ILLINOIS STATE UNIVERSITY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For The Year Ended June 30, 2005

FINANCIAL OPERATIONS (All Funds) (in thousands)	FY 2005	FY 2004
OPERATING REVENUES Student tuition and fees (net of scholarship allowances).......... Grants and contracts........................................................................ Auxiliary facilities.............................................................................. Other operating revenues................................................................ Total Operating Revenues...................................................... OPERATING EXPENSES Instruction.......................................................................................... Research............................................................................................. Public service..................................................................................... Academic support............................................................................. Student services................................................................................ Institutional support......................................................................... Operation and maintenance of plant.............................................. Auxiliary facilities.............................................................................. Depreciation....................................................................................... Payments on behalf of the University........................................... Other operating expenditures.......................................................... Total Operating Expenses....................................................... Operating loss....................................................................................... NONOPERATING REVENUES (EXPENSES) State Appropriations....................................................................... Payments on behalf of the University............................................... Investment income............................................................................. Interest on capital assets and related debt.................................. Other nonoperating revenues (expenses).................................... Net nonoperating revenues Income (loss) before other revenues, expenses, gains and losses Transfers from the Capital Development Board.......................... Capital grants and gifts................................................................... INCREASE IN NET ASSETS.............................................................. Net assets, beginning of year.............................................................. Net assets, end of year.........................................................................	$88,419,957 26,254,879 57,752,634 20,544,325 $192,971,795 $89,270,282 13,111,090 12,057,416 10,002,030 25,559,122 23,115,754 20,414,726 42,740,825 13,553,122 42,893,414 20,690,745 $313,408,526 ($120,436,731) $80,452,000 43,775,566 1,932,457 (2,851,351) 9,308,907 $132,617,579 $12,180,848 11,829,104 6,861,075 $30,871,027 $243,612,169 $274,483,196	$79,445,827 25,501,492 58,447,697 19,007,753 $182,402,769 $89,875,267 12,611,868 10,497,928 9,710,201 23,930,788 21,971,127 18,334,823 42,582,625 12,340,446 102,777,101 18,136,014 $362,768,188 ($180,365,419) $78,904,476 103,615,384 556,012 (3,029,410) 8,614,026 $188,660,488 $8,295,069 14,782,721 6,153,982 $29,231,772 $214,380,397 $243,612,169
SELECTED ACCOUNT BALANCES (ALL FUNDS)	JUNE 30, 2005	JUNE 30, 2004
Cash and cash equivalents................................................................... Investments............................................................................................ Capital assets.......................................................................................... Revenue Bonds Payable...................................................................... . Accrued compensated absences........................................................	$33,680,685 44,884,365 255,069,878 52,979,932 19,034,972	$22,185,687 55,145,726 236,356,688 55,918,240 19,005,384
UNIVERSITY PRESIDENT
During audit period and currently: Dr. C. Alvin Bowman, President

The University did not provide initial six month training as required for 308 employees hired during FY05

Contracts and leases did not require all required certifications

Contracts and leases were not filed with the State Comptroller as required

Use of negative timekeeping used by exempt civil service and academic employees

University officials disagreed

Auditor comment

State law requires employees to submit timesheets documenting time spent on official State business

Auditors believe a positive timekeeping system is required by law

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

ETHICS TRAINING NOT BEING ADMINISTERED IN COMPLIANCE WITH THE STATE OFFICIALS AND EMPLOYEES ETHICS ACT

The University is not ensuring that all new employees are receiving ethics training within six months of being hired in compliance with the State Officials and Employees Ethics Act.

The University did not provide the initial six month training as required by the Act for 308 employees hired during Fiscal Year 2005. These personnel were hired subsequent to the fall 2004 training date and more than six months prior to the earliest fall 2005 training date. (Finding 1, page 12)

We recommended that the University develop procedures to ensure that newly hired employees receive the appropriate ethics training within six months of their initial date of employment.

The University agreed with our recommendation to ensure that newly hired employees receive appropriate ethics training within six months of initial employment. In addition to the annual on-line ethics training program currently provided to all employees, the University has implemented an additional periodic training process for those employees hired after the conclusion of the annual training program.

CONTRACTS AND LEASES NOT FILED WITH THE STATE COMPTROLLER’S OFFICE AND DID NOT INCLUDE REQUIRED CERTIFICATIONS

Certain contracts and leases were not filed with the State Comptroller's Office as required and did not include all required certifications for State contracts. We examined 25 contractual agreements and 10 real property lease agreements entered into by the University and noted the following:

¨ Two contracts (8%) and two lease agreements (20%) did not include all the required certifications. These included contracts for insurance services and equipment rental. Some contracts were based on hourly rates and others were for a specified maximum fee.

We noted the following certifications (statutory reference noted in parenthesis) or clauses were missing from at least one of the contracts or leases examined:

§ Bribery Clause (30 ILCS 500/50-5(d))

§ Contract Debt Certification (30 ILCS 500/50-11(b))

§ Forced Labor Act Certification (30 ILCS 583/10(a))

§ Felony Conviction Act under Sarbanes-Oxley Certification (30 ILCS 500/50-10.5(b))

¨ Twelve contracts (48%) and two lease agreements (20%) tested were not filed with the State Comptroller's Office as required. The Illinois Procurement Code (30 ILCS 500/20-80(b)) and SAMS Procedure 15.10.40 require State agencies to file contracts exceeding $10,000 with the State Comptroller within 15 days of execution. In addition, the Statewide Accounting Management System (SAMS) Procedure 15.20.10 states, "File Only contracts including contracts paid entirely from locally held funds do not require obligation and are not entered into the SAMS system. They must, however, be filed with the Illinois Office of the Comptroller (IOC) and must meet all IOC documentation and certification requirements."

Failure to file contracts with the State Comptroller is a violation of State statutes and regulations, and failure to include all required certifications in contracts and leases may result in the University doing business with a vendor/lessor that is prohibited from contracting with the State. (Finding 2, pages 13-14)

We recommended that the University implement procedures to ensure all contracts over $10,000 are filed with the Office of the State Comptroller in accordance with State statutes and guidelines. We further recommended the University review its procedures to ensure contractual agreements and leases entered into by the University include all the required certifications for State contracts.

The University agreed with our recommendation to ensure all contracts over $10,000 are filed with the Office of the State Comptroller in accordance with State statutes and guidelines and has since implemented procedures to do so. The University also agreed with the recommendation to ensure all contracts and leases include the required certifications.

TIME SHEETS NOT REQUIRED

The University did not require positive time reporting for all of its employees in compliance with the State Officials and Employees Ethics Act (Act).

Of the 37 employees’ time sheets that we examined, 10 (all faculty or salary civil service employees) did not submit time sheets documenting the time spent each day on official State business to the nearest quarter hour. We noted that the University's procedures only required positive time reporting for hourly civil service employees and student workers. Exempt civil service and academic employees were required to submit benefit usage cards that identified leave time used (negative time reporting).

The Act requires the University (through policies adopted by the Illinois Board of Higher Education) to adopt personnel policies consistent with the Act. The Act (5 ILCS 430/5-5(c)) states, "the policies shall require State employees to periodically submit time sheets documenting the time spent each day on official State business to the nearest quarter hour." (Finding 3, pages 17-18)

University officials stated that members of the higher education community had received a memo from the Executive Inspector General that stated, "it appears that a system of absence reporting would be an appropriate method of time keeping under the Ethics Act. Under this system, an employee would only report time during their normal work schedule that was not spent at work and provide the category of leave taken for that time away."

We recommended that the University require all employees to maintain time sheets in compliance with the Act.

The University officials disagreed that its system of requiring non-hourly employees to report absence time during their normal work schedule is not in compliance with the State Officials and Employees Ethics Act (Act). The Illinois Office of Executive Inspector General, who is charged with implementing the Act, has indicated the University's current absence management system complies with the Act. Implementation of a comprehensive positive time reporting system would incur significant additional cost while yielding no real benefit. The current time reporting system utilized by the University does accomplish the need for employees to account for time spent on official State business in a cost beneficial manner.

In an auditor comment we noted that the State Officials and Employees Ethics Act defines “State Agency” to include “public institutions of higher learning…” 5 ILCS 430/1-5. Illinois State University is defined as a “public institution of higher learning” in Section 2 of the Higher Education Cooperation Act. 110 ILCS 220/2. Further, the State Officials and Ethics Act defines “State employee” to be “any employee of a State agency.” 5 ILCS 430/1-5.

As noted in the finding, the State Officials and Employees Ethics Act requires “State employees to periodically submit time sheets documenting the time spent each day on official State business to the nearest quarter hour…” 5 ILCS 430/5-5 (c). This timekeeping requirement went into effect March 1, 2004. The negative timekeeping system used for University faculty and salary civil service employees requires those employees to report only time away from State business, not the time spent each day on State business. Further, it is logical to assume that, by adopting this language, the legislature meant to effect a change in the method used by State employees to record their time – that is, to adopt a positive timekeeping system.

Finally, the memorandum from the Office of Executive Inspector General upon which the University relied in maintaining its customary negative timekeeping system for several categories of its employees clearly states that it “is not a legal opinion.”

We continue to believe that a positive timekeeping system for State employees is required by the State Officials and Employees Ethics Act. If the University disagrees with this conclusion, we further recommend that it seek a formal, written opinion from the Attorney General’s Office on the requirements of this statutory provision.

OTHER FINDING

The remaining finding is reportedly being given attention by the University. We will review the University’s progress toward the implementation of our recommendation in our next audit.

Mr. Greg Alt, Comptroller, provided responses to the findings and recommendations.

AUDITORS’ OPINION

Our auditors stated the University’s financial statements as of June 30, 2004 and for the year then ended, are fairly presented in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:CML:pp

SPECIAL ASSISTANT AUDITORS

Our special assistant auditors were Nykiel, Carlin & Co.

ILLINOIS STATE UNIVERSITY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

OPERATING REVENUES

OPERATING EXPENSES

INCREASE IN NET ASSETS..............................................................

OTHER FINDING