The Board’s decentralized organizational structure led to the failure to properly communicate essential financial reporting such as accounts and loans receivable, and grant program details between the financial reporting division and other divisions.

Throughout the audit process, we noted several instances where the Board’s organizational structure directly impacted the Board’s ability to communicate and process essential information. For example, we noted one division overstated total receivables by $1.7 million when reporting to the State Comptroller and the financial reporting division. We also noted divisions responsible for administering federal and state programs did not communicate new programs, programs that ended or the type of grants to the financial reporting division. In other instances the Board did not ensure an employee was trained to operate the School Technology Revolving Loan Program (Fund 569) loan system, did not track changes in individual responsibilities and the location of records during staff reductions, staffing changes and physical moves during the year and did not assign a central area for monitoring new mandates affecting the Board to assist in assessing risk and determining whether sufficient resources are available to ensure compliance.

We recommended the Board establish policies and procedures to ensure effective communication among all divisions to provide management with the information necessary to evaluate the financial reporting impact of all events and transactions affecting the Board. (Finding 1, pages 15-17)

Board officials did not accept our conclusion that its organizational structure led to the issues listed in this finding. They concluded the main factor that contributed to the issues listed was the significant loss of personnel the agency experienced during Fiscal Year 2003.

In an auditor’s comment, we noted this is a repeat finding and that in the prior audit, SBE stated that it had recently centralized and realigned its structure to improve communications. Nevertheless, we found similar problems in the current audit. While these problems may have been exacerbated by the 2003 early retirement initiative, it is important to note that they existed prior to that time. We leave it up to the SBE to determine, within its managerial discretion, what specific organizational structure changes will be sufficient to ensure effective communication of essential financial reporting information among its various divisions.

The Board did not have sufficient controls over its accounts receivable reporting and recordkeeping. During the audit period, the Board was required to file quarterly accounts receivable reports with the Office of the State Comptroller for Funds 130, 410, 567, 569 and 605. At June 30, 2003, accounts receivable for these funds totaled $25.1 million on the Board’s financial statements. During our testing we noted the following:

We recommended the Board establish and implement formal policies and procedures to ensure accounts receivable are reported in accordance with Statewide Accounting Management Systems procedures, proper records are maintained and a supervisory review is performed of the C-97 and C-98 Forms prior to submission to the Comptroller’s office. Further, we recommended the Board implement a system encouraging collaboration between divisions to ensure the accurate reporting of all receivables for compliance and financial reporting purposes. (Finding 2, pages 18-20)

Board officials agreed to improve its internal procedures to ensure that accounts receivable are reported as required by the SAMS.

The Board did not properly perform reconciliations of cash receipts or cash balances. During our testing of reconciliations, we noted the following:

We recommended the Board ensure cash receipt and cash balance reconciliations are performed in accordance with Statewide Accounting Management Systems (SAMS) procedures and a thorough and timely supervisory review of the reconciliations is performed. (Finding 3, pages 21-22)

Board personnel stated they agree with the recommendation and are continuously improving the process of reconciling cash receipts as required by SAMS.

The Board did not maintain adequate controls over, nor did it devote the proper time or resources to, the financial reporting process. We noted financial statements, related footnotes, and financial related schedules were not prepared timely. We also noted several errors in Board prepared accounting reports transmitting financial information to the Office of the State Comptroller in accordance with Generally Accepted Accounting Principals (GAAP). As a result, many adjusting entries and revisions were necessary.

We recommended the Board establish and maintain effective controls over the GAAP and financial reporting process to ensure the timely and accurate submission of financial data. (Finding 4, pages 23-25)

Board officials stated they believe they have adequate controls over the GAAP and financial reporting process. They believe delays in the process are primarily due to issues outside their control, and most of the adjusting entries that had to be made were also caused by events outside its control.

In an auditor’s comment we agreed that some of the problems noted in the GAAP and financial reporting process were caused by factors outside the agency’s control, but other adjustments were due to errors in SBE’s original submissions.

The Board did not have adequate controls over its supplies inventory. During our testing, we noted computer system controls were not in place to restrict access to the inventory reporting system and receipts and disbursements recorded could not be agreed to supporting documentation. In addition, the computer system did not have a separate field to account for adjustment transactions, allowed changes to inventory to result in negative inventory quantities, did not require supervisory approval for the transaction to be processed and did not provide detailed information to support a review. Lastly, 9 of 124 inventory items disclosed no change in the inventory counts from the prior year and no activity during the current fiscal year. This finding has been repeated since 1999.

We recommended the Board strengthen its internal controls over its supplies inventory by segregating the responsibilities for recording inventory receipts, shipments and adjustments from the physical handling of inventory. Further, the Board should ensure an adequate review of inventory changes is performed and outdated supplies are disposed of timely and in an appropriate manner. (Finding 5, pages 26-27)

Board personnel stated they are strengthening controls to provide adequate segregation of duties. They will also monitor supplies and address any obsolete items. (For the previous Board responses, see Digest footnote #1.)

The Board did not comply with duties mandated by State statute. We noted the Board did not initiate and maintain an annual Governor’s Recognition Program; implement a system of rewards to recognize and reward schools whose students perform at high levels or which demonstrate outstanding improvements; develop a model curriculum; make computer literacy and high-tech competency grants available to qualifying school districts; schedule hearings within 60 days from the date of appeals on suspensions taken; prepare or make available family life instruction courses and evaluation procedures; ensure the required number of members served on the Advisory Council on Bilingual Education; or establish a State-level Committee of Cooperative Services, all required by the School Code.

We recommended the Board comply with the mandated duties. (Finding 6, pages 28-30)

Board officials stated they now have a system in place to recognize and reward schools whose students perform at high levels or demonstrate outstanding improvements. The Board has ensured the required number of members serve on the Advisory Council for Bilingual Education. The Board is also pursuing legislative changes to help resolve the computer literacy and high tech grant issue as well as the Teaching Certificate suspension appeal and hearing timeframes. Because of limited resources, the Board will prioritize the remaining mandates and implement them in the order of their priority.

The Board did not maintain proper controls over contract requirements. We noted 3 of 25 (12%) general contracts with alterations to signature dates. The original signature date of one contract was approximately six months prior to the altered date. The original signature date could not be determined for two of the contracts. The contracts, each of which exceeded $10,000, were filed with the Office of the State Comptroller subsequent to the altered contract dates.

We recommended the Board strengthen its controls to ensure compliance with all contracting rules, regulations, and statutory requirements. (Finding 8, page 34)

Board officials stated this finding was caused by the improper actions of one staff member who is no longer with the Board. The Board has reinforced with staff the current contracting policy.

The Board did not provide adequate oversight of Regional Offices of Education (ROEs) and Intermediate Service Centers (ISCs). During our audit, we noted the Board established a central contact for the ROEs/ISCs; however, the Board did not maintain documentation of meetings of the coordinating council. In addition, the Board did not include language identifying allowable and unallowable expenditures in some grant application material, provide training to the ROEs/ISCs in the use of expenditure codes, or perform annual record reviews of the 48 ROEs/ISCs. Lastly, the Board did not monitor the meetings of the ROE/ISC advisory boards or monitor, set guidelines or introduce legislation on additional compensation paid to ROE superintendents and assistant superintendents by sources other than the State or county.

We recommended the Board implement policies and procedures to ensure proper oversight of the ROEs and ISCs. These policies and procedures should include controls designed to improve ROE/ISC financial reporting guidelines, strengthen the Board’s oversight of the ROEs/ISCs and specify documentation to ensure compliance with mandated duties. (Finding 11, pages 37-40)

Board officials stated the ROEs are elected officials. They have their own boards they have to report to, not ISBE. ISBE agreed to implement biennial site visits at which time they will monitor Advisory Board meetings and is in the process of implementing the annual record reviews. However, the Board does not believe they have the authority or the requirement to fulfill the remaining recommendations.

In an auditor’s comment, we noted the State Board has the responsibility for effectively overseeing the State’s elementary and secondary education system, as well as ensuring the proper use of State Board funds. The 2001 management audit of the State Board’s funding of Regional Offices of Education concluded that grant agreements contained few guidelines, which resulted in questionable uses of State Board funds. In addition, good business practices suggest that minutes or other documentation of the coordinating council meetings be maintained to ensure proper monitoring and accountability, as well as ensuring that issues raised are followed-up on and addressed. In its response to the same finding in the OAG’s 2002 compliance audit, the State Board attributed the lack of coordinating council documentation to an oversight. Regarding the training of ROE’s on expenditure codes, in its response to the 2001 management audit, the State Board stated it would "partner with the ROEs and provide technical assistance to address their internal training needs."

The remaining findings are less significant and are reportedly being given attention by the Agency. We will review progress towards the implementation of our recommendations during the Agency’s next audit.

Karl Vogl, Chief Internal Auditor, provided the responses to our findings and recommendations.

Our special assistant auditors stated that the Agency’s financial statements of the governmental activities, the major fund, and the aggregate remaining fund information of the Agency, as of and for the year ended June 30, 2003, are fairly stated in all in all material respects.

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WILLIAM G. HOLLAND, Auditor General

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Our special assistant auditors for this audit were PTW & Co.