REPORT DIGEST

PRAIRIELAND ENERGY, INC.

FINANCIAL AUDIT

For the Years Ended June 30, 2007

FINANCIAL OPERATIONS

FY 2007

FY 2006

OPERATING REVENUES

Steam Sales...............................................................

Chilled Water Sales...................................................

Hot Water Sales........................................................

Electricity Sales.........................................................

Budget Allocation University of Illinois........................

Total...................................................................

OPERATING EXPENSES

Energy Costs.............................................................

Facilities Rental..........................................................

Salaries

Office Rent................................................................

Budget Allocation University of Illinois........................

Other........................................................................

Total...................................................................

NONOPERATING REVENUES (EXPENSES)

Interest......................................................................

Other........................................................................

Income Tax (Expense) Credit....................................

Total...................................................................

INCREASE (DECREASE) IN NET ASSETS................

NET ASSETS - Beginning of Year..................................

NET ASSETS - End of Year...........................................

$2,882,019

1,541,329

1,442,324

4,090,464

$9,956,136

$7,936,031

1,451,850

116,499

15,180

237,184

$9,756,744

$7,238

(134)

(28,614)

($21,510)

$177,882

$727,750

$905,632

$7,324,034

2,246,063

3,750,328

335,680

21,210

$13,677,315

$10,845,009

2,903,880

46,593

13,596

21,210

68,294

$13,898,582

$9,107

(514)

70,002

$78,595

$(142,672)

$870,422

$727,750

SELECTED ACCOUNT BALANCES

AT JUNE 30,

2007

AT JUNE 30,

2006

Cash..............................................................................

Accounts Receivable......................................................

Deferred Income Taxes Payable.....................................

$626,529

$2,105,601

$140,462

$197,509

$656,587

$235,642

CORPORATION PRESIDENT

During Audit Period: Mr. Lyle Wachtel (thru 12/31/07), Vacant 12/31/07 thru 2/5/08,

Mr. Walter Knorr – 2/6/08 thru current

Failure to identify and record proper accounting adjustments

Liabilities not recorded

Accounts receivable not credited

Tax liability for $264,256 was not recorded

Agency agrees with auditors

Failure to properly bill

Customers were not billed in accordance with the written service agreements

Written service agreement could not be located

Several documents missing University signatures

Agency indicates corrective action initiated

No integrated accounting system

Untimely billings

Agency agrees with auditors

Adoption and implementation of policies needed

Agency agrees with auditors

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE CONTROLS

Prairieland Energy, Inc. maintained its accounting records during the year on the cash basis and recorded accrual adjustments at the end of the year in order to report financial results in accordance with accounting principles generally accepted in the United States of America. However, Prairieland failed to identify and properly record certain accrual adjustments.

During our testing, we identified the following adjustments which had not been previously recorded by Prairieland:

· We identified two liabilities which had not been recorded in accounts payable. The first liability, in the amount of $43,164 was found early in the audit process and was recorded by Prairieland after bringing it to their attention. The second liability, in the amount of $30,299 was found while updating our liabilities search near audit completion. A proposed entry was not recorded by Prairieland.

· We identified a deposit slip dated June 30, 2007 for $36,408 which cleared the bank on July 2, 2007 that was not included as a deposit in transit and the customers’ accounts receivable had not been credited for the payments.

· Prairieland had not recorded a liability for the built-in gains tax to their conversion from cash to accrual for filing income taxes and Subchapter S election. The built-in gains tax liability related to this was $264,256.

Failure to properly identify liabilities and record transactions in accordance with accounting principles generally accepted in the United States of America may lead to materially misstated financial statements. (Finding 1, Page 21)

We recommended that Prairieland improve its procedures and related controls for identifying liabilities and recording transactions in accordance with accounting principles generally accepted in the United States of America.

Prairieland management accepted our recommendation and stated that they have initiated a review of accounting procedures and internal controls and procedures will be revised as necessary.

BILLING ERRORS AND CONTRACT IRREGULARITIES

Prairieland Energy, Inc. did not properly bill its electric service customers in accordance with its written service agreements.

We sampled 10 residential and tested 100% of the larger commercial (non-University) electric service customer billings during the year and noted the following:

· Seven of the 10 residential customers were not billed in accordance with the written service agreements. We found 5 under-billings ($6.80 under-billed) and 2 over-billings ($9.67 over-billed).

· We also examined 96 commercial electric service invoices and noted 42 with errors that exceeded $1. The 42 errors resulted in a net under-billing of $2,678.

We also noted the following with regards to service agreements:

· Prairieland could not locate a written service agreement for steam and chilled water services for a commercial customer.

· An amended service agreement between Prairieland and the University dated December 7, 2006 was not signed until January 31, 2007 and several schedules to the agreement which defined service rates were signed only by the President of Prairieland.

· Multiple service agreements with differing rates were noted for three commercial electric service customers.

Failure to properly bill customers in accordance with written service agreements is a violation of those agreements and may result in liability to the customers and lost revenue to Prairieland. Failure to properly maintain written service agreements may jeopardize Prairieland’s position if billing disputes arise. (Finding 2, Pages 22-23)

We recommended that Prairieland bill its customers in accordance with its written service agreements, rectify the noted billing errors and properly maintain all service agreements.

Prairieland management stated that they have initiated a review of staffing, processes and procedures. They also stated that customer billing software and processes will be revised to provide accurate and reliable customer billing and collection. Further, Prairieland officials stated that the management of service agreements will also be reviewed and improved procedures will be implemented.

INADEQUATE SYSTEM OF ACCOUNTING FOR SALES AND RELATED ACCOUNTS RECEIVABLE

Prairieland Energy, Inc. does not maintain an integrated accounting system for recording its sales and accounts receivable and some billings are not done timely.

Prairieland maintains its accounting records on a cash basis during the year and records accrual adjustments at the end of the year. Prairieland uses an excel spreadsheet to track the monthly billing and payments of non-University electricity customers and to record accounts receivable at year end, but it is not used for recording monthly sales and billings. Energy sales were recorded during the year based on deposits reflected on the bank statements and not based on a detailed sales journal.

We also noted that billings to a commercial customer of steam and chilled water in Champaign were not done timely. These bills were for one to six months of usage at a time and did not follow any type of billing pattern. (Finding 3, Page 24) (This finding was first reported in 2005)

We recommended that Prairieland maintain its accounting records on the accrual basis, records sales and accounts receivable when they are earned, and implement a regular billing cycle for steam and chilled water customers in Champaign.

Prairieland management accepted the finding and recommendation and stated that they have initiated a review of staffing, processes and procedures. They also stated that sales and accounts receivable software and procedures will be revised to provide accurate and reliable reporting. (For previous University response, see Digest Footnote #1.)

CONFLICT OF INTEREST AND FRAUD PREVENTION AND DETECTION POLICIES

Prairieland Energy, Inc. has not implemented a conflict of interest policy for its operations nor adopted a formal policy regarding the periodic evaluation of fraud risks.

Prairieland’s Board of Directors and management are all University or Foundation employees, and in the past have completed conflict of interest statements relative to their position within the University or Foundation. However, no conflict of interest statements have been utilized relative to Prairieland’s operations. Prairieland’s Board of Directors did adopt a conflict of interest policy at its January 29, 2007 Board meeting, but the policy only addresses “salaried staff members” of Prairieland and has yet to be implemented. (Finding 4, Pages 25-26)

We recommended that Prairieland review the content of its newly adopted conflict of interest policy and implement an appropriate program to identify and avoid conflicts of interest specific to Prairieland. We further recommended that Prairieland management establish a continuous fraud prevention, deterrence and detection plan. This should include evaluating whether appropriate internal controls have been implemented in any area identified as posing a higher risk of fraudulent activity, as well as controls over the financial reporting process.

Prairieland management accepted the recommendation and stated that they will discuss both issues with the Board of Directors.

AUDITORS’ OPINION

Our auditors stated the Corporation’s June 30, 2007 financial statements are fairly presented in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLK:pp

SPECIAL ASSISTANT AUDITORS

Our special assistant auditors were Clifton Gunderson LLP.

DIGEST FOOTNOTE

#1 Inadequate System of Accounting for Sales and Related Accounts Receivable – (Previous University Response)

2006: “Prairieland Energy Incorporated (“Prairieland”) acknowledges the need to have adequate accounting records for its activities. The challenge until now has been the need for Prairieland to utilize a cash accounting process in its activities and how this system in the past has been translated to GAAP. Prairieland is in the process of converting its accounting processes to an accrual basis and will establish the appropriate ledgers and journals for FY 2007.”