university of ILLINOIS LIBRARY AT URBANA-CHAMPAIGN BOOKSTACKS 6S1.83S0^5 STX roiume 15 • 2009Annual I ILLINOIS Emerging and Potential Audit Issues AudltwVISORY William G. Holland AUDITOR GENERAL FUNDAMENTAL AUDITOR GENERAL’S DEFICIENCIES STILL MESSAGE IMPACT TIMELY FINANCIAL REPORTING Timely and accurate financial information is essential for State leaders The State ofIllinois’ current financial reporting fomts (SCO forms) designed by to make informed decisions regarding reporting process does not allow the State the Comptroller’s Office to prepare the the State’s finances. Intimesoffinancial to prepare a complete and accurate CAFR. Forthe most part, these SCO difficulties, the need for timely financial ComprehensiveAnnual Financial Report forms are completed for each ofthe State’s information becomes even more critical. (CAFR) or the Schedule ofExpenditures 786 active funds. The forms are completed Unfortunately, financial reporting in ofFederal Awards (SEFA) in a timely within each State agency by accounting Illinois in recent years has become manner. Reporting issues at various personnel who have varying levels of increasingly less timely. individual agencies caused the State’s knowledge, experience, and understanding This edition of the Audit Advisory financial statements to not be finalized ofgenerally accepted accounting discusses Illinois’ recent experience in financial reporting and what must be until .lune ofthe subsequent year, in each principles (GAAP) and ofthe State’s done in the future to improve it. ofthe past two fiscal years. '’ accounting policies and procedures. Included are excerpts from a finding Problems with accurate and timely Agency personnel involved with this related to the State’s Comprehensive financial reporting continue to exist eveti process are not under the organizational Annual Financial Report (CAFR) that though the auditors have: continuously control orjurisdiction ofthe Comptroller’s 1 ) details financial reporting problems that reported numerous findings on the internal Office. Further, these agency personnel may face the State. controls (material weaknesses and signifi- lack the qualifications, time, support, and Also included is a discussion of the cant deficiencies); 2) commented on the training necessary to timely and accurately American Recovery and Reinvestment inadequacy ofthe financial reporting report year end accounting information to Act of 2009 (ARRA) which provides process ofthe State; and 3) regularly pro- assist the Comptroller’s Office in the significant new revenue to the State, but posed adjustments to financial statements preparation ofthe statewide financial also provides significant new challenges regarding the reporting and oversight of year after year. These findings have been statements in accordance with GAAP. those funds. Finally, increased pressure directed primarily toward the Office ofthe Although the deficiencies relative to from the federal government for even State Comptroller and major State agencies the CAFR and SEFA financial reporting shortertime frames in which tocomplete underthe organizational structure ofthe processes have been reported by our the State’s Single Audit ~ which impacts Office ofthe Governor. Office for a number ofyears, problems both State agencies and the Office ofthe The State has not been able to solve continue with the State’s ability to provide AuditorGeneral - is examined. these problems or make substantive accurate and timely external financial As those responsible for the changes to the system to effectively reporting. Corrective action necessary to accounting,reporting,andauditingofthe remediate these financial reporting weak- remediate these deficiencies continues to State’s financial information, we share nesses. The process is overly dependent on be problematic. responsibilitiestoensurethat ourwork is completed in a timely manner. It will the post audit program being a part ofthe In discussing these conditions with the take increased efforts on all ofour parts internal control for financial reporting Office ofthe Governor, they stated the to effectively address this issue. . even though the Office oftheAuditor lack ofan automated accounting system General continues to inform State agency and decentralized agencies with over 00 1 officials that the post audit function is not separate financial systems results in wide and should not be an internal control and varied controls instead ofa uniform mechanism for any operational activity set ofcontrols to carry out the accounting related to financial reporting. policy set by the Comptroller’s Office. The State ofIllinois has a highly The Comptroller’s Office, to some decentralized financial reporting process. degree, would have the ability to better WILLIAM G. HOLLAND The system requires State agencies to analyze the financial activities ofState September2009 prepare a series ofcomplicated financial agencies from a financial reporting SeeIMPACTonPage2 2009 Illinois AuditAdvisory 1 AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 On February 17, 2009, the President signed into law the These states contain about 65 percent ofthe U.S. population and American Recovery and Reinvestment Act of2009 (ARRA). are estimated to receive about two-thirds ofthe intergovernmen- The Act is expected to provide the State ofIllinois with over S9 tal grant funds available through the RecoveryAct. Illinois was billion in additional direct funding from the federal government one ofthe 16 states selected for the GAO’s ongoing analysis. for infrastructure, fiscal stabilization, and other programs over The Inspector General offices in the various federal agencies the next several years. ARRA is designed to create or savejobs, administering theARRA funding will also be very active and invest in science, health care, transportation, education, and participants in overseeing the use oftheARRA funding. energy efficiency. While these federal entities will be doing their own auditing, While ARRA provides critical funding to the State ofIllinois, monitoring, and reporting, they are also relying heavily on the it has serious implications for the State agencies that administer audit work done by theAuditor General’s Office, primarily the these funds, as well as the Office ofthe Auditor General which Statewide SingleAudit offederal funds. Each year, the Auditor is responsible for auditing those funds. General conducts a Statewide Single Audit offederal funds Some ofthe ARRA funds will be for new programs; in other received by the State ofIllinois. Beginning with the SingleAudit cases, the funding will supplement or expand existing programs. for the year ending .lune 30, 2009, the Single Audit will include For new programs, agencies may need to establish a new system theARRA funds. The federal Office ofManagement and Budget ofinternal controls over the receipt and disbursement ofthese has issued, and will continue to issue, guidance and require- funds. For existing programs, internal controls should already be ments that the SingleAudits ofARRA funding must meet. in place, but new or additional controls may be needed ifthe As part ofthe increased emphasis on accountable, transparent funding is significantly greater than current funding, or ifnew use oftheseARRA monies, there is increased pressure being program requirements are added. put on states to complete their Single Audits in a more timely Since a main purpose ofARRA isJob retention and creation, manner (see inset). Historically, due largely to the inability to get agencies need to also ensure that accurate and reliable tracking timely, accurate financial information needed to complete the and reporting mechanisms are established. These significant new Single Audit from State agencies, the timeliness ofthe Single responsibilities to State agencies come at the same time agency Audit has been problematic. The federal Single Audit Act budgets are being cut and headcount is being reduced. requires Single Audits to be completed within 9 months ofthe A cornerstone ofthe ARRA funding is a strong emphasis on fiscal year end. However, since 2001, the Statewide Single accountable and transparent use ofthese funds. The expenditure Audits in Illinois have been completed during the time period ofthe ARRA funds, along with the outcomes ofsuch June through August. The SingleAudit for 2008 was issued by expenditures, (such asJobs retained or created) will be closely the Office ofthe Auditor General on August 1 1, 2009. scrutinized by various entities. The federal Government Complicating the matter is that before the SingleAudit can be Accountability Office (GAO) is taking a lead role in overseeing finalized, the State’s Comprehensive Annual Financial Report these accountability efforts. The GAO selected 16 states for (CAFR) must be completed. In recent years, release ofthe detailed review and monitoring ofthe use ofthe ARR.A funds. SeeARRAonI*u»e^ IMPACT component units. The Office ofthe GASB Statement No. 45 until March 19, Continuedfromp(i;^e / Comptroller has the statutory authority to 2009. In order for timely financial request submission offinancial informa- statements to be prepared and audited, perspective ifthe State had a centralized tion but does not currently have the ability the correct information should ha\e been automated financial reporting system, fhe to enforce those submissions on a timely submitted by the Department in October estimated cost ofsuch a system would basis from other State agencies. of2008. well exceed SI00 million. This lack of For example, in order for the State to Failure to establish elTective internal automated systems and lack ofa general have financial statements in accordance controls at all State agencies regarding ledger system requires labor intensive with generally accepted accounting financial reporting for the preparation of manual tabulations by accounting principles for the year ended June 30, the CAfR and the SFd'A prevents the State personnel who lack the qualifications 2008, the State needed to implement from completing an audit in accordance and systems to report accurate financial GASB Statement No. 45, Accounting and with timelines set forth in OMB Circular information on a timely basis. financial Reporting by Fimploycrs for A-133 which may result in the suspension In discussing these conditions with Fostemployment Benefits Other fban offederal funding. Delays in financial Comptroller personnel, they indicated I’cnsions. 1he Department of1Icalthcarc reporting decrease the usefulness ofsuch delays were caused by a separation in the and family Scr\iccs failed to submit information and affect the State's ability responsibility for the State’s internal needed data in the form ofaccurate to comply with continuing disclosure control procedures among agencies and actuarial reports necessary to implement requirements. 2 i’liiio Illinois Audit Ad\isory HIGH RISK AREAS Our compliance examinations identify certain aspects of State decision makers lack critical information necessary to State government that expose the State to an unacceptable level manage the operations ofthe State. In times offunding shortfalls ofrisk. The four high risk areas highlighted in this issue ofthe as currently being experienced by the State, the need for timely Audit Advisory are: 1 ) Contracting Processes; 2) Subrecipient and accurate financial information is even more important. Monitoring; 3) Untimely Financial Reporting; and 4) Fraud Second, the federal government is in the process ofimposing and Abuse. new, more restrictive time requirements on states’ financial 1. CONTRACTING PROCESSES reporting and auditing. Ifthe State’s financial reporting The contracting process poses significant risks for State continues to be delayed, the risk increases that federal funding agencies and is susceptible to fraud and abuse. There are a myriad to the State may be delayed or withheld. ofways the contracting process can be manipulated or abused. Finally, untimely financial information may have an adverse Consequently, an agency’s system ofinternal controls related to impact ifpublic users are not getting needed information. For contracting needs to be strong, monitored, and enforced. example, bond rating agencies use information in the State’s Contracting deficiencies have been routine findings in OAG financial reports as part oftheir assessment ofthe overall risk audits. Examples ofcontracting deficiencies included; lack of and bond rating for the State. Ifneeded financial infonnation is documentation in the procurement file; changing the method unavailable, it may have an adverse, and costly, impact on ofprocurement from Invitation to Bid to Sole Economically the State’s bond rating and related borrowing costs. Feasible method after communicating with a prospective Financial reporting delays and errors result in several bidder; allowing vendors to begin work without a significant effects, including increased audit testing, delays formal written agreement in place; failure to publish in the completion ofaudits, and delays in the preparation the required notice in the Procurement Bulletin; and ofthe Comptroller’s Comprehensive Annual contracts lacking all required certifications. Financial Report (CAFR), as well as the Statewide SUBRECIPIENT MONITORING Single Audit. Problems with agencies’ financial 2. State agencies’ failure to adequately reporting were directly responsible for the delay in the monitor subrecipients has been a central issuance ofthe State’s most recent CAFR, which was finding in the State’s Single Audit for issued in July 2009. By contrast, in 2007 the CAFR years. The FY 2007 Single Audit was issued in February. As noted in this Advisory, included 26 findings and the FY 2008 the federal government is considering reducing Single Audit had 27 findings related the time period for completing SingleAudits to agencies’ deficiencies in monitoring from 9 months after the end ofthe fiscal year, subrecipients. Agencies covered by the Single to 6 months after fiscal year end. This will Audit received $17.3 billion in federal funding in require not only an earlier completion ofthe FY 2008, ofwhich $3.7 billion was passed through to Single Audit, but also ofthe State’s CAFR. grantees. Deficiencies in financial reporting included It is not sufficient for agencies to simply pass funding on to late preparation offinancial statements and other third parties. Rather, a system must be established to monitor financial reporting forms (GAAP forms) and improper recording how those funds are being spent and ensure these monies are or misclassification oftransactions, requiring significant being spent for the specified purpose. Subrecipient monitoring revisions and adjustments to financial statem.ents. includes many aspects, such as reviewing and receiving grant 4. FRAUD ANDABUSE or audit reports, as well as some level ofon-site reviews or Each State agency needs to have a fraud detection program. inspections. Recent audits have identified several instances where, due to a 3. UNTIMELY FINANCIAL REPORTING lack ofadequate internal controls and oversight, public funds Untimely Financial reporting poses significant risks to the have been used for undocumented or improper purposes. State ofIllinois. These risks occur in several critical key areas. One area identified in audits as being susceptible for fraud First, ifreporting on the State’s financial position is delayed. and abuse deals with the use ofcredit cards or P-cards. Auditors SeeHIGHRISKonPane4 ARRA Continuedfrompa^e2 CAFR has also been delayed. Several factors contribute to the To be successful at releasing more timely CAFRs and Single delay in completing the CAFR, including the State’s financial Audits will take a concerted effort by the three key players: reporting system which is cumbersome and antiquated, as well State agencies who prepare and provide the necessary financial as a lack ofcooperation provided by State agencies and a lack data; the Comptroller’s Office which prepares the financial ofexperienced financial staffat agencies to complete financial statements; and the Office ofthe Auditor General which audits reports in a timely and accurate manner. the information. 2009 Illinois Audit Advisoiy 3 HIGH RISK Continuedfrompu^re3 found instances in which it appeared was purchased as w'ell as the business assessments oftheir operations to identify that employees were making personal purpose ofthe purchase. Also, there areas where misappropriation ofState purchases with these cards and were was an inadequate segregation ofduties assets could occur. Once those areas are not reimbursing the agency for the and/or inadequate independent supervi- identified, then the controls need to be personal use. sion or review ofthe purchases to ensure periodically reviewed and tested to Controls circumvented in these they were for government puiposes. ensure that they are properly designed instances included the failure to require Agency managers have the responsibil- and working. documentation or receipts to show what ity to conduct internal vulnerability UNIVERSITYOFILLINOI8-URBANA SINGLE AUDIT: lllll lllllII III III 3 0112 079457103 Revisions to Filing Deadlines and Extensions The federal SingleAuditAct Several federal entities, including the for the filing of[SingleAudits].” requires that the reporting package, GovernmentAccountability Office, Furthermore, revisions to the which includes the audited financial federal Office ofManagement and SingleAuditAct are currently being statements, schedule ofe.xpenditures Budget, the Recovery Accountability considered that would reduce the time offederal awards, corrective action and Transparency Board, and certain period in which Single Audits must plan, and auditor’s reports, must be members ofCongress, have taken the be completed from 9 months to 6 submitted to the federal clearinghouse position that 9 months to complete months, with no option for the federal and made available for public inspec- SingleAudits (let alone any additional agency to grant an extension, except tion within 9 months after the end of time granted by an extension) does in conjunction with a federal disaster the period audited, or within a longer not provide for timely oversight infor- declaration. timeframe authorized by the federal mation on the use offederal funds. These proposed changes, ifand agency when the 9-month timeframe The Inspector General ofthe federal when implemented, will have a would place an undue burden on the Dept, ofHealth and Human Services dramatic impact on the operations non-federal entity. recently issued a notice that the ofthe Office oftheAuditor General Over the past several months, there “granting ofan extension for the filing and the conduct ofthe Single Audit has been increased pressure to not [ofSingle Audits] is in conflict with in Illinois. More timely, more accurate only limit the ability offederal agen- the principles oftransparency and financial information, as well as a cies to grant extensions to the 9 month accountability as contained in the higher level ofcooperation from the completion requirement, but also to Recovery Act. Therefore, effective State agencies, will be needed to significantly reduce the 9 month immediately, we are unable to successfully meet these new time period to complete the Single Audit. recommend the granting ofextensions demands. PRINTEDBYAUIMORIIYOFHIESTATEOF ILLINOIS• LPUORDER58753 •SEPTEMBER2009•675COPIES omccoftheAuditorGciu'ral • lies Park Pla/a, 740 HastAsh Street Springfield. Illinois62703-.3154 • Michael A. Bilandie Building, 160N. LaSalleStreet,SuiteS-000 Chicago, Illinois60601-3109 ILLINOIS DEPOSITORY Phone: 217-782-6046 Ea.x; 217-785-8222 CCT 0 9 2009 TTY: 1-888-261-2887 I,-mail: auditor^'omail.state.il.us UNI^l Y OF ILLINOIS Website: \\ww.auditor.illinois.gov -: 3,JA-CHAMPAIGN