REPORT DIGEST
REGIONAL OFFICE OF EDUCATION #25
HAMILTON AND JEFFERSON COUNTIES
Financial Audit (In accordance with the Single Audit Act and OMB Circular A-133)
For the Year Ended June 30, 2010
Summary of Findings:
Total this audit: 7
Total last audit: 3
Repeated from last audit: 3
Release Date: March 30, 2011
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 www.auditor.illinois.gov
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SYNOPSIS
• The Regional Office of Education #25 did not have
sufficient internal controls over the financial reporting process.
• The Regional Superintendent did not sign off his approval
of all journal entries.
• The Regional Office of Education #25 had excess working
capital reserves in its Internal Service Funds.
• The Regional Office of Education #25 did not have
sufficient collateral to cover deposits over the FDIC insured limit.
• The Regional Office of Education #25 did not fully comply
with State law when establishing or renewing its line of credit.
• The Regional Office of Education #25 did not properly
record internal activity with its blended component unit, the Hamilton-Jefferson
Educational Services Cooperative.
• The Regional Office of Education #25 did not have sufficient internal controls over its federal awards.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
CONTROLS OVER FINANCIAL STATEMENT PREPARATION
The Regional Office of Education #25 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 #25 did not have sufficient
internal controls over the financial reporting process. 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. Auditors,
in their review of the Regional Office’s accounting records, noted the following:
• Numerous material adjustments were required to present
financial statements in accordance with generally accepted accounting
principles.
• The Regional Office did not have adequate controls over
the maintenance of complete records of capital assets and did not calculate
depreciation expense.
According to Regional Office officials, they did not have
adequate funding to hire and/or train their accounting personnel in order to
comply with these requirements (Finding 10-01, pages 13-14) This finding was first reported in 2007.
The auditors recommended that, as part of its internal
control over the preparation of its financial statements, including
disclosures, the Regional Office of Education #25 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 #25 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.
The Regional Office noted that in an attempt to correct this
finding, they sent the Controller to various trainings to better understand
accrual accounting and reporting under generally accepted accounting principles
(GAAP). (For previous Regional Office
response, see Digest Footnote #1.)
INADEQUATE REVIEW OF JOURNAL ENTRIES
The Regional Superintendent for Regional Office of Education
#25 did not sign off his approval of all journal entries. The Regional Office of Education #25 is
responsible for establishing and maintaining an internal control system over
journal entries to prevent errors or fraud.
In addition, adequate controls over compliance with laws, regulations,
and grant agreements require supervisory review of expenditures charged to
grant programs.
Without appropriate review, unallowable costs could be
charged to grant program expenditures or errors in calculating allocations
could be made and not be detected in a reasonable period of time. While the Regional Superintendent stated that
he discussed journal entries with the Controller and verbally approved them,
there was no documentation of such approval. (Finding 10-02, page 15)
The auditors recommended that the Regional Superintendent
should review and approve all journal entries along with supporting information
documenting the allocations before the entries are posted to the accounting
records.
The Regional Superintendent agreed with this finding.
EXCESS WORKING CASH IN INTERNAL SERVICE FUNDS
The Regional Office of Education #25 had excess working
capital reserves in its Internal Service Funds.
Internal Service Funds are used to account for the administrative
services which are provided to many Regional Office of Education #25’s
funds. Revenue is generated through
charges to other funds using interfund billings. Regulations set forth by OMB Circular A-87
(revised 5/14/04) require charges by an internal service activity to provide
for the establishment and maintenance of a reasonable level of working capital
reserve. In addition, the full recovery
of costs is allowable. A working capital
reserve of up to 60 days cash expenses for normal operating purposes is
considered reasonable. A working capital
reserve exceeding 60 days may be maintained for exceptional cases; however, it
requires approval of the cognizant federal agency.
Over the last two years, average expenses within the
administrative Internal Service Funds were $316,188. Cash on hand in the administrative Internal
Service Funds at June 30, 2010 totaled $151,008, representing approximately 174
days of average expenses.
Additionally, the Regional Office paid $21,812 for
playground equipment with excess cash from the Internal Service Fund, which is
not a prescribed method of reducing the excess balance in the funds, as defined
above.
All programs with expenditures paid from the Internal
Services Funds’ indirect cost rate included a surcharge in addition to the cost
of the actual expenditure. The surcharge
varied based upon the type of expenditure being paid. The amount of each grant was overcharged is
not readily determinable. It is also not
readily determinable which program funds were used to purchase the playground
equipment.
The Regional Office of Education #25’s prior year indirect
cost rate was too high, as the calculation included funding for future
expenditures. The Regional Office was
not aware of the issue until late in fiscal year 2010 and did not have time to
make the necessary adjustments before the end of the year. (Finding 10-03, pages 16-18)
The auditors recommended that the Regional Office of
Education #25 should lower the indirect cost rate and provide credits to the
individual programs overcharged in prior years.
Funds for future equipment purchases should be accumulated in the
general fund or in a special revenue fund designated for that purpose. The Regional Office should not charge grants
for this expenditure, unless it is specifically allowed by the grant. Purchases
made out of Internal Service Funds for playground equipment should be
reclassified to a fund that would allow such expenditures.
The Regional Superintendent agreed with this finding.
UNINSURED DEPOSITS IN BANK
At June 30, 2010, the Regional Office of Education #25 did
not have sufficient collateral to cover deposits over the Federal Deposit
Insurance Corporation (FDIC) insured limit.
There were $54,971 of deposits in a bank that were uncollateralized and
uninsured.
The Public Funds Deposit Act (30 ILCS 225/1) gives the
authorization for deposits in excess of the federally insured limit to be
covered by pledged collateral held by the financial institution’s trust
department in the Regional Office of Education #25’s name. In addition, prudent business practice
requires that all deposits held by financial institutions for the Regional
Office be adequately covered by depository insurance or collateral.
Uninsured deposits could cause a loss to the Regional Office
of Education #25 if the bank failed. The
Regional Office had an agreement with the bank to monitor the cash balance and
make sure that collateral was sufficient to cover any balance that exceeded the
amount insured by FDIC. On June 29,
2010, deposits totaling $305,809 were made to the checking account from the
State of Illinois. The deposits resulted
in uncollateralized deposits of $54,971. (Finding 10-04, page 19)
Auditors recommended that the amount of pledged collateral
should be monitored periodically by the Regional Office personnel to ensure
that an adequate level is maintained.
The Regional Office should work with the bank to determine that
collateral is sufficient to cover large deposits.
The Regional Superintendent agreed with this finding.
CONTROLS OVER COMPLIANCE WITH LAWS AND REGULATIONS
The Regional Office of Education #25 did not fully comply
with the statutes when establishing a line of credit or renewing its line of
credit. The Illinois School Code in
section 105 ILCS 5/18-20 allows a Regional Superintendent to borrow an amount
up to 50 percent of the State payments that are due and payable, as certified
by the State Superintendent. Funds
borrowed under this section are to be repaid immediately upon receipt of
payments.
In a section added June 26, 2009, the Illinois School Code
105 ILCS 5/17-19 also allows a Regional Superintendent to take out a line of
credit in anticipation of revenues.
However, the Regional Superintendent is only allowed to take out 85
percent of current year anticipated grant revenue or 50 percent of next fiscal
year anticipated grant revenue, as certified by the State Superintendent. The Regional Superintendent shall authorize
this line of credit by executive order or resolution. The executive order or resolution shall set
forth facts demonstrating the need for the line of credit, the amount to be
borrowed, the maximum interest rate allowed, and the date by which the funds
will be repaid. Funds borrowed under
this section are to be repaid within 60 days after the revenues have been received.
The Regional Office did not fully comply with the statutes
when establishing the line of credit or renewing its line of credit on December
31, 2009 and on February 10, 2010. The Regional Office could not produce
certification documentation required by sections 5/18-20 or 5/17-19 of the
School Code regarding the revenue that was being borrowed upon and did not
authorize the line of credit by executive order or resolution.
The Regional Office of Education #25 originally took out a
line of credit on May 15, 2009, following the provision of the Illinois School
Code 105 ILCS 5/18-20 borrowing authority.
On June 26, 2009, the Illinois School Code 105 ILCS 5/17-19
establishment of lines of credit by Regional Superintendents became
effective. This new law had additional
requirements for Regional Superintendents to follow.
When the line of credit matured on December 31, 2009, it was
renewed through February 15, 2010. On February 10, 2010, the line of credit was
again renewed and the credit line available was increased. The Regional Superintendent could not
document compliance with the certification requirements of either of the
statutory provisions. Section 5/18-20 required that the grant payments to be
borrowed against be certified by the State Superintendent. In addition, the new
section 5/17-19 requires the Regional Superintendent to authorize the line of
credit by executive order or resolution.
(Finding 10-05, pages 20-21)
The auditors recommended that the Regional Office of
Education #25 should comply with the requirements of 105 ILCS 5/18-20 or 105
ILCS 5/17-19, as applicable, when borrowing against anticipated revenues.
The Regional Superintendent agreed with this finding.
RECORDING OF TRANSACTIONS IN THE REGIONAL COOPERATIVE FUND
The Regional Office of Education #25 did not properly record
internal activity with its blended component unit, the Hamilton-Jefferson
Educational Services Cooperative (Coop Board).
GASB No. 34 states that the interfund activity, including activity with
a government’s blended component units, can be reported as interfund
reimbursements. This interfund activity
should be reported as a reduction of the expenditure or expense by the
provider/recipient fund and an expenditure of the benefactor/paying fund. Additionally, the expenditures used to
reimburse the provider fund should be carefully monitored to make sure they are
classified in the correct expenditure category.
The Coop Board purchases supplies that it in turn resells to
the Regional Office. The Coop Board also
pays bills which it then allocates to the Regional Office’s funds. Rather than reporting the payments for these
purchases from the Regional Office’s funds as reduction of related expenditures
in the Coop Board’s accounting records, the Coop Board shows these
reimbursements as local revenue. As a
result, the expenditures are reported twice, once by the Regional Office’s
funds and once by the Coop Board. In
addition, the Coop Board is incorrectly reporting local revenue.
The Regional Office of Education #25 also misclassified some
expenditures when reporting activity with the Coop Board. Since the Regional Office’s funds are
reimbursing the Coop Board, the expenditures reported by both funds should be
classified to the same type of expenditure categories. However, several instances were noted where
the expenditures would be reported as one type of expenditure, such as
purchased services, in the Regional Office’s fund but would be reported as
another type of expenditure, such as supplies, by the Coop Board.
The Regional Office of Education #25’s Coop Board revenues
and expenditures were overstated. In
addition, some expenditures paid to the Coop Board were misclassified. The Regional Office’s personnel were not
aware of the proper reporting of internal activities between funds and its
blended component unit. (Finding 10-06, pages 22-23)
Auditors recommended that the Regional Office of Education
#25 should report payments between its funds and the Coop Board as internal
reimbursements. The Coop Board should
report a reduction in expenditures when it receives a reimbursement from the
Regional Office’s funds. The Regional
Office also needs to make sure that expenditures are classified properly when
reimbursing the Coop Board.
The Regional Superintendent agreed with this finding.
CONTROLS OVER FEDERAL AWARDS
The Regional Office of Education #25 did not have sufficient
internal controls over its federal awards.
The A-102 Common Rule and OMB Circular A-110 require that the
non-federal entities receiving federal awards establish and maintain internal
control designed to reasonably ensure compliance with federal laws,
regulations, and program compliance requirements. The objectives of internal control pertaining
to the compliance requirements for federal programs are found in OMB Circular
A-133.
Auditors, in their review of the Regional Office’s federal
award for Title I School Improvement and Accountability – System of Support
(Title I), Title II Teacher Quality – System of Support (Title II), State
Fiscal Stabilization Fund (SFSF) – Education State Grants, Recovery Act – ARRA
– General State Aid (ARRA Education), and State Fiscal Stabilization Fund
(SFSF) – Government Services, Recovery Act – ARRA General State Aid (ARRA
Government), noted the following:
• Some Title I and Title II expenditures had not yet been
paid out by October 26, 2010. The grant
period ended June 30, 2010, and all but one reimbursement had been received as
of September 30, 2010.
• At least one Title II reimbursement request that had been
sent to the grant administrator had not been reimbursed. The Regional Office did not realize that the
amount had not been reimbursed until noted by the auditor.
• The Regional Office did not record System of Support
revenue from separate revenue sources in separate accounts. Per an auditor request for the revenue
information from the Regional Office of Education #2 (which passes System of
Support funding to ROE #25), revenue was also received from State sources for
Title I and Title II.
• The Regional Office did not entirely spend its 2009 ARRA
Education grant within the grant period specified by the Illinois State Board
of Education. Some 2010 ARRA Education
and ARRA Government Services expenditures were also outside of the grant
period.
The Regional Office of Education #25 had Title I and Title
II payables at October 26, 2010 that should have been paid previously. The Regional Office did not receive all of
the reimbursements it was entitled to.
Revenues were misclassified between federal and State sources. The ARRA federal grants were not spent within
the specified period of availability.
This could result in the granting agency requesting reimbursements or
adjusting any future grant awards.
The Regional Office of Education #25 did not realize that
its procedures for its federal awards did not meet the objectives for internal
control over compliance requirements for federal programs. (Finding 10-07,
pages 24-26)
Auditors recommended that the Regional Office of Education
#25 should implement internal control procedures to ensure that all
transactions are properly recorded and accounted for and are executed in
compliance with laws, regulations, and the provisions of contracts or grant
agreements in accordance with OMB Circular A-133.
The Regional Superintendent agreed with this finding.
AUDITORS’ OPINION
Our auditors state the Regional Office of Education #25’s
financial statements as of June 30, 2010 are fairly presented in all material
respects.
WILLIAM G. HOLLAND
Auditor General
WGH:KJM
AUDITORS ASSIGNED:
West & Company, LLC were our special assistant auditors.
DIGEST FOOTNOTES
#1: Controls Over Financial Statement Preparation - Previous
Regional Office Response
In its prior response in 2009, the Regional Office of
Education #25 responded that it understands the nature of this finding and
realizes that this circumstance is not unusual in an organization of this
size. The Regional Office 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.
The Regional Office noted that in an attempt to correct this
finding, they contracted with a Certified Public Accountant to assist the
Regional Office with its yearend closing entries and who is willing to accept
responsibility for the financial statements.