U.S. Department of Labor
Office of Inspector General

Audit Report

ADOPTING BEST PRACTICES CAN IMPROVE THE EFFECTIVENESS OF THE STATE UNEMPLOYMENT INSURANCE (UI) FIELD AUDIT PROGRAM
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This report reflects the findings of the Office of Inspector General at the time that the audit report was issued. More current information may be available as a result of the resolution of this audit by the Department of Labor program agency and the auditee. For further information concerning the resolution of this report's findings, please contact the program agency.

Report Title:  Adopting Best Practices Can Improve the Effectiveness of
                        State Unemployment Insurance (UI) Field Audit Program

Report Number:  03-99-006-03-315

Issue Date:  March 22, 1999

The OIG conducted an audit to help ETA and the States identify ways to improve the effectiveness of the field audit program and to examine how ETA measures and evaluates the program's effectiveness.  Our audit (of 12 States) placed States into high, medium and low categories with respect to "net tax contributions returned per audit hour."  The audit found that: (1) the field audit programs in the top-performing States employed significantly different strategies than the programs in lower-ranked States, and (2) performance measures needed improvement.

           COMPARISON OF FIELD AUDIT BEST PRACTICES
 

 

BEST PRACTICE

 NUMBER OF STATES VISITED BY STRATA
HIGH
(5 STATES)		 MIDDLE
(3 STATES)		 LOW
(4 STATES)
1. Managing for Results X X      X              
2. Selective Process Using SIC Codes X X X 1 X X X X        
3. Blocked Claims Audits X X X X                
4. Followup on Change Audits   X X X                 
5. IRS 1099 - MISC Analysis X                      
6. 10% or Less Random Sample X   X   X X X X        
1997 NET CONTRIBUTIONS PER AUDIT HOUR
Return per Audit Hour ($) (**) 241 75 37 24 18 8 6 5 3 2 (2) (8)

1.   This state uses a 90 percent random sample and 10 percent selective process. However, 80 percent of the state's net contributions resulted from the 10 percent selective process.

(**) Source of this data was UIS.

The primary objective of the field audit program is topromote and verify employer compliance with State laws, regulations, and policies.  We found that program management in the most successful States focused on achieving the best possible results per audit hour by designing ways to select employers that had the highest likelihood of noncompliance.  These States often combined strategies to improve the field audit programs' effectiveness, such as selecting employers based on Standard Industrial Classification codes, performing blocked claim audits, and performing followup audits of employers that had a history of prior audit exceptions.  One State successfully used IRS Form 1099 to identify misclassified workers.  Also four of five States had effective blocked claim audit programs that resulted in approximately $8.5 million in contributions from noncompliant employers.

The low-performing States focused only on achieving a yearly production goal of auditing
2 percent of the contributory employer population.  Further, a significant portion of their audits was randomly selected, or they used methods unrelated to the probability of noncompliance.

We also found that improvements were needed in measuring the field audit program's effectiveness.  The UI Service has developed three computed measures for the field audit program:

(1)  Percentage of change in total wages resulting from audit;

(2)  Percentage of contributory employers that were audited; and

(3)  Percentage of total wages audited (annualized).

However, only one measure, percentage of contributory employers audited, has an established desired level of achievement.   A majority of the States we visited were using only this measure as the measure of program effectiveness.

We recommended that ETA encourage the State employment Security Agencies (SESA) to implement the best practices identified in our report and, in addition, that ETA should modify the existing performance measures.  We also recommended that ETA develop and implement an agreement with the IRS to provide SESAs with access to IRS Form 1099 and develop a software program to analyze this form.

UIS has taken action to resolve five of the eight audit recommendations.  The unresolved  recommendations will be addressed in the formal resolution process.

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