REPORT DIGEST CHICAGO STATE UNIVERSITY FINANCIAL AUDIT For the Year Ended June 30, 2014 Release Date: January 29, 2015 FINDINGS THIS AUDIT: 3 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 0 -- 0 -- 0 Category 2: 2 -- 1 -- 3 Category 3: 0 -- 0 -- 0 TOTAL: 2 -- 1 -- 3 FINDINGS LAST AUDIT: 1 Category 1: Findings that are material weaknesses in internal control and/or a qualification on compliance with State laws and regulations (material noncompliance). Category 2: Findings that are significant deficiencies in internal control and noncompliance with State laws and regulations. Category 3: Findings that have no internal control issues but are in noncompliance with State laws and regulations. State of Illinois, Office of the Auditor General WILLIAM G. HOLLAND, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov INTRODUCTION This digest covers the Chicago State University’s financial audit as of and for the year ended June 30, 2014. The Chicago State University’s compliance examination (including the Single Audit) covering the year ended June 30, 2014 will be issued at a later date. SYNOPSIS • (14-1) The University did not maintain appropriate controls over advances made to employees and did not comply with Internal Revenue Service regulations related to amounts advanced that were not substantiated under an accountable plan. • (14-2) The University incorrectly accounted for accrued compensated absences and calculated accrued leave liability of the University. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NONCOMPLIANCE AND INADEQUATE CONTROLS OVER ADVANCES TO EMPLOYEES The University did not maintain appropriate controls over advances made to employees that were provided to pay for University expenses and did not comply with Internal Revenue Service (IRS) regulations related to amounts advanced that were not substantiated under an accountable plan. The University made advances of approximately $260,000 and $224,000 to employees (primarily athletics coaches) during fiscal years 2013 and 2012, respectively. In fiscal year 2014, the University made two adjusting journal entries totaling $228,095 to write off the remaining amounts that were outstanding as of June 30, 2013 in which the University had not received appropriate documentation from the employees to substantiate the use of the funds for University business. The University informed the auditors they were not pursuing recovery of these amounts or reporting it as compensation to those employees who failed to substantiate the use of the advances. IRS Treasury Regulations (Regulation 1.62-2(c)) allow an employer to exclude from an employee’s gross income amounts paid under an “accountable plan” under which the employer requires the employee to substantiate all expenses and repay any amounts received in excess of documented expenses. If not paid under an “accountable plan” such amounts are includable in the employee’s gross income and is subject to all payroll taxes. Failure to implement adequate controls over travel advances and failure to comply with IRS regulations could result in misappropriation of State funds and additional payroll tax liabilities and penalties. (Finding 1, page 43). We recommended the University establish adequate controls over travel advances and comply with IRS regulations. University officials agreed with the finding and stated that Athletic Department staff is being expanded to include a dedicated Business Officer to oversee the process of submitting timely documentation for all travel. INACCURATE ACCOUNTING OF ACCRUED COMPENSATED ABSENCES The University did not properly account for accrued compensated absences and did not properly calculate the accrued leave liability. During our testing of accrued compensated absences, we noted the following: • We selected a sample of 5 employees from employment categories that do not vest accrued leave and noted that 3 of the employees were included on the accrued compensated absences schedule. We brought this information to the attention of the University and asked them to go through their records and remove all individuals that were not allowed to accrue absences. A total of 56 employees were removed from the schedule, totaling $332,866. The University posted an adjusting entry to correct their financial statements for this error. • We also tested a sample of 24 employees to determine if the University was properly accounting for leave time earned and used during the year. We noted seven employees in our sample that had accrued leave time that was not correctly accumulated. The miscalculation ranged from under accruing by 60.79 hours to over accruing by 40 hours. Once brought to the University’s attention, these employees’ records were corrected. The projected understatement based on our sample was $20,092. • We also noted the University failed to include payouts that were made to employees during the month of July 2014 in the year-end liability balances given to the auditors. An adjusting journal entry of $163,340 was posted to correct this misstatement. (Finding 2, pages 44-45) This finding was first reported in 2011. We recommended the University improve its system for accumulating and calculating compensated absences to ensure records and reporting are accurate. University officials agreed with our finding and stated that all employees from the Human Resources and Accounting functions that are integral to this process will receive training to expand their knowledge of the entire process. (For the previous University response, see Digest Footnote #1.) OTHER FINDING The remaining finding is reportedly being given attention by the University. We will review the University’s progress towards the implementation of our recommendations in our next engagement. AUDITOR’S OPINION Our auditors state the financial statements of the Chicago State University as of and for the year ended June 30, 2014 are fairly presented in all material respects. WILLIAM G. HOLLAND Auditor General WGH:TLK SPECIAL ASSISTANT AUDITORS Our Special Assistant Auditors for this audit were Borschnack Pelletier & Co. DIGEST FOOTNOTES #1 - Inaccurate Accounting of Accrued Compensated Absences – Previous University Response - During FY ’13, the process for capturing vacation and sick time that supports the compensated absences calculation was manual in nature. To effectively eliminate the errors going forward, the University has conducted training that covers data gathering and input processes that support this calculation. The University has also initiated efforts to transition to an automated system that will support the calculation for the FY ’14 time period. The University accepts the recommendation.