REPORT DIGEST
DEPARTMENT OF COMMERCE AND ECONOMIC
OPPORTUNITY

Compliance Examination
For the Two Years Ended June 30, 2014

Release Date:  April 16, 2015

FINDINGS THIS AUDIT:  11

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 0 -- 0
Category 2:  5 -- 6 -- 11
Category 3:  0 -- 0 -- 0
TOTAL:  5 -- 6 -- 11

FINDINGS LAST AUDIT: 9

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

SYNOPSIS

• (14-1) The Department did not ensure
adequate controls were established in the
administration of grant programs.

• (14-2) The Department failed to comply with
certain provisions of the Small Business
Development Act with regards to the approval
and administration of a direct loan and use of
an equity intermediary.

• (14-3) The Department’s internal auditing
program did not fully comply with the Fiscal
Control and Internal Auditing Act.

• (14-4) Required reports were not submitted
or timely submitted by the Department in
accordance with the mandates set forth in
State Law.

• (14-6) The Department was not in compliance
with various statutory mandates.

• (14-10) The Department did not perform
annual employee performance evaluations for
all employees, and did not perform certain
employee performance evaluations on a timely
basis.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

WEAKNESSES IN CONTROLS OVER GRANT
ADMINISTRATION

The Department expended $1,783,743,086 for
awards and grants during the examination
period.  During the examination period
expenditures for awards and grants accounted
for 88% of the Department’s total expenditures
of $2,031,383,968.

During the examination of controls over grants
processing, auditors identified a number of
issues, some of the items noted are as
follows:
• Based on testing of monitoring for 5 grants
in the Office of Energy and Recycling
(Office), auditors noted the Office did not
have an adequately designed methodology or
guidelines to ensure efficient and effective
onsite monitoring.
• The Department did not ensure payments to
grantees were made only after required reports
were received and approved by the Department
in compliance with the grant agreement.  In 14
of 62 (23%) grants tested, the grant
agreements were executed more than 30 days
after the beginning date of the grant term.
The Department disbursed funds totaling
$16,002,671 prior to approving required
reports that would allow for the disbursement
of the funds.
• The Department did not return 2 of 9 (22%)
refund vouchers tested to the grantor
organization in a timely manner.  One of the
refund vouchers consisted of multiple unspent
grants totaling $135,434 and was returned to
the grantor three to six years from the end of
the awarded grant periods.  The other refund
totaling $133,872 was returned to the grantor
one to two years after the refunds were
received by the Department from sub-grantees.
• The Department’s Grant Tracker available on
the Department’s website did not have accurate
information on the amount of grants paid to
certain grantees.  Auditors noted the total
amount of disbursements or payments on 4
grants had exceeded the total award amount by
$504,025 in the Grant Tracker.  Further
verification showed the information on the
Grant Tracker did not correctly capture other
transactions that were related to the
disbursements, such as adjustments to account
for program income and refunds.

Failure to ensure adequate control and
procedures are established and followed for
the administration of the grant programs
increases the risk of undetected noncompliance
and delay in recovering unused funds, if any.
(Finding 1, pages 12-14)  This finding has
been repeated since 2008.
We recommended the Department strengthen its
controls over the grant administration process
including grant monitoring and review.

Department management accepted the
recommendation and will work with grant
program offices to ensure adequate training is
available to grant management staff.
Additionally, the Department will ensure any
subsequent refunds received from grantees on
expired grant programs are submitted back to
the grantor timely.  (For the previous
Department response, see Digest Footnote #1)

FAILURE TO COMPLY WITH THE REQUIREMENTS ON
GRANTING AND ADMINISTERING LOAN UNDER THE
SMALL BUSINESS DEVELOPMENT ACT

The Department entered into a loan agreement
on July 29, 2013 to help finance a Borrower’s
general working capital needs. The loan amount
was $150,000 with an interest rate of 2% per
annum and a maturity date of July 29, 2021.
During testing of the application and approval
processing of the loan, the auditors noted the
following:
• The Department has no security interest or
personal guarantee on this loan.  The
Department waived the longstanding standard
practice of obtaining from the borrower their
personal guarantee on the loan while
acknowledging the borrower’s unusual debt
structure where the only third party
investment in the borrower after year 2017 is
the Department’s loan.
• The Department also waived their standard
objective of the number of jobs to be created
or retained under this loan program by the
borrower, allowing the borrower to meet a
reduced jobs retained/created requirement.

During testing of the borrower’s compliance
with significant covenants of the loan
agreement, auditors noted the following:
• As of June 30, 2014, the Borrower had not
complied with all the post-closing conditions
of the loan agreement which was due on January
29, 2014 to provide the Department with
satisfactory documentation that the borrower
has raised additional equity.  The borrower
had only provided documentation to support
raising $100,000 of the required $150,000
additional equity set forth in the loan
agreement.  The auditors initially inquired of
the Department about the borrower’s compliance
with the post-closing condition on July 11,
2014.  On August 19, 2014, the Department
responded that the loan agreement had been
amended.  The amendment to the loan agreement
and promissory note was entered into and
signed by both parties on July 21, 2014, 10
days after the auditors’ initial inquiry.  One
of the amended terms was the post-closing
condition which the borrower had not complied
with as of February 2015.
• As of June 30, 2014, the borrower was 11
months in arrears on its monthly interest
payment.  After this was brought to the
Department’s attention, the Department worked
with the Borrower to collect interest in
arrears.

The above bullets would be considered default
events as defined in the loan agreement.  The
Department was not able to provide supporting
documentation to show it has taken the
necessary actions to compel the borrower to
cure its failure to meet the post-closing
condition, or that the Department had detected
and notified the borrower of its non-
compliance during Fiscal Year 2014.

During Fiscal Year 2014, the Department
entered into an Equity Intermediary Agreement
in accordance with the Small Business
Development Act (Act) whereby the Department
will provide funding to the intermediary to
purchase on behalf of the Department, equity
interest in 2 small venture capital
businesses.  The operating agreements between
the Department and the 2 small venture capital
businesses were executed November 11, 2013 and
December 3, 2013, respectively, for a total
investment of $201,747.

During testing, auditors noted the Finance
Review Committee (FRC) reviewed and
recommended to the Director, at its meeting
held on November 18, 2013, to approve the
equity intermediary application of the
Intermediary. The Director’s approval of this
application is evidenced by the Commitment
Letter issued to the Intermediary dated
November 22, 2013. The operating agreement on
November 11, 2013 was executed through the
Intermediary whose application had not been
reviewed and approved by the Department at the
time the operating agreement was executed.
Wording within the November 11, 2013 operating
agreement sets forth it constitutes the legal,
valid and binding obligation of the member
(Department) in accordance with its terms.

Failure to adhere to the Act is noncompliance
with the statutory requirements and puts the
State’s assets at potential risk. (Finding 2,
pages 15-19)

We recommended the Department ensure
compliance with the requirements in approval
and administering loans and equity funding
under the Small Business Development Act.

Department (DCEO) management accepted the
recommendation and will work with business
finance staff to ensure continued compliance
with the requirements of the Small Business
Development Act (the “Act”).

NONCOMPLIANCE WITH THE FISCAL CONTROL AND
INTERNAL AUDITING ACT

The Department’s Office of Internal Audit
(OIA) did not conduct and complete any audits
of the Department’s major systems of internal
accounting and administrative controls and did
not conduct reviews of the design of major new
electronic data processing systems and major
modifications to existing systems prior to
their installation to ensure these systems
provide for adequate audit trails and
accountability for the last four fiscal years.

The Fiscal Control and Internal Auditing Act
(Act) requires the chief executive officer of
each designated State agency ensure the
internal auditing program includes audits of
major systems of internal and administrative
control conducted on a periodic basis so that
all major systems are reviewed at least once
every two years.  Additionally, the audits
must include grants received or made by the
designated State agency to determine the
grants are monitored, administered, and
accounted for in accordance with applicable
laws and regulations.  The Act also requires
the internal auditing program to include
reviews of the design of major new electronic
data processing systems and major
modifications to existing systems prior to
their installation to ensure these systems
provide for adequate audit trails and
accountability.

The major areas of internal control must be
audited regularly to ensure adherence to an
effective internal control system. Failure to
perform regular audits of major systems of
internal and administrative controls may
result in weaknesses in internal control not
being timely detected.  (Finding 3, pages
20-21)

We recommended the Department allocate
sufficient staff to the OIA to complete
internal audits of the Department’s major
systems of internal accounting and
administrative controls such that internal
audits are conducted on a periodic basis so
all major systems are reviewed at least once
every two years as required by the Act.

Department management accepted the
recommendation and will seek to fill the now-
vacant Chief Internal Auditor position, as
well as the Deputy Chief Internal Auditor
position, to help ensure future compliance
with the Act.

FAILURE TO SUBMIT, OR TIMELY SUBMIT REQUIRED
REPORTS

During testing of statutes applicable to the
Department, auditors noted the Department did
not submit or timely submit required reports,
some of the exceptions noted are as follows:
• The Department did not submit a report on
its evaluation of the effectiveness of the tax
credit program to the Governor and the General
Assembly as required by the Economic
Development for a Growing Economy (EDGE) Tax
Credit Act.  The last evaluation report
submitted by the Department was on November 1,
2005.  The Department made the decision that
the EDGE Annual Report, which is submitted to
the Governor and the leaders in the Senate and
House on or before July 1 each year, would be
sufficient to fulfill this requirement.  The
auditors noted the EDGE Annual Report for
calendar year 2012, which was submitted on
June 6, 2013, included a summary of jobs
created and potential capital investment of
each program, however, the report did not
discuss the Department’s assessment of the
effectiveness in creating new jobs in Illinois
and the revenue impact of the program.
• The Department did not timely submit the
report on energy efficiency programs to the
Governor and General Assembly for Fiscal Years
2013 and 2012 as required by the Energy
Conservation Act.  These reports were filed 88
and 11 days after they were due.
• The Department did not timely submit the
Large Business Attraction Fund Report to the
Governor and General Assembly for Fiscal Years
2012 and 2013 as required by the Large
Business Development Act.  The reports were
filed 28 and 9 days after they were due.
• The Department did not timely submit the
reports evaluating the effectiveness of the
River Edge Redevelopment Zone Act to the
Governor and General Assembly during fiscal
years 2013 and 2014.  The reports were
submitted 63 and 22 days after they were due.
• The Department prepared an Energy
Contingency Plan (Plan), however they did not
submit the Plan to the Governor and General
Assembly nor did they inform the Governor and
General Assembly that such Plan had been
prepared for their consideration.

Failure to submit or timely submit required
reports is noncompliance with the statutory
requirements and inhibits accumulation of
meaningful oversight information for the
Governor and General Assembly.  (Finding 4,
pages 22-24)  This finding has been repeated
since 2010.

We recommended the Department enhance its
monitoring procedures to ensure submission or
timely submission of required reports to the
Governor and General Assembly.

Department management accepted the
recommendation and will re-emphasize the
importance of required reporting to the
Governor and General Assembly.  Additionally,
the Department will periodically test the
tracking system to ensure its functionality
and ability to remind staff of upcoming report
preparation and submittal dates.  (For the
previous Department response, see Digest
Footnote #2)

NONCOMPLIANCE WITH STATUTORY MANDATES

During testing, auditors noted the following:
• The Department did not establish a
comprehensive community economic development
project to provide technical assistance to
communities for purposes specified in the
Small Business Development Act.
• The Department’s Film Production Services
Tax Credit quarterly and annual reports were
prepared using projections and budgets.
Actual information subsequently becomes
available to the Department from the final tax
credit documents submitted by accredited film
productions. The initial submitted reports are
not updated to reflect actual information that
is required by the Film Production Tax Credit
Act.
• The Department received an appropriation
under the Alternate Fuels Act; however, the
Department did not administer the Clean Fuel
Education Program in Fiscal Year 2013 and
2014, as required by statute.
• The Department did not comply with the
requirements of the State Construction
Minority and Female Building Trades Act.  The
Department did not identify construction
projects that are funded by the State or the
American Recovery and Reinvestment Act, equal
to or greater than $5,000,000 in total value,
located in specified areas of the State.
(Finding 6, pages 28-30)

We recommended the Department allocate
resources to comply with the statutory
requirements or seek a legislative remedy as
appropriate.

Department management accepted the
recommendation and acknowledged certain
statutes require action by the Department to
address mandates that are no longer relevant,
were never funded, or for which the Department
is implementing controls to ensure compliance.
The Department utilizes a mandate database to
assist in identifying and prioritizing
corrective actions needed to ensure compliance
with the requirements of the statutes.  The
Department will take necessary actions for the
mandates identified in this finding or will
seek legislative action if necessary.

EMPLOYEE PERFORMANCE EVALUATIONS WERE NOT
COMPLETED ANNUALLY AND TIMELY

During testing of employee files for
performance evaluations, the auditors noted
the following:
• Four of 53 (8%) employees tested did not
have performance evaluations completed, 1 for
Fiscal Year 2013 and 3 for Fiscal Year 2014.
• One of 53 (2%) performance evaluations was
not completed for an employee after the
probationary period.
• Twelve of 53 (23%) employees’ annual
performance evaluations were completed 5 to
220 days after they were due.

Employee performance evaluations are a
systematic and uniform approach used for the
development of employees and communication of
performance expectations to employees.
(Finding 10, pages 38-39)  This finding has
been repeated since 2006.

We recommended the Department remind
supervisors of the requirements for completing
employee performance evaluations and develop a
process to monitor and ensure that employee
performance evaluations are timely completed.

Department management accepted the
recommendation and will intensify its efforts,
utilizing the established tracking system, to
remind supervisors of the requirements for
completing employee performance evaluations.
(For the previous Department response, see
Digest Footnote #3)

OTHER FINDINGS

The remaining findings are reportedly being
given attention by the Department.  Auditors
will review the Department’s progress towards
the implementation of all the recommendations
in the next engagement.


ACCOUNTANTS’ REPORT

The auditors conducted a compliance
attestation examination of the Department for
the two years ended June 30, 2014 as required
by the Illinois State Auditing Act.   The
auditors stated the Department complied, in
all material respects, with the requirements
described in the report.

Auditor General

WGH:RPU
SPECIAL ASSISTANT AUDITORS

Our Special Assistant Auditors for this
examination were E. C. Ortiz & Co. LLP.

DIGEST FOOTNOTES

#1 - WEAKNESSES IN CONTROLS OVER GRANT
ADMINISTRATION

2012:  The Department accepts the finding and
will establish a close out policy to include
reasonable due dates for grantees to submit
final grant reports and to allow adequate time
for the Department staff to review and either
approve the closeout report or take
appropriate action to timely address
unresolved issues with the grantee.  The
policy will supplement current policies and
procedures the Department uses to ensure
grantees return unspent or unobligated grant
funds to the Department within 45 days after
the end of the grant to comply with the
Illinois Grant Funds Recovery Act.

The Department continues to be committed to
improve grant management controls and will
work with grant program offices to ensure each
one uses a risk-based monitoring plan to
include site visits, desk reviews or on-site
reviews.

#2 - FAILURE TO SUBMIT, OR TIMELY SUBMIT
REQUIRED REPORTS

2012:  The Department accepts the finding.
The Department improved its monitoring
procedures in March 2012 by making significant
computer coding changes to the Statutory
Reporting Site.  This is an electronic
tracking system used by the Department to
monitor compliance with the statutory
reporting requirement deadlines.  The original
tracking system was frequently failing to send
automatic emails to staff to remind them of
upcoming milestones to ensure the Department
files statutory reports by their mandated
deadlines.

#3 - EMPLOYEE PERFORMANCE EVALUATIONS WERE NOT
COMPLETED ANNUALLY AND TIMELY

2012:  The Department accepts the finding.
The Director understands the importance of
employee evaluations and the impact they have
to properly manage staff resources.  The
Director is committed to continually emphasize
to senior staff that the Department’s
corrective action for this finding is a
priority.  The performance evaluation
notification database, administered by the
Office of the Human Resources, will be better
utilized to allow for increased reporting and
monitoring of evaluation timeliness.  The
Director, as part of the corrective action,
will regularly monitor each office’s
timeliness in completing evaluations.  If
untimeliness is observed, the Director’s
Office will contact the appropriate senior
manager to ensure they are aware of the
situation and to receive their commitment to
take prompt action to adequately resolve the
untimeliness.  The Director will stress to
senior management the expectation he has for
each office to improve their evaluation
timeliness and the results will be tracked and
provided to them.