Our 2002 audit of the University of Illinois is presented in three reports. The financial part consists of two reports which include the various financial statements of the University and other supplementary information. The Compliance Audit report contains the compliance findings disclosed by our audit tests.

The University Hospital's reconciliation between the total accounts receivable per the subsidiary ledger and the total accounts receivable per the University Financial Accounting System (general ledger) contained an unlocated system variance of approximately $710,000 at June 30, 2002. An accounts receivable reconciliation of all detail components of the overall accounts receivable must be accumulated and manually prepared in order to tie to the general ledger at the end of each month. The underlying detail components are supported by various reports that were tested during audit procedures.

Hospital personnel identified the difference during the reconciliation process, but were unable to determine the cause for the difference. Unreconciled variances have occurred in the monthly closing and reconciliation process throughout the year. Gross accounts receivable for the University Hospital totaled approximately $198 million at June 30, 2002. The detailed reports were overstated by the approximately $710,000 unlocated difference. Several individuals use the detailed reports to perform various tasks, such as the estimation of the contractual and bad debt allowances. (Finding 1, page 12)

University officials concurred with our finding and stated they are currently reconciling the accounts receivable subsidiary ledger and general ledger monthly and making appropriate adjustments for any differences.

The Urbana and Chicago campuses had errors in their June 30, 2002 unrestricted accounts receivable balances. At the Urbana campus, a miscommunication and a duplicate entry posting caused a $600,000 overstatement of unrestricted accounts receivable. At the Chicago campus, a lack of understanding caused a $1,074,261 overstatement of unrestricted accounts receivables and revenues. The dental accounts receivable at June 30, 2002 were reported gross, rather than net of credit balances, as historically had been done. (Finding 4, page 15)

We recommended the University implement procedures to facilitate proper recording of receivables and ensure that the procedures are clearly understood by responsible personnel.

University officials concurred. They stated the Urbana Accounting Division will continue to refine closing interactions and communications with units to assure correct entries are recorded. They stated the Chicago College of Dentistry staff has been retrained on the procedures for determining the net receivable amount and the proper classification of deferred revenues.

The Student Accounts Receivable System (SAR) at the Urbana Campus is antiquated, complicating adherence to good data processing practices, and should be replaced before it disrupts operations. There is very little documentation as to how the system is structured and operates, and because of the age of the system, proposed updates and enhancements by users are limited. While the SAR is currently operative, the lack of documentation and age of the system puts continued maintenance at the mercy of the few programmers who have gained an understanding of how it works. Good data processing practices prescribe that system documentation exist so any experienced member of the Information Technology staff can understand the system and correct problems in a timely fashion. (Finding 6, page 19)

We recommended the University continue its efforts towards replacing the current Urbana Campus SAR with a modern receivable system within a reasonable time frame.

University officials concurred with our recommendation and stated that replacement of the Urbana Campus SAR is planned as part of the implementation of an Enterprise Resource Planning (ERP) system for support of university-wide administrative systems. The University selected SCT as their ERP vendor in September 2000, and the project timeline indicates this module will be live in the summer of 2003. This finding has been repeated since 1998. (For previous University responses, see Digest footnote 1.)

The Urbana campus is the beneficiary of charitable remainder trusts that were not recorded in the financial statements. During our review of the University's beneficial interest trusts, we identified five trusts that have charitable remainder interests that will revert to the University at a future date. Beneficial interest trusts are properly not recorded in the financial statements. However, generally accepted accounting principles require recording a pledge receivable for charitable remainder amounts that will be received at a future date. University personnel were not aware that charitable remainder trusts are to be recorded in the financial statements. The gross value of the University's interest in these five trusts was approximately $4,600,000 at June 30, 2002. The University should record the present value of estimated future cash flows. (Finding 3, page 14)

University officials concurred with our finding and stated that beginning in Fiscal Year 2003 the Office of Cash Management and Investments will alter year-end accounting procedures to include the recording of the net present value of pledge receivables related to charitable remainder trusts.

The remaining findings are reportedly being addressed by University management. We will review progress toward the implementation of our recommendations in our next audit. University responses were provided by Michael B. Bass, Assistant Vice President for Business and Finance.

The financial audit report contains five sets of financial statements in the Annual Financial Report; and the revenue bond financial statements of the Auxiliary Facilities System, the Willard Airport Facility, the Construction Engineering Research Laboratory, and the Health Services Facilities System.

Our auditors state the June 30, 2002 financial statements are fairly presented in all material respects.

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WILLIAM G. HOLLAND, Auditor General

WGH:KMA:pp

BKD LLP were our special assistant auditors.