REPORT DIGEST
BOARD OF INVESTMENT FINANCIAL AUDIT For the Year Ended: June 30, 2009 Release Date: February 16, 2010 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 (217) 782-6046 or TTY (888)
261-2887 This Report Digest and the
Full Report are also available on the worldwide web at http://www.auditor.illinois.gov |
SYNOPSIS ·
ISBI
did not have adequate controls over financial reporting for its securities
lending transactions. ·
ISBI
needs to enhance its accounting and reporting process for determining and
reviewing the fair value measurements and disclosures used for reporting its alternative
investments on a timely basis. {Financial data is summarized on the reverse page} |
FINANCIAL
AUDIT
|
STATEMENT
OF CHANGES IN NET ASSETS |
FY 2009 |
FY 2008 |
|
Additions:
Investment Income–Increase/(Decrease) in Fair Value Investment Income - Interest
& Dividends.................. Investment Income - Securities
Lending...................... Total Investment Income/(Loss)............................. Deductions:
Salaries and Benefits...............................................
Operating Expenses............................................... External Support (consulting and investment
fees)..... Total Expenses.................................................... Revenue Over / (Under) Expenses.................... Member
Systems’ Withdrawals.................................................. Net
Assets Beginning of the Year.............................................. Net
Assets End of the Year....................................................... |
$(2,592,469,141) 262,164,673 17,578,262 $ (2,312,726,206) $1,647,133 556,791 39,068,759 $ 41,272,683 $ (2,353,998,889) (277,000,000) 11,315,053,161 $ 8,684,054,272 |
$ (1,029,242,365) 316,825,531 16,624,470 $ (695,792,364)
$1,422,254 567,688 39,860,694 $ 41,850,636 $ (737,643,000) (499,500,000) 12,552,196,161 $11,315,053,161 |
|
EXTERNAL SUPPORT EXPENSES |
FY 2009 |
FY 2008 |
|
Custody.................................................................................... Consulting and Professional........................................................ Investment Advisors / Managers................................................ Investment Services and Research............................................. Total External Support Expenses...................................... |
$ 264,532 1,329,476 37,272,541 202,210 $39,068,759 |
$ 212,604 1,471,182 38,008,970 167,938 $39,860,694 |
MEMBER SYSTEMS’ WITHDRAWALS |
FY 2009 |
FY 2008 |
|
State
Employees’ Retirement System......................................... Judges’
Retirement System........................................................ General
Assembly Retirement System........................................ Total Member Systems’
Withdrawals................................. |
$237,000,000 30,500,000 9,500,000 $277,000,000 |
$462,000,000 30,400,000 7,100,000 $499,500,000 |
|
INVESTMENT PORTFOLIO ANALYSIS - Fair Value |
JUNE 30, 2009 |
|
|
Government
and Agency Obligations.......................................... Foreign
Obligations.................................................................... Corporate
Obligations................................................................ Common
Stock & Equity Funds.................................................. Commingled
Funds……………………………………………….. Preferred
Stock (Domestic & Foreign)....................................... Foreign
Equity Securities............................................................ Hedge
Funds............................................................................. Real
Estate Investments............................................................ Private
Equity........................................................................... Money
Market Instruments........................................................ Infrastructure
Funds.................................................................. Bank
Loans.............................................................................. Forward
Foreign Exchange Contracts......................................... Total
Investment Portfolio................................................. |
$ 665,018,889 33,237,090 668,047,761 2,610,218,733 335,484,184 334,285 1,482,594,431 880,939,190 875,929,700 450,491,810 235,126,490 305,969,947 197,259,098 (5,594,545) $ 8,735,057,063 |
$ 852,045,701 113,005,430 1,058,164,332 3,823,791,711 417,894,222 5,094,532 1,984,314,463 598,985,402 1,332,081,349 524,628,589 307,481,504 209,975,518 202,137,983 (72,622) $11,429,528,114 |
|
SELECTED ACCOUNT BALANCES |
JUNE 30, 2009 |
|
|
Cash......................................................................................... Total Accounts Receivable........................................................ Prepaid Expenses...................................................................... Capital Assets........................................................................... Operating Expenses Payable...................................................... Investment Purchases
Payable................................................... |
$ 12,662,039 $186,099,275 $ 16,184 $ 57,635 $ 5,077,999 $173,277,766 |
$ 43,667,005 $187,106,001 $ 16,242 $ 52,797 $ 7,101,649 $338,215,349 |
BOARD CHIEF EXECUTIVES
|
|
|
|
During Engagement Period:
Executive Director: William R. Atwood. Chairman: Michael Goetz, Ronald Powell Currently: Executive Director: William R. Atwood. Chairman: Ronald Powell |
||
|
Auditors proposed financial statement
adjustments for unrealized loss of $71.4 million.
ISBI
agrees with auditors Alternative
Investments were overstated by $21.6 million
Limited
Information
ISBI
made repeated requests for information from Private Investment Funds and
Investment Advisors
ISBI
agrees with auditors |
INTRODUCTION
This digest covers our
audit of the Illinois State Board of Investment financial statements for the
year ended June 30, 2009. A report on
the results of our compliance attestation examination for the year ending
June 30, 2009 is being issued separately. Pursuant to the Illinois
Pension Code, the Illinois State Board of Investment (Board) manages the
investments of the State Employees’ Retirement System, General Assembly
Retirement System and the Judges’ Retirement System. MEMBER SYSTEMS WITHDRAWALS During fiscal year 2009 the member
systems’ withdrawals from the Board decreased $222.5 million from $499.5
million during fiscal year 2008 to $277.0 million during fiscal year
2009. Total member systems’ net
contributions (withdrawals) since inception of the Illinois State Board of Investment total approximately ($1.7
billion). FINDINGS,
CONCLUSIONS, AND RECOMMENDATIONS INADEQUATE INTERNAL
CONTROLS OVER FINANCIAL REPORTING FOR SECURITIES LENDING The
Illinois State Board of Investment (ISBI) did not record the fair market
value of the investment of cash collateral received for securities lending
transactions. The fair market value of the investments as of
June 30, 2009 was $1,395 million with related obligations of $1,467
million. The cash collateral was
invested in a money market fund that had declined in value during the fiscal
year. Management accounted for the
investment at its historical par value and did not take into consideration
market fluctuations. The resulting
unrealized loss of $71.4 million was proposed by the auditors and recorded in
the June 30, 2009 financial statements. Management indicated different personnel
in the Agency were responsible for monitoring different facets of the
securities lending process and not all pertinent information was disseminated
to the Accounting Unit which is responsible for recording the financial
effects of these types of transactions in the Agency financial records.
We recommended that ISBI improve its controls
so it timely obtains and reviews all relevant investment information
necessary to properly record and disclose all material investment
transactions in ISBI’s annual financial statements. ISBI should record the related assets and
obligations on the general ledger and not only as a report entry. In addition, ISBI’s investment portfolio
should be continuously reviewed to ensure non-viable investments are
re-directed to more viable options.
(Finding 1, page 21) Management
indicated they will update internal control procedures to incorporate a
monthly closing process for securities lending that records al securities
lending assets and obligations at fair value in the general ledger. NEED TO ENHANCE ACCOUNTING AND FINANCIAL REPORTING FOR
ALTERNATIVE INVESTMENTS ISBI
should enhance its accounting and reporting process for determining and
reviewing the fair value measurements and disclosures used for reporting its
alternative investments on a timely basis.
During a review of ISBI’s alternative investments, it was discovered
that the financial activity reported for certain alternative investments was
not current as of the Statement of Plan Assets for interim reporting periods. Many of the alternative investment fund
balances in the December 31, 2008 internal financial statements were
represented by the values provided by ISBI’s private investment funds and
separate account investment advisors as of September 30, 2008 with cash
activity through December 31, 2008, but did not include any unrealized gains
or losses in the underlying investments for the period from October 1 through
December 31. Additionally, certain
private investment funds and separate account investment advisors did not
report the quarterly valuation of investments as of June 30, 2009 within a
reasonable time period, causing a delay in the audit process as well as
issuance of the audited financial statements.
As a result, ISBI’s Alternative Investment balances were overstated by
approximately $21.6 million at June 30, 2009, until ISBI received reports
from its private investment funds and separate account investment advisors
and made adjustments accordingly. Alternative investments comprise
approximately 25% of ISBI’s total investments and include real estate,
private equity, infrastructure, and hedge funds as of June 30, 2009. Based on the organizational structure and
limited staff of the ISBI, they oversee the valuation procedures performed by
the alternative portfolio’s private investment funds and separate account
investment advisors. ISBI management may look to the private investment funds
and separate account investment advisors for guidance, but management must
have sufficient information to evaluate and independently challenge the
information provided by these private investment funds and separate account
investment advisors. In connection with the issuance of the
Institute of Certified Public Accountants (AICPA) Practice Aid, Alternative Investments – Audit
Considerations, management performed additional procedures and an
evaluation of their alternative investment valuations. These procedures are a part of ISBI’s
Alternative Investment Protocol, an ongoing comprehensive internal control
process related to the valuation of alternative investments. However, ISBI relies on its private
investment funds and separate account investment advisors to report
unrealized gains and losses with respect to underlying investment or
underlying private investment funds;
due to investor transparency restrictions unique to alternative
investments, management has limited available information on the underlying
investments or underlying private investment funds to provide for a timely
valuation as of their financial statement date without the private investment
funds’ and separate account investment advisors’ reported valuations. According to ISBI management,
the 2008 meltdown in the financial markets precipitated the alternative
portfolio’s private investment funds and separate account investment
advisors, as well as their auditors, to be extremely careful in the release
of data to limited partners during the December 2008 reporting cycle. Auditors of private investment funds and
separate account investment advisors counseled their clients not to release
any interim capital statement data to investors until the auditors’ annual
audit work was complete. Contrary to
repeated requests from ISBI, the private investment funds and separate
account investment advisors would not release the data until their auditors
signed off on their December 2008 information. Regarding the other incident at 6/30/2009,
the delay for the largest valuation adjustment in the amount of $16 million was
the result of waiting on data from a terminated separate account investment
advisor’s auditor. The second highest
valuation adjustment for $3.2 million was late due to the fact that a
particular private investment fund’s auditor requested late entries to be
posted at the 6/30/2009 reporting period for disclosure of the fund’s
non-economic losses. The remaining two
private investment funds’ data was distributed late despite requests from
ISBI to provide estimates. We recommended that ISBI
improve its controls so it timely obtains and reviews all relevant investment
information necessary to properly record and disclose material investment
transactions in ISBI’s annual financial statements. ISBI should emphasize the importance of
timely reporting to each private investment fund and separate account
investment advisor. This notice may
increase the likelihood that ISBI will receive timely financial statements
from its alternative investments, which would provide assurance to ISBI that
its financial statements are accurately represented as of a given date as
well as improve ISBI’s exercise of the Alternative Investment Protocol. (Finding 2, page 22 - 24)
Management indicated they will update internal control procedures to
include a distribution of an annual letter to all private investment fund and
separate account advisors stressing the importance of timeliness of reporting
quarterly and annual information to ISBI.
ISBI will disclose in the
quarterly financial statements the nature and amount of any valuations that
are stated on a cashflow basis for the current period as well as the
historical impact of using those amounts.
ISBI will also determine through a retroactive look back process if
the necessary adjustments to bring those cashflow amounts reported in line
with the funds’ final reported valuation exceed 2% of the value of the
particular asset class impacted for the prior period. If the amount of the retroactive adjustment
amount exceeds 2% of the value of the asset class, the prior period financial
statements will be restated. ISBI will notify the auditors in writing when they come for annual
financial fieldwork if there are valuations yet to be received and that the
books are still open. ISBI will also
inform the retirement systems in writing of any valuations to be received and
that the books are still open during financial statement fieldwork.
AUDITORS'
OPINION
Our auditors state the June 30, 2009
financial statements of the Illinois State Board of Investment are fairly
presented. ____________________________________ WILLIAM G. HOLLAND, Auditor General WGH:AKS:pp SPECIAL ASSISTANT AUDITORS
Our special assistant auditors for this
audit were McGladrey & Pullen LLP. |