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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.
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. |
