REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #34
LAKE COUNTY

FINANCIAL AUDIT (In Accordance with the Single
Audit Act and OMB Circular A-133)
For the Year Ended: June 30, 2012


Release Date:   July 11, 2013

Summary of Findings:
Total this audit: 5
Total last audit:  7
Repeated from last audit: 5

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
www.auditor.illinois.gov

SYNOPSIS

The Regional Office of Education #34:

• did not have sufficient internal controls
over the financial reporting process;

• did not apply appropriate accounting
principles;

• did not have adequate controls over purchased
services expenditures;

• did not have adequate internal controls over
reporting or accurate expenditure reports; and

• did not have adequate documentation for
payroll expenditures.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

CONTROLS OVER FINANCIAL STATEMENT PREPARATION

The Regional Office of Education #34 is
required to maintain a system of controls over
the preparation of financial statements in
accordance with generally accepted accounting
principles (GAAP).  The Regional Office’s
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 #34 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 for management or employees in the
normal course of performing their assigned
functions to prevent or detect and correct
financial statement misstatements and
disclosure omissions in a timely manner.

In their review of the Regional Office’s
accounting records, auditors noted numerous
adjustments were required to present financial
statements in accordance with generally
accepted accounting principles.  The Regional
Office did not have proper controls in place
over the preparation of financial statements to
ensure that they are presented in accordance
with generally accepted accounting principles.
(Finding 12-1, pages 12-13) This finding was
first reported in 2010.

The auditors recommended that, as part of
internal control over the preparation of
financial statements, including disclosures,
the Regional Office of Education #34 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 #34’s
activities and operations.

The Regional Office of Education #34 responded
that it agrees with the finding and will
continue to implement comprehensive preparation
and review procedures to insure that financial
statements including disclosures are complete
and accurate.  The Regional Office stated that
included in the corrective activities are
continued consulting services and training to
Lake ROE finance staff regarding preparation of
financial statements (including review for
completeness and accuracy).  In addition, the
Lake ROE has conducted additional training
regarding successful use of the Lake ROE’s
financial management software and has
contracted with a part-time business consultant
who is reviewing Lake ROE business procedures
and controls.  Finally, in an effort to
streamline preparation of comprehensive
financial statements, the Lake ROE has begun
consolidating multiple installations of the
financial management software into one cohesive
system by the end of Fiscal Year 2013. (For
previous Regional Office response, see Digest
Footnote #1.)


FAILURE TO APPLY APPROPRIATE ACCOUNTING
PRINCIPLES

Generally accepted accounting principles (GAAP)
require that a lease be capitalized if certain
criteria are met.  In addition, sound internal
controls require that an inventory of all fixed
assets and depreciation schedules for assets
meeting the capitalization threshold for
reporting be properly maintained.

The Regional Office of Education #34 did not
properly record several transactions and, as a
result, did not properly apply the appropriate
generally accepted accounting principles
(GAAP).
The Regional Office of Education #34
capitalizes items costing $5,000 or more.  The
capitalization of assets and related
depreciation expense were recognized in the
governmental and business-type activities of
the government-wide Statement of Net Assets.
Based on review of the schedule of capitalized
assets and related depreciation (schedule),
auditors noted the following:

• Items costing less than $5,000 were included
in the schedule.

• Two of the three capital lease equipment
items tested were listed at cost equal to the
total lease payments and not at the present
value of the lease obligations.

• One of the three capital lease equipment
items was not included in the schedule.

For monitoring purposes, the Regional Office of
Education #34 maintains a fixed asset listing
with equipment items costing $500 and above.
The Regional Office of Education #34 did not
properly include and exclude items above and
below the capitalization threshold of $5,000
when calculating and recording fixed asset
additions and depreciation expense.  In
addition, the Regional Office of Education #34
did not have personnel with adequate training
and knowledge to record capital lease
transactions in accordance with GAAP.  (Finding
12-2, pages 14-15) This finding was first
reported in 2010.

Auditors recommended that the Regional Office
of Education #34 should establish procedures to
ensure that transactions are properly accounted
for and reported in accordance with generally
accepted accounting principles.  If necessary,
accounting and reporting guidance should be
obtained from technical resources to be in
conformity with GAAP.  The fixed asset schedule
should also be completed to include all capital
lease items, and only capital assets above the
capitalization threshold.

The Regional Office responded that it agrees
with the finding and has posted recommended
adjusting entries to record transactions in
accordance with GAAP.  The Regional Office
noted that in addition, previous adjustments
made to the fixed assets/inventory schedule and
reporting procedures were further reviewed and
refined as a part of a recently contracted
business consultant’s scope of work.  The ROE
noted that this review and refinement were
accompanied by desk-side training of staff
involved with fixed assets/inventory schedules
and/or calculation of depreciation schedules.
(For previous Regional Office response, see
Digest Footnote #2.)

INADEQUATE CONTROLS OVER PURCHASED SERVICES
EXPENDITURES

Good internal controls require that all
contracts be executed prior to services being
performed and payments being made to
contractors.  During their review of
expenditures, auditors noted that for 2 of 6
contracts selected for testing, services were
performed and paid by the Educational Services
Division (ESD) prior to the ESD obtaining a
signed contract with the consultant.

Failure to timely maintain contracts may result
in services being provided that are
inconsistent with program goals and activities,
inadequate protection of the Regional Office of
Education #34’s interests, and unallowed costs
charged to programs.  Proper controls have not
been established to ensure that all contractual
payments are supported by signed contracts.
(Finding 12-3, page 16)  This finding was first
reported in 2008.

The auditors recommended that the Regional
Office of Education #34 should establish
procedures to ensure all program costs are
sufficiently documented and adequately
supported.  All consultant agreements should be
supported by a current written contract with
detailed scope of services and rates of
compensation prior to service being performed.

The Regional Office of Education #34 responded
that it agrees with the finding and will
continue to refine and monitor internal
procedures to ensure all consultant agreements
are supported by a current, timely written
contract with scope of services and rates of
compensation.  The ROE noted that it has
developed a system to document and generate
supporting materials to track hours worked and
services provided.  (For previous Regional
Office response, see Digest Footnote #3.)

INADEQUATE INTERNAL CONTROLS OVER REPORTING AND
INACCURATE EXPENDITURE REPORTS

Good business practices dictate that proper
internal controls, such as management review
and approval of expenditure reports submitted
to granting agencies, should be in place.
Amounts submitted on grant expenditure reports
should be in agreement and reconcile with the
general ledger.

The Regional Office of Education #34 did not
have adequate controls in place to ensure
amounts submitted on grant expenditure reports
are in agreement and reconcile with the general
ledger.  Auditors, during their review of
expenditure reports, noted the following:

• The final expenditure report submitted for
the Beginning Teacher Induction Pilot Program
grant, which was received from the Illinois
State Board of Education, was inaccurately
reported.  When compared to the expenditures
recorded in the general ledger, most categories
were over reported while the purchased services
category was under reported by $330.  In total,
actual expenditures recorded were less than the
amount reported by $10,660.

• The final expenditure report submitted for
the ARRA Technology grant, which was received
from the Illinois State Board of Education, was
inaccurately reported.  When compared to the
expenditures recorded in the general ledger,
all categories were inaccurately reported.
This was due to a lack of reclassifications
made in the general ledger.  In total, actual
expenditures agreed to the amounts reported.

The Regional Office of Education #34 has
inadequate internal controls in place to ensure
that expenditure reports submitted to granting
agencies agree and reconcile to the general
ledger.  Therefore, expenditure reports
submitted did not agree and reconcile with
amounts reported in the general ledger.
(Finding 12-4, pages 17-18)

The auditors recommended that the Regional
Office of Education #34’s management should
review expenditure reports and supporting
documentation prior to submission to granting
agencies to ensure that expenditures were
actually incurred, allowable, and properly
classified.  Supporting expenditure
documentation and indication of management’s
review should be included with a copy of the
report and available for subsequent internal
and external review and analysis.  In addition,
Regional Office of Education #34 should contact
the Illinois State Board of Education to
determine the need to amend its expenditure
reports.

The Regional Office of Education #34 responded
that it agreed with the finding.  The Regional
Office noted that year-end errors in
expenditure reports were due to loss of
critical expertise in expenditure report
preparation associated with personnel
turbulence, to inexperience in both preparing
and reviewing staff members regarding
expenditure reports, and failures to reconcile
(with documentation) expenditures to budgeted
categories and amounts.  The ROE noted that as
a result, management controls have been put in
place to ensure full supporting documentation
is available for all expenditure reports and
that expenditures align with budgeted
categories.  The ROE stated that it has filed
an amended expenditure report for the Beginning
Teacher Induction Pilot Program and has
returned unexpended funds to the Illinois State
Board of Education (ISBE).  The Regional Office
also responded that since expenditures were
allowable and equaled revenues for the ARRA
Technology Grant, no revision of the final
expenditure report was required by ISBE.

INADEQUATE DOCUMENTATION FOR PAYROLL
EXPENDITURES

Office of Management and Budget (OMB) Circular
A-87, Cost Principles for State, Local and
Indian Tribal Governments, established
principles and standards for determining costs
for federal awards carried out through grants,
cost reimbursement contracts, and other
agreements with State and local governments and
federally recognized Indian tribal governments.
To be allowable under federal awards, costs
must meet certain general criteria.  Those
criteria, among other things, require that
expenditures must be allocable, reasonable, and
supported by adequate documentation.

Part 4 of the OMB Circular A-133 Compliance
Supplement for the Department of Education
prescribes that employee time and effort
distribution records must be maintained to
document the portion of time and effort
dedicated to the single cost objective and each
program or other cost objective supported by
non-consolidated Federal funds or other revenue
sources.

During review of payroll expenditures, auditors
noted that salaries and benefits for salaried
employees assigned on multiple programs were
allocated and charged to the programs based on
budgets.  No time allocation sheets or time and
effort reports were prepared for the months of
July 2011 to December 2011 to account for
actual time charged by program.  For the months
of January 2012 to June 2012, the Regional
Office of Education #34 began preparing time
and effort reports, however, the Regional
Office did not compare actual time and effort
to the budgeted allocations.  Therefore,
adjustments were not made to correct
differences or errors in actual time versus the
charged budgeted allocations.   The salaries
and benefits expenditures for the Regional
Office of Education #34 for fiscal year 2012
totaled $671,782 for Title I- School
Improvement and Accountability.

The Regional Office of Education #34 has not
established policies and procedures regarding
salaries and benefits that incorporate the
requirements of Allowable Costs/Cost Principles
of the Circular A-133 Compliance Supplement and
Cost Principles of OMB Circular A-87 for
Compensation for Personnel Services.  In
addition, the Regional Office’s staff did not
anticipate significant differences between the
budgeted and actual time spent by program and
therefore did not see the need to summarize
time charges and re-allocate salary costs based
on actual time spent. (Finding 12-5, pages
19-22)  This finding was first reported in
2010.

Auditors recommended that the Regional Office
of Education #34 should develop and implement
adequate policies and procedures to ensure
compliance with the Allowable Costs/Cost
Principles of the OMB Circular A-133 Compliance
Supplement and Cost Principles of OMB Circular
A-87 for Compensation for Personnel Services.
These policies and procedures should include
requiring staff involved in multiple programs
to submit time sheets by program or time and
effort reports by program.  The Regional Office
should also establish a payroll cost allocation
procedure that allows for computation and
comparison of actual time charged with budgeted
or pre-determined allocation rates on a regular
basis.  Payroll charges by program should be
based on the time devoted and identified
specifically to the performance of those
programs.

The Regional Office of Education #34 responded
that it agrees with the finding. While the ROE
had begun implementation of corrective action
regarding this repeat finding, the corrective
actions did not encompass all of the
requirements of OMB Circular A-87.  The
Regional Office has developed and implemented
time and effort accounting policies and
procedures to ensure compliance with the
Allowable Costs/Cost Principles of the OMB
Circular A-133 Compliance Supplement and Cost
Principles of OMB Circular A-87 for
Compensation for Personnel Services.  These
policies and procedures require staff involved
in multiple programs to submit time sheets by
program or time and effort reports by program.

The ROE also stated that it has also
established a payroll cost allocation procedure
that allows for computation and comparison of
actual time charged with budgeted or pre-
determined allocation rates on a regular basis.
Payroll charges by program will be reviewed
based on the time devoted and will be
identified specifically to the performance of
the applicable programs.  These employee cost
allocation summaries are reviewed in
conjunction with affected program monthly and
quarterly expenditure reports.  Additionally,
semi-annual certifications for employees who
work solely on federal grant programs stating
that they had worked full time on those
programs are now being prepared.  (For previous
Regional Office response, see Digest Footnote
#4.)

AUDITORS’ OPINION

Our auditors state the Regional Office of
Education #34’s financial statements as of June
30, 2012 are fairly presented in all material
respects.

WILLIAM G. HOLLAND
Auditor General

WGH:KJM

AUDITORS ASSIGNED:  Winkel, Parker & Foster,
CPA PC were our special assistant auditors.

DIGEST FOOTNOTES

#1: Controls Over Financial Statement
Preparation – Previous Regional Office Response

In its prior response in 2011, the Regional
Office of Education #34 responded that it
agrees with the finding and will continue to
implement comprehensive preparation and review
procedures to insure that financial statements
including disclosures are complete and
accurate.  The Regional Office noted that
included in the corrective activities are
contracting with a private Certified Public
Accountant firm to provide independent review,
consulting services and training to Lake ROE
finance staff regarding preparation of
financial statements (including review for
completeness and accuracy).  In addition, the
Lake ROE has conducted additional training
regarding successful use of the Lake ROE’s
financial management software and has
contracted with a part-time business consultant
who is reviewing Lake ROE business procedures
and controls.  Finally, in an effort to
streamline preparation of comprehensive
financial statements, the Lake ROE has begun
consolidating multiple installations of the
financial management software into one cohesive
system by the end of Fiscal Year 2013.

#2:  Failure to Apply Appropriate Accounting
Principles – Previous Regional Office Response

In its prior response in 2011, the Regional
Office responded that it agrees with the
finding and will post recommended adjusting
entries to record transactions in accordance
with GAAP.  The Regional Office noted that in
addition, previous adjustments made to the
fixed assets/inventory schedule and reporting
procedures will be further reviewed and refined
as a part of a recently contracted business
consultant’s scope of work.  The ROE also noted
that this review and refinement will be
accompanied by desk-side training of staff
involved with fixed assets/inventory schedules
and/or calculation of depreciation schedules.

#3:  Inadequate Controls Over Purchased
Services Expenditures – Previous Regional
Office Response

In its prior response in 2011, the Regional
Office of Education #34 responded that it
agrees with the finding and will refine
internal procedures to ensure all consultant
agreements are supported by a current, timely
written contract with scope of services and
rates of compensation.  The ROE noted that it
has developed a system to document and generate
supporting materials to track hours worked and
services provided.

#4: Inadequate Documentation for Payroll
Expenditures – Previous Regional Office
Response

In its prior response in 2011, the Regional
Office of Education #34 responded that it
agrees with the finding. While the ROE had
begun implementation of corrective action
regarding this repeat finding, the corrective
actions did not encompass all the requirements
of OMB Circular A-87.  The Regional Office has
developed and implemented time and effort
accounting policies and procedures to ensure
compliance with the Allowable Costs/Cost
Principles of the OMB Circular A-133 Compliance
Supplement and Cost Principles of OMB Circular
A-87 for Compensation for Personnel Services.
These policies and procedures require staff
involved in multiple programs to submit time
sheets by program or time and effort reports by
program.  The ROE will also establish a payroll
cost allocation procedure that allows for
computation and comparison of actual time
charged with budgeted or pre-determined
allocation rates on a regular basis.  Payroll
charges by program will be reviewed based on
the time devoted and will be identified
specifically to the performance of the
applicable programs.  Additionally, semi-annual
certifications for employees who work solely on
federal grant programs stating that they had
worked full time on those programs are now
being prepared.