State Insurer Fires Its Auditor

California’s state-owned workers’ compensation insurer has fired its longtime auditor after the accounting firm refused to certify the carrier’s financial statements and questioned the adequacy of its reserves.

The dismissal of PricewaterhouseCoopers comes just two months after the release of an audit in which the accounting firm said the nonprofit State Compensation Insurance Fund of California needed to set aside an additional $1 billion to pay future claims.

Officials at State Fund, which provides workers’ comp coverage for about half of California’s employers, had disputed those audit results and defended the insurer’s reserve levels as adequate to meet its obligations to injured workers.

Although it isn’t unusual for corporate clients to dismiss their auditors, the firing of Pricewaterhouse underscores the unresolved issues dogging the state’s ailing workers’ compensation system despite just-passed legislation to reform it.

Those include the health of the publicly owned State Fund, which has been strained by rapid growth due to the collapse of so many private insurers in the California market. In recent months, California Insurance Commissioner John Garamendi has been highly critical of State Fund’s management, and other politicians, including Arnold Schwarzenegger, have called for a comprehensive review of the carrier’s financial condition.

State Fund’s predicament could play a role in determining how much and how fast workers’ comp premiums are reduced in the wake of the legislative overhaul, which is aimed at cutting as much as $6 billion in medical costs annually from the $29-billion system. If State Fund is required to set aside additional reserves, the carrier might not be able to pass along as much in savings to employers.

Jim Zelinski, a State Fund spokesman, said Tuesday that the carrier’s move on Oct. 1 to dump its auditor of 20 years was a “business decision.” He denied that it was retribution for the firm’s delivering an audit report that the carrier didn’t like.

“Like any business organization, State Fund periodically reviews its contracts and relationships with vendors and contractors,” Zelinski said. “At this time, we think it makes some business sense to look at another firm.”

State Fund and Pricewaterhouse officials had wrangled for months behind the scenes over the adequacy of the insurer’s loss reserves, resulting in repeated delays of the audit’s release to the public.

Released in late July, the audit concluded that State Fund’s $9.8 billion in reserves as of Dec. 31, 2002, should be increased by about $1 billion. Pricewaterhouse spokesman David Nestor declined to comment on that dispute or the motivation behind the firing of his firm.

“We are proud of the work that we have performed and believe that our audit report speaks for itself,” Nestor said.Garamendi has largely concurred with Pricewaterhouse’s analysis. He has been pushing State Fund to shore up its capital position, which has deteriorated to the point that the Department of Insurance has determined it would be justified to step in to run the operation. Though the agency has made no moves in that direction, State Fund has countered by suing Garamendi and the Department of Insurance to prevent a takeover.

State Fund has steadfastly maintained that its reserves are sufficient to cover its liabilities, a position that has been affirmed by the agency’s actuarial firm, Milliman USA.

Accounting experts said it was not uncommon for businesses to dismiss their auditors. So far this year, 668 publicly owned U.S. firms have done so, according to Auditor-Trak, a service of Strafford Publications Inc., an Atlanta-based publisher of legal and business information services and accounting profession data.

Jon McKenna, executive editor of Auditor-Trak, said companies fired their auditors for a wide variety of reasons, including genuine disagreements over the way some items should be accounted for. He said such parting of the ways wasn’t necessarily a reflection of wrongdoing on the part of either the auditor or the client.

McKenna said State Fund should have no trouble finding an auditor to replace Pricewaterhouse. But he said that if the insurer is shopping for a firm that might be more sympathetic to its views on reserves, it may be looking in vain. He said the Sarbanes-Oxley Act of 2002, which toughened rules for financial accounting and reporting, would make it unlikely that another firm would reach a markedly different conclusion from Pricewaterhouse’s if the firm’s concerns were solidly grounded in established accounting principles.

“Any good firm is going to find the same thing,” McKenna said.

Garamendi on Tuesday registered no objection to State Fund’s decision to change auditors.

“It’s the right of every insurer to select the appropriate auditor,” he said.

“We have no reason to believe that [State Fund] isn’t acting in good faith. We look forward to continuing to work cooperatively with management.”