REPORT DIGEST

DEPARTMENT OF HUMAN SERVICES

FINANCIAL AUDIT
For the Year Ended June 30, 2014

Release Date:  February 11, 2015

FINDINGS THIS AUDIT:  7

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  2 -- 2 -- 4
Category 2:  1 -- 2 -- 3
Category 3:  0 -- 0 -- 0
TOTAL:  3 -- 4 -- 7

FINDINGS LAST AUDIT (Government Auditing
Standards Findings only): 4

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 report presents our Department-wide
financial statement audit for the year ended
June 30, 2014.  At June 30, 2014, the
Department operated 6 Developmental Centers, 7
Mental Health Centers, 1 combined Mental
Health and Developmental Center and 3
Rehabilitation Services Facilities.  The
findings are presented in the report beginning
at page 55.

SYNOPSIS

• (14-1) The Department had inadequate
controls over the reporting of year-end
balances related to its various federal grant
programs which resulted in material audit
adjustments to the financial statements.

• (14-2) The Department’s allowance for
doubtful accounts was materially misstated
because all available information was not used
to determine the amount.

• (14-3) The Department’s year-end financial
reporting to the Illinois Office of the
Comptroller contained inaccuracies and errors
which resulted in changes being made to
originally submitted information.

• (14-4) The Department has weaknesses in the
quarterly reporting of accounts receivable due
to a cumbersome reporting system that relies
on numerous subsystems and requires manual
entries.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO IMPROVE REPORTING FOR GRANT RELATED
ACCOUNT BALANCES

The Department of Human Services (Department)
does not have adequate controls over the
reporting of year-end balances related to
various federal grant programs, resulting in
material audit adjustments to the Department’s
financial statements

In reviewing amounts reported in the GAAP
Packages and Comptroller Forms (SCO 563 Forms)
for federal grant receivables, payables and
unearned revenue, we found that the process
for reporting grants and related accruals for
financial reporting was inadequate.  During
our testing of the year-end accruals reported
on the SCO-563 Forms, we noted the accruals
appeared unreasonable when analyzed at the
overall Department level.  As a result of
additional testing, we found that the
Department utilized a flawed methodology for
the allocation of expenditures and calculating
grant accruals.  The flawed methodology was
noted in 23 grants tested, resulting in gross
adjustments totaling $296 million.

The Department may report receipts and
disbursements for a single grant program in 2
or more funds.  Grant receipts are also not
always deposited in the funds from which the
corresponding claimed expenditures are spent.
As a result, in order to report activity by
fund for financial reporting purposes, the
Department utilized a methodology for
allocation of expenditures and computing year-
end accruals.  The methodology was found to be
flawed and was not reviewed for reasonableness
and substantiation.

We also noted the following additional grant
related errors and omissions:

• The November 2013 Consolidated Accounting
and Reporting System (CARS) reconciliation of
federal grant receipts was missing.

• The Department did not draw the monthly
maximum allowed under the Cash Management
Improvement Act Agreement with the U.S.
Department of the Treasury for the
Supplemental Nutrition Assistance Program
(SNAP).  The Department’s draws amounted to $2
million bimonthly for a total of $48 million
for the year. When the Department reconciled
expenditures to draw amounts at the end of the
fiscal year, a final draw of approximately $59
million was effectuated for the expenditures
that were incurred throughout the year.

• The Department received $17.2 million every
third month for the Department of Children and
Family Services, totaling $68.8 million for
the year.  The agreement provided to the
auditors did not contain any information on
the amount of the payments under the
agreement, or the frequency of the payments.
(Finding 1, Pages 55-57)

We recommended the Department implement a
process for ensuring amounts reported for all
grants are accurate and that controls are in
place to ensure knowledgeable individuals
validate amounts reported for these grants.

Department officials agreed with the
recommendation and stated they have
implemented a new GAAP process for grant
reporting.

NEED TO IMPROVE REPORTING FOR ALLOWANCE FOR
DOUBTFUL ACCOUNTS

The Department overstated the allowance for
doubtful accounts and did not utilize all
information available.

The DHS Recoveries Trust Fund accounts for
approximately $462 million in receivables
(gross) for overpayments to program recipients
for things such as food stamps and grants.
The Department initially recorded an allowance
for doubtful accounts for these receivables of
approximately $430 million, resulting in a net
receivable of $32 million.  The Department
calculated the allowance amount by dividing
the FY 2014 collections amount by the
receivable balance at June 30, resulting in a
collection rate of 7%.  The remaining 93% was
considered uncollectable, which was applied to
the gross receivable balance at June 30, 2014
to estimate the $430 million allowance amount.
An analysis by the auditors of collections
information dating back to 1986 determined an
average collection rate of 32.37%.

In discussing the actual collection rate with
the Department, they determined a revision to
their estimate of the collection methodology
was necessary.  The revised calculation
prepared by the Department considered a ten-
year-average collection period and the
allowance was recorded at 68.75% or $317.5
million.  As a result, the initial allowance
for doubtful accounts was overstated by
approximately $112 million.  (Finding 2, Pages
58-59)

We recommended the Department analyze all
available collection data annually and adjust
the methodology for calculating the allowance
for doubtful accounts as necessary.

Department officials agreed with the
recommendation and stated they developed a new
methodology for calculating the allowance for
doubtful accounts and will analyze all
collection data annually to recalculate the
allowance for doubtful accounts.

NEED TO IMPROVE FINANCIAL REPORTING TO THE
ILLINOIS OFFICE OF THE COMPTROLLER AND
PREPARATION OF YEAR-END FINANCIAL STATEMENTS

The Department’s year-end financial reporting
to the Illinois Office of the Comptroller
contained inaccuracies and errors which
resulted in changes being made to originally
submitted information.

The Department does not have an adequate
general ledger or adequate controls over year-
end financial reporting which resulted in
significant errors in the GAAP basis draft
financial statements, GAAP schedules prepared
for the State Comptroller’s Office, and
additional supporting schedules and analysis.

The Department did not timely record all
expenditures and receipts into CARS.

• This included payroll transactions totaling
$204 million through June 30 and $55 million
for the lapse period (July and August 2014).
The Department generally relied on inquiries
from the Comptroller’s Statewide Accounting
Management System (SAMS) for payroll
expenditure data because they could not rely
on their own internal accounting records for
payroll information.

• When reviewing the expenditure
reconciliations from the Department’s
accounting system to the Comptroller’s
accounting system at June 30, 2014, the
auditors noted the General Revenue Fund had
significant reconciling items which $16.517 of
expenditures were not posted to the
Department’s accounting system.

We also noted the following issues with the
year-end financial reporting process:

• The Department does not have a documented
process for estimating liabilities payable
from future year’s appropriations for certain
transaction types.

• The Department does not have a process to
ensure that indirect costs and the related
reimbursements are captured and recorded in
the proper period.

• In FY 2013 the Department overstated
operating transfers out from the General
Revenue Fund to the DHS Public Assistance
Recoveries Trust Fund by $11.655 million.  The
physical transfer of the funds has not been
made as of the date of this report.

• The Department does not perform a
supervisory review of all amounts recorded in
its GAAP Packages and financial statements.
These amounts include the following:

* Payments made by the Department of
Healthcare and Family Services (HFS).  A
spreadsheet is provided by HFS supporting the
payments made by HFS; however, those charged
with financial reporting at the Department do
not have a full understanding of the
information provided by HFS sufficient to
identify amounts that might be inaccurate.

* A balance recorded by the Department for
compensated absences payable in its financial
statements ($69 million as of June 30, 2014).
The amount is based on a summarized report
obtained from the payroll system (“timekeeping
system”).  In order to obtain the detail
necessary to perform testing over the balance
of accrued sick and vacation, the IT
department had to be notified to run a special
report.  The detail was never obtained and
reviewed by those responsible for financial
reporting.  (Finding 3, Pages 60-62).  This
finding has been repeated since 2009.

We recommended management perform a thorough
assessment of the year-end financial reporting
process and determine the significant
estimates that need to be re-evaluated.  Also,
the Department should work with management of
HFS to gain a better understanding of the
amounts reported in the Department’s financial
statements.

Department officials agreed with the
recommendation and stated they will perform a
thorough assessment of the year-end financial
reporting process and continue to make
improvements to ensure accurate and timely
preparation of GAAP reporting forms and year-
end financial statements.  (For the previous
Department response, see Digest Footnote #1.)

WEAKNESSES OVER QUARTERLY REPORTING OF
ACCOUNTS RECEIVABLE

The Department’s accounts receivable reporting
system is cumbersome, relies on numerous
subsystems, and requires manual entries.

During testing of the quarterly receivable
forms required by the Office of the State
Comptroller, the auditors noted the reports
were manually compiled from multiple accounts
receivable systems in order to issue a single
report.  The compilation is complex and
cumbersome and, as a result, there is a
potential for errors in reporting.  The
current process takes several hours to
complete over a period of several weeks.  The
Department’s current primary accounts
receivable system is the Accounts Receivable
System (ARS) and the secondary systems are the
Consolidated Accounting and Reporting System
(CARS) and the Reimbursement System II (RE2).
The systems need to be updated to handle the
quantity of transactions processed by the
Department.

The Department submitted accounting reports to
the Comptroller that contained differences
that could not be reconciled for the first two
quarters of FY 2014.  Auditors reviewed the
supporting documentation for receivables but
were unable to reconcile the amounts to the
totals reported for the quarter end.  For
fiscal year 2014, differences ranged from $5
million to $10 million at the end of quarters
one and two.

Due to the size of the Department and the
balance of accounts receivable (approximately
$516.5 million), the current process for
compiling the data does not efficiently or
effectively integrate automation of its
accounts receivable activity into the
Department’s financial accounting system,
CARS, and makes it difficult to prepare an
accurate aging of the Department’s accounts
receivable.  (Finding 4, Pages 63-64).  This
finding has been repeated since 2007.

We recommended the Department implement a
Department-wide accounts receivable system and
work with the appropriate parties regarding
any possible State-wide consolidated
accounting system initiatives.

Department officials agreed with the
recommendation and stated that the State of
Illinois has received competitive proposals
related to the acquisition of a system that
will replace several major legacy systems.
(For the previous Department response, see
Digest Footnote #2.)

AUDITOR’S OPINION

Our auditors stated the financial statements
of the Department of Human Services as of June
30, 2014, and for the year ended are fairly
stated in all material respects.

WILLIAM G. HOLLAND
Auditor General

WGH:etl

SPECIAL ASSISTANT AUDITORS

Our Special Assistant Auditors for this audit
were McGladrey, LLP.

DIGEST FOOTNOTES

#1 WEAKNESSES IN PREPARATION OF GAAP REPORTING
FORMS AND FINANCIAL STATEMENTS

2013:  The Department agrees with the
recommendation.  The Department will implement
procedures and cross-training measures to
ensure GAAP Reporting Packages are prepared in
a timely, accurate and complete manner.  This
will include seeking or allocating sufficient
staff resources and the implementation of
formal procedures to ensure GAAP financial
information is prepared and submitted to the
Office of the Comptroller in a timely and
accurate manner, and that all supporting
documentation is maintained in a
contemporaneous manner.

#2 WEAKNESSES OVER QUARTERLY REPORTING OF
ACCOUNTS RECEIVABLE

2013:  The Department agrees with the
recommendation.  The Department continues to
review the Accounts Receivable agency wide.
Based on the results of the review, we will
establish and implement any changes as
solutions occur.  DHS would like to see one
uniform Accounts Receivable System that would
handle all DHS debt and would satisfy all
receivable functions including financial
reporting. Until a Statewide solution is
implemented the Department will work to
improve the systems it currently maintains.
The Department will continue to work with the
appropriate parities regarding any possible
statewide consolidated accounting system
initiatives.