the date of our audit report. Management was unable to provide a reasonable or reliable estimate of the financial statement impact of this backlog of claims. Because of this, we were unable to obtain sufficient appropriate audit evidence to conclude that the accounts payable balance in the unemployment compensation fund was free of material misstatement.”

“In addition to continuing the uncertainty for thousands of Kentuckians waiting for unemployment claims to be processed, the inability to provide reliable data on the amount of claims still owed adds to the challenge that faces the General Assembly as legislators return in January to craft a new budget,” said Auditor Harmon.   “It is imperative for UI officials to address the problems that led to this issue, so that reliable data can be provided for the current fiscal year and going forward.”

The Office of the Auditor of Public Accounts will release more detail on the specific issues auditors found within the UI system when we issue the first volume of the Statewide Single Audit of Kentucky (SSWAK) in the coming months.