SACRAMENTO >> The California State Auditor is urging departments to improve financial responsibility after a recent report found several state agencies failed to follow generally accepted accounting principles.

Auditors documented 14 deficiencies in which departments failed to follow, or could not provide evidence they followed, best practices set by the Governmental Accounting Standards Board, a private organization that provides accounting guidance for state and local governments.

The auditors found material weaknesses that could lead to inaccuracy in the state’s financial reporting and less serious, but still notable, accounting issues that they said warrant attention from lawmakers.

Some of those issues, the audit warned, could cause the state to report incorrect information in its Annual Comprehensive Financial Reports, documents that provide an overview of the state’s financial health. It’s important for the state’s financial reports have minimal errors, the recently published ACFR said, because the documents are used as part of the budgeting process.

The report focused on the financial activities of state departments for fiscal year 2022-23, which ended June 2023.

One source of financial misstatements was the Employment Development Department’s inaccurate estimate of how much California paid in ineligible unemployment claims. The unemployment agency said it overpaid $46 billion in unemployment claims.

During the COVID-19 pandemic, illegitimate unemployment claims in California exploded. The state overpaid billions in unemployment claims, which California may never recover.

In 2020, district attorneys revealed that inmates at California’s prisons and jails had filed billions of dollars worth of fraudulent claims with EDD. Former U.S. Attorney McGregor Scott was named as a special counsel by the department to help coordinate investigations into the fraud scandal.

Auditors found that EDD did not verify eligibility for a significant number of claims, some of which were missing required documentation, while others had conflicting information that the department failed to address.

The state auditors said EDD couldn’t provide “sufficient and appropriate audit evidence” of how much federally funding unemployment benefits were distributed, which meant the auditors couldn’t guarantee the department’s financial reports were accurate.

The auditor recommended the unemployment agency should create a multi-level review system to estimate the amount of ineligible payments made by the state. The report also noted inconsistencies between statements made by EDD and the U.S. Department of Labor as to whether the federal government will recognize the department’s outstanding liability related to the ineligible payments. EDD said it is waiting on clarification from the federal Labor Department over this issue.

The EDD agreed with the auditor’s recommendation that the department could improve review processes to further prevent ineligible payments. The EDD declined to comment on the report.

Other deficiencies outlined in the audit included financial misstatements by the Department of Health Care Services. The department that oversees the state’s Medi-Cal program overstated expenses from California’s General Fund by $6.5 billion, according to the audit; simultaneously, DHCS understated the amount of federal dollars the department received and paid by $5.4 billion.

Auditors reported that these inconsistencies partially stemmed from DHCS misstating the amount of federal dollars needed to provide healthcare services for immigrant populations who received limited benefits, such as pregnancy and emergency medical care.

“These errors occurred mainly because of the lack of detailed, GAAP-compliant accrual methodologies and insufficient communication between program and accounting staff,” the report said. DHCS corrected the General Fund and federal fund accruals after the auditor informed the department, the audit said.

Another financial reporting misstep identified by the State Auditor was related to federal reimbursements for disaster response work done by the California Department of Forestry and Fire Protection. When CalFire performs certain disaster recovery work, it is eligible for reimbursement from the Federal Emergency Management Agency.

In fiscal year 2022-23, CalFire and the California Governor’s Office of Emergency Services asked for a $912 million reimbursement from the federal government.

“However, when we initially requested documentation to support the restatement, each department informed us that it was the other department’s responsibility to justify the amounts recorded,” the auditor’s report read.

In response, both departments agreed to continue creating guidelines that outline the responsibilities of CalFire and CalOES to submit accurate financial statements.