REPORT DIGEST DEPARTMENT OF NATURAL RESOURCES FINANCIAL AUDIT OF CAPITAL ASSET ACCOUNT For the Year Ended June 30, 2012 COMPLIANCE EXAMINATION For the Two Years Ended June 30, 2012 Release Date:   April 4, 2013 Summary of Findings: Total this audit: 13 Total last audit:  17 Repeated from last audit: 7 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 Department did not accurately report indirect cost in the Schedule of Expenditures of Federal Awards. • The Department failed to enforce concessionaire lease agreements regarding rental and reserve payments. • The Department lacked documentation to provide evidence that certain mandated duties were performed. • The Department did not comply with duties mandated by State law. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NEED TO IMPROVE REPORTING OF INDIRECT COST The Department did not accurately report indirect cost in the Schedule of Expenditures of Federal Awards (SEFA). During our testing of the SEFA, we noted the Department did not properly report $853,000 in indirect cost as part of the federal expenditures.  Upon notification, the Department corrected the expenditures reported in the SEFA.  (Finding 12-1, page 14) We recommended the Department develop controls to ensure the accurate reporting of indirect cost on the SEFA. Department officials agreed with our recommendation and stated they would include indirect costs in future preparations. NEED TO ENFORCE CONCESSIONAIRE LEASE AGREEMENTS The Department failed to enforce concessionaire lease agreements regarding rental and reserve payments. During the engagement period, the Department had approximately 90 concessionaires located at State parks throughout Illinois.  The Department’s concession coordinators are responsible for negotiating and enforcing lease terms, overseeing the site, approving rates charged, and collecting rental payments. During our testing of 66 rental payments for concessionaires, we noted 38 (58%) of the rental payments were remitted in an untimely manner, ranging from four to 249 days late. We also noted, the largest four concessionaires, as measured by rental payments/deposits, did not properly adhere to the terms and conditions stated in the lease agreement. Specifically, these concessionaires did not submit, or submitted late, the required documents as set forth in the lease agreements.  Some of the conditions noted follow: • Two concessionaires remitted reserve deposit slips, totaling $108,993, two and 46 days late, respectively. • Two concessionaires submitted their 2010 Schedule of Gross Revenues and the Statement of Income 45 days late. • One concessionaire’s file did not contain reconciliation between the 2010 and 2011 Profit and Loss Statement and the monthly rental payments received. Also, the 2010 Profit and Loss Statement was submitted 22 days late. • One concessionaire’s file did not have supporting documentation identifying the concessionaire budgeted for a minimum of 2% of gross revenues for marketing the lodge complex, as stated in lease. • One concessionaire’s budget of capital expenditures for real and personal property was not prospective for a three-year period. Further, only one marketing plan was submitted.  (Finding 12-2, pages 15-22) This finding was first reported in 2006. We recommended the Department ensure adequate controls are in place to monitor compliance with contracts and lease agreements. The Department officials agreed with our recommendation and stated they were taking steps towards a more focused response to late payments by concessionaires and other lessees.  A revised policy will simplify and increase the efficiency of the process for collection of outstanding payments and other deliverables by establishing clear threshold time frames for a several step process designed to subject non-paying lessees to legal processes for collection and eviction.  The Department will also review boilerplate lease agreement language for revisions requiring additional penalties if payments are late.  (For the previous Department response, See Digest Footnote #1) IMPROVEMENTS NEEDED TO ENSURE COMPLIANCE WITH MANDATES The Department did not have an adequate system in place to ensure compliance with its mandated duties. During our testing, we noted the Department: • Failed to maintain evidence of submission of annual reports filed with the Governor and General Assembly in accordance with the Open Space Lands Acquisition and Development (OSLAD) Act (525 ILCS 35/11) • Failed to maintain proper documentation on its obligation to file consent to the issuance of a license to sell alcoholic liquors in retail buildings located in State Parks under the Liquor Control Act (235 ILCS 5/6-15). (Finding 12-7, page 25) We recommended the Department ensure its compliance with statutory mandates and maintain documentation. The Department officials agreed with our recommendation and stated in the case of reports to the General Assembly and the Governor, that they now have a form and a defined process for compliance.  In the case of the Liquor Control Commission, a letter has already been sent. NON-COMPLIANCE WITH MANDATED DUTIES The Department did not comply with duties mandated by the State law. Some of the conditions noted follow: • The Department’s Office of Mines and Minerals had not established policies or procedures to comply with the Coal Mining Act (225 ILCS 705/2.15) • The Department did not comply with provisions of the Fluorspar and Underground Limestone Mines Act (225 ILCS 710).  Specifically, the Department failed to: 1) appoint inspectors of mines; 2) maintain records of mines; and 3) submit required reports to the Governor and General Assembly. • The Department’s Miners’ Examining Board failed to submit required reports to the Director for fiscal years 2011 and 2012 as required by the Coal Mining Act (225 ILCS 705/8.14). • The Department did not employ the appropriate number of State Mine Inspectors as required by the Coal Mining Act (225 ILCS 705/4.23).  During fiscal years 2011 and 2012, we noted 44 and 47 operational mines in the State, respectively, for which the Department only employed 10 inspectors; however, the Act requires no fewer than 16 inspectors. • The Department failed to submit annual financial reports to the Oil and Gas Board as required by the Oil and Gas Act (225 ILCS 725/1.2). (Finding 12-10, pages 28-31) We recommended the Department establish policies and procedures to track all mandated duties and identify responsible parties to ensure compliance. Department officials agreed with our recommendation and stated they would address statutory compliance. OTHER FINDINGS With regard to the other findings noted in our report, Department management indicated they are being given attention.  We will review the progress towards the implementation of our recommendations during our next engagement. AUDITOR’S OPINION Our auditors stated at June 30, 2012 the Department of Natural Resource’s Schedules of Capital Assets and Intangible Assets are fairly presented. WILLIAM G. HOLLAND Auditor General WGH:MKL:rt AUDITORS ASSIGNED Washington, Pittman & McKeever, LLC were our special assistant auditors for this audit. DIGEST FOOTNOTES #1 - NEED TO ENFORCE CONCESSIONAIRE LEASE AGREEMENTS 2010 - The Department agreed with the recommendation and stated that although the Department established and maintained a system of internal fiscal and administrative controls which provides assurances that revenues, expenditures, resources and funds applicable to concession operations are properly recorded and accounted for, the Department also exercises administrative authority to provide continuity of services for visitors of the Illinois Department of Natural Resources sites.  The Department will continue to track the late payments, reports, and schedules and work with concessionaires to ensure collection of tardy contractual obligations.  Also, all pages of documents received will be date-stamped to document exact submission of deliverables.  Additionally, a new policy has been developed which will restrict future oral lease agreements and will reduce to writing any existing oral agreements.