REPORT DIGEST ILLINOIS STATE UNIVERSITY FINANCIAL AUDIT, SINGLE AUDIT, AND COMPLIANCE EXAMINATION FOR THE YEAR ENDED JUNE 30, 2017 Release Date: March 20, 2018 FINDINGS THIS AUDIT: 7 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 3 -- 0 -- 3 Category 2: 2 -- 2 -- 4 Category 3: 0 -- 0 -- 0 TOTAL: 5 -- 2 -- 7 FINDINGS LAST AUDIT: 4 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 SYNOPSIS • (17-02) The University did not comply with its revenue bond covenants. • (17-03) The University did not ensure certain transactions were properly reported within the University’s financial statements. • (17-04) The University failed to request an appropriation for its proportion of collegiate license plates sold to support scholarships for its in-State students. • (17-05) The University did not always ensure compliance with the University Faculty Research and Consulting Act and University policies regarding outside employment. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NONCOMPLIANCE WITH BOND COVENANTS The Illinois State University (University) did not comply with its revenue bond covenants. During testing, we noted the University calculated excess funds under the University Guidelines and transferred moneys out of the University’s Auxiliary Facilities System (System) to the University’s Income Fund in violation of its debt covenants. We reviewed the University’s financial audits and compliance examinations dating back to Fiscal Year 1982 and concluded the following: • $1,763,614 was calculated as excess funds within the System at the end of Fiscal Year 2016 and transferred from the System to the University’s Income Fund during Fiscal Year 2017; and, • $8,318,521 was calculated as excess funds within the System at the end of Fiscal Year 2017 and transferred from the System to the University’s Income Fund during Fiscal Year 2018. In order to remedy this matter, the University returned $10,082,135 on January 17, 2018, to the System from the University’s Income Fund. University management corrected the Fiscal Year 2016 error on its Fiscal Year 2017 financial statements by reclassifying $1,763,614 in unrestricted cash and cash equivalents within the Income Fund to restricted cash and cash equivalents for the System. (Finding 2, pages 17-18) We recommended the University review its bond covenant compliance on a routine basis to identify and rectify any noncompliance conditions. University officials agreed with the recommendation. INADEQUATE CONTROL OVER ACCOUNTING AND FINANCIAL REPORTING The University did not ensure certain transactions were properly reported within the University’s financial statements. During testing, we noted the following: • Throughout the fiscal year, the Illinois State University Foundation (Foundation) pays certain costs on behalf of the University. Frequently, these transactions arise when departments across the University choose to submit an invoice for payment by the Foundation instead of charging the expense against their University accounts. The auditors noted the University and Foundation did not have a process in place to identify and report the revenues and expenses associated with these on-behalf nonexchange transactions within the University’s financial statements, which totaled $4,257,836 during Fiscal Year 2017. University management corrected this error in the University’s final financial statements. • During our review of the University’s grant accounting at June 30, 2017, we noted the University netted the accounts receivable portion of several grants against the unearned revenue portion of other grants. This error resulted in the University understating both accounts receivable and unearned revenue by $907,636. • During the academic year, the faculty members of the University’s laboratory schools spend time observing the University’s College of Education’s student teachers. Initially, the laboratory schools incur the expense associated with these transactions. At the end of the academic year, the University performs an internal transaction to charge these expenses against the College of Education’s accounts, which was not eliminated for financial reporting purposes. As such, the revenues and expenses recorded in the University’s draft financial statements were overstated by $1,300,492. • During analytical reviews of the University's accounts, we noted the University improperly capitalized demolition costs associated with the University's South Campus Complex (the former Atkin-Colby and Hamilton-Whitten residence halls and the attached Feeney Dining Center), totaling $4,223,295, as land improvements. • One of 44 (2%) tested cash disbursements subsequent to fiscal year end, totaling $327,929, was not split between Fiscal Year 2017 activity occurring before June 30, 2017, totaling $196,757, and Fiscal Year 2018 activity occurring after June 30, 2017, totaling $131,172. This invoice pertained to interior painting at the South Tower of the Watterson Towers over the summer. • During our review of the University’s cash reconciliations at June 30, 2017, we noted an unsupported reconciling error, totaling $235,581. After discussions with the University, it appears this amount represents an unrecorded equity adjustment from a prior period. (Finding 3, pages 19-21) We recommended the University enhance its internal control over financial reporting to ensure transactions with the Foundation are properly reported, accounts receivable and unearned revenue from grants are properly reported, internal activity is eliminated, demolition costs are properly recorded, transactions split among fiscal years are properly recorded, and bank reconciliations are prepared with proper documentation to support reconciling items. University officials agreed with the recommendation. NONCOMPLIANCE WITH THE ILLINOIS VEHICLE ACT The University failed to request an appropriation for its proportion of collegiate license plates sold to support scholarships for its in-State students. During testing, the auditors noted the University had not requested, drawn down, and disbursed scholarships of $127,100 to eligible students from the University’s proportion of collegiate license plates sold. This amount represents fees collected and deposited into the State Treasury by the Secretary of State from Calendar Year 2010 through Calendar Year 2015, which were available for appropriation to the University during Fiscal Year 2012 through Fiscal Year 2017. (Finding 4, page 22) We recommended the University request an appropriation from the General Assembly for its proportional share of collegiate license plates sold and award scholarships to residents of the State using those moneys. University officials agreed with the recommendation. NONCOMPLIANCE WITH THE UNIVERSITY FACULTY RESEARCH AND CONSULTING ACT The University did not always ensure compliance with the University Faculty Research and Consulting Act and University policies regarding outside employment. During testing, we noted: • 44 of 93 (47%) cases of outside employment had the Request for Approval of Secondary/ Outside Employment Form (Form PERS 927) approved by the University’s Provost between one to 321 days late. • 29 of 91 (32%) cases of outside employment did not have the Annual Report of Secondary/ Outside Employment Form submitted by the faculty member by the deadline of August 31, 2017. (Finding 5, pages 23-24) This finding has been repeated since 2012. We recommended the University Provost implement internal controls to ensure faculty members with outside research, consulting services, or employment receive written pre- approval to conduct the requested activity and annually disclose the time spent on these activities in accordance with State law and University policy. University officials agreed with the recommendation and stated they will continue to assess the faculty research and consulting approval process to ensure more timely approvals and disclosures. (For the previous University response, see Digest Footnote #1.) OTHER FINDINGS The remaining findings pertain to inadequate controls over reporting restricted accounts, noncompliance with the Illinois Human Rights Act, and noncompliance with the State Officials and Employees Ethics Act. We will review the University’s progress towards the implementation of our recommendations in our next financial audit and compliance examination. AUDITOR’S OPINIONS The auditors stated the financial statements of the University as of and for the year ended June 30, 2017, are fairly stated in all material respects. The auditors also conducted a Single Audit of the University as required by the Uniform Guidance. The auditors stated the University complied, in all material respects, with the types of compliance requirements that could have a direct and material effect on the University’s major federal programs for the year ended June 30, 2017. ACCOUNTANT’S OPINION The accountants conducted a compliance examination of the University for the year ended June 30, 2017, as required by the Illinois State Auditing Act. The accountants qualified their report on State compliance for Findings 2017-001, 2017-002, and 2017-003. Except for the noncompliance described in these findings, the accountants stated the University complied, in all material respects, with the requirements described in the report. This financial audit, Single Audit, and compliance examination 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:djn DIGEST FOOTNOTES #1 – Noncompliance with the University Faculty Research and Consulting Act – Previous University Response 2016: The University agrees with the recommendation and will continue to assess the faculty research and consulting approval process and implement modifications to ensure more timely approvals and annual disclosures of outside research, consulting and employment activities.