{Expenditures and Activity Measures are summarized on the next page.}

The State's process and source of information used to prepare the SEFA are from manual data collection forms designed and used by the State Comptroller in its preparation of the State's Comprehensive Annual Financial Report (CAFR). These agency prepared forms are reviewed by the State Comptroller and subsequently, by each agency's post auditor, whose reviews often identify needed corrections and a lack of completeness in their original preparation.

During our audit of agencies administering major programs we noted the State's process for compiling the SEFA is inadequate to permit timely and accurate reporting in accordance with the deadline prescribed in OMB Circular A-133 which is March 31 or six months after the issuance of the basic financial statements, whichever is earlier.

Our review encompassed:

For example, the total days lapsing by eleven of the agencies from the State Comptroller requested filing date (8/30) to the submission to the OAG for SEFA compilation purposes were as follows:

                                                                            Total
Finding          Agency                                          Days

02-02  Dept. of Human Services                               181
02-03  Dept. of Children and Family Services            173
02-04  IL State Board of Education                          185
02-05  IL Student Assistance Commission                 231
02-06  Dept. of Transportation                                  187
02-07  Dept. of  Commerce &  Community Affairs    192
02-08  Dept. of Employment Security                        144
02-09  Dept. of Natural Resources                            167
02-10  IL Environmental Protection Agency               180
02-11  IL Criminal Justice Information Authority         147
02-12  Dept. of Public Health                                     125

The type of errors, discrepancies, deficiencies and omissions varied by agency and fund. Problems noted were:

Federal regulations require that a recipient of federal awards prepare appropriate financial statements, including the SEFA and ensure that the required audit, which is a condition of receiving federal funds, is properly performed and submitted when due. Also, the federal regulations require recipients of federal awards to establish and maintain internal controls designed to reasonably ensure compliance with federal laws, regulations, and program compliance requirements.

As a result of the errors, deficiencies and omissions noted throughout the process used by the State in its financial reporting process, along with the inability to meet the required filing deadline of 03/31/03, the auditors identified the inadequacies as a reportable condition for all federal programs administered by the State. (Findings 02-01 through 02-12, pages 26-52)

We recommended the State Comptroller implement an automated process for compiling the SEFA which will allow completion in accordance with OMB Circular A-133. Also, State agencies should review the current process with the State Comptroller and implement changes necessary to ensure timely submission of complete and accurate forms.

The State Comptroller's Office agrees that the SEFA needs to be timely completed and accurately prepared and will attempt to automate the manual forms used by agencies in the CAFR reporting process. Certain agencies identified the complexities they encounter in the current reporting process to include the forms used in compiling the SEFA. Also, agencies will be evaluating their internal process for improvements in both accuracy and timeliness. Other agencies will be implementing an additional supervisory review so that more timely and accurate reporting will result. And finally, most agencies indicated a commitment to work with the State Comptroller and the Office of the Auditor General to ensure enhanced reporting in both accuracy and timeliness.

The Department of Children and Family Services (DCFS) does not adequately monitor or have an adequate system in place to monitor federal funding for the Foster Care, Adoption Assistance, and Temporary Assistance for Needy Families Programs provided to subrecipients.

In our subrecipient monitoring sample of 50 subrecipients out of a total of 108 subrecipients (totaling $79,394,246 of $125,293,366 in total federal expenditures), we noted certain items of noncompliance. Some of the conditions noted in our sample results showed DCFS did not always:

Subrecipient monitoring procedures applicable to a pass-through entity require monitoring subrecipients activities to provide reasonable assurance that the subrecipient is administering federal awards in compliance with federal requirements and that prompt corrective action is taken on any audit finding. DCFS will then have information to assess any impact in the subrecipient's ability to comply with applicable federal regulations.

As a result of the conditions noted pertaining to subrecipient monitoring, the auditors qualified their report on three major programs - Foster Care, Adoption Assistance, and Temporary Assistance for Needy Families programs. (Finding 02-30, pages 90 and 91)

We recommended DCFS implement procedures to ensure: (1) OMB Circular A-133 audit reports are received from subrecipients within the 180 days as required; (2) desk reviews are performed timely, including review of reports, follow-up on subrecipient findings and implementation of Corrective Action Plans, receipt and review of applicable management letters, and documentation of such review; and (3) an evaluation of the current staffing of the

 monitoring department to ensure resources are adequate. We also recommended DCFS consider revising its on-site monitoring policy to include a risk based approach for selecting subrecipients for on-site visits.

DCFS officials agreed with the recommendation and stated they have implemented procedures to (1) notify subrecipients of audit requirements, (2) track receipt of required audits, (3) monitor and follow-up on past due audits, and (4) utilize a risk-based approach to prioritize audit reviews and on-site visits.

UNTIMELY PERMANENCY HEARINGS HAVE OCCURRED IN FOSTER CARE PROGRAM

DCFS is late in preparing a "permanency plan" due to failure in conducting permanency hearings timely for the Foster Care program.

During the review of 30 Foster Care Program files, the auditors noted permanency hearings were not performed within the required timeframe for four of the beneficiaries tested. The delay in performing the permanency hearings ranged from 37 to 215 days after the required timeframe. This delay rendered these beneficiaries ineligible until the permanency hearings were conducted. Also, DCFS does not have a process in place to ensure permanency hearings were completed within required timeframes nor do they have a list of beneficiaries where permanency hearings are not completed. DCFS claimed reimbursement for foster care maintenance payments during this period where the child was determined to be "ineligible" totaling $23,627.

Each foster child's permanency hearing is critical to the finalization of a "permanency plan". It is the permanency plan that establishes goals for placement of the child in a permanent living arrangement, which may include reunification, adoption, legal guardianship, etc. The permanency hearing serves as the judicial determination that reasonable efforts have been made by DCFS to finalize the permanency plans.

In order to obtain reimbursement for foster care maintenance costs, DCFS must obtain a judicial determination or show that it has made reasonable efforts to finalize the permanency plan that is to be in effect within 12 months of entering a foster child status. Also, each foster child must have an annual renewal of the permanency plan thereafter.

As a result of DCFS' failure to ensure timely permanency hearings of each child placed in foster care, the auditors qualified their report on the Foster Care Program. (Finding 02-29, pages 88 and 89)

We recommended DCFS implement procedures to monitor each foster child's permanency hearing to ensure all hearings are held within the federally prescribed timeframes.

DCFS officials accepted the finding and state they have developed and implemented a procedure for identifying and notifying responsible agency management of delinquent permanency hearings.

The Illinois Department of Human Services (IDHS) did not follow the established procedures approved by the U.S. Department of Health and Human Services (USDHHS) for charging payroll and related fringe benefit expenditures to the Rehabilitation Services - Vocational Rehabilitation Grants to States Program.

During the review of payroll and fringe benefit costs charged to federal programs, the auditors noted cost centers related to the Office of Rehabilitation Services were charged 100% to the federal program. This approach contradicted USDHHS approved methodology specified in the PACAP where random moment time studies are needed to charge the federal program for payroll and fringe benefit costs. The permissibility of using a 100% methodology requires time and effort certifications for these employees. These certifications were not completed by IDHS employees.

The use of the direct charge versus using the PACAP resulted in questioned costs of $2,785,719 being improperly allocated to the federal program. This amount is the difference when using the unsupported 100% direct charge ($39,068,951) compared to the approved PACAP cost allocation methodology ($36,283,232).

A cost allocation plan identifies, measures and allocates the costs to be charged to each program operated by the State agency. Also, established principles and standards, including specific allocation criteria, need to be available to adequately document the permissible expenditures. This documentation would include IDHS obtaining a certification from each employee (or their direct supervisor) that 100% of their time was spent on a specific program.

As a result of IDHS' failure to follow its approved cost allocation plan, the auditors qualified their report on the Rehabilitation Services - Vocational Rehabilitation Grants to States Program. (Finding 02-20, pages 71 and 72)

We recommended IDHS allocate costs to the Vocational Rehabilitation program using the allocation methods contained in the approved PACAP. Additionally, we recommended IDHS obtain effort certifications for payroll and fringe benefit costs when directly charged to a program.

IDHS officials accepted the finding and stated they will reconcile the random moment time studies' results previously reported to adjust its final charge to the Vocational Rehabilitation Program.

The Illinois Criminal Justice Information Authority's (ICJIA) documentation to substantiate payroll costs claimed for federal reimbursement does not exist. This condition resulted in a qualification of the Crime Victim Assistance Program. Total FY 02 federal program payroll and fringe benefits expenditures from the several federal programs were $2,493,388. This total amount is being reported as the amount of questioned costs.

ICJIA estimates the percentage of time employees will spend on each program and uses this percentage throughout the year to allocate to payroll and fringe benefit expenditures among federal programs. However, ICJIA does not require employees to document and certify the actual time spent on each federal program.

Federal cost principles require the ICJIA to maintain personnel activity reports that distribute their payroll and fringe benefits if they work on multiple activities. The reports must reflect an after-the-fact distribution of the actual activity of each employee. Also, where an employee works 100% on a single federal program, the ICJIA is required to obtain a certification from the employee or their supervisor. (Finding 02-60, pages 149 through 151)

We recommended ICJIA implement its new methodology to track time spent on each program to include a procedure to adjust budgeted time to actual time spent.

ICJIA officials accepted our recommendation and state they implemented a new time documentation system, which has been reviewed and approved by the U.S. Department of Justice, for employees on federal reimbursed payrolls. Complete implementation of the new process began on July 1, 2002.

ICJIA is not adequately monitoring subrecipients receiving federal awards with respect to Crime Victim Assistance, Byrne Formula Grant Program (Byrne), and Violent Offenders Incarceration and Truth In Sentencing Grants (VOITIS) programs.

During the year ended June 30, 2002, ICJIA passed through the following amounts to subrecipients:

                                                               Percentage
                                                                 Passed
Program         Subrecipients                    through
                 Number            Expenditures

Crime
Victim
Assistance    57                    $12,060,000       85%

Byrne           57                      $9,873,000       63%

VOITIS         2                       $903,000            5%

We reviewed 30 subrecipient files for the Crime Victim Assistance program noting ICJIA did not perform any on-site fiscal and administrative review procedures of its subrecipients. Additionally, we noted ICJIA performed a limited number of formal on-site visits for its Byrne and VOITIS grant subrecipients during fiscal year 2002.

Failure to adequately monitor subrecipients could result in federal funds being expended for unallowable purposes and subrecipients not properly administering the federal programs in accordance with laws, regulations, and the grant agreements.

According to federal regulations, a pass-through entity is required to monitor the activities of subrecipients as necessary to ensure that federal awards are used for authorized purposes in compliance with laws, regulations, and the provisions of contracts or grant agreements and that performance goals are achieved. The A-102 Common Rule requires non-federal entities receiving federal awards establish and maintain internal control designed to reasonably ensure compliance with federal laws, regulations, and program compliance requirements. (Finding Code 02-61, pages 152 and 153)

As a result of ICJIA's failure to adequately monitor subrecipients, the auditor's qualified their report on the Crime Victim Assistance Program.

We recommended ICJIA perform timely on-site monitoring visits, which include reviewing financial and programmatic records, and observation of operations and/or processes

 for compliance with requirements that are direct and material to the program.

Authority officials accepted the finding.

The Department of Public Aid (IDPA) did not follow the clearance pattern specified in the TSA related to the administrative and benefit payment cash draws for the Medicaid program. Not following the agreed clearance pattern results in the State paying the federal government an interest cost for the use of cash in excess of the agreed average days a warrant takes to clear the State Treasurer's account.

The auditors noted that IDPA drew down federal cash (similar to prior years) based upon the date the Comptroller's Office (IOC) charged the appropriation. The IOC's Statewide Accounting Management Systems (SAMS) is designed to recognize an expenditure when processing the invoice voucher (an approved payment) which usually correlates to the date the warrant was issued by the IOC. However, when cash management practices are invoked by the IOC, as was done during FY 2002, the warrant issuance is held awaiting adequate cash availability prior to release by the IOC. The period of the delay from posting of the invoice voucher (expenditure posting to SAMS) to the actual date of warrant issuance was up to eight weeks. As such, IDPA drew down funds prior to the actual issuance of warrants during this period which was not in compliance with the prescribed funding technique. Additionally, IDPA did not calculate an interest liability which is owed to the federal government for the delay in the disbursement of funds.

The State annually negotiates an agreement with the U.S. Department of the Treasury which details the funding technique to be used for the draw down of federal funds. The FY 2002 funding technique required the use of the average clearance pattern for both administrative and benefit payments. The average days of clearance agreed to was 6.2 after the warrant is issued. (Finding 02-13, pages 57 and 58)

As a result of the conditions noted, the auditors (based on invoice voucher posting) determined the Medicaid program cash draws were in excess of amounts disbursed (warrants issued); and thus, was not in compliance with the TSA. This internal control deficiency is a material weakness and resulted in the auditors qualifying their report on the Medicaid Cluster due to cash management practices.

We recommended IDPA work with the IOC to establish procedures to ensure federal cash draws are based upon the date the warrant is issued by the IOC.

Agency officials accepted our recommendation and indicate they have met with the IOC and acquired access to financial information that is based upon the date that warrants are actually issued.

The Department of Commerce and Community Affairs (DCCA) did not have adequate supporting documentation of their claim for payroll and indirect costs charged to the Low-Income Home Energy Assistance (LIHEAP) and the Community Services Block Grant (CSBG) Programs.

During the review of payroll and fringe benefit costs charged to federal programs, the auditors noted that employee effort certifications on file did not indicate on which specific federal program(s) the employee had worked. Additionally, the auditors noted that although an employee had worked on activities of both LIHEAP and CSBG, their time was allocated 100% to only one of the programs instead of proportionately based on time spent. Since the indirect costs charged are based on each program's direct payroll expenditures, the indirect costs charged to LIHEAP and CSBG are not adequately documented.

Failure to allocate the costs based on a proportionate amount of hours worked resulted in questioned costs of $4,076,553 being improperly charged to the programs. This amount results from overcharging LIHEAP and CSBG $2,830,191 and $1,246,362, respectively, without an adequate support of the hours spent by federal program.

Established federal costing principles, standards and criteria for determining allowable costs require DCCA to meet certain criteria prior to obtaining expenditure reimbursement. This documentation would require DCCA to obtain employee certification of how much time the employee spent on each federal program. This certification must be obtained at least every 6 months.

As a result of DCCA's failure to maintain adequate documentation in support of the amount charged, the auditors qualified their report on the LIHEAP and CSBG programs. (Finding 02-50, pages 130 and 131)

We recommended DCCA obtain the effort certifications for all payroll and fringe benefit expenditures charged to federal programs.

DCCA officials accepted the finding and state they will obtain effort certifications unless the federal government approves an alternative system.

The Illinois State Board of Education (ISBE) is not adequately performing on-site reviews pursuant to its established cycle for subrecipients.

In the review of 50 subrecipient monitoring files, the auditors noted that no on-site monitoring reviews were performed within the timeframe established by the ISBE for 23 (or 46%) of those tested for the Title One Grants to Local Educational Agencies, the Special Education Cluster, and the Vocational Education Basic Grants to States Programs. These three programs expended $691,935,000 of which $678,673,000 (98%) is paid to subrecipients.

 The cycle for on-site visits per ISBE policy varies from 3 to 6 years.

ISBE is required to manage and monitor the day-to-day operations of the grant and subgrant supported activities. This management and monitoring activity is to assure compliance with each program function and activity applicable to the federal requirements and that performance goals are achieved.

As a result of the inadequate monitoring of subrecipients, the auditors determined the various federal programs subrecipient monitoring activities were not in compliance. This is a material weakness which resulted in the auditors qualifying their report due to subrecipient monitoring requirements. (Finding 02-37, pages 104 and 105)

We recommended ISBE implement an adequate system to ensure that all subrecipients receive on-site monitoring visits within the established timeframes.

ISBE officials stated they are in the process of implementing, with the approval of the U.S. Department of Education, a risk based approach for on-site monitoring of all three programs.

The remaining findings pertain to other compliance and internal control matters. We will follow up on the status of corrective action on all findings in our next Statewide Single Audit for the year ended June 30, 2003.

The auditors state the Schedule of Expenditures of Federal Awards for the State of Illinois as of and for the year ended June 30, 2002 is presented fairly in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:SES:pp

KPMG LLP were our special assistant auditors for this audit.