INTRODUCTION
This
report covers our financial audit of the Illinois Housing Development Authority,
a component unit of the State of Illinois, for the year ended June 30,
2007. Information on the results of
testing performed in conjunction with our compliance attestation examination
and Single Audit for the year ended June 30, 2007 will be released in a
separate report.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INCOMPLETE DOCUMENTATION FOR THE RISK RATINGS ASSIGNED
TO PROGRAM LOANS
The
Authority did not document the rationale for the decisions made to support
the risk ratings assigned to all program loans under the new loan rating
methodology.
During
the year ended June 30, 2007, the Authority significantly modified the
methodology used to assign risk ratings to program loans. The new methodology was formally approved
by the Authority’s Board at the May 2007 Board meeting, and the Authority
implemented the new methodology when assigning risk ratings to the program
loans within the June 30, 2007 financial statements. Management held meetings with the asset
managers to discuss each loan, and assigned the appropriate rating to each
loan under the new methodology, however the rationale for the decisions made
to support the ratings was not always formally documented.
The
Authority has approximately $1,814,439,000 in loans outstanding at June 30,
2007. We selected 161 loans in the
multi-family, single family, and trust fund programs totaling approximately
$278,287,000 or 15% of the Authority’s program loan receivables as of June
30, 2007. For the loans that did not
document the rationale for the risk rating assigned under the new
methodology, we were able to observe other documentation and/or inquire of
management to support the appropriateness of the risk rating and the related
allowance for estimated losses.
Without
formally documenting the rationale for the decisions made to support the risk
rating for each loan under the new methodology, the allowance for estimated
loses could be misstated. (Finding 1,
pages 59-60)
Authority
officials concurred with our recommendation to implement procedures to
formally document the rationale for the decisions made to support the risk
rating assigned to all program loans.
INADEQUATE PROCESS FOR THE ESTABLISHMENT OF NEW LOANS
IN THE LOAN SUBSIDIARY SYSTEM
The
Authority does not have an adequate process for the establishment of new
loans in the loan subsidiary system.
The
Authority utilizes a loan subsidiary system (Benedict billing and receivable
system) to track loan activity and the outstanding loan balances of its
Multi-Family, HOME, and Affordable Trust Fund programs. The subsidiary system provides Authority
management with a formal platform to monitor program loans. The system is updated for program loans
issued to or redeemed by developments on an ongoing basis. The system automatically generates
principal and interest billing statements for distribution to developments
based on the input information.
During
our testing we noted the Authority does not have an adequate process to
ensure that new loans are accurately entered into the Benedict system. Specifically, we noted that one individual
is responsible for entering new loan information into the Benedict system
without a supervisory review of the information added or changed.
Without
ensuring controls embedded within the Benedict system are functioning
properly and can be relied upon to input and update these loan balances, the
risk exists that the true outstanding loan balance and activity will not be
known by management and properly reported in the financial statements. (Finding 2, pages 60-61) This finding was first reported in
2006.
We
recommended the Authority implement procedures to ensure new loans entered
into the Benedict system agree to the final loan documents.
Authority
officials concurred with our recommendation.
INADEQUATE RECONCILIATION PROCEDURES FOR DEPOSITS HELD
IN ESCROW
The
Authority does not have an adequate process for reconciling the general
ledger with the subsidiary ledger used to account for deposits held in
escrow.
Deposits
from developers, which are held in escrow in the Authority’s administrative
fund, may be used when necessary to pay principal and interest payments and
fund construction cost overruns, change orders, tax and insurance payments
and capital improvements. In
addition, on certain developments, letters of credit and assignments of
syndication proceeds are held by the Authority for similar purposes and to
fund potential operating deficits of the related developments; investment
income earned on deposited funds is credited to the respective developer’s
escrow accounts.
The
Authority did not reconcile the deposits held in the escrow subsidiary ledger
to the general ledger balance during the year ended June 30, 2007. We noted at June 30, 2007, the subsidiary
ledger balance used to account for the deposits held in escrow was
approximately $159,345,000, and the general ledger balance for the deposits
held in escrow was approximately $158,952,000, resulting in a difference of
approximately $393,000. The Authority
could not identify the reason for the difference.
Without
reconciling the deposits held in escrow, the Authority may not have adequate
funds on hand to satisfy liabilities incurred that are funded with escrow
balances. (Finding 3, page 62)
Authority
officials agreed with our recommendation to implement timely reconciliation
procedures for the deposits held in escrow.
INADEQUATE PROCESS FOR CALCULATING AND REPORTING LOSS
ON DEBT REFUNDING TRANSACTION
The
Authority does not have an adequate process for calculating and reporting the
loss on debt refunding transactions.
As
required under U.S. generally accepted accounting principles, when debt
refunding transactions result in the defeasance of debt, the principal amount
of the old debt and any unamortized bond issue costs, premiums or discounts
associated with the defeased bonds should be removed from the financial
statements. The difference between
the reacquisition price and the net carrying amount of the old debt (a gain
or loss) should be recorded, deferred and amortized as a component of
interest expense in a systematic and rational manner over the remaining life
of the old debt or the new debt, whichever is shorter. On the statement of net assets, this
deferred amount should be reported as a deduction from or an addition to the
new debt liability.
During
the year ended June 30, 2007, the Authority refunded approximately
$107,725,000 of the Multi-Family Housing Bonds with the issuance of new
housing bonds in the Mortgage Loan Program Fund, which resulted in the
defeasance of debt. The Authority did
not calculate the loss on the refunding transaction, and continued to report
the unamortized discounts, premiums, and issue costs pertaining to the
defeased bonds in the financial statements.
We recalculated a deferred loss of $12,351,000 which was reclassified
as a deduction to the outstanding balance of the new debt.
Without
a process in place to ensure gains or losses associated with debt refunding
transactions are calculated and reported in the financial statements in
accordance with U.S. generally accepted accounting principles, financial
statements could be materially misstated.
(Finding 4, pages 63-64)
We
recommended the Authority implement procedures to ensure gains and losses
associated with debt refunding transactions are calculated and reported in
the financial statements in accordance with U.S. generally accepted
accounting principles.
Authority
officials concurred with our recommendation.
AUDITORS’ OPINION
Our
auditors state the June 30, 2007 financial statements of the Illinois Housing
Development Authority are presented fairly in all material respects.
____________________________________
WILLIAM
G. HOLLAND, Auditor General
WGH:KMA:pp
SPECIAL ASSISTANT AUDITORS
KPMG
LLP were our special assistant auditors for the audit.
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