POLICY HIGHLIGHTER

Volume 14, Number 23
October 6, 2004

Numerous audit findings doubles state's fraud-loss insurance premium

Washington's continued fiscal mismanagement and inadequate audit oversight has resulted in a doubling of the state's Employee Dishonesty Blanket Bond insurance premium and a 400 percent increase in the deductible for fiscal year 2004-05. The Office of Financial Management (OFM) has identified Washington's numerous audit findings as the culprit for this insurance premium increase.

In a letter sent to state agencies regarding Washington's Employee Dishonesty Blanket Bond, OFM wrote:

In compliance with RCW 43.17.100, the referenced commercial insurance policy has been renewed. This policy provides coverage for loss sustained by the state of Washington through any fraudulent or dishonest act(s) committed by any of its employees. This year's renewal has been extremely difficult. Although Great American has provided the state fidelity coverage for a number of years, their quote for the 2004-2005 policy term was unacceptable. The state's insurance broker approached the insurance market, but because of the state's claims history and the number of audit findings relating to inadequate internal controls, it was not easy to find carriers willing to provide coverage. We were able to obtain coverage but at a cost. Premium has doubled and the deductible has increased from $100,000 to $500,000.

OFM also sent the following email to one state agency regarding the difficulty in obtaining continued fraud-loss insurance coverage: "Our broker is in the process of renewing the state's fidelity bond for 2004-05. Because of our claims activity and findings by the Auditor's Office we are having a difficult time getting quotes. One carrier is looking hopeful but before they will give us a quote they need more information."

The current trend for yearly audit findings indicates the difficulty in obtaining this insurance next year may only increase. Consider that in 2001, the state auditor issued 13 audit findings. That number grew to 24 by 2002. Last year, the number of audit findings reached an astounding 60. The 2004 audit findings are due to be released before the end of this year.

While it is encouraging that some legislative hearings were held last month regarding a few of the 2003 audit findings (Labor and Industries and Department of Social and Health Services audits), the legislature must exert more oversight and ultimately require compliance with audit findings. Many of the 2003 audit findings were repeats from the year before. According to state law, the instance of a repeat audit finding should never occur (Please see EFF PH 14-10).

Since the state auditor does not have the ability to enforce compliance and cause corrective action for audit findings, the responsibility for ongoing fiscal mismanagement and increases in the state's fraud-loss insurance premium falls equally on Washington's executive and legislative branches. Until agencies face meaningful consequences for audit violations, taxpayers will continue to suffer the pain of both the initial agency wrongdoing as well as being forced to have more of their hard-earned tax-dollars earmarked to ever increasing state insurance premiums.

Prepared by: Jason Mercier | Budget Research Analyst | 360-956-3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org