REPORT DIGEST

UNIVERSITY OF ILLINOIS

FINANCIAL AUDIT

For The Year Ended June 30, 2008

FINANCIAL OPERATIONS	FY 2008	FY 2007*
OPERATING REVENUES
Tuition and fees, net..........................................................	$662,464,000	$617,812,000
Federal grants, contracts and appropriations................	607,465,000	604,164,000
State and private gifts, grants and contracts.................	221,037,000	197,592,000
Hospital and medical activities.........................................	648,708,000	568,514,000
Auxiliary enterprises, net...................................................	330,309,000	304,094,000
Educational activities.........................................................	234,549,000	206,316,000
Other.....................................................................................	141,784,000	129,537,000
Total Operating Revenues........................................	$2,846,316,000	$2,628,029,000
OPERATING EXPENSES
Instruction...........................................................................	$758,676,000	$703,540,000
Research...............................................................................	568,946,000	561,876,000
Public service......................................................................	342,840,000	326,348,000
Academic support..............................................................	249,000,000	236,561,000
Hospital and medical activities.........................................	470,345,000	431,762,000
Auxiliary enterprises..........................................................	261,408,000	234,751,000
On behalf payments for fringe benefits...........................	441,480,000	376,657,000
Operation and maintenance of plant................................	259,068,000	218,028,000
Institutional support..........................................................	178,572,000	167,172,000
Depreciation........................................................................	199,609,000	191,679,000
Scholarships and fellowships...........................................	199,197,000	198,016,000
Other.....................................................................................	109,277,000	98,397,000
Total Operating Expenses.........................................	$4,038,418,000	$3,744,787,000
Operating Income (Loss)...........................................................	$(1,192,102,000)	$(1,116,758,000)
NONOPERATING REVENUES (EXPENSES)
State appropriations...........................................................	$680,503,000	$665,752,000
Capital appropriations, gifts and grants..........................	8,393,000	20,828,000
Private gifts and endowments..........................................	130,202,000	128,852,000
On behalf payments for fringe benefits...........................	357,637,000	305,047,000
Other, net.............................................................................	(45,140,000)	42,150,000
INCREASE IN NET ASSETS...................................................	($60,507,000)	$45,871,000
Net assets, beginning of year...................................................	2,415,856,000	2,369,985,000
Net assets, end of year..............................................................	$2,355,349,000	$2,415,856,000
SUMMARY – STATEMENT OF NET ASSETS	June 30, 2008	June 30, 2007*
Current Assets............................................................................ Noncurrent Assets..................................................................... Total Assets........................................................................ Current Liabilities........................................................................ Noncurrent Liabilities................................................................. Total Liabilities.................................................................... Total Net Assets................................................................. Total Liabilities and Net Assets.......................................	$1,207,789,000 3,935,404,000 $5,143,193,000 $832,060,000 1,955,784,000 $2,787,844,000 2,355,349,000 $5,143,193,000	$1,129,519,000 3,775,826,000 $4,905,345,000 $656,092,000 1,833,397,000 $2,489,489,000 2,415,856,000 $4,905,345,000
UNIVERSITY PRESIDENT
During Audit Period: Dr. B. Joseph White Currently: Dr. B. Joseph White

* Certain reclassifications have been made to the 2007 amounts to conform to the current year presentation.

Failure to bill customers timely and reconcile accounts receivable timely

Department of Central Management Services request for national gas supply

The Board of Trustees approved the contract to act as an agent for the Department of Central Management Services

Most vendor invoices tested were not paid within 60 days

Electric and natural gas billings were not processed timely

$5.5 million of energy billings were filed with Court of Claims

Accounts receivable aging problems

Accounts receivable detail was not reconciled timely

University funds are temporarily financing the costs of energy for other governments

The management fees charged by ERC do not cover the costs of administering the program

Auditors’ recommendation

University officials agreed with the auditors

Lack of controls over P-Card transactions

Inappropriate charges by the employee

Duties were not properly segregated

The employee was arrested and charged with a felony

University is seeking restitution

Auditor’s recommendation

University officials agreed with the auditors

Monitoring and reporting utility budget deficits were ineffective

$125 million accumulated budget deficit

Policy guidance to the Board of Trustees is currently not sufficient

The accounting for utility expenditures is overly complex

Auditor’s recommendation

University officials agreed with the auditors

Inaccurate accounting for deferred revenue resulted in adjustments to the financial statements

University officials agreed with the auditors

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO IMPROVE ENERGY RESOURCE CENTER PRACTICES

Through a contractual agreement, the University’s Energy Resource Center (ERC) has been providing energy-related services to Central Management Services (CMS). These services include an arrangement in which the ERC purchases utilities on behalf of CMS and invoices participating CMS, state agency and local government facilities. In providing this service, ERC did not bill its customers or reconcile accounts receivable on a timely basis. ERC also did not pay the utility vendors promptly. The results of these failures resulted in ERC incurring costs not fully reimbursed under the contract.

The main focus of the Energy Resource Center at the University of Illinois Chicago Campus is to make significant contributions regarding energy conservation and production technologies while creating a cleaner, more sustainable environment.

In the fall of 1998, CMS requested a supply of natural gas for several of its facilities and facilities of other state agencies and local governments when the original supplier for CMS discontinues its natural gas business. Because it was so close to the winter heating season it was operationally efficient to include CMS’s facility requirements in the existing University natural gas supply contracts. CMS wanted ERC to help them identify and implement energy related programs throughout the state.

In May, 1999 the Board of Trustees (BOT) approved ERC assisting CMS in a natural gas acquisition program where ERC would act as an agent for CMS to procure a natural gas supplier and would initiate payment of the bills for the user facilities and these facilities (CMS, state agency and local government sites) would reimburse ERC, plus pay additional fees for management services. On June 25, 2008, the University extended this contract through June 30, 2009.

During our testing of various components of ERC, we noted the following:

Accounts Payable Issues:

ERC entered into this contract without having appropriate administrative staff in positions to ensure the timely payment of vendor invoices and timely billing of receivables. As of June 30, 2008, ERC had not paid 19 of 25 vendor invoices tested within the required 60 days. Vendor invoices are not submitted for payment until the invoices to user governments are processed. This process experienced significant delays during the year ended June 30, 2008.

Accounts Receivable Issues:

Electric billings to the user governments were not processed for up to 6-8 weeks after ERC received invoices from the energy provider. Natural gas billings were sent monthly, on average 6-8 weeks after the end of the billing period.
Further, ERC has not exhibited consistent follow-up on unpaid accounts. Approximately $5.5 million of energy billings were not processed within the lapse period and were filed with the Illinois Court of Claims subsequent to year end.
The accounts receivable aging is based on invoice dates, that are not timely, and not on service dates. Consequently, the actual age of the receivables exceeds the aging reported in the accounts receivable aging.
The detailed accounts receivable schedule as of June 30, 2008 for ERC was not reconciled to the general ledger until October 2, 2008.

Diversion of University funds from the University’s mission:

By paying utility vendors before receipt of funds from user governments, University funds are diverted to temporarily finance the costs of energy for other governments. Additionally, the management fees do not cover the costs of the other supporting offices necessary to administer the billing and collecting of energy purchases. In effect, the user governments’ utility costs are partially subsidized by the University.
University officials were not aware of the magnitude of the accounts receivable balances when they were negotiating the one-year renewal of the contract with CMS due to ERC’s failure to record receivables on a timely basis. Knowledge of the cost of capital committed to financing the accounts receivable would have generated a higher administrative fee to allow the University to recapture the cost of carrying the accounts receivable for the user governments.

The failure to include all costs of administering such activities can allow for use of University funds that is not in furtherance of the University’s mission. In addition, failure to ensure timely payment of vendor invoices and timely billing of receivables delays the receipt of cash available for University use and exposes the University to costs of capital not reimbursed under the current fee structure. Finally, the failure to perform timely reconciliations of the detailed accounts receivable schedule allows for potential errors to remain undetected. (Finding 1, Pages 6-8)

We recommended the University consider whether the contract with CMS is an appropriate use of the University’s resources before entering into a new contract to extend services beyond June 30, 2009 and obtain specific approval from the Board of Trustees for these activities. We also recommended that the University devote adequate resources for the timely payment of invoices and billing and reconciliation of the accounts receivables of the Energy Resource Center.

University officials agreed with the recommendation and stated that in December 2008, the University notified CMS that it would be interested in exploring a continuing consulting relationship between ERC and CMS beyond FY09, but such a relationship could not include the current billing, payment and collection role.

INAPPROPRIATE CHARGES PAID BY UNIVERSITY

A Department at the Chicago Campus had inadequate controls in place over P-Card transactions and other expenditures. The lack of controls allowed a University employee to make inappropriate charges to the University totaling approximately $159,000 over a six-year period.

During the audit period, in response to overspending in various accounts over this time period, a University official began a review of the Department’s expenditures and became aware of an employee making inappropriate charges with a University P-Card. When questioned about the charges on November 6, 2007, the employee initially denied making them, however, resigned from the University later that day. The University official contacted the University Police Department and the Office of University Audits to assist with the investigation into the expenditures.

Further investigation into the Department and the employee’s expenditures revealed over 1,400 transactions totaling nearly $156,000 in charges to the employee’s P-Card between fiscal year 2002 and fiscal year 2007 that were determined by the University to be personal in nature. The total inappropriate charges ranged from approximately $11,000 to more than $42,000 per fiscal year and constituted 84% of the employee’s total P-Card charges. The inappropriate charges included personal expenditures at gas stations, grocery stores, office supply stores, restaurants, hotels, and airlines. In addition, the employee used the Department head’s P-Card to make over $2,600 of inappropriate charges. Further, the investigation noted that during fiscal years 2004 and 2005, reimbursements were made to the employee using charges already paid with the University P-Card as documentation to support the reimbursement.

During our audit, we noted that the employee served as the P-Card reconciler and P-Card approver for the employee’s charges until September 2006. After September 2006, many of the charges were automatically approved by the P-Card system.

In January 2008, the employee was arrested and charged with theft over $100,000, a Class X felony. The case is currently pending and the University is seeking restitution.

The University of Illinois Office of Business and Financial Services Policies and Procedures (Section 7.6) state that the cardholder may not hold the role of P-Card reconciler or P-Card approver for his/her own transactions. The Policies and Procedures also state that the P-Card may only be used by the person to whom it is issued. In addition, a good system of internal control provides for proper segregation duties so that no one person handles all elements of any transaction.

Failure to adhere to established policies and procedures has resulted in the University incurring unnecessary costs and has resulted in the misuse of University assets. (Finding 2, Pages 9-10)

We recommended that the University review the segregation of duties surrounding P-Card transactions and emphasize the importance of a timely and adequate review, approval, and reconciliation of all transactions. We further recommended that the University ensure that the Policies and Procedures are clearly understood and followed by all personnel in the P-Card program.

University officials accepted our recommendation and stated that they will review the segregation of duties surrounding P-Card and other transactions and re-emphasize each unit’s role in being accountable for a good system of internal control.

NEED TO IMPROVE INTERNAL CONTROLS OVER UTILITIES

University policies for monitoring and reporting budget deficits and for limitations on transfers were ineffective or not complied with resulting in an accumulated budget deficit of $125 million over a period of several years. Actual utility expenses exceeded budget by approximately $7.5 million in fiscal year 2008.

During the audit we noted the following issues:

¨ The current Board of Trustees (BOT) policy does not provide sufficient guidance on when BOT approval is required for transfers between state funds and other unrestricted funds.

¨ The University’s accounting for utilities is overly complex. The account structure is spread across all campuses and University Administration. (Finding 4, Pages 13-14 )

We recommended that the Business and Financial Policies and Procedures and BOT policies, respectively, be revised to include a policy for comparison of budget and actual expenditures and for annual budget deficit elimination for activities that cross campuses and University Administration, and to clearly indicate whether the limitation on transfers is cumulative. We further recommended that University management simplify the accounting and reporting for utilities, and any other activities, if any, that cross campuses and University Administration.

University officials accepted our recommendation and stated that interim and year-end reports, which included budget-to-actual financial comparisons for utility operations, were presented to the BOT in March and November 2008, respectively. The University has reviewed staffing levels and added staff members in the utilities accounting function. Further staffing changes are planned. Utility budgeting and accounting activities are being adjusted to improve clarity and transparency, and a team has commenced work on this task. The University is in the process of developing policy and procedure revisions to address the matters referenced in this finding.

DEFERRED REVENUE CALCULATED INCORRECTLY

The University understated the liability for deferred revenue in the general ledger at June 30, 2008 by $5,233,754. Tuition revenue was overstated by $7,478,483 and student waivers were understated by $2,244,729.

During fiscal year 2008, the Chicago Campus elected to have multiple sessions for the summer semester, each with different beginning and ending dates. University Accounting and Financial Reporting (UAFR) used the dates listed in an outdated Undergraduate Catalog to calculate the tuition revenue, tuition waivers, and deferred revenue. Once notified of this error by the auditors, UAFR adjusted the revenues and liability for deferred revenue in the financial statements.

Failure to properly calculate the tuition revenue and liability for the deferred revenue session could result in a misstatement of the University financial statements. (Finding 7, Page 18 )

We recommended that the University enhance its process of deferring revenue by confirming summer semester dates with the appropriate campus offices.

University officials accepted our recommendation and stated that they have implemented an improvement to its deferred revenue calculation procedure to include confirmation of summer session dates with the appropriate campus office.

OTHER FINDINGS

The audit report contains three other findings which are not summarized in this report digest.

We will review the University’s progress toward the implementation of all our recommendations in our next audit.

AUDITORS’ OPINION

Our auditors state the June 30, 2008 financial statements are fairly presented in all material respects.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLK:pp

SPECIAL ASSISTANT AUDITORS

Clifton Gunderson LLP were our special assistant auditors.

SYNOPSIS

FINANCIAL OPERATIONS