Auditor McCarthy releases first audit on unemployment fraud

OLYMPIA – An audit released today provides the first, high-level accounting of some of the circumstances surrounding the major fraud scheme that targeted Washington state's unemployment benefits in the spring.

As part of its annual audit of the state's financial statements, the Office of the Washington State Auditor found that the Employment Security Department (ESD) did not have adequate internal controls to prevent the fraud. The Department also reported inaccurate fraud and recovery numbers for the state's financial statements.

Additionally, the Auditor issued a finding to the state itself for not explicitly noting fraud on its financial statements.

“This audit is a building block – it is the first in a series that will examine the fraud at the ESD,” Auditor Pat McCarthy said. “We are still learning about what happened and vetting the information. I expect more clarity in the months to come.”

The findings released today were part of the larger Comprehensive Annual Financial Report, or ACFR. The role of Auditor's Office in the ACFR is to assess whether the state of Washington's financial statements accurately reflect the state's financial position in fiscal year 2020. Data used in the audit is as of June 30, 2020, the end of the fiscal year. Key figures include:

• The “known and suspected” fraud loss, as of June 30, 2020, was about $600 million. This sum covers more than 122,000 known or suspected fraudulent claims in fiscal year 2020.
• By that same time, the state had recovered $250 million, resulting in an estimated net loss of $350.9 million for fiscal year 2020.
• These amounts are almost certainly different today, as ESD's recovery efforts are ongoing.
• ESD paid out more than $7.5 billion in Unemployment Insurance benefits to 926,815 people in fiscal year 2020. The vast majority of those payments happened after the pandemic began in March. (These figures include the fraud.)
• In fiscal year 2020, ESD issued 684 percent more in benefits funding (about eight times) to 390 percent more people (about five times) than in fiscal year 2019.

The audit found ESD originally reported incorrect numbers for the state's financial statements because it planned to account for and investigate the fraud in its entirety during the next fiscal year. Those numbers have been corrected in the final ACFR.

The audit also showed changes in ESD's internal controls that made the program more vulnerable to fraud:

• The elimination in March of the “waiting week,” time ESD typically would use to verify eligibility for benefits. This decision was driven by federal incentives to distribute pandemic relief quickly as well as an executive order from the governor. As a result, benefits were paid before eligibility was verified.
• An automated process to detect claims that present a higher risk for identity theft was not working for much of the year. By the time it was repaired in May, a large number of fraudulent transactions had already occurred.

The audit notes that some pandemic-related relief funding was especially vulnerable to fraud. The federal Pandemic Unemployment Assistance Program offered benefits to self-employed people and others who would not typically be eligible for unemployment insurance. These claimants were not required to submit documentation to substantiate employment.

The finding issued to the state concerns the decision made by the Office of Financial Management that it would not list the fraud as a separate category on financial statements as an “extraordinary event.” This decision, in the Auditor's judgment, was incorrect.

“This fraud is a source of major concern for the public, legislators, and the media – all of whom are considered users of these financial statements,” Auditor McCarthy said. “Additionally, these funds were given to the state to use for the benefit of Washingtonians. The financial statements should be transparent about what happened.”

The ACFR is one of a series of audits that will address the unemployment benefits fraud. The Office expects to publish the next one – an accountability audit of ESD – in the first quarter of 2021.

For a link to the complete Comprehensive Annual Financial Report for the state of Washington, click here.

For a link to the Auditor's findings, click here.