REPORT DIGEST

DEPARTMENT OF EMPLOYMENT SECURITY

FINANCIAL AUDIT
FOR THE YEAR ENDED JUNE 30, 2018

Release Date:  June 4, 2019

FINDINGS THIS AUDIT: 8

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  7 -- 0 -- 7
Category 2:  1 -- 0 -- 1
Category 3:  0 -- 0 -- 0
TOTAL:  8 -- 0 -- 8

FINDINGS LAST AUDIT: 1

Category 1: Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2: Findings that are significant
deficiencies in internal control and
noncompliance with State laws and
regulations.
Category 3: Findings that have no internal
control issues but are in noncompliance
with State laws and regulations.

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, 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

INTRODUCTION

This digest covers the Department of
Employment Security’s (Department)
Financial Audit of the Unemployment
Compensation Trust Fund for the year ended
June 30, 2018.

SYNOPSIS

• (18-1) The Department did not have
adequate controls over their taxes
receivable.
• (18-2) The Department did not have
adequate controls over their claimant
overpayment receivables, which led to the
draft financial statements including
accounts which had been written off.
• (18-3) The Department did not have
adequate controls over refunds.
• (18-4) The Department’s refund payable
account contained amounts that were already
paid resulting in the draft financial
statements being misstated.
• (18-7) The Department of Revenue and the
Department did not maintain adequate
controls over changes to the enterprise-
wide system (GenTax).

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE CONTROLS OVER TAXES RECEIVABLE

The Department did not have adequate
controls over their taxes receivable, which
caused a misstatement in the Department’s
draft financial statements. As a result of
the inaccuracies noted during testing, the
gross taxes receivable balance was adjusted
by $10,323,207.

During testing of accounts receivable, we
requested the Department provide their
population of taxes receivable as part of
our testing of the Department’s financial
statements. However, the Department did not
provide documentation demonstrating the
completeness of the population. Due to
these conditions, we were unable to
conclude the Department’s population
records were sufficiently precise and
detailed under the Professional Standards
promulgated by the American Institute of
Certified Public Accountants (AU-C § 330,
AU-C § 530).  As a result of this
condition, the auditors had to perform
significant additional procedures relating
to the balance of taxes receivable.

Our testing specifically noted:
• The Department did not post interest to
employer accounts for the month of June
2018.  This resulted in the receivable
being understated by $1,711,049.

• The Department included accounts which
had been written off, but remained in the
taxes receivable balance. This resulted in
the receivable being overstated by
$3,406,515.

• The Department incorrectly placed the
Stop Debit Write Off indicator on employer
accounts. This indicator stops the debit
write off process for the account or
period.  These accounts should have been
included in taxes receivable, causing it to
be understated by $3,798,901.

• The Department determined there were
accounts that should have been written off;
however, they were not. As a result, taxes
receivable was overstated by $12,426,642.
(Finding 1, pages 23-24)

We recommended the Department develop
appropriate controls to ensure all
transactions are properly recorded and
presented in its financial statements.

The Department accepted the finding and
stated they have made corrections to
address identified issues.

INADEQUATE CONTROLS OVER CLAIMANT
OVERPAYMENT RECEIVABLES

The Department did not have adequate
controls over their claimant overpayment
receivables, which led to the draft
financial statements including accounts
which had been written off.  As a result,
the accounts receivable related to claimant
overpayments was materially misstated.  Due
to the inaccuracies noted during testing,
the gross accounts receivable balance was
adjusted by $312,486,000, with the net
balance being adjusted by $20,545,000.

During testing, we determined the
Department’s accounts receivable related to
claimant overpayments included accounts
that had been written off in prior years
totaling $312,486,000. An adjustment to the
allowance was also recorded for these
accounts. In addition, while reviewing the
approved write offs in the Illinois Benefit
Information System (IBIS), we noted there
were no approved write-offs during the
first and second quarters of calendar year
2018.  (Finding 2, page 25)

We recommended the Department implement
controls to ensure written off accounts are
not reflected in the Department’s accounts
receivable.

The Department accepted the finding and
stated corrections to IBIS have been made
to address identified issues.

INADEQUATE CONTROLS OVER REFUND LIABILITIES

The Department did not have adequate
controls over refunds, resulting in refund
liabilities in the Department’ draft
financial statements being misstated. As a
result, an adjustment of $11,352,058 was
made to the liability.

During testing, we determined there were
51,180 accounts, totaling $13,108,555,
which were past the three-year statute of
limitations at June 30, 2018. Upon review
of the 51,180 accounts, the Department
determined it had subsequently paid out
erroneous refunds totaling $1,756,497.
(Finding 3, page 26)

We recommended the Department implement
controls over refunds to prevent erroneous
refunds and the proper accounting of refund
liabilities.

The Department accepted the finding and
stated they implemented corrections to
ensure proper treatment of refunds.

INADEQUATE REFUNDS PAYABLE

The Department’s refunds payable account
contained amounts that were already paid
resulting in the Department’s draft
financial statements being misstated. As a
result, refunds payable was adjusted by $15
million.

During testing, it was determined the
Department’s refunds payable account
contained refunds for which the Department
had already paid the employer. The
Department included these amounts in the
refunds payable account erroneously due to
the employer not cashing the refund.
(Finding 4, page 27)

We recommended the Department implement
controls to ensure that uncashed checks are
not included in refunds payable.

The Department accepted the finding and
stated uncashed refund checks will not be
included in refunds payable-applied for
future financial statements.

INADEQUATE CONTROLS OVER CHANGES TO GENTAX

The Department of Revenue and the
Department (collectively referred to as the
“Departments”) did not maintain adequate
controls over changes to the enterprise-
wide tax system (GenTax).  During Fiscal
Year 2018, GenTax processed over 15.3
million transactions and $46.7 billion in
payments from taxpayers.

As part of the audit process, we requested
the Departments provide the population of
changes to GenTax. In response, the
Departments provided a listing of changes;
however, during our testing we noted
changes which were not applicable to
GenTax.

Due to these conditions, we were unable to
conclude the Departments’ population of
changes to GenTax were sufficiently precise
and detailed under the Professional
Standards promulgated by the American
Institute of Certified Public Accountants
(AU-C § 330, AU-C §530, AT-C §205).

Even given the population limitations noted
above, we performed testing and noted:

During the audit period, the Departments
had four different change control
procedures. In order to test the procedures
for compliance, we selected a sample of 137
proposed changes to Gentax made by the
Departments’ personnel during the audit
period. Out of the 137 proposed changes,
only 100 of them were deemed a required and
necessary change to Gentax by the
Departments’ management and were
subsequently made. Out of the 100 required
changes to Gentax, we noted the following:

• 58 (58%) changes did not contain evidence
that testing had been conducted or lacked
testing documentation.

• 12 (12%) changes were not approved, or
approval was by an unauthorized individual
during the development stages or migration
to the production environment.

• 2 (2%) changes did not follow the
required change control process.

The Departments’ varying iterations of
change control procedures required that all
changes be tested, with testing documented
and approved by authorized individuals
throughout the development process and
migration. (Finding 7, pages 30-31)

We recommended the Department work with the
Department of Revenue to utilize adequate
internal controls over changes to GenTax
and maintain documentation to support the
processes and procedures utilized to
mitigate the applicable risks related to
system changes.

The Departments accepted the recommendation
and stated change control procedures have
been revised and an improved tracking
solution has been implemented.

OTHER FINDINGS

The remaining findings pertain to failure
to convert employer account detail during
conversion process, lack of write off
policies, and inadequate security over
GenTax.  We will review the Department’s
progress towards the implementation of our
recommendations in our next financial
audit.

AUDITOR’S OPINION

The auditors stated the financial
statements of the Unemployment Compensation
Trust Fund of the Department as of and for
the year ended June 30, 2018 are fairly
stated in all material respects.

This financial audit was conducted by RSM
US LLP.

JANE CLARK
Division Director

This report is transmitted in accordance
with Section 3-14 of the Illinois State
Auditing Act.

FRANK J. MAUTINO
Auditor General

FJM:JGR