REPORT DIGEST

STATE OF ILLINOIS

Statewide Financial Statement Audit
For the Year Ended:  June 30, 2011

Release Date:  June 21, 2012

Summary of Findings:
Total this audit: 5
Total last audit:  8
Repeated from last audit: 5

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

The Illinois Office of the State Comptroller prepares
the State of Illinois Comprehensive Annual Financial
Report (CAFR).  The CAFR is the State’s official annual
report which provides the readers with the financial
position of the State as of June 30, 2011, and results
of operations during the fiscal year.

The financial section of the CAFR includes the
Independent Auditors’ Report on the basic financial
statements, the management discussion and analysis, the
basic financial statements, required supplementary
information, and individual fund statements and
schedules.

AUDITORS’ OPINION

The June 30, 2011 financial statements of the State of
Illinois are fairly presented in all material respects.

The financial statements reflect a continuing financial
deficit.  At June 30, 2011:

• The net assets of governmental activities continued to
deteriorate and the deficit increased by $6.3 billion
from FY10 to FY11.  Overall, net assets of governmental
activities are reported as a deficit of $43.8 billion.
(Exhibit 1)

• The General Revenue Fund deficit decreased by $738
million from FY10 to FY11.  The June 30, 2011 deficit
was $8.1 billion.  (Exhibit 2)

Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or
deteriorating.  A comparison of Illinois’ financial
position to other states is contained in Exhibit 3.

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
ON COMPLIANCE

In accordance with Government Auditing Standards, a
report on our consideration of the State of Illinois’
internal control over financial reporting and our tests
of its compliance is also issued as part of our
financial statement audit.  This report is a separate
document and is summarized in this document.  Our report
noted that the State’s decentralized internal control
system is not adequate.  We also reported significant
financial reporting deficiencies at several State
agencies.

STATE OFFICIALS

Governor, Patrick Quinn

Comptroller (January 10, 2011 to Present), Judy Baar
Topinka

Comptroller (through January 9, 2011), Daniel W. Hynes

Speaker of the House, Michael J. Madigan

President of the Senate, John J. Cullerton

FINANCIAL ANALYSIS OF THE STATE

The net assets of the State’s governmental activities
declined $6.283 billion.  The following condensed
financial information was derived from the government-
wide Statement of Net Assets and reflects the State’s
governmental activities financial position as of June 30
for fiscal years 2004 through 2011.

The deficits reflected in Exhibit 1 are presented on an
accrual basis and represent the excess of total
liabilities over total assets at a given point in time.
These deficits represent the deferral of current and
prior year costs to future periods. (Please see full
report for Exhibit 1.)

GENERAL REVENUE FUND

Many programs are accounted for in the General Fund.
The GAAP basis financial position of the General Revenue
Fund deficit decreased at June 30, 2011 from June 30,
2010.  The fund balance deficit in the State’s General
Revenue Fund decreased by $738 million on a GAAP basis
(from a deficit of $8.818 billion, as restated, to a
deficit of $8.080 billion).  Exhibit 2 reflects the
General Revenue Fund deficit for fiscal years 2004
through 2011. (Please see full report for Exhibit 2.)

STATE COMPARISON

Exhibit 3 provides an analysis of Illinois’ Net Assets
at June 30, 2011 compared to other States. (Please see
full report for Exhibit 3.)

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE FINANCIAL REPORTING PROCESS

The State of Illinois’ current financial reporting
process does not allow the State to prepare a complete
and accurate Comprehensive Annual Financial Report
(CAFR) or the Schedule of Expenditures of Federal Awards
(SEFA) in a timely manner.  Reporting issues at various
individual agencies caused delays in finalizing the
financial statements, which did not occur until at least
the end of May of the subsequent year for the past five
fiscal years.  The lack of timely financial reporting
limits effective oversight of State finances, adversely
affects the State’s bond rating, and jeopardizes federal
funding.

Accurate and timely financial reporting problems
continue to exist even though the auditors have: 1)
continuously reported numerous findings on the internal
controls (material weaknesses and significant
deficiencies), 2) commented on the inadequacy of the
financial reporting process of the State, and 3)
regularly proposed adjustments to financial statements
year after year.  These findings have been directed
primarily toward the Office of the Comptroller (IOC) and
major State agencies under the organizational structure
of the Office of the Governor.

The Office of the State Comptroller has made changes to
the system used to compile financial information;
however, the State has not solved all problems to
effectively remediate these financial reporting
weaknesses.  The process is overly dependent on the post
audit program being a part of the internal control for
financial reporting even though the Illinois Office of
the Auditor General has repeatedly informed State agency
officials that the post audit function is not and should
not be an internal control mechanism for any operational
activity related to financial reporting.  (Finding 1,
pages 7-10)

We recommended the Office of the Governor and the Office
of the State Comptroller work together to resolve the
State’s inability to produce timely and accurate GAAP
basis financial information and a Statewide SEFA.

The Governor’s Office response stated the Governor’s
Office, the Governor’s Office of Management and Budget
and the Office of the Comptroller are working to address
these challenges and have developed a timeline for short
term, mid-term and long range plans.  The response
provided further details these plans  The Governor’s
Office further stated that they will continue working
with the agencies to provide as much complete
information as possible given the State’s current
capacities.


The Comptroller’s Office response stated the IOC will
continue to assist the Governor’s Office in their
efforts to increase the quality of the GAAP packages and
provide training and technical assistance to State
Agencies. In addition, legislation passed by the General
Assembly, and if approved by the Governor, would create
the Financial Accounting Standards Board whose mission
would be to improve the timeliness, quality, and
processing of financial reporting for the State.

FINANCIAL REPORTING WEAKNESSES

The State of Illinois did not have adequate controls to
assess the risk that information reported by individual
agencies of the primary government would not be fairly
stated and compliant with generally accepted accounting
principles.  The Office of the Auditor General performs
audits at 23 agencies of the primary government,
including five pension systems and the State Board of
Investments.  During these audits, we noted at 13
agencies there were a total of 16 material weaknesses
and 28 significant deficiencies related to the internal
controls over the financial reporting process.

Material weaknesses and significant deficiencies further
extend financial reporting timelines since additional
measurements and reporting is required.  Completion or
substantial completion of these audits is necessary in
order for the Auditor General to issue an opinion on the
State’s basic financial statements.

In addition to the deficiencies noted above,
restatements and material errors were noted during our
audits, which are as follows:

• The beginning balances in the financial statements of
the primary government were restated due to the
correction of one error.  The restatement totaled
$325.778 million due to the Department of Healthcare and
Family Services understating the Department’s drug
rebate receivables.

• Material misstatements were identified by the auditors
at six agencies.  The misstatements ranged from $1.6
million to $349 million.  (Finding 2, pages 11-14)

We recommended the State implement additional internal
control procedures in order to assess the risk of
material misstatements to the financial statements and
to identify such misstatements during the financial
statement preparation process.  The internal control
procedures should include a formal evaluation of prior
problems and implementation of procedures to reduce the
risk of these problems reoccurring.

The Governor’s Office response stated that with agencies
all using many financial systems it is difficult to set
Statewide internal controls.  Rather than spend time
monitoring a multitude of financial systems and the
internal controls needed, the Governor’s Office has
focused on solving this problem with a centralized
financial accounting system.  The Governor’s Office
further stated that if the State had an entity-wide
financial accounting system, internal controls would be
built into the system to lessen the risk that statements
are not fairly presented.  These internal controls would
detect any deficiencies that could result in a material
weakness or a significant deficiency.

The Comptroller’s Office response stated the IOC will
continue to assist the Governor’s Office in their
efforts to increase the quality of the GAAP packages by
providing training and technical advice to State
agencies. In addition, legislation passed by the General
Assembly, and if approved by the Governor, would create
the Financial Accounting Standards Board whose mission
would be to improve the timeliness, quality, and
processing of financial reporting for the State.

FINANCES INCREASE RISKS

The State of Illinois did not have sufficient controls
over its finances to ensure obligations are paid timely.
This condition increases the risk that liabilities will
not be properly recorded.  We noted the following during
our financial audit of the State’s financial statements
and our financial audits at various Departments.

The State had transactions, totaling $4.740 billion, on
hand at June 30, 2011 that had been approved for payment
by the State, but remained unpaid at year end due to the
State’s cash flow difficulties.  Of this amount,
approximately $3 billion was owed to external parties,
the remaining balance was related to intra-governmental
transactions.

During our audit of the Illinois Department of Revenue
(IDOR), the auditors reported that there was a deficit
balance totaling $1.5 billion in the Income Tax Refund
Fund, a sub account of the General Revenue Fund, because
the State did not allocate sufficient income tax
revenues into the Income Tax Refund Fund.

Large deficits in the Income Tax Refund Fund indicate
that the State is essentially borrowing from taxpayers
(individuals and businesses) since overpayments of taxes
are not revenue to the State when accounted for in
accordance with generally accepted accounting principles
(GAAP).  Delays in paying tax refunds generates
additional adjustments to convert cash basis amounts to
GAAP basis.  These necessary adjustments, due to lack of
cash payment, increases the risk that liabilities will
not be recognized in the proper period.  (Finding 5,
pages 19-21)

We recommended the Governor work with the General
Assembly to improve the State’s control over State
finances in a manner that eliminates significant payment
delays including refunds due to taxpayers.

The Governor’s Office response stated that the Office
recognizes that significant balances are owed at year-
end; however disagrees that this is the result of
insufficient controls over its current finances.  The
Office attributed the unpaid bills as a result of
decades of fiscal mismanagement as well as the economic
downturn and diminished revenues.

The Governor’s Office further stated that the Office
successfully undertook Medicaid reform in the 2012
legislative session and this reform will have a 2013
impact of reducing the part of the unpaid accounts
payable that belongs to Medicaid payments.  In addition
the Fiscal Year 2013 budget that passed the legislature
has funds set aside to begin paying down the liability.
These unpaid bills create a risk that liabilities are
unrecorded is the result of finding 11-1.  If the State
had a consolidated accounting system with a general
ledger, these liabilities could be properly recorded.

The Governor’s Office and GOMB agreed that the refund
rate set by the General Assembly is insufficient to pay
tax refunds.  The 2013 refund rate that is set for FY
2013 is closer to what is estimated to be needed to pay
refunds in fiscal 2013.

In an auditors’ comment we noted that the amount of held
payments of $4.740 billion at the end of Fiscal Year
2011 created an additional risk that material
liabilities would not be recorded in the proper period.
The held payments had legal authorization for payment
and were unpaid due to a lack of resources.  Attributing
the cause of this additional weakness to a lack of
control over State finances is reasonable since the
State essentially follows a cash basis budget process.
As noted in the finding, we do agree that economic
conditions are relevant to the cause of the condition.

OTHER FINDINGS

The remaining findings included two noncompliance
issues.  We will review the State’s progress towards the
implementation of our recommendations in our next audit.

WILLIAM G. HOLLAND
Auditor General

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