REPORT DIGEST NORTHERN ILLINOIS UNIVERSITY FINANCIAL AUDIT FOR THE YEAR ENDED JUNE 30, 2016 Release Date: February 9, 2017 FINDINGS THIS AUDIT: 2 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 0 -- 1 -- 1 Category 2: 1 -- 0 -- 1 Category 3: 0 -- 0 -- 0 TOTAL: 1 -- 1 -- 2 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 Northern Illinois University’s Financial Audit as of and for the year ended June 30, 2016. The Northern Illinois University’s Compliance Examination (including the Single Audit) covering the year ended June 30, 2016 will be issued at a later date. SYNOPSIS • (16-1) The University’s internal controls over financial reporting are not sufficient to prevent misstatements. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS IMPROVEMENTS NEEDED IN THE FINANCIAL REPORTING PROCESS The University’s internal controls over financial reporting are not sufficient to prevent misstatements. During our audit of the significant balances comprising the University’s financial statements we noted errors and deficiencies. Some of the more significant items were as follows: • The University improperly capitalized $1,267,471 of asbestos remediation costs as a capital asset instead of expensing them in fiscal year 2015. As the amount was not material to the financial statements, an audit adjustment was booked in fiscal year 2016 to remove the costs from capital assets by expensing them rather than restating opening net position. This corrects the year-end balance of capital assets and net position but results in current year operating expenses being overstated by $1,267,471. • The University has improperly capitalized net library book activity (additions – disposals) as an addition each year instead of separately tracking additions and deletions. This impacts the financial statements as the University is keeping older, fully depreciated books on its asset listing and expensing a portion of its additions each year instead of capitalizing them. Additionally, in fiscal year 2016, there was a formula error in the University’s calculation and disposals were added to additions instead of subtracted. When informed of the error, the University recorded a correcting entry which reduced net capital assets by $3,013,864 and increased operating expenses by the same amount. This partially corrected the error and an unrecorded audit adjustment was proposed to fully correct the misstatement. This results in net capital assets and opening net position being understated by $2,512,884 and $1,844,552 respectively, and current year operating expenses being overstated by $668,332. • The University improperly capitalized the amounts noted below as fiscal year 2016 capital asset additions. They were evaluated together for the purposes of determining a proposed adjustment: – $3,100,743 of costs already capitalized as an addition in fiscal year 2015 – $49,850 of costs billed in error by a vendor and refunded to the University – $32,908 of costs for which the University cannot provide a vendor invoice – $11,520 of employee training costs – $1,970 of overhead allocation for which there is not sufficient documentation to support that the costs were necessary to place the asset into service No adjustment was recorded which results in net capital assets being overstated at year-end by $3,012,275 and operating expenses being understated by the same amount. The year-end misstatement is less than the amount of errors noted above due to the depreciation the University recorded on the assets during the fiscal year totaling $184,716. • The University expensed $398,006 of leasehold improvements for one of its facilities in fiscal year 2015 instead of capitalizing the cost to capital assets and amortizing it over the life of the lease. The improvement should have been considered an intangible asset as the University has a legal right to use the improvements over the course of the lease. This results in a year-end understatement of net capital assets and ending net position of $250,430 and a $53,664 understatement of operating expenses. No adjustment was proposed as the dollar amounts were not individually significant to the financial statements. • The University participates in the Perkins Loan program under which it makes loans to students using both institutional and federal funds. The University has a receivable recorded for the loans and interest owed by students under the program and a liability recorded for the amount of the receivable that must be repaid to the federal government when the program is closed. In fiscal year 2005 the University recognized revenue of $784,920 for interest and fees students owed on the loans and increased the recorded loan receivable by the same amount. This receivable was to be reversed in fiscal year 2006 when the University received the interest and fees but was never reversed resulting in revenue being recorded twice. No adjustment was recorded in fiscal year 2016 to remove the receivable which results in an overstatement of net student loans, government loan fund advances, and opening net position by $784,920, $675,031, and $109,889, respectively. The overstatement of the receivable is split between the University’s opening net position and amount owed the federal government as the liability is adjusted each year based on the net income or loss generated by the loan program. • The University did not properly eliminate all inter-university transactions from the financial statements. The proposed adjustment was not recorded resulting in operating revenues and expenses being overstated by $2,087,937. (Finding 1, pages 5-11) This finding has been repeated since 2011. We recommended the University improve controls over financial reporting to ensure accurate presentation and disclosure of their annual financial statements. University officials concurred with the finding and stated they have conducted a process review of each component of this finding and is taking corrective actions. (For the previous University response, see Digest Footnote #1.) OTHER FINDING The remaining finding is reportedly being given attention by the University. We will review the University’s progress towards implementation of our recommendations in our next engagement. AUDITOR’S OPINION Our auditors stated the financial statements of Northern Illinois University as of June 30, 2016, and for the year then ended, are fairly stated in all material respects. FRANK J. MAUTINO Auditor General FJM:tlk DIGEST FOOTNOTES #1 – Financial Reporting Process – Previous University Response 2015: The University accepts the Auditor's recommendation. Management has conducted a process review of each component of this finding and has implemented corrective actions that include the following: 1.) Expand training for staff accountants on accounting guidelines, standards and reconciliation procedures. 2.) Expand use of technology and systems to automate manual processes. 3.) Update and refine policies and procedures for departments that provide data feeds to the accounting function. These steps will eliminate all material exceptions referenced in this audit finding.