Commission on Health and Safety and Workers' Compensation

Executive Summary

CHSWC Study of the Division of Workers' Compensation Audit Function


The 1989 California workers' compensation reform legislation established an audit function within the Division of Workers' Compensation (DWC) to monitor the performance of insurers, self-insured employers, and third-party administrators to ensure that industrially-injured workers were receiving proper benefits in a timely manner.

In April 1998, the Senate Industrial Relations Committee and the Assembly Insurance Committee jointly requested that the Commission undertake an evaluation of the effectiveness of the audit function of the Division of Workers' Compensation.

The study determined that although much time and effort was being expended by the DWC Audit Unit in performing audits of workers' compensation insurers, a redirection of these activities would produce more effective outcomes. The research team found that the current audit procedure did not include all insurers within a reasonable period of time, did not focus on the worst performers and concentrated penalties on relatively inconsequential violations.

After research and thoughtful discussions with the Audit Advisory Committee and other community members, the project team is recommending a new DWC Audit System. The focus of this new system would be

The following is a summation of findings and recommendations from that study. Detailed descriptions are presented in the full report.


Major Findings

We believe that an audit function is an important and necessary component of the California workers' compensation system. If staffed appropriately and focused on critical areas, a workers' compensation audit function will continue to be a useful tool to ensure prompt and accurate delivery of benefits to industrially-injured workers.

The research team found the staff of the Audit Unit to be very knowledgeable, dedicated, and highly professional in their approach to and completion of their duties within the current parameters of the audit function. Suggestions for changes in this report should not be construed as criticism of overall Audit Unit staff performance.

However, we have determined that improvements could and should be made to this vital program. The following are findings on which the Legislature, the Commission, the DWC, and the workers' compensation community could base decisions to improve this function in the State of California.

Findings were noted in the following areas:




As a result of the Commission's analyses and with the participation of the Advisory Committee, proposals are being made to address system shortcomings or failures. These include recommendations regarding the DWC Audit Function and other aspects of the California workers' compensation system affecting benefit delivery.

Recommendations for the Audit function:

Recommendations for other aspects of the California workers' compensation system affecting benefit delivery:



Overview of Proposed Audit Process

Under current DWC audit procedures, locations are rarely subject to random audits and almost never subject to targeted audits. The Commission recommends the replacement of current audit procedures with the following:

The results of the routine audits should be used to:





Highlights of Proposed Changes


Proposed Penalty Structure

The Commission Research Team found that the current audit penalty structure offered insufficient incentives for good performance and was biased in its application. The Project Research Team recommends a penalty structure that would:

These changes are meant to:

Administrative Penalties

If a location fails the FCA, the location would be subject to the following administrative penalties, based on the size of the location and the size of the sample selected for the auditing process.


Table of Administrative Penalties


If a location passes at the FCA level, administrative penalties for unpaid or late paid compensation would be paid at the minimum level (Rank 1).