FWCJUA Audit Committee Meeting Report: April 27

The Florida Workers’ Compensation Joint Underwriting Association (“FWCJUA”) Audit Committee (“Committee”) met on Monday, April 27, 2009, to review the 2008 FWCJUA Financial Audit and Committee Charter Procedures.

2008 Financial Audit

Auditor Thomas Howell Ferguson P.A. (“the auditor”) said that the most recent FWCJUA audit did not identify any significant deficiencies or material weaknesses in the organization’s operations.

The audit identified the following control deficiencies that it determined did not constitute significant deficiencies or material weaknesses:

• When comparing the reinsurance recoverable balance to the amount recorded on the FWCJUA general ledger, a $39,000 difference was noted.  FWCJUA management responded that the difference results from the fact that the FWCJUA records the recoverables paid by Travelers as part of its service fee on a cash basis.  The auditor recommended the FWCJUA consider reviewing the Allocated Loss Adjustment Expenses paid by Travelers prior to the end of each month to ensure expense payments are recorded in the proper period.  Committee members noted that amount is generally much smaller, and its size was a result of being noted at year’s end.  However, the Committee agreed to monitor the recoverables amount over time.
• Based on a review of the Schedule F penalty calculation, the auditor noted that the FWCJUA did not include the premiums receivable portion allocated to unauthorized reinsurers.  Thus, the recorded Schedule F penalty was deficient by $93,900.  The auditor recommended that the premiums receivable for unauthorized reinsurers be included when calculating the Schedule F penalty. 

The auditor’s verbal recommendations included:

• Evaluating credit ratings of reinsurers, and of the banks providing collateral on a regular basis.  This recommendation was made based on the auditor having noted that PMA Capital Insurance Company was downgraded to a rating of C++ without a Letter of Credit being obtained.  The auditor also noted that a Letter of Credit secured by a number of banks included Citibank, which had a rating of less three stars (or “adequate”).  The reinsurance contracts state that the reinsurer is to provide collateral via funds withheld or a Letter of Credit, should its rating become B++ or lower.  The Committee agreed to monitor the issue and bring it to the attention of the FWCJUA Reinsurance Committee.
• Developing monitoring procedures relating to providers not paid on the fee schedule and request a monthly report from Travelers of claims paid to those providers.  The auditor noted that, during controls testing over the claims cycle, a claim from a medical provider had been initially underpaid; the provider had an agreement to be paid at 100 percent, rather than according to the fee schedule.  There is no formal process or monitoring of providers who have the 100-percent payment agreement.  Committee members responded that few providers are not paid on a fee schedule, and it may be enough to note this fact in a claim file, as opposed to establishing specific procedures for those providers.  The Committee directed FWCJUA Staff to review the issue.
• The FWCJUA’s checklist of all required month-end procedures should be used more consistently, or that the FWCJUA change its procedure.  The Committee agreed the checklist would be followed consistently.
• Additional review of the FWCJUA Annual Statement to ensure accuracy of information reported.  This recommendation was made after the auditor noted non-financial reporting errors on Schedules DA and F of the Annual Statement filed with the Florida Office of Insurance Regulation.  Although the errors did not affect the account balances and do not result in a material misstatement of the financial statements, it is important that the information presented in the Annual Statement be complete and accurate.  The Committee said the issue would be addressed and corrected in this year’s Annual Statement.

The Committee passed a motion to file the 2008 FWCJUA audit with the Florida Department of Financial Services and the FWCJUA Board of Governors (“Board”).

Audit Committee Charter Procedures

The Committee discussion included the following procedural issues:

• How the FWCJUA management is assessing the adequacy and effectiveness of internal controls, and whether there are adequate controls over the approval and monitoring of transactions and their effects on the FWCJUA Financial Statement.  The Committee determined that the assessment of controls is adequate.
• Significant risks faced by the FWCJUA.  Committee members said the FWCJUA is getting much smaller, and thus, the most important issue is managing its depopulation.
• Whether FWCJUA management fosters an environment that promotes high-quality financial reporting, including addressing effectiveness of internal control issues; whether the auditors felt pressure by management to accept less than high-quality financial reporting.  The auditors said management cooperated fully.
• Whether the auditors noted any instances of employee fraud, questionable payments, or violations of laws or regulations.  The auditors said they did not.
• An update from the FWCJUA General Counsel on legal and regulatory matters that may have a material effect on the financial statements.  The General Counsel said an audit letter had been submitted to the auditor, and there were no issues of significance.
• Asking the FWCJUA management and the auditors to identify difficult areas regarding estimates, and to explain how each made their judgments in those areas.  Committee members agreed the biggest concern is anticipating the size and number of accounts the FWCJUA will have in 2010 to facilitate the budget process later this year.
• Providing an opportunity for the auditor to be available to the Board annually to review the results of the audit.  The Board will be presented with the results at its meeting on Friday, May 1.

The Committee adopted its tentative quarterly meeting schedule for the remainder of 2009, and agreed it would send out a notice if additional, unscheduled meetings are warranted.  Upcoming Committee meetings, to be held via teleconference, are scheduled as follows:

• 10:00-11:00 a.m., Thursday, August 20, 2009
• 10:00-11:00 a.m., Wednesday, November 18, 2009

Should you have any questions or comments, please contact Colodny Fass.

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