Volume 16, 2010 Annual
William G. Holland, Auditor General
Auditor General’s Message
Since 2003, each issue of the Audit Advisory has highlighted problems associated with the State’s financial reporting system. Recognizing that financial reporting problems result in inaccuracies, inefficiencies, and delays that negatively impact the ability of State decision-makers to have timely and accurate information, as well as potentially jeopardizing the State’s federal funding, the Senate passed Resolution Number 609 directing my Office to conduct a management audit of the State’s financial reporting system. This issue of the Advisory discusses these financial reporting issues and solicits your input into addressing this problem.
In these difficult budget times, we look for ways to assist our staffs to effectively do their jobs with limited resources. To that end, this issue of the Audit Advisory contains a listing of dates when certain reports must be filed. Audits routinely contain findings that required reports were not submitted on a timely basis. Hopefully the listing included in the Advisory will prove to be a useful tool for management to ensure that required reports are being timely filed, thereby reducing the number of findings my Office needs to report in future years.
Also included is a summary of high risk areas, as well as a brief article containing tips on interactions with auditors which, if followed, should help make for a more productive and efficient audit.
WILLIAM G. HOLLAND
LACK OF STATEWIDE FINANCIAL REPORTING SYSTEM
The State of Illinois’ current financial reporting process does not allow the State to prepare a complete and accurate Comprehensive Annual Financial Report (CAFR) or the Schedule of Expenditures of Federal Awards (SEFA) in a timely manner. Reporting issues at various individual agencies caused the State’s CAFR to not be released until July in 2009 and June in 2010. The Statewide Single Audit has been released in August 2009 and July 2010, significantly past the 9 month fiscal year end deadline imposed by the federal government.
Although the deficiencies relative to the CAFR and SEFA financial reporting processes have been reported by our Office for a number of years, problems continue with the State’s ability to provide accurate and timely external financial reporting. The State has not been able to solve these problems or make substantive changes to the system to effectively remediate these financial reporting weaknesses.
The Comprehensive Annual Financial Report (CAFR) and Related Report on Internal Control and Compliance for the period ending June 30, 2009 contained a finding on untimely financial reporting. This finding has been repeated since 2007 and is similar to a finding in the Single Audit which has been repeated since 2002.
In discussing this condition with the Office of the Governor, they stated that there are over 100 separate decentralized agency financial systems in the State and that the lack of an enterprise accounting system results in widely varied controls rather than a uniform set of controls to carry out the accounting policy set by the Comptroller. The decentralized nature of the State’s accounting systems and lack of a general ledger system results in time consuming, manual tabulations by accounting personnel who may lack the qualifications and systems to report accurate financial information on a timely basis.
In discussing these conditions with Office of Comptroller management, they indicated delays were caused by a separation in responsibility for the State’s internal control procedures among agencies and components units. The Comptroller’s Office has the statutory authority to request submission of financial information but does not currently have the ability to enforce those submissions on a timely basis from other State agencies.
Failure to establish effective internal controls at all State agencies regarding financial reporting for the preparation of the CAFR and the SEFA prevents the State from completing an audit in accordance with timelines set forth in OMB Circular A-133 and may result in the suspension of federal funding. Further, delays in financial reporting decrease the usefulness of such information.
HIGH RISK AREAS
The four high risk areas highlighted in this issue of the Audit Advisory include the following: 1) Contracting Processes; 2) Subrecipient Monitoring; 3) Untimely Financial Reporting; and 4) Fraud and Abuse.
1. CONTRACTING PROCESSES
The contracting process poses significant risks for State agencies and is
susceptible to fraud and abuse. Consequently, an agency’s system of internal controls related to contracting needs to be strong, monitored, and enforced.
2. SUBRECIPIENT MONITORING
State agencies’ failure to adequately monitor subrecipients has been a central finding in the State’s Single Audit for years. The FY 2008 Single Audit had 27 findings and the FY 2009 Single Audit had 25 findings related to agencies’ deficiencies in monitoring subrecipients. Agencies covered by the Single Audit received $23.7 billion in federal funding in FY 2009, of which $5.2 billion was passed through to grantees.
It is not sufficient for agencies to simply pass funding on to third parties. Rather, a system must be established to monitor how those funds are being spent and ensure these monies are being spent for the specified purpose. Subrecipient monitoring includes many aspects, such as reviewing and receiving grant or audit reports, as well as some level of on-site reviews or inspections.
3. UNTIMELY FINANCIAL REPORTING
Untimely financial reporting poses significant risks to the State of Illinois.
The issue of untimely financial reporting is discussed on page 1 of the Audit Advisory.
4. FRAUD AND ABUSE
Each State agency needs to have a fraud detection program. Recent audits have identified several instances where, due to a lack of adequate internal controls and oversight, public funds have been used for undocumented or improper purposes. Agency managers have the responsibility to conduct internal vulnerability assessments of their operations to identify areas where misappropriation of State assets could occur.
AUDIT OF STATE’S FINANCIAL REPORTING SYSTEM
In March 2010, the Illinois State Senate passed Resolution Number 609 directing the Office of the Auditor General to conduct a management audit of the State’s financial reporting system. As part of our audit, we sent a survey to all agencies that are part of the State’s primary government.
Since the input of all is valued, we welcome any additional comments you might have regarding the State’s financial reporting system. Examples of input that would be helpful include:
• The most significant problems or limitations with the current system;
• Examples of what works well;
• Specific examples of duplicative, outdated financial reporting processes; and
• Suggestions on how the process could be improved.
Should you have any perspectives or comments regarding the State’s financial reporting problems and/or suggestions on how they could be best addressed, please feel free to send them to Mr. Joe Butcher, the OAG manager of this audit, at firstname.lastname@example.org.
TIPS TO HELP EXPEDITE AN AUDIT
• If you don’t understand what the auditors are requesting, ask the auditors immediately. Don’t wait until the request is due.
• Review data before providing it to auditors to make sure it is what they are requesting. Incomplete or inaccurate data not only delays the audit but also raises red flags concerning the data’s validity and reliability.
• Auditors have access to confidential information within the audit’s scope. When providing confidential information to auditors, mark it confidential and inform auditors as to the reason it is confidential. However, please do not e-mail confidential information to auditors unless it is encrypted.
• If you have significant questions or concerns regarding a finding, don’t wait to the exit conference to bring it to the auditors’ attention
Is Your Agency Late for an Important Date?
Our audit findings reveal that many agencies routinely miss recurring reporting deadlines. While some of these reports are ministerial in nature, failure to comply not only subjects an agency to an audit finding but also suggests a lack of management controls over legal requirements. Additionally, as more agencies struggle to get by with less staff, anticipating and making plans in advance to meet upcoming deadlines becomes more critical.
Based on a sampling of our recent audits, we've compiled a list of due dates for reports that most State agencies are required to submit.
Items are listed by: Due Date, Report, Report Recipient, and Source of Requirement:
1/1; Agency Workforce; Secretary of State & Governor; State Employment Records Act (5 ILCS 410/20)
1/15; Travel Headquarters (TA-2); Legislative Audit Commission; State Finance Act (30 ILCS 105/12-3)
1/15; Identification of State agency employee responsible for distribution of agency publications; Illinois State Library Documents Section; Illinois Administrative Code (23 Ill.Adm.Code 3020.150)
5/1; Evaluation of internal fiscal and administrative controls (FCIAA Certification); Auditor General; Fiscal Control and Internal Auditing Act (30 ILCS 10/3003)
5/1; Statements of Economic Interests; Secretary of State; Governmental Ethics Act (5 ILCS 420/4A-105)
7/1 - 7/31; Proof of driver's license and liability insurance for employees assigned a State vehicle; Agency Director; Illinois Vehicle Code (625 ILCS 5/7-601(c))
7/15; Travel Headquarters (TA-2); Legislative Audit Commission; State Finance Act (30 ILCS 105/12-3)
8/1; Agency Fee Imposition; State Comptroller; State Comptroller Act (15 ILCS 405/16.2) and SAMS Procedure 33.16.20
8/15 - 8/31*; General deadline for GAAP reporting packages; State Comptroller; SAMS Procedure 27.10.10
10/30; Annual Real Property Utilization; Central Management Services; State Property Control Act (30 ILCS 605/7.1(b))
11/15*; GAAP basis financial statements (incl. footnote disclosures); State Comptroller; SAMS Procedure 27.10.10
* Critical deadline for completion of the State's Comprehensive Annual Financial Report and Statewide Single Audit. See accompanying article on page in this Audit Advisory.
Other deadlines are not fixed dates but instead are triggered by an event or occurrence. A sampling of those requirements that our audit experience shows are often missed by agencies follows:
Items are listed by: Timeframe, Triggering Event, Action, and Source of Requirement:
Prior to authorizing travel; Use of private vehicle on State business; Obtain statement from State employee certifying he/she is duly licensed and has statutory minimum insurance coverage; Illinois Vehicle Code (625 ILCS 5/10-101(b)) and Illinois Administrative Code (80 Ill.Adm.Code 3000.300 (f) (1))
Within 24 hours; Any single item of receipt exceeding $10,000; Deposit; State Officers and Employees Money Disposition Act (30 ILCS 230/2)
Within 48 hours; An accumulation of receipts exceeding $500 but less than $10,000; Deposit; State Officers and Employees Money Disposition Act (30 ILCS 230/2)
Within 3 days; Accident in State vehicle; File report (Form SR-1) with law enforcement and CMS; Illinois Administrative Code (44 Ill.Adm.Code 5040.520)
Within 3 business days; Award of contract through emergency purchase; Post notice in the online electronic Procurement Bulletin; Illinois Procurement Code (30 ILCS 500/15-25 (c))
Within 5 business days (21 working days if for a commercial purpose); Receipt of request for public records; Grant or deny unless timeframe is extended; Freedom of Information Act (5 ILCS 140/3 (d) and 3.1)
Within 10 days; Award of contract through emergency purchase; File emergency purchase affidavit with Procurement Policy Board and Auditor General; Illinois Procurement Code (30 ILCS 500/20-30 (c))
Within 15 days; Grant or contract liability greater than $10,000 incurred; File copy with State Comptroller; Illinois Procurement Code (30 ILCS 500/20-80 (b))
Within 15 days; Execution of a real property lease; File a copy with the Secretary of State; State Finance Act (30 ILCS 105/9)
Within 30 days; Receipt of vendor bill; Review and approve or deny; State Prompt Payment Act (30 ILCS 540) and Illinois Administrative Code
(74 Ill.Adm.Code 900.70)
Within 30 days; Acquisition, change or deletion of equipment; Adjust property records; Illinois Administrative Code (44 Ill.Adm.Code 5010.400)
Within 30 days; New employee hired ; Take ethics training; State Officials and Employees Ethics Act (5 ILCS 430/5-10 (c))
Within 45 days; End of grant period; Receive unused grant funds back from grantee; Grant Funds Recovery Act (30 ILCS 705/4 (d))
Within 60 days; Travel expense incurred by State employee; Submit request for reimbursement; Internal Revenue Service Publication 535 and Accounting Bulletins numbers 134, 135 and 137
Finally, State agencies are required to fulfill some requirements on an annual basis but the date for completion is not set in statute. Agencies should establish tickler files to ensure these requirements are met each year:
Items listed by Annual Requirement and Source of Requirement:
Evaluation of each employee; Illinois Administrative Code (80 Ill.Adm.Code 302.270 (d))
Physical Inventory of State Equipment to CMS; Illinois Administrative Code (44 Ill.Adm.Code 5010.460)
Ethics Training; State Officials and Employees Ethics Act (5 ILCS 430/5-10 (a))
The above requirements are not applicable to all agencies and represent only a sampling of some of the deadlines that we have noted as often being overlooked by State agencies. We hope, however, that the above lists can be used by State agency management to identify and monitor staff efforts to comply with applicable laws, rules and procedures.
Office of the Auditor General
Iles Park Plaza, 740 East Ash Street
Springfield, Illinois 62703-3154
Michael A. Bilandic Building,
160 N. LaSalle Street, Suite S-900
Chicago, Illinois 60601-3109