Chapter 3
Workers' Compensation Board

Table of Contents

Provincial Auditor Saskatchewan
1996 Fall Report

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Executive Summary

In our 1996 Spring Report, we express concerns about our access to the Workers' Compensation Board (WCB) and our ability to audit the WCB. We said we would audit the WCB directly for 1995. This Chapter reports on the results of our audit. We wish to acknowledge the cooperation extended to us by the WCB and KPMG, the WCB's appointed auditor.

The WCB faces pressures and demands from its many participants. These pressures and demands include: questions about the continued relevance of the compensation program's structure; the need to control costs and explain significant increases in costs; and the need for consistent and fair assessments of injuries. The WCB is aware that how it balances and manages these pressures and demands will drive its success.

We set out the results of our audit in three sections. These sections are: compliance with the law, sound financial management, and public accountability.

In the first section, we report the WCB needs to set aside sufficient money to pay for the costs of injuries incurred (i.e., reserves) so that it complies with The Workers' Compensation Act, 1979 (Act). We recommend the WCB adjust its rate setting process and practices to comply with the Act or seek appropriate changes to the Act.

In the second section, we report the WCB needs to improve the system it uses to track and estimate its compensation costs. We also report it should develop expertise to estimate reliably its compensation costs and related benefits-liability. The WCB has recognized these needs and is working on them. The WCB also acknowledges that inadequacies in this important system caused it difficulties in a number of areas. For example, the WCB could not produce reliable estimates of total compensation costs for its monthly financial reports. Also, it could not prepare a financial plan (i.e., budget) for its entire operations.

In the last section, we describe our concern with the reliability of the WCB's financial statements. We have doubts about the assumptions and process used to calculate the benefits-liability. So, we cannot determine if the $467 million benefits-liability ($436 million - 1994) and the $121 million compensation expense ($114 million - 1994) recorded in its 1995 financial statements are fairly presented.

Due to the concerns we raise in this Chapter, we have advised the WCB and KPMG that we plan to work closely with KPMG in the 1996 audit. We look forward to their continued cooperation.

Provincial Auditor Saskatchewan
1996 Fall Report

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Key issues the WCB faces

.04 To help legislators and the public understand and assess the WCB, we set out, in paragraphs .05 to .06, the key issues the WCB currently faces.

.05 The success of the WCB is best measured by the success of the compensation program. As with most other workers' compensation programs in Canada, Saskatchewan's program, developed in 1930, is based on five underlying principles. These are no-fault compensation, security of benefits, collective employer liability, independence of the board, and exclusive jurisdiction of the board. The WCB's 1995 Annual Report indicates that the Board of the WCB is committed to these principles and uses them to guide its decisions.

.06 To deliver the compensation program, the WCB works with many participants. These include workers and their representatives; employers; health care professionals; workers' counsellors; government appointed review committees; other parts of the Government; and those involved in injury and disease prevention. The WCB is experiencing increased pressures and demands from these participants. How the WCB manages these pressures and demands will drive its success. These pressures and demands include the following:

• Questions about the continued relevance of the five underlying principles Various participants in the compensation program question the need to follow these principles. Should employers continue to be collectively liable for compensation costs? Are benefits provided to workers too high? Too low? Should the Board continue to have exclusive jurisdiction to adjudicate claims?

 

Provincial Auditor Saskatchewan
1996 Fall Report

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• Need to control costs and explain the significant increases in costs

From 1990 to 1995, the WCB's expenses increased $70.2 million (166%) of which $52.6 million was due to increases in compensation costs. Due to the principle of collective liability, employers pay for these rising costs. Employers are unhappy about continued cost increases. They view these increases as more taxes that adversely affect their ability to compete and employ people. They are asking the WCB to explain the increases in costs and how the WCB plans to control them.

• Need for consistent and fair assessments of injuries

Assessment of injuries requires a great deal of knowledge, experience and judgement. The WCB must work closely with health service providers and the medical community in these assessments. New types of work place injuries (e.g., stress, carpel tunnel syndrome) increase the complexity of these assessments. In these cases, the WCB must identify the new type of injury, determine if it is a work place injury and determine if it qualifies for compensation.

Workers today are proactive and questioning. No longer do they readily accept the judgement of others. Instead, they ask for the basis of the judgement, seek advice of others and expect fair treatment. If they feel they are not treated fairly, they seek recourse. This applies to their dealings with the WCB.

 

Background

.07 In Chapter 27 of our 1996 Spring Report, we express concerns about our access to the WCB and our ability to audit the WCB. We advised the Assembly that we would audit the WCB directly for 1995. We also stated we would not rely on the 1995 reports of the WCB's appointed auditor, KPMG. This included KPMG's Auditor's Report that accompanies the WCB's 1995 financial statements.

 

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1996 Fall Report

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.08 To carry out our audit efficiently, we used the work KPMG had done to the extent possible. We did additional procedures directly as we determined necessary. The management of the WCB and KPMG cooperated with us.

.09 The following audit objectives and conclusions relate to 1995. The audit findings are relevant to both 1994 and 1995. In addition, paragraphs .82 to .85 set out audit findings applicable only to 1994.

 

Our audit objectives

.10 The objectives of our audit were to form the following opinions and to report the results to the Legislative Assembly:

• an opinion on the rules and procedures used by the WCB to safeguard and control its assets and ensure compliance with authorities. We limited our audit to those authorities relating to financial reporting, safeguarding assets, revenue raising, spending, borrowing and investing activities;

• an opinion on the WCB's compliance with those authorities; and

• an opinion on the reliability of the WCB's financial statements.

 

Our audit conclusions

.11 The WCB had adequate rules and procedures to safeguard and control its assets, except the matters described in paragraphs .29 to .85.

.12 The WCB complied with the governing authorities referred to above, except the matters described in paragraphs .17 to .26.

.13 The WCB's financial statements for the year ending December 31, 1995 were reliable, except the matter described in paragraphs .89 to .98.

 

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1996 Fall Report

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.14 In paragraphs .100 to .107, we bring other significant matters to the attention of the Legislative Assembly

Our audit findings

.15 This Chapter sets out our findings under three sections. These sections are: compliance with the law, sound financial management, and public accountability.

.16 As stated earlier, the WCB operates under The Workers' Compensation Act, 1979 (Act). The WCB must ensure it designs adequate processes to ensure compliance with this Act. Paragraphs .17 to .26 set out one matter where the WCB needs to reconsider its current processes.

 

Insufficient money set aside

.17 The WCB needs to set aside sufficient money to pay for the costs of injuries incurred (i.e., reserves) as required by The Workers' Compensation Act (Act).

.18 Various provisions of the Act direct the WCB on how to set rates charged to employers. The Act envisions employers would be grouped together by industry. It calls these groupings classes. It gives the WCB authority to set classes. It does not provide guidance on how the WCB should set these classes.

.19 The WCB has a process to group employers into different classes of industries. Grouping employers is challenging because there are a small number of employers in Saskatchewan.

.20 In addition, the Act envisions that employers, within each of these classes, would be collectively liable for injuries occurring within their class. It requires today's employers to pay costs related to today's claims. The Act does not anticipate that one class would subsidize the costs incurred by another.

.21 If one class does not have sufficient money set aside to pay for the costs of its injuries (i.e., reserves), the law contemplates that the WCB would recover the deficiency from employers within this class either immediately or in the next year. The Act does not contemplate on-going deficiencies in classes.

 

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1996 Fall Report

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.22 The WCB sets rates for each class to cover the expected costs of injuries occurring in that year. Also, the WCB sets the rates to recover part of any deficits in the classes. The WCB intends to recover the deficits over an undefined period.

.23 In 1995, the WCB identified several classes with deficits. Initially, it set its rates to recover these deficits by charging affected employers more. It published these increased rates in the December 1, 1995 Saskatchewan Gazette. Later, due to concerns raised about these proposed increases, the WCB decided not to use these rate increases.

.24 At December 31, 1995, several classes have deficits. Many have had deficits for more than one year. These individual classes do not have sufficient money set aside to pay the total costs of their injuries (i.e., reserves).

.25 Since several classes have had deficits for more than one year, the WCB did not comply with the Act.

We recommend

.26 The WCB should adjust its rate setting process and practices to comply with the law or seek appropriate changes to the law.

.27 As stated earlier, the WCB faces several key issues. One of these issues is the need to control costs and explain significant increases in costs. This is an integral aspect of good financial management. Other aspects of sound financial management include: setting clear financial objectives (i.e., financial plans), setting financial controls to ensure its affairs are being managed appropriately; and ensuring management and the Board receive the right information to ensure its objectives are achieved.

.28 In paragraphs .29 to 85, we set out areas where the WCB could improve its financial management. For each of these areas: we state the problem; we set out the benchmarks we used to evaluate the WCB's practices; and then we identify where the WCB's needs to strengthen its practices.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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System to determine compensation costs needs strengthening

.29 The WCB needs to improve its system to estimate its compensation costs and to track these costs for each claim. In 1995, these costs were $121 million.

.30 An adequate compensation system is necessary to properly manage the WCB's insurance operations and to help it set rates charged to employers. We evaluated the WCB's system against the following set of good practices.

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1996 Fall Report

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.32 In 1995, the WCB recognized its system to estimate and track compensation costs was not adequate. It started to develop a better system. During 1995, this system was not fully developed and its information could not be used.

.33 For reported claims, the WCB keeps track of the costs it pays for each claim and some key factors that affect the cost of the claim. However for most claims, the WCB does not estimate or record in its accounts the total cost it expects to pay for each claim. Also for individual claims, it does not track information on all key factors (e.g., expected duration of the claim). For claims incurred but not yet reported (IBNR), the WCB does not have a system to estimate these claims throughout the year. This makes it more difficult to estimate the compensation costs it expects to pay for reported claims and for IBNR claims.

.34 The lack of a proper system to estimate compensation costs on a per claim basis and to estimate IBNR claims, resulted in the WCB's monthly estimates of its total compensation costs being inaccurate. See paragraphs .62 and .63 for further information.

We recommend

.35 The WCB should continue to develop a system to estimate compensation costs it expects to pay for each claim and for claims incurred but not yet reported. It should record these estimates in its accounts throughout the year.

 

More actuarial knowledge required

.36 The WCB needs a better understanding of the actuarial process.

.37 The WCB hires an independent actuary twice a year to calculate its benefits-liability. Without an adequate system to estimate compensation costs, the WCB can not use the actuary to confirm the reliability of its estimates. This lack of an adequate system placed the WCB in an inappropriate situation where they have to rely heavily on the work and reports of an independent actuary to determine its benefits-liability. This makes the WCB's review and challenge of its independent actuary's work and reports more critical and more difficult.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.38 To effectively review and challenge the actuarial process, the WCB must have an adequate understanding of the process. This understanding is also critical to ensure it can develop its own estimates of compensation costs (see paragraph .35). We evaluated the WCB's practices against the following set of good practices.

Good practices when using actuaries or estimating compensation costs .39 Estimating actuarial liabilities (e.g., benefits-liability) and their impact on compensation costs is complex. The actuarial process involves many judgements about the effect of possible events, many of which are not expected to occur until some point in the future. Therefore, to ensure actuarial estimates are reliable, management should: obtain a sound understanding of the actuarial process and the relevant professional actuarial standards; obtain a sound understanding of how the liability is calculated and how its policies and practices affect the total compensation costs and related benefits-liability; maintain accurate and complete source data used to calculate the liability; track key information used to set actuarial assumptions; provide timely advice to its actuary or to those persons responsible for estimating compensation costs about changes in the WCB's policies and practices that may affect the actuarial process; review and challenge assumptions and processes proposed by the actuary or by those persons responsible for estimating compensation costs; obtain a clear understanding of reasons for changes in the liability; and use methods and assumptions for its annual rate setting process that are similar to those used to determine its total compensation costs and its related liability.

.40 1995, the WCB tried to better understand the actuarial process used to determine its liability. It questioned its actuary on the assumptions and process used. However, since it had not developed its assumptions independent of the actuary and did not have a proper system to estimate compensation costs, it could not effectively challenge the work and report of its actuary. The WCB published its 1995 financial statements without an effective challenge of the actuary's work and report. Also, it did not sufficiently understand how changes in its policies and practices affect its total compensation costs and related benefits-liability.

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1996 Fall Report

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.41 In addition, the assumptions the WCB used to determine its compensation costs for financial reporting purposes were not always consistent with those used to set its rates. Without an adequate system to estimate and track total compensation costs for each claim or a sound understanding of the actuarial process, the WCB was unable to explain adequately why it used different approaches for financial reporting and for setting rates to charge employers. Also, it could not assess if the assumptions and process used to set its rates continued to make sense.

We recommend

.42 The WCB should develop expertise sufficient to estimate reliably its compensation costs and related benefits-liability.

.43 The WCB should seek independent actuarial advice to confirm the reliability of its estimates of total compensation expense and related benefits-liability.

.44 The WCB should ensure the assumptions it uses to set rates are similar to those used to determine its total compensation expense and related benefits-liability.

.45 The WCB identified its lack of sufficient actuarial expertise. In November 1995, the WCB hired a consulting actuary to assess the appropriateness of the assumptions and process its actuary used to determine the WCB's 1994 and 1995 benefits-liability. In addition, it asked this actuary to participate in setting the 1997 rates. The consulting actuary has not yet released its final written report. (See related information in paragraphs .93 to .95.)

.46 Also in February 1996, the Review of the Saskatchewan Workers' Compensation Board's 1996 Assessment Rates and Assessment Rate Process, commonly referred to as the Neville Report, raised similar concerns about rate setting.

 

Comprehensive financial plan and better forecasts needed

.47 The WCB needs to prepare a comprehensive financial plan (i.e., budget) that shows the full cost of the activities planned for its entire operations.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.48 The development and approval of budgets (e.g., operating, capital, and financial) are key to good financial management. Budgets set out the financial objectives of organizations. Forecasts are important monitoring tools. Forecasts set out the financial results organizations think are likely as opposed to those it initially planned, i.e., budgeted. We evaluated the WCB's budgeting and forecasting practices against the following set of good practices.

Sound budgeting and forecasting practices .49 Good budgets should: show the financial implications of planned activities. The nature and level of these planned activities reflect the strategy the organization plans to use to deliver its programs and services in a cost-effective manner; be supported with sound underlying assumptions. Boards should challenge the assumptions used to prepare the budget; supply a basis for forecasts throughout the year; provide a yardstick against which management and the Board can measure actual results and take corrective action when necessary. For example, if the actual number and duration of claims exceed those expected and result in higher costs, the organization may wish to adjust its strategy to control these costs; provide managers with the fiscal goals (i.e., revenue, expense, investing and financing goals) of the organization; and provide managers with the authority to act within approved limits, once the Board approves the budget. Good forecasts are typically based on the initial budgets (operating, capital and financial) and reflect the financial impact of the known or expected changes in activities.

.50 In 1995, the WCB planned various strategies and activities. For example, it started the early intervention program and restructured its medical department to improve access to treatment and facilitate cooperation among health-care providers. However, the WCB did not set out, in writing, how these strategies and activities would affect its operations, (e.g., the expected nature, level and severity of injuries) and affect its financial plan (e.g., budget).

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.51 Also, the WCB did not prepare and its Board did not review a budget for its full operations (i.e., revenue, and expenses relating to claims). The WCB did prepare a budget for its administrative activities. These activities account for about 15% of the WCB's total expenses. The Board reviewed this budget but it did not approve this budget since it was not finalized until late in 1995.

.52 Each month, the WCB forecasts its revenues and expenses. As we later explain in paragraph .63, these forecasts did not accurately estimate the expected investment income and compensation costs. Since the WCB did not have a comprehensive budget, its monthly forecasts were not based on activities the WCB initially planned. These forecasts did not clearly state the underlying assumptions used to prepare them (e..g, nature and level of activities expected). Staff provide these forecasts to senior management and the Board for their review.

.53 The Board does not keep minutes or other written evidence of their review of the monthly reports provided. These reports include forecasts. As a result, little written evidence of the Board's review of the forecasts and other reports exists.

.54 In 1995, the WCB planned to prepare a comprehensive budget for 1996. However, due to inadequacies in its compensation system (see paragraphs .29 to .35), the WCB could not prepare a comprehensive budget at that time. In early 1996, the Board of Directors reviewed and approved the 1996 budget for the WCB's administrative activities.

We recommend

.55 The WCB should prepare a budget for its entire operations and clearly define the key assumptions used to prepare the budget.

.56 The Board of Directors should review and approve the budget supporting the WCB's plans before the start of its fiscal year.

.57 The Board of Directors should document its review of the forecasts of its operating, capital and financing activities each month. These forecasts should set out clearly the key assumptions used to prepare them.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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Complete and reliable monthly financial information necessary

.58 The WCB's monthly financial reports are not complete. Also, the amounts recorded as investment income and compensation costs in these reports are not accurate.

.59 Senior management and the Board need complete and accurate financial information throughout the year to monitor the performance of the WCB's activities and to make decisions. We evaluated the WCB against the following.

Sound financial reporting practices .60 Sound interim (e.g., monthly) financial reports should: be concise; show the financial results of all of its activities (i.e, assets, liabilities, reserves, fund balances, revenues, expenses and changes in cash flows); be prepared using the same basis of accounting as used to prepare the annual financial statements; agree to information recorded in its accounts (i.e., general ledger and other sub-ledgers); compare planned (i.e., initially budgeted and current forecast) to actual results; and explain significant variances between planned and actual results. These explanations should be based on the activities of the WCB.

.61 Each month, senior management and the Board of Directors receive various reports on non-financial activities and receive incomplete reports on financial activities. The financial reports do not include a statement of financial position (i.e., assets, liabilities, reserves and injury fund) and a statement of changes in financial position (i.e., cash flows). These statements are necessary to provide a full and concise picture of the financial results of the WCB.

.62 The information in the monthly financial reports does not agree with that recorded in the WCB's accounts. During the year, the WCB does not record properly its investment income nor its benefits-liability and related compensation expense. Its benefits-liability and related compensation expense should reflect the costs the WCB needs to pay for compensation for injuries that have already occurred. To prepare its monthly financial reports, the WCB includes its estimates of investment income and compensation costs but it does not record these estimates in its accounts until year end.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.63 Due to poor estimates of investment income and compensation costs, the WCB's monthly reports were not accurate. For example, in its December 1995 financial reports, the WCB reported actual investment income as $42.5 million and total compensation costs as $112.6 million. The WCB's published 1995 financial statements report investment income of $40.7 million, and total compensation costs as $121.4 million.

.64 Also, since the WCB does not have a comprehensive financial plan, its monthly financial reports can not compare fully its actual performance to that originally planned. The reports do compare the WCB's administrative activities to that originally planned. For its other activities, the reports compare only actual results with the actual results of the prior periods or those forecasted.

.65 Since the WCB does not state its expected level of activities, its non-financial reports compare the current period's activities (e.g., number of claims by type, duration of claims, number and status of appeals) to those of prior periods. The WCB indicates it relies on its knowledge and experience to identify trends in activities and costs, and to take corrective action as necessary. Also we indicate, in paragraph .53, limited written evidence of the Board's review of these reports exist. Monitoring the cost-effectiveness of its strategies becomes more difficult when plans and expected results are not fully documented.

We recommend

.66 The WCB should prepare monthly financial statements for its entire operations for the Board's review. These statements should include the following:

• statements of financial position, operations and changes in financial position;

• comparisons of actual results with those planned; and

• explanations of significant variances. These explanations should be based on the activities of the WCB.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.67 The Board of Directors should document its review of these statements.

.68 The WCB should improve its system and practices used for estimating investment income and compensation expenses. It should record these amounts throughout the year in its accounts.

.69 Starting in mid-1996, the Board of Directors receive statements of financial position and operations each month. The Board documents its receipt of the WCB's monthly reports. The monthly reports includes these statements.

 

Improvements to information technology systems needed

.70 The WCB uses information technology (IT) systems extensively to deliver its programs and services. Its programs and services are dependent upon these IT systems. In paragraphs .71 to .85, we set out areas where the WCB could improve its IT systems.

 

Adequate contingency plan needed

.71 The WCB needs a written and tested contingency plan based on a risk assessment.

.72 If the WCB's information technology (IT) systems are not operating, commitments may be missed, decisions delayed and essential data lost. This would increase program and service costs.

.73 We evaluated the WCB against the following.

Good contingency planning practices .74 A contingency or disaster recovery plan sets out the procedures needed to protect the continuous operations of IT systems and the availability of data. These plans should cover all significant IT operations and they should reflect the importance of each program and service. Less important programs and services need not be recovered as quickly as important ones. Contingency plans should set out the following: the procedures to make electronic copies (backups) of the system programs, applications, and data; the procedures for the safe storage of the backups; the importance of systems, applications, data and the recovery time; the arrangements to replace or rent essential IT equipment; the requirement for senior management to approve the plans; the procedures to periodically test the contingency plans; the training of staff in contingency plan procedures; the procedures for the safe storage of the contingency plans; and the procedures to ensure all IT equipment, programs and data will function properly in the year 2000. Senior management should review and approve the contingency plans and the testing of these plans. They need to ensure the recovery time will meet their needs and that their plans work.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.75 The WCB has taken initial steps to develop a contingency plan. It has procedures to make electronic copies of the system programs, applications, and data. These procedures cover their safe storage. However, the WCB has not yet completely developed or tested its contingency plan.

We recommend

.76 The WCB should complete the development of its contingency plan and test its plan to ensure it works.

 

Formal information technology security policy needed

.77 The WCB needs approved IT security policies and procedures that meet its needs.

.78 The management of security starts with the establishment of security policies and procedures. We evaluated the WCB against the following.

Good security policies and procedures .79 Clearly defined security policies and procedures ensure organizations carry out proper security procedures that address their needs. Sound policies and procedures reduce the risk of being over-secured leading to increased costs, or being under-secured thus placing the achievement of the organization's goals and objectives at risk. Management should ensure these policies and procedures are documented; cover major IT risk areas; cover all significant applications and systems; are reviewed and approved by executive management; are based on a risk analysis that is approved by executive management. Carrying out a risk analysis helps reduce risks to an acceptable level. Risk analysis should identify the importance of applications and data, the risks, the impact of current security measures and the impact of recommended changes to security practices; require senior management's review and approve of its risk analysis; and assign responsibility for these policies and procedures to one person. This person should be a senior manager and be independent of the IT operations and programming.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.80 The WCB's current security policies do not cover all significant applications and systems. The WCB has not yet carried out a comprehensive risk analysis.

We recommend

.81 The WCB should set and approve security policies and procedures based on the results of its risk analysis.

 

System development controls improved in 1995

.82 In 1994, the WCB lacked adequate system development controls. This contributed to its major IT project being late and over-budget.

.83 Developing new systems is risky. If the development of new systems is not managed well, costs increase, deadlines pass and systems fail. We evaluated the WCB against the following.

Good system development practices .84 To ensure proper development of new systems, rules and procedures should ensure the following: information needs are known; new systems satisfy the information needs; procedures are in place to convert information from old systems to new systems; standards exist and are used to measure the actual and expected performance of new systems at defined intervals in its development; progress is monitored through an approved development and acquisition plan; system and computer programs are adequately tested before being used; and access to computer information and programs is controlled.

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.85 In 1994, the WCB made significant changes to its claims information systems without adequate system development controls. In 1995, it developed and used adequate policies and procedures for IT systems development. These new policies and procedures should allow the WCB to appropriately control and manage future IT system development projects.

.86 As stated earlier, the WCB is responsible for the management and delivery of the compensation program in Saskatchewan. The WCB must show its key stakeholders how it carries out this responsibility and provide them with information to allow them to both understand and assess its performance.

.87 To achieve this, the WCB must clearly state its objectives, and explain the strategies (e.g., use of early intervention models, and a return-to-work program) it will use to deliver its programs and services, and to meet its objectives. The WCB must set out the planned costs of those programs and services (i.e., budget). Then it must reveal the full actual cost of these programs and services, and report on its actual results. It should also report on whether its results differed from what it planned, explain why, and outline what action it took to improve the situation.

.88 Paragraphs .89 to .105 set out areas where the WCB should improve its accountability to legislators, the public and other key stakeholders.

 

Concern with reliability of the WCB's financial statements

.89 The WCB's published 1995 financial statements may not be reliable. We can not determine if the $467 million ($436 million - 1994) recorded as benefits-liability on the statement of financial position and the $121 million ($114 million - 1994) recorded as compensation expense in the statement of operations and injury fund are fairly presented.

 

Provincial Auditor Saskatchewan
1996 Fall Report

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.90 The benefits-liability is the estimated amount the WCB needs to pay for injuries that have already occurred. The determination of this estimate is complex since there are many factors that affect compensation costs. In paragraph .31, we describe some of these factors. Also in paragraph .39, we state the actuarial process involves many judgements about the effect of possible events, many of which are not expected to occur until some time in the future.

.91 The change in the benefits-liability from one period to the next is reflected in the annual cost of compensation benefits (i.e., compensation expense). Generally, increases in the liability increase the compensation expense; while decreases in the liability decrease the compensation expense. As we explain in paragraphs .29 to .35, the WCB does not have an adequate system to estimate its compensation expense and related benefits-liability. Instead, the WCB uses an actuary to determine the liability and to calculate the change from one period to the next.

.92 In these cases, our audit standards require us to do work to determine if we can rely on the work and report of the WCB's actuary. We must obtain sufficient and appropriate audit evidence to support our reliance. To do this, we obtained a general knowledge of the actuary's standards. Then, we ensured the WCB's actuary received complete and accurate data from the WCB to calculate the liability. Next, we tried to determine if the assumptions and process the actuary used to calculate the liability were reasonable and appropriate based on our knowledge of the WCB's activities.

.93 We found that we could not rely on the work and reports of the WCB's actuary because of our doubts about the assumptions and process used to calculate the benefits-liability. Our doubts arose from the following:

• 1995 correspondence between the WCB and the actuary contain many unresolved concerns about the appropriateness of its actuary's assumptions and process used to determine the liability;

• the WCB hired a second (consulting) actuary in November 1995 to assess the appropriateness of the assumptions and process its actuary used to determine the WCB's 1995 liability;

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• the WCB was unable to explain adequately the appropriateness of the assumptions and process used to determine its 1995 liability;

• the benefits-liability and related compensation expense recorded in the financial statements do not include an amount for the future costs of administering existing claims;

• the WCB's first actuary's report did not disclose information as expected by actuarial standards for workers' compensation practices (e.g., sources of experience gains since the last actuarial valuation);

• as a result of work of the WCB's consulting actuary, its first actuary advised the WCB in August 1996 of an omission in the 1995 actuarial opinion that accompanies the WCB's published 1995 financial statements. The first actuary advised the WCB that his estimate of the benefits-liability did not reflect the impact of the 1994 changes to The Workers' Compensation Act, 1979. These changes altered how the WCB determined the earnings of injured workers.

The first actuary felt the potential impact of these changes remains unclear until sufficient experience has developed under the revised Act. Consequently, the benefits-liability and related compensation expense recorded in the financial statements do not include the impact of these changes in law.

.94 The WCB did not plan to receive the report of its consulting actuary before it published its 1995 financial statements. The WCB planned to receive this report in August 1996. To publish its 1995 financial statements within the time period required by law, the WCB decided to use the work and reports of its first actuary even though it had concerns.

.95 At the date of this Chapter, management and its consulting actuary have advised us of the following. The consulting actuary has completed his work. He has calculated a different liability than the first actuary. He has raised some issues about the process and assumptions the first actuary used. He has corresponded with the first actuary on those issues. The actuaries have not yet resolved those issues. The WCB has not yet received the final written report of its consulting actuary. Until we receive this report, we can not determine if we can rely on the work and reports of the consulting actuary.

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.96 Therefore, we could not obtain sufficient and appropriate audit evidence to verify the WCB's reported compensation expense and related benefits-liability. This is due to the WCB's lack of a proper system to estimate its compensation expense and its related benefits-liability (see paragraphs .29 to .35) and due to our doubts about the assumptions and process used to calculate the benefits-liability (see paragraphs .36 to .44 and .93 to .95).

.97 In our opinion, the WCB's 1995 financial statements are reliable, except we do not know if these financial statements correctly report the benefits-liability, compensation expense, net income and injury fund balances. This concern also applies to the WCB's 1994 financial statements. Previously, we had advised the Assembly the 1994 financial statements were reliable. In KPMG's opinion, the 1994 and 1995 financial statements of the WCB are reliable.

We recommend

.98 The WCB should ensure it has sufficient and appropriate support for its total compensation expense and benefits-liability when it publish its financial statements.

.99 When the WCB obtains sufficient and appropriate support, it should consider if it should issue new financial statements.

 

Proper comparison of planned to actual results needed

.100 The WCB's published financial statements do not include a comparison of planned to actual results.

.101 Such a comparison helps legislators and other users of financial statements understand and assess what the WCB planned to do compared with what it did. This, in turn, helps them to assess the performance of the WCB.

We recommend

.102 The WCB's published financial statements should include a comparison of actual results to those planned.

Provincial Auditor Saskatchewan
1996 Fall Report

51

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Public disclosure of payments required

.103 The WCB needs to comply with The Standing Committee on Public Accounts' recommendation to provide the Legislative Assembly with a list of persons who receive public money in that fiscal year.

.104 The WCB has not provided such a list to the Legislative Assembly.

We recommend

.105 Each year, the WCB should provide the Assembly with a list of persons who receive public money.

.106 Management has advised us that the WCB can not legally publish details about its payments to individual injured workers.

 

Appointed auditor's reports

.107 In our 1996 Spring Report, we indicated we would assess whether we could rely on KPMG's 1994 report on the WCB's financial management practices, i.e., its rules and procedures to safeguard and control its assets. At that time, KPMG reported that the WCB had adequate financial management practices. Based on our further work and the above audit findings, we found the WCB did not have adequate financial management practices in 1994. As a result, we can not rely on that 1994 report of KPMG. We carried out additional procedures we considered necessary to allow us to form our opinion.

Provincial Auditor Saskatchewan
1996 Fall Report

52

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