REPORT DIGEST ILLINOIS STATE TOLL HIGHWAY AUTHORITY FINANCIAL AUDIT For the Year Ended: December 31, 2008 COMPLIANCE EXAMINATION For the Year Ended: December 31, 2008 Summary of Findings: Total this audit 5 Total last audit 11 Repeated from last audit 4 Release Date: September 23, 2009 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 did not comply with financial accounting standards pertaining to capitalization of interest costs incurred during the asset’s construction period. ¨ The Toll Highway Authority did not have sufficient control over the financial reporting process. ¨ The Toll Highway Authority’s Master Vendor Listing contains duplicate and inactive vendors.

ILLINOIS STATE TOLL HIGHWAY AUTHORITY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For The Year Ended December 31, 2008

FINANCIAL OPERATIONS (GAAP BASIS)	2008	(Restated)* 2007
Operating Revenues Toll Revenue.................................................................... Toll Evasion Recovery...................................................... Concessions..................................................................... Miscellaneous.................................................................. Total Operating Revenues................................................ Operating Expenses Depreciation and Amortization.......................................... Services and Toll Collection.............................................. Bad Debt Expense........................................................... 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................................................ Total Operating Income................................................... Total NonOperating Expenses.......................................... Change in Net Assets...................................................... Net Assets at Beginning of Year...................................... Net Assets at End of Year...............................................	$583,646,592 224,047,528 1,754,403 3,429,783 812,878,306 $278,626,714 110,093,269 146,850,695 59,634,767 45,304,051 22,344,274 21,942,396 684,796,166 128,082,140 106,139,805 21,942,335 2,083,603,824 $2,105,546,159	$572,092,902 29,738,604 3,788,756 2,819,131 608,439,393 $219,434,538 86,550,454 23,221,646 52,414,462 44,833,917 21,246,925 24,261,781 471,963,723 136,475,670 65,841,389 70,634,281 2,012,969,543 $2,083,603,824
SIGNIFICANT ACCOUNT BALANCES (GAAP Basis)	2008	(Restated)* 2007
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 Total Net Assets................................................................	$357,722,016 267,827,509 124,296,311 167,159,562 30,567,798 74,038,196 4,853,139,669 3,397,544,225 2,105,546,159	$438,306,545 207,329,644 108,865,464 660,429,117 25,779,142 140,089,282 4,031,102,382 3,114,525,455 2,083,603,824

* - The December 31, 2007 balances were restated to correct errors in accounting for capital assets.
The effect of the restatement increased net assets at December 31, 2007 by $73,878,895.

EXECUTIVE DIRECTOR

During Audit Period: Mr. Brian McPartlin 1-1-08 thru 10-24-08, Acting Executive Director Dawn Catuara 10-25-08 thru 11-19-08, Executive Director - Jeffrey Dailey 11-19-08 thru 12-17-08, Acting Executive Director – Dawn Catuara 12-18-08 thru 2-5- 09, Acting Executive Director – Michael King 2-6-09 thru current

Failure to comply with generally accepted accounting principles Construction period interest was expensed instead of capitalized December 31, 2007 net assets were understated by approximately $74 million Tollway agrees with auditors Insufficient controls over financial reporting Intergovernmental revenues and expenses were understated by $81 million Leases receivable and deferred revenue were overstated by $1.6 million Errors in reporting the investments footnote disclosure Errors in reporting the revenue bonds payable footnote disclosure Errors totaling $928,000 were noted in the Tollway’s Trust Indenture Basis financial statements Tollway agrees with auditors Master Vendor Listing contains duplicate and inactive vendors 121 different listings of vendors that were inactive An employee was included in the Master Vendor Listing

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS INTEREST NOT PROPERLY CAPITALIZED The Illinois State Toll Highway Authority (Tollway) did not comply with Statement of Financial Accounting Standards No. 34 Capitalization of Interest Cost, which requires capitalization of interest costs incurred during the asset’s construction period. During our audit we discovered that the Tollway had been expensing all construction period interest. As a result of identifying this issue, the Tollway developed an accounting policy and a process to estimate the amounts of qualifying net interest expense for FY 2000 through FY 2008, to be capitalized to infrastructure assets. Net capitalized interest amounts were then depreciated through each fiscal year-end to determine the restatement amount, as well as the amount to be reported through December 31, 2008. Prior to FY 2000, the Tollway’s practice was to record infrastructure in annual pools, and information supporting the individual pools was not sufficiently detailed to determine if qualifying interest was included or excluded. Prior to FY 2000, all infrastructure assets were depreciated over a 20 year useful life. As such, the remaining effect of un-capitalized interest on net assets is not expected to be material. The Tollway’s December 31, 2007 ending net assets were understated by approximately $74 million as a result of this error in accounting. For 2008, there was an additional error of approximately $8.4 million for un-capitalized interest costs, net of the associated accumulated depreciation. The Tollway’s December 31, 2008 financial statements, which include partial prior year comparative information for the December 31, 2007 year end, have been restated to reflect the $74 million adjustment. The $8.4 million adjustment relating to the year ended December 31, 2008 year end financial statements has been corrected by the Tollway in those financial statements. (Finding 1, Pages 10-11) We recommended that the Tollway make an assessment of all accounting standards that are applicable to determine the impact on their financial reporting. In addition, we recommended that all interest incurred during the construction period as described in the applicable accounting standards be capitalized. Tollway officials agreed with our recommendation and stated that they have amended their capital asset policy to address interest capitalization under FASB 34 and acquiring an online service to stay abreast of accounting pronouncements. NEED TO IMPROVE CONTROLS OVER FINANCIAL REPORTING The Illinois State Toll Highway Authority (Tollway) does not have sufficient controls over the financial reporting process. During our audit of the financial statements we noted the following: · The Tollway enters into agreements with State/local governments to share the responsibility of costs incurred over common infrastructure. These costs had been improperly recorded by the Tollway. As of year end, total revenues and expenses were each understated by $81 million. The Tollway corrected these amounts in the final financial statements. · Leases receivable and the corresponding deferred revenue for the two oasis system leases (retail and fuel leases) were overstated by $1.6 million in the trial balance and the draft financial statements. This amount represented one year of lease payments. The Tollway corrected these amounts in the final financial statements. · The footnote disclosures for investments in the draft financial statements contained errors in reporting investment types for certain funds under the custody of the State Treasurer. A total of $395 million in investments were classified as repurchase agreements with no credit rating. Additionally, approximately $9.6 million of investments in FNMA agency securities were classified as money market investments in the draft financial statements. Necessary disclosures were corrected in the final financial statements. · The counterparty credit ratings provided in the interest rate exchange agreement section of the revenue bonds payable draft footnote were not accurately reflected as of year end. The Tollway obtained the correct ratings from Moody’s and Standard and Poor’s and corrected the ratings in the final financial statements. · The amount reported for the “Bond Interest and Other Financing Costs” line of the Tollway’s Trust Indenture Basis Financial Statements (presented as supplementary information in their financial statements) was incorrect. The spreadsheet provided by the Tollway to the auditors contained numerous errors totaling $928,000. The errors were corrected by the Tollway in their final financial statements. (Finding 2, Pages 12-14) This finding was first reported in 2005. We recommended that internal control over financial reporting be strengthened. The Tollway should develop policies and procedures for recording infrastructure assets which are constructed or enhanced by the Tollway on behalf of another governmental entity or other external party. The Tollway should also develop policies and procedures for recording receivables and deferred revenues pertaining to long-term lease agreements. Recorded amounts should be supported by detailed schedules that correspond to the signed lease agreements. We also recommended that the Tollway develop policies and procedures to ensure the adequate review and approval for preparing their footnote disclosures and the schedules supporting their trust indenture financial statements. Tollway officials agreed with our recommendations to develop policies and procedures for the accounting for intergovernmental agreements, long term lease agreements and an adequate review of footnotes and schedules in the financial statements. In addition to developing policies, Tollway officials stated that they will continue to pursue a standard fully integrated general ledger system. (For the previous Tollway response, see Digest footnote #1.) MASTER VENDOR FILE RECORD PROBLEMS The Illinois State Toll Highway Authority’s (Tollway) Master Vendor Listing contains duplicated and inactive vendors. During our testing of the Master Vendor File we noted that there were 121 different listings of vendors which were inactive but in the file and had the same Federal Employer Identification Number (FEIN) as an active vendor. We also noted that there was an employee included in the vendor file. Upon further investigation, we noted that the vendor/employee initially started as an outside contractor and has since been hired by the Tollway as an employee. This employee is still listed in the Master Vendor Listing. Having multiple vendor numbers for the same vendor increases the risk of a payment being issued twice to the same vendor and going undetected. Multiple vendor numbers for the same vendor also increases the risk that purchasing controls inherent in the system are not being followed. Having a current employee in the vendor listing increases the risk of unauthorized payments being made to the employee. By systematically reviewing the Master Vendor File, the Tollway reduces its exposure to making duplicate payments. (Finding 4, Pages 17-18) We recommended that the Tollway review the entire vendor master list to ensure vendors have not been issued more than one vendor number. In cases where it may be necessary to have multiple vendor numbers for the same FEIN, the Tollway should determine which vendor number should be associated with the vendor and all other inactive vendor numbers should be placed in an inactive file along with all inactive vendors. We also recommended that the Tollway remove the employee from the master vendor list. Tollway officials stated that procurement has recently reviewed the master vendor file and is developing a system to perform regular reviews going forward. 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, 2008 and for the year then ended were presented fairly in all material respects. The Toll Highway Authority’s December 31, 2007 net assets have been restated/increased by $73,878,895 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. ____________________________________ 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 recommendation. We agree that internal controls over financial reporting should continue to be strengthened and we continually make the effort to improve our financial reporting processes and their integrity. We will enhance our processes to the fullest extent possible and continue to pursue the acquisition of a standard and fully integrated general ledger system, which would include an automated accounts payable subsidiary ledger which would track all open invoices and allow a proper accrual at the end of each accounting period.