REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #25

HAMILTON AND JEFFERSON COUNTIES

FINANCIAL AUDIT

(In Accordance with the
Single Audit Act and OMB Circular A-133)

For the Year Ended:

June 30, 2007

Summary of Findings:

Total this audit                 5

Total last audit                 2

Repeated from last audit  1

Release Date:

June 19, 2008

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 is also available on

the worldwide web at

http://www.auditor.illinois.gov

SYNOPSIS

·         The Regional Office of Education #25 did not have adequate internal controls over disbursements and purchases.

·        The Regional Office of Education #25 incorrectly recorded internal reimbursements and a refund.

·         The Regional Office of Education #25 incorrectly classified $7,423 of capital outlay expenditures as supply and material expenditures. 

• The Regional Office of Education #25 did not allocate interest earned from a bank account to each source of funds. 

• The Regional Office of Education #25 did not have sufficient internal controls over the financial reporting process. 

        {Expenditures and Revenues are summarized on the reverse page.}

The Regional Office of Education #25 did not have adequate internal controls over disbursements and purchases.

The Regional Office of Education #25 incorrectly recorded internal reimbursements and a refund.

The Regional Office of Education #25 incorrectly classified $7,423 of capital outlay expenditures as supply and material expenditures. 

The Regional Office of Education #25 did not allocate interest earned from a bank account to each source of funds. 

The Regional Office of Education #25 did not have sufficient internal controls over the financial reporting process. 

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

INADEQUATE INTERNAL CONTROL PROCEDURES

        The Regional Office of Education #25 did not have adequate internal controls over disbursements and purchases.  In testing, auditors noted the following:

• The bank reconciliations did not have documentation on them indicating who prepared the reconciliation and that it was reviewed and approved by a member of management.

• An individual independent of the bank reconciliation and the deposit slip preparation process does not periodically verify that the log of the checks received by the Regional Office agrees with the deposit slip and bank deposit receipt.

• There was no indication that payroll checks or direct deposits have been reviewed by management to ensure that they agree to the amount of the employee’s approved salary and hourly rate.

• There were two instances where the Regional Office disbursed payment from a vendor statement instead of the original invoice.  In one instance the Regional Office also paid sales taxes on the purchase.  In the other instance the Regional Office paid for a purchase from a vendor’s statement and then later paid for the same purchase from the original invoice which resulted in an invoice in the amount of $44,213 being paid twice. 

• During the testing of 40 payroll disbursements, one instance was noted where the program director’s signature was missing from an hourly employee’s timesheet.

• The receipts and disbursements of the Institute and GED funds were decentralized from the main accounting system and do not follow the Regional Office’s established receipt and disbursement procedures.

• During the testing of 84 credit card purchases, one instance was noted where the Regional Office paid a late fee and interest.

         The Regional Superintendent of Schools is responsible for establishing and maintaining an internal control system over disbursements and purchases to prevent errors and fraud.  Lack of proper segregation of duties among the Regional Office’s personnel, lack of proper review of the various accounting process, and lack of adequate documentation to support each disbursement could result in unintentional or intentional errors or misappropriation of assets, in which the errors or fraud could be material to the financial statements and may not be detected in a timely manner by employees in the normal course of performing their assigned duties. (Finding 07-01, pages 12a – 12b)

         Auditors recommended specific actions to the Regional Office to address the weaknesses in internal controls noted in the finding.  The Regional Superintendent agreed with the finding.

MISCLASSIFICATION OF REIMBURSEMENTS

         The Regional Office of Education #25 incorrectly recorded internal reimbursements and a refund.  Generally accepted accounting principles require that payments made on-behalf of another fund be recorded as a due to and due from other funds in the affected funds.  However, the Regional Office recorded internal reimbursements as local revenue. 

         Generally accepted accounting principles also require refunds received from prior expenditures to be reported as a reduction of the related expense.  However, the ROE recorded a refund received from a duplicate payment as local revenue.

         Regional Office officials were not aware of the proper reporting of payments made on-behalf of other funds and the subsequent internal reimbursements, or for reporting funds received.  (Finding 07-02, page 12c)

         Auditors recommended that the Regional Office report expenditures made on-behalf of other funds as a due to and due from other funds in the affected funds and clear the due to and due from other funds when the reimbursement is recorded.  Auditors also recommended that the Regional Office report the receipt of a refund for a prior expenditure as a reduction of the related expense.

         The Regional Superintendent agreed with the finding.

IMPROPER EXPENDITURE CLASSIFICATION

         The Regional Office of Education #25 incorrectly classified $7,423 of capital outlay expenditures as supply and material expenditures.  Capital outlay expenditures in excess of the ROE capitalization threshold should be recorded in the correct account code and included on the Regional Office’s capital asset listing.

         The Illinois State Board of Education requires that expenditures be classified in the appropriate functional category.  In addition, generally accepted accounting principles require the capitalization of assets that meet or exceed established capitalization thresholds and that those assets be expensed over their estimated useful life.

         Misclassification of capital outlay expenditures may cause inaccurate expenditure reports and an incomplete listing of capital assets.  According to Regional Office officials, an error was made in posting the expenditures.  (Finding 07-03, page 12d).

         Auditors recommended that the Regional Office classify capital outlay expenditures in excess of their established capitalization threshold in the correct account code and include those items on their capital asset listing.

         The Regional Superintendent agreed with the finding.

INTEREST ALLOCATION

         The Regional Office of Education #25 did not allocate interest earned from a bank account to each source of funds.  The Regional Office calculated an interest allocation at the end of each month based on each fund’s cash balance; however, the Regional Office did not record the allocated interest to the appropriate funds in the general ledger.

         The Regional Office of Education Accounting Manual states that if dollars from two or more sources of funds are combined in one bank account and/or fund, the ROE must allocate, on a reasonable basis, a portion of the interest earned on that bank account or fund to each source of funds.  In addition, federal regulations (34 CFR Part 80.21) require that annual interest earned in excess of $100 must be submitted promptly to the granting agency.  Regional Office officials said that they were unaware of the requirement to allocate interest earned in their commingled cash account to each source fund.  (Finding 07-04, pages 12e – 12f)  

         Auditors recommended that Regional Office of Education #25 allocate interest earned monthly on each fund’s positive cash balance and begin recording allocated interest to the appropriate funds.  In addition, auditors recommended that the Regional Office remit interest income earned in excess of $100 from federal funding to related granting agencies.

         The Regional Superintendent agreed with the finding.

Controls Over Financial Statement Preparation

         The Regional Office of Education #25 is required to maintain a system of controls over the preparation of financial statements in accordance with generally accepted accounting principles (GAAP).  Regional Office internal controls over GAAP financial reporting should include adequately trained personnel with the knowledge and expertise to prepare and/or thoroughly review GAAP based financial statements to ensure that they are free of material misstatements and include all disclosures as required by the Governmental Accounting Standards Board (GASB).

         The Regional Office of Education #25 did not have sufficient internal controls over the financial reporting process.  The Regional Office maintains their accounting records on the cash basis of accounting. While the Regional Office maintains controls over the processing of most accounting transactions, there are not sufficient controls over the preparation of the GAAP based financial statements sufficient for management or employees in the normal course of performing their assigned functions to prevent or detect financial statement misstatements and disclosure omissions in a timely manner.

         In their review of the Regional Office’s accounting records, auditors noted that the Regional Office did not have adequate controls over the maintenance of complete records of accounts receivable, accounts payable, or deferred revenues.  While the Regional Office did maintain records to indicate the balances of accounts payable, accounts receivable, and deferred revenues, there were no entries made by the ROE to reconcile their grant activity, such as posting grant receivables and deferred revenues.  The Regional Office’s financial information required numerous adjusting entries to present the financial statements in accordance with generally accepted accounting principles.  (Finding 07-05, pages 12g – 12h)

         According to Regional Office officials, they did not have adequate funding to hire and/or train their accounting personnel in order to comply with these requirements.

         The auditors recommended that, as part of its internal control over the preparation of its financial statements, including disclosures, the Regional Office of Education #25 should implement a comprehensive preparation and/or review procedure to ensure that the financial statements, including disclosures, are complete and accurate.  Such procedures should be performed by a properly trained individual(s) possessing a thorough understanding of applicable generally accepted accounting principles, GASB pronouncements, and knowledge of the Regional Office of Education’s activities and operations.

         The Regional Superintendent agreed with the finding. 

AUDITORS’ OPINION

        Our auditors state the Regional Office of Education #25’s financial statements as of June 30, 2007 are fairly presented in all material respects.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:KJM

SPECIAL ASSISTANT AUDITORS

        Our special assistant auditors were Kemper CPA Group, LLP.