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Insufficient controls over financial reporting
52 accounts were
adjusted subsequent to April 2007
Adjustments to
beginning net assets totaled $9 million
Repurchase
agreements totaling $2.8 million were written off
Interfund balances
did not balance
Amounts were out of
balance throughout the year
Unsubstantiated
balance of $6 million was written off
Worker’s
compensation accrual was understated by $600,000
Unamortized bond
discounts and premiums were overstated by $512,000
General Account
bank reconciliation did not include $5.6 million in timing differences for
warrants
The software system
used by the Tollway does not allow invoices to be entered into system after
year-end
Improvements needed
in recording and maintaining capital asset records
Property control
department did not update inventory listing for items that were obsolete or
were missing
Dates were entered
incorrectly in the capital asset software
458 items totaling
$720,000 could not be located initially by the property control department
Some of the assets
dated back to 1991 and 80% were over 5 years old
57 items were
located totaling $113,000
The Tollway is
still searching for the remaining items
Inaccurate dating
of capital assets resulted in accumulated depreciation being overstated by
$728,000
Placed in service
date changes resulted in an overstatement of ending accumulated depreciation
of $42,200
Toll violators not
billed timely
Toll
violation revenue decreased $14 million in 2006
Audits
of major systems not performed
Authority
interaction with Illinois Office of Internal Audit
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FINDINGS, CONCLUSIONS, AND
RECOMMENDATIONS
INSUFFICIENT CONTROLS OVER FINANCIAL REPORTING
The Illinois State Toll Highway
Authority (Tollway) does not have sufficient controls over the financial
reporting process.
During our audit, we noted
that numerous adjustments were made to the initial trial balance provided to
the auditors. Fifty-two accounts were
adjusted subsequent to April 2007.
Some of the more significant adjustments noted during our review are
as follows:
·
Beginning net
assets were adjusted by approximately $9 million. These adjustments were necessary to properly reverse prior year
audit entries and correct beginning capital asset balances. In addition, amounts that should have been
charged to current operations were recorded directly to net assets.
·
Repurchase
agreements totaling $2.8 million were written off. These balances were recorded as a passed adjustment in 2005.
·
Interfund
balances did not balance. The
variance totaling $1,640,829 was identified by Tollway accounting personnel
and consisted of accounting errors for items throughout the year. Rather than recording these identified
amounts accurately in the general ledger, the net difference of $1,640,829
was posted via journal entry to a selected interfund account in order to
balance. The workpaper provided to
the auditors supporting the interfund account balance indicated that the
amounts were out of balance monthly throughout the year, not just at
year-end.
·
The Tollway
had a balance of approximately $6 million in the “Due to From Liability”
account (a component of accounts payable in the financial statements) that
was unsubstantiated and was not corrected until May 2007 (five months after
year-end). This account was noted in
the prior audit and the auditors proposed an adjustment for $1.5 million at
that time. At the end of 2006 the
balance had increased to $6 million and was ultimately written-off to
non-operating project expense.
·
The account
reconciliations prepared by Tollway staff for the worker’s compensation
accrual did not agree to amounts recorded in the general ledger. The amount recorded in the general ledger
was understated by approximately $600,000.
The auditors proposed an adjustment for this amount.
·
The
unamortized bond discounts and premiums recorded in the general ledger were
overstated by $512,000 in the initial trial balance. The supporting schedules provided for the
individual accounts were accurate however the necessary adjustments were not
properly recorded in the financial statements. An adjustment was made to the final financial statements.
·
We also noted
the following deficiencies within the General Account Bank Account
reconciliation: 1) the initial bank reconciliation completed for the General
Account was not prepared correctly and did not include approximately $5.6
million in reconciling items representing timing differences for warrants;
and 2) reconciling items totaling $658,838 (General Account) could not be
identified by the Tollway. An
adjustment was made in the final financial statements for the $5.6 million of
timing differences relating to the warrants.
As for the unidentified reconciling items, upon further review by
Tollway personnel, the amount that could not be identified at year-end
totaled approximately $22,000.
·
During our
examination of year-end accruals we discovered that a majority of the
December 31, 2006 liability for accounts payable and other accrued
liabilities was recorded using journal entries. These adjustments, totaling approximately $17 million, were
recorded manually by adjusting journal entry to general ledger, Accrued
Expenses -Other, as opposed to using an automated accounts payable
system. The Tollway’s present
automated system only contains vouchers that have been submitted to the State
Comptroller’s office for payment as of December 31 (“pay order liabilities”)
and does not support other liabilities for which vendor invoices were
received after December 31 pertaining to the prior fiscal year (2006). The software system utilized by the
Tollway does not allow invoices to be entered into the system after year-end.
(Finding 1, Pages 74-77)
We recommended that internal control
over financial reporting be strengthened.
Individuals preparing account reconciliations should cross-check all
amounts to ensure that the supporting workpaper (including all detail) agrees
to the balance recorded in the general ledger and trial balance. In addition, an individual other than the
preparer should review all significant trial balance accounts to ensure
supporting documentation exists, amounts agree to the trial balance and that
all posted adjustments are accurate.
All unresolved reconciling items should be researched and properly
recorded prior to the month-end close.
We further recommend that
the Tollway use an automated accounts payable system to track all vendor
invoices. This would also include
other routine bills received such as utilities and other re-occurring
expenses for which the Tollway is billed.
Journal entries should only be used in circumstances where an invoice
is not available such as for recording estimates and retainages related to
construction projects.
Tollway officials
agreed with our recommendations and stated that they are continuously
improving their reconciliation processes.
CAPITAL ASSETS
The Illinois State
Toll Highway Authority’s (Tollway) practices and procedures for recording and
maintaining capital asset records needs improvement. The following items were noted during our
review of the capital asset records:
·
The property control department did not
remove/reclassify capital assets from the detailed capital asset inventory
for certain items that were considered scrap/obsolete or which could not be
located during the annual capital asset inventory.
·
Certain transferred building assets were dated
incorrectly within the newly-adopted capital asset software. These assets were transferred from the
infrastructure category to the building category during 2006.
·
Certain machinery and equipment capital assets were
depreciated incorrectly within the newly-adopted capital asset software as a
result of Tollway personnel changing the “placed in service” date.
During our initial testing of existence relating to capital
assets we noted the following:
1. Certain
capital assets were categorized in a “lost department” code on the Fixed
Asset by Asset Number report (the Tollway’s detailed inventory listing). The report detail included 458 items,
totaling approximately $720,000 (historical cost), which could not be located
during various internal physical inventory counts performed by the Tollway’s
property control department. As a
result on the inability to initially locate these items, the items were
re-categorized to a department entitled “lost” until such time that there
were sufficient resources to broaden the search.
·
Some of the “lost” items included hand-held items
such as computers, computer software, printers, radios, chargers, and
telecommunications equipment such as a hands-free mobile phone kit.
·
Some of these capital assets identified as “lost”
date back to 1991.
·
80% of the items classified as “lost” are over 5
years old.
·
The current net book value of these assets is
approximately $41,000.
·
During our physical observations of warehoused
inventory, we noted a number of items not in use that appeared to be obsolete
and that should have been written-off the capital asset listing.
Upon presenting these exceptions to Tollway personnel,
additional searches were performed to locate some of these “lost department”
items. Fifty-seven (57) items, with
historical cost totaling approximately $113,000 were subsequently located by
Tollway personnel. Tollway personnel
are still in the process of searching for the remaining items missing.
2. During
our testing we noted that certain capital assets totaling approximately $36
million were incorrectly dated when transferred from the infrastructure
category to the building category within the newly-adopted capital asset
software. These capital assets were
recorded in the software with an incorrect “placed in service date”. The inaccurate dates resulted in an error
in the depreciation calculation and an overstatement of building accumulated
depreciation of approximately $728,000.
Upon bringing this to the Tollway’s attention, the errors were
subsequently corrected.
3. The
placed in service date for 43 machinery and equipment assets changed from the
prior year due to the fact that the Tollway entered current capital asset
additions to already existing assets, which were either fully or partially
depreciated. When capital assets were
entered into the software as an addition to an already existing asset, the
original “placed in service” date was changed within the software for the
original portion of the asset. We
noted that the new software accounted for the modified asset (original plus
current addition) as if the entire asset was a new addition. As a result of this dating issue, the
machinery and equipment ending accumulated depreciation balance was
overstated by approximately $42,200. (Finding 2, Pages 78-81)
We recommended that the Tollway follow its
written process and procedures document pertaining to the removal of capital
assets from the accounting records for items that have been deemed lost or
obsolete. The property control
department should investigate all lost assets on a timely basis. Items subsequently located should be
reassigned to a specific department.
All other items should be removed from the inventory records if deemed
un-locatable after a reasonable search.
Property control should report these items to the accounting
department on a timely basis so that they can be removed from the financial
accounting records.
We further recommended that the Tollway
designate a person to review the information entered into the capital asset software
on a regular basis in order to ensure that the amounts have been entered and
dated accurately and in accordance with the Tollway’s capital asset
policy. This would include entering
each capital addition into the software as a new asset, with its own
identification number. Each addition
would then be separately depreciated over its estimated useful life. Additionally, we recommended that all
capital asset entries be reviewed by a responsible supervisor to ensure that
all entries are prepared correctly prior to posting them to the trial
balance.
Tollway officials agreed with our
recommendations and stated that their property control unit is currently
investigating all items deemed lost.
UNTIMELY VIOLATION SYSTEM
IMPLEMENTATION
The Illinois State Toll Highway Authority (Tollway) has
not exercised their right to pursue collection of the toll violators.
The Toll Highway Act (605 ILCS 10/3) authorizes the Tollway
to enforce a violation enforcement system that seeks reimbursement from Toll
violators. To obtain maximum results,
the system must be functioning properly and enforced in a timely manner.
The Tollway has not been able to bill toll violators on a
timely basis. The Tollway is
implementing a new violation system and the last billings occurred in July
2006. As of mid-July 2007, the
Tollway was still implementing the system and had not resumed issuing notices
to violators. The notices pertaining
to violators since the last billing in 2006 have been delayed but not
forgiven and will be billed when the system is fully implemented.
 Toll
violation revenue recorded for 2005 was approximately $26 million and in 2006
the amount decreased 54% to approximately $12 million. (Finding 4, Page 83)
We recommended the Tollway fully implement its new system and
resume billing all toll violators in accordance with their right established
by state statute.
Tollway officials agreed with our recommendation and stated
that the violation enforcement conversion is expected to be completed in
2007.
INTERNAL AUDITS OF MAJOR SYSTEMS
NOT PERFORMED
The
Illinois State Toll Highway Authority (Tollway) failed to audit any major
systems of internal accounting and administrative controls of the Tollway for
the year ended December 31, 2006.
The Tollway completed one internal audit during the fiscal
year, however the Tollway did not complete any internal audits of the major
systems of internal accounting and administrative controls during calendar
year 2005 or 2006. The Fiscal Control
and Internal Auditing Act (30 ILCS 10/2003) requires that the Tollway’s chief
executive officer ensure that “audits of major systems of internal accounting
and administrative control be conducted on a periodic basis so that all major
systems are reviewed at least once every two years.”
Tollway management stated that Executive Order #10 required
most state agencies to transfer the internal audit function to the Illinois
Office of Internal Audit (IOIA), a division of the Department of Central
Management Services. The nature of
the Tollway’s governance created uncertainty as to whether the Tollway was
required to comply. However, the
Tollway entered into negotiations with the IOIA to perform this service but
could not reach agreement on a reasonable fee and scope of service. (Finding
5, Pages 84-85)
We recommended the Tollway complete all required internal
audits on a timely basis.
Tollway officials agreed with our recommendation and stated
that they expect to complete all required audits by the end of 2008.
OTHER FINDINGS
The
other findings are reportedly being addressed by Tollway management. We will review progress toward
implementation of all our recommendations during the next audit.
AUDITORS’ OPINION
Our
auditors stated the Illinois State Toll Highway Authority’s financial
statements as of December 31, 2006 and for the year then ended were presented
fairly in all material respects.
____________________________________
WILLIAM
G. HOLLAND, Auditor General
WGH:TLK:pp
SPECIAL ASSISTANT AUDITORS
Our special assistant auditors for this audit were McGladrey & Pullen LLP.
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