REPORT DIGEST

ILLINOIS POWER AGENCY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION
For the Year Ended:  June 30, 2013

Release Date:  July 31, 2014

Summary of Findings:
Total this audit: 23
Total last audit: 17
Repeated from last audit: 12

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

• The Agency’s financial statements contained
inaccuracies, which would have resulted in a
material misstatement if not corrected.

• The Agency did not comply with statutory
limitations on fund transfers from the Trust
Fund to the Operations Fund.

• The Agency lacked controls to properly
record receivables and ensure the accuracy of
Alternative Compliance Payments remitted by
Alternative Retail Electric Suppliers.

• State laws and regulations in accounting for
the Agency’s expenditures from the Renewable
Energy Resources Fund were not complied with.

• A Resource Development Bureau was not
established within the Agency as required by
its enabling statute.

• Appropriations within the Illinois Power
Agency Trust Fund were not properly used.

• The Agency did not properly approve
contracts.

• The Agency filed late contracts with the
State Comptroller and failed to adequately
file late affidavits for those late contracts.

• The Agency filed an emergency purchase
affidavit for a purchase which was not an
emergency.

• The Agency maintained inadequate controls
over the collecting and reporting of accounts
receivable.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO IMPROVE FINANCIAL STATEMENT REPORTING

The Illinois Power Agency’s (Agency) financial
statements contained inaccuracies.  These
problems, if not corrected, would have
resulted in a material misstatement.

During testing, we temporarily suspended the
audit of the financial statements in February
2014 due to the number of significant errors
noted, some of which are noted below:

• The Agency did not appear to have properly
recognized revenue for Alternative Compliance
Payments (ACPs) received and processed by the
Illinois Commerce Commission totaling
$1,047,226 and $30,624,972 at June 30, 2012,
and June 30, 2013, respectively.

• The Agency understated its accounts
receivable at June 30, 2013, totaling $382,346
for ACPs.

• The Agency recorded transactions related to
FY 2012 activity, totaling $92,192, in the
Agency’s FY 2013 records.

The preceding matters noted were in addition
to the following matters already encountered
and resolved prior to February 2014, as noted
below:

• The Agency recorded assets and liabilities
that did not exist at June 30, 2013, in the
Illinois Power Agency Trust Fund, totaling
$26.835 million and $1.944 million,
respectively.  This was corrected by the State
Comptroller before February 2014.

• The Agency did not record or disclose any
liabilities or contingent liabilities for
contracts to purchase renewable energy between
June 2013 and May 2014.  After notification
from the auditors, the Agency contacted the
suppliers to obtain this information in the
Agency’s financial records and statements in
October 2013.

During discussions with the Agency’s
management and external consultants, the
auditors and the Agency agreed to the
following steps to prepare auditable financial
statements:

• The Agency would review every transaction
recorded during FY 2013 to check whether the
transaction was properly entered into the
Agency’s records.


• The Agency would perform reconciliations of
the Agency’s cash, expenditures, and receipts
to the records of the State Comptroller and
explain all reconciling items.

The Agency provided revised financial
information to the auditors in March 2014.
The Agency recorded 17 adjusting journal
entries to correct errors they discovered
within their financial records during this
review.  During testing of the Agency’s
revised records, the auditors still noted the
following errors and misstatements:

• The Agency’s opening balances for the
current year did not agree with the closing
balances reported in the FY 2012 financial
statements.  The auditors identified an
adjusting journal entry from the prior year
that was posted by the Agency in the wrong
period totaling $86,567.  This adjusting entry
proposed by the auditors was corrected by the
Agency in its financial records.

• The Agency’s beginning balance for
unavailable revenue related to ACPs in FY 2012
was overstated by $1,047,226. The auditors
proposed an adjusting entry to correct this
error, which the Agency recorded in its
financial statements.

• The Agency did not comply with statutory
limitations on fund transfers from the
Illinois Power Agency Trust Fund to the
Illinois Power Agency Operations Fund.   The
auditors proposed an adjusting entry to
correct this error of $997,827, which the
Agency recorded in its financial statements.

• The Agency did not properly calculate its
outstanding liabilities due to vendors for
prompt payment interest not paid in prior
years, overstating its liability by $48,620.
The auditors proposed an adjusting entry to
correct this error which the Agency recorded
in its financial statements.  (Finding 1,
pages 15-18)

We recommended the Agency enhance its
accounting and financial reporting procedures
to ensure its accounting records are accurate
and allow for the accurate preparation of
financial statements in accordance with
accounting principles generally accepted in
the United States of America.

Agency management agreed with the finding and
stated that they have already implemented
corrective action to address this finding.

NEED TO COMPLY WITH THE INVESTMENT INCOME
TRANSFER LIMITATIONS OF THE STATE FINANCE ACT

The Agency did not comply with statutory
limitations on fund transfers from the
Illinois Power Agency Trust Fund (Trust Fund)
to the Illinois Power Agency Operations Fund
(Operations Fund).

During FY 2008, electric generating utilities
operating within the State contributed $25
million to the Agency for deposit into the
Trust Fund.  Pursuant to the State Finance Act
(Act), these moneys have been invested to
generate investment income to both grow the
corpus within the Trust Fund and provide an
additional revenue source to fund the Agency’s
operations.

Each year, the Agency is to transfer an amount
not exceeding the lesser of either 90% of the
investment income during the fiscal year or an
amount appropriated by the General Assembly
for deposit into the Operations Fund from the
Trust Fund. The Agency must retain the
remainder of the year’s investment income and
add it to the corpus within the Trust Fund,
which cannot be considered in calculating
future year transfers of investment income.

Some of what we noted follows:

• The beginning balance of the Trust Fund at
July 1, 2012, was less than the $25 million
initially contributed to the Trust Fund in FY
2008.  Although the Trust Fund has never had
an investment loss during any year from FY
2008 through FY 2012, the balance had not
increased by the amount of investment income
that should have been retained within the
Trust Fund pursuant to the Act.  Further, it
appears the Agency actually transferred a
portion of the initial $25 million
contribution from the Trust Fund to the
Operations Fund.  At July 1, 2012, auditors
estimated cumulative excess transfers of
$469,834.

• The General Assembly appropriated $300,000
to the Agency in FY 2013 for transfer from the
Trust Fund to the Operations Fund.  The
Agency’s FY 2013 financial statements included
an accrual due from the Trust Fund to the
Operations Fund for $735,801 from FY 2013
investment income.  This amount exceeds the
appropriation limitation by $435,801.  The
Agency had not requested this $735,801
transfer as of the close of fieldwork.

The auditors proposed adjusting journal
entries to correct these errors, which the
Agency recorded in the financial statements.
(Finding 2, pages 19-21)

We recommended the Agency record and perform
transfers of investment income in accordance
with the provisions of the State Finance Act.
We also recommended the Agency return the
amount of excess transfers to the Trust Fund.

Agency management agreed with the finding and
recommendations.

LACK OF CONTROLS OVER ALTERNATIVE COMPLIANCE
PAYMENTS

The Agency did not establish controls to
properly record receivables and ensure the
accuracy of payments remitted by Alternative
Retail Electric Suppliers (ARES).

At the conclusion of each Energy Year (June-
May), each ARES calculates their Alternative
Compliance Payment (ACP) liability by
preparing a spreadsheet to self-report amounts
due to the Illinois Commerce Commission
(Commission) and remits the calculated amount
due by September 1.

During FY 2013, the processing of all ACPs was
administered by the Commission.  The
Commission accepted payments, verified the
payment’s accuracy to the self-reported
spreadsheet submitted by the ARES, and
deposited the cash receipts into the Illinois
Power Agency Renewable Energy Resources Fund
(Renewable Fund). The Agency’s Director
performed a review of ACP receivables at June
30, 2013, that were paid to the Commission in
October 2013.

During testing, the auditors noted the
following:

• The Agency did not properly record both
prior year and current year transactions
within the Renewable Fund.  The auditors noted
the Agency did not capture or consider the
receipt date of ACPs paid to the Commission to
properly cut-off revenue recognition at the
conclusion of the State’s Lapse Period. The
auditors proposed a $1,047,226 and a
$30,624,972 reduction in unavailable revenue
at June 30, 2012, and June 30, 2013,
respectively.  After notification from the
auditors of this condition, the Agency
recorded the adjusting journal entries
necessary to restate the opening balances for
prior year errors and corrected the current
year’s errors.

• The Agency did not have an interagency
agreement with the Commission detailing the
specific functions, duties, and
responsibilities of both the Agency and
Commission for the accounting, recordkeeping,
and deposit of ACPs.

• The Agency does not have a mechanism to
identify any potential credit carry-forwards
or refunds due to retail electric suppliers
for financial reporting purposes.  During the
audit period, the Commission reported the
existence of two overpayments from retail
electric suppliers to the auditors totaling
$158.

• The Agency has not coordinated with the
Commission to establish a process and
procedure for the refund of excess ACPs.
Additionally, the auditors noted the Agency
does not have any appropriation authority to
actually pay a refund if the Commission
allowed an ARES to apply to the Agency for a
refund.  (Finding 3, pages 22-25)  This
finding was first reported in 2011.

We recommended the Agency work with the
Commission to obtain the information necessary
to report ACPs in the Agency’s financial
statements and work with the Commission to
address the issuance of, and financial
reporting for, refunds and carry-forwards, or
seek legislative remedy.

Agency management agreed with the finding and
recommendations.  (For the previous Agency
response, see Digest Footnote #1.)

NEED TO IMPROVE CONTROLS OVER THE PURCHASE OF
RENEWABLE ENERGY CREDITS

The Agency did not comply with State laws and
regulations regarding accounting for the
Agency’s expenditures from its Renewable
Energy Resources Fund (Renewable Fund).

During FY 2013, the Agency entered into
contracts with Renewable Energy Suppliers
(RES) to purchase Renewable Energy Credits
(RECs) curtailed by order of the Illinois
Commerce Commission (Commission).  Under the
terms of the contracts, the RES have the
option, but not the obligation, to deliver
RECs to the Agency under the terms of the
contracts for energy produced from June 1,
2013 through May 31, 2014.  The contracts
require settlement by the RES providing RECs
for retirement to the Agency on or before July
20, 2014.

The total potential cost of the REC purchase
contracts is $2,240,006.  The Agency could
potentially procure an amount not to exceed
2,974 photovoltaic (solar) RECs and 118,646
wind RECs.

During testing, the auditors noted the
following:

• The Agency did not structure the terms of
its contracts as to require settlement for
RECs produced in June 2013 by the conclusion
of the State’s FY 2013 Lapse Period on August
31, 2013.  According to auditor confirmations
with the RES, they expect to deliver 648
photovoltaic RECs and 318 wind RECs produced
in June 2013 to the Agency, totaling $97,473.
As the Agency’s contracts did not require
settlement, the RES did not deliver the RECs
and provide a proper bill to the Agency
resulting in the Agency not charging FY 2013
appropriations for expenses incurred during
the fiscal year and pushing these expenses out
to future appropriations.

• The Agency did not report a liability for
the $97,473 payable related to June 2013 RECs
or disclose the existence of the $2,142,533
contingent commitment of future resources
related to the remaining value of outstanding
contracts to the Office of the State
Comptroller.  After receiving notification
from the auditors of this condition, the
Agency calculated the liability and prepared
footnote disclosures to describe the existence
of this transaction within the Agency’s
financial statements.

• The Agency did not procure RECs from
distributed renewable energy generation
devices.  The Illinois Power Agency Act
requires the Agency to procure renewable
energy resources and at least 0.5% shall come
from distributed renewable energy generation
devices by June 1, 2013.  Agency officials
stated they could not lawfully procure RECs
from distributed renewable energy generation
devices due to two regulatory and statutory
barriers.

• The Agency did not create credit
requirements for suppliers of distributed
renewable energy.  Additionally, the Agency
did not solicit the use of third-party
organizations to aggregate distributed
renewable energy into groups of no less than
one megawatt in installed capacity.  (Finding
4, pages 26-29)

We recommended the Agency structure its
contractual agreements to accommodate fiscal
year limitations and identify and record all
liabilities and contingencies in the financial
statements.  We also recommended the Agency
create credit requirements for suppliers of
distributed renewable energy and procure RECs
from distributed renewable energy generation
devices, or seek legislative remedy.

Agency management agreed with the finding and
recommendations.

FAILURE TO ESTABLISH A RESOURCE DEVELOPMENT
BUREAU

The Agency did not establish a Resource
Development Bureau.

During our audit, we noted the Agency had not
established a Resource Development Bureau nor
did the Agency’s Director appoint a Chief of
the Resource Development Bureau.

Failure to create this required bureau and
appoint a Bureau Chief is a violation of State
statute.  (Finding 10, pages 37-38)  This
finding was first reported in 2009.

We recommended the Agency establish a Resource
Development Bureau or seek a legislative
remedy.

Agency management agreed with the finding and
recommendation.  (For the previous agency
response, see Digest Footnote #2.)

NEED TO COMPLY WITH APPROPRIATION LAWS

The Agency did not properly use appropriations
within the Illinois Power Agency Trust Fund
(Trust Fund).

During testing, the auditors noted the
following:

• The Agency circumvented the appropriations
process by directly depositing investment
income received from the Illinois State Board
of Investment, totaling $92,192, into the
Illinois Power Agency Operations Fund
(Operations Fund) as opposed to depositing the
receipt into the Trust Fund and performing an
interfund cash transfer to move the moneys,
pursuant to appropriation, into the Operations
Fund.

• During FY 2013, the Agency transferred the
remaining cash on deposit in the Trust Fund
within the State Treasury, totaling $36,324,
to the Illinois State Board of Investment.  To
perform this transaction, the Agency
incorrectly charged the entire amount to its
FY 2013 appropriation for transferring moneys
from the Trust Fund to the Operations Fund as
opposed to charging this activity to the Trust
Fund’s nonappropriated interfund cash transfer
line item.

Failure to use appropriations from the General
Assembly in strict adherence with the purpose
of the line item circumvents legislative
control, reduces the reliability of the
State’s financial information, and represents
noncompliance with State law.  (Finding 12,
pages 43-44)
We recommended the Agency deposit investment
income into the Trust Fund and only interfund
cash transfer moneys pursuant to an
appropriation from the General Assembly.  We
further recommended the Agency ensure amounts
charged to an appropriation line item
represent an allowable use under the terms of
the appropriation law.

Agency management agreed with the finding and
recommendations.

NEED TO PROPERLY APPROVE CONTRACTUAL
AGREEMENTS

The Agency did not properly approve contracts.

During FY 2013, the Agency entered into six
contracts individually valued in excess of
$250,000, totaling $3,498,793.

In our testing we noted three of the six
contracts in excess of $250,000, totaling
$1,484,000, were not properly approved.  Two
of the noted contracts were missing the Chief
Legal Counsel’s signature and one contract was
missing the date the Chief Legal Counsel and
Chief Financial Officer signed the contract.
(Finding 14, pages 49-50)

We recommended the Agency approve all
contracts in accordance with the State Finance
Act.

Agency management agreed with the finding and
recommendation.

NEED TO FILE CONTRACTUAL AGREEMENTS TIMELY

The Agency did not maintain adequate internal
control over compliance with the provisions of
the Illinois Procurement Code.

During FY 2013, the Agency entered into 13
contracts individually valued in excess of
$20,000, totaling $3,979,802.

In our testing we noted:

• Three contracts, totaling $181,916, were
filed with the State Comptroller between 74
and 83 days late.

• The Agency did not properly complete late
filing affidavits for the three contracts
filed late, as noted above. All three
affidavits were not signed by the Agency’s
Director, one affidavit was not notarized, and
two affidavits were not filed with the Auditor
General.

(Finding 15, pages 51-52)  This finding was
first reported in 2009.

We recommended the Agency implement internal
controls designed to allow for the timely
filing of contractual agreements and review
documents filed with external parties for
compliance with applicable laws, rules, and
regulations.

Agency management agreed with the finding and
recommendation.  (For the previous agency
response, see Digest Footnote #3.)

AVOIDABLE USE OF AN EMERGENCY CONTRACT

The Agency filed an emergency purchase
affidavit for a purchase which was not an
emergency, in violation of the Illinois
Procurement Code (Code).

During FY 2013, the Agency entered into one
emergency purchase, totaling $30,434, with a
public accounting firm to prepare the Agency’s
FY 2012 GAAP Packages, financial statements,
and procedure manuals.

During testing we noted the reason for the
emergency, as noted on the affidavit filed
with the Auditor General, was the “deadline to
renew this contract was overlooked.”  Thus,
this purchase only met the definition of an
emergency under the Code due to the Agency’s
inability to timely identify a need to enter
into a renewal contract with the vendor, thus
creating the emergency.  (Finding 16, pages
53-54)

We recommended the Agency follow the Code and
use the emergency provisions of the Code only
in true emergencies and not due to inadequate
planning.

Agency management agreed with the finding and
recommendation.

NEED TO IMPROVE CONTROLS OVER ACCOUNTS
RECEIVABLE

The Agency did not maintain sufficient control
over collecting and reporting accounts
receivable.

During testing, some of what we noted follows:

• The Agency’s procedures for collecting
accounts receivable are inadequate and not
designed to ensure amounts are promptly
recorded within the Agency’s billing records.

– The Agency posted invoices for procurement
planning expenses to two electric utilities,
totaling $1,030,123, as an adjustment dates
June 30, 2013; however, the actual date the
Agency billed the utilities was August 26,
2013.  The auditors concluded these amounts
had not been billed in a timely manner by the
Agency.

– As of June 10, 2013, seven Renewable Energy
Suppliers (RES) were not timely billed for a
nonrefundable fee, totaling $27,274. The
Agency eventually posted these receivables as
an adjustment dated June 30, 2013, but was
unable to identify the actual date the Agency
billed the RES.  In addition, the Agency did
not report these receivables as past due on
the Agency’s June 30, 2013, quarterly accounts
receivable report to the State Comptroller.

• The Agency did not exercise adequate control
over aging accounts receivable or estimating
uncollectible amounts. We noted the following:

– The Agency has not reviewed its accounts
receivable process to determine whether its
method of not calculating an estimate for
uncollectible accounts is fair and reasonable.
For example, the auditors noted one account,
totaling $9,430, where the Agency had not
recorded an allowance for doubtful accounts
even though the entity disputes the amount due
and the amount was originally billed around
October 2012.

– Due to the lack of controls over invoice
billing, the Agency’s ability to prepare
accurate aging reports of accounts receivable
for its quarterly reports to the State
Comptroller was significantly limited.  As
such, the auditors could not conclude as to
whether the Agency’s accounts receivable aging
schedule within its quarterly report of
accounts receivable to the Office of the State
Comptroller was fair and accurate.

•	The Agency did not submit accurate
quarterly accounts receivable reports to the
Office of the State Comptroller.  Some of what
we noted follows:

– The Agency did not report accounts
receivable under a recognized Major Revenue
Source account within the State’s Chart of
Accounts.  The Agency reported a portion of
each quarter’s accounts receivable activity to
an expenditures account (#510).

– Three of four quarterly reports did not
report a beginning balance for accounts
receivable which agreed with the prior
quarter’s ending balance for accounts
receivable.  We noted differences between
$25,000 and $470,000. (Finding 20, pages
60-63)

We recommended the Agency implement controls
to ensure accounts receivable are properly
recorded in the Agency’s records and
accurately reported to the Office of the State
Comptroller.

Agency management agreed with the finding and
recommendation.

OTHER FINDINGS

The remaining findings pertain to:  1)
reconciliation of agency records, 2)
inadequate controls over the Agency’s
information systems, equipment, employee
attendance, cash receipts, and personal
services, 3) failure to adopt formal
administrative rules for agencies operations,
fees and charges, and developing prequalified
supplier lists, 4) voucher processing, 5)
interagency agreements, 6) noncompliance with
FCIAA, and 7) Travel Headquarter Reports.  We
will review the Agency’s progress towards
implementation of our recommendations in our
next engagement.

AUDITORS’ OPINION

The auditors stated the financial statements
of the Agency as of and for the year ended
June 30, 2013, are fairly stated in all
material respects.

ACCOUNTANTS’ OPINION

The accountants conducted a compliance
examination of the Agency for the year ended
June 30, 2013, as required by the Illinois
State Auditing Act.  The auditors qualified
their report on State Compliance for Findings
2013-001 through 2013-004 and Findings
2013-007 through 2013-013.  Except for the
noncompliance described in these findings, the
auditors stated the Agency complied, in all
material respects, with the requirements
described in the report.

WILLIAM G. HOLLAND
Auditor General

WGH:TLK

AUDITORS ASSIGNED

This financial audit and compliance
attestation examination was performed by the
Office of the Auditor General’s staff.


DIGEST FOOTNOTES

#1-Lack of Controls Over Alternative
Compliance Payments-Previous Agency Response
2012 - The Agency agrees with this finding. As
part of the completion of the Office of
Auditor General’s fiscal year 2011 audit of
the Agency, the IPA conceded that entering an
interagency agreement with the Illinois
Commerce Commission (“ICC”) would document
each party’s responsibilities and help
formalize the controls that the Agency
believes are or should be in place. The IPA
did not reach this conclusion until near the
end of the fiscal year 2011 audit
process—after or just before the close of
fiscal year 2012. As a result, the Agency was
unable to secure an interagency agreement
during fiscal year 2012. The Agency is
attempting to secure an interagency agreement
with the ICC in fiscal year 2013.

#2-Failure to Establish a Resource Development
Bureau-Previous Agency Response
2012 - The Agency agrees with this finding.
While the Planning and Procurement Bureau was
not established in fiscal year 2012, it has
since been established in fiscal year 2013 and
is currently staffed by a Planning and
Procurement Bureau Chief.

As previously noted in the Agency Response to
fiscal year 2011 Finding 11-17, the Agency
respectfully submits that although Section
1-70 of the Act requires hiring of a Chief of
the Resource Development Bureau, the Agency
believes that hiring for this position would
not be a productive use of state resources at
this time. This is because, based on the
results of this year’s electricity procurement
planning that the Agency is required to
undertake pursuant to Section 1-75 of the Act,
there is and will be no need for the Agency to
develop generation pursuant to Section 1-80 of
the Act in the short or medium term. As a
result, the Agency believes there would be
little to no substantive work for the Chief of
the Resource Development Bureau to undertake
for several years.

The Agency agrees that in fiscal year 2012,
the procurement process from a staffing point
of view was solely under the purview of the
Acting Director and the Chief Fiscal Officer.
Responding further, the Agency also notes the
procurement process for several of the
Agency’s required procurements also included
oversight by the Illinois Commerce Commission,
the use of outside procurement administrators,
and review by an independent procurement
monitor (see 20 ILCS 3855/1-75 and 220 ILCS
5/16-111.5 which detail oversight by the
Illinois Commerce Commission and use of expert
advisors in procurement of energy and related
resources and retention of expert advisors).

#3-Failure to Timely File Contractual
Agreements-Previous Agency Response
2012 - The Agency agrees with this finding.
The Agency made its best efforts to submit
proper contracts within 15 days from
execution. While contracted with Shared
Services, the Agency made efforts to submit
acceptable contract documents in a timely
manner, but lacked sufficient time and
expertise, and delays were the result of the
Agency having to resubmit contract documents.
After the interagency agreement with Shared
Services lapsed, the Agency lacked sufficient
knowledge and time to submit acceptable
contracts on its own, leading to delays as
Agency personnel attempted resolved non-
conformance with Illinois Office of the
Comptroller requirements.