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INTRODUCTION
The Illinois Finance
Authority is a body politic and corporate created July 17, 2003 by Public Act
(Act) 93-205, effective January 1, 2004.
This Act consolidated seven of the State’s existing finance
authorities into the Illinois Finance Authority (Authority). The Authority succeeded to the rights and
duties of the existing authorities as of January 1, 2004. The mission of the Authority is to foster
economic development to the public and private institutions that create and
retain jobs, and improve the quality of life in Illinois by providing access
to capital. This is the initial audit
of the Illinois Finance Authority.
FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS
NEED FOR A COMPREHENSIVE
ACCOUNTING SYSTEM AND PROCEDURES
The Illinois Finance Authority did not have a comprehensive
accounting system and procedures in place for the period under audit.
The Authority was formed January 1, 2004 by combining seven
prior authorities with similar functions.
At January 1, 2004, a comprehensive accounting system was not in place
at the Authority. The Authority utilized
one of the accounting systems of the previous authorities until a new system
was put in place in May 2004. As
such, much of the information from early 2004 needed to be transferred from
the previous system to the new accounting system.
The failure to have a comprehensive accounting system and
procedures in place from the beginning of the year (due to the start of the
business) resulted in numerous accounting and financial reporting
problems. Following is a listing of
some of the incomplete or inaccurate transactions that were noted during the
current year audit:
·
There were
approximately 550 transactions that had narrative descriptions in a field not
linked to the general ledger activity report that was provided to the
auditors to use in the audit.
·
Several manual
journal vouchers entered into the accounting system contained inadequate
descriptions, were not dated, and/or contained inadequate accounting
documentation.
·
There was
inaccurate classification of debt securities and improper realization of
gains and losses associated with the inaccuracies.
·
During the audit,
we received seven different adjusted trial balances. The activity from the former Illinois
Rural Bond Bank, and construction notes were not included until the final
trial balance provided on November 24, 2004.
·
There were 7
valuations of the 32 venture capital investments that were improperly written
up above cost to fair market value.
Under generally accepted accounting principles these investments
should not been adjusted upward.
·
During testing of
accounts and loans receivable, a sample of 37 items was selected. It was noted that 12 of the items sampled
had inaccurate balances. The
difference in the majority of the balances averaged less than $1,000. In addition the Authority provided
auditors the incorrect balances of accounts and loans receivable to confirm
in August 2004 and the entire confirmation of receivables had to be
re-performed in November 2004.
·
Expenditures
totaling $117,466 were not included as activity for the Illinois Farm
Agribusiness Loan Guarantee Fund.
This represented the activity related to the interest buy down program
that was inherited from the prior Illinois Farm Development
Authority. Only after the auditors
raised questions was this activity recorded on the Authority’s books and
reported in its financial statements.
·
Accounts payable
was originally understated by $112,529 and other accrued liabilities were
originally understated by $24,837.
Prudent
business practice calls for the proper classification of assets, liabilities,
revenue and expenditures, good accounting records, appropriate procedures and
internal controls. The lack of a
comprehensive accounting system and procedures results in poor accounting
records, making it difficult to monitor the use of funds, to compare
expenditures to other periods, and to create and monitor budgets. (Finding 1, pages 10-12)
We
recommended the Authority perform a comprehensive review of its entire
accounting system and procedures. The
review should encompass how information is being entered into the accounting
system, internal controls over the data and adequacy of review procedures to
ensure the accuracy of the information.
Further, we recommended that procedures to ensure the accuracy of the
accounting and financial reporting information should be established and
documented.
Authority
officials accepted our recommendation and indicated that they are performing
a comprehensive review of their entire accounting system and that they are
committed to conducting business with a complete and effective accounting
system.
SEGREGATION OF DUTIES NEEDS IMPROVEMENT
The
Authority does not have an adequate segregation of duties in its accounting
and financial reporting area.
During our review of internal controls, we
noted that:
· Personnel
responsible for payables are not independent of purchasing, receiving,
disbursing, and general ledger functions.
· An
independent person does not mail checks payable to vendors.
· The
person conducting the inventory of capital assets is not independent of the
capital asset record keeping function; and a member of management does not
review detailed capital asset records.
· The
staff accountant maintains the general ledger, and prepares and reconciles
the loan status report.
Good
business practices require an adequate segregation of duties. Internal controls are designed to
safeguard assets and help prevent losses from employee dishonesty or
error. Functions that involve access
to or the handling of assets should be segregated from functions that involve
the approval of transactions and functions that involve the recording of
transactions. (Finding 2, pages 13-14)
We recommended the Authority implement the following
policies:
1.
To
the extent possible the Authority should segregate the purchasing, receiving,
disbursing and general ledger functions.
In addition we recommend that a member of management receive and
review the bank statements directly before forwarding them to the person
responsible for reconciling the bank accounts.
2.
Signed checks should not be
returned to the employee responsible for processing accounts payable or cash
disbursements. Checks should be
prepared for mailing and mailed by an employee independent of the
above-mentioned functions.
3.
An
employee independent of the record keeping function should perform the
physical inventory of property and equipment and a member of management
should review the detail capital asset records.
4.
The person maintaining the
general ledger should not be the same person that maintains and reconciles
the loan status report.
Authority officials accepted
our recommendation and indicated that they are performing a comprehensive
review of their entire accounting system and procedures and that future
updates to the Authority procedures will consider segregation of duties.
MONITORING OF BOND COMPLIANCE NEEDS IMPROVEMENT
The Authority does not have adequate procedures in place to
effectively monitor compliance with conduit debt loan and indenture
agreements.
The Authority is responsible for the administration of over
$19 billion in conduit debt. Conduit debt is limited issue revenue bonds that
are secured solely by the revenue streams of and property financed by the
borrower. Neither the Authority nor
the State of Illinois is obligated in any manner for repayment of the
debt. The following is a list of some of the
noncompliance with conduit debt loan and indenture agreements noted during
our sample testing relating to our sample of 40 bonds issued by former
agencies:
·
Out of 23 bonds
that required annual financial statements to be sent to the Authority (within
120-180 days depending on the loan agreement), the Authority did not provide
to auditors the borrower’s financial statements for six (6) bonds with a
total outstanding balance of $550 million.
For the remaining 17 financial statements, it could not be determined
as to when the financial statements were received.
·
Out of seven (7)
bonds that required quarterly financial statements to be sent to the
Authority, the Authority did not provide to auditors the borrower’s quarterly
financial statements for four (4) bonds with a total outstanding balance of
$251 million.
·
Out of eighteen
(18) bonds that required an annual certificate of compliance to be sent to
the Authority, the Authority did not provide to auditors the certificates of
compliance for six (6) bonds with a total outstanding balance of $419
million.
Relating
to our entire sample of 66 bonds issued by Illinois Finance Authority and
prior agencies:
·
The Authority
could not provide to auditors copies of the Form C-08, “Notice of Payment of
Bond Interest and/or Principal”, required to be filed with the Office of the
State Comptroller for 18 bond principal and/or interest payments that
occurred between January 1, 2004 and June 30, 2004 for 17 bonds (one issue
had two payments due) with a total outstanding balance of $978 million.
The
Office of the State Comptroller prepared a listing of revenue bonds that had
delinquent reporting activity during the period of January 1, 2004 through
June 30, 2004. A review of that
listing, dated September 2, 2004, resulted in the following conditions being
noted:
·
179 interest and
92 principal payment transmittal forms (Form C-08) were not received in a
timely manner.
·
9 interest and 1
principal payment transmittal forms (Form C-08) were past due and were not
received.
·
13 prospectus and
8 maturity schedule transmittal forms (Form C-05) were not received in a
timely manner.
·
3 maturity
schedule transmittal forms (Form C-05) were past due.
Failure
to ensure compliance with the conduit debt loan and indenture
agreements could put the State at risk and could jeopardize future bond
sales. (Finding 3, pages
15-17)
We recommended that the Authority create internal controls to
adequately monitor, review and retain documents received from the borrower
per the loan agreements and from the trustee per the indenture
agreements. Further, the Authority
should establish internal controls that ensure the State Comptroller’s office
receives the required forms in a timely manner.
Authority officials accepted our recommendation and indicated
that they were in the process of building a system for monitoring compliance
with the compliance requirements of their bond issues.
NEED TO
IMPROVE INTERNAL CONTROL REVIEW OF BOND TRUSTEES
The Authority does not have adequate procedures for reviewing
internal controls in place at trustee banks that administer outstanding
bonds.
The Authority has 55 trustees and paying agents as of June
30, 2004. The trustees and paying
agents are chosen by the borrower, but subject to approval by the
Authority. At June 30, 2004, the
total amount of conduit debt under trustee management is approximately $19
billion representing approximately 950 issues. The trustees receive interest and principal payments, make
interest payments to investors and perform various reporting functions. The Authority has not evaluated the
significance of the 55 trustees and paying agents to determine which are
performing accounting functions significant to the Authority’s
operations. Because of the significance
of the procedures performed, many of the trustees have an internal control
review performed by an outside auditor in the form of a SAS 70 report.
The Authority does not have adequate procedures in place to
determine from which trustees it should obtain SAS 70 reports. Nor does the Authority have adequate
procedures in place to review and evaluate the SAS 70 reports on its
trustees. In our testing, we noted
the Authority did not have SAS 70 reports on all of its trustees. Out of the 12 SAS 70 reports reviewed, we
noted two (2) trustee SAS 70 reports that contained deficiencies in their
internal controls. Although these two
(2) trustees are responsible for less than 3% of the bonds outstanding,
procedures need to be established to review all of the SAS 70 reports and
follow up on findings noted in those reports.
Due to the significance of the reliance placed by the
Authority on the procedures performed by the trustees and paying agents, it
is critical that internal controls be properly monitored. Without appropriate monitoring, errors
could be made in bond principal and interest payments, payments to investors
or various reporting requirements.
(Finding 4, pages 18-19)
We recommended the
Authority establish procedures to appropriately monitor the internal controls
of the trustees and paying agents responsible for bond administration. This includes procedures for obtaining,
reviewing and following-up on SAS 70 reports of all trustees.
Authority officials
accepted our recommendation and indicated that they are establishing
procedures to monitor the internal controls of institutions responsible for
administration of bond proceeds.
NONCOMPLIANCE WITH THE ILLINOIS PROCUREMENT CODE AND STATEWIDE
MANAGEMENT SYSTEM PROCEDURES
The Authority does not have adequate procedures in place to
ensure compliance with the Illinois Procurement Code and Statewide Accounting
Management System (SAMS) procedures relating to purchasing and contractual
compliance.
The
Illinois Finance Authority had 24 contractual agreements (contracts) during
the audit period, however, they were unable to provide auditors with a copy
of 7 (29%) contracts. Of the
remaining 17 contracts, we noted the following:
·
6 contracts (4
contracts with fixed fees totaling $150,620 and 2 with variable terms)
required to be filed with the State Comptroller’s Office were not filed.
·
5 contracts (3
contracts with fixed fees totaling $130,620 and 2 contracts with variable
terms) that were subject to competitive bidding were entered into without
undergoing the competitive selection process. These contracts required the
Department of Central Management Services (DCMS) approval and they
were not filed with DCMS. These
contracts also were required to be published in the Illinois Procurement
Bulletin and they were not published.
These contracts required disclosures of financial interest and the
required disclosures were not obtained.
·
Payment was
processed for one fixed fee contract totaling $28,120 prior to the effective
date of the contract;
·
Four contracts with actual payments totaling $209,440
were noted to be emergency services.
However, there were no emergency purchase affidavits filed with the
Office of the Auditor General for these contracts.
Illinois
Procurement Code (30 ILCS 500/1-1 et seq.) and Statewide Accounting
Manual System (SAMS) Procedure 15.10.40 details the principles of competitive bidding and
economical procurement practices applicable to all purchases and contracts,
including, but not limited to, requirements as to which contracts are to be
filed with the State Comptroller and DCMS, restrictions on advance payments,
which contracts are to be published in the Illinois Procurement Bulletin;
required Disclosures, and procedures for emergency purchases.
The
lack of compliance with State statute and SAMS procedures undermines the
principle of accountability through public disclosure, increases the risk of
overpaying for contractual services, of the State bearing additional risk not
addressed in contractual provisions, and of contracting with parties with a
conflict of interest with the Authority or the State. (Finding 5, pages 20-21)
We recommended that the
Authority implement controls and procedures to ensure compliance with the
Illinois Procurement Code and SAMS procedures when procuring contractual
services.
Authority officials
accepted our recommendation and stated that they have catalogued all
contracts in effect and maintained signed original copies in their Chicago
office. Authority officials further
indicated that copies of contracts will be mailed to DCMS and to the Office
of the Comptroller as required.
NEED TO COMPLY WITH THE STATE OFFICIALS AND EMPLOYEE ETHICS ACT
The Authority did not
maintain a positive timekeeping system for its employees, officers, or Director
of time spent on official state business in quarterly hour increments.
The “State Officials and
Employees Ethics Act” (Act) (5 ILCS 430/5-5c) requires the Authority to
develop a personnel policy for all employees to document their time. The Act requires all employees to complete
a time sheet documenting hours worked each day on official state business to
the nearest quarter hour. (Finding
11, page 29)
We recommended that the
Authority modify their personnel policies and begin maintaining time sheets
on all employees to ensure compliance with the Act.
Authority officials
accepted our recommendation and stated that they are in the process of
modifying personnel policies and procedures to require that employees
maintain time sheets to record their activities as required by the Act.
OTHER FINDINGS
The remaining findings are less significant
and are reportedly being giving attention by the Authority. We will review progress toward
implementing our recommendations in our next audit of the Authority.
Mr. Michael Pisarcik, Chief
Administrative Officer of the Illinois Finance Authority, provided the
Authority’s responses.
AUDITORS’ OPINION
Our auditors state the financial statements of the Authority
as of and for the six months ended June 30, 2004 are fairly presented in all
material respects.
____________________________________
WILLIAM
G. HOLLAND, Auditor General
WGH:JAF:pp
SPECIAL ASSISTANT AUDITORS
McGladrey & Pullen, LLP were our special assistant
auditors on this audit.
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