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REPORT DIGEST DEPARTMENT OF REVENUE FINANCIAL
AUDIT AND COMPLIANCE
EXAMINATION For the Year Ended: June 30, 2007 Summary of Findings: Repeated from last audit 1 Release Date: May 20, 2008
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 the worldwide web at http://www.auditor.illinois.gov |
INTRODUCTION
This
report digest covers both the Financial Audit and State Compliance
Examination of the Department of Revenue for the year ended June 30,
2007. The Financial Audit Report
contains three findings. These two
findings pertain to material weaknesses in internal control over financial
reporting. The
State Compliance Examination Report contains 8 findings one of the audit
findings (number2) appears in both the Financial Audit and State Compliance
Examination report due to the nature of the problem. Overall, these two reports have a total of
nine different audit findings. SYNOPSIS ¨ The Department did not adequately control and monitor the tax allocation methodology utilized by the Department. ¨ The Department violated provisions of the State Finance Act by prepaying ($1.6 million in FY 06, and $2.8 million in FY 07) future fiscal years’ expenses out of appropriated funds and creating false and misleading billing invoices to support the payments. ¨ The Gaming Board improperly expended its FY07 appropriation for payments owed to local governments for FY06. ¨ The Department did not process vouchers for payment from the Illinois Tax Increment Fund within the required time limits.
{Expenditures and Activity
Measures are summarized on the next page.} |
DEPARTMENT OF REVENUE
EXPENDITURE STATISTICS |
FY 2007 |
FY 2006 |
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|
|
|
|
Total Expenditures (All Funds)............................... |
$9,324,457,663 |
$8,823,611,224 |
|
OPERATIONS
TOTAL.............................................
% of Total Expenditures......................................... |
$245,128,689
3% |
$222,180,107
3% |
|
Personal Services................................................... % of Operations Total Expenditures...................... Average Number of Employees............................ |
$111,748,789
45%
2,089 |
$109,410,271
49%
2,058 |
|
Other Payroll Costs (FICA, Retirement)...................
% of
Operations Total Expenditures....................... |
$28,936,710
12% |
$25,779,864
12% |
|
Contractual Services................................................
% of
Operations Total Expenditures....................... |
$45,680,319
19% |
$42,882,934
19% |
|
All Other Operations Items....................................... % of Operations Total Expenditures....................... |
$58,762,871
24% |
$44,107,038
20% |
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|
|
|
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AWARDS
& GRANTS, REFUNDS TOTAL................
% of Total Expenditures........................................... |
$4,760,860,740
51% |
$4,511,816,769
51% |
|
NON-APPROPRIATED
FUNDS................................
% of Total Expenditures......................................... |
$4,318,468,234
46% |
$4,089,614,348
46% |
|
Total Deposits Remitted to the State Treasury |
$32,467,682,443 |
$30,567,310,077 |
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Income Taxes..............................................................
% of Total Revenues.............................................. |
$14,132,824,600
43% |
$12,612,491,657
41% |
|
Sales Taxes.................................................................
% of Total Revenues.............................................. |
$11,678,859,678
36% |
$11,456,366,645
37% |
|
Motor Fuel
Taxes.......................................................
% of Total Revenues.............................................. |
$1,378,004,677
4% |
$1,373,236,099
5% |
|
Public
Utilities Taxes...................................................
% of Total Revenues.............................................. |
$1,803,399,625
6% |
$1,758,633,440
6% |
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Other
Collections.........................................................
% of Total Revenues.............................................. |
$3,474,593,863
11% |
$3,366,582,236
11% |
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PROPERTY AND EQUIPMENT at June 30, |
$21,108,346 |
$27,543,808 |
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SELECTED ACCOUNT BALANCES at June 30, Taxes Receivable..................................................... Allowance for Uncollectible Taxes............................ Net Taxes Receivable........................................... |
$2,068,548,000
(581,995,000)
$1,486,553,000 |
$1,935,446,000
(634,498,000)
$1,300,948,000 |
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DEPARTMENT
DIRECTOR
During Audit Period: Brian A. Hamer
Currently: Brian A. Hamer |
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Inadequate monitoring
Tax allocation
methodology not updated since 2003 Insufficient funds to process payments timely
Inadequate monitoring of
fund balances
Allocation problems
Interest income to local
governments decreased Adjustments needed to
year-end liabilities Restatement of balances
previously reported Misleading billing
invoices Prepaid future fiscal
years’ expenses out of appropriated funds Prepayments to DCMS
Internal Service Funds Creation or
falsification of six invoices with DCMS headings Department agrees with
recommendation
Department denies any
intended violation of State Finance Act Gaming Board paid $4.9
million from FY07 appropriation for FY06 payments Deficiency appropriation
was not requested Vouchers for Tax Increment Financing processed for
payment late due to lack of funds
Fund swept in FY05 |
FINDINGS, CONCLUSIONS, ANDRECOMMENDATIONS LACK OF
CONTROL AND MONITORING OVER TAX ALLOCATION METHODOLOGY The Department of Revenue (Department)
receives sales tax receipts daily and deposits 98% of the receipts into a
variety of funds based on a predetermined formula. The remaining 2% stays in a clearing account as a reserve. The Department must use an allocation
formula because the actual sales tax returns are not finalized until up to
two months after collection of the revenues.
Once the returns are finalized, the 2% reserve is deposited into the
funds with deficiencies and payments are made to the various local
governments for which the taxes were received. The process is similar for telecommunication taxes. During our testing we noted the following: •
The Department did not adequately monitor and adjust the amount of
taxes allocated to the Home Rule Municipal Retailers Occupation Tax Fund
(Fund 138) (HRMROT), the Local Government Tax Fund (189), the
Telecommunications Tax Fund (719) and other corresponding funds, in a timely
manner.
•
The tax allocation
methodology had not been updated since 2003.
Since 2003, the City of Chicago increased its sales tax by 0.25% and
89 other local governmental entities also increased their sales tax
rates. The Department did not adjust the allocation formula to take into
account any of these changes in sales tax rates until after the HRMROT fund had been depleted to a point
to where there were insufficient funds to process payments timely (March
2007). Once the problem was
identified, the Department adjusted the percentage deposited in the HRMROT fund from 4.86% to 6.1%. •
The
Department did not adequately monitor and adjust the amount of
telecommunications tax collected on behalf of various local governments. The Department was depositing 22% of the
tax receipts into the Telecommunications Tax Fund (Fund 719), an agency fund,
when they should have been depositing 29%.
•
The
Department was not adequately monitoring the fund balances in order to detect
the errors in the tax allocation process.
Reasonable monitoring should have detected the steady decline in HRMROT fund balance and the consumption
of the 2% reserve prior to the fund being totally depleted in March
2007. The Department was alerted to
the HRMROT fund shortage by
parties external to the Department.
·
The
Department’s process to deposit sales tax receipts into the HRMROT fund was inadequate resulting in
under-allocation of the HRMROT
fund. As a result of the error in the
allocation methodology, the Department adjusted current and future receipts
by $55 million from other funds in order to replenish the fund and improve
the cash balance deficiency caused by the incorrect allocation process.
·
As a result of the HRMROT fund being under-allocated receipts, the
interest income received and paid to local governments was also affected by
the incorrect allocation process. Per
State Comptroller records, the HRMROT fund received about $363,000 less in
investment income in FY07 compared to FY06, but Departmental records for
sales taxes disbursed to the local governments increased 11% or $70.5
million.
·
Despite the adjustment to the allocation percentages in fiscal year
2007, the year-end liabilities reported as amounts due to other local
governments for sales and related taxes (within the special revenue and
agency funds), were initially understated by approximately $65 million. The liabilities reported as due to other
governments for telecommunications tax (agency fund) were initially
understated by approximately $20.8 million.
General Fund revenues were initially overstated by approximately $85.8
million. Adjustments of $76.3 million
to correct the more significant differences were recorded by the Department
in March 2008. The remaining
differences were deemed immaterial by the Department and were not recorded.
·
This issue also required financial reporting restatement of balances
previously reported. As of July 1,
2006, the Department restated certain amounts. Specifically, they decreased the general fund balance by $149.7
million and decreased July 1, 2006 net assets for governmental activities by
$149.7 million. In addition, July 1,
2006 total assets and total liabilities of agency funds were increased by
$76.4 million. (Finding 1, pgs. 62-65, Financial Audit Report) We recommended that the Department
implement the necessary controls and procedures to adequately monitor and
adjust the tax allocation formula in a timely manner. In addition, we recommended the Department
implement controls to detect unusual changes in fund balances (increases and
decreases) in order to evaluate the adequacy of the allocation methodology
and to find errors or irregularities.
Finally, we recommended that all year-end liabilities for sales and
related taxes be analytically reviewed to ensure the liability reported more
accurately represents payment activity. Department
officials agreed with the recommendation and stated they have implemented
procedural changes to monitor the tax formulas every six months. They also stated this will ensure fund
balances are reviewed and any potential changes are implemented timely. INAPPROPRIATE
LAPSE PERIOD EXPENDITURES The Department violated
provisions of the State Finance Act by prepaying future fiscal years’
expenses out of appropriated funds and creating false and misleading billing
invoices to support the payments. During our testing we noted the following:
·
The Department paid $1,592,300 out of FY06 appropriations (10
separate invoices) towards the FY07 Department of Central Management Services
(DCMS) Internal Service Fund billings.
·
The Department paid $2,825,621 out of FY07 appropriations (8 separate
invoices) towards the FY08 DCMS Internal Service Fund billings.
·
In FY07, the Department created or falsified six invoices with DCMS
headings as supporting documentation in order to make these prepayments. Of these invoices, 1 of the 6 invoices
stated it was for FY07 charges or leases when, in fact, it was to prepay FY08
costs. The remaining five invoices
stated they were prepayments. All six
invoice vouchers (Form C-13) submitted to the State Comptroller stated they
were “FY2007 Contracted Prior to July 1.”
·
In FY07, the Department created two invoices on Department of Revenue
letterhead, in essence charging itself, in order to prepay two invoices to
DCMS. Both invoices appeared to be
for FY07 charges and did not clearly state they were prepayments for
FY08. Both invoice vouchers (Form
C-13) submitted to the State Comptroller stated they were “FY2007 Contracted
Prior to July 1.”(Finding 2, pgs 67-69 Financial audit report and pgs. 10-13
Compliance report) We recommended the
Department implement strict rules and policies to forbid the manual creation
of invoices for any vendor or service and comply with fiscal year limitations
as set forth in the State Finance Act in making expenditures. Further, we recommended the Department
examine its internal controls to determine how false vouchers were created
and paid and implement changes to prevent similar activity in the
future. Department officials agreed to the recommendation and state they did not intend any violation of the State Finance Act by making prepayments to another state agency (DCMS) that provides services to the Department through revolving funds. Department officials stated they were not aware that prepayments to DCMS were prohibited by the State Finance Act. Past practice had been to make similar payments for information technology and telecommunications services to assure liabilities were paid on or ahead of schedule.
Department officials also provided the following: The Department interpreted a section within the State Finance Act that provides for advance payments of goods or services to permit what are characterized as prepayments. In following its interpretation of the statute, the Department made no attempt to deceive. The Department internally prepared and paid these invoices in the absence of a formal billing from DCMS. These invoices were not intended to be misleading, rather they were instruments to detail and document prepayments. With three exceptions, the Department prominently marked these as "prepayments" on the invoices. Prepayments were not an effort to circumvent the appropriations process. In FY07 for its telecommunications appropriation [the year and budget line at the center of this issue], the Department lapsed 10 percent of its appropriation.
The Department has communicated to staff that no payments should be processed in the future without a proper invoice. IMPROPER FISCAL YEAR
EXPENDITURE The Gaming Board (Board)
receives a yearly appropriation from the State Gaming Fund for distributions
to local governments for admissions and wagering taxes received in accordance
with the Riverboat Gambling Act (Act) (230 ILCS 10/12-13). In FY06, the admissions
and wagering taxes received in accordance with the Act exceeded the
authorized appropriation for the State Gaming Fund. As a result, the Board improperly expended $4,932,848 of its
FY07 appropriation for payments owed to local governments for FY06. A
deficiency appropriation was not requested for this amount as required. (Finding 5, pgs. 18-19 in the Compliance
Report) We recommended the Board
put controls in place to ensure all expenditures are paid out of the proper
fiscal year appropriation. The Board agreed with the finding. The Board noted that the following: if the appropriation is underfunded, the
remaining amount due must still be paid to local governments. Some local governments rely on their share
of taxes to fund their day-to-day operations. A supplemental appropriation can take up to 90 days. The delay could potentially place a
financial hardship on some local governments. In the future we will include language in our appropriations
bill that allows prior year obligations for gaming distributions to home dock
local government agencies to be paid from the current year appropriation, if
necessary. VOUCHERS NOT PROCESSED
TIMELY FROM THE TAX INCREMENT FUND The Department did not
process vouchers for payment from the Illinois Tax Increment Fund within the
required time limits. We noted 4 of 4 vouchers
tested (100%), totaling $20,567,426, were processed for payment 6 to14 days
late. These vouchers were all part of
the payment for Tax Increment Financing (TIF). All vouchers were dated in the month after the month stipulated
in the Illinois Municipal Code. Department personnel stated that they do not
send vouchers to the Comptroller if there is not enough money in the fund to
make payments to TIF districts. The Auditors noted that
Public Act 93-0839 caused $1,500,000 to be swept from the TIF Fund in FY05.
(Finding 9, pgs. 26-27 in the Compliance Report) We recommended the Department perform a
thorough review of the TIF Fund allocation and payment process. Further, the Department should formulate a
plan to return the TIF payments to the statutory time frames required by the
Illinois Municipal Code or seek legislative remedy. Department
officials agreed with the recommendation.
Department officials also agreed that payments were not made to
municipalities within statutory timeframes, and it agrees with the auditors’
analysis that shows there was insufficient money in the TIF Fund to make the
payments within statutory deadlines.
Department officials stated they will make the certifications on a
timely basis if funds are available.
Otherwise the Department will seek a legislative remedy. OTHER
FINDINGS
The
remaining findings are reportedly being given attention by the
Department. We will review the
Department’s progress towards implementing our recommendations during the
next audit period. AUDITORS’ OPINION Our
auditors stated the financial statements of the Department of Revenue as of
June 30, 2007, and for the year then ended are fairly presented in all
material respects. STATE
COMPLIANCE EXAMINATION – ACCOUNTANT’S REPORT The auditors qualified their report on State Compliance for findings 07-2 and 07-5. Except for the noncompliance described in these findings, the auditors state the Department complied, in all material respects, with the requirement described in the report. ____________________________________ WILLIAM G. HOLLAND, Auditor General WGH:CL:pp AUDITORS ASSIGNED The
compliance examination was performed by the Auditor General’s staff. McGladrey
& Pullen, LLP were our special assistant auditors
for the financial audit. |