vs. ) CASE NO. 80-344
Respondent. )
PURSUANT TO NOTICE, an administrative hearing was held before DONALD R. ALEXANDER, Administrative Hearing Officer, on July 18, 1980, at Room 212, Ashley Building, Tallahassee, Florida.
For Petitioner: Douglas P. Chanco, Esquire
Suite 131, Montgomery Building 2652 Executive Center Circle East Tallahassee, Florida 32301
Whether the petitioner should revoke respondent's self-insurance privilege for failure to comply with Rule 38F-5.10(2)(a), Florida Administrative Code.
On February 12, 1980, the Department of Labor and Employment Security, through its Bureau of Self-Insurance, notified the Deauville Hotel (respondent) of its intention to revoke respondent's workers' compensation self-insurance privilege for failure to comply with the requirements of Rule 38F-5.10(2)(a), Florida Administrative Code. This Rule requires each se1f-insurer to have on file with the Department a "financial statement of a current date showing a net worth of not less than $250,000 and a current ratio of more than 1 to 1, and a working capital of an amount establishing financial strength and liquidity of the business to pay normal compensation claims promptly". Specifically, petitioner contends the respondent filed financial statements for calendar year 1978 that were not certified by an outside independent accounting firm, and that such statements reflected an unsatisfactory current ratio and net worth in contravention of the Rule.
Respondent is a large luxury hotel located in Miami Beach, Florida, and employs more than 400 persons. It is a division of Deauville Operating Corporation. Respondent is now and has been for a number of years a self- insurer under Section 440.38(1)(b), Florida Statutes. The privilege to self- insure is granted by the Department when an employer demonstrates the financial ability to promptly discharge all amounts required to be paid under the provisions of the Workers' Compensation Law as contained in Chapter 440, Florida Statutes. Having once established the requisite financial integrity, an employer must file within six months following the close of each succeeding fiscal year financial statements demonstrating the continued ability to discharge all obligations under the Law. The Department is reposed with the responsibility of reviewing the financial statements to insure compliance with the applicable rules governing self-insurers. When the administrative complaint was issued, respondent had on file financial statements consisting of a balance sheet, statement of income, home office equity, and changes in financial position (Exhibit No. 1). All statements were prepared using the year ending December 31, 1978.
Three financial measurements are used by the Department to evaluate the financial integrity of an employer. These are current ratio, net worth and working capital. However, the Department has chosen to rely only upon the first two measurements as a basis for revoking the self-insurance privilege of respondent. The current ratio of a business entity is determined by comparing the ratio of current assets to current liabilities as shown in the most recent financial statement (Rule 38F-5.01 (10), Florida Administrative Code). The owner's equity or net worth is computed by subtracting total liabilities from total assets. Working capital is derived by taking the excess of current assets over current liabilities. (Rule 38F-5.01(16), Florida Administrative Code);. The application of these measurements to the 1978 financial statements of respondent reveals a current ratio of .82 to 1 based upon current assets and liabilities of $667,542 and $816,542, respectively, a negative net worth of
$543,112, and a working capital in a negative position.
Efforts by petitioner in late 1979 and early 1980 to obtain more current financial statements of respondent were not successful. However, in April and July, 1980, respondent filed certain financial data for calendar year 1979 and the year ending March 31, 1980 (Exhibit Nos. 2, 3, 6 and 7).
Exhibit Nos. 2 and 3 pertain to the financial position of the Deauville Operating Corporation at December 31, 1979, and incorporate therein the operating results of the Deauville Hotel. Exhibit No. 2 failed to segregate the Corporation's current assets and liabilities from total assets and liabilities. Therefore, no determination of current ratio or working capital can be made.
The Exhibit does show the Corporation had a net worth of $2,643,487. Exhibit No. 3 revised the data shown in Exhibit No. 2 and provided a division of assets and liabilities from which a measurement of current ratio and working capital can be calculated. However, the Corporation improperly classified as a current asset a long-term receivable in the amount of $2 million. Had this asset been properly classified, current liabilities would have exceeded current assets and produced a negative working capital and current ratio of less than 1 to 1.
Exhibit Nos. 6 and 7 are financial statements of the Deauville Hotel for calendar year 1979 and the year ending March 31, 1980, respectively. Exhibit No. 6 shows total current assets and liabilities of $495,449 and
$1,072,540, respectively, as of December 31, 1979. The resulting current ratio is .46 to 1 while the working capital is in a negative position. Net worth is a negative $394,639. As of March 31, 1980, current assets had increased to
$832,763 while current liabilities had slightly decreased to $1,017,636. The current ratio is accordingly less than 1 to 1. At the same time, net worth had increased to a positive amount of $137,901 while working capital remained in a negative position by virtue of current liabilities exceeding current assets (Exhibit No. 7).
None of the financial statements are certified by outside independent accounting firms. The audit reports for the set of statements contained in Exhibit Nos. 1, 2, 6 and 7 specifically contain a disclaimer by the accountants that they have "not audited or reviewed the accompanying financial statements, and accordingly, do not express an opinion or any other form of assurance on them". By the same token, the statements encompassed in Exhibit No. 3 include the conspicuous disclaimer by the accountant that such statements are "unaudited".
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of this cause and the parties thereto pursuant to Section 120.57, Florida Statutes.
Section 440.38(1)(b), Florida Statutes, permits an employer to become a self-insurer for workers' compensation claims "by furnishing satisfactory proof to the division of his financial ability to pay such compensation and receiving an authorization from the division to pay such compensation directly." Thus, the authorization to become a self-insurer hinges upon the employer possessing sufficient financial ability to render certain the payment of compensation to injured employees and other obligations under the Workers' Compensation Act.
Rule 38F-5.10(2)(a), Florida Administrative Code, provides in pertinent part as follows:
Each application for self-insurance shall be accompanied by the following:
Financial statement of a current date showing a net worth of not less than
$250,000 and a current ratio of more than
1 to l, and a working capital of an amount establishing financial strength and liquid- ity of the business to pay normal compensa- tion claims promptly.
These financial indicators are widely accepted tools for financial statement analysis, and provide valuable measurements of a business unit's ability to meet its current obligations. A check as to compliance with the financial requirements is easily accomplished by an analysis of the financial statements under review.
The financial statements of the Hotel for calendar year 1978, upon which the administrative complaint is predicated, fail to meet the current ratio, working capital and net worth requirements prescribed in Rule 38F- 5.10(2)(a), Florida Administrative Code (Exhibit No. 1). More current financial statements submitted by the Hotel after the initiation of this proceeding are also fraught with infirmities, for they too present a financial position which fails to conform with the current ratio, working capital and net worth requirements of the Rule (Exhibit Nos. 6 and 7).
The Deauville Operating Corporation has never made an application to be self-insured, and is not the named self-insured under Section 440.38, Florida Statutes, and the filings submitted by it on behalf of the Hotel also fail to meet the requirements of the Rule relative to current ratio and working capital (Exhibit Nos. 2 and 3).
None of the financial statements filed by the Hotel and the Corporation have been certified in the manner prescribed by Rule 38F-5.01(11), Florida Administrative Code.
This Rule defines a certified audit as follows:
An audit upon which the auditor expresses:
his professional opinion that the accom- panying financial statements present fairly the financial position of self- insurer or fund in conformity with generally accepted accounting principles consistently applied, and accordingly including such tests of the accounting records and such other auditing proce- dures as considered necessary in the circumstances.
Non-certified statements are permissible only when the employer attests to his statements being true and correct. See Rule 38-F-5.05(3), Florida Administrative Code. Without the required attestation by the employer, the respondent has not submitted financial statements in accordance with the Rule.
The respondent has failed to comply with the applicable rule governing self-insurers; thus, its privilege to be a self-insurer should be revoked until such time as respondent can demonstrate the requisite financial ability to do so.
Based upon the foregoing findings of fact and conclusions of law, the Hearing Officer recommends that petitioner Department revoke the privilege of respondent to be a self-insurer under Section 440.38(1)(b), Florida Statutes.
DONE AND ENTERED this 15th day of August, 1980, in Tallahassee, Florida.
DONALD R. ALEXANDER
Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301
Filed with the Clerk of the Division of Administrative Hearings this 15th day of August, 1980.
Douglas P. Chanco, Esquire Suite 131, Montgomery Building
