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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.
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