Due to the ongoing California Department of Insurance investigation of State Compensation Insurance Fund, the insurer's 2006 year-end financial statements will be published late. Though State Fund has submitted its annual and quarterly financial statements in a timely manner, the year-end statements won't be published until after the CDI issues its investigation report to the public.

Separately, State Fund likely will face monetary penalties because it failed to file its CPA Audit Report on time, which was held up due to concerns by its auditor, KPMG International. Exactly what those concerns were is unknown at this time.

"SCIF did request an extension from us for its CPA audit report, which was due last June 1, because the auditors felt uncomfortable providing an opinion pending the SCIF investigation," says CDI spokeswoman Jennifer Kerns.

"SCIF did request an extension from us for its CPA Audit Report, which was due June 1, because the auditors felt uncomfortable providing an opinion pending the SCIF investigation."
-Jennifer Kerns, Department of Insurance

It is unknown if the auditor's report will necessitate a restatement of reports already filed.

This is not the first time State Fund's auditors have had issues with its financials. State Fund, in 2002, fired its former auditor, PriceWaterhouseCoopers, over a material disagreement – a $1 billion disagreement over reserves. State Fund later sued the Department and then Commissioner John Garamendi to prevent the State from taking action. And it turned out that PWC's assessment of the situation was correct when later State Fund increased its reserves. Visit our archives at www.wcexec.com to read the 2003 Flash Report.

The Insurance Code allows for such extensions, though penalties will be assessed. The Department did not respond to questions emailed in regard to the cost of such an extension.

"In the meantime, we are following up on the status of the CPA audit report and whether KPMG LLP still considers the investigation a substantive issue in light of their audit opinion," says Kerns. "Currently, the issue of the CPA audit report is between the CPAs and SCIF."

KPMG International has completed its audit of the insurer, according to State Fund spokesman Patrick Andersen. Due to confidentiality agreements, KPMG declined comment.

In a letter posted on State Fund's website, former interim president Larry Mulryan says the insurer has been grappling with significant internal changes, shifts in the marketplace, and intensive scrutiny of its management practices.

But, "despite these concerns," Mulryan writes, "State Fund maintained solid financial footing and continued to provide stability to the California workers' compensation system."

Andersen says the report is being held up by mutual agreement with CDI until after the regulatory investigation is finished.

"Once released, the end-of-year financial report will reveal that our financial performance in 2006 was solid and that the California workers' compensation insurance market can continue to count on State Fund to serve as bedrock for future stability," he adds.

The annual statements are due March 1 of every year, and quarterly financial statements are due 45 days after a quarter ends.

The Department has had a financial examiner working on-site at State Fund since 2005, says Kerns, adding that the examiner originally intended to pull up stakes Dec. 2006. But when concerns about State Fund's safety groups arose, he was asked to stay put.

"He has been over there since 2005 as part of our regulatory authority to have a financial authority on-site, and he will be there for quite some time to come," says Kerns. "He is technically an employee of the CDI, but he sits at the State Fund to monitor things."

"He was one of the first individuals to raise the red flag and say, 'Hey, there is some stuff you might want to be aware of,' according to one of our deputies. He has been very active and involved in the top-down audit, so I believe we will have some pretty good analysis of the financial picture."

The Department declined to make the examiner available for interviews, saying that his ability to work depends on his being out of the public eye.