The Regional Office of Education #46 did not have sufficient internal controls over the financial reporting process.

The Regional Office of Education #46 did not present quarterly reports to its county boards, as required by the School Code.

The Regional Office of Education #46 did not report accurate outstanding obligations associated with the Truants Alternative and Optional Education grant in its expenditure reports.

The Regional Office of Education #46 did not classify transactions appropriately in its accounting system.

The Regional Office of Education #46 did not complete monthly reconciliations of its pooled cash for the year ended June 30, 2007 until November 19, 2007.

The Regional Office of Education #46 did not have sufficient collateral in place to insure their cash balances against possible loss.

The Regional Office of Education #46 did not have adequate controls over fixed assets.

The Regional Office of Education #46 did not allocate interest earned from their commingled bank account to each fund.

The Regional Office of Education #46 had not established sufficient internal control procedures over disbursements and purchases.

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Controls Over Financial Statement Preparation

The Brown, Cass, Morgan, and Scott Counties Regional Office of Education #46 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 #46 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 some of the processing of 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.

The Regional Office did not maintain adequate controls over the financial reporting process and numerous adjustments would have been required to present financial statements in accordance with generally accepted accounting principles. The Regional Office of Education #46 had significant problems with its accounting system and internal controls which caused the auditors to disclaim an opinion on the financial statements. For example, auditors, in their review of the Regional Office’s accounting records, noted the following:

The Regional Office incorrectly posted payroll to various individual grant and program payroll cash accounts throughout the general ledger. The incorrect postings caused negative balances in the program accounts when these balances should be zero at the end of each pay period. Regional Office management was unable to adjust the general ledger to reflect the correct balances.
The general ledger included seven accounts for which the account code was invalid and did not assign assets, liabilities, or fund balances to a specific program or fund. The largest of these was a Fund Balance/Retained Earnings account with a balance of $19,230.
The Regional Office does not record any accrual entries. As a result, entries were not made related to accounts receivable, accounts payable, or deferred revenues.
The Regional Office does not have a system for approval of journal entries to assure they are accurate and appropriate.
Various grants/programs in the general ledger had funds due to their granting agency that were prior year liabilities or unexpended grant funds from the current year. These funds were not returned to the granting agency. Management stated that they do not return funds unless the granting agency requests them.
The Regional Office could not provide an auditable general ledger. Revenue and expenditure transactions posted to the general ledger were inconsistently accounted for and could not be properly tracked. There were also numerous transfers recorded in the general ledger at the end of the fiscal year in an attempt to correct other transaction mispostings. These transfers were inconsistently posted.
The Regional Office was not able to produce a government-wide trial balance or individual fund trial balances due to accounting system limitations.
The Regional Office could not provide a complete listing of fixed assets over $500. The fixed asset listing provided by the Regional Office did not record depreciation in accordance with the Regional Office’s fixed asset policy for current year additions.

Because of problems related to the accuracy of the general ledger, auditors terminated work before testing was

completed and issued a disclaimer of opinion on the financial statements for the year ended June 30, 2007. 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 07-9, pages 23-25)

Auditors recommended that as part of its internal control over the preparation of its financial statements, including disclosures, the Regional Office of Education #46 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 #46 responded that there were subsidiary records showing that the grants were expended, but the general ledger was not corrected to show this completed expenditure of funds. The ROE noted that they have hired both an independent accounting software consultant and a CPA consultant to work with the office in order to put practices in place so the proper recording procedures will be used in the future. They also noted that there will be ongoing training for their office bookkeeper to monitor and check that this is done correctly.

CONTROLS OVER COMPLIANCE WITH LAWS AND REGULATIONS

The Illinois School Code (105 ILCS 5/3-5) states that the county superintendent shall present under oath or affirmation to the county board at its meeting in September and as nearly quarterly thereafter as it may have regular or special meetings, a report of all his acts as county superintendent, including a list of all the schools visited with the dates of visitation. (This mandate has existed in its current form since at least 1953.)

The Regional Office of Education #46 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.

According to the Regional Office, this reporting requirement was not a part of the normal office procedures and the Regional Superintendent was unaware of the requirement. The September 2007 and December 2007 reports for fiscal year 2008 were sent to the county boards in December 2007 and quarterly thereafter. (Finding 07-1, pages 10-11)

Auditors recommended that the Regional Superintendent should attend the county board meeting in September and quarterly thereafter to report all of his acts, including a list of the all the schools visited and dates of visitation as required by 105 ILCS 5/3-5.

The Regional Office of Education #46 responded that they did miss the September meeting, but this process has become part of normal office procedures and all reports are currently being made in a timely fashion.

INACCURATE EXPENDITURE REPORT

The Regional Office of Education #46 did not report accurate outstanding obligations associated with the Truants Alternative and Optional Education grant in its expenditure reports. The Regional Office of Education submitted expenditure reports showing obligations as the difference between actual expenditures and the budgeted amount of the grant. These obligated expenditures did not correspond to specific outstanding liabilities. Reported obligated amounts were simply the remaining balances of the grant.

Amounts submitted on grant expenditure reports to the Illinois State Board of Education should be in agreement with the general ledger. (Finding 07-2, page 12) This finding was first reported in 2003.

Auditors recommended that the Regional Office of Education #46’s management should review expenditure reports and the supporting documentation prior to their actual filing to ensure actual expenditures and specific outstanding obligations related to the grant are reported.

The Regional Office of Education #46 responded that they have hired both an independent accounting software consultant and a CPA consultant to work with the office in order to put practices in place so the proper recording procedures will be used in the future. They noted that there will be ongoing training for their office bookkeeper to monitor and check that this is done correctly. (For previous Regional Office response, see Digest Footnote #1.)

IMPROPER EXPENDITURE CLASSIFICATION

Regional Office of Education #46 did not classify transactions appropriately in its accounting system. In our analytical tests of expenditures, we noted that the Regional Office of Education #46 had several issues related to classification of expenditures including:

· A total of $22,920 in program expenditures was charged initially to the County Support Fund instead of being posted to the program actually incurring the expense. The appropriate program was later expensed and the County Support Fund was reimbursed. However, the County Support Fund reimbursement was posted as revenue instead of reducing the expense. Consequently, revenues in the County Support Fund were overstated.

· A total of $745 of capital outlay items was recorded as supplies.

· Expenditures were inconsistently recorded. For example, pest control services totaling $245 were charged to the following four different expenditure classifications: Other Professional and Technical Services; Repair and Maintenance; Other Property Services; Other Purchased Services.

Transactions are not being recorded in accordance with the Illinois Program Accounting Manual and ROE Accounting Manual. Financial reports prepared by the ROE require additional analysis in order to be comparable and consistent with reporting requirements and GAAP. (Finding 07-3, pages 13-14)

Auditors recommended that the Regional Office of Education #46 should ensure that expenditure amounts are classified correctly and consistently in the general ledger as required by the Illinois State Board of Education, the Illinois Administrative Code, and by the ROE Accounting Manual.

The Regional Office of Education #46 responded that they recognize that these errors did occur and have hired both an independent accounting software consultant and a CPA consultant to work with this office in order to put practices in place so the proper recording procedures will be used in the future. They note that there will be ongoing training for their office bookkeeper to monitor and check that this is done correctly.

RECONCILIATION OF POOLED CASH ACCOUNT

Regional Office of Education #46 maintains a pooled cash account for many of their funds. The total of all funds in a pooled cash account should equal the total cash recorded in the general ledger. The pooled cash account should be reconciled in a timely manner and not less than monthly. In addition, cash recorded in individual programs should accurately reflect the transactions of the individual programs.

The ROE did not complete monthly reconciliations of its pooled cash for the year ended June 30, 2007 until November 19, 2007. Even after the November reconciliations were completed, cash within many of the individual grants and programs did not balance. Auditors noted at least four (4) instances in which cash for individual programs was distributed from the wrong accounts resulting in incorrect fund balances.

Inaccurate recording of program transactions could cause inaccurate expenditure reports, inaccurate grant reporting information, and incomplete and inaccurate financial statements. (Finding 07-4, page 15)

Auditors recommended that the Regional Office of Education #46 should ensure that all individual pooled cash account transactions are reconciled in a timely manner and not less than monthly. The Regional Office should also begin accurately reporting individual program transactions in the financial records.

The Regional Office of Education #46 responded that they have hired both an independent accounting software consultant and a CPA consultant to work with this office in order to put practices in place so the proper recording procedures will be used in the future. They noted that there will be ongoing training for their office bookkeeper to monitor and check that this is done correctly.

UNDERCOLLATERALIZATION OF BANK ACCOUNTS

Regional Office of Education #46 did not have sufficient collateral in place to insure their cash balances against possible loss. 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 institutions’ trust departments in the Regional Office of Education #46’s name. In addition, prudent business practice requires that all cash and investments held by financial institutions for the ROE be adequately covered by depository insurance or collateral.

The Regional Office of Education #46 had a bank balance at year end that was undercollateralized by $30,579, leaving it exposed to custodial credit risk. The face value of the securities pledged was adequate; however, the market value of pledged securities was inadequate. The market value of pledged securities should be used to determine the adequacy of coverage. Failure to secure full collateral on cash and investment balances may result in monetary losses to the Regional Office.

According to Regional Office management, there was an agreement with the financial institution to automatically pledge securities for deposits, but neither the bank nor the Regional Office understood the concept that these pledged securities should be pledged based on their market value rather than their face value. (Finding 07-5, page 16) This finding was first reported in 2005.

Auditors recommended that the Regional Office of Education #46 should monitor collateral requirements for its bank accounts. The Regional Office should consider making a formal arrangement with the bank to automatically pledge securities for any deposit amounts in excess of the FDIC insured amount and ensure that adequate coverage is

obtained based on the market value of the pledged securities.

The Regional Office of Education #46 responded that its banks now understand that they need to pledge at elevated levels in order to insure that the market value of the security is actually as high as, or higher than its investment levels. (For previous Regional Office response, see Digest Footnote #2.)

Inadequate Controls Over Property and Equipment

The Regional Office of Education #46 did not have adequate controls over fixed assets. The Regional Office of Education (ROE) Accounting Manual requires each ROE to maintain detailed fixed asset records for both accounting purposes as well as insurance purposes, for fixed assets costing $500 or more. Generally accepted accounting principles require that an inventory of all fixed assets and depreciation schedules for assets meeting the capitalization threshold for reporting be maintained.

In addition, sound internal controls require that policies and procedures on fixed assets should cover acquisition and tagging, recording and reporting, depreciation (if applicable), transfers and dispositions, and annual physical inventory, and that they should be formally documented and consistently applied.

The equipment listing provided by the Regional Office was inaccurate and incomplete. Auditors noted the following in tests of fixed assets:

· A laptop computer and personal digital assistant with a total value of $1,837, which had been stolen in August 2005, were included on the fixed asset listing;

· Two new phone systems and two defibrillators with a total value of $9,474 were omitted from the list; and

Equipment items were not tagged with fixed asset tag numbers that clearly indicated they were the property of the Regional Office. Several of the items not included on the fixed asset listing were older items clearly indicating that a tagging system was not in place.

The absence of a sound system of internal controls over fixed assets can result in inaccurate reporting of fixed assets and inadequate physical control for equipment items. An incomplete fixed asset listing does not provide an adequate basis for physical control and losses may occur without being detected.

According to Regional Office management, there was a policy to track fixed asset inventory, however, steps had never been taken to assign specific responsibility for each step to individuals. Consequently, no one was aware of who was responsible for each step. (Finding 07-6, pages 17-18)

Auditors recommended that the Regional Office of Education #46 should adhere to the ROE Accounting Manual fixed asset policy and procedures to effectively and efficiently monitor property acquisitions, transfers and disposals, and provide for accurate reporting of fixed asset balances.

The Regional Office of Education #46 responded that they have created a new manual with specific descriptions of responsibilities for each of the steps involved and whose responsibility it is.

Failure to Allocate Interest Earned

The Regional Office of Education (ROE) Accounting Manual states that if dollars from two or more funds are combined in one bank account or fund, the ROE must allocate, on a reasonable basis, a portion of the interest earned on that bank account or fund to each of those funds. The allocation should be done no less than monthly when bank statements are received.

The Grant Funds Recovery Act (30 ILCS 705/1 et seq.) states that interest earned on grant funds becomes part of the grant principal and is treated accordingly for all purposes unless the grant agreement and/or the grant regulations provides otherwise. The Act further states that any grant funds not expended (or legally obligated) by the end of the grant period must be returned to the grantor.

Interest earned on funds that are not grants but are set up by statute (examples include Institute, GED, and Bus Driver) must be allocated to the fund and expended for the same purpose.

The Regional Office did not allocate interest earned from its commingled bank account to each fund. For Fiscal Year 2007, Regional Office of Education #46 earned a total of $12,141 in unallocated interest. The Regional Office received various grant funds from State and federal sources, as well as funds received for services provided by their Institute, GED, and Bus Driver Training funds.

Interest earned on excess funds that are not allocated to that particular fund may result in unallowable expenditures and noncompliance with State and federal statutes and regulations. Regional Office of Education #46 had established a system to allocate interest earned in their commingled cash account to each fund on an annual basis rather than a monthly basis. (Finding 07-7, pages 19-20)

Auditors recommended that the Regional Office of Education #46 develop a plan to appropriately allocate interest earned on commingled funds and follow the appropriate State and federal statutes and regulations.

The Regional Office of Education #46 responded that they have developed a plan to appropriately allocate interest earned on commingled funds that follows the appropriate State and federal statutes and regulations. They noted that they had been allocating on an annual basis rather than the prescribed monthly basis.

Inadequate Internal Control Procedures

The Regional Office of Education #46 had not established sufficient internal control procedures over disbursements and purchases. The Regional Office of Education (ROE) Accounting Manual establishes that the Regional Superintendent of Schools is responsible for establishing and maintaining an internal control system over disbursements and purchases to prevent errors and fraud.

During the audit we noted the following weaknesses in the Regional Office’s internal control system:

A. The monthly bank reconciliations were not completed until November of 2007 for the fiscal year ended June 30, 2007.

B. Disbursement checks are signed electronically and mailed to vendors before supporting documentation is approved by the Regional Superintendent.

C. The bookkeeping function is located in a different city than the Regional Office’s primary location making it more difficult for the Regional Superintendent to provide adequate oversight of the accounting function.

D. In 2 of 25 credit card charges reviewed, approval of the expenditure was not documented, and for 18 of 25 credit card transactions tested, approval occurred 1 to 30 days after the payment was made.

E. The budget module of the Regional Office’s accounting system was not in place during the year. As a result, budget to actual reviews were not done for grant funds during the year.

F. Blank check stock was kept unlocked in the bookkeeper’s office. In addition, there are inadequate controls to ensure check stock from the proper checking account is being used to make disbursements.

G. The Regional Office paid finance and late fees totaling $108 and sales taxes totaling $89 on credit card purchases.

The internal control weaknesses noted above could result in unintentional or intentional errors or misappropriation of assets, where 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 07-8, pages 21-22)

Auditors recommended that the Regional Office of Education #46’s management should assure that a system of internal controls has been established and is maintained to control receipts, disbursements, and purchases and to prevent errors and fraud. The auditors made specific recommendations to address each of the internal control weaknesses cited in the finding.

AUDITORS’ OPINION

Our auditors expressed a disclaimer of opinion on the Brown, Cass, Morgan, and Scott Counties Regional Office of Education #46’s basic financial statements as of June 30, 2007.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:KJM

AUDITORS ASSIGNED

This audit was performed by the Office of the Auditor General's staff.

DIGEST FOOTNOTES

#1: INACCURATE EXPENDITURE REPORT--Previous Regional Office Response

In its prior response in 2006, the Regional Office accepted the recommendation, stating it will review expenditure reports and their supporting documentation prior to their filing.

#2: UNDERCOLLATERALIZATION OF BANK ACCOUNTS--Previous Regional Office Response

In its prior response in 2006, the Regional Office accepted the recommendation, stating it will monitor its bank balances on a monthly basis to make sure there is adequate collateralization to protect its cash and investments from potential loss.

Complete Regional Office responses to prior findings are available upon request from the Auditor General’s Office.

	FY 2007	FY 2006
TOTAL REVENUES	$1,627,058	$1,657,556
Local Sources	$322,826	$300,374
% of Total Revenues	19.84%	18.12%
State Sources	$1,143,473	$1,071,245
% of Total Revenues	70.28%	64.63%
Federal Sources	$160,759	$285,937
% of Total Revenues	9.88%	17.25%

TOTAL EXPENDITURES	$1,569,559	$1,578,626
Salaries and Benefits	$1,151,462	$1,131,268
% of Total Expenditures	73.36%	71.66%
Purchased Services	$187,815	$227,753
% of Total Expenditures	11.97%	14.43%
All Other Expenditures	$230,282	$219,605
% of Total Expenditures	14.67%	13.91%

TOTAL NET ASSETS	$1,115,936	$1,058,257

INVESTMENT IN CAPITAL ASSETS	$14,453	$14,788

Percentages may not add due to rounding.

BROWN/CASS/MORGAN/SCOTT COUNTIES

FINANCIAL AUDIT

FY 2007

FY 2006

TOTAL REVENUES