REPORT DIGEST

 

DEPARTMENT OF CENTRAL MANAGEMENT SERVICES

 

FINANCIAL AUDIT

AND COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2008

 

Summary of Findings:

 

Total This Audit†††††††††††††††††††† 24

Total Last Audit†††††††††††††††††††† 28

Repeated From Last Audit†††† 19

 

 

Release Date:

June 4, 2009

 

 

 

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

 

 

 

 

 

To obtain a copy of the Report contact:

Office of the Auditor General

††††††††††††††††††† 740 E. Ash Street

Springfield, IL 62703

(217) 782-6046 or TTY (217) 888-2887

 

This Report Digest and the Full Report are also available on

the worldwide web at

http://www.auditor.illinois.gov

 

 

SYNOPSIS

 

  • The Department generated excess retained earnings balances for certain internal service fund activities and failed to make adequate adjustments as required by OMB Circular A-87.

 

  • The Department recognized costs for federal reporting purposes different than reported in the Departmentís financial statements, and unallowable costs were reported for federal purposes.

 

  • The Department did not document the distribution of salaries or wages for employees working on multiple activities as required by federal regulations.

 

  • The Department did not maintain complete, accurate, or detailed records to substantiate its current midrange computer systems and equipment.

 

  • The Department has not established a property management function to effectively manage occupancy costs and revenues.

 

  • While procuring a master contract for the purchasing of servers and accessories, the Department communicated with a prospective bidder resulting in a change of procurement from an Invitation to Bid method to a Sole Economically Feasible method.

 

  • The Departmentís Illinois Office of Internal Audit was unable to demonstrate compliance with the Fiscal Control and Internal Auditing Act that requires audits of major systems of internal accounting and administrative control.

 

 

 

 

 

 

 

 

{Expenditures and Activity Measures are summarized on the next page.}

 

 


STATE OF ILLINOIS

DEPARTMENT OF CENTRAL MANAGEMENT SERVICES

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For The Year Ended June 30, 2008

 

STATEMENT OF ACTIVITIES INFORMATION Ė

GOVERNMENTAL ACTIVITIES

(expressed in thousands)

 

Fiscal Year 2008

 

Fiscal Year

2007

PROGRAM REVENUES

Charges for Services.......................................................................

 

EXPENSES

Total Expenses...............................................................................

NET (EXPENSE) REVENUES...................................................

 

Total General Revenues and transfers..............................................

CHANGE IN NET ASSETS.......................................................

 

Beginning Net Assets, July 1...........................................................

ENDING NET ASSETS, JUNE 30............................................

 

$640,934

 

 

$759,821

$(118,887)

 

$90,504

$(28,383)

 

$158,326

$129,943

 

$576,496

 

 

$693,522

$(117,026)

 

$121,345

$4,319

 

$154,007

$158,326

STATEMENT OF NET ASSETS INFORMATION

GOVERNMENTAL ACTIVITIES

(expressed in thousands)

 

Fiscal Year 2008

 

Fiscal Year

2007

Cash equity with State Treasurer.....................................................

$70,915

$65,723

Cash and cash equivalents...............................................................

$4,040

$4,107

Capital Assets, net..........................................................................

$287,004

$295,393

Other Assets..................................................................................

$126,247

$137,391

Total Assets.................................................................................

$488,206

$502,614

Accounts Payable...........................................................................

$52,679

$53,169

Long Term Obligations...................................................................

$285,810

$261,638

Other Liabilities..............................................................................

$19,774

$29,481

Total Liabilities............................................................................

$358,263

$344,288

Net Assets, invested in capital assets, net of debt.............................

$247,054

$249,652

Net Assets, restricted.....................................................................

$3,594

$3,675

Net Assets, unrestricted..................................................................

$(120,705)

$(95,001)

Total Net Assets..........................................................................

$129,943

$158,326

SELECTED ACTIVITY MEASURES (unaudited)

FY08

FY07

Average Number of Employees (audited)........................................

Number of Business Enterprise Program applications received.........

Number of Network Data Circuits managed....................................

Number of flexible spending account participants.............................

Number of equipment items transferred out of surplus......................

Percent of Workersí Compensation claims paid within 90 days........

Total gallons of gasohol sold...........................................................

Number of facilities participating in I-cycle.......................................

1,635

1,859

8,170

11,937

1,951

42.08%

971,230

254

1,682

809

8,048

10,602

1,826

78.64%

957,388

252

EXECUTIVE DIRECTOR

 

 

During the Audit Period: Maureen OíDonnell (through August 24, 2008)

†††††††††††††††††††††††††††††††††††††††† James P. Sledge (effective August 25, 2008)

Currently: †††††††††††††††††††††††† James P. Sledge

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Excess retained earnings balances have not been adequately adjusted as required

 

 

 

 

 

 

 

 

 


$13.322 million due to the federal government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Unallowable costs reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inconsistencies in Financial Reporting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Excess retained earnings balances need to be determined annually

 

 

 

 


Expenditures not reasonable or necessary

 

 

 

 

 

 

 

 

 

Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time spent working not adequately documented

 

 

 

 


$2,800,098 in payroll costs for 82 employees were misallocated among internal service funds

 

 

 

 

 

 

 

 

Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Listing of servers incomplete and erroneous

 

400 servers not included on server listing

 

 

 

 

 

 

 

 

 

 

 


Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Billing system operational December 2004, however monthly billings still not processed timely

 

 

 

 

 

 

 

 

 

 

139 (28%) leases expired but State continues to occupy

 

 


Many leases in holdover status for over 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


$12,553,805 due from other State agencies for facilities management

 

 

 

 

 

 

Lawsuit filed for unpaid utility bills totaling $296,042

 

 

 

 

 

 

 

 

 

 

Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in procurement to sole source

 

 

 

 

 

 

 

 

 

 

 

Communication with prospective bidder resulted in change of procurement process

 

 

 

 

 

 

 

 

 

 

 

 

Department agrees with auditors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Failure to demonstrate compliance with State law

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Major system audits not completed every two years

 

 

 

 

 

 

 

 

 

 

Key agencies with significant responsibilities excluded from audits

 

 

 

 

 

Risk assessments not clearly documented

 

 

 

 

 

 

 

 

 

 

 

 

 

INTRODUCTION

 

††††† Our audit of the Department of Central Management Services is a Financial Audit and Compliance Examination for the year ended June 30, 2008.This report contains Government Auditing Standards findings and State Compliance findings.

 

††††† Our compliance examination included procedures examining DCMSí expenditures from its Shared Services appropriation in Fiscal Year 2008.DCMS was one of the three agencies participating in the implementation of the Administrative and Regulatory Shared Services Center (ARSSC), located in the Department of Revenue.DCMS reported incurring implementation costs for the ARSSC ranging from $301,054 to $709,412 during Fiscal Years 2006, 2007, and 2008.Please refer to the Analysis of Operations section of the report (pages 142 and 143) and Finding Code No. 08-24 (page 64) for more information about DCMS and the ARSSC.

 

 

 

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

 

 

EXCESS RETAINED EARNINGS BALANCES REPRESENTING NONCOMPLIANCE WITH FEDERAL REGULATIONS

 

The Department generated excess retained earnings balances for certain internal service fund activities and failed to make adequate adjustments as required by OMB Circular A-87.

 

The Departmentís internal service funds receive revenue from charges for services provided to various federal grants of the State. OMB Circular A-87 allows internal service funds to maintain reasonable working capital reserves (up to 60 days cash expenses) for normal operating purposes.However, two internal service funds administered by the Department maintained retained earnings balances in excess of the allowable working capital reserve.

 

Consequently, a payback representing the federal share of excess retained earnings balances for fiscal years 2006 and 2007 is required from the:1) Statistical Services Revolving Fund (SSRF) totaling approximately $5.931 million; and 2) Communications Revolving Fund (CRF) totaling approximately $2.445 million.Department officials believe that it is probable that a payback will be required from these funds for fiscal year 2008.It is estimated that for fiscal year 2008, the SSRF liability is approximately $3.858 million and the CRF liability is approximately $1.088 million.Total liabilities recognized at June 30, 2008, representing the federal share of excess retained earnings balances, are reported to be $9.789 million for the SSRF and $3.533 million for the CRF.

 

Furthermore, Circular A-87 stipulates ďA comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable cost of the service will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs.ĒThe Department performs the annual comparison; however, the adjustments required by Circular A-87 are not made on a timely basis.As a result, the internal service funds continued to accumulate excess retained earnings balances.(Finding 1, pages 16-17)This finding was first reported in 2006.

 

We recommended the Department comply with the provisions of OMB Circular A-87 by making adequate adjustments for excess retained earnings balances in internal service funds for each billed service using an acceptable method.

 

Department officials concurred with our recommendation and stated that the existence of an excess balance alone is not a violation of A-87.The federal requirement is that excess balances be remedied through the four methods mentioned above.The Department contends that its adjustment methods are acceptable.The Department does agree that adjustments should be timely.DCMS continues to adjust rates annually (c) and adjust central service cost allocations annually (d) to reduce exposure to excess balances.However, these annual adjustments cannot guarantee that excess balances will be entirely eliminated, since rates and costs are projections and are usage-sensitive.Billing credits (b), like cash refunds, take multiple years to apply, so the adjustment occurs no faster than a negotiated payback and requires significantly more up-front cash which the state does not have.Therefore, direct negotiated paybacks (a) have always been, and will likely always be, a part of the remedy for excess balances.The timeliness of direct paybacks is dependent on the federal review cycle.The federal Dept of HHS includes imputed interest in the payback calculations in recognition of, and as compensation for, any delay in remedying the excess balances.

 

 

NEED TO REPORT COSTS IN ACCORDANCE WITH FEDERAL REGULATIONS

 

The Department recognized costs for federal reporting purposes different than reported in the Departmentís financial statements prepared in accordance with generally accepted accounting principles (GAAP), and unallowable costs were reported for federal purposes.

 

Specifically, we noted the following during our review of the fiscal year 2007 reconciliations that were completed by the Department during the audit period (in March 2008) for the Statistical Services Revolving Fund (SSRF), Communications Revolving Fund (CRF), and the Facilities Management Revolving Fund (FMRF):

 

        Equipment totaling $1,574,000 purchased in the SSRF during the fiscal year 2006 lapse period was properly reported as fiscal year 2007 expenses for the GAAP basis financial statements but was expensed in fiscal year 2006 for federal purposes.

 

        Equipment totaling $715,000 purchased in the SSRF during the fiscal year 2007 lapse period was reported as 2007 expenses for the GAAP basis financial statements but capitalized in fiscal year 2008 for federal purposes.

 

        An increase in compensated absence liability in the SSRF totaling $161,000 was reported as 2007 expenses for the GAAP basis financial statements but was not accrued for federal purposes in fiscal year 2007.

 

        Equipment totaling $2,869,000 purchased in the CRF during the fiscal year 2007 lapse period was reported as 2007 expenses for the GAAP basis financial statements but capitalized in fiscal year 2008 for federal purposes.

 

        An increase in compensated absence liability in the CRF totaling $270,000 was reported as 2007 expenses for the GAAP basis financial statements but was not accrued for federal purposes in fiscal year 2007.

 

        Commission income in the CRF of $1,410,000 was reported for federal purposes in fiscal year 2007 but not reported as revenue in the 2007 GAAP basis financial statements.

 

        Encumbrances in the CRF totaling $1,667,000 were properly excluded from fiscal year 2007 expenses for the GAAP basis financial statements but were expensed in fiscal year 2007 for federal purposes.

 

        Accrued interest expense of $1,041,000 for Certificates of Participation was reported in FMRF for the fiscal year 2007 GAAP basis financial statements but was reported in fiscal year 2008 for federal purposes.

 

A number of the differences cited above represent timing differences and, over a period of two fiscal years the over and under statements will offset one another.However, as the determination of excess retained earnings balances is required to be performed annually, reporting such revenues and expenses in the wrong period could significantly alter the results of the calculation of excess balances.

 

During our testing of expenditures charged to the internal service funds, we also noted certain expenditures that were not reasonable and necessary for the administration of the fund.Included were travel expenses for the Director and cable for the Directorís office paid from the SSRF and purchases of bottled water from the CRF.(Finding 2, pages 18-20)

 

We recommended the Department comply with the provisions of OMB Circular A-87 by reporting revenues and expenses in accordance with generally accepted accounting principles for federal purposes.

 

Department officials concurred with our recommendation and stated that they have developed a more clear presentation of the reconciliation process for fiscal year 2008, and they are adjusting their practices where feasible to reduce the total number of reconciling items.

 

 

DOCUMENTATION OF PAYROLL COSTS NOT IN COMPLIANCE WITH FEDERAL REGULATIONS

 

The Department did not document the distribution of salaries or wages for employees working on multiple activities as required by federal regulations.

 

Fiscal year 2007 revenues and expenses for the Departmentís internal service funds were reported to the federal government during March 2008.During our testing we noted transactions between the Statistical Services Revolving Fund (SSRF) and Communications Revolving Fund (CRF) involving payroll costs for employees performing services on behalf of both Funds.However, the time spent working by the employees on behalf of each Fund was not supported by adequate documentation as required by federal regulations.

 

During fiscal year 2007, the SSRF incurred payroll costs for approximately 61 employees performing services on behalf of the CRF in the amount of $1,791,063.During the same period, CRF incurred payroll costs for approximately 21 employees performing services on behalf of the SSRF in the amount of $1,009,035.This resulted in a payment of $782,028 to SSRF from CRF.(Finding 3, pages 21-22)

 

We recommended the Department comply with the provisions of OMB Circular A-87 by maintaining appropriate personnel activity reports or equivalent documentation to support costs of salaries and wages reported for federal purposes.

 

Department officials concurred with our recommendation and stated that the Department has already changed this process for the fiscal year 2008 federal reporting period.

 

 

INCOMPLETE AND INACCURATE RECORDS OVER COMPUTER SYSTEMS AND EQUIPMENT

 

The Department did not maintain complete, accurate, or detailed records to substantiate its current midrange computer systems and equipment.

 

20 ILCS 405/405-410, effective January 15, 2005, authorized the Department to consolidate Information Technology functions of State government.As a result of the consolidation the Department had an increased responsibility to administer, secure, and monitor the midrange environment.

 

In order to conduct our audit work of the midrange environment for several consolidated agencies, we requested a listing of all servers utilized by the specific agency.Although the Department provided a listing, we determined the listing contained incomplete and erroneous information.In addition, during our additional audit work we discovered approximately 400 additional servers which were not included on the Departmentís server listing.

 

The lack of complete, accurate, and detailed information available from the Department inhibited our ability to identify and target high-risk servers for detailed audit testing to support audit work.(Finding 8, pages 34-35)

 

We recommended the Department ensure complete, accurate and detailed records are available to substantiate its midrange computer systems and equipment.††

 

Department officials concurred with our recommendation and stated that many of the issues described are related to legacy environments, and these environments did not have adequate controls in place prior to moving the servers to the data center.Based on reviews of legacy agenciesí prior audit reports, it is evident that these systems were not being effectively managed prior to their move and were at serious risk from an environmental and security perspective.The Department is currently pursuing the initiation of a project for a Configuration Management database to replace the Technical Validation database, which represents all DCMS managed IT processing equipment.The Department is also reconciling its databases against the legacy Agency inventory systems to improve data integrity.

 

 

INEFFECTIVE PROPERTY MANAGEMENT

 

The Department has not established a property management function to effectively manage occupancy costs and revenues.

Responsibility for managing the majority of State owned and leased buildings was transferred to the Department through Executive Order 2003-10, which consolidated the Facilities Management function.

 

In fiscal year 2005, the Department initiated the development of a process to account for the costs of properties by agency.The process included development of a cost allocation methodology and Billing Allocation System (BAS) that was intended to establish a mechanism to capture costs by property, including allocable overhead costs, and generate billings to user agencies.

 

As part of the process development that began during fiscal year 2005, the Department contracted with a consultant to design a cost allocation methodology that would determine costs by agency and property for purposes of establishing billings to the agencies for the management of their buildings and properties.The BAS was developed and functional on December 8, 2004.However, the Department has historically not produced bills from the BAS in a timely manner. The Department did not complete the calculation of the new rates or send the first billings for fiscal year 2008 until the end of October 2007.During our testing, we noted August and September 2007 billings were not sent to agencies until December 2007.Delays in updating the cost allocation model and billing agencies have created difficulties in monitoring user agency occupancy costs which had a negative impact in the development of fiscal year 2008 budgets and forecasting for fiscal year 2009.

 

The Department is also not actively managing its leased space or occupancy, nor bidding and renewing, or consolidating its existing leases resulting in a substantial number of leases that have not been timely renewed or terminated.Department records indicate that as of March 2, 2009, 139 of the 505 (28%) leases were in holdover status.Leases in holdover status represent leases for which the contractual term of the lease has expired but the State continues to occupy the building and pay on a month-to-month basis under the previous terms of the lease.Many of these leases have been in this status for over 5 years.The Department has not assessed effective utilization of the space and has not negotiated terms that may be more favorable to the State.However, in May 2007 the Department contracted with multiple vendors to outsource professional services, including architects and contractors, to assist with duties performed by internal leasing representatives.The contracts awarded total a maximum award amount of approximately $912,000.

 

Payments to vendors for monthly lease obligations, utilities and other occupancy related costs were not made timely.Issues noted included:

 

         The Department did not conduct a true up of fiscal year 2006 billings to amounts paid until fiscal year 2008.Thus current rates could not be adjusted to reflect the true costs of the facilities.There is a two year lag on the reconciliation of vendor payments and amounts billed to other agencies for facility management services.

 

         As of December 2008, several agencies had not paid their fiscal year 2008 bills due to the Facilities Management Revolving Fund.At December 31, 2008 the Department reported receivables totaling $12,553,805 for services provided in fiscal year 2008.

 

         The Department received disconnection notifications from utility companies.

 

        A lawsuit has been filed against the Department by an electric utility provider seeking payment of unpaid or outstanding accumulated electric bills at various State of Illinois facilities.The claimant is seeking $296,042.(Finding 19, pages 52-55)This finding was first reported in 2005.

 

We recommended the Department obtain necessary information to enable preparation of complete, accurate and timely billings to user agencies.In addition, we recommended the Department continue efforts in reducing the number of leases in holdover status.

 

Department officials concurred with our recommendation and stated the following:

        The Department has fully implemented a cost allocation methodology and billing system to facilitate timely billing and rates in accordance with A-87 guidelines.The federal Department of HHS has reviewed and approved the methodology.

 

        The Department utilizes the cost accounting capabilities of its Accounting Information System (AIS) and the CRIS system to accurately allocate costs to applicable buildings and service centers.This information is then utilized in the process of rate development.

 

        In fiscal year 2009, new rates were billed a full 2 months earlier than prior years.The Department has become much more efficient and now typically issues billings days after the end of each applicable billing month.

 

        The initial billing delay in fiscal year 2008 did not impact budgetary development or monitoring of occupancy costs as stated in the finding.It did have an initial impact on cash flows into the fund.However, statewide cash shortage was the major contributor during fiscal year 2008 to any delayed vendor payments.

 

        The Department has no control over agency payments into the FMRF.Statewide cash shortage is the primary contributor to delayed agency payments.

 

        The Department has established relationships with many utility providers who have communicated that shut-off notices are automatically generated by their systems.They understand that the State works within a given set of constraints and most have also indicated that State accounts are flagged to ignore shut-off notices.

 

        In September 2007, the Department began utilizing the Strategic Planning and Analysis Tool (SPAT), created from agency fiscal year 2008 Annual Space Plans, which allowed the Department to see side-by-side comparisons of properties in its leased and owned portfolios.SPAT allows the Department to develop preliminary consolidation and space reduction strategies by identifying potential vacant space since it contains metrics allowing it to compare the ratio of employee to space in any facility.The tool also contains total cost of ownership information that allows the Department to compare costs of comparable facilities in order to eliminate expensive leases.†† ††

 

 

COMMUNICATION WITH PROSPECTIVE BIDDER DURING PROCUREMENT PROCESS

 

While procuring a master contract for the purchasing of servers and accessories, the Department communicated with a prospective bidder resulting in a change of procurement from an Invitation to Bid method to a Sole Economically Feasible method.The prospective bidder was the vendor awarded the sole source contract.

 

The Department has made a significant investment in brand-specific hardware (servers and related accessories) and determined it was in the Stateís best interest to ensure compatibility by continuing to purchase the same brand.The hardware to be procured was potentially available directly through the manufacturer (who holds the current contract) or through various resellers.During fiscal year 2008, the Department initiated an Invitation for Bid (IFB) procurement process anticipated to result in the expenditure of approximately $9 million.Following commencement of the IFB procurement process, the Department had several contacts with the manufacturer, including representation that the manufacturer would prohibit any reseller from offering a price better than the price the manufacturer would offer.As a result of these contacts, the Department cancelled the IFB and initiated a sole economically feasible procurement process.The Department subsequently received the letter from the manufacturer supporting the pricing representation.(Finding 22, pages 59-60)

†††††††††††

We recommended the Department establish appropriate controls to ensure the procurement process is conducted in a fair and open manner that does not exclude any potential bidders.

 

Department officials concurred with our recommendation and stated that procurements should be conducted in a fair and open manner to ensure competition.While significant financial benefits to the State of Illinois where gained and documented in this case as a result of these negotiations, the Department agrees that even the appearance of not having a fair and open procurement should be avoided.While the Department agrees with the recommendation, the Department also reserves the right to utilize all provisions in the procurement code, including the Sole Economically Feasible Source provision.As such, the Department will implement controls to ensure all legitimate provisions of the procurement code are applied appropriately and within the guidelines of the code.

 

Department officials further stated that one additional control when using the Sole Economically Feasible Source procurement approach is to expand and document research of market pricing verifying that the State is receiving the most economical procurement.In this case the research was done but the trail of documentation was lacking. The Department stated it did determine that the pricing offered was 5% lower than that offered through the Western States Contract Alliance, and up to 10% lower than pricing offered by the vendor to the State of Texas.Finally, the manufacturer had agreed to honor pricing from the previous contract during the contract negotiations, so there was no period where agency needs went unmet.

 

INADEQUATE DOCUMENTATION OF COMPLIANCE WITH THE FISCAL CONTROL AND INTERNAL AUDITING ACT

 

The Departmentís Illinois Office of Internal Audit (IOIA) was unable to demonstrate compliance with the Fiscal Control and Internal Auditing Act that requires audits of major systems of internal accounting and administrative control.

 

The Institute of Internal Auditorsí International Standards for the Professional Practice of Internal Auditing (IIA Standards) require the IOIA to develop risk-based plans to determine the priorities of the internal audit activities while the Fiscal Control and Internal Auditing Act (Act) (30 ILCS 10/2003) establishes specific mandates regarding internal audit requirements at Illinois State agencies.

 

The Act requires the internal auditing program to include audits of major systems of internal accounting and administrative control be conducted on a periodic basis so that all major systems are reviewed at least once every two years.IOIA made substantial improvements in the number of audits performed during fiscal year 2008.An external assessment concluded the IOIA had generally complied with the Act; however, based on our testing and review, we noted IOIA could not demonstrate that audits of major systems were being completed once every two years as required by the Act and certain risk assessment processes lacked sufficient documentation as follows.

 

        Internal audits were completed in the eleven major transaction/event cycles set forth in the Statewide Accounting Management System (Procedure 02.50.20); however, the extent of testing performed in four of the cycles did not provide coverage commensurate with assessed risk on a state-wide basis.For each major cycle, IOIA excluded key agencies from the audits performed even though the excluded agencies have significant responsibilities within the cycles.

 

        The IOIA implemented a risk assessment process and identified risks, however, the documentation did not always clearly demonstrate how the compiled information was evaluated and correlated to the overall audit plan and/or to the specific internal audit procedures.In addition, during fiscal years 2007 and 2008, IOIA spent approximately 23,000 hours of the total 44,000 internal audit hours (52%) performing internal audits on just seven agencies.The extensively audited agencies clearly possess significant audit risk to the State as a whole, however, the overall plan lacked sufficient documentation to substantiate a higher level of risk for the audited agencies as compared to other agencies.(Finding 23, pages 61-63)This finding was first reported in 2006.

 

We recommended the Department ensure that audits of all major systems of internal accounting and administrative control are conducted at least once every two years as required by the Fiscal Control and Internal Auditing Act.We further recommended the Department improve documentation of the risk assessment process to more clearly associate the internal audit effort with identified/assessed risks.

 

OTHER FINDINGS

 

††††† The remaining findings are reportedly being given attention by the Department.We will review the Departmentís progress toward the implementation of all our recommendations in our next engagement.

 

AUDITORSí OPINION

 

††††† Our auditors stated the Departmentís financial statements as of and for the year ended June 30, 2008 are fairly presented in all material respects.

 

 

 

 

___________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLD:pp

 

 

 

 

SPECIAL ASSISTANT AUDITORS

 

††††† Sikich LLP was our special assistant auditor for this engagement.

 

 

DIGEST FOOTNOTES

 

#1 Ė EXCESS RETAINED EARNINGS BALANCES REPRESENTING NONCOMPLIANCE WITH FEDERAL REGULATIONS

 

2007:†††††††††††††† Disagreed.The Department contends that direct payback to the Dept. of HHS, which is negotiated approximately every two years, is an appropriate and allowable adjustment mechanism to remedy excess balances.Furthermore, the Department stated that the large balances accumulated in recent years were the cumulative result of the IT consolidations, and consequently, more frequent rate adjustments and credits were not feasible during such a volatile developmental period.The Department indicated it will continue to adjust rates going forward to reduce exposure to excess balances.However, direct negotiated paybacks have always been, and will likely always be a part of the remedy for excess balances.

 

 

#2 - INEFFECTIVE PROPERTY MANAGEMENT

 

2007:†††††††††††††† Partially Agreed.The Department concurs with the findings that all corrective actions from the prior audits have not been fully implemented, and we continue to actively pursue full implementation.However, we do contend some of the statements in the current findings:we do not agree that holdover leases are not being managed.Holdover leases are being significantly reduced and actively managed, and our lease consolidation plan is implementing our property utilization assessment targets.We do not agree that there is a deficiency in our accounting system, ability to collect and manage costs, true ups and federal reconciliations.We do not agree that DCMS can exert any additional leverage to make agencies pay their bills in a timely fashion.

 

 

#3 - INADEQUATE DOCUMENTATION OF COMPLIANCE WITH THE FISCAL CONTROL AND INTERNAL AUDITING ACT

 

2007:†††††††††††††† Agreed.The Department concurs.Prior to new management, documentation of audit coverage by the major internal control systems was not adequately documented for fiscal year 2006 and half of fiscal year 2007.For fiscal year 2008, IOIA will allocate adequate resources to verify sufficiency of the audit planís coverage, accuracy of the recordkeeping for the assessment of audit coverage and conduct audits of all major systems to ensure compliance with the Fiscal Control and Internal Auditing Act.