ILLINOIS STUDENT ASSISTANCE COMMISSION – ILLINOIS DESIGNATED ACCOUNT PURCHASE PROGRAM
For the Year Ended: June 30, 2010
Summary of Findings:
Total this audit: 5
Total last audit: 3
Repeated from last audit: 2
Release Date: April 7, 2011
State of Illinois, Office of the Auditor General
WILLIAM G. HOLLAND, AUDITOR GENERAL
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This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov
This report covers our financial audit of the Illinois Student Assistance Commission (Commission) – Illinois Designated Account Purchase Program (IDAPP) as of June 30, 2010 and for the year then ended.
• IDAPP did not provide auditors with complete and accurate financial statements on a timely basis.
• IDAPP did not properly apply student loan payments to principal and interest.
• IDAPP invested in a money market mutual fund with holdings in securities not permitted by its investment policy.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
FINANCIAL REPORTING PROCESS NEEDS IMPROVEMENT
The Illinois Student Assistance Commission (Illinois Designated Account Purchase Program) did not provide the auditors with complete and accurate financial statements on a timely basis. Also, the Illinois Designated Account Purchase Program (IDAPP) does not have sufficient control over financial reporting.
During the audit entrance conference on May 11, 2010, a deadline for submission of IDAPP’s draft financial statements was determined and agreed to by the auditors and IDAPP management. The deadline for delivery of the complete draft financial statements to the auditors for fiscal year 2010 was October 1, 2010. An initial draft was provided to the auditors on September 30, 2010, which was incomplete and had not been fully reviewed by the Commission and all parties involved with the preparation and approval of the financial statements. Changes and adjustments to the initial draft occurred as late as November 15, 2010, 46 days after the agreed upon deadline, when several reclassifications and other changes were made affecting the financial statements and note disclosures.
Several errors and omissions were identified and corrected during the audit of the draft financial statements for IDAPP. Some of the more significant items were as follows:
• Transfers in and out were out of balance, requiring an adjusting entry in the amount of $750,000 to the general ledger.
• Severance accruals in the amount of $137,000 relating to benefits for terminated employees were not recorded in the draft financial statements.
• An adjustment to write off uncollectible notes receivable in the amount of $683,000 was not made timely.
• Pledged revenue disclosures were not reported for the 2009 series debt issuances in the draft financial statements.
According to IDAPP management, changes subsequent to the initial delivery of the draft financial statements were the result of the ongoing review of the financials by the Commission and the Illinois Office of the Comptroller. (Finding 2, pages 30-31) This finding was first reported in 2008.
We recommend the Commission improve controls over financial reporting to ensure accurate presentation and disclosure of IDAPP’s annual financial statements. The Commission should take a comprehensive look at the entire financial reporting process and make changes needed to timely release financial reports to users and to auditors.
IDAPP officials accepted our recommendation and stated it’s reviewing all of its policies and procedures regarding the close process and the preparation of the financial statements. (For the previous IDAPP response, see Digest footnote #1)
STUDENT LOAN PAYMENTS NOT PROCESSED CORRECTLY
IDAPP did not properly apply student loan payments to principal and interest.
IDAPP utilizes several external service organizations to manage and monitor its student loan portfolio. During our testing of student loan payments, we noted that for four out of twelve (33%) payments sampled for one of the service organizations, there were errors in the application of the payments between principal and interest.
IDAPP management acknowledged it was aware of a system problem relating to the processing of payments at this service provider. Subsequent to IDAPP’s fiscal year ended June 30, 2010, the service provider performed a retrospective calculation for each loan possibly affected by this situation. In addition, IDAPP has hired an independent third party entity to review this retrospective calculation for propriety. Based on the review performed by the service provider, misapplied payments as of June 30, 2010 totaled approximately $291,000, resulting in an understatement of IDAPP’s student loan receivable balance by the same amount. This amount was deemed immaterial and was not recorded at year end.
According to IDAPP management, this situation occurred due to the way the computer program used by the service organization handled forbearances, deferments and the related capitalized interest.
The service provider in question manages approximately $312 million of IDAPP’s student loan portfolio as of June 30, 2010. This represents 28% of the student loan receivable balance of $1,107 million at fiscal year end 2010. Misapplication of student loan payments between interest and principal could result in IDAPP’s student loan receivable and operating revenue being misstated. Additionally, misapplication of payments could lead to certain borrowers “paying off their loan” when a balance actually remains, or over-paying the remaining loan balance. Although individual payments misapplied during the year ended June 30, 2010 appear to be insignificant, these amounts can accumulate throughout the years to a more significant amount. (Finding 3, pages 32-33)
We recommended IDAPP management closely monitor each service organization used to manage its student loan portfolio. Reviews of the service organization’s processes and controls should be performed on a periodic basis.
IDAPP officials accepted the auditors’ recommendation and indicated it has a process to review the reports on controls of all the outside service providers and follows up on any findings that are deemed material weaknesses.
NONCOMPLIANCE WITH INVESTMENT POLICY
IDAPP invested in a money market mutual fund with holdings in securities not permitted by its investment policy.
As of June 30, 2010, the Illinois Designated Account Purchase Program (IDAPP) had invested $13.4 million in a Fund, which invests in corporate debt securities that were not guaranteed by the full faith and credit of the United States of America as required by the investment policy. This investment was approximately 5% of IDAPP’s total investment balance as of the fiscal year end 2010. (Finding 4, pages 34-35)
We recommended IDAPP improve controls over investments to ensure that it is in compliance with its investment policies. Further IDAPP should reinvest the money invested in the money market fund in violation of its investment policy to an allowable investment vehicle.
IDAPP officials accepted our recommendation and indicated the non-compliant investment was sold and the funds moved into a compliant investment on December 16, 2010.
Our auditors stated the financial statements of the IDAPP are fairly presented in all material respects.
WILLIAM G. HOLLAND
SPECIAL ASSISTANT AUDITORS
Our special assistant auditors for this audit were McGladrey & Pullen LLP.
#1 – Financial Reporting Process Needs Improvement
We accept the recommendation. IDAPP is reviewing all of its policies and procedures regarding the close process and the preparation of the financial statements. Quality control checks will be put in place to ensure the submission of accurate financial statements.