Our 2003 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.

During the current year audits, University management and the auditors noted problems in the reporting of capital assets to appropriate financial statement entities.

The 1997-A and 1997-B bond indenture agreements specified buildings that were to be capitalized as part of the Health Services Facilities System (System). During the year ended June 30, 2003, management of the System and the University discovered that the appropriate buildings were not recorded on the System’s financial statements. The School of Public Health West building was originally recorded on the System’s financial statements in 1998, but should not have been. Another building, the Magnetic Resonance Imaging Facility, was originally recorded on the System’s financial statements but was mistakenly reclassified to the University’s financial statements in 2000. The discovery of these errors resulted in a prior period adjustment to the System’s financial statements totaling $11,271,146.

The financial statements for the Auxiliary Facilities System (System) had to be adjusted for construction of the Lincoln Residence Hall in Springfield, in the amount of approximately $7,037,000, which had been expensed in 2001 and 2002. It was also discovered that this System’s financial statements did not include approximately $4,809,000 of capital assets and $3,859,000 in accumulated depreciation related to items used in its activities. The discovery of these errors resulted in a net prior period adjustment to the System’s financial statements of $7,987,000.

University management attributed the above errors in part to system weaknesses in the general ledger, which does not support comprehensive balance sheets by bonded entity. All data related to bonded entities must be retrieved from the Property Accounting System. Proper coding and reconciliation of the additions to entity assets is necessary to ensure accurate reporting of capital assets in the appropriate financial statement entities. (Finding 1, pages 12-13)

We recommended the University review its process and procedures for coding capital assets in the Property Accounting System and implement additional procedures to provide for a periodic reconciliation of amounts contained in the Property Accounting System to the amounts in the underlying records used to prepare the financial statements.

University officials concurred with our finding and stated they have implemented a new General Ledger and Fixed Asset System. As part of that implementation they will be initiating procedures to reconcile fixed asset records to the capital asset balances in the General Ledger.

Two instances were noted where accounts receivable balances at June 30, 2003 were overstated in the University’s financial statements. Accounts receivable for the College of Dentistry were overstated by $1,591,163 due to a miscalculation by departmental accounting personnel. In another area, parking accounts receivable were initially overstated by $1,288,014. The error resulted from the University recording a receivable for all unpaid citations issued since July 1, 1998 with no allowance made for the portion of these citations deemed to be uncollectible. (Finding 2, page 14)

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

University officials concurred. They stated the College of Dentistry administrative staff has added additional review procedures into their year-end closing procedures to assure the receivables and revenues are correctly stated in the financial statements. They stated the Accounting Division will continue to refine closing interactions and communications with units to assure correct entries are recorded.

Statements of Appointments were not completed properly as required by a federal grant agreement. The Department of Health and Human Services requires the completion of a Statement of Appointment Trainee form for each trainee receiving grant support. The form must be completed and submitted within 30 days of the appointment. In addition, trainee appointments can be made for no more than 12 months nor less than 9 months.

We originally noted two instances of six tested in which the regulations were not complied with. In one instance, the Statement was completed and signed after the appointment period had ended. In the other instance, the period of appointment exceeded the 12-month limitation.

Based upon the results of the review of the original sample of six appointments, the scope was expanded to include an additional eight specific Statements of Appointment. While coordinating the gathering of the eight additional forms, the University’s Principal Investigator (PI) discerned that there had been a misunderstanding related to the record keeping requirements on the Statements of Appointment, and that of the six statements originally provided to the auditors, four had been only recently prepared for submission in response to the audit request. The PI informed University officials of the misrepresentation, who in turn notified the audit firm and the Auditor General’s Office. Regarding the additional eight forms that were requested, only three were provided by the University. Of the three provided, one of the forms was signed more than 30 days after the appointment began.

Failure to comply with federal requirements could jeopardize future funding. (Finding 4, pages 16 - 17)

We recommended the University develop oversight procedures to ensure that all Statements of Appointments follow the guidelines set by the federal grant.

University officials concurred and stated an oversight committee has been established to examine all administrative requirements under the program to ensure overall compliance and to upgrade internal processes and communication.

The calculation of excess interest earned on federal funds for the Chicago Campus resulted in more funds being sent back to the Department of Health and Human Services than was required.

The University is required to calculate how much interest they earn on federal grant funds and return any interest earned over $250 per year. The University calculates the interest earned on federal grant funds by campus with the Chicago and Urbana campuses using different methods. The Urbana Campus determines the average daily cash balance for all federal funds and calculates an average quarterly balance to determine interest earned on federal funds. The Chicago Campus determines an average quarterly balance by federal agency. From those totals they calculate interest earned on any positive balances. They do not net the negative balances with the positive balances in determining interest earned. Based upon the Urbana Campus' method of calculation, the Chicago Campus could have saved approximately $72,000.

The criteria used for calculating interest earned on federal funds is included in regulations contained in the OMB Circular A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. However, the guidelines do not specify a specific method of calculation as long as the method used is reasonable. (Finding 5, page 18)

We recommended the Chicago Campus update their method of tracking federal cash balances and calculating excess interest earned on federal funds to match the method used by the Urbana Campus to maximize the amount of interest that may be retained by the University.

University officials concurred and stated effective FY 2004 the calculation methodology for excess interest earned will be consistent across campuses.

The current process used by the Hospital to calculate and post contractual allowances to active patient accounts should be strengthened. Our review indicated the following procedures were not adequately addressed by the Hospital on a monthly basis:

The procedures listed above are necessary to ensure that all factors that may impact the estimate for contractual allowances are properly considered. Generally accepted accounting principles require reporting patient accounts receivable at net realizable value. Strong internal controls require that a reasonable process be used to determine the amount of estimates to be recorded in the financial statements.

Failure to adequately implement procedures for estimating contractual allowances on active patient accounts could result in the untimely or inaccurate recording of those allowances which may misstate the Hospital’s periodic operating statement. (Finding 7, pages 21 - 22)

We recommended the Hospital review its process for calculating and posting contractual allowances and consider implementing additional procedures as listed in the finding.

University officials concurred and stated the Hospital is currently implementing a contract management system that will significantly enhance its ability to monitor its many different contracts to ensure appropriate payment and an accurate recording of contractual allowances.

The remaining findings are less significant and 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 four sets of financial statements in the Annual Financial Report; and the revenue bond financial statements of the Auxiliary Facilities System, the Willard Airport Facility, and the Health Services Facilities System.

Our auditors state the June 30, 2003 financial statements are fairly presented in all material respects.

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WILLIAM G. HOLLAND, Auditor General

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Clifton Gunderson LLP were our special assistant auditors.