Agreed-Upon Procedures – Fiscal Year Ended June 30, 2023

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Report Summary

Background

The Delaware Office of Auditor of Accounts (AOA) presents an Agreed-Upon Procedures (AUP) report on the Delaware Department of Labor Division of Unemployment Insurance (DOLUI) for the fiscal year ended June 30, 2023.

DOLUI has received a Disclaimer of Opinion on its audited financial statements for three audit reports: the Fiscal Year 2023 and Fiscal Year 2024 Delaware Annual Comprehensive Financial Reports (ACFR), and the Fiscal Year 2024 Federal Uniform Guidance Single Audit. These disclaimers indicate an inability to audit DOLUI due to a lack of fiscal and accounting data.

AOA completed this AUP engagement as part of an ongoing process to move DOLUI towards auditability and establish a baseline of data about DOLUI’s accounting processes, procedures, and data. This AUP tested 12 business processes within DOLUI for accuracy, reliability, and completeness of data.

This engagement was performed in accordance with 29 Del. C. §2906. 

The Unemployment Process

The unemployment insurance system in Delaware is built on a number of business processes, many of which were tested in this AUP engagement. These processes begin with the collection of taxes paid by private businesses, grants from the federal government, and reimbursements from State agencies and nonprofit organizations. These funds are collected and held in State custody in the Delaware Unemployment Compensation Fund (DUCF), which is managed by DOLUI. Funds are then paid out from the DUCF to claimants as unemployment benefits.

Throughout these business processes, DOLUI employees and systems are meant to perform accounting tasks with supporting documentation on employers, claimants, and transactions. When performed correctly, these business processes and accounting tasks will accurately represent the fiscal activity of DOLUI.

The business processes of unemployment, in a simplified form, are meant to operate as follows:

• A private company that employs people within the State of Delaware is required to register with DOLUI by submitting a completed UC-1 Form*.
  • DOLUI then creates a record for the company in their Mainframe database and imports data about the company from the UC-1.
  • DOLUI uses this data to assign the company an initial Unemployment tax rate in Mainframe.
  • Once every quarter, the company is required to submit a completed a UC-8 Form* (a quarterly unemployment insurance tax report) to DOLUI with their tax payment. This form includes information on the company’s Delaware employees and their salaries.
  • The completed UC-8 form and tax payment are either mailed to a lockbox in a physical location at either JPMorgan Chase or PNC Bank, or submitted digitally to an equivalent digital lockbox (payroll services often submit digitally).
  • The bank collects the tax payment into one of 21 bank accounts held by DOLUI (these accounts collectively make up the DUCF), and DOLUI collects the UC-8 form from the lockbox.
  • DOLUI then imports the information from the UC-8 form into Mainframe. This process includes creating records for the company’s tax payment and each of their employees.
  • After a period of time, DOLUI uses the data from collected UC-8 forms to assign the company a new Unemployment Tax rate more specific to their employee salaries and turnover, known as an experience rate*.
    
• Public sector employers and nonprofit organizations follow a different process. This process also begins with the employer submitting a UC-1 Form*.
  • DOLUI creates Mainframe records for public sector employers and nonprofit organizations, but these employers are not assigned an Unemployment Tax rate.
  • Once every quarter, these employers are required to submit a completed QPR1 Form* (Public Sector) or QPR2 Form* (nonprofit organizations). This form includes information on the employer’s employees and their salaries.
  • The completed QPR1 and QPR2 forms are then mailed to an address associated with DOLUI or submitted to DOLUI digitally (payroll services often submit digitally).
  • DOLUI then imports information from the QPR1 and QPR2 forms into Mainframe. This process includes creating records for all of the employees.
  • Once a month, after a former employee of a public sector employer or nonprofit organization claims Unemployment benefits, DOLUI then sends the employer a reimbursement invoice*.
  • The employer then pays that reimbursement invoice to a lockbox in a physical location at either JPMorgan Chase or PNC Bank, or to an equivalent digital lockbox (payroll services often submit digitally).
  • The bank collects the tax payment into one of 21 bank accounts held by DOLUI and DOLUI records the payment in Mainframe.
    
• If an Unemployment benefit claimant has worked in multiple states including Delaware, this triggers a process known as a combined wage claim.
  • In the combined wage claim process, each state must substantiate the unemployment claim, and states may reimburse each other for claims.
    
• When a Delaware employee files an unemployment claim*, DOLUI searches for that claimant’s record in Mainframe.
  • If an associated record in Mainframe can not be located, DOLUI investigates the claimant’s claim by contacting their former employer, and then creates the record.
  • Benefits are then paid weekly to that employee from the DUCF. These payments are recorded in Mainframe.
  • The claimant is required to report on their employment and job search activity* to DOLUI weekly while they are collecting benefits.
    
• Information on the fiscal activity within DOLUI, including tax payments in and benefits paid out, is exported from Mainframe at least once a month and recorded in journal entries*.
  • These journal entries are then reconciled with bank statements from the 21 DUCF bank accounts.
  • The reconciliations are then recorded in a general ledger* kept in Microsoft Dynamics (an accounting software). These records are held on the cash basis.
  • To prepare DOLUI’s accounting records for Delaware’s ACFR, the Division of Accounting then converts the general ledger information from the cash basis to an accrual basis trial balance.

*This designates a supporting document that should be held by DOLUI to substantiate their accounting records.

Key Information and Findings

DOLUI is experiencing several challenges that affect its operational efficiency, compliance with federal requirements, and financial reporting processes. These challenges appear to stem from:

• A lack of accessible data has created significant scope limitations, preventing thorough analysis of methodologies used to calculate amounts owed to employers. This raises concerns about compliance with federal laws such as the CARES Act and ARPA.

• Numerous inactive employer accounts continue to accrue interest, penalties, and court costs. These amounts are reserved in the allowance for doubtful accounts, as reflected in the accounting trial balance, but the ongoing accruals indicate systemic inefficiencies.

• Due to insufficient documentation, testing of certain processes, such as the reviewer/approver procedures, could not be completed. This undermines the ability to verify the accuracy and integrity of financial records.

• The inability to validate the methodology for calculating liabilities owed to employers raises doubts about the accuracy of recorded amounts in the accounting trial balance.

These concerns, in the aggregate, highlight the need for improved data management, process transparency, and compliance measures to ensure operational effectiveness and adherence to legal standards. Addressing these areas of concern will be essential to strengthening compliance, enhancing transparency, and improving overall operational effectiveness.