REPORT DIGEST
REGIONAL OFFICE OF EDUCATION #34:
LAKE COUNTY
FINANCIAL AUDIT (In Accordance with the Single Audit Act and
OMB Circular A-133)
For the Year Ended June 30, 2010
Release Date: September 1, 2011
Summary of Findings:
Total this audit: 5
Total last audit: 1
Repeated from last audit: 1
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
____________________________
SYNOPSIS
• The Regional Office of Education #34 did not have
sufficient internal controls over the financial reporting process.
• The Regional Office of Education #34 did not apply
appropriate accounting principles.
• The Regional Office of Education #34 did not have proper
internal controls for reporting accrued compensated absences.
• The Regional Office of Education #34 did not have adequate
controls over purchased services expenditures.
• The Regional Office of Education #34 did not have adequate
documentation for payroll expenditures.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
CONTROLS OVER FINANCIAL STATEMENT PREPARATION
The Regional Office of Education #34 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 control 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 #34 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 the following:
• The Regional Office did not have adequate controls over
the maintenance of complete records of accounts receivable, accounts payable or
deferred revenue. While the Regional
Office maintained records to support the balances of accounts receivable,
accounts payable and deferred revenue, not all entries were made by the
Regional Office to reconcile their grant activity, such as posting grants
receivable and deferred revenue.
• The Regional Office’s financial information required
numerous adjusting entries to present the financial statements in accordance
with GAAP. These included multiple
adjusting entries from the prior year’s audit that were not recorded in the
general ledger. In addition, many of the
fund balance accounts listed on the trial balance received from the Regional
Office did not agree to the amounts reported in the prior year. The Regional Office made adjustments to the
beginning fund balances, however, for financial statement preparation, the
prior year ending balances were used as the beginning balances.
• Trial balance reports for 36 funds had positive or
negative amounts, rather than being $0.
• A bank account for the Regional Safe School Program fund
was not reconciled with the general ledger balance.
• Balances of income statement (nominal) accounts from the
trial balance and general ledger for the Regional Safe School Program captured
only the transactions from January 1, 2010 through June 30, 2010. Balances of the same nominal accounts from
July 1, 2009 through December 31, 2009 were closed into the fund balance
account. Auditors had to review the
detail of cash receipts and disbursements for the July 1, 2009 through December
31, 2009 time period in order to determine the proper account balances.
• Errors were noted during our review of individual account
balances. For example, investments
totaling $24,714 were recorded as accounts receivable and $71,115 due to other
governmental units were recorded as accounts payable.
According to Regional Office officials, delays in receiving
the auditors’ FY 09 adjusting journal entries impacted the Regional Office’s
ability to maintain up-to-date accounts and accurate balances. In addition, delays in payments of grant
funds by the State of Illinois severely affected closeout of the year’s
accounts and contributed to insufficiency of funding to adequately train
accounting personnel to prepare financial statements in compliance with GAAP,
as required by GASB. (Finding 10-1, pages 13-15)
The auditors recommended that, as part of its internal
control over the preparation of its financial statements, including
disclosures, the Regional Office of Education #34 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 #34 responded that it
agrees with the finding. The ROE #34
noted that it will implement preparation and/or review procedures to ensure
that financial statements, including disclosures, are complete and accurate.
FAILURE TO APPLY APPROPRIATE ACCOUNTING PRINCIPLES
Generally accepted accounting principles require that a
lease be capitalized if any one of following four criteria is a characteristic
of the lease transaction: 1) the lease
transfers ownership of the property to the lessee by the end of the lease term,
2) the lease contains bargain purchase options, 3) the lease term is equal to 75%
or more of the estimated economic life of the leased property, or 4) the
present value of the minimum lease payments at the inception of the lease,
excluding executory costs, equals at least 90% of the fair value of the leased
property. In addition, sound internal
controls require that an inventory of all fixed assets and depreciation
schedules for assets meeting the capitalization threshold for reporting be
maintained properly.
Interfund loans should be reported as interfund receivables
by the lender fund and interfund payables by the borrower fund. Interfund Reimbursements should not be
reported in the governmental entity’s financial statements as revenues and
expenses in order to avoid “double counting” of revenues and
expenses/expenditure items.
The Regional Office of Education #34 did not properly record
several transactions and, as a result, did not properly apply the appropriate
generally accepted accounting principles (GAAP).
• For FY 2010, payments on leases of certain equipment with
lease terms equal to the estimated economic life of the leased property, were
treated as operating leases and recorded as purchased services ($48,499). These leases met the criteria for capital
leases.
• The ROE #34 capitalizes items costing $5,000 or more. Based on our review of the schedule of capitalized
assets and related depreciation (schedule), the following were noted:
1. Items costing less than $5,000 were included in the
schedule.
2. Two of six capital lease equipment items tested were
listed at cost equal to the total lease payments and not at the present value
of the lease obligations.
3. Four of six capital lease equipment items tested were not
included in the schedule.
4. Due to an inaccurate basis of calculating the
depreciation expense, the computed net book value and depreciation expense was
overstated by $52,268 and understated by $12,001, respectively.
• Interfund receipts and disbursements pertaining to
reimbursements of TRS and THIS employee contributions ($181,106) were recorded
as revenues and expenses instead of receivables and payables.
According to Regional Office of Education #34 officials:
• The ROE #34 generally does not keep the equipment items
through the end of the lease term and considered the recording of the lease
transactions as purchased services proper.
• For monitoring purposes, the ROE #34 maintains a fixed
asset listing with equipment items costing $500 and above. The ROE #34 did not properly exclude items
below the capitalization threshold of $5,000 when calculating and recording
fixed asset additions and depreciation expense.
In addition, the ROE #34 did not have personnel with adequate training
and knowledge to record capital lease transactions in accordance with GAAP.
• For the reimbursements of TRS and THIS employee
contributions, the ROE #34 maintains a separate fund to account for the
receipts which are recorded as revenues and disbursements which are recorded as
expenses. (Finding 10-2, pages 16-18)
Auditors recommended that the Regional Office of Education
#34 should establish procedures to ensure that transactions are properly
accounted for and reported in accordance with generally accepted accounting
principles. If necessary, accounting and
reporting guidance should be obtained from technical resources to be in
conformity with GAAP. The fixed asset
schedule should also be completed to include all capital lease items, and only
capital assets above the capitalization threshold.
The Regional Office of Education #34 responded that it
agrees with the finding and will post proposed adjusting entries to record
transactions in accordance with GAAP.
The Regional Office noted that adjustments will be made to the fixed
assets/inventory schedule to allow appropriate identification of capital lease
items and separation of items above and below the $5,000 capitalization
threshold. The Regional Office also
noted that this will also ensure accurate future calculations of fixed asset
additions and depreciation expenses.
CONTROLS FOR REPORTING ACCRUED COMPENSATED ABSENCES
Governmental Accounting Standards Board (GASB) Statement No.
16, Accounting for Compensated Absences, requires that vacation leave, sick
leave, and other compensated absences with similar characteristics be accrued
as a liability as the benefits are earned by the employees if the leave is
attributable to past service and it is probable that the employer will
compensate the employees for the benefits through paid time off or some other
means, such as cash payments at termination or retirement (termination
payments). Alternatively, the liability
should be measured based on the sick leave and other compensated absences with
similar characteristics accumulated at the balance sheet date by those
employees who currently are eligible to receive termination payments as well as
other employees who are expected to become eligible in the future to receive
such payments.
Under terms of employment at ROE #34, employees are granted
general and sick leave in varying amounts.
Upon the termination of an employee eligible to use general leave, all
accumulated leave credit will be paid as of the date of termination up to a
maximum of 330 hours.
The Regional Office of Education #34 did not have adequate
controls in place for identifying and reporting the Regional Office’s liability
for accrued compensated absences. During
our review of the liability for accrued compensated absences for 25 employees,
we noted that the ROE #34 did not recognize a compensated absences liability in
its financial statements for fiscal years 2009 and 2010. Based on auditors’ computation, compensated
absences liability for fiscal years 2009 and 2010 totaled $140,319 and
$140,361, respectively. Auditors
proposed adjusting entries on the government wide and fund financial statements
to correct the compensated sick and vacation expenses and to restate beginning
net assets.
In addition, the Regional Office’s Education Services
Division maintains a spreadsheet to monitor vacation leave hours earned by each
eligible employee. Based on auditors’
review of vacation leave balances for five (5) employees, the following errors
were noted:
• Hours earned by two (2) employees were overstated by a
total of 19 hours due to an error in summarizing the numbers from the timecard.
• Hours earned by one (1) employee were overstated by a
total of 29 hours due to an error in computation. The computed vacation hours exceeded the
maximum of 330 hours.
Failure to implement adequate internal control procedures
for identifying, calculating and reporting the Regional Office’s liability for
accrued compensated absences may result in a material misstatement of the ROE
#34’s financial statements. This also
could result in incomplete and inaccurate disclosure of compensated absences
liability.
According to Regional Office of Education #34 officials, the
ROE #34 did not have personnel with adequate training and knowledge to comply
with GASB Statement No. 16, Accounting for Compensated Absences. (Finding 10-3, pages 19-20)
Auditors recommended that the Regional Office of Education
#34 should implement adequate internal controls to ensure that financial
information is complete and accurate. If
necessary, accounting and reporting guidance should be obtained from technical
resources to be in conformity with GAAP.
The Regional Office of Education #34 responded that it
agrees with the finding and will incorporate GASB Statement No. 16, Accounting
for Compensated Absences into office processes and procedures. The Regional Office also noted that it will
record proposed adjusting entries and calculate compensated absences liability
for FY 2011 and future years.
INADEQUATE CONTROLS OVER PURCHASED SERVICES EXPENDITURES
During their review of expenditures, auditors noted that the
contractual agreement for 1 of 11 (9%) contracts for the time period July 1,
2009 through June 30, 2010 was executed and signed on June 28, 2010. In addition, the Regional Office #34 did not
maintain documentation to support the hours worked and services provided. The amount paid totaled $35,721 and was paid
from local funding. The contract was
executed with the Assistant Regional Superintendent under a consultant
agreement to act as the Executive Director for the Regional Office #34’s
blended component unit, Education Services Division (ESD). The ESD is responsible for providing a
variety of in-service training and staff development opportunities to improve
the knowledge and skills of educators and for serving as the primary regional
delivery system for State and federal grant supported programs and services in
education. The Regional Office is the
administrative and fiscal agent for the ESD.
Good internal controls require that all contracts be
executed prior to services being performed and payments being made to
contractors. In addition, the Regional
Office is responsible for ensuring that contractors maintain documentation of
the hours worked and services provided under the contract.
Failure to execute contracts prior to when the services
begin and not maintaining documentation of the hours worked and the services
provided, may result in services being provided that are inconsistent with
program goals and activities, inadequate protection of the Regional Office’s
interests, and unallowable costs charged to the program.
Regional Office management stated that the services and
amount of the contractual services to be provided were established when the
employee began working at the Regional Office.
As a result, the ROE #34 did not have a current written contract on
file. (Finding 10-4, pages 21-22)
The auditors recommended that the Regional Office of
Education #34 establish procedures to ensure that all program costs are
sufficiently documented and adequately supported. Auditors noted that all consultant agreements
should be supported by a current written contract with detailed scope of
services and rates of compensation. The ROE #34 should also maintain
documentation to support hours worked and the services provided.
The Regional Office of Education #34 responded that it
agrees with the finding. The Regional
Office noted that corrective documents were created in June 2010 for FY2009,
FY2010 and FY 2011 contracts. The Regional
Office noted that it will continue to follow established procedures to ensure
program costs are sufficiently documented and adequately supported. The ROE also noted that all consultant
agreements will be supported by a current written contract with detailed scope
of services and rates of compensation.
INADEQUATE DOCUMENTATION FOR PAYROLL EXPENDITURES
Office of Management and Budget (OMB) Circular A-87, Cost
Principles for State, Local and Indian Tribal Governments, established
principles and standards for determining costs for federal awards carried out
through grants, cost reimbursement contracts, and other agreements with State
and local governments and federally recognized Indian tribal governments. To be allowable under federal awards, costs
must meet certain general criteria.
Those criteria, among other things, require the expenditures must be
allocable, reasonable, and supported by adequate documentation.
Part 4 of the OMB Circular A-133 Compliance Supplement for
the Department of Education prescribes that employee time and effort
distribution records must be maintained to document the portion of time and
effort dedicated to the single cost objective and each program or other cost
objective
supported by non-consolidated Federal funds or other revenue
sources.
During review of payroll expenditures, auditors noted the
following:
• Salaries and benefits totaling $666,607 for nine (9)
salaried employees assigned on multiple programs were allocated and charged to
the programs based on budgets. No time
allocation sheets or time and effort reports were prepared to account for
actual time charged by program.
• Three (3) employees who worked solely on Title I-School
Improvement and Accountability grant, did not prepare the required semi-annual
certification stating that they had worked full time on this program. Salaries and benefits for these employees
totaled $287,885.
Failure to prepare time allocation sheets did not provide a
sufficient basis for the allocation of actual payroll charges incurred by
program, which may result in a program being over or under charged for salary
and benefits. Also, noncompliance with
the Allowable Costs/Cost Principles of the Circular A-133 Compliance Supplement
may result in the federal funds being expended for unallowable purposes.
The Regional Office of Education #34 did not have
established policies and procedures regarding salaries and benefits that
incorporate the requirements of Allowable Costs/Cost Principles of the Circular
A-133 Compliance Supplement and the Cost Principles of OMB Circular A-87 for
Compensation for Personnel Services. In
addition, the Regional Office staff did not anticipate significant differences
between the budgeted and actual time spent by program and therefore did not see
the need to summarize time charges and re-allocate salary costs based on actual
time spent. (Finding 10-5, pages 23-26)
Auditors recommended that the Regional Office of Education
#34 should develop and implement adequate policies and procedures to ensure
compliance with the Allowable Costs/Cost Principles of the OMB Circular A-133
Compliance Supplement and Cost Principles of OMB Circular A-87 for Compensation
for Personnel Services. These policies
and procedures should include requiring staff involved in multiple programs to
submit time sheets by program or a time and effort report by program. The Regional Office should also establish a
payroll cost allocation procedure that allows for computation and comparison of
actual time charged with budgeted or pre-determined allocation rates on a
regular basis. Payroll charges by
program should be based on the time devoted and identified specifically to the
performance of those programs.
The Regional Office of Education #34 responded that it
agrees with the finding and will develop and implement adequate policies and
procedures to ensure compliance with the Allowable Costs/Cost Principles of the
OMB Circular A-133 Compliance Supplement and Cost Principles of OMB Circular
A-87 for Compensation for Personnel Services.
The Regional Office noted that the policies and procedures will include
requiring staff involved in multiple programs to submit a time and effort
report by program. The ROE noted that it
will also establish a payroll cost allocation procedure that allows for
computation and comparison of actual time charged to budgeted allocation rates
on a regular basis. The ROE stated that
payroll charges by program will be based on the time devoted and identified
specifically to the performance of those programs.
The Regional Office noted that these corrective actions will
be developed for full implementation in FY 2012. The ROE noted that FY 2011 time and effort
estimations will be based upon budget allocations as compared to completed
employee time and effort reports used to calculate monthly cumulative pay
entitlements.
AUDITORS’ OPINION
Our auditors state the Regional Office of Education #34’s
financial statements as of June 30, 2010 are fairly presented in all material
respects.
WILLIAM G. HOLLAND
Auditor General
WGH:KJM
AUDITORS ASSIGNED:
E.C. Ortiz & Co., LLP were our special assistant auditors.