[Audit Report on the Unemployment Insurance Program, Department of Labor, Government of the Virgin Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-148

Title: Audit Report on the Unemployment Insurance Program, Department
       of Labor, Government of the Virgin Islands

Date:  DECEMBER 18, 1998



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U.S. Department of the Interior
Office of Inspector General




AUDIT REPORT


UNEMPLOYMENT INSURANCE PROGRAM,
DEPARTMENT OF LABOR, GOVERNMENT OF THE
VIRGIN ISLANDS


REPORT NO. 99-I-148

DECEMBER 1998




MEMORANDUM

             TO:  The Secretary

           FROM:  Eljay B. Bowron
                  Inspector General

SUBJECT SUMMARY:  Final Audit Report -
                  "Unemployment Insurance Program,
                  Department of Labor, Government of the
                  Virgin Islands" (No. 99-i-148)

Attached for your information is a copy of the subject final
audit  report.   The objective of the audit was to determine
whether  the  Virgin   Island's   Department  of  Labor  (1)
adequately  enforced the collection  of  unemployment  taxes
from  employers   and  deposited  such  collections  in  the
appropriate accounts  and  (2)  ensured  that only qualified
applicants received unemployment benefits.

The Department's Division of Unemployment  Insurance did not
(1)  issue  unemployment insurance bills to employers  in  a
consistent and  timely  manner;  (2)  ensure the accuracy of
employers'  unemployment  accounts; (3) actively  follow  up
with employers concerning delinquent unemployment taxes; (4)
consistently   assess   interest   and   penalties   against
delinquent  employers;  (5)   ensure   that  only  qualified
applicants  received  unemployment insurance  benefits;  (6)
maintain  an  adequate  level   of  internal  controls  over
computer operations; (7) adequately  safeguard  computer and
hard   copy  files  for  all  individuals  who  applied  for
unemployment   benefits;   (8)   ensure  that  monthly  bank
reconciliations were performed; and  (9)  ensure that blank,
canceled, and voided checks were controlled and secured.  As
a  result,  delinquent  unemployment  taxes  totaled   about
$18.5 million,   156   claimants   received  excess  benefit
payments of more than $152,800, supporting  records were not
available for 183 additional claimants who received  benefit
payments  of  about  $400,400,  and  197 canceled checks for
benefit payments could not be located.

Based  on  the  response  from the Governor  of  the  Virgin
Islands to the draft report's  12 recommendations to improve
the  unemployment  tax  collection,   unemployment   benefit
payment,  and administrative oversight functions within  the
Division of  Unemployment  Insurance,  we  considered  three
recommendations    resolved   and   implemented   and   nine
recommendations resolved but not implemented.

If  you have any questions  concerning  this  matter, please
contact  me  at  (202)  208-5745  or Mr. Robert J. Williams,
Assistant Inspector General for Audits, at (202) 208-4252.

Attachment




                                        V-IN-VIS-004-97


Honorable Roy L. Schneider
Governor of the Virgin Islands
No. 21 Kongens Gade
Charlotte Amalie, Virgin Islands 00802


Subject:  Audit Report on the Unemployment Insurance
          Program, Department of Labor,
          Government of the Virgin Islands (No. 99-i-148)

Dear Governor Schneider:

This  report  presents the results of our review of the
Unemployment  Insurance  Program  administered  by  the
Department of Labor,  Government of the Virgin Islands.
The objective of the audit was to determine whether the
Department (1) adequately  enforced  the  collection of
unemployment  taxes  from employers and deposited  such
collections in the appropriate accounts and (2) ensured
that  only qualified applicants  received  unemployment
benefits.

Based on our review, we concluded that the Department's
Division   of   Unemployment   Insurance  did  not  (1)
effectively collect unemployment  taxes from employers,
(2)  ensure  that  only  qualified applicants  received
unemployment benefits, and  (3)  have an adequate level
of  administrative  controls  over its  bank  accounts.
Specifically, we found that:

-  The   Division   did  not  (1)  issue   unemployment
insurance bills to employers in a consistent and timely
manner,   (2)  ensure  the   accuracy   of   employers'
unemployment  accounts,  (3)  actively  follow  up with
employers concerning delinquent unemployment taxes, (4)
consistently  assess  interest  and  penalties  against
delinquent  employers,  and  (5)  maintain  an adequate
level  of  internal  controls over computer operations.
As a result, 43 employers  overpaid  their unemployment
taxes  and  had  to  be  issued refunds totaling  about
$496,600,     21    employers    underreported    their
unemployment  taxes  by  about  $60,000,   about  2,100
employers owed $17.4 million in delinquent unemployment
taxes  and  80 government and nonprofit employers  owed
$1.1 million  for  unemployment  benefits paid to their
former employees, interest and penalties totaling about
$16,400 were not assessed during fiscal  years 1996 and
1997, and there was little assurance that the status of
employers' unemployment tax accounts on the  Division's
computer system was reliable.

-  The  Division did not (1) ensure that only qualified
applicants received unemployment insurance benefits and
(2) adequately  safeguard  computer and hard copy files
for  all  individuals  who  applied   for  unemployment
benefits.  As a  result, 156 claimants  received excess
benefit  payments  of  more  than  $152,800, supporting
records were not available for 183 additional claimants
who  received benefit payments of about  $400,400,  and
there   was   little   assurance  that  information  on
claimants  and  benefits  payments  on  the  Division's
computer system was reliable.

-  The Division did not ensure  that  (1)  monthly bank
reconciliations were performed and (2) blank, canceled,
and voided checks were properly controlled and secured.
As  a  result,  discrepancies existed between bank  and
book balances for  the  Division's Unemployment Benefit
Account, and 197 canceled  checks  for benefit payments
could not be located.

We  made  12  recommendations  to the Governor  of  the
Virgin   Islands   to  improve  the  unemployment   tax
collection,   unemployment    benefit    payment,   and
administrative oversight functions within  the Division
of Unemployment Insurance.

The  October  8,  1998, response (Appendix 2) from  the
Commissioner of Labor indicated concurrence with all 12
recommendations and  provided information on corrective
actions that had been  or  were  being taken.  Based on
the   response,   we   consider  three  recommendations
resolved  and  implemented   and  nine  recommendations
resolved   but  not  implemented.    Accordingly,   the
unimplemented  recommendations will be forwarded to the
Assistant Secretary  for  Policy, Management and Budget
for tracking of implementation.

Since  the  report's  recommendations   are  considered
resolved,  no  further  response  to  this  office   is
required (see Appendix 3).

The  Inspector  General Act, Public Law 95-452, Section
5(a)(3), as amended  requires  semiannual  reporting to
the  U.S.  Congress  on  all audit reports issued,  the
monetary impact of audit findings (Appendix 1), actions
taken   to   implement   audit   recommendations,   and
identification  of each significant  recommendation  on
which corrective action has not been taken.

We  appreciate the  assistance  of  the  staff  of  the
Department of Labor in the conduct of our audit.


                               Sincerely,


                               Eljay B. Bowron
                               Inspector General




                     CONTENTS


                                                   Page

                   INTRODUCTION....................  1

BACKGROUND         ................................  1
OBJECTIVE AND SCOPE................................  2
PRIOR AUDIT COVERAGE...............................  3

FINDINGS AND RECOMMENDATIONS.......................  4

A.  UNEMPLOYMENT TAX COLLECTIONS...................  4
B.  UNEMPLOYMENT BENEFIT PAYMENTS.................. 12
C.  ADMINISTRATIVE CONTROLS........................ 17

APPENDICES

1.  CLASSIFICATION OF MONETARY AMOUNTS............. 20
2.  DEPARTMENT OF LABOR RESPONSE................... 21
3.  STATUS OF AUDIT REPORT RECOMMENDATIONS......... 28
                   INTRODUCTION


BACKGROUND

The  Unemployment   Insurance  Program  in  the  Virgin
Islands  is a coordinated  Federal-local  program  that
operates under  the  provisions of Title 20, Chapter V,
of  the  Code  of  Federal  Regulations  and  Title 24,
Chapter 12, of the Virgin  Islands  Code.   The Code of
Federal  Regulations  defines the Federal  requirements
under which state unemployment  insurance programs must
operate  to  be  eligible for certification  under  the
Federal  Unemployment   Tax  Act.   Such  certification
allows tax credits to be  given  to  employers  against
unemployment taxes imposed by the Internal Revenue Code
of  1954  and  grants  to  be  given  to the states for
administrative expenses of their unemployment insurance
programs.  The Virgin Islands Code defines the specific
policies  and  procedures under which the  Unemployment
Insurance Program operates in the Virgin Islands.

According to the Governor's Executive Budget for fiscal
year 1998, the Virgin  Islands  Department of Labor has
the   overall   responsibility   for   "promoting   and
protecting  the  welfare  of  workers,  and  developing
programs  and  services  designed  to  alleviate  labor
problems  which  would  interfere with business harmony
and   stability."    The   Department's   Division   of
Unemployment  Insurance provides  temporary  income  to
workers who are  unemployed or underemployed through no
fault  of their own.   In  accordance  with  Title  24,
Section 301,   of  the  Virgin  Islands  Code,  benefit
payments  to  claimants   are   funded   through   "the
systematic  accumulation  of  funds [paid by employers]
during periods of employment from which benefits may be
paid [to individuals] during periods of unemployment."

The  Division  of Unemployment Insurance  has  a  total
staff  of  38 employees  and  maintains  an  office  on
St. Thomas and two offices on St. Croix.  The office on
St. Thomas is  the  main  office,  and it processes all
unemployment tax payments received from  employers  and
all  unemployment  benefit  payments made to claimants.
This  office  also  maintains  all   files  related  to
employers  in  the Virgin Islands.  All  three  offices
accept  applications   for  unemployment  benefits  and
maintain   files  related  to   applicants   in   their
respective   geographic    areas   of   responsibility.
Interstate and combined wage  claims  (benefits paid to
claimants  who  worked  in  the United States  and  the
Virgin Islands during the benefit  year)  are processed
by the office on St. Thomas.

The  Division's  records  indicate that, during  fiscal
year  1997,  there  were  about  3,400  Federal,  local
government,  and  private  employers   in   the  Virgin
Islands.  Private employers are required by the  Virgin
Islands  Code and the Department of Labor's regulations
to submit  to  the  Division  quarterly  reports of all
employees  and their wages and to pay unemployment  tax
contributions  based  on  tax  rates  assigned  by  the
Division.   Federal  and  local government agencies and
nonprofit  organizations may  elect  to  reimburse  the
unemployment  insurance  program  for  benefits paid to
their  former  employees  in  lieu of making  quarterly
unemployment tax payments, and all such entities in the
Virgin Islands have chosen that  reimbursement  method.
Unemployment  tax  collections  from  private employers
totaled  $8.8 million  during  fiscal  year   1996  and
$7.7 million during fiscal year 1997.

Under Federal law, the unemployment tax collections are
deposited  with  the  Treasury of the United States  on
account for the Virgin  Islands.   The  Division  makes
drawdowns   against   this   account   to   pay  weekly
unemployment benefits to claimants.  The drawdowns from
the   Federal   Unemployment   Insurance  Fund  totaled
$9.9 million during fiscal year  1996  and $7.4 million
during fiscal year 1997.

To qualify for unemployment benefits, an applicant must
meet certain eligibility requirements that  are defined
in the Virgin Islands Code and the Unemployment Benefit
Manual.   In  general,  a claimant must have qualifying
wages,  be unemployed or underemployed,  be  physically
able to work,  be  available  to  work, and be actively
seeking work.  A claimant can receive  benefits  of  as
much as $231 per week (depending on the total amount of
qualifying  wages)  for  an initial period of 26 weeks.
Benefit amounts may be reduced  or  denied  entirely if
the  claimant  receives other forms of income.   If  an
applicant is disqualified  from  receiving benefits and
disagrees with this determination,  the  individual may
appeal and ask for a hearing by an impartial  examiner.
About  11,000  claimants[1]  received benefits totaling
$11.5 million during fiscal year  1996, and about 7,300
claimants   received  benefits  totaling   $6.7 million
during fiscal  year 1997.   Unemployment tax refunds to
employers  and  other payments  from  the  Unemployment
Insurance accounts  totaled  about  $283,000  in fiscal
year 1996 and $828,000 in fiscal year 1997.

OBJECTIVE AND SCOPE

The objective of the audit was to determine whether the
Department   of   Labor  (1)  adequately  enforced  the
collection of unemployment  taxes  from  employers  and
deposited   such   collections   into  the  appropriate
accounts and (2) ensured that only qualified applicants
received unemployment benefits.  The scope of the audit
included  a  review  of unemployment  tax  billing  and
collection practices and  unemployment  benefit payment
practices that were in effect during fiscal  years 1996
and  1997 and other periods as appropriate.  The  audit
was performed at the offices of the Department of Labor
on St.  Thomas  and  St.  Croix  and  the Department of
Finance on St. Thomas.

Our review was made in accordance with  the "Government
Auditing Standards," issued by the Comptroller  General
of  the  United  States.  Accordingly, we included such
tests of records and  other  auditing  procedures  that
were considered necessary under the circumstances.

We  limited  the  evaluation  of internal controls over
operations of the Division of Unemployment Insurance to
the extent that we considered necessary  to  accomplish
the  audit  objective.  The internal control weaknesses
identified were  related to the collection of insurance
taxes from employers,  the  processing  of unemployment
benefit  claims  and  payments,  and the administrative
controls  over  bank  accounts.  These  weaknesses  are
discussed in the Findings  and  Recommendations section
of this report.  The recommendations,  if  implemented,
should improve the internal controls in these areas.

PRIOR AUDIT COVERAGE

Neither the General Accounting Office nor the Office of
Inspector General has conducted any prior audits of the
Unemployment  Insurance  Program of the Virgin  Islands
Department of Labor.

**FOOTNOTES**

[1]:The 11,000 claimants during fiscal year 1996 included
individuals who were unemployed or underemployed in the
aftermath of Hurricane Marilyn in September 1995.


FINDINGS AND RECOMMENDATIONS

A.  UNEMPLOYMENT TAX COLLECTIONS

The  Division  of  Unemployment   Insurance   did   not
effectively  enforce the collection of unemployment tax
contributions   from   employers.    Specifically,  the
Division did not (1) issue unemployment insurance bills
to  employers  in a consistent and timely  manner,  (2)
ensure   the  accuracy   of   employers'   unemployment
accounts, (3) actively follow up with employers who had
delinquent  unemployment  taxes,  and  (4) consistently
assess   interest   and  penalties  against  delinquent
employers.   Title 24,   Section 309,   of  the  Virgin
Islands Code outlines the legal requirements related to
the collection of delinquent and contested unemployment
taxes.   Section 310.8  of the Department of  Finance's
Government  Accounting Manual  requires  that  agencies
keep  an  up-to-date   record   of   issued  bills  and
periodically follow up on those bills  which  are  past
due.  The Department of Labor's Unemployment Tax Manual
contains   the   procedures   for   the  collection  of
unemployment taxes.  However, the deficiencies  existed
because   Division   officials   did   not  effectively
supervise the collection process or organize  available
staff  resources  to  ensure  compliance  with existing
policies and procedures.  In addition, the Division was
dependent on an outdated computer system that  did  not
have basic internal controls to ensure the integrity of
data  and  the  accuracy  of  the  bills  issued.  As a
result, 43 employers overpaid their unemployment  taxes
and  had  to be issued refunds totaling about $496,600;
21 employers  underreported their unemployment taxes by
about $60,000 because  the  incorrect  tax  rates  were
used;  about  2,100  employers  (who  were  subject  to
quarterly  payment  of  unemployment  taxes) owed $17.4
million   in   delinquent   unemployment   taxes    and
80 employers (who had elected to pay unemployment taxes
on   a   reimbursable   basis)  owed  $1.1 million  for
unemployment benefits paid  to  their former employees;
and interest and penalties totaling  about $16,400 were
not assessed during fiscal years 1996 and 1997.

Issuance of Bills

The  Division  issued quarterly unemployment  insurance
report forms, which are used by the employers to report
the names, Social Security numbers, and salaries of its
employees and to  determine  the amount of unemployment
taxes to be paid,  to employers  in  a  timely  manner.
Additionally,  the  Division  issued  up to two special
notices  to employers each year: one notice  to  inform
them that  a "delinquent tax rate" of 9.5 percent would
be applied in  the  following  year  if  any delinquent
unemployment taxes were not paid by December 31 and the
second notice to inform them, by January 31,  of  their
unemployment tax rate for the current year.[2]

However, Part E-8c of the Unemployment Insurance Manual
also  requires  that  the  Division issue statements of
account (bills) to employers  at other times during the
year as needed to inform them of  transactions  related
to   their  unemployment  insurance  accounts;  missing
quarterly  reports; and outstanding unemployment taxes,
including interest and penalties.  Our review disclosed
that such bills  were  not  issued  to  employers after
1994.  Additionally, bills for the first quarter, which
ended March 31, 1997, were not issued until  May  1997,
and bills for the second quarter, which ended June  30,
1997,  were  not  issued  until  August 1997.  Further,
these bills were not subjected to the Division's normal
process of printing an "edit run" to allow its staff to
identify obvious errors prior to printing  and  issuing
the  bills.   We  also  found  that bills for the third
quarter,  which  ended  September 30,  1997,  were  not
issued.  The Division's Computer  Manager  told us that
he  was  instructed by his supervisor not to issue  the
third quarter bills because the "edit run" would not be
corrected  and  the  issuance of inaccurate bills would
result   in  "too  many"  inquiries   from   employers.
However, the  Computer Manager's supervisor said that a
computer problem  resulted in the incorrect calculation
of interest due on  outstanding  balances  and that the
bills were therefore not issued.

Verification of Employer Payments

Part  E-7b of the Unemployment Tax Manual requires  the
Division  to  contact  employers by telephone to verify
and/or correct the amount  of unemployment tax payments
received,  and  Part E-7g of the  Manual  requires  the
Division  to  send  memoranda  to  employers  who  have
underpaid or overpaid  unemployment taxes, interest, or
penalties.  However, we found that the Division did not
always  perform these functions.   As  a  result,  some
employers  continued to make overpayments over a period
of several quarters  and  eventually had to be refunded
payments by the Division.   For  example, we found that
at  least  43 employers  were issued  refunds  totaling
about $496,600 during the period of June 1995 to August
1997.

Additionally,  we reviewed  a  sample  of  60  employer
accounts (35 on  St. Thomas  and  25  on St. Croix) and
found that 21 employers who had delinquent unemployment
taxes  totaling  $961,000 had underreported  their  tax
liabilities by about  $60,000 because they had used the
incorrect unemployment tax rates.  However, we found no
evidence in the Division's files for these employers to
indicate that they had  been  contacted  regarding  the
underreported   taxes   or   the  delinquent  balances.
Therefore,  we  contacted  the employers  through  site
visits and telephone inquiries to determine the reasons
for  the  delinquencies and/or  the  underreporting  of
taxes.  In 12 cases, the employers stated that they had
not  been contacted  by  the  Division  concerning  the
unpaid or underreported taxes.  For example:

-  One  business  did not submit quarterly unemployment
reports or make unemployment  tax payments for calendar
years 1993 through 1995 and had  made  only one payment
for  1996.  Although  the  business  had an outstanding
balance of more than $130,000, the business  owner  had
not been contacted by the Division, and no legal action
had  been taken to enforce collection of the delinquent
amount.

-  Another  business  did not make any unemployment tax
payments  in 4 years.  Although  the  business  had  an
outstanding   balance   of  more  than  $140,000,  this
business  owner  also had not  been  contacted  by  the
Division, and no legal action had been taken to collect
the delinquent amount.

Collection of Delinquent Taxes

The collection enforcement  procedures  established  by
the Virgin Islands Code and the Unemployment Tax Manual
were  not used by the Division to ensure the collection
of delinquent  unemployment  taxes.   Title 24, Section
309(b)(1), of the Virgin Islands Code states that if an
employer  defaults on unemployment tax payments  and/or
interest  and   penalties  accrued  on  an  outstanding
balance,  civil action  should  be  taken  against  the
employer.   The  Tax  Manual  also  defines  collection
options  that  are available to the Division, including
establishing  an   8-month  installment  payment  plan,
issuing  demand  letters,  and  seeking  an  injunction
against  the  continued  operation  of  the  delinquent
business.  However,  none  of  these collection options
were used by the Division.  As a  result,  as  of  July
1997,  2,099  employers  who  were subject to quarterly
payment of unemployment taxes owed  delinquent taxes of
$17.4 million, and 80 employers who had  elected to pay
unemployment  taxes  on  a reimbursable basis  owed  an
additional   $1.1   million   as    reimbursement   for
unemployment benefits paid to their former employees.

To test the level of collection enforcement activity by
the Division, we reviewed the files for  a sample of 60
employers  (35 on St. Thomas and 25 on St. Croix).   We
found that 24 employees  (8  on  St. Thomas  and  16 on
St. Croix)  had  delinquent  taxes  of  about $988,500.
However,  the  records  maintained  by  the  Division's
revenue  officers contained documentation of collection
action for  only 2 of the 24 delinquent employers (both
on St. Thomas).   For example:

-  One business  did  not  file unemployment reports or
pay taxes for 11 consecutive  quarters  in 1995 through
1997.    Despite   attempts   by   Division  officials,
including an audit of the business in  June  1996 which
disclosed  that  the  business  owner had underreported
wages paid to employees in 1992,  1993,  and  1994, the
business owner did not agree to an installment  payment
plan or otherwise pay the unemployment taxes of $47,400
that  were  owed.  However, the Division did not pursue
more aggressive  collection actions, such as seeking an
injunction  against   further   business   activity  or
referring the case for legal action.

-  Another   business   had   not  made  any  quarterly
unemployment tax payments since September 1993 and owed
$590,000.    Although  the  business   agreed   to   an
installment payment  plan  in  1995,  it  did  not make
regular  payments  against the delinquent amount.   The
business owner told  us  that  the  Government owed the
business  for two contracts and that it  therefore  did
not have funds  to  pay the delinquent taxes.  However,
the Division did not  pursue other available collection
options,  such  as  offsetting   the  delinquent  taxes
against the amounts that the Government  may  have owed
the business.

The  Division's  Acting  Chief of Tax told us that  the
three revenue officers on  St.  Croix  did  not perform
collection  activities  because  they  had to routinely
respond  to inquiries from employers concerning  errors
in their accounts.   The  Chief  stated,  however, that
during  1995  and  1997,  the  one  revenue officer  on
St. Thomas contacted delinquent employers by telephone.
Division officials also stated that the  lack  of  more
aggressive  collection  efforts  was due to the lack of
vehicles for site visits by revenue  officers.   At the
July 23, 1998, meeting to discuss the preliminary draft
of this report, the Commissioner of Labor noted that an
undetermined  portion  of  the  delinquent unemployment
insurance  taxes  of  $17.4  million  may  be  owed  by
employers who are no longer in  business  and therefore
should be written off as uncollectible.

We  also  found that the Division was not effective  in
pursuing the  collection  of amounts owed by government
and nonprofit employers who  had  elected  to reimburse
the  Unemployment  Insurance  Program  for unemployment
benefits  paid  to their former employees  in  lieu  of
making    quarterly    unemployment    tax    payments.
Specifically,  as  of September 30, 1997, 48 government
employers owed $936,500 and 32 nonprofit employers owed
$231,200, for a total  of about $1.1 million.  Although
Title 24, Section 308(e),  of  the  Virgin Islands Code
requires that nonprofit employers who  elect to use the
reimbursement method obtain surety bonds  in  the event
that   funds   are   not   available  to  pay  extended
unemployment benefits to former employees, the Division
did  not  ensure  that  such  surety   bonds  had  been
obtained.   We  found that 5 of 10 employers  contacted
were not aware that they had outstanding balances.

Assessment of Penalties and Interest

Our review also disclosed that during fiscal years 1996
and 1997, Division employees backdated the receipts for
281 unemployment  tax  payments in order to prevent the
Division's   computer  from   automatically   assessing
penalties and interest on late payments, which resulted
in the loss of penalties and interest totaling $16,400.
Although Division  policy states that only the Director
and the Chief of Tax  are authorized to waive penalties
and interest, Division  officials  told  us  that other
Division  employees  were  familiar with the procedures
necessary  to  bypass  the computerized  assessment  of
penalties  and interest.   However,  several  employees
told us that  they  were instructed by past and present
supervisors  to  backdate   the   contribution  payment
receipts.   We  could  not  verify  either  explanation
because there was no documentation as  to  who bypassed
the  process  to  automatically  assess  penalties  and
interest.  When we told the Division's Director  of the
backdating,  she  developed  a  form  to be used by the
Division   to  approve  and  document  the  waiver   of
penalties and interest.

Use of Staff  Resources.  We believe that the principal
cause  of  the  collection   enforcement   deficiencies
disclosed by our review was that the Division  did  not
effectively  supervise  and  use  its  available  staff
resources.    Specifically,   although   most   of  the
employer-related activity and record keeping took place
on St. Thomas, the Division's Tax Contribution  Section
had  six staff positions on St. Thomas (a collector,  a
fiscal  assistant,  two  data  entry operators, and two
revenue officers) and six staff  positions on St. Croix
(the  Acting Chief of Tax, an auditor,  three   revenue
officers,  and  a  computer programmer).  Therefore, in
addition  to  the  revenue  officers  on  both  islands
devoting a significant  amount of time in responding to
inquiries   from  employers   instead   of   conducting
collection   enforcement   activities,   as   discussed
previously, we  found that some of the staff members on
St. Croix were not used appropriately as follows:

-  The computer programmer on St. Croix was assigned as
a collector, which  we believe was not an effective use
of  the  employee's  computer   programming  expertise.
Additionally, the presence of a computer  programmer at
the  St. Thomas office would have allowed the  Division
to   segregate    some    of    the    computer-related
responsibilities.   Instead,  the  Division's  Computer
Manager  on  St. Thomas had no support  staff  and  had
unrestricted access to all computer operations.

-  The auditor  on  St.  Croix  had  completed only two
audits of employers during the past 4  years,  although
many  employers  on  St.  Thomas  who  had large-dollar
delinquencies  had  never been audited.  Therefore,  we
believe that the auditor's  expertise  could  have been
more effectively used on St. Thomas.

Additionally,  because  the  Acting  Chief  of  Tax was
located  on  St. Croix rather than on St. Thomas, where
most  of  the  employer-related   activity  and  record
keeping  was  centered, he could not  provide  adequate
supervisory oversight  over  the  activities of the Tax
Contribution Section's staff on St.  Thomas.  The audit
guide  "Assessing  Internal  Controls  in   Performance
Audits," issued by the U.S. General Accounting  Office,
states  that  a  key element of an effective system  of
internal controls  is  that  "qualified  and continuous
supervision  is to be provided to ensure that  internal
control  objectives   are   achieved."   Therefore,  we
believe that the allocation of  the  Division's  staff,
particularly   with  regard  to  the  Tax  Contribution
Section, should  be  reviewed  and revised to allow for
more effective supervision and use  of  available staff
resources.

Reliability of Computerized Data

The "Fraud Examiners Manual"[3] includes  a description
of  the  general  security  controls that should  exist
within  a  computerized  system.    According   to  the
"Manual,"  these  controls  include  the following: (1)
restricting  programmers'  access  to  input  data  and
computer    operations,    (2)   restricting   computer
operators' access to computer  programs,  (3)  ensuring
that only authorized people have access to the computer
programs  and  data  files  by  using  password  access
restrictions,    and    (4)   establishing    emergency
procedures for the backup  and  restoration of computer
programs  and critical data files.   However,  none  of
these  control   features  were  in  place  within  the
Division's  computer  operations  unit.   The  Computer
Manager worked  alone and performed all administrative,
programming,  and   operating   tasks  related  to  the
computer system.  Moreover, the Computer  Manager  told
us  that  he had access to all employees' passwords and
to the Chief  of  Security's  main password, which gave
him   unlimited   access   to  all  of   the   system's
capabilities and data.  Although  user passwords should
be changed at least once a year, the  Computer  Manager
used an option within the system to match passwords  to
specific   screens/functions,   which   did  not  allow
employees  to  set  their own passwords.  The  Computer
Manager also told us  that  after  Hurricane Marilyn in
September 1995, he entered information to establish new
and update existing claimant accounts  because  of  the
increased  number of unemployment claims received after
the hurricane.   We  believe  that all of these factors
resulted in a major breakdown of internal controls over
the  Division's computer operations  which  placed  the
integrity  of all unemployment insurance tax collection
and  benefit   payment   data,  including  confidential
employer and employee data, at risk.  During our audit,
we  noted  discrepancies  between  information  in  the
Division's computer and in  the related hard copy files
as follows:

-  The computer file for an employer showed that, as of
November 18, 1997, the employer  owed interest of $984.
However,  because  the  business's  "start"   date  was
October 4, 1997, it was unlikely that interest  of $984
on unpaid unemployment taxes would have accumulated  in
the  6  weeks  that  the  business  was  in  operation.
Therefore,  we  believe  that  either the interest  due
amount  or  the  recorded  business   start   date  was
incorrect.

-  Similarly,  the  computer  file for another employer
showed that, as of November 18, 1997, the employer owed
interest of $27,783.  However,  the  business's "start"
date was June 2, 1997, and the employer  was current in
the  payment of unemployment taxes for the  second  and
third  quarters  of  calendar year 1997.  Therefore, we
believe that either the  interest  due  amount  or  the
recorded business start date was incorrect.

-  On  June  8, 1995, one of the 43 employers discussed
previously in  this  finding  had  made overpayments of
unemployment  taxes  and received a refund  payment  of
$27,709  based  on data  contained  in  the  Division's
computer system.   However, our review of the hard copy
files for this employer  indicated  that  the  employer
owed  delinquent  taxes  of  $74,212  for the same time
period and was therefore not entitled to the refund.

-  Another employer's computer record showed  a  credit
balance  of  $9,285,  which  indicated  an overpayment.
However,  our  review of the hard copy files  disclosed
that the employer owed delinquent taxes of $77,235.  We
found that the discrepancy  occurred  because of a data
input   error   related   to   the  settlement  of   an
administrative appeal.

Because   of   the  errors  cited,  we   believe   that
unemployment insurance  data on the Division's computer
is not reliable.

As  of  February 1998, when  our  audit  fieldwork  was
completed, Virgin Islands Department of Labor officials
were in the  process  of  finalizing  a grant agreement
with  the U.S. Department of Labor that  would  provide
$2.9 million  for the acquisition and installation of a
new  computer system  for  the  Unemployment  Insurance
Program,  which would allow the Division to improve its
operations and also overcome "Year 2000 problems"[4] in
its computer  system.   However,  we  believe  that the
staffing  and  operating  procedures  of the Division's
computer  operations unit should also be  analyzed  and
revised to  provide  a  reasonable  level  of  internal
control  and  assurance that the unemployment insurance
data are accurate and reliable.

In  a  July 21, 1998,  memorandum  to  the  Information
Technology  staff,  the  newly hired Assistant Director
established interim procedures to (1) restrict computer
programmers'  access  to  data   input   and   computer
operations  functions, (2) restrict computer operators'
access to computer  programs,  (3)  ensure  that system
users  had  active  passwords  to restrict unauthorized
access   to   the   system,  (4)  establish   emergency
procedures for off-site  backup  of  important computer
files,  and  (5)  maintain  an  audit  history  of  all
computer  accesses.  At the July 23, 1998,  meeting  to
discuss  a  preliminary   draft  of  this  report,  the
Commissioner stated that the  Department had received a
portion  of  the  U.S. Department  of  Labor  grant  to
upgrade  its  computer   operations   and   had   begun
negotiations  to  acquire  a new unemployment insurance
software  system  from  a  state   whose   unemployment
insurance  program  was  similar to that of the  Virgin
Islands.

Recommendations

We recommend that the Governor  of  the  Virgin Islands
direct the Commissioner of Labor to:

1. Enforce   existing   procedures  contained  in   the
Unemployment Tax Manual which  require  the Division of
Unemployment  Insurance  to  issue  periodic  (such  as
quarterly) statements of account to employers  that are
delinquent  in  the  payment  of unemployment insurance
taxes.

2. Enforce  existing  procedures   contained   in   the
Unemployment  Tax  Manual which require the Division of
Unemployment Insurance  to  contact  employers that are
delinquent  in  the  filing  of quarterly  unemployment
insurance  tax  reports  or  that   have   overpaid  or
underpaid unemployment taxes.

3. Enforce   existing   procedures  contained  in   the
Unemployment Tax Manual which  require  the Division of
Unemployment  Insurance  to  follow up with  delinquent
employers to ensure that they  make arrangements to pay
outstanding balances.  For those  employers  who do not
respond    to   initial   collection   efforts,   other
enforcement  collection  options should be used.  After
all  available  collection  options   have  been  made,
accounts for employers that are no longer  in operation
should be written off as uncollectible.

4. Establish  formal procedures to ensure that  waivers
of penalties and  interest  on  delinquent unemployment
taxes  are  made  only  with  the written  approval  of
authorized    Division   of   Unemployment    Insurance
officials.

5. Perform an analysis of the work load and staffing to
identify the staffing  needs  of  the  Tax Contribution
Section of the Division of Unemployment  Insurance  and
restructure  the  Section to achieve better supervision
and use of staff resources.

6. Ensure  that  Division   of  Unemployment  Insurance
officials  adequately  plan  for  the  acquisition  and
installation of the new computer  system  so  that  the
system   will   meet   the  Division's  long-term  data
processing needs, provide an adequate level of internal
controls  and  segregation   of   duties,  and  provide
accurate and reliable data.


**FOOTNOTES**

[2]:The unemployment tax rates vary depending on the
extent to whicheach employer's former employees received
unemployment insurance benefits in the prior calendar year.

[3]:The "Fraud Examiners Manual" (second  edition),
Chapter 1.1600 ("Computer Fraud"), published by the Association
of Certified Fraud Examiners, 1993.

[4]:The  term  "Year  2000  problems" is used to describe
the  potential failure of information technology  systems,
applications,  and hardware that would make them unreliable
because of their inability to  correctly interpret  dates
after  December  31,  1999.   (That  is, many computer
systems that use two digits to keep track of the date will,
on  January 1, 2000, recognize "double zero" not as 2000
but as 1900.) Commissioner  of  Labor Response and Office
of Inspector General Reply

The October 8, 1998, response (Appendix 2) to the draft
report from the  Commissioner  of  Labor concurred with
the six recommendations and indicated  that  corrective
actions  either  had been or would be taken.  Based  on
the response, we consider  Recommendations  1, 4, and 6
resolved and implemented and Recommendations  2, 3, and
5 resolved but not implemented (see Appendix 3).

B.  UNEMPLOYMENT BENEFIT PAYMENTS

The  Division  of  Unemployment  Insurance did not  (1)
ensure   that   only   qualified  applicants   received
unemployment  insurance  benefits  and  (2)  adequately
safeguard  computer  and  hard   copy   files  for  all
individuals  who  applied  for  unemployment  benefits.
Title  24, Sections 304 and 305(d)(2),  of  the  Virgin
Islands    Code    contains   the   basic   eligibility
requirements for unemployment  benefit  applicants, and
Section 312 of the Code makes the Commissioner of Labor
responsible   for   providing   regulations   for   the
destruction   of   agency  records.   The  Unemployment
Benefit  Manual  contains   specific   procedures   for
processing  claims.   However,  there were insufficient
management controls to ensure that  these  requirements
were  complied  with  by  the  staff  of the Division's
Benefit  Claim  Section.   As a  result, 156  claimants
received excess benefit payments of more than $152,800,
and  supporting  records were  not  available  for  183
additional claimants  who  received benefit payments of
about $400,400.

Processing of Benefit Applications

According  to  the Unemployment  Benefit  Manual,  each
applicant  for unemployment  benefits  is  required  to
complete an  initial  claim form and provide the reason
for separation from the  last  employer.  If the reason
given on the initial claim form  is "lack of work," the
claim is automatically accepted without being forwarded
to  one  of  the  Division's adjudicators.[5]   If  the
applicant does not  provide a letter of separation from
the last employer, a  copy  of  the  initial claim form
must be sent to the last employer for  verification  of
the  reason  for  separation.   Additionally,  the last
employer is to be notified when benefits are paid  to a
former employee.

However,   based   on   our   review  of  a  sample  of
31 applicant  files,  we found that  3  applicants  had
received  unemployment  benefits,   although  they  had
listed "lack of work" as the reason for separation from
the  last  employer  and  their files did  not  contain
documentation verifying that  the reason for separation
had  been  obtained  from  their  last  employer.   One
applicant  had voluntarily quit his  job  but  received
unemployment  benefits  of  $345,  which  had  not been
recovered  by  the  Division at the time of our review.
When  the  employer  was   notified  that  unemployment
benefits  had  been paid to the  former  employee,  the
employer contacted  the  Division  to  explain that the
employee had voluntarily quit his job.

The  Unemployment  Benefit  Manual  also requires  that
applicants submit a copy of their Social  Security card
with  their initial claim forms.  The Division's  Chief
of  Benefits   told  us  that  verification  of  Social
Security  numbers   was   given   "special  attention."
However,  we  found that the numbers  were  not  always
verified in that  our  review of the Division's benefit
payment list disclosed that the Social Security numbers
provided by four applicants  were  not  valid.   In one
instance, the applicant's file contained a copy of  the
individual's  Social  Security  card, but the number on
the benefits list and on benefit  checks  issued to the
individual was different.

The  Unemployment Benefit Manual further requires  that
benefits be reduced or denied if an individual receives
any earnings, earning substitutes, or replacements such
as back  pay  and pensions.   Each new applicant should
be interviewed  by  Benefit  Claim Section personnel to
verify information on the initial  claim  form  and  to
obtain  additional  information  as necessary about any
additional income reported by the applicant.   However,
based on our review of 25 files for  applicants who had
been  overpaid,  we  found  that in six instances,  the
individuals received additional  income that would have
made   them   ineligible  for  unemployment   benefits.
However, this additional  income  was not identified at
the  time  of  processing  of the initial  claim.   For
example:

-  An applicant received unemployment benefits of about
$4,500  for  a  5-month period  during  which  he  also
received workman's compensation benefits.  The Division
had not recovered  improper payments of about $3,600 at
the time of our review.

-  Another applicant  received unemployment benefits of
about $2,080 for a 2-month  period during which he also
received severance and vacation  pay.  The Division had
not recovered improper payments of  about $1,900 at the
time of our review.

The  Unemployment  Benefit Manual further  requires  an
applicant who is certified  as eligible for benefits to
perform  weekly  job  searches and  submit  job  search
reports as a condition  of continuing to receive weekly
benefit payments.  The job  search  reports  are  to be
mailed  to  the  Division by unemployed individuals and
hand   carried  to  the   Division   by   underemployed
individuals.   The form used for the job search reports
contains the notices  "Your  job search[es] are subject
to verification" and "It is necessary  that  you answer
the  questions  on  this form and return it."  However,
the Chief of Benefits  told  us  that  the  job  search
reports were not reviewed and/or verified because there
was   "no  one  on  staff"  to  perform  such  reviews.
Additionally,  there was no followup to ensure that all
benefit claimants  submitted  the job search reports as
required.   We  found  that,  as a  result,  applicants
continued  to  receive  unemployment   benefits   after
obtaining full-time employment.  For example:

-  A  claimant  received unemployment benefits of about
$2,450  for  a  4-month  period  during  which  he  was
employed on a full-time  basis.  The entire overpayment
amount was outstanding.

-  Another claimant received  unemployment  benefits of
$3,440  for  a  3-month  period  during  which she  was
employed  on a full-time basis.  The individual  became
unemployed  again,  and deductions were being made from
her current unemployment  benefits   to  liquidate  the
$3,000 balance that was outstanding.

Supervisory Oversight

Based  on  our review, we believe that the deficiencies
cited in the  benefit  payment process occurred because
of an insufficient level  of  supervisory  oversight of
the   Benefit   Claim   Section  staff.   Specifically,
although the Section had  five employees  on St. Thomas
and nine employees on St. Croix, the Chief of Benefits,
who  was responsible for supervising the Benefit  Claim
Section  staff  on  both  islands,  was  located on St.
Thomas.  Further, the Benefit Claim Section's two claim
adjudicators   on   St.   Thomas  told  us  that  their
recommendations  to  approve   applicants'  claims  for
unemployment benefits were not reviewed by a supervisor
before being approved and processed  for  payment.  The
Chief of Benefits told us that she did not  review  the
decisions   of  one  of  the  claim  adjudicators.   Of
25 overpayment  cases  reviewed,  we  found  that  in 8
cases, totaling $14,100, the overpayments resulted from
the  subsequent  reversal  of the decisions made by the
claim adjudicators.  In these  cases,  we  believe that
supervisory reviews prior to approving the claims could
have prevented the overpayments.

We  also  believe that the lack of adequate supervisory
oversight contributed  to  the  Benefit Claim Section's
inability  to consistently meet the  14-day  processing
time frame established  in  the  Unemployment Insurance
Appraisal  Manual.  In the 1997 Unemployment  Insurance
Program and  Budget  Plan,  the  former Commissioner of
Labor   stated   that   only  41.9  percent   of   1996
unemployment  benefit cases  were  resolved  within  14
days.  Our review disclosed that only 17 (34.7 percent)
of 49 cases processed  by  the  intrastate  adjudicator
during  1997 were resolved within the established  time
frame.   In   the   1997   budget   plan,   the  former
Commissioner  of  Labor  recommended  that  the  vacant
position  of  Local  Office  Manager  on  St. Thomas be
filled to give the Chief of Benefits the opportunity to
effectively  monitor  all  office  functions  on   both
islands.  However, the Chief of Benefits was located on
St. Thomas,  and  there  was no budgeted position for a
Local  Office Manager on St.  Croix  to  supervise  the
staff on that island.

We also found that the lack of segregation of duties in
the Benefit  Claim Section compromised the integrity of
the entire benefit  payment process.  Specifically, the
Chief of Benefits was personally involved in key phases
of the benefit payment  process,  including  performing
data   entry  of  claimant  information  and  printing,
signature stamping, and mailing benefit payment checks.
The U.S.  General  Accounting Office's guide "Assessing
Internal Controls in  Performance  Audits"  states that
"key   duties   and  responsibilities  in  authorizing,
processing,  recording,   and   reviewing  transactions
should be separated among individuals."

Collection of Benefit Overpayments

Title 24, Section 305(j)(1), of the Virgin Islands Code
requires  that  claimants  repay  any  overpayments  of
unemployment benefits within 2 years  of  the  date  of
final  determination  of  their  case.   The  Code also
provides  that  no  repayment  will be required if  the
overpayment  was  not  the  fault  of   the   claimant.
However,  our  review of the Division's benefit payment
process  disclosed   that   156   unemployment  benefit
claimants  (including  the specific examples  discussed
earlier in this finding)  received benefit overpayments
totaling  $152,800  based  on  claims  that  originated
during the period of 1984 to  1997.   The  overpayments
were  for  individual amounts that ranged from  $61  to
$5,590,  and   65  of  the  156  overpayments  remained
outstanding longer  than the 2-year limit stated in the
Virgin Islands Code.   Based  on our review of the case
files for a sample of 25 overpayments, we found that 15
overpayments ($21,840) resulted from improper claims by
the applicants, 8 overpayments  ($14,190) resulted from
errors by the Division, and 2 overpayments  ($460) were
for   reasons  that  were  undeterminable  because   of
incomplete  files.   We  also found that the Division's
Benefit Claim Section had  not  made a reasonable level
of effort to contact the claimants  and  to arrange for
repayment of the overpayments which did not result from
errors  by the Division.  Specifically, 20  of  the  25
claimants  had  never  been  contacted,  and  repayment
agreements  were  negotiated  with  only  2 of  the  15
claimants  whose claims were improper.  In one of those
cases, the claimant  made  only four payments, totaling
$200, during the period of June  1995  to December 1997
and  owed about $2,730 at the time of our  review.   In
the  other  case,  the  claimant  was  unemployed,  and
deductions were being made from her benefit payments to
liquidate   the   $3,000  outstanding  balance  of  her
overpayment.  In November 1997,  two  other  cases were
referred  to  the  Attorney  General  for legal action,
although  the  Division  had  not  used  all  available
administrative   enforcement  actions.   Further,   the
Division had not written  off  the  eight overpayments,
totaling $14,190, that resulted from errors made by the
Division.

Reliability of Computer and Hard Copy Files

We  found that significant internal control  weaknesses
in the  Division's  computer operations compromised the
integrity  and  reliability  of  data  related  to  the
unemployment benefit  payment process (also see Finding
A).  The Computer Manager had complete and unrestricted
access to all computer  operations and passwords, which
included  the ability to enter  and  revise  claimants'
data files and the responsibility to print unemployment
benefit checks.  In addition, the Division did not have
any contingency plans for backing up critical files.

On July 8,  1997  (the  start  date of this audit), the
records for 1,031 benefit claimants  were  deleted from
the   computer   master  file.   The  Computer  Manager
initially told us  that  erroneous  dates  entered into
some  of  the claimant records by a summer student  had
caused the  system  to  fail  during  the  printing  of
benefit checks, thus resulting in the records that were
processed being deleted.  However, the Computer Manager
later  told us that the problem occurred because one of
the computer's  10  disks  had become warped because of
the  excessive  heat  in  the  computer   room.   In  a
memorandum   to   the  Director  of  the  Division   of
Unemployment Insurance, the Computer Manager identified
all of the deleted  records  by  Social Security number
and requested that the related hard  copy files be used
to  reenter the deleted claimant information  into  the
system  to  rebuild the master file.  However, the hard
copy files for  192 St. Thomas  claimants  could not be
located.   Benefit  payment  records indicate that  the
192 claimants  had been paid a  total  of  $418,700  in
unemployment benefits during the period of July 1995 to
June 1997.  As of  February  1998, the files for 183 of
the  192  claimants had not been  located.   Therefore,
there was no  support for the benefit payments of about
$400,400 that had been made to these 183 individuals.

As discussed in Finding A, Virgin Islands Department of
Labor officials  were  in  the  process of finalizing a
grant agreement with the U.S. Department  of Labor that
would  provide  $2.9 million  for  the acquisition  and
installation   of  a  new  computer  system   for   the
Unemployment Insurance  Program.   In  addition  to our
recommendation   (No.   A.6)   that  the  staffing  and
operating   procedures   of  the  Division's   computer
operations  unit  should be  analyzed  and  revised  to
provide a reasonable  level  of  internal  controls and
assurance that unemployment insurance data are accurate
and  reliable,  we  believe that the Department  should
establish  formal  records   retention   and   disposal
procedures  for  computer and hard copy records related
to the Unemployment  Insurance  Program,  including the
backup of critical computer files.

Recommendations

We  recommend  that the Governor of the Virgin  Islands
direct the Commissioner of Labor to:

1. Enforce  existing   procedures   contained   in  the
Unemployment  Benefit Manual which require the Division
of Unemployment  Insurance  to verify claimants' Social
Security numbers and statements  regarding  termination
of  employment, sources of income, and results  of  job
searches.

2. Perform   a  work  load  and  staffing  analysis  to
identify  the  staffing  needs  of  the  Benefit  Claim
Section of the Division  of  Unemployment Insurance and
restructure the Section to achieve  better use of staff
resources, a greater level of supervisory  oversight of
daily  operations, and an adequate level of segregation
of duties.

3. Enforce   existing   procedures   contained  in  the
Unemployment Benefit Manual which require  the Division
of    Unemployment   Insurance   to   take   collection
enforcement  action  to  recover overpayments and other
improper payments to claimants  except  for  those that
were  caused  by  errors made by Division staff,  which
should  be  written  off  in  accordance  with  program
requirements.

4. Develop and implement  formal  records retention and
disposal  procedures for the Division  of  Unemployment
Insurance which will ensure that permanent computer and
hard  copy  records   are  maintained  for  all  active
unemployment insurance taxpayers and benefit claimants.
The records retention and  disposal plan should also be
in compliance with any records  retention  requirements
of  the  Federal  Unemployment Tax Act and provide  for
secure backup copies of critical computer files.

Commissioner of Labor  Response  and Office of
Inspector General Reply

The October 8, 1998, response (Appendix 2) to the draft
report from the Commissioner of  Labor  concurred  with
the  four recommendations and indicated that corrective
actions  would  be  taken.   Based  on the response, we
consider Recommendations 1,2, 3, and 4 resolved but not
implemented (see Appendix 3).


**FOOTNOTES**

[5]:According to Department officials, the function of
the adjudicators is to gather additional information
and make an unbiased decision as to a claimant's
eligibility when the reason for separation from the
last employer is an issue in the case.

C.  ADMINISTRATIVE CONTROLS

The Division of Unemployment Insurance did not maintain
an  adequate  level  of administrative control over the
Unemployment   Insurance   Program's   bank   accounts.
Specifically, the  Division  did  not  ensure  that (1)
monthly  bank  reconciliations were performed and   (2)
blank,  canceled,   and  voided  checks  were  properly
controlled  and  secured.    Good   business  practices
dictate  that bank accounts be periodically  reconciled
and that blank, canceled, and voided checks be properly
controlled  and  secured.   The  deficiencies  occurred
because  the Division did not have formal policies  and
procedures    for   reconciling   bank   accounts   and
controlling blank,  canceled,  and voided checks.  As a
result,  discrepancies  existed in  the  cash  balances
recorded  in  the bank statements  and  the  Division's
internal records  for the Unemployment Benefit Account,
and 197 canceled checks  for benefit payments could not
be located.

Reconciliation of Bank Accounts

The Division had not reconciled  the  Clearing  Account
and   Unemployment   Benefit  Accounts  (both  checking
accounts) in more than  20  years.   Although  Division
personnel  verified  the posting of drawdowns from  the
U.S.  Treasury, they did  not  verify  the  posting  of
deposits  of  unemployment  tax  collections,  canceled
benefit  checks,  or other bank transactions.  Instead,
Division staff maintained  an internal register for the
Unemployment Benefit Account  that listed all drawdowns
as "debits" and all issued benefit checks as "credits."
However, the balances shown on  the  internal  register
did  not match the bank statements because the register
did not  take  into  consideration  outstanding checks,
bank   service   charges,   and   other   "in  transit"
transactions.  The Division employee who maintained the
internal  register  said that the procedures  she  used
were based on supervisory  instructions provided to her
about  20 years ago.  The Division  did  not  have  any
formal procedures for performing formal reconciliations
between the balances shown on the internal register and
on the bank statements.

In March  1997, the Director of the Division instituted
a  computerized   reconciliation    program    for  the
Division's  bank  accounts.  However, this program  was
only a check reconciliation  process because it did not
include a reconciliation of deposit  information  or of
the  final  monthly  account  balances.   Further,  the
computerized  check  reconciliation program was stopped
in  April 1997 because  of  a  situation  in  which  89
unemployment benefit checks had duplicate check numbers
(see  the  section "Control of Checks").  Although this
problem   was   subsequently   corrected,   the   check
reconciliation program was not reactivated.

We also found  that  there  was  inadequate supervisory
oversight  of the bank account reconciliation  process.
For example,  the  Director  told  us  that she was not
aware  that  formal reconciliations were not  performed
between the Division's  internal  register and the bank
statements.   Further,  there  was  a  lack  of  proper
segregation of duties related to the maintenance of the
Division's  bank  accounts.   Specifically,   the  same
employee who requested drawdowns from the U.S. Treasury
also  prepared  the  internal  bank  account registers,
prepared  monthly  reports  to  the U.S. Department  of
Labor  on the status of the accounts,  stored  canceled
checks,  and  had  the  authority to issue "hand drawn"
unemployment  benefit  checks.   We  believe  that  the
absence of monthly bank  reconciliations,  the  lack of
internal  procedures  for  the  processing of drawdowns
from the U.S. Treasury, and the lack  of segregation of
duties  constituted  a  serious  breakdown   in   basic
internal   controls  that  put  Unemployment  Insurance
Program funds  at the risk of loss or misuse.  As noted
in  Finding B, the  U.S.  General  Accounting  Office's
guide   "Assessing  Internal  Controls  in  Performance
Audits" states that "key duties and responsibilities in
authorizing,   processing,   recording,  and  reviewing
transactions should be separated among individuals."

Control of Checks

The   Division  did  not  have  formal   policies   and
procedures  related  to  the  handling  of unemployment
benefit  checks.   As  a  result,  control over  blank,
canceled,  and  voided  checks  was  inadequate.    For
example,  although  the Division used prenumbered blank
checks, computer-generated numbers were also printed on
the checks during the  check  printing process.  During
April 1997, the computer-generated numbers on 89 checks
were  different  from  the  preprinted  numbers.   This
duplication  caused  the  Division's   automated  check
reconciliation program to malfunction (see  the section
"Reconciliation of Bank Accounts").  Further,  although
the  bank  used  the  preprinted  numbers  in  its bank
statements,  the  Division  used the computer-generated
check  numbers in all of its internal  record  keeping.
We also  found  that a record was not maintained of the
sequence of preprinted  numbers on the batches of blank
checks provided to the Division's  Computer Manager for
the printing of benefit checks.  Therefore,  there  was
no   control   over   the  use  of  the  blank  checks.
Additionally, the Division  did not maintain a register
or  otherwise  control  the issuance  of  "hand  drawn"
checks.

Control  over  canceled  and  voided  checks  was  also
inadequate.   Specifically,   we  found  that  canceled
checks  were  stored in unlocked  cabinets  which  were
easily accessible  to  all  of the Division's employees
and that voided checks were kept  in various locations,
including employees' desks.  We performed  a  numerical
trace  of  all  checks  issued  from  the  Unemployment
Benefit Account during fiscal year 1996 and were unable
to  locate  159 checks  among  either  the canceled  or
voided  checks.   This  number included 31 checks  that
were  not listed in the internal  check  register.   We
also were  unable  to  locate 38 checks, totaling about
$7,800, that were issued  to  benefit claimants in 1997
under  the  special  Disaster  Unemployment  Assistance
program which was instituted after  Hurricane Bertha in
July 1997.  Also, during our review of  the  case files
for  benefit  claimants,  we found six checks, totaling
about $1,570, that had not  been  either  voided by the
Division or mailed to the claimants.

Recommendations

We  recommend  that the Governor of the Virgin  Islands
direct the Commissioner of Labor to:

1. Develop and implement formal policies and procedures
to ensure that the  Division  of Unemployment Insurance
reconciles  its  bank  accounts  on  a  monthly  basis;
provides an adequate level of supervisory  oversight of
the  bank  reconciliation  process;  and  maintains  an
adequate  level of segregation of duties for  functions
related to  the  physical handling, record-keeping, and
supervisory oversight of the Division's resources.

2. Develop and implement formal policies and procedures
to ensure that the  Division  of Unemployment Insurance
maintains  an  adequate level of  control  over  blank,
canceled, and voided  checks.   The  procedures  should
ensure  that  a  record  is maintained of the numerical
sequence  of  blank  checks  issued   to  the  computer
operations unit, the preprinted check numbers  are used
for all internal record-keeping functions, a record  is
maintained  of  all  voided checks and all "hand drawn"
checks, and all voided  and  canceled checks are stored
in a secure area which is accessible only to authorized
Division   personnel.   The  procedures   should   also
establish controls  to  ensure that "hand drawn" checks
are properly authorized and supported.

Commissioner of Labor Response  and  Office of
Inspector General Reply

The October 8, 1998, response (Appendix 2) to the draft
report  from the Commissioner of Labor  concurred  with
the two recommendations  and  indicated that corrective
actions  would be taken.  Based  on  the  response,  we
consider Recommendations  1  and  2  resolved  but  not
implemented (see Appendix 3).

APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

                              Unrealized    Unsupported
                                                Finding
                               Revenues*     Costs*

   A.  Unemployment Tax Collections
Verification of Employer Payments$60,000
Collection of Delinquent Taxes18,500,000
Assessment of Penalties and Interest16,400

B.  Benefit Payments
Collection of Benefit Overpayments152,800
Reliability of Computer and
   Hard Copy Files                           $400,400

   C.  Administrative Controls
Control of Checks                               7,800

   Totals                    $18,729,200     $408,200

*Amounts represent local collections processed through
the Unemployment Trust Fund in the Treasury of the
United States in accordance with Sections 903 and 904
of the Social Security Act and the Federal Unemployment
Tax Act.

APPENDIX 2
Page 1 of 7


COMMISSIONER OF LABOR RESPONSE

APPENDIX 3


STATUS OF AUDIT REPORT RECOMMENDATIONS


--------------------------------------------------------
Finding/Recommendation
Action
Reference              Status      Required


A.1, A.4, and A.6   Implemented.     No further action is
                                     required.
A.2, A.3, and A.5   Resolved;
                    not        The recommendations will be
                    implemented.referred to the Assistant
                               Secretary for Policy,
                               Management and Budget for
                               tracking of implementation.
                               However, when corrective
                               actions have been
  B.1, B.2, B.3,               completed, appropriate
     and B.4        Resolved;  supporting documentation
                    not        should be provided to our
                    implemented.office.

                               The recommendations will be
                               referred to the Assistant
                               Secretary for Policy,
                               Management and Budget for
   C.1 and C.2                 tracking of implementation.
                    Resolved;  However, when corrective
                    not        actions have been
                    implemented.completed, appropriate
                               supporting documentation
                               should be provided to our
                               office.

                               The recommendations will be
                               referred to the Assistant
                               Secretary for Policy,
                               Management and Budget for
                               tracking of implementation.
                               However, when corrective
                               actions have been
                               completed, appropriate
                               supporting documentation
                               should be provided to our
                               office.
 ----------------------------------------------------------




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