For the Year Ended:

June 30, 2003

Total this audit                      5

Total last audit                      3

Repeated from last audit       2

Release Date:

March 9, 2004

State of Illinois

Office of the Auditor General

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 TDD (217) 524-4646

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• The University did not properly record purchases and disposals of capital assets.

• The University did not properly record construction-in- progress in the accounting records.

• The University did not comply with the requirements of the University Faculty Research and Consulting Act.

The University did not properly record purchases and disposals of capital assets in the property control records or in the University’s financial records.

• An item valued at $112,000 was purchased in 1992, but not reported as an addition until fiscal year 2003. In fiscal year 2003 the item was incorrectly recorded and incorrectly expensed.
• An item with a value of $109,531 was recorded as an addition twice and capitalized twice.
• Two items with a value of $20,220 were purchased in 2001 and not reported as additions until fiscal year 2003.
• Assets with a value of $48,211 (six items) were inadvertently deleted from property control records. When the error was discovered in fiscal year 2003 the items were re-added.

Generally accepted accounting principles require all capital asset additions and all deletions be recorded in the financial records in the year in which the transaction occurs. Also under the State Property Control Act (30 ILCS 605/6.02) the University "shall maintain a permanent record of all items of property."

Failure to record capital asset additions and deletions in the proper period can result in inaccurate financial reporting and can impede management oversight controls. (Finding 1, Pages 12-13)

We recommended that the University coordinate its current procedures for tracking property additions and deletions with its procedures for conducting physical counts of inventories.

Expenditures and capital appropriations related to construction in progress on the University’s College of Business building were not properly recorded in the University’s financial statements.

• Capital appropriations received from the Capital Development Board were reported as a reduction in operating expenditures rather than reported as capital appropriations. As a result, expenses and revenue were understated by $2,082,741 and $9,255,246 in fiscal years 2002 and 2003, respectively.
• Prior to fiscal year 2003, the University had recorded Capital Development Board capital appropriations one quarter late. The University’s June 30, 2003 financial statements reflect five quarters of capital appropriations, resulting in an overstatement of $1,201,493 in fiscal year 2003.
• The Illinois State University Foundation reimbursed the University $116,007 and $183,993 for costs related to the construction of the College of Business building in fiscal years 2002 and 2003, respectively. Neither the additions to construction in progress for the costs incurred on the building nor the revenue from the Foundation were recorded. This results in an understatement of assets and revenue.
• The University expensed $300,000 and $550,000 in fiscal years 2002 and 2003 that should have been capitalized and reflected as construction in progress at June 30, 2002 and 2003. The errors result in an overstatement of expenses and understatement of capital assets over the two-year period.

Generally accepted accounting principles require costs related to the construction of capital assets be capitalized in the year in which the transaction occurs.

Failure to record construction in progress in the proper period can result in inaccurate financial reporting and can impede management oversight controls. (Finding 2, Pages 14-15)

We recommended that the University review its financial reporting practice related to construction projects. Further, the University should record capital appropriations as well as funds received from the University’s Foundation as revenue. University management should also establish policies to ensure that future construction projects are reported appropriately.

University officials agreed with the recommendation and have completed a review of its practice for recording construction projects and have implemented new procedures to ensure that construction projects are properly reported. University policy has been modified to record capital appropriations and funds received from the Foundation as revenue.

The University Faculty Research and Consulting Act (110 ILCS 100/1) states that no full time member of the faculty of a state-supported institution of higher learning may undertake, contract for or accept anything of value in return for research or consulting services for any person other than that institution on whose faculty he serves unless 1) he has prior written approval of the President of the institution based on a request that estimates time to be spent and 2) he submits to the President an annual statement of actual time spent on such outside services. University policy states annual reports must be submitted to the College Dean by June 30^th.

We noted the following during our testing of 60 faculty requests for approval of outside employment:

• 30 of 60 (50%) of requests tested were not approved prior to start of outside employment,
• 13 faculty members did not submit annual reports by June 30^th, and
• 1 faculty member did not file a request seeking approval for outside employment.

Failure to seek prior approval for outside employment and timely filing of annual reports results in non-compliance with State statutes and University policy. (Finding 3, page 16)

We recommended that the University establish and implement procedures to ensure requests for approvals of outside employment and filing of annual reports are done in a timely manner.

University officials agreed with our recommendation and will send information to department chairpersons annually to ensure faculty awareness of the requirements of the University Faculty Research and Consulting Act. In addition, the University responded that the policy will be revised to require annual reports be submitted by August 31^st of each year to better correlate with faculty presence on campus. #9;

The remaining findings are less significant and are reportedly being given attention by University officials. We will review progress toward implementation of our recommendations in our next audit.

University responses to the findings were provided by University Comptroller Greg Alt in correspondence dated February 5, 2004.

Our auditors stated the University’s financial statements as of June 30, 2003 and for the year then ended, are fairly presented in all material respects.

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