REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #31

KANE COUNTY

FINANCIAL AUDIT

(In Accordance with the

Single Audit Act and

OMB Circular A-133)

For the Year Ended:

June 30, 2008

Summary of Findings:

Total this audit                      2

Total last audit                      1

Repeated from last audit       0

Release Date:

May 14, 2009

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

http://www.auditor.illinois.gov

SYNOPSIS

• The Regional Office of Education #31 had $390,571 in deposits at June 30, 2008, which were not adequately collateralized.

• The Regional Office of Education #31 did not properly record certain lease transactions and capital asset acquisitions.

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

The Regional Office of Education #31 had $390,571 in deposits at June 30, 2008, which were not adequately collateralized.

The Regional Office of Education #31 did not properly record certain lease transactions and capital asset acquisitions.

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

INADEQUATE MONITORING OF COLLATERAL ON DEPOSITS

         The Kane County Regional Office of Education #31 had $390,571 in deposits at June 30, 2008, which were not adequately collateralized.  The Public Funds Deposit Act (30 ILCS 225/1) gives the authorization for deposits in excess of the federally insured limit to be covered by pledged collateral held by the financial institutions’ trust departments in the Regional Office’s name.  In addition, prudent business practice requires that all cash and investments held by financial institutions for an ROE be adequately covered by depository insurance or collateral. 

         As of June 30, 2008, the cash balance with the primary bank account totaled $3,064,066, of which $390,571 was not adequately collateralized and exceeded Federal Deposit Insurance Corporation (FDIC) coverage.  In Fiscal Year 2008, the FDIC covered up to a maximum of $100,000.  The Regional Office confirmed annually, with the bank holding the deposits, the balance of the deposits held and whether these deposits were insured or if collateral was pledged to secure these deposits.  Subsequent to notification by the auditors, additional collateral was obtained by the Regional Office for the balance exceeding the FDIC coverage.

         Failure to secure full collateral on cash balances may result in monetary losses to the Regional Office.  Inadequate monitoring of pledged collateral increases the risk that depository institutions will not have pledged sufficient collateral.  According to Regional Office management, the failure to obtain the required additional collateral for the cash balances was due to oversight.  In addition, the ROE did not anticipate the increase in bank balances at year-end. (Finding 08-1, pages 12-13)

         Auditors recommended that the Kane County Regional Office of Education #31 should monitor collateral requirements for its bank accounts.  The Regional Office should also establish controls for confirming amounts pledged by the bank on a regular basis and consider making a formal arrangement with the bank to automatically pledge securities for any deposit amount in excess of the FDIC insured amount.

         The Regional Office responded that it agreed with the finding.  The ROE noted that the Director of Finance has instituted changes to the monitoring of collateral on deposits with the bank in question and will continue to do so in the future.

FAILURE TO APPLY APPROPRIATE ACCOUNTING PRINCIPLES

         The Kane County Regional Office of Education #31 did not properly record certain lease transactions and capital asset acquisitions, and as a result, did not properly apply the appropriate generally accepted accounting principles (GAAP).  GAAP requires that a lease be capitalized if any one of the following four criteria is characteristic of the lease transaction:  (1) the lease transfers ownership of property to the lessee by the end of the lease term, (2) the lease contains bargain purchase options, (3) the lease term is equal to 75 percent or more of the estimated economic life of the leased property, or (4) the present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair market value of the leased property.  Capital leases are treated as an acquisition of assets and the incurrence of obligations by the lessee.

         The Illinois Administrative Code (74 Ill. Adm. 420.320 (c) (1) and (2)) requires that each Regional Office of Education maintain the accounting records necessary to prepare financial statements in accordance with GAAP.

         For Fiscal Year 2008, payments on leases of certain equipment that have a lease term equal to the estimated economic life of the leased equipment were treated as operating leases and recorded as purchased services ($21,187).  The lease transactions meet the criteria for capital leases.  As of June 30, 2008, the total net book value of the leased equipment and the present value of the related lease payable were $36,982, and $38,111, respectively.

         The Regional Office subsequently revised its financial statements to include the required adjustments and disclosures necessary to apply the appropriate GAAP.

         Failure to use the applicable GAAP may result in inaccurate and incomplete financial statements.  In addition, transactions were not recorded in accordance with the Illinois Program Accounting Manual and the ROE Accounting Manual.  Financial reports prepared by the Regional Office required additional analysis in order to be comparable and consistent with reporting requirements and GAAP.

         According to Regional Office management, they generally do not keep equipment items through the end of the lease term and therefore, considered the recording of the lease transactions as operating expenses proper.

         Auditors recommended that Regional Office of Education #31 establish procedures to ensure lease transactions and capital asset acquisitions are properly accounted for and reported in accordance with GAAP.  If necessary, accounting and reporting guidance should be obtained from technical resources to be in conformity with GAAP.  Further, transactions should be carefully reviewed for proper accounting and recognition as required by the Illinois Administrative Code and the ROE Accounting Manual.  

         The Regional Office agreed with the finding.  It noted that the Regional Office will properly record certain lease transactions and capital asset acquisitions and apply the appropriate GAAP in the future. 

AUDITORS’ OPINION

         Our auditors state the Regional Office of Education #31’s financial statements as of June 30, 2008 are fairly stated in all material respects.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:KJM

SPECIAL ASSISTANT AUDITORS

         Our special assistant auditors were E.C. Ortiz & Co., LLP.