Washington state auditor warns unemployment agency on audits

By Paul Roberts / The Seattle Times

Since May, the head of Washington’s unemployment agency has been buffeted with criticism for a slow-footed response to a massive fraud that leeched away hundreds of millions of taxpayer dollars.

Now Employment Security Department (ESD) Commissioner Suzi LeVine is being rebuked by state Auditor Pat McCarthy for hindering her office’s investigation into what went wrong.

In an unusual step, McCarthy recently accused LeVine of imposing “significant constraints” on auditors, including attempts at limiting interviews with key ESD employees and delaying access to important documents.

McCarthy, in an Oct. 20 memo to LeVine, warned if such roadblocks continued, auditors would report that “management interference” had prevented completion of several audits that are underway. It would be a rare finding — and a black eye for Gov. Jay Inslee’s administration, which has faced growing criticism for its handling of the pandemic’s economic fallout.

The memo was released to The Seattle Times after a public-records request.

McCarthy, in an interview, described ESD’s response to the audit as unlike anything she’s encountered at any other state agency since she took office in 2017.

The roadblocks have centered in part on efforts by the auditor’s office to document the scale of the theft and the total amount of money since recovered. According to ESD’s estimates, criminals stole $576 million, of which $356 million has been recovered as of Friday.

McCarthy, a Democrat not generally known as a political bomb-thrower, was at pains to acknowledge the difficulties ESD faces.

“I understand that they have had a tsunami of challenges with regard to the number of unemployment claims,” said McCarthy, referring to the wave of pandemic-related layoffs in March and April. “But right now it is critically important … that we are able to complete this work.”

In a statement, LeVine said her agency has welcomed the audits from the start, and shares a goal with the auditor of continuously improving the unemployment system. She added ESD has put in place procedures to get information to auditors as quickly as possible.

“We remain firmly committed to full transparency and are collaborating closely with the State Auditor and her staff, as we have all along,” LeVine said.

McCarthy said ESD has made some improvements since her warning letter, which was also sent to Inslee’s staff. But she said “we are still having some challenges” that could delay completion of at least one of the ongoing audits.

The auditor’s office is conducting five audits of ESD. All aim to shed new light on how cybercriminals — including a Nigerian crime ring known as “Scattered Canary” — stole hundreds of millions by filing false unemployment claims.

Three of the audits are routine, regularly scheduled examinations of ESD’s finances and management that have taken on new importance. McCarthy announced two additional probes in June amid pressure from state lawmakers and the public over the fraud and subsequent breakdowns in paying legitimate claims to tens of thousands of unemployed people.

McCarthy’s criticism is the latest in a string of embarrassments for ESD since the start of the pandemic.

In May, Washington state was one of the first states to disclose problems with impostor fraud, in which criminals used stolen Social Security numbers and other personal information to file fake claims. Since then, multiple states have reported similar problems.

ESD has been criticized for failing to block the fraud, and for its slowness in releasing information about the crime. In September, five months after the fraud was disclosed, the agency also acknowledged that a known software flaw had contributed to some of the theft.

For months, McCarthy’s staff has sought information and interviews to push ahead on the audits, including a financial accounting due next month.

McCarthy said conflicts between ESD and audit staff emerged early, and became serious enough that auditor staff asked the governor’s office to take a more active role in the audit. McCarthy said the problems revolved around two elements of the auditing process.

First, ESD was slow to respond to some requests for information by the auditor’s office.

In August, for example, the auditor’s office asked ESD to document the amount of money that had been recovered as of June 30, the end of the fiscal year. ESD publicized the size of the recoveries in August and September, but McCarthy said ESD did not begin providing the auditor’s office with actual documentation until Nov. 20.

ESD, in a statement to The Seattle Times, said the agency is working closely with the auditors to document recovery estimates but noted that the process takes time due to the “fluidity of the fraud data.”

McCarthy also took ESD to task for attempting to put conditions on how and when the auditor’s office could interview ESD staff about the fraud and other subjects.

The issue came to a head in mid-October, when LeVine objected to auditors seeking direct access to her agency’s front-line staff.

In an Oct. 16 email to Sadie Armijo, director of special investigations at the auditor’s office, LeVine complained auditors were not following “protocols” for requests to be funneled through ESD’s own internal audit division. LeVine also wanted an ESD liaison to sit in on auditor interviews with ESD employees.

LeVine copied aides to Inslee on her message, defending protocols as necessary to protect ESD staff “in a maximally stressful environment from being negatively impacted” by multiple audits.

McCarthy’s Oct. 20 response told LeVine she had no authority to dictate terms of the audits, which follow standards issued by the U.S. Government Accountability Office. “Those are the only protocols we follow,” she wrote.

“I wanted to make sure the commissioner knew that’s not the way the state auditor’s office functions. Our position and the work we do is established in state law,” McCarthy said in the interview.

In addition to the work by McCarthy’s staff, ESD is also being audited by the U.S. Department of Labor. The Justice Department is also investigating the fraud.

Inslee hired LeVine, a top national Democratic Party fundraiser, ambassador and former Microsoft executive, in 2018; she reports to him.

McCarthy is an independent statewide elected official. A Democrat and former Pierce County executive, McCarthy was elected to a second term as auditor this month.

Inslee spokesperson Tara Lee said in an email the governor’s office and the Office of Financial Management have been working with the auditor and ESD “and we are not aware of any issues that aren’t resolvable. All indications are that the audits will be done on time and on target.”

Despite harsh criticism of ESD’s management of the crisis from some state legislators and union-backed worker advocacy groups, Inslee has defended LeVine, and has instead pointed blame at criminals who scammed the unemployment system.

But some state lawmakers — including fellow Democrats — have grown frustrated with ESD’s slow pace of providing crucial information about the fraud and other problems with the unemployment system.

“It’s like pulling molasses,” said state Sen. Karen Keiser, D-Des Moines. While not familiar with the auditor’s struggles, Keiser said she’s seen “a slowness of response” by ESD throughout the pandemic-induced crisis.

That may have been understandable earlier in the year, when the joblessness crisis struck abruptly, said Keiser, who chairs a Senate committee that oversees ESD. But problems have persisted, she said.

“At this point, I think a lot of our patience has worn thin,” she said. “For heaven’s sake. By now, their communications should be more under control, more responsive.”