NOTE:

The Toll Highway Authority’s FY 07 financial statements should be read in conjunction with the FY 2008 financial statements. In the FY 2008 financial statements, the December 31, 2007 net assets have been restated (increased by $73.9 million) to correct errors in reporting capitalized interest. Because the
December 31, 2007 net assets have been restated, the previously issued auditors’ report dated
August 7, 2008 is not to be relied upon without consideration of the auditors’ report dated
August 28, 2009 on the restatement of the December 31, 2007 net assets.
 


REPORT DIGEST

 

ILLINOIS STATE TOLL HIGHWAY AUTHORITY

 

FINANCIAL AUDIT

For the Year Ended:

December 31, 2007

 

COMPLIANCE EXAMINATION

For the Year Ended:

December 31, 2007

 

Summary of Findings:

Total this audit                   11

Total last audit                     6

Repeated from last audit      5

 

Release Date:

August 27, 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 the Full Report are also available on

the worldwide web at

http://www.auditor.illinois.gov

 

 

 

 

 

SYNOPSIS

 

 

¨      The Toll Highway Authority does not have sufficient controls over the financial reporting process.

 

¨      The Toll Highway Authority’s practices and procedures for recording and maintaining capital assets records needs improvement.

 

¨      The Toll Highway Authority has not timely exercised their rights to pursue collection of the toll violations.

 

¨      The Toll Highway Authority did not ensure that all contracts were executed on a timely basis.

 

¨      The Toll Highway Authority did not complete required audits of all the major systems and the chief internal auditor does not report directly to the Tollway’s chief executive officer as required under State Statute.

 

 

 

 


 

 

 

ILLINOIS STATE TOLL HIGHWAY AUTHORITY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For The Year Ended December 31, 2007

 

 

 

FINANCIAL OPERATIONS (GAAP BASIS)

2007

2006

 

Operating Revenue

  Toll Revenue....................................................................

  Toll Evasion Recovery......................................................

  Concessions....................................................................

  Miscellaneous..................................................................

   Total Operating Revenue.................................................

 

Operating Expenses

  Depreciation and Amortization..........................................

  Services and Toll Collection..............................................

  Insurance and Employee Benefits......................................

  Engineering and Maintenance of Roadway and Structures..

  Traffic Control, Safety Patrol, and Radio Communications..

  Procurement, IT, Finance and Administration.....................

   Total Operating Expenses................................................

 

$572,092,902

29,738,604

3,788,756

      2,819,131

$608,439,393

 

 

$213,980,232

109,772,100

52,414,462

44,833,917

21,246,925

  24,261,781

$466,509,417

 

$567,499,808

11,695,274

3,031,576

      2,868,573

$585,095,231

 

 

$186,283,372

95,662,840

49,640,432

35,261,319

18,743,387

  19,983,865

$405,575,215

SIGNIFICANT ACCOUNT BALANCES (GAAP Basis)

2007

2006

 

Cash and Cash Equivalents (Unrestricted)..........................

Cash and Cash Equivalents Restricted For Debt Service.....

Cash and Cash Equivalents – IPASS Accounts..................

Cash and Cash Equivalents – Construction.........................

Accounts Receivable (net).................................................

Investments Restricted For Debt Service............................

Capital Assets (net)...........................................................

Revenue Bonds Payable and Unamortized Bond Premium

$438,306,545

207,329,644

108,865,464

660,429,117

25,779,142

140,089,282

3,957,223,487

3,114,525,455

$553,378,025

148,776,433

111,434,388

710,010,883

24,322,497

142,146,867

3,096,854,036

2,465,535,669

 

EXECUTIVE DIRECTOR

During Audit Period and Current: Mr. Brian McPartlin

 

 

 

 

 




 

 

 


Insufficient controls over financial reporting

 

 

 

 

Accounts receivable was understated by $340,000

 

 

 

 

 


Unidentified variance of $103,000 between supporting documentation and the trial balance

 

 

 

Interest payable and interest expense were understated by $483,000

 

 

 

 

 


$112,000 overstatement of liabilities

 

 

 

 

 

 

 

 

 

 

The software system used by the Tollway does not allow invoices to be entered into system after year-end

 

 

 

 

 

 

 


$2.2 million of accounts payable were not properly accrued

 

Accrued liabilities were overstated by $228,000

 

 

Construction accruals were understated by $477,000

 


Accrued payroll was understated by $272,000

 

 

 

$364,000 adjustment to deferred revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tollway agrees with auditors

 

 

 

 

 

 

Improvements needed in recording and maintaining capital asset records

 

 

 

Capital lease termination not accounted for properly

 

 

 

 

Additions were expensed as opposed to being capitalized

 

 

 

 

 


Depreciation is not being consistently calculated on pooled assets

 

 

 

 

 


Transponder purchases were improperly capitalized by approximately $7 million and depreciation expenses was overstated by $1.5 million

 

 

 


Inconsistent method of depreciation resulting in a $6.3 million reduction in depreciation

 

 

 

 

 


Useful life utilized is not included in the capitalization policy

 

 

 

 


Capitalization policy needs to be updated for current practice

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Tollway agrees with auditors

 

 

 

 

 

 


Toll violators not billed timely

 

 

 

 

 

 

 

 

 


1.5 million potential notices had not been issued as of December 31, 2007

 

 

 

 

 

 

 

 

Tollway agrees with auditors

 

 

 

 

 


Contracts not executed timely

 

 

 

 

 

 

 

 

 

 

 

Tollway agrees with auditors

 

 

 

 

 


Audits of all the major systems were not performed

 

 

 

 


6 of 9 required audits were not completed during the 2006-2007 fiscal year cycle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tollway agrees with auditors

 

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 review of the financial documentation we noted the following:

 

·        The Accounts Receivable – Toll Evasion Recovery Account was understated by approximately $340,000 at year end.  Tollway personnel recorded a journal entry crediting the accounts receivable account; however the adjustment should have been recorded as a debit to the account.

 

·        An unidentified variance existed between the supporting information provided for accounts receivable and the balances reported in the trial balance.  Supporting documentation received from the Tollway was approximately $103,000 less than the amount recorded on the trial balance.

 

·        The Tollway did not fully amortize debt issuance costs at the end of December 2007.  The original cost of the issuance was approximately $964,000 and approximately $481,000 was used as the basis for the calculation.  The remainder of the costs were not known until after year-end.  As a result, accrued interest payable and interest expense were understated by approximately $483,000.

 

 

·        We noted two vouchers totaling $112,000 (dated March 2006) were inappropriately recorded as liabilities as of December 31, 2007 (Comptroller Reimbursement Account).  Upon further inquiry, these two vouchers were noted as paid by the Comptroller on March 15, 2006, but were not reversed out of the liability account by the Tollway at year-end.

 

·        During our examination of year-end accruals we discovered that a majority of the December 31, 2007 liability for accounts payable and other accrued liabilities was recorded using journal entries.  These adjustments, totaling approximately $25 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 records 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 (2007).  The software system utilized by the Tollway does not allow invoices to be entered into the system after year-end.

 

·        Various accounts payable invoices totaling approximately $2.2 million were not properly accrued at year-end. 

 

·        A manual entry to accrued liabilities was erroneously recorded twice at year-end causing an overstatement of accrued liabilities of approximately $228,000.

 

·        Various construction accruals totaling approximately $477,000 were not properly accrued at year-end.

 

·        Accrued payroll at year-end was understated by approximately $272,000.  There were four Tollway departments missing accruals for the last two days of the fiscal year resulting in the understatement.

 

·        The amount of pension benefit assets held in excess of the pension benefit obligation was recorded by the Tollway as both restricted net assets and deferred revenue.  The required deferred revenue reversal of approximately $364,000 was communicated to management and has been corrected in the final financial statements.  Although the amount of the adjustment was immaterial it was recorded to enhance the comparability of the deferred revenue detailed footnote in the Notes to the Financial Statements.

 

All other adjustments listed above were communicated to management but were not corrected on the final financial statements as the amounts were deemed immaterial. (Finding 1, Pages 10-12)  This finding was first reported in 2005.

 

      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) is complete and accurate and 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 financial reporting processes and their integrity. (For the previous Tollway response, see Digest footnote #1.)

     

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 Tollway did not appropriately account for a capital lease termination.  As a result, beginning net assets were understated by approximately $1.9 million, revenue was overstated by approximately $1.4 million, expenses were understated by approximately $2.5 million and capital assets were overstated by approximately $2.1 million.

 

·        Two machinery and equipment capital asset additions totaling approximately $3 million were expensed as opposed to being capitalized in 2007.

 

·        During 2007, the Tollway entered its pooled infrastructure capital assets into its capital asset software.  Previously these assets were depreciated in pools using Excel.  The capital asset software utilized by the Tollway prorated depreciation expense on most of the pooled assets for depreciation not recorded in prior years.  In recalculating depreciation expense we noted that depreciation on one of these assets was not prorated; instead the entire amount of approximately $2.5 million was recorded in 2007 as depreciation expense.  Depreciation is not being consistently calculated on pooled assets.

 

·        During 2006, approximately $7 million in transponder purchases were improperly capitalized.  As a result of this error, beginning net assets are overstated by approximately $7 million and 2007 depreciation expense is overstated by approximately $1.5 million.

 

·        Depreciation on the new southern extension of I-355 (part of the 2007 infrastructure acquisitions) is being calculated at the full month convention whereas in prior years depreciation has consistently been calculated using a half year convention resulting in an inconsistent method of depreciation.  This inconsistency has resulted in depreciation being approximately $6.3 million less compared to what depreciation would have been if calculated utilizing a half year convention.  The Tollway’s written capitalization policy does not specify depreciation conventions to be used.

 

·        Certain infrastructure assets are being depreciated over 5 years.  Although this is consistent with past practice, this useful life has not been included in the Tollway’s written capitalization policy.

 

·        The useful life of one building asset, a leasehold improvement, was changed from 20 years in 2006, to 7 years (the remaining term of the lease) in 2007.  Useful lives for buildings per the revised written capitalization policy are 20 years which is unchanged from the prior year policy.  The change in life for this individual asset has resulted in depreciation expense being overstated by approximately $36,000

 

·        During our observation of property and equipment inventory, we noted that one item out of 20 (5%), totaling approximately $6,000 could not be located.

 

·        During our observation of property and equipment inventory, we noted that one item out of 10 (10%) was recorded at an incorrect value in that freight charges of approximately $1,800 were not included in the asset value.

 

     The adjustments listed above were communicated to management but were not corrected on the final financial statements as the amounts were deemed immaterial. (Finding 2, Pages 13-14)  This finding was first reported in 2005.

 

     We recommended that the Tollway capitalize and depreciate all assets in accordance with its written capitalization policy.  Where appropriate, the policy should be updated to reflect current practice for areas such as useful lives and should also address depreciation conventions to be used.  In addition, the Tollway should account for lease terminations in accordance with accounting principles generally accepted in the United States of America.

 

      Tollway officials agreed with our recommendations and stated that they will update their written capitalization policy and will strive to improve their review process for new capital assets placed in service. (For the previous Tollway response, see Digest footnote #2.)

 

UNTIMELY VIOLATION SYSTEM IMPLEMENTATION

 

      The Illinois State Toll Highway Authority (Tollway) has not exercised their right to pursue collection of the toll violations.

 

      The Toll Highway Act (605 ILCS 10/10) 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.  In August 2007, the Tollway implemented a new violation system and resumed issuing notices to violators; however, there were approximately 1.5 million potential notices that had not been issued as of December 31, 2007.  According to the Summary of Significant Accounting Policies in the Tollway’s Notes to the Financial Statements, revenue from toll evasion is recognized in the month that the violation notice is issued. (Finding 3, Page 15)

 

      We recommended the Tollway bill all toll violators in accordance with their rights established by state statute, in a timely fashion.

 

      Tollway officials agreed with our recommendation and stated that the violation enforcement conversion is expected to be completed in 2008.

 

UNTIMELY EXECUTION OF CONTRACTS

     

      The Illinois State Toll Highway Authority (Tollway) did not ensure that all contracts were executed on a timely basis.

 

      During our review of 12 contracts, we noted that 9 contracts (75%), totaling approximately $282 million, were signed between 3 and 77 days after issuance of the Notice to Proceed.  The Notice to Proceed is the Tollway’s written communication to the contractor notifying them that they are authorized to proceed with work outlined in the contract. (Finding 6, Page 18)

 

      We recommended that the Tollway process and approve all contracts in writing before the beginning of the contract period.

 

      Tollway officials agreed with our recommendation and stated that they currently require all contract signatures to be obtained before a Notice to Proceed is issued.

 

INTERNAL AUDITS OF MAJOR SYSTEMS NOT PERFORMED

 

      The Illinois State Toll Highway Authority (Tollway) did not complete required audits of all the major systems and the chief internal auditor does not report directly to the Tollway’s chief executive officer as required under State Statute.

 

      During our audit we noted that six out of nine (67%) planned major systems internal audits were not completed during the 2006-2007 fiscal year cycle.  Audits under the State’s Fiscal Control and Internal Auditing Act, which are required to be performed at least once every two years, were not completed. Additionally, we noted that the chief internal auditor reports directly to the inspector general.

 

      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.”   Section 30 ILCS 10/2002(b) of the act also states “the chief internal auditor shall report directly to the chief executive officer and shall have direct communications with the chief executive officer and the governing board, if applicable, in the exercise of auditing activities.”

 

      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 8, Pages 21-22) This finding was first reported in 2005.

 

      We recommended the Tollway complete all required internal audits on a timely basis.  We further recommend that the chief internal auditor report directly to the Tollway’s Director.

 

      Tollway officials agreed with our recommendation and stated that they anticipate completion of all required audits in 2008. (For the previous Tollway response, see Digest footnote #3.)

 

 

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, 2007 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.

 

 

DIGEST FOOTNOTE

 

#1 Financial Reporting - Previous Tollway Response

We concur with the condition noted.

 

The Tollway is continuously improving its reconciliation processes.  We recently hired a second Chief Accountant to better manage the workload involved in reconciling, reviewing and approving workpapers for all general ledger accounts (432) monthly.  We now have a formal monthly closing process resulting in completed workpapers that have been agreed to the trial balance and have been reviewed by one of the two Chief Accountants.  The Chief Accountants and the Controller then meet to review and approve the workpapers.

 

The automated accounts payable system is more difficult to fix.  The present automated system is not integrated with our general ledger-which is not programmed for GAAP accounting.  There is no ability in our General Ledger Accounts Payable and Budget System (GAB) to anticipate invoices near year-end that will need to be booked for that year.  Thus, we annually compile information on these types of invoices in Excel spreadsheets and manually record the liability in our ledger.  Until the Tollway obtains a new financial reporting system that is integrated with a procurement module this situation will exist.

 

#2 Capital Assets - Previous Tollway Response

We concur.

 

The Property Control Unit is currently in the process of investigating all items deemed lost.  They have prepared lists of these assets to send to the responsible Tollway departments and will advise General Accounting of any assets to be removed from the accounting records.  The undepreciated value of the remaining items is approximately $20,000.

 

Our General Accounting staff is now led by two Chief Accountants.  One is responsible for all Debt and Capital funds and accounts (the other for all Maintenance and Operating funds and accounts).  With this division of labor, with a trained senior accountant on the Debt and Capital team, and with the capital asset software now installed and loaded, we have instituted monthly processes to reconcile (1) capital asset software to GAB; (2) Property Control’s records to capital asset software; and (3) reports of project expenses to Machinery and Equipment, CIP, or Infrastructure.  Some of the issues noted in this finding were the result of transition to a new software system which, we have discovered, has some deficiencies that we must work around.

 

#3 Internal Auditing - Previous Tollway Response

We concur.

In 2006, the Tollway began to rebuild its Internal Audit Department.  The department however was not fully staffed early enough in the year to complete all required audits, although this process was begun.  In 2006, an audit of petty cash was performed.  So far in 2007, two of the required cycle audits have been completed (Agency Organization and Management and Expenditures). Two more required audits are currently in process (Procurement and Personnel and Payroll).

 

In addition, the following required audits are in the audit plan:

Property, Equipment and Inventories

Administrative Support Services

Revenues, Receivables and Cash

Electronic Data Processing

Budgeting, Accounting and Reporting

 

The Tollway expects to complete all required audits by the end of 2008.