REPORT DIGEST

STATE OF ILLINOIS

Statewide Financial Statement Audit
For the Year Ended:  June 30, 2012

Release Date:  June 20, 2013

Summary of Findings:
Total this audit: 5
Total last audit:  5
Repeated from last audit: 5

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, Iles Park Plaza, 740 E.
Ash Street, Springfield, IL 62703
(217) 	782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are also available on
the worldwide web at www.auditor.illinois.gov

INTRODUCTION

The Illinois Office of the State Comptroller prepares
the State of Illinois Comprehensive Annual Financial
Report (CAFR).  The CAFR is the State’s official annual
report which provides the readers with the financial
position of the State as of June 30, 2012, and results
of operations during the fiscal year.

The financial section of the CAFR includes the
Independent Auditors’ Report on the basic financial
statements, the management discussion and analysis, the
basic financial statements, required supplementary
information, and individual fund statements and
schedules.

AUDITORS’ OPINION

The June 30, 2012 financial statements of the State of
Illinois are fairly presented in all material respects.

The financial statements reflect a continuing financial
deficit.  At June 30, 2012:

• The net assets of governmental activities continued to
deteriorate and the deficit increased by $3.0 billion
from FY11 to FY12.  Overall, net assets of governmental
activities are reported as a deficit of $46.6 billion.
(Exhibit 1)

• The General Revenue Fund deficit increased by $1.1
billion from FY11 to FY12.  The June 30, 2012 deficit
was $9.1 billion.  (Exhibit 2)

Over time, increases and decreases in net assets measure
whether the State’s financial position is improving or
deteriorating.  A comparison of Illinois’ financial
position to other states is contained in Exhibit 3.

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND
ON COMPLIANCE

In accordance with Government Auditing Standards, a
report on our consideration of the State of Illinois’
internal control over financial reporting and our tests
of its compliance is also issued as part of our
financial statement audit.  This report is a separate
document and is summarized in this document.  Our report
noted that the State’s decentralized internal control
system is not adequate.  We also reported significant
financial reporting deficiencies at several State
agencies.

STATE OFFICIALS

Governor
Patrick Quinn

Comptroller
Judy Baar Topinka

Speaker of the House
Michael J. Madigan

President of the Senate
John J. Cullerton

House Republican Leader
Tom Cross

Senate Republican Leader
Christine Radogno


FINANCIAL ANALYSIS OF THE STATE

The net assets of the State’s governmental activities
declined $2.965 billion.  The following condensed
financial information was derived from the government-
wide Statement of Net Assets and reflects the State’s
governmental activities financial position as of June 30
for fiscal years 2005 through 2012.

(See pdf digest for EXHIBIT 1)

Source: Illinois’ Comprehensive Annual Financial Report
(2012)
Numbers reflect restatements.

The deficits reflected in Exhibit 1 are presented on an
accrual basis and represent the excess of total
liabilities over total assets at a given point in time.
These deficits represent the deferral of current and
prior year costs to future periods.

GENERAL REVENUE FUND

Many programs are accounted for in the General Fund.
The GAAP basis financial position of the General Revenue
Fund deficit increased at June 30, 2012 from June 30,
2011.  The fund balance deficit in the State’s General
Revenue Fund increased by $1.123 billion on a GAAP basis
(from a deficit of $8.010 billion, as restated, to a
deficit of $9.133 billion).  Exhibit 2 reflects the
General Revenue Fund deficit for fiscal years 2005
through 2012.

 (See pdf digest for EXHIBIT 2)

 Source: Illinois’ Comprehensive Annual Financial Report
 (2012)
Numbers reflect restatements.

STATE COMPARISON

Exhibit 3 provides an analysis of Illinois’ Net Assets
at June 30, 2012 compared to other States.
(See pdf digest for Exhibit 3.)

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE FINANCIAL REPORTING PROCESS

The State of Illinois’ current financial reporting
process does not allow the State to prepare a complete
and accurate Comprehensive Annual Financial Report
(CAFR) or the Schedule of Expenditures of Federal Awards
(SEFA) in a timely manner.  Reporting issues at various
individual agencies caused delays in finalizing the
financial statements, which did not occur until at least
the end of May of the subsequent year for the past six
fiscal years.  The lack of timely financial reporting
limits effective oversight of State finances, adversely
affects the State’s bond rating, and jeopardizes federal
funding.

Accurate and timely financial reporting problems
continue to exist even though the auditors have: 1)
continuously reported numerous findings on the internal
controls (material weaknesses and significant
deficiencies), 2) commented on the inadequacy of the
financial reporting process of the State, and 3)
regularly proposed adjustments to financial statements
year after year.  These findings have been directed
primarily toward the Office of the State Comptroller and
major State agencies under the organizational structure
of the Office of the Governor.

The Office of the State Comptroller has made significant
changes to the system used to compile financial
information and agencies have submitted their financial
information in a more timely manner; however, the State
has not solved all problems to effectively remediate
these financial reporting weaknesses.  The process is
overly dependent on the post audit program being a part
of the internal control for financial reporting even
though the Illinois Office of the Auditor General has
repeatedly informed State agency officials that the post
audit function is not and should not be an internal
control mechanism for any operational activity related
to financial reporting.

Although the deficiencies relative to the CAFR and SEFA
financial reporting processes have been reported by the
auditors for a number of years, problems continue with
the State’s ability to provide accurate and timely
external financial reporting.  Corrective action
necessary to remediate these deficiencies continues to
be problematic; however, two recent Public Acts have the
potential to positively affect the financial reporting
process.  Public Act 97-408, effective August 16, 2011,
established a statutory deadline of October 31 of each
year for State agencies to report financial information
for the previous June 30 to the State Comptroller.
Public Act 97-1055, effective August 23, 2012,
established the Financial Reporting Standards Board
(Board).  The purpose of the Board is to “assist the
State in improving the timeliness, quality, and
processing of financial reporting for the State.”
(Finding 1, pages 7-10)

We recommended the Office of the Governor and the Office
of the State Comptroller continue to work together to
resolve the State’s inability to produce timely and
accurate GAAP basis financial information and a
Statewide SEFA.

The Governor’s Office agreed with our recommendation and
stated that the Governor’s Office and the Governor’s
Office of Management and Budget (GOMB) are and will
continue to work cooperatively with the Office of the
Comptroller to address these challenges with effective
solutions.  Further, the Governor’s Office stated that
Governor Quinn signed into law SB 3794, an initiative of
the Governor’s Office, in order to create a statutory
framework to begin to address the basic issues with the
State’s financial reporting capabilities.  The response
provided further details of the plans to address the
issues.

The Comptroller’s Office agreed with our recommendation
and stated that the Office will continue to assist the
Governor’s Office in their efforts to increase the
quality of GAAP packages and provide training and
technical assistance to State agencies.  In addition,
the Office will work with the newly created Financial
Accounting Standards Board in their mission to improve
the timeliness, quality and processing of financial
reporting for the State.

FINANCIAL REPORTING WEAKNESSES

The State of Illinois did not have adequate controls to
assess the risk that information reported by individual
agencies of the primary government would not be fairly
stated and compliant with generally accepted accounting
principles.  The Office of the Auditor General performed
audits at 27 agencies of the primary government,
including five pension systems and the State Board of
Investments.  During these audits, we noted at 17
agencies there were a total of 22 material weaknesses
and 27 significant deficiencies related to the internal
controls over the financial reporting process.

Material weaknesses and significant deficiencies further
extend financial reporting timelines since additional
measurements and reporting is required.  Completion or
substantial completion of these audits is necessary in
order for the Auditor General to issue an opinion on the
State’s basic financial statements.

In addition to the deficiencies noted above,
restatements and material errors were noted during our
audits, which are as follows:

• The beginning balances in the financial statements of
the primary government were restated due to the
correction of three errors.  The three errors resulted
in a total of $211.173 million in restatements.

•Material misstatements were identified by the auditors
at six agencies.  The misstatements ranged from $184
thousand to $401 million.  (Finding 2, pages 11-14)

We recommended the State continue their efforts to
improve internal control procedures in order to assess
the risk of material misstatements to the financial
statements and to identify such misstatements during the
financial statement preparation process.  The internal
control procedures should include a formal evaluation of
prior problems and implementation of procedures to
reduce the risk of these problems reoccurring.

The Governor’s Office agreed with our recommendation and
stated that the Governor’s Office has focused on solving
this problem by implementing a centralized financial
accounting system.   Further, the Governor’s Office
stated that if the State had an enterprise-wide
financial accounting system it would incorporate
standard internal controls to lessen the risk of
inaccuracy by preemptively detecting and facilitating
resolution of any material

The Comptroller’s Office agreed with our recommendation
and stated that the Office will continue to assist the
Governor’s Office in their efforts to increase the
quality of GAAP packages and provide training and
technical assistance to State agencies.  In addition,
the Office will work with the newly created Financial
Accounting Standards Board in their mission to improve
the timeliness, quality and processing of financial
reporting for the State.

FINANCES INCREASE RISKS

The State of Illinois did not have sufficient controls
over its finances to ensure obligations are paid.  This
condition increases the risk that liabilities will not
be properly recorded.  We noted the following during our
financial audit of the State’s financial statements.

The State had transactions, totaling $4.475 billion, on
hand at June 30, 2012 that had been approved for payment
by the State, but remained unpaid at year end due to the
State’s cash flow difficulties.  Of this amount,
approximately $3 billion was owed to external parties;
the remaining balance was related to intra-governmental
transactions and statutorily mandated transfers.  Due to
the State not being able to pay external vendors in a
timely manner, the State paid approximately $136 million
in interest payments during Fiscal Year 2012.  (Finding
5, pages 19-20)

We recommended the Governor work with the General
Assembly to improve the State’s control over State
finances in a manner that eliminates significant payment
and unnecessary interest payments to State vendors.

The Governor’s Office agreed with our recommendation and
stated measures have been taken to prevent future
findings in this area.  The response provided further
details of the steps that have been taken.

OTHER FINDINGS

The remaining findings included two noncompliance
issues.  We will review the State’s progress towards the
implementation of our recommendations in our next audit.

WILLIAM G. HOLLAND
Auditor General

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