REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #2

ALEXANDER, JOHNSON, MASSAC, PULASKI, AND UNION COUNTIES

FINANCIAL AUDIT

(In Accordance with the
Single Audit Act and OMB Circular A-133)

For the Year Ended:

June 30, 2007

Summary of Findings:

Total this audit                  5

Total last audit                  1

Repeated from last audit   0

Release Date:

June 26, 2008

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

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

http://www.auditor.illinois.gov

SYNOPSIS

• The Regional Office of Education #2 was not following its established internal control procedures over receipts and disbursements. 

·        The Regional Office of Education #2 recorded internal reimbursements as local revenue instead of crediting a due to other fund and then reversing the transaction when the check is written to the other fund.

·         The Regional Office posted payroll expenditures for three pay periods in July and August 2008 to the general ledger prior to June 30, 2007.  As a result, the Regional Office’s cash and liabilities were understated.

·        The Regional Office of Education #2 classified $5,532 of capital outlay expenditures as supply and material expenditures instead of including them on their capital outlay listing.

·        The Regional Office of Education #2 did not have sufficient internal controls over the financial reporting process. 

        {Expenditures and Revenues are summarized on the reverse page.}

The Regional Office of Education #2 was not following its established internal control procedures over receipts and disbursements. 

The Regional Office of Education #2 recorded internal reimbursements as local revenue instead of crediting a due to other fund and then reversing the transaction when the check is written to the other fund. 

The Regional Office posted payroll expenditures for three pay periods in July and August 2008 to the general ledger prior to June 30, 2007.  As a result, the Regional Office’s cash and liabilities were understated.

The Regional Office of Education #2 classified $5,532 of capital outlay expenditures as supply and material expenditures instead of including them on their capital outlay listing.

The Regional Office of Education #2 did not have sufficient internal controls over the financial reporting process. 

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

INADEQUATE INTERNAL CONTROL PROCEDURES

         The Regional Office of Education #2 was not following its established internal control procedures over receipts and disbursements.  The Regional Superintendent of Schools is responsible for establishing and maintaining an internal control system over receipts and disbursements to prevent errors and fraud.  In testing, auditors noted the following: 

• In 11 credit card statements, 24 instances were noted where the Regional Office paid $132 in sales taxes on purchases.

• During testing of 108 disbursements:

-       Two instances did not document approval for transfers between bank accounts.

-       Twenty-three instances did not document approval of employee fiscal year 2007 salary plans.

• Bank statements and reconciliations were not reviewed by an individual independent of the disbursement and reconciliation preparation process.

• The Regional Office does not have formal capital asset disposal procedures to ensure all disposals are properly approved nor is there an independent review of the capital asset listing to ensure that the current year asset additions and disposals agree.

• Prepared checks are not being compared to the supporting documentation by an individual independent of the payroll and vendor disbursement process.

• The Regional Office’s controller can prepare payroll and vendor disbursement checks and has access to the Regional Superintendent’s signature stamp, which allows one person the ability to prepare and sign a check.

• Contrary to Regional Office policy, two instances were noted where employees made personal purchases on the ROE credit card and then reimbursed the ROE.

         Lack of effective internal control procedures could result in unintentional or intentional errors or misappropriations of assets, in which the errors or fraud could be material to the financial statements and may not be detected in a timely manner by employees in the normal course of performing their assigned duties. (Finding 07-01, pages 12a-12b)

         The auditors recommended that the Regional Office implement internal control procedures the ensure that the Regional Office does not pay sales taxes on purchases and that internal controls are followed for every purchase.  Auditors also recommended the strengthening of internal controls in the areas of bank reconciliations, check preparation process, and payroll disbursement.  Finally, auditors recommended that the Regional Office: develop formal capital asset procedures to ensure all disposals are properly approved and the capital asset listing agrees with current year asset additions and disposals; establish proper segregation of duties to ensure that no one individual has access to all steps of an accounting process; and ensure that the credit card policy is adhered to.

         Management of the Regional Office of Education #2 responded that although the Regional Office has followed its internal control procedures from previous years, under the new auditing standards or reporting, the Regional Office agrees that some internal control weaknesses were found.  The Regional Office noted that it has implemented the above recommendations to correct any weaknesses identified. 

RECORDING REIMBURSEMENTS FROM PROGRAMS

         The Regional Office of Education #2 recorded internal reimbursements as local revenue instead of crediting a due to other fund and then reversing the transaction when the check is written to the other fund.  As a result, the local revenue and expenses were overstated.

         Generally accepted accounting principles require that payments made on-behalf of another fund be recorded as a due to and due from other funds in the effected funds.  The Regional Office was not aware of the proper reporting of payments on-behalf of other funds and subsequent internal reimbursements. (Finding 07-02, page 12c)

         The auditors recommended that the Regional Office report expenditures on-behalf of other funds as due to and due from other funds in the effected funds and clear the due to and due from other funds when the reimbursement is recorded.

           The Regional Office of Education #2 responded that it agrees with the finding and has implemented the recommendation detailed above.

RECORDING OBLIGATIONS

         The Regional Office of Education #2 prepared and signed payroll checks for their July 15, 2007, July 31, 2007, and August 15, 2007 pay periods prior to June 30, 2007, but did not disburse the checks to the employees until the appropriate pay dates.  The Regional Office posted the payroll expenditures for these pay periods to their general ledger prior to June 30, 2007 as a reduction of cash and as an expenditure.  As a result, the Regional Office’s cash and liabilities were understated.

         Generally accepted accounting principles require obligations at year end to be recorded as a liability to the entity.  The Regional Office was not aware of the proper reporting of obligated salaries at year end. (Finding 07-03, page 12d)

         The auditors recommended that the Regional Office report obligated salaries at year end as a liability to the Regional Office and prepare the actual payroll checks at the end of the appropriate payroll period.

         The Regional Office of Education #2 responded that for instructional staff that end their work in May but would like to spread their salary out and receive checks throughout the summer, checks have been written and dated in June for the three above mentioned pay periods.  Staff members had the option to pick up all of their checks as soon as they were written, or the Regional Office could hold the checks and mail them at the time of the pay periods.  Most employees chose to keep their checks at the office and have them mailed throughout the summer.  In the future, the checks will still be written and dated in June, but all of the checks will be mailed to the staff members.

IMPROPER EXPENDITURE CLASSIFICATION

         The Regional Office of Education #2 classified $5,532 of capital outlay expenditures as supply and material expenditures instead of classifying their capital outlay expenditures in excess of their established capitalization threshold, in the correct account code and including those items on their capital outlay listing. 

         Misclassification of capital outlay expenditures may cause inaccurate expenditure reporting as well as an incomplete listing of capital assets.  The Regional Office made an error when posting the expenditure. (Finding 07-04, page 12e)

         The auditors recommended that the Regional Office classify capital outlay expenditures, in excess of their capital threshold, in the correct account code and include those items on their capital asset listing.

           The Regional Office of Education #2 responded that it agrees with this finding and will ensure that all employees involved in the coding of items are aware of the rules and regulations regarding classifying items for accounting purposes.

Controls Over Financial Statement Preparation

         The Regional Office of Education #2 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 #2 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.

         In their review of the Regional Office’s accounting records, auditors noted that the Regional Office did not have adequate controls over the maintenance of complete records of accounts receivable, accounts payable, or deferred revenues.  While the Regional Office did maintain records to indicate the balances of accounts payable, accounts receivable, and deferred revenues, not all entries were made by the ROE to reconcile their grant activity, such as posting grant receivables and deferred revenues.  The Regional Office’s financial information required several adjusting entries to present the financial statements in accordance with generally accepted accounting principles.  (Finding 07-05, pages 12f-12g)

         The auditors recommended that, as part of its internal control over the preparation of its financial statements, including disclosures, the Regional Office of Education #2 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 #2 responded that it accepts the degree of risk associated with this condition because the added expense of seeking additional accounting expertise to prepare and/or review financial statements would take away from the funds available to provide educational services for the schools in the region.

AUDITORS’ OPINION

         Our auditors state the Regional Office of Education #2’s financial statements as of June 30, 2007 are fairly presented in all material respects.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:JB

SPECIAL ASSISTANT AUDITORS

Our special assistant auditors were Kemper CPA Group, LLP.