REPORT DIGEST ENVIRONMENTAL PROTECTION AGENCY Financial Audit Water Revolving Fund For the Year Ended: June 30, 2012 Compliance Examination For the Two Years Ended: June 30, 2012 Release Date: March 21, 2013 Summary of Findings: Total this audit: 10 Total last audit: 10 Repeated from last audit: 3 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 Agency did not have adequate controls over financial reporting. • The Agency did not adequately maintain employee personnel files. • The Agency did not fully comply with the requirements of the Electronic Products Recycling and Reuse Act. • The Agency did not ensure its internal auditing program fully complied with the Fiscal Control and Internal Auditing Act (FCIAA). FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NEED TO IMPROVE CONTROLS OVER FINANCIAL REPORTING The Illinois Environmental Protection Agency (Agency) did not exercise adequate internal control over financial reporting. During our testing, we noted the following: • The Agency did not develop a basis or prepare any calculation for the estimated arbitrage rebate of $1,000,000 within the rebate fund of the State of Illinois Revolving Fund, Series 2004. During 2009, the Agency paid $323,000 rebate on Bond Series 2004. In anticipation for a substantially higher rebate to be paid in May, 2014, the Agency transferred $500,000 on both bond payment dates, September, 2011 and March, 2012. • The Agency did not accrue interest income totaling $388,909 from March 2012 through June 2012 on investments of the debt service fund under the Debt Service Forward Delivery Agreement for the State of Illinois Revolving Fund, Series 2004 issuance. This resulted in an overstatement of Due to Component Units by the same amount. (Finding 1, pages 11-12) We recommended the Agency document the calculation of estimated arbitrage liability based upon an accumulation of relevant, sufficient and reliable data and properly record interest accruals. Agency officials accepted our recommendation and stated although they believed the past transfers were a reasonable estimation of the future arbitrage tax liability, they have established a formal process to document the relevant, sufficient and reliable data used for this accounting estimate. They also stated they developed procedures to ensure interest income earned between March and June on investments of debt service funds is recorded in the financial statements. INADEQUATE MAINTENANCE OF EMPLOYEE PERSONNEL FILES The Agency did not adequately maintain employee personnel files. During our review of 40 employee personnel files, we noted the following: • Seventeen (43%) employees tested did not have performance evaluations for the evaluation period tested. The time elapsed from the employee’s previous performance reviews ranged from 10 to 170 months. • Seventeen (43%) employee evaluations were performed after the due date. The time elapsed from the due date to the performance review approval date ranged from 5 to 302 days. In addition, we also noted 16 (40%) employee files tested had missing signed withholding authorizations for union, association, credit union, or college savings. (Finding 2 pages 13-14.) This finding was first reported in 1994. We recommended the Agency comply with internal procedures and Administrative Code rules by performing annual evaluations for all employees in a timely manner. Further, the Agency should ensure its personnel files contain all required payroll deduction and withholding documentation and obtain the missing documents from the employees. Agency officials accepted our recommendation and stated they continue to face challenges in performing administrative functions where too few management employees remain outside of the union to perform timely evaluations. In addition, they stated the evaluation tool has little to no impact on the majority of employees as 97% of our employees are in a bargaining unit and salary increases are not dependent on performance. The Agency uses the evaluation tool where necessary to address performance issues in a disciplinary action. The Agency also stated they recognize employee successes through employee recognition events and messages from the Director. Further, they stated all required payroll deduction and withholding documentation found to be missing have been re-submitted by employees. (For the previous Agency response, see Digest footnote # 1). NONCOMPLIANCE WITH ELECTRONIC PRODUCTS RECYCLING AND REUSE ACT The Agency did not fully comply with the requirements of the Electronic Products Recycling and Reuse Act. During our testing of Agency’s compliance with the Electronic Products Recycling and Reuse Act (Act), we noted the following: • There were no grants awarded in fiscal year 2012. • The Agency did not meet on June 15, 2012 with associations that represent Illinois retail merchants to discuss compliance with retailer responsibilities. • The Agency did not prepare and submit an annual report to the Governor and to the General Assembly on July 1, 2011 and May 15, 2012 as required. • The Agency had posted the list of registered collectors, the addresses of their collection sites and their business telephone numbers. However, a link to the collector’s website was not included in the information posted. (Finding 7, pages 21-22) We recommended the Agency ensure compliance with the requirements of the Electronic Products Recycling and Reuse Act. Agency officials accepted our recommendation and stated they are accepting grant applications until the application deadline with the grants being awarded by the end of February 2013. Agency officials further stated they will schedule the first meeting with the Illinois Retail Merchants prior to June 15, 2013. In addition, the 2012 Legislative Report for Program Year 2011 activities has been filed with the required offices and posted to the Agency’s website, and the website now includes a link to the collectors’ websites as required. NONCOMPLIANCE WITH THE FISCAL CONTROL AND INTERNAL AUDITING ACT The Agency did not ensure its internal auditing program fully complied with the Fiscal Control and Internal Auditing Act (FCIAA). The Agency’s Internal Audit Division had only one staff member, an internal auditor, until February 2011 when a chief internal auditor was hired. Based on our review of the Agency’s Internal Audit Plan for fiscal year, we noted there were 13 planned audits for fiscal year 2012, however, the Internal Audit Division had not completed any internal audits during fiscal year 2012. (Finding 8, pages 23-24). We recommended the Agency complete internal audits of major areas of internal control and ensure compliance with FCIAA. Agency officials accepted our recommendation and stated they adopted a biennial internal audit plan including all major internal control areas, system development projects, and special audits. The Agency further stated these projects will be completed by June 30, 2013. OTHER FINDINGS The remaining findings are reportedly being given attention by the Agency. We will review the Agency’s progress towards the implementation of our recommendations in our next engagement. AUDITORS’ OPINION Our special assistant auditors stated the Water Revolving Fund Financial Statements of the Illinois Environmental Protection Agency as of and for the year ended June 30, 2012 are fairly stated in all material respects. WILLIAM G. HOLLAND Auditor General WGH:PH:rt SPECIAL ASSISTANT AUDITORS E.C. Ortiz & CO., LLP were our special assistant auditors. DIGEST FOOTNOTE # 1 INADEQUATE MAINTENANCE OF EMPLOYEE PERSONNEL FILES – Previous Agency Response 2010: Accepted. The Agency will continue to strive for timely completed performance evaluations. All required payroll deduction and withholding documentation found to be missing have been re-submitted by employees.