Attestation Report Of The Nebraska Department Of Insurance

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS1.Financial Coding IssuesDuring testing, we noted several transactions that were not recorded properly in the State’s accounting system,EnterpriseOne. Some errors noted required adjustment to the financial schedule, as detailed below, to ensure theNebraska Department of Insurance’s (Department) financial activity was presented accurately.Return of Deposit with VendorDuring the examination period, the Department received 750,000 back from the administrator of theComprehensive Health Insurance Pool (CHIP) that was held previously on deposit to pay claims. Due to errors inrecording this transaction, the 750,000 was recorded in the Department of Insurance Cash Fund. This transactionshould have been recorded instead to the Comprehensive Health Insurance Pool Fund. As a result of this codingerror, 750,000 was not distributed properly in accordance with Neb. Rev. Stat. § 44-4225(5) (Cum. Supp. 2018)and Neb. Rev. Stat. § 77-912 (Reissue 2018). Had this transaction been recorded properly, the General Fund,Insurance Tax Fund, and Mutual Aid Assistance Fund would have received the amounts detailed in the table below:FundGeneral FundInsurance Tax FundMutual Aid Assistance FundTotalAmount 300,000375,00075,000 750,000Section 44-4225(5) states, in relevant part, the following:No later than May 1, 2002, and each May 1 thereafter, after funding of the net loss from operation of the pool for theprior premium and related retaliatory tax year, taking into account the policyholder premiums, account investmentincome, claims, costs of operation, and other appropriate gains and losses, the director shall transmit any moneyremaining in the fund as directed by section 77-912, disregarding the provisions of subdivisions (1) through (3) ofsuch section . . . .Section 77-912 provides, as is relevant, the following:The Director of Insurance shall transmit fifty percent of the taxes paid in conformity with Chapter 44, article 1, andChapter 77, article 9, to the State Treasurer, forty percent of such taxes paid to the General Fund, and ten percent ofsuch taxes paid to the Mutual Finance Assistance Fund promptly upon completion of his or her audit and examinationand in no event later than May 1 of each year . . . .The financial schedule was adjusted to show this balance as Due to Fund in the Comprehensive Health InsurancePool Fund, rather than Due to Vendors in the Insurance Cash Fund.Software CapitalizationThe Department began implementation of a new computer system to help Nebraska taxpayers navigate the processof filing a health care insurance company appeal and track the progress of filed claims. As of April 30, 2020, theDepartment had incurred costs of 236,406 related to this project, all of which were recorded as operating expenses.However, these costs met capitalization requirements and, therefore, should have been recorded as capital outlay.The financial schedule was adjusted for this error.The Nebraska State Accounting Manual, AM-005, General Policies, Section 28 – Capital Outlay (“ComputerSoftware Capitalization”), requires costs related to internally developed software to “be capitalized as a separateasset if the cost is 100,000 or more and has a life greater than one year.”-4-

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)1.Financial Coding Issues (Continued)Insurtech Conference ActivityThe Department sponsored the 2019 “Insurtech on the Silicon Prairie Conference,” which was a joint endeavor bythe Nebraska Insurance Federation and the Department to promote Nebraska’s economic development and toheighten the awareness of advances in technology that can aid the effectiveness of both insurance operations andinsurance regulation. The Department was responsible for collecting registration fees for this conference andissuing payments, totaling 64,497, for conference-related expenditures, using the fees received.After the conclusion of the conference, the Department posted a journal entry in the accounting system that reversedout the 64,497 in revenues and expenditures related to the 2019 conference, effectively acting as if this activitynever occurred.The Nebraska State Accounting Manual, AM-005, General Policies, Section 1 – State Agency SponsoredConferences, provides the following, in relevant part:No adjustment will be made to an agency’s appropriation (without the approval of DAS Budget), nor will netting ofreceipts against disbursements be allowed when sponsoring a conference. Any disbursement must be included in theagency’s budget. (§81-1182)Other Coding IssuesDuring testing, we also noted the following issues regarding the account coding used by the Department: Three payments included costs, totaling 8,996, related to travel expenses incurred by independentcontractors used by the Department. The Department recorded these travel expenditures to the Accounting& Auditing Services or the Legal Services Expense account codes; however, the Contractual Services –Travel account code appears to be more appropriate for such expenditures. One payment for 15,000 was paid to an independent contractor providing services for the Senior HealthInsurance Information Program. The Department recorded this expenditure to Subrecipient Payment –SEFA; however, 1099-Aid-Services appears more appropriate because this individual is not a subrecipient.This error resulted in the payment being identified incorrectly as a subrecipient payment on the State ofNebraska’s Schedule of Expenditures of Federal Awards (SEFA).Good internal controls require procedures to ensure that financial transactions are recorded accurately.Without such procedures, there is an increased risk for a material misstatement of the financials to occur and remainundetected, further increasing the possibility of loss or misuse of funds.We recommend the Department implement procedures to ensure that all of itsfinancial activity is recorded accurately in the accounting system.Department Response:A. Financial Coding Issues – Return of Deposit with VendorThe original coding was in error. This has been corrected and proper disbursement of the taxes was done prior tothe close of the fiscal year. This specific type of transaction, namely money coming back from the NECHIPAdministrator, is rare. On 7/07/20, detailed instructions were created that include specific account codes to beused.-5-

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)1.Financial Coding Issues (Concluded)B. Financial Coding Issues – Software CapitalizationCosts were identified and recoded into a fixed asset code for IT projects in progress. Any such item shall be codedto a fixed asset code in the future.C. Financial Coding Issues – Insurtech Conference ActivityNetting of receipts for this conference will not be allowed going forward.D. Financial Coding Issues – Contractor TravelThe agency has begun using the contractor travel code, effective 7/1/2020.E. Financial Coding Issues – SHIP ContractorThis coding issue was corrected in April 2020, prior to the initiation of this audit.2.Payroll Segregation of DutiesThe State’s accounting system does not have an established segregation of duties for payroll processing. Therefore,employees with access to process payroll are able to perform all procedures without a secondary individual beingrequired to approve transactions. One employee was able to perform all payroll processes within the system andcertify the accuracy of payroll to the Department of Administrative Services (DAS).Accordingly, the Department should have compensating procedures in place, such as a documented review of thefinal payroll register by an individual without payroll access, to ensure no one individual is able to conceal errorsor irregularities.The Department had 14,752,727 in personal service expenditures during the period July 1, 2018, throughApril 30, 2020.Additionally, we noted the following specific errors during our testing of payroll. For one of three employee terminations tested, the sick and vacation leave hours earned on the employee’sfinal paycheck were improper. The following variances were noted:Leave TypeSick LeaveVacation Leave ce0.930.5For 1 of 10 employees tested, the employee’s adjusted service date was incorrect. This employee was hiredoriginally in a temporary capacity, being moved later to a permanent, full-time position. The Departmentdid not adjust properly the employee’s service date to the date permanent employment began; instead, theservice date was left as the date temporary employment began. The difference in dates is shown below:ActualService Date4/23/2018Proper ServiceDate6/4/2018-6-Difference inDays42

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)2.Payroll Segregation of Duties (Concluded) The Department lacked adequate procedures to ensure vacation leave in excess of the 280-hour maximum(35 days) were lapsed properly as of December 31, 2019. The following table details the excess vacationleave hours noted that were carried over improperly to 2020:Employee #1Employee #2Employee #3Employee #4ExcessCarry-Over3.4 hours1.9 hours0.9 hours0.9 hoursTitle 273 NAC 10-004.02 requires the following:All employees’ accumulated vacation time in excess of thirty-five days shall be forfeited as of December 31 of eachcalendar year. In special and meritorious cases, when it would cause hardship for an employee to take earnedvacation leave before December 31, excess carryover leave may be approved by the Agency Head. In these cases, theagency head shall assure hours carried over shall be used within the next six months. In no case shall approved carryover vacation continue from year to year.(Emphasis added.) No such approval from the Agency Head was obtained for the excess leave noted.A good internal control plan requires procedures to ensure that an adequate segregation of duties exists, so no oneindividual is in a position both to perpetrate and to conceal errors and/or irregularities. This would require someonewithout payroll access to perform a documented comparison of the final payroll register to employee timesheets,confirming that the payroll was proper. Those same internal control procedures should ensure also that employeeservice dates, leave earnings, and leave carry-overs are proper.Without such procedures, there is an increased risk of errors or irregularities occurring and not being detected.We recommend the Department implement procedures to ensure a propersegregation of duties, such as requiring someone without payroll access to performa documented review of the final payroll register for accuracy and reasonableness.Those same procedures should ensure also that employee service dates, leaveearnings, and leave carry-overs are proper.Department Response:A. Payroll – Segregation of DutiesThe Department will initiate a process to have an individual without payroll access review the final payroll register.B. Payroll – Leave and Date AdjustmentsAdjustments to leave balances and tenure dates will be reviewed by a second person.3.ContractsDuring our testing of the Department’s expenditures, we noted the following regarding contracts – or, in oneinstance, the lack thereof – entered into by the Department:-7-

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)3.Contracts (Continued)State Contracts DatabaseOne contract tested was not included on the State Contracts Database, as required by State statute. The contract inquestion provided reinsurance coverage for the Excess Liability Fund (Fund), a trust fund created by Neb. Rev.Stat. § 44-2829(1) (Reissue 2010) and intended “for the exclusive use and purposes stated in the Nebraska HospitalMedical Liability Act.”During the examination period, payments on this reinsurance contract totaled 1,625,000. As permitted by § 442829(6), those contract payments came from the Fund.The Taxpayer Transparency Act (Act) is set out at §§ 84-602.01 to 84-602.04 (Cum. Supp. 2018, Supp. 2019).Neb. Rev. Stat. § 84-602.04(4)(a) (Supp. 2019) of the Act states, in relevant part, the following:The web site described in this section shall include a link to the web site of the Department of Administrative Services.The Department’s web site shall contain:(i) A data base that includes a copy of each active contract that is a basis for an expenditure of state funds,including any amendment to such contract and any document incorporated by reference in such contract . . . .(Emphasis added.) According to Neb. Rev. Stat. § 84-602.03(1)(a) (Cum. Supp. 2018) of the Act, “Expenditure ofstate funds means all expenditures of state receipts, whether appropriated or nonappropriated, by a state entity . . .[.]”Section 84-602.03(4) of the Act defines “state receipts” as follows:State receipts means revenue or other income received by a state entity from tax receipts, fees, charges, interest, orother sources which is (a) used by the state entity to pay the expenses necessary to perform the state entity’s functionsand (b) reported to the State Treasurer in total amounts by category of income. State receipts does not include passthrough funds.(Emphasis added.) Additionally, Section 84-602.03(2) of the Act provides the following definition for “passthrough funds”:Pass-through funds means any funds received by a state entity if the state entity is acting only as an intermediary orcustodian with respect to such funds and is obligated to pay or otherwise return such funds to the person entitledthereto[.](Emphasis added.) The Department claims that the balance held in the Fund falls within the definition of “passthrough funds” at § 84-602.03(2) of the Act and, therefore, the reinsurance contract was not required to be includedon the State Contracts Database.As mentioned already, the contract at issue provided reinsurance coverage for the Fund, and the 1,625,000 paidfor that coverage came from the Fund. Contrary to the definition of “pass-through funds” in § 84-602.03(2) of theAct, however, the Department was not “acting only as an intermediary or custodian with respect to” the Fund moneypaid to the reinsurance provider. Likewise, the Department was not “obligated to pay or otherwise return” the Fundmoney to the reinsurance provider, nor was the reinsurance provider “entitled” to receive that money.Rather, the contract expenditures arose from the Department’s discretionary use of the Fund money, per § 442829(6), to pay for the cost of the reinsurance coverage purchased. Therefore, the Fund money must be seen asState receipts – which, under § 84-602.03(4) of the Act, are “used by the state entity to pay the expenses necessaryto perform the state entity’s functions” – not pass-through funds held for a particular beneficiary or recipientclaiming a proprietary interest in those monies.-8-

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)3.Contracts (Concluded)Good internal controls require procedures to ensure that all of the Department’s contracts are available on the StateContracts Database.Without such procedures, there is an increased risk of the Department not only failing to comply with State statutebut also preventing both the Legislature and the general public from having access to important financialinformation, as intended by the Act.Lack of ContractThe Department was unable to provide any written contract or agreement to support an 11,799 payment to MidlandArea Agency on Aging (Midland). Midland offers services related to the Senior Health Insurance InformationProgram (SHIIP), but documentation is lacking for the specific services that the Department received or the termsof the arrangement under which they were provided.Additionally, the Department had only an invoice from Midland for the 11,799 payment tested. The Departmentdid not obtain any detailed documentation to support the costs listed on the invoice, which included personnel,travel, printing, phone, liability insurance, and audit costs.Good internal controls require procedures to ensure that the Department memorializes its agreements in writtencontracts that specify the particulars of those arrangements and are kept on file for subsequent review. Those sameprocedures should ensure also that the Department obtains detailed documentation to support the costs included oninvoices submitted for payment.Without such procedures, there is an increased risk for the loss and/or misuse of funds.We recommend the Department implement procedures to ensure the following: 1)all of its contracts are posted on the State Contracts Database, as required by theAct; 2) agreements are memorialized in written contracts that specify theparticulars of those arrangements and are kept on file for subsequent review; and3) detailed documentation is obtained to support costs on invoices submitted forpayment.Department Response:A. Contracts – State Contracts DatabaseThis type of contract had not historically been entered into E1 or scanned into the state contract database. Theagency has agreed to begin entering & scanning in line with auditor recommendations.B. Contracts – Lack of ContractThe agency agrees that all contractors should be engaged with a written contract and entered into E1 and the statecontract database.4.Capital Asset IssuesDuring our testing of the Department’s capital assets, we noted the following: During the examination period, the Department sold a Dell Laptop at a surplus property auction. This assetwas originally purchased using Federal funds. This item was grouped into a “lot” by DAS – SurplusProperty. The Department received notification showing only the total proceeds of that lot, not the amountpaid for each item. All proceeds of the sale were deposited into the Department of Insurance Cash Fund.-9-

NEBRASKA DEPARTMENT OF INSURANCECOMMENTS AND RECOMMENDATIONS(Continued)4.Capital Asset Issues (Continued)Without receiving detailed information regarding how much each item sold for, however, the Departmentis unable to ensure compliance with Neb. Rev. Stat. § 81-161.04(2) (Cum. Supp. 2018), which provides thefollowing, in relevant part:Except as otherwise provided in this subsection, the proceeds of the [surplus property] sales shall bedeposited with the State Treasurer and credited to the General Fund unless the using agency certifies to themateriel division that the property was purchased in part or in total from either cash accounts or federalfunds or from a percentage of such accounts or funds, in which case the proceeds of the sale to that extentshall be credited to the cash or federal account in the percentage used in originally purchasing the property.(Emphasis added.) The Department did not make the certification referenced in the above statutorylanguage, and the applicable Federal regulations do not require the sale proceeds to be returned to theFederal government. Consequently, the Department should have posted a journal entry to move thoseproceeds from the Department of Insurance Cash Fund to the General Fund. The Passed Transaction Report identifies capital asset purchases that were not added to the capital assetrecords. During testing of three purchases included on this report, totaling 12,953, we noted that theDepartment “passed” on adding the items to the capital asset records because the items did not meetcapitalization requirements. If items are “passed” on, the Department should post journal entries to recordthe purchase as an operating expense, rather than a capital asset purchase. However, the Department failedto process such journal entries, resulting in the Department’s accounting records overstating capital outlayexpenditures. During testing of two capital asset additions, we noted that one addition recorded the incorrect value anddate of acquisition for the assets purchased. This addition was for the purchase of four firearms. TheDepartment reduced improperly the amount capitalized for each firearm purchased by the trade-in valuereceived. The Department also failed to capitalize freight costs.The table below offers a comparison of the Auditor of Public Accounts’ (APA) calculated value of

NEBRASKA DEPARTMENT OF INSURANCE JULY 1, 2018, THROUGH APRIL 30, 2020 This document is an official public record of the State of Nebraska, issued by . Lincoln, Nebraska 68509 Phone: 402-471-2111 . NEBRASKA DEPARTMENT OF INSURANCE TABLE OF CONTENTS Page Background Information Section