Register/Subscribe

Comp insurer used funds for entertainment: Report

An audit of the Kentucky Employers’ Mutual Insurance Co. has revealed improper contract reporting, lack of oversight in competitive bidding and failure to properly account for the use of funds for bar tabs, golf outings and sporting events, according to a release Tuesday from state auditor Mike Harmon’s office.

KEMI is a nonprofit municipal corporation and the state’s largest provider of workers compensation insurance, covering 23,000 policyholders. About 16% of its premiums are paid by public entities.

The auditor initiated an examination of the company in April 3, 2018, reviewing policies and payouts beginning in Jan. 1, 2016. The auditor’s 57-page report revealed that more than one-third of expenditures and reimbursements lacked documentation and detailed violations of the company’s procurement policy. In one instance, KEMI paid out more than $100,000 for unbudgeted marketing, though the policy requires board approval for unbudgeted expenses in excess of $50,000. The auditor also found that the company procured land through a noncompetitive process and paid the broker nearly $40,000 more than had been agreed upon in the contract, failed to properly code expenditures, such as tagging approximately $200,000 in employee parking each year as rent, and mislabeled the employee incentive plan benefit as a salary expense. The company also coded golf outings as meals or seminars/conventions in five instances, labeled employee appreciation door prizes and gift cards totaling more than $800 as advertising, and cited bar tabs as meals, according to the auditor’s office.

The report found that many KEMI expenditures appeared unreasonable or personal in nature, such as a lunch and dinner for a manager totaling $735, a $600 three-day trip to Florida for a three-hour presentation and a downtown meal for a KEMI board member and manager to discuss “modernization” that included more than $100 in liquor and $97 in food. The auditor also noted that employees routinely used sporting event tickets identified as being purchased for development purposes. The report noted that in 2017, the communications director was reimbursed for more than $3,000 for the purchase of season tickets to University of Kentucky football games, though the tickets were assigned to KEMI managers with no indication of attendance by agents, employers or policyholders. 

The report also outlined recommendations on tightening spending, re-evaluating policies and requiring that four of the KEMI’s board members be elected by policyholders.

“(I)t is my hope KEMI’s management and board will implement the recommendations in our report, which will improve transparency and oversight of their operations,” Mr. Harmon said.

Jon Stewart, KEMI’s president & CEO, said that prior to the release of the audit, the company made several changes at the board’s direction to address concerns referenced in the report, including revising KEMI’s internal procedures for procurement.

“We will continue to review the (Kentucky Auditor of Public Accounts) recommendations and determine what actions are necessary to ensure that we meet our dual role of being a state-created entity and a competitive insurance company,” Mr. Stewart said. “We continually look for opportunities to make improvements for the benefit of our policyholders and fulfill our role as Kentucky's leader in the workers compensation industry."