A new state audit faults the Washington state Employment Security Department (ESD) for failing to fix a software vulnerability that contributed to the theft of $600 million in this spring’s massive unemployment fraud.
The report, released Friday by the Office of Washington State Auditor Pat McCarthy, also called out the state’s fiscal overseer, the Office of Financial Management, for misstating the fraud’s potential impact on the state budget.
While the audit report contained no major new revelations, it highlighted uncertainty over how much of the stolen money came from the state’s own coffers and whether any stolen federal dollars might have to be repaid from the largest known theft of public money in state history.
It also spurred renewed calls from some critics for the firing of ESD Commissioner Suzi LeVine — calls that have been rejected by Gov. Jay Inslee and top Democrats in the Legislature.
According to ESD’s most recent estimates, the state has recovered $357 million, leaving a net loss of $243 million. Efforts to get back more money are ongoing.
The report issued Friday is the first of five audits into the unemployment fraud fiasco. Others are expected to be released in the coming months and could shed more light on how fraudsters were able to make off with hundreds of millions of dollars.
“We’re coming in with an objective, independent set of eyes to really look at what transpired,” McCarthy said in an interview. “Here are the facts. Here’s what we know.”
Friday’s findings were included in what is normally a bone-dry annual financial review of state government finances, called the Comprehensive Annual Financial Report (CAFR). Friday’s CAFR covered the fiscal year 2020, which ended June 30.
It spotlighted lingering questions about the fraud, which blindsided the ESD as it struggled to process a wave of legitimate unemployment claims at the outset of the pandemic.
In an interview and statement Friday morning, LeVine said ESD has already implemented the auditor’s recommendations to improve its anti-fraud defenses.
“What this audit does is it confirms that the things that we’ve done have been the right things to do,” LeVine said. “We so appreciate the feedback and we know there’s more feedback coming that we also look forward to getting, so that we can continue to improve.”
But tensions have arisen between LeVine’s agency and the auditors. Last month, McCarthy took the extraordinary step of rebuking LeVine, a fellow Democrat, for delays in supplying the auditor’s office with information about the fraud.
And on Wednesday, just two days before the audit was to be released, ESD posted an update that substantially increased the agency’s estimate of the number of unemployment claims believed to have been fraudulent, a move that McCarthy said is “not normal” for an agency being audited.
Friday’s audit report acknowledged the extraordinary challenges ESD faced as it attempted to simultaneously process an unprecedented number of unemployment claims while implementing a hastily developed federal relief program in response to the pandemic.
One of the contributing factors cited by the auditor directly related to that haste. To get benefits to claimants faster, the ESD waived the traditional “waiting week” during which the agency normally verifies claimants’ identities before paying out benefits.
As a result of that change, which was directed by Inslee via executive order and encouraged in all states by federal officials, “benefits were paid before eligibility was verified,” the audit said.
But auditors also found ESD’s internal protections were inadequate. A fraud-detection program that was supposed to flag claims at a higher risk for identity theft was not working for much of the year, the audit noted.
“By the time it was repaired in May, a large number of fraudulent transactions had already occurred,” the audit stated.
In September, LeVine disclosed that issue during an interview with The Seattle Times. But she said even if it had been fixed before fraud began, just 14.5% of the fraudulent claims would’ve been stopped.
The agency has since improved its discovery process and made other changes, including ways “to more quickly identify fraudulent claims, suspend payments and identify payments to recover,” LeVine said in a statement Friday.
Friday’s audit called out OFM, the state’s budget office, for failing to categorize the fraud as an “extraordinary event” on the state balance sheet.
According to the auditor, OFM said “the vast majority of the fraudulent claims” were paid out of emergency federal funds, and OFM thought the state would not be required to pay those back.
OFM disputed the auditor’s finding in a statement, noting that it disclosed the fraud losses on its financial statements, following national accounting standards.
“OFM agrees the state must be transparent in its financial disclosures and was in no way trying to conceal information about the fraud losses,” said the statement provided by spokesperson Ralph Thomas.
On Friday, LeVine said the ESD didn’t have exact figures for the share of the fraud made up by state vs federal dollars. “There’s going to be some blend of state and federal money, both that went out [to fraudsters] as well as it has been recovered, and we do not have that breakdown at this point in time,” LeVine said.
State Sen. Karen Keiser, D–Des Moines, said she was concerned by the lack of “clarity” on state vs. federal money in the fraud and recovery.
A spokesperson for McCarthy’s office said the federal share will be determined by another audit, scheduled for March, that tracks federal funding that flows through the state.
Still unclear is why ESD posted a fraud update so close to release of the audit. In that update, ESD revised upward its estimate of the number of “known, suspected or probable” fraudulent claims to 122,000, a 41% jump from the agency’s estimate in August.
The ESD also revised its estimate of the theft to $600 million, up 4% from $576 million. (That revised figure was still within the range of $550 million to $650 million the agency estimated in May.)
The release of the audit brought renewed criticism from state Republicans, who have pointed to LeVine’s role as a major Democratic Party fundraiser.
“Suzi LeVine should have been fired months ago, and should certainly be fired now,” said Caleb Heimlich, chair of the Washington state Republican Party, in a statement. “Unfortunately Governor Inslee cares more about his political donors than the people of Washington State.”
But Keiser scoffed at the idea of replacing LeVine amid the ongoing chaos at the agency.
“Take the captain of the ship out when you’re in the middle of a hurricane,” Keiser said. “I think that’s just damn foolish.”