REPORT DIGEST

DEPARTMENT OF HUMAN SERVICES

FINANCIAL AUDIT

For the Year Ended:

June 30, 2006

Release Date:

March 20, 2006

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 the Full Report are also available on

the worldwide web at

http://www.state.il.us/auditor

SYNOPSIS

This digest covers our financial audit of the Department of Human Services (Department) for the year ended June 30, 2006. A two year compliance attestation examination and a one year financial audit will be performed for the period(s) ending June 30, 2007.

- The Department did not determine billing eligibility for resident accounts in State mental health facilities in a timely manner, resulting in delayed and potentially lost revenue to the State and inaccurate Department account receivable balances. Factoring in potential uncollectible amounts, Department personnel estimated this could result in delayed or potential lost revenue to the State of up to $6 million.

- The Department did not maintain a centralized oversight function over commodities, resulting in inadequate controls. Inventory control includes responsibilities at individual facilities, multiple warehouses, and Central Office locations.

{Selected financial information is summarized on the next page.}

DEPARTMENT OF HUMAN SERVICES

FINANCIAL AUDIT

For The Year Ended June 30, 2006

FINANCIAL INFORMATION – Governmental Funds (in thousands)

FY 2006

FY 2005

REVENUES

Program revenues: charges for service...............................

Program revenues: operating grants ..................................

General revenue: taxes, interest and other.........................

Total revenue............................................................

EXPENDITURES

Health and social services................................................

Debt service – principle...................................................

Debt services – interest....................................................

Capital outlays.................................................................

Total expenditures.....................................................

OTHER SOURCES (USES)

Appropriation from State resources.................................

Transfers in...................................................................

Transfers out..................................................................

Receipts collected & transmitted to State Treasurer..........

Lapsed appropriations....................................................

Other...........................................................................

Total other sources (uses)......................................

FUND BALANCE (DEFICIT)

Decrease in fund balance............................................

Fund balance July 1.....................................................

Decrease for Changes in Inventory................................

Fund balance (deficit) June 30...............................

$ 33,002

3,036,948

10,783

$3,080,733

$6,220,426

336

1,709

$6,222,552

$3,915,646

64,170

(91,525)

(660,361)

(35,989)

(77,806)

$3,114,135

$ (27,684)

8,644

(1,242)

$ ( 20,282)

$ 28,330

2,930,449

21,613

$2,980,392

$6,080,278

202

1,781

$6,082,279

$3,847,002

81,338

(83,710)

(631,553)

(40,713)

(78,844)

$3,093,520

$ (8,367)

17,011

$ 8,644

SELECTED ACCOUNT BALANCES – JUNE 30, Governmental Funds (in thousands)

2006

2005

ASSETS

Cash and cash equivalents & investments........................

Due from other governments – federal & local................

Loans, taxes and other receivables, net...........................

Due from other Department and State funds..................

Inventories........................................................................

Unexpended appropriations.........................................

Other assets..............................................................

Total assets...........................................................

LIABILITIES

Accounts payable & accrued liabilities........................

Deferred Revenue.....................................................

Due to other funds – State, federal, local & department..

Unavailable revenue...................................................

Total liabilities......................................................

FUND BALANCE (DEFICIT)

Fund balance (deficit), reserved & unreserved..........

Total liabilities and fund balance..........................

$ 79,704

211,731

40,570

3,457

10,417

209,906

185

$ 555,970

$ 360,497

41,534

60,042

114,179

$ 576,252

$(20,282)

$ 555,970

$ 66,765

199,195

37,795

953

11,659

184,111

186

$500,664

$319,724

49,253

52,300

70,743

$492,020

$ 8,644

$500,664

SECRETARY

During Audit Period: Carol L. Adams, Ph.D.

Currently: Carol L. Adams, Ph.D.

Delayed or potential lost revenue of up to $6 million

10 facilities were noted as having problems billing residents

2 facilities were approximately 3 years delinquent in their billings

Centralized oversight not maintained

Inventory weaknesses noted at 24 locations

Financial statement adjustments had to made for 10 facilities

17 facilities did not perform complete year-end physical inventories

Problems with procedures and internal controls

INTRODUCTION

The Department of Human Services (Department) is a part of the executive branch of the State of Illinois (State). The Department is organized to assist Illinois residents to achieve self-sufficiency, independence and health to the maximum extent possible by providing integrated family oriented services, promoting prevention and establishing measurable outcomes in partnership with communities.

The financial statements of the Department are intended to present the financial position and changes in financial position of only that portion of the governmental activities, the major fund, and the aggregate remaining fund information of the State that is attributable to the transactions of the Department.

FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

Failure to bill resident accounts in a timely manner

The Department did not determine billing eligibility for resident accounts in State mental health facilities in a timely manner, resulting in delayed and potentially lost revenue to the State and inaccurate Department account receivable balances. Factoring in potential uncollectable amounts, Department personnel estimated this could result in delayed or potential lost revenue to the State of up to $6 million.

Ten of the 17 facilities operated by the Department that provide services to mental health residents were noted as having problems billing residents. We noted that Elgin Mental Health Center and John J. Madden Mental Health Center were approximately three fiscal years delinquent in their eligibility determinations, and thus their billings. Three additional facilities were also delinquent to a lesser extent in completing determinations and billings.

Department personnel stated billings are delinquent because staff resources allocated to certain facilities have been cut back due to budgetary constraints.

We recommended the Department allocate sufficient staff resources to each facility to process all delinquent determinations and billings and process all future billings in a timely manner. (Finding 06-01, pages 9-10)

Department officials agreed with our recommendation and stated staff have been hired at the Madden and Elgin Mental Health Centers. In addition, consultants have been contracted to complete outstanding Medicaid and Medicare billings using DHS patient data in DHS’s billing system. They have submitted Medicare claims due by December 31, 2006 for all mental health facilities for a total of approximately $2.6 million and Medicaid claims for Elgin and Madden Mental Health Centers. Medicare claiming for subsequent periods and Medicaid for all other mental health facilities will be completed in the next phase.

Inadequate controls over commodities

The Department does not maintain a centralized oversight function over commodities, resulting in inadequate controls. Inventory control includes responsibilities at individual facilities, multiple warehouses, and Central Office locations.

Although the Department has initiated procedures to review and monitor commodity costs, several errors or omissions were noted. We noted several exceptions and weaknesses over commodities inventories during our testing:

· Discrepancies and/or weaknesses were noted at twenty-four locations.

· Manual adjustments were made for financial statement purposes for 10 facilities. The ending inventory balances for four other locations should have been adjusted but were not. One facility required an inventory reduction adjustment of $331,831 after the year-end reports were printed.

· A total of 17 facilities failed to perform a complete year-end physical inventory count or the count was not conducted in close proximity to the end of the fiscal year.

· Tests revealed problems related to the lack of or inadequate written inventory procedures; inadequate segregation of duties; failure to make timely adjustments to inventory records; counts that could not be reconciled; and areas being disorganized.

· Six facilities operated independent systems, one of which was a duplication of effort.

Department officials stated they have begun the process of centralizing certain functions related to pharmaceutical commodities. However, controls over commodities are still decentralized based upon job duties of legacy agencies and budgetary constraints. By failing to maintain centralized oversight over commodities, multiple problems have occurred.

We recommended the Department continue establishing a centralized oversight function related to commodities to allow for strengthened controls. (Finding 06-02, pages 11-12) This finding was first reported in 1999.

Department officials agreed with our recommendation and indicated they are currently standardizing the commodity inventory numbers that are used by all areas. Research is still being conducted to determine whether an alternative software package should be purchased, and a central oversight function will be implemented along with detailed procedures and monitoring tools in order to strengthen commodity controls. (For the previous Department response, see Digest Footnote #1)

AUDITORS' OPINION

Our auditors state the Department's June 30, 2006 financial statements are fairly presented in all material respects.

___________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:RPU:pp

SPECIAL ASSISTANT AUDITORS

Sikich LLP were our special assistant auditors for this audit.

DIGEST FOOTNOTE

#1 - INADEQUATE controls over commodities – Previous Department Response

2005: Agree. The Department will investigate centralizing this function.