REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #26: HANCOCK
AND MCDONOUGH COUNTIES

FINANCIAL AUDIT
FOR THE YEAR ENDED: JUNE 30, 2015

Release Date:  July 14, 2016

FINDINGS THIS AUDIT:  0

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  1 -- 3 -- 4
Category 2:  1 -- 1 -- 2
Category 3:  0 -- 0 -- 0
TOTAL:  2 -- 4 -- 6

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

• (15-1)  The Regional Office of Education
#26 did not have sufficient internal
controls over the financial reporting
process.

• (15-2)  The Regional Office of Education
#26 did not have adequate internal control
procedures.

• (15-3) The Regional Office of Education
#26 did not have adequate internal
controls over expenditures.

• (15-4)  The Regional Office of Education
#26 was in noncompliance with reporting
grant requirements.

• (15-5)  The Regional Office of Education
#26 had inadequate internal controls over
inventory.

• (15-6)  The Regional Office of Education
#26 was not in compliance with payroll
reporting.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

CONTROLS OVER FINANCIAL STATEMENT
PREPARATION

The Regional Office of Education #26 is
required to maintain a system of controls
over the preparation of financial
statements in accordance with generally
accepted accounting principles (GAAP).
The Regional Office’s internal controls
over GAAP financial reporting should
include adequately trained personnel with
the knowledge, skills, and experience to
prepare GAAP-based financial statements
and include all disclosures as required by
the Governmental Accounting Standards
Board (GASB).

The Regional Office of Education #26 did
not have sufficient internal controls over
the financial reporting process.  The
Regional Office maintains its accounting
records on cash basis accounting during
the fiscal year and posts year-end accrual
entries for financial statement purposes.
While the Regional Office maintains
controls over the processing of most
accounting transactions, there were not
sufficient controls over the preparation
of 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.

During review of the Regional Office of
Education #26’s financial information
prepared by the Regional Office, the
auditors noted the following:

• The Regional Office did not have
adequate controls over the maintenance of
complete records of accounts receivable,
accounts payable, or unearned revenue.
While the Regional Office did maintain
records to indicate the balances of
accounts receivable, accounts payable, and
unearned revenue, no entries were provided
to reconcile the Regional Office’s grant
activity, such as posting grant
receivables and unearned revenue.
• Disbursements were miscoded by the
Regional Office to the wrong grants in the
Distributive Fund, and the Regional
Office’s own grant activity was not
recorded in the Distributive Fund.
• Numerous material adjustments were
needed to make the financial statements
comply with generally accepted accounting
principles.
• In addition, the Regional Office did not
have adequate controls to record and
report the Regional Office’s net accrued
pension liabilities/assets, deferred
outflows of resources, deferred inflows of
resources, and pension expenses in
accordance with GAAP.   Proposed adjusting
entries by auditors were approved and
accepted by the Regional Office’s
management.
According to the Regional Office of
Education #26’s management, current
funding levels were not adequate to hire
and/or train accounting personnel in order
to comply with these requirements.  In
addition, the complex requirements of GASB
Statements No. 68 and No. 71 were new for
Fiscal Year 2015 and will require
additional time and training before the
ROE can fully implement the requirements
on its own.  (Finding 2015-001, pages
12a-12c) This finding was first reported
in 2007.

The auditors recommended that as part of
internal control over the preparation of
financial statements, the Regional Office
of Education #26 should implement
comprehensive preparation procedures to
ensure that the financial statements are
complete and accurate.  These procedures
should be performed by a properly trained
individual(s) possessing a thorough
understanding of applicable GAAP, GASB
pronouncements, and knowledge of the
Regional Office of Education #26’s
activities and operations.

The Regional Office of Education #26
responded it accepts the degree of risk
associated with this condition because the
additional expense to seek outside
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 of Education #26 will
continue to work with the other Regional
Offices of Education to determine the most
effective method of ensuring that its
employees possess the knowledge required
to compile the necessary GAAP-based
financial statements.  The organization
will also research the possibility of
having another accounting company prepare
financial statements independent of the
auditors.  (For previous Regional Office
response, see Digest Footnote #1 located
at the end of the digest.)

INADEQUATE INTERNAL CONTROL PROCEDURES

The Regional Superintendent of Schools is
responsible for establishing and
maintaining an internal control system
over accounting transactions to prevent
errors and fraud.

Auditors noted the following weaknesses in
the Regional Office of Education #26’s
internal control system for which there
were no mitigating controls:

A. There is inadequate segregation of
duties over cash receipts.  Payments
received by check are given to the
individual who records them in the
accounting system.  The individual who
records receipts should not have physical
custody of the receipts.

B. Two of 20 (10%) journal entries
examined were not supported by adequate
documentation and auditors could not
assess their validity.  Three of 20 (15%)
journal entries examined had no evidence
of review by someone independent of the
general ledger process.

C. Revenue of $4,936 properly recorded in
the Western Area Purchasing Coop fund was
originally recorded in the Fingerprinting
fund and was then recorded as an expense
rather than an offset to revenue in the
Fingerprinting fund when it was moved to
the correct fund, causing revenues and
expenditures to be overstated by this
amount.

D. Supplies and materials below the
Regional Office’s capitalization threshold
totaling $1,436 were miscoded as capital
outlay.  Capital asset additions of $3,703
were miscoded as purchased services.
Capital asset additions totaling $15,960
were appropriately coded as capital outlay
but were not included on the Regional
Office’s capital asset schedule.  Three
items totaling $1,566 were appropriately
expensed and excluded from the capital
asset schedule in the prior year but were
incorrectly added to the capital asset
schedule in the current year.  Three items
totaling $1,397 from prior year’s capital
asset schedule were missing from the
current-year schedule.

E. Nine months of bank reconciliations
were not performed and reviewed in a
timely manner.  Because the June 2015
reconciliation was not performed until
October 2, 2015, a reconciling item of
$245,910 was omitted from the cash
balances reported to the auditors.  In
addition, receipts and disbursements
relating to FY2015 activity that occurred
after year end were recorded in cash in
FY2015 rather than accounts receivable and
payable, causing a cash overstatement of
$204,232.  Four FY2016 General State Aid
payments totaling $29,806 were incorrectly
recorded in FY2015, causing cash and
revenue to be overstated by this amount.

F. Education for Homeless Children and
Youth grant funding of $6,145 that
remained unspent in the Adult Learning
Resource Center Fund and was due back to
the grantor at the end of FY2013 had not
been returned to the grantor at the end of
FY2015.


G. There was no documented approval of the
pay increase for an employee who changed
from part-time to full-time status during
the year.

The Regional Office of Education #26 has
not established or documented sufficient
internal control procedures. (Finding
2015-002, pages 12d-12f) This finding was
first reported in 2012.

The auditors recommended the following for
the Regional Office of Education #26:

A. The individual responsible for the cash
recording process should not be given
physical access to cash receipts.  An
individual independent of the recording
process should make cash deposits and
verify that the amounts recorded agree to
deposit records.

B. All journal entries should be
accompanied by supporting documentation
and have documented review and approval by
someone independent of the general ledger
processes.

C. Revenues should be recorded in the fund
that earned the revenue.  Otherwise, if
revenue is initially recorded in another
fund, the associated transfer of cash to
the fund that earned the revenue should be
recorded as an offset to the associated
revenue in the reimbursing fund.

D. The Regional Office should establish
procedures to ensure its capital asset
schedule is maintained in accordance with
the Regional Office’s capital asset
policy.  The capital asset schedule should
be reconciled to the general ledger
capital asset and capital outlay accounts.

E. Bank balances should be timely
reconciled to the general ledger, and if
any discrepancies are identified, they
should be corrected.

F. Absent an extension or permission from
the grantor to carry unspent funding
forward to the next grant period, any
unspent grant funds at the end of the
grant period should be returned to the
grantor in a timely manner.

G. Approval by a member of management
should be documented for any changes in an
employee’s employment status or pay rate.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendations and has revised
the new Fulton/Hancock/McDonough/Schuyler
Regional Office of Education policies,
procedures and/or practices to address the
findings noted as needed.   (For previous
Regional Office response, see Digest
Footnote #2 located at the end of the
digest.) This finding was first reported
in 2012.

INADEQUATE INTERNAL CONTROLS OVER
EXPENDITURES

The Regional Superintendent of Schools is
responsible for establishing and
maintaining an internal control system
over accounting transactions, including
disbursements, to prevent errors and
fraud.

During testing, auditors noted the
following:

A. A duplicate payment of $1,126 was made
in the Bus Driver Training fund as the
result of a vendor submitting a duplicate
invoice.

B. Fiscal year 2016 software licenses
totaling $86,800 and a FY16 workshop
registration of $1,200 were expensed in
the current year rather than recorded as
prepaid expenses in the Education Fund
Apex and Truants Alternative Optional
Education Program Training accounts.

The Regional Office of Education #26 has
not established or documented sufficient
internal control procedures over
expenditures. (Finding 2015-003, page 12g)
This finding was first reported in 2013.

The auditors recommended the following for
the Regional Office of Education #26:

A. Vendor invoices should be reconciled to
purchase orders to ensure that duplicate
invoices are not paid.

B. The Regional Office should observe
proper cutoff and record expenses in the
fiscal year in which they were or will be
incurred.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendation and has revised
the new Fulton/Hancock/McDonough/Schuyler
Regional Office of Education policies,
procedures and/or practices to address the
findings noted as needed.  (For previous
Regional Office response, see Digest
Footnote #3 located at the end of the
digest.)

NONCOMPLIANCE WITH GRANT REQUIREMENTS

The Regional Office of Education #26 must
comply with grant accounting and reporting
requirements established by grant
agreements with the Illinois State Board
of Education (ISBE) and other grantors, in
addition to the requirements established
by ISBE’s fiscal policies and procedures
for grantees.  Among these requirements
are accurate, current, and complete
disclosure of grant financial activity, an
amended program budget if an expenditure
line item exceeds the budgeted amount by
the greater of $1,000 or 20%, and
reporting actual rather than estimated or
budgeted costs.

During testing, auditors noted the
following:

A. Expenditure reports submitted for the
McKinney Education for Homeless Children
14-4920-00, ROE/ISC Operations, Truants
Alternative Optional Education Program
(TAOEP) 15-3695-PD, and Early Childhood
3705-01 and 3705-00 grant programs did not
agree to the expenditures recorded in the
Regional Office’s accounting records.  A
total of $1,981 (ROE/ISC Operations) and
$7,847 (Early Childhood 3705-00) of
unexpended grant funding is due back to
ISBE from these programs.

B. Expenditures for purchased services in
the McKinney Education for Homeless
Children 14-4920-00 grant program exceeded
the budgeted amounts by more than ISBE’s
permitted threshold; however, an amended
budget was not submitted to ISBE.  In
addition, a $2,000 stipend payment was
miscoded as supplies rather than purchased
services in the Title I – Foundational
Services grant program; had it been
correctly coded, an amended budget would
have been required.

C. Activity for the Title II-Teacher
Quality – Leadership program was recorded
in the General Fund rather than tracked
separately in a restricted fund.

D. At October 5, 2015, the Early Childhood
3705-00 and 3705-01, McKinney Education
for Homeless Children, and Title II –
Teacher Quality grant programs were frozen
because the fourth quarter and the final
grant expenditure reports had not been
filed with ISBE by the deadline.  In
addition, the Family Violence Coordinating
Council grant’s fourth quarter and final
expenditure reports had not been filed
with the grantor by their deadlines of
July 15 and July 30, 2015, respectively.
FY2016 payments of $78,000 in the Early
Childhood 3705-00 program and $80,130 in
the Early Childhood 3705-01 program had
been frozen and not paid to the Regional
Office as of October 5, 2015.  At that
time, the Regional Office had reported the
Early Childhood 3705-00 and 3705-01 grants
as under expended and a total of $15,590
due back to ISBE, but that amount had not
yet been returned to ISBE. This amount
includes the $7,847 noted in point A
above.

E. Support for two reimbursement requests
totaling $1,620 could not be located for
the Title I – Foundational Services grant
program.

F. Mileage reimbursements in the Child and
Family Connections grant program were paid
as a flat-rate monthly stipend rather than
per-mile actual costs.  The Regional
Office did not verify whether the monthly
stipend exceeded the maximum rate
permitted by the State.  A total of
$30,351 was expended for mileage
reimbursements in this program.

The Regional Office of Education #26’s
grant expenditure reports and budgetary
comparisons were not prepared using
information obtained from the Regional
Office’s accounting system.  The Education
Fund accounts established for the Title II
grant were not used for tracking this
grant’s activity.  Regional Office
personnel were unaware of or were unable
to timely perform all activities necessary
to comply with grant requirements.
(Finding 2015-004, pages 12h-12k)

The auditors recommended the following for
the Regional Office of Education #26:

A. Grant reports that disclose financial
information should be prepared using
current and accurate financial data based
on reports obtained from the Regional
Office’s accounting system.  The Regional
Office should establish policies and
procedures to ensure expenditures of
grants that span the Regional Office’s
fiscal year end are reported in the proper
period.

B. Budgets should be amended and
resubmitted to the granting agency
whenever expenditures by line item exceed
thresholds established by the grantor.

C. All grant activity should be recorded
using a separate set of accounts that
allows management and program directors to
monitor compliance with grant restrictions
that require funding to be used only for
specific purposes.

D. The Regional Office should establish
policies and procedures to ensure that all
reports required by grantors are timely
filed.

E. Records supporting all grant activity,
including requests for reimbursement,
should be retained and maintained in such
a way that they can be located when needed
to substantiate grant receipts and
expenditures.

F. If employees are reimbursed for mileage
at a flat monthly rate rather than the
State-approved per-mile rates [the rate
promulgated pursuant to 5 USC 5707(b)(2)],
the mileage reimbursement paid should be
compared to the State-approved, per-mile
rates and any excess reimbursement should
be reclassified as wages.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendations and has revised
the new Fulton/Hancock/McDonough/Schuyler
Regional Office of Education policies,
procedures and/or practices to address the
findings noted as needed. (For previous
Regional Office response, see Digest
Footnote #4 located at the end of the
digest.)

INADEQUATE INTERNAL CONTROLS OVER
INVENTORY

The Regional Superintendent of Schools is
responsible for establishing and
maintaining an internal control system
over accounting transactions, including
inventory, to prevent errors and fraud.

The Regional Office was not able to
provide auditors with documentation to
support the provided inventory value.  In
addition, the inventory value recorded in
the Regional Office’s general ledger was
not adjusted to the year-end value.

The Western Area Purchasing Co-op does not
perform a physical inventory count at year
end; rather, they perform a physical count
after most inventory has been delivered to
Co-op members and calculate the year-end
inventory value from supporting documents,
such as vendor invoices, shipping
manifests, and receipts of delivery to Co-
op members.  These documents did not
support the inventory value reported by
the Co-op.  (Finding 2015-005, page 12l)

The auditors recommended that the Western
Area Purchasing Co-op staff perform a
physical inventory count on or near the
fiscal year end or should maintain
adequate documentation to support the
calculated year-end value.  The accurate
inventory value should be recorded in the
Regional Office’s general ledger.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendations and has revised
the new Fulton/Hancock/McDonough/Schuyler
Regional Office of Education policies,
procedures and/or practices to address the
findings notes as needed.

PAYROLL REPORTING

Internal Revenue Code Reg. § 31.3121(d)-1
establishes that an individual is an
employee if the person for whom the
services are performed has the right to
control and direct the individual who
performs the services.  Revenue Ruling
87-41 further establishes a 20-factor
common-law test for employment status.
The Internal Revenue Service (IRS)
recently revised this 20-factor common-law
test for determining the proper
classification of workers between
independent contractors and employees by
condensing the prior 20 factors and
organizing those tests into three main
groups: (1) behavioral control, (2)
financial control, and (3) the type of
relationship of the parties.

During testing, auditors noted that three
individuals were paid as independent
contractors in the Title I – Foundational
Services program.  Their stipends,
totaling $11,700, were coded as purchased
services, on which payroll taxes were not
withheld or paid.  These same three
individuals were also paid as employees of
the Regional Office for providing similar
services in other programs.  The Regional
Office should not treat individuals as
both employees and as independent
contractors for providing similar
services.

The Regional Office was not aware of the
applicability of the IRS employment rules
and regulations to stipends paid from
grant awards. (Finding 2015-006, pages
12m-12n)

The auditors recommended that the Regional
Office of Education #26 develop policies
and procedures to ensure that all IRS
rules and regulations are followed with
regard to employee classification and
compensation and that the appropriate
payroll taxes are withheld and remitted to
the proper federal and State authorities.

The Regional Office of Education #26
responded it will review the current
auditors’ recommendations and has revised
the new Fulton/Hancock/McDonough/Schuyler
Regional Office of Education policies,
procedures and/or practices to address the
findings noted as needed.

AUDITORS’ OPINION

Our auditors state the Regional Office of
Education #26’s financial statements,
except for the Business-Type Activities
and the Western Area Purchasing Co-op, as
of June 30, 2015 are fairly presented in
all material respects.

FRANK J. MAUTINO
Auditor General

FJM:KJM

AUDITORS ASSIGNED:  Kemper CPA Group LLP
were our special assistant auditors.

DIGEST FOOTNOTE

#1: CONTROLS OVER FINANCIAL STATEMENT
PREPARATION – Previous Regional Office
Response

In its prior response in 2014, the
Regional Office of Education #26 responded
that it accepts the degree of risk
associated with this condition because the
additional expense to seek outside
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 also
noted that it will continue to work with
the other Regional Offices of Education to
determine the most effective method of
ensuring that its employees possess the
knowledge required to compile the
necessary GAAP-based financial statements.
The organization will also research the
possibility of having another accounting
company prepare its financial statements
independent of the auditors.

#2: INADEQUATE INTERNAL CONTROL PROCEDURES
– Previous Regional Office Response

In its prior response in 2014, The
Regional Office of Education #26 responded
that it will review the current auditors’
recommendation and will revise the
Regional Office’s policies, procedures
and/or practices to address the findings
noted as needed.

#3 INADEQUATE INTERNAL CONTROLS OVER
EXPENDITURES – Previous Regional Office
Response

In its prior response in 2014, the
Regional Office of Education #26 responded
that it will review the current auditors’
recommendations and will revise the
Regional Office’s policies, procedures
and/or practices to address the findings
noted as needed.

#4  NONCOMPLIANCE WITH GRANT REQUIREMENTS
– Previous Regional Office Response

In its prior response in 2014, the
Regional Office of Education #26 responded
that it will review the current auditors’
recommendations and will revise the
Regional Office’s policies, procedures
and/or practices to address the findings
noted as needed.