REPORT DIGEST REGIONAL OFFICE OF EDUCATION #1 ADAMS AND FINANCIAL AUDIT (In Accordance with the For the Year Ended: June 30, 2007 Summary of Findings: Total this audit 9 Total last audit 5 Repeated from last audit 5 Release Date: June 24, 2008
State of
Office of the Auditor General WILLIAM G. HOLLAND AUDITOR GENERAL
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SYNOPSIS · During the past fiscal year, the Regional Office of Education #1 recorded a portion of the revenue and expense transactions of the West Central Regional System #240 in its general ledger system. · The Regional Office of Education #1 had three programs with excess cash balances at June 30, 2007 that had not been obligated, and the balances were not refunded to the granting agencies by August 15, 2007. · All fiscal year 2007 bank reconciliations of Regional Office of Education #1 were completed between two and ten months late. · The Regional Office of Education #1 did not comply with certain statutory administrative requirements. · A comparison of expenditure reports to the Regional Office of Education #1’s general ledger revealed instances where the totals on the final 2007 expenditure reports did not agree with the Regional Office of Education #1’s general ledger. · The Regional Office of Education #1 did not have sufficient internal controls over the financial reporting process. · The Regional Office of Education #1 did not have adequate controls over fixed assets. · The Regional Office of Education #1 incurred finance charges and paid sales taxes. · Some employees of the Regional Office of Education #1 received forms of compensation which were not appropriately reported to the Internal Revenue Service.
{Expenditures and Revenues are summarized on the reverse page.} |
REGIONAL OFFICE OF EDUCATION #1
FINANCIAL AUDIT
For The Year Ended June 30, 2007
|
FY 2007
|
FY 2006
|
TOTAL REVENUES |
$1,807,306 |
$1,674,394 |
Local Sources |
$332,340 |
$289,892 |
% of Total Revenues |
18.39% |
17.31% |
State Sources |
$1,095,264 |
$1,086,884 |
% of Total Revenues |
60.60% |
64.91% |
Federal Sources |
$379,702 |
$297,618 |
% of Total Revenues |
21.01% |
17.77% |
|
||
TOTAL EXPENDITURES |
$1,839,880 |
$1,645,713 |
Salaries and Benefits |
$870,523 |
$851,575 |
% of Total Expenditures |
47.31% |
51.75% |
Purchased Services |
$265,237 |
$229,666 |
% of Total Expenditures |
14.42% |
13.96% |
All Other Expenditures |
$704,120 |
$564,472 |
% of Total Expenditures |
38.27% |
34.30% |
|
|
|
TOTAL NET ASSETS |
$663,795 |
$696,369 |
|
|
|
INVESTMENT IN
CAPITAL ASSETS |
$49,975 |
$43,120 |
|
||
Percentages
may not add due to rounding |
REGIONAL
SUPERINTENDENT |
During Audit Period: Honorable Raymond Scheiter Currently: Honorable Raymond Scheiter |
During the past
fiscal year, the Regional Office of Education #1 recorded a portion of the
revenue and expense transactions of the West Central Regional System #240 in
its general ledger system.
The Regional Office of Education #1 had three programs with excess cash balances at June 30, 2007 that had not been obligated, and the balances were not refunded to the granting agencies by August 15, 2007.
All fiscal year 2007 bank reconciliations of Regional
Office of Education #1 were completed between two and ten months late.
The Regional Office of Education #1 did not comply with
certain statutory administrative requirements.
A comparison of expenditure reports to the Regional
Office of Education #1’s general ledger revealed instances where the totals
on the final 2007 expenditure reports did not agree with the Regional Office
of Education #1’s general ledger.
The Regional Office of Education #1 did not
have sufficient internal controls over the financial reporting process.
The Regional Office
of Education #1 did not have adequate controls over fixed assets.
The Regional Office
of Education #1 incurred finance charges and paid sales taxes.
Some employees of the
Regional Office of Education #1 received forms of compensation which were not
appropriately reported to the Internal Revenue Service. |
FINDINGS, CONCLUSIONS AND RECOMMENDATIONSTRANSACTIONS OF TWO ENTITIES ARE IN ONE ACCOUNTING SYSTEM During the past fiscal year, the Regional Office of Education #1 recorded a portion of the revenue and expense transactions of the West Central Regional System #240 (WCR) in its general ledger system. The WCR administers vocational education services for the region, and Regional Office of Education #1 acts as a fiscal agent for the WCR. According to governmental accounting standards, transactions of two separate primary government units should not be co-mingled in one general ledger system. According to GASB 14, a special purpose government is a primary government if it has the following three characteristics: a separately elected governing board, fiscal independence, and status as a separate legal entity. The WCR has a separately elected board, is a legally separate entity, and is fiscally independent. During Fiscal Year 2007, the Regional Office of Education #1 attempted to maintain a separate general ledger system for the WCR. However, the ROE continued to maintain WCR cash accounts on the ROE books and recorded certain WCR transactions in the ROE general ledger. (Finding 07-1, page 11) This finding was first reported in 2003. Auditors
recommended that Regional Office of Education #1 establish an entirely
separate set of records in order to eliminate the co-mingling of the Regional
Office of Education and the West Central Regional System accounting activity.
The Regional Office of Education #1 agreed with the recommendation, noting it will work to improve the general ledger systems in order to properly separate transactions of the West Central Regional System #240. (For previous Regional Office response, see Digest Footnote #1.) DISBURSEMENT OF EXCESS GRANT FUNDS The Regional Office of Education #1 had three programs with excess cash balances at June 30, 2007 that had not been obligated, and the balances were not refunded to the granting agencies by August 15, 2007. The three grant-funded programs had period-end cash balances totaling $42,089. In addition, the Regional Office of Education #1 had interest income earned from federal funding of $268 that was due back to the grantor agency. The
Illinois Grant Funds Recovery Act (30 ILCS 705/5) requires that all grant
funds that have not been expended or obligated by the end of the grant period
be returned to the granting agency within 45 days after the end of the
period. The Act also states that all
interest earned on grant funds held by a grantee shall become part of the
grant principal when earned and be treated accordingly for all purposes
unless the grant agreement provides otherwise. In addition, the Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local
Governments (34 Code of Federal Regulations Part 80.21) requires that
interest earned on federal fund balances in excess of $100 be remitted back
to the federal granting agency.
(Finding 07-2, pages 12-13) This
finding was first reported in 2003. The
auditors recommended that the Regional Office of Education #1 return any
unspent grant funds to the granting agency.
In addition, the Regional Office should remit interest income earned
from federal funding in excess of $100 to the related granting agencies. The Regional Office of Education #1 agreed with the finding. The Regional Office responded that it plans to obtain, from bookkeeping, accurate reconciled reports, at least annually, which consider: beginning fiscal year cash balances, current fiscal year grant income, current fiscal year program expenses, current fiscal year interest allocated to the programs, and year end cash balances by program. Furthermore, granting agencies will be notified of any excess grant funds, according to State forms, at period end. Excess funds with no activity during the previous two fiscal years will be consolidated. (For previous Regional Office response, see Digest Footnote #2.) BANK ACCOUNTS WERE NOT PROPERLY RECONCILED
FOR FISCAL YEAR 2007 All fiscal year 2007 bank
reconciliations of the Regional Office of Education #1 were completed between
two and ten months late. For example,
the August 2006 bank reconciliations were completed in June 2007, and the
January 2007 bank reconciliations were completed in July 2007. All cash account discrepancies were
eventually investigated and corrected. The effect of not properly performing
reconciliations was to carry incorrect cash balances on the books of the ROE
for nearly the entire fiscal year.
Also, not identifying and addressing unrecorded items negates the
effectiveness of this important internal control and causes expenditure
reports to granting agencies to be incorrect. Sound internal control requires bank
reconciliations to be performed monthly to ensure that all transactions have
been recorded. The bank reconciliation
process should include identifying and correcting all discrepancies between
the bank records and the books on a timely basis. (Finding
07-3, page 14) This finding was
first reported in 2002. The auditors recommended that the
Regional Office of Education #1 reconcile all bank statements every month and
correct any discovered discrepancies in a timely manner. The Regional Office of Education #1 agreed with the finding. The Regional Office responded that it plans to perform a monthly reconciliation of all bank accounts and correct any discovered discrepancies in a timely manner. (For previous Regional Office response, see Digest Footnote #3.) CONTROLS OVER
COMPLIANCE WITH LAWS AND REGULATIONS The Regional Superintendent did not
present at the September county board meeting, and as nearly quarterly
thereafter, a report of all his acts including a list of all the schools
visited and dates of visitation. The
Regional Superintendent did present one annual report to the county board,
but that report occurred in November 2006 rather than September 2006, and
quarterly reports thereafter were not prepared. These reports to the county board are required
by the Illinois School Code (105 ILCS 5/3-5) and the mandate has existed in
its current form since at least 1953. The Illinois School Code (105 ILCS 5/3-7) states that each school district shall, as of June 30 each year, cause an audit to be made of its accounts. Each school district shall on or before October 15 of each year, or by an extension date not to exceed 60 days, submit an original and one copy of such audit to the Regional Superintendent of Schools. The Regional Office of Education #1
supplied evidence that 6 of the 10 district financial statement audit reports
were submitted to the ROE by the due date or an extended due date. However, four of the districts submitted
their reports to the ROE between 1 and 10 days late with no documentation of
an approved extension. (Finding 07-4,
pages 15-16) The auditors recommended that the Regional Superintendent submit his annual report to the county board in September each year and quarterly thereafter as required by the Illinois School Code. Auditors also recommended that the Regional Office of Education #1 implement a system for monitoring whether or not copies of financial statements are on hand and making requests of the school districts in order to receive district financial statements as required by the Illinois School Code. The Regional Office of Education #1 responded that the Regional Superintendent did present an annual report to the county board in November, which identified the districts visited and dates of visitation. The ROE noted that it will work to complete the annual report by the September board meeting in the future, and the ROE will start preparing quarterly reports to the board. The Regional Office of Education #1 also responded that it will request audit reports from the school districts each year early enough in order to receive the reports by October 15 or by an extended due date. EXPENDITURE REPORT FOR EDUCATION FUND DID NOT AGREE TO GENERAL LEDGER A comparison of expenditure reports to the Regional Office of Education #1’s general ledger revealed instances where the totals on the final 2007 expenditure reports did not agree with the Regional Office of Education #1’s general ledger. For five different programs, expenditure amounts were over or under reported to the granting agencies by amounts ranging from $6,715 under reported to $11,573 over reported. Expenditure reports for education programs submitted to the Illinois State Board of Education and Illinois Department of Human Services should agree with the expenditures reported on the Regional Office of Education #1’s general ledger. The Regional Office of Education #1 personnel responsible for expenditure report preparation used numbers that were not yet adjusted for bank reconciliation differences. (Finding 07-5, page 17) This finding was first reported in 2005. The auditors recommended that Regional Office of Education #1 personnel responsible for preparing the expenditure reports should use expenditures per the general ledger after the bank reconciliations are done and all adjustments have been made. The Regional Office of Education #1 agreed with the finding. They responded that accounting personnel will not prepare reports to the Illinois State Board of Education or the Illinois Department of Human Services until all bank reconciliations are completed and all resulting adjustments have been made. (For previous Regional Office response, see Digest Footnote #4.) Controls
Over Financial Statement Preparation
The Regional Office of Education #1
is required to maintain a system of controls over the preparation of
financial statements in accordance with generally accepted accounting
principles (GAAP). Regional Office internal controls over GAAP
financial reporting should include adequately trained personnel with the
knowledge and expertise to prepare and/or thoroughly review GAAP based
financial statements to ensure that they are free of material misstatements
and include all disclosures as required by the Governmental Accounting
Standards Board (GASB). The Regional Office of Education #1
did not have sufficient internal controls over the financial reporting
process. The Regional Office maintains
their accounting records on the cash basis of accounting. While the Regional
Office maintains controls over the processing of most accounting
transactions, there are not sufficient controls over the preparation of the
GAAP based financial statements for management or employees in the normal
course of performing their assigned functions to prevent or detect financial
statement misstatements and disclosure omissions in a timely manner. For
example, auditors, in their review of the Regional Office’s accounting
records, noted the following:
The auditors recommended that, as
part of its internal control over the preparation of its financial
statements, including disclosures, the Regional Office of Education #1 should
implement a comprehensive preparation and/or review procedure to ensure that
the financial statements, including disclosures, are complete and
accurate. Such procedures should be
performed by a properly trained individual(s) possessing a thorough
understanding of applicable generally accepted accounting principles, GASB
pronouncements, and knowledge of the Regional Office of Education’s
activities and operations. The Regional Office of Education #1 responded that it will employ accountants familiar with ROE operations to prepare financial statements according to GAAP standards. INADEQUATE CONTROLS
OVER PROPERTY AND EQUIPMENT The Regional Office of Education #1 did not have adequate controls over fixed assets. In tests of fixed assets, auditors noted that the fixed asset listings did not have complete information as to the acquisition source document, acquisition month and day, fund and expense account number, and depreciation expense. The Regional Office of Education Accounting Manual requires each ROE to maintain detailed fixed asset records, for accounting and insurance purposes, for fixed assets costing $500 or more. Generally accepted accounting principles require an inventory of all fixed assets and depreciation schedules for assets meeting the capitalization threshold. The ROE Accounting Manual also states that the fixed asset inventory records should include: the inventory control number; major asset class; function and activity; reference to acquisition source document; acquisition date; vendor; short description of asset; unit charged with custody; location, fund and account from which purchased; method of acquisition; estimated useful life and method of depreciation; estimated salvage value; and date, method, and authorization of disposition. In addition, sound internal controls require that policies and procedures on fixed assets should cover acquisition and tagging, recording and reporting, depreciation, transfers and dispositions, and annual physical inventory, and that they should be formally documented and consistently applied. The absence
of a sound system of internal control over fixed assets can result in
inaccurate reporting of fixed assets and inadequate physical control for
equipment items. Regional Office
personnel were unaware of certain requirements listed in the ROE Accounting
Manual pertaining to fixed asset lists.
Also, Regional Office personnel have never attempted to calculate fixed
asset depreciation expense. (Finding
07-7, page 19) Auditors recommended that the Regional Office of Education #1 adhere to the ROE Accounting Manual to effectively and efficiently monitor property acquisitions, transfers and disposals, and provide for accurate reporting of fixed asset balances. The fixed asset listing should include all the details required by the ROE Accounting Manual, including depreciation expense. The Regional Office responded that it intends to comply with requirements of the ROE Accounting Manual pertaining to fixed asset information tracking and depreciation calculations. UNALLOWABLE FINANCE
CHARGES AND SALES TAX The Regional Office of Education #1, which is not subject to sales tax, paid $93 in sales tax during fiscal year 2007. The accounting department should have noted the charged sales tax and requested an invoice adjustment from the vendors. Also, a sample of credit card statements showed $324 in credit card finance charges during fiscal year 2007. If the accounting department had made all the payments on time, the charges would not have been incurred. Grant
provisions require that funding be spent on allowable costs. Internal controls should exist to prevent
payment of unallowable credit card finance charges and improperly charged
sales tax. According to Regional
Office officials, they lack sufficient funding to hire an adequate accounting
staff. (Finding 07-8, page 20) Auditors recommended that the Regional Office implement internal controls to ensure that disbursements are paid in a timely manner to avoid finance charges, and errantly charged sales tax should be challenged and corrected by the vendors before payment is remitted to them. The Regional Office responded that it intends to improve its payment procedures to avoid finance charges and improperly charged sales taxes. CERTAIN
COMPENSATION WAS NOT PROPERLY REPORTED THROUGH THE PAYROLL SYSTEM Some employees of the Regional Office of Education #1 received forms of compensation which were not appropriately reported to the Internal Revenue Service. Internal Revenue Service Publication
15-A requires existing employees of an entity who are compensated for duties
beyond the duties of their original agreement to be paid as wages subject to
all payroll taxes and withholdings.
The Internal Revenue Service Code Sections 61 and 274 also dictate
that certain employee fringe benefits are taxable. Auditors
noted the following instances where ROE employees received forms of compensation which were not
appropriately reported:
The year-end W-2’s for
2006 understated employee taxable income.
Also, employee compensation was not supported by adequate
documentation, which may result in incorrect reimbursement for services
provided. Based on discussions with
DHS, the performance incentives and mileage bonuses were allowable under the
grant agreement. The ROE staff were not aware of all of the relevant IRS
compensation and independent contractor rules. (Finding 07-9, pages 21-22) The auditors recommended that the
Regional Office report all additional compensation to existing employees as
wages subject to all applicable payroll taxes and withholdings. Auditors also recommended that management
of the Regional Office and payroll personnel should familiarize themselves
with appropriate rules to run an accurate payroll system or consider
outsourcing payroll. The Regional Office of
Education #1 responded that it has reviewed the finding and will report all
compensation of employees as wages subject to all applicable taxes and
withholding. It noted that payroll
personnel will familiarize themselves with appropriate rules for payroll
accounting. AUDITORS’ OPINION
Our auditors state the Regional Office of Education #1’s financial
statements as of June 30, 2007 are fairly presented in all material respects.
____________________________________ WILLIAM
G. HOLLAND, Auditor General WGH:JRB SPECIAL ASSISTANT AUDITORS Our special assistant auditors were
Fick, Eggemeyer & Williamson, CPA’s. DIGEST
FOOTNOTES
#1: TRANSACTIONS
OF TWO ENTITIES ARE IN ONE ACCOUNTING SYSTEM– Previous Regional Office
Response In
its prior response in 2006, the
Regional Office of Education #1 accepted the recommendation, noting it has
implemented a new general ledger system for fiscal year 2007 in order to
separately record transactions of the West Central Regional System #240. #2: DISBURSEMENT
OF EXCESS GRANT FUNDS – Previous Regional Office Response In
its prior response in 2006, the
Regional Office of Education #1 accepted the recommendation to prepare
accurate reconciled reports at year-end for its grant programs and will
notify the granting agencies of any excess grant funds at period end. #3: BANK ACCOUNTS WERE NOT PROPERLY
RECONCILED—Previous Regional Office Response In
its prior response in 2006, the Regional
Office of Education #1 accepted the recommendation to perform a monthly
reconciliation of all bank accounts and correct any discovered discrepancies
in a timely manner.
#4: EXPENDITURE REPORT FOR
EDUCATION FUND DID NOT AGREE TO GENERAL LEDGER—Previous Regional Office
Response In
its prior response in 2006, the
Regional Office of Education #1 agreed with the recommendation to have
personnel responsible for preparing the expenditure reports use expenditures
per the general ledger accounts after all adjustments have been made and make
necessary corrections to the final reports. |