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INTRODUCTION
Our report
covers the financial audit of the Department of Corrections - Correctional
Industries (ICI) for the fiscal year ended June 30, 2006 and a compliance
examination for the two years ended June 30, 2006. ICI is a division of the Illinois Department of
Corrections. ICI operates
manufacturing, service and agricultural industries within the adult
correctional centers.
FINDINGS,
CONCLUSIONS AND RECOMMENDATIONS
Weaknesses in Preparation of the Year End Financial Statements and
GAAP Packages
During our audit of the ICI
June 30, 2006 financial statements and Generally Accepted Accounting
Principles (GAAP) financial reports submitted to the Office of the State
Comptroller, we recommended twelve audit adjustments to various accounts
within ICI’s financial records and financial reports for a total of $2.3
million. A majority of the
adjustments were to correct account balances for overstatements,
understatements or errors made during the year.
ICI is required to prepare annual
financial statements of its financial activity to comply with reporting
requirements set forth by the Office of the Comptroller. In addition, The Fiscal Control and
Internal Auditing Act (FCIAA), requires all State agencies to establish and
maintain a system of internal fiscal control to provide assurance revenues,
expenditures and transfers of assets, resources, or funds applicable to
operations are properly recorded and accounted for to permit the preparation
of amounts and reliable financial reports.
This finding
is considered to be a reportable condition.
In our judgment, this reportable condition can adversely affect ICI’s
ability to record, process, summarize and report financial data consistent
with the assertions of management in the financial statements.
ICI management
indicated that errors and omissions in the financial statements and GAAP
packages are due to staff shortages to the extent that those who were most
familiar with general ledger and financial statements were also covering duties
of vacant positions on top of their regular duties.
We recommended ICI devote sufficient resources to its
financial accounting function such that the financial information is properly
recorded and accounted for to permit the preparation of reliable financial
statements. (Finding 1, pages
14-15)
ICI officials
accepted our recommendation and stated they will make every effort to ensure
the financial reports are accurate and timely.
EXCESS COSTS FOR MANAGEMENT INFORMATION SYSTEM
ICI has made limited
progress in its plan to install an automated management information system
(system) and has incurred excessive
costs for computer hardware, software and consulting services.
Since fiscal
year 2000 ICI has only been using three of the system’s ten software modules
that were purchased, and the three modules are only being used at the ICI
Central Office and one of the 20 remote locations. ICI paid the vendor $340,000 of a $420,000 contract that was to
include the software plus installation, training and support.
ICI continues to
use the 3 modules and paid the original vendor $97,714 in fiscal year 2005
and $118,998 in fiscal year 2006 for technical support for the system modules
still being used. In addition, during
fiscal year 2004 and 2003, ICI paid the vendor $38,830 and $25,093,
respectively for technical support for the system.
Management
stated a lack of progress in the installation of the system, fiscal
constraints and re-examining the need for the system have limited progress in
implementing additional system modules.
We recommended ICI management critically re-examine the need
for the Management Information System project and determine if the current limited implementation is cost-effective and
meets its needs. Additionally, ICI management
needs to conduct a thorough assessment to determine if the full
implementation of all modules at all sites will provide a cost-beneficial
solution. (Finding 2, pages
16-17) This finding was first
reported in 2000.
ICI officials
indicated they have implemented our recommendation and are in the process of
a business redesign evaluation and implementation. In addition, it was noted a core team was established to review
the implementation of the final modules for inventory. It was further indicated that based upon
this team’s review, the Department will make a decision regarding the system
and its future. (For previous ICI
response, see Digest Footnote #1)
CONTINUED USE OF TEMPORARY
ASSIGNMENTS
ICI
continues to place union employees on temporary assignment for periods beyond
time limits specified by the union agreement. The lengthy assignments violate the union agreement and
circumvent required steps in the hiring process.
During our
testing, we noted 15 employees working in temporarily assigned positions
during fiscal years 2005 and 2006.
All of these employees were union members and were working in
temporarily assigned positions beyond the time limits specified in the union
agreement. One employee while on temporary assignment incurred approximately
$14,500 in travel costs related to their temporary assignment. At June 30, 2006, 7 employees were still
on temporary assignment, these employees have been on these temporary
assignments from 3 to 45 months.
The union
agreement with the State sets specific time limits of either 60 or 45 days
for temporary assignments, depending on the reason for the temporary
assignment. According to the union
agreement, if the assignment extends beyond the set timeframe, then the
extensions should be mutually agreed upon (we found only one signed mutual
agreement to extend the temporary assignments beyond 60 days). ICI management stated that lengthy
temporary assignments of employees were due to staffing limitations.
We recommended ICI reevaluate the propriety of its
continued use of temporary assignments for long-term employment
positions. For assignments to union
positions, they should comply with the union agreement’s requirement for
mutual agreement of the assignments.
We recommended the agreement be documented in writing. (Finding 3, pages 18-19) This finding was first reported in 1998.
ICI
management accepted our recommendation and stated they temporarily assign
employees and rotate assignments as permitted. In addition, ICI
management indicated they will review the need for the temporary
assignments. (For previous ICI
response, see Digest Footnote #2)
Untimely signing/execution of written contract agreements
We noted 4 of 25 (16%) contractual
agreements tested had not been signed by all required parties before the
earliest date of service allowed by the contractual agreement’s terms. The average length of time between the
beginning date of the contractual agreements and their final required signature
was 26 days (with a range of 5 to 57 days).
These 4 contracts, totaling $126,899, were for computer support, and
repairs and maintenance of various equipment. In addition, services for all the 4 referenced contracts began
1 to 31 days before the last required party signed and dated the contractual
agreements.
Good business practice dictates that all required parties
sign a contract agreement prior to the beginning of the contract period. Further, all contracts entered into must
be approved by all parties prior to the beginning of the services.
ICI management stated the lack of staff
in field offices and the fiscal office caused the delay in the processing of
the contracts. In the above noted
contracts, field office staff did not wait for the approval notification of
the contract from the Central Office before they placed an order for services
with the vendor resulting in services being performed by the vendor without a
signed/executed contract.
We recommended ICI management take the
necessary steps to ensure contract agreements are signed/executed by all the
required parties in a timely manner.
Field office staff should be reminded that a contract should be signed
/executed before goods or services are provided by the vendor. (Finding 5, pages 22-23)
ICI management accepted our recommendation and stated they
will make every effort to ensure that all contracts are executed timely.
All relevant costs are not being included in the computation of
manufacturing costs
ICI does not
include any occupancy costs for the production facilities they use at the
Correctional Centers (Centers) in their computation of the manufacturing
costs of its products. ICI has 19
facilities for manufacturing its products at various Centers. Occupancy costs should include at a
minimum maintenance, utilities and any computed rent or depreciation for the
facility being utilized. In addition,
ICI policies and procedures do not address what should be included in the
computation of the costs of its products.
According to ICI management, ICI is not charged by the Centers or the
Department of Corrections for occupancy costs, therefore occupancy costs are
not included in the production cost computation.
By not including any occupancy costs associated with the
production facilities at the Centers the true cost of the production of the
items is not being considered in determining the price of the products. The Department of Corrections or
ultimately the State is subsidizing these costs of the ICI operation.
We
recommended ICI work with the Department of Corrections Central Office to
identify and include occupancy costs relating to Center manufacturing
facilities to provide a good estimate of the total cost of a product. In addition, ICI should include guidelines
in its policies and procedures for the basis of valuation/estimate of these
costs and their inclusion in the computation of product costs as a basis of
setting a selling price. (Finding 7,
pages 26-27)
ICI
management accepted our recommendation and stated that with assistance from
the Field Services Unit they will review the occupancy costs to determine the
estimated cost to produce certain products.
OTHER FINDINGS
The remaining findings
are reportedly being given attention by ICI management. We will review the ICI’s progress towards
the implementation of our recommendations during our next engagement.
AUDITORS' OPINION
Our auditors state the June 30, 2006 financial statements of
the Illinois Department of Corrections - Correctional Industries are fairly
presented in all material respects.
_____________________________________
WILLIAM G. HOLLAND, Auditor General
WGH:RPU:pp
SPECIAL ASSISTANT AUDITORS
Our special assistant
auditors for this engagement were E.C. Ortiz & Co., LLP.
DIGEST FOOTNOTES
#1 EXCESS
COSTS FOR MANAGEMENT INFORMATION SYSTEM – Previous ICI Response
2004:
Recommendation Implemented.
ICI is currently in process of fully implementing the system
(Marcola). Pilot installation of the
final portions and testing has been completed. User training and final implementation is to be completed in
March 2005. Additional modules and
system revisions will be completed over the next few months with users being
added and training as systems come on line.
#2 CONTINUED
USE OF TEMPORARY ASSIGNMENTS– Previous ICI Response
2004:
Recommendation accepted. ICI
will work to limit temporary assignments in accordance with labor
contracts. Any supplemental agreements
will be documented in writing.
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