REPORT DIGEST

 

DEPARTMENT OF CORRECTIONS - CORRECTIONAL INDUSTRIES

 

FINANCIAL AUDIT

For the Year Ended

June 30, 2006

 

COMPLIANCE EXAMINATION

For the Two Years Ended

June 30, 2006

 

Summary of Findings:

Total this report††††††††††††††††††††† 7

Total last report††††††††††††††††††††† 4

Repeated findings††††††††††††††† †† 2

 

Release Date:

June 20, 2007

 

 

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 the Full Report are also available on

the worldwide web at

http://www.auditor.illinois.gov

 

 

 

SYNOPSIS

 

 

®      During our audit of the Illinois Department of Corrections Ė Correctional Industries (ICI) June 30, 2006 financial statements and Generally Accepted Accounting Principles (GAAP) financial reports submitted to the Office of the State Comptroller, we recommended twelve audit adjustments to various accounts for a total of $2.3 million.

 

®      ICI has made limited progress in its plan to install an automated management information system and has incurred excessive costs for computer hardware, software and consulting services.

 

®      ICI continues to place union employees on temporary assignment for periods beyond time limits specified by the union agreement.

 

®      ICI did not timely sign/execute written contract agreements with vendors.

 

®      ICI does not include any occupancy costs for the production facilities they use at the Correctional Centers in their computation of the manufacturing costs of its products.Occupancy costs should include at a minimum maintenance, utilities and any computed rent or depreciation for the facility being utilized.

 

 

 

 

 

 

 

 

 

 

 

 

{Selected expenditure and financial information is summarized on the next page.}

 


 

 

 

ILLINOIS DEPARTMENT OF CORRECTIONS - CORRECTIONAL INDUSTRIES

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For the Two Years Ended June 30, 2006

 

APPROPRIATION EXPENDITURE STATISTICS Ė Working Capital Revolving Fund

 

FY 2006

 

FY 2005

         Total Expenditures...................................................

$35,933,002

$41,611,232

OPERATIONS TOTAL..................................................

$35,933,002

$40,361,232

†† % of Total Expenditures............................................

100%

97.0%

†††† Personal Services....................................................

$9,213,236

$8,705,986

% of Operations Expenditures......................................

25.6%

21.6%

Average Number of Employees..................................

164

166

Inmate Compensation...........................................

$1,770,719

$1,791,678

% of Operations Expenditures......................................

4.9%

4.4%

Other Payroll Costs (FICA, Retirement & Insurance)....

$3,788,619

$4,405,614

% of Operations Expenditures............................

10.6%

10.9%

Commodities........................................................

$17,728,416

$20,867,993

% of Operations Expenditures..................................

49.3%

51.7%

Contractual Services...................................................

$1,940,976

$2,146,375

% of Operations Expenditures...................................

5.4%

5.3%

Equipment...............................................................

$255,162

$1,472,307

% of Operations Expenditures.......................................

0.8%

3.7%

Operation of Automotive Equipment................................

$1,006,104

$799,417

% of Operations Expenditures....................................

2.8%

2.0%

All Other Items..........................................................

$229,770

$171,862

% of Operations Expenditures....................................

0.6%

0.4%

AWARDS AND GRANTS...........................................

$0

$1,250,000

% of Total Expenditures...........................................

0.0%

3.0%

FINANCIAL OPERATIONS (expressed in thousands)

FY 2006

FY 2005

Operating Revenues......................................................

$37,120

$†† 39,889

Operating Expenses......................................................

38,000

†† 41,166

†††† Operating Income (Loss) .......................................

$(880)

$(1,277)

Net Non-Operating Revenues (Expenses)....................

362

(1,008)

Transfers to Other Funds...............................................

$(3,905)

(15,878)

†††† Net (Loss) ..............................................................

$(4,423)

$(18,163)

Net Assets, Beginning of the Year.............................

22,989

†† 41,152

Net Assets, End of the Year.....................................

$18,566

$†† 22,989

SELECTED ACCOUNT BALANCES (expressed in thousands)

 

June 30, 2006

 

June 30, 2005

Cash and Cash Equivalents.......................................................

$1,277

$3,786

Property, Equipment and Livestock, net ....................................

$6,897

$7,564

Inventories...............................................................................

$8,977

$9,568

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

$2,388

$2,221

SELECTED ACTIVITY MEASURES

FY 2006

FY 2005

Average Number of Inmate Workers........................................

Number of Industry Operations at June 30,................................

1,026

38

1,045

34

CORRECTIONAL INDUSTRIES' CHIEF EXECUTIVE OFFICER

During Audit Period:James R. Underwood

Currently:James R. Underwood


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit adjustments were recommended totaling $2.3 million

 

 

 

 

 

State law requires ICI to establish and maintain a system of internal control to prepare reliable financial reports

 

 

 

 

 

 

 

 

 

ICI management attributes problems to staff shortages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited progress made in implementing the automated management system

 

 

 

 


Significant costs incurred for computer hardware, software and consulting services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees are assigned to temporary assignments for extended periods

 

 


15 employees were working in temporary assignments during FY 06 and FY 05

 

 

 

 


One employee was paid $14,500 in travel costs related to their temporary assignment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4 of 25 contracts were not signed by all the required parties before services began

 

Services began 1 to 31 days prior to obtaining all required signatures

 

 

 

 

 

 

 

 

Field staff did not wait for Central Office approval before placing orders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy costs are not included in the computation of product costs

 

 

 

 

 

 

 

 

 

Subsidizing ICIís occupancy costs

 

 

 

 

 

 

INTRODUCTION

 

Our report covers the financial audit of the Department of Corrections - Correctional Industries (ICI) for the fiscal year ended June 30, 2006 and a compliance examination for the two years ended June 30, 2006.ICI is a division of the Illinois Department of Corrections.ICI operates manufacturing, service and agricultural industries within the adult correctional centers.

 

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

 

Weaknesses in Preparation of the Year End Financial Statements and GAAP Packages

 

During our audit of the ICI June 30, 2006 financial statements and Generally Accepted Accounting Principles (GAAP) financial reports submitted to the Office of the State Comptroller, we recommended twelve audit adjustments to various accounts within ICIís financial records and financial reports for a total of $2.3 million.A majority of the adjustments were to correct account balances for overstatements, understatements or errors made during the year.

 

ICI is required to prepare annual financial statements of its financial activity to comply with reporting requirements set forth by the Office of the Comptroller.In addition, The Fiscal Control and Internal Auditing Act (FCIAA), requires all State agencies to establish and maintain a system of internal fiscal control to provide assurance revenues, expenditures and transfers of assets, resources, or funds applicable to operations are properly recorded and accounted for to permit the preparation of amounts and reliable financial reports.

 

This finding is considered to be a reportable condition.In our judgment, this reportable condition can adversely affect ICIís ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements.

 

ICI management indicated that errors and omissions in the financial statements and GAAP packages are due to staff shortages to the extent that those who were most familiar with general ledger and financial statements were also covering duties of vacant positions on top of their regular duties.

 

†††† We recommended ICI devote sufficient resources to its financial accounting function such that the financial information is properly recorded and accounted for to permit the preparation of reliable financial statements.(Finding 1, pages 14-15)

 

ICI officials accepted our recommendation and stated they will make every effort to ensure the financial reports are accurate and timely.

 

EXCESS COSTS FOR MANAGEMENT INFORMATION SYSTEM

 

ICI has made limited progress in its plan to install an automated management information system (system) and has incurred excessive costs for computer hardware, software and consulting services.

 

Since fiscal year 2000 ICI has only been using three of the systemís ten software modules that were purchased, and the three modules are only being used at the ICI Central Office and one of the 20 remote locations.ICI paid the vendor $340,000 of a $420,000 contract that was to include the software plus installation, training and support.

 

ICI continues to use the 3 modules and paid the original vendor $97,714 in fiscal year 2005 and $118,998 in fiscal year 2006 for technical support for the system modules still being used.In addition, during fiscal year 2004 and 2003, ICI paid the vendor $38,830 and $25,093, respectively for technical support for the system.

 

Management stated a lack of progress in the installation of the system, fiscal constraints and re-examining the need for the system have limited progress in implementing additional system modules.

 

†††† We recommended ICI management critically re-examine the need for the Management Information System project and determine if the current limited implementation is cost-effective and meets its needs.Additionally, ICI management needs to conduct a thorough assessment to determine if the full implementation of all modules at all sites will provide a cost-beneficial solution.(Finding 2, pages 16-17)This finding was first reported in 2000.

 

ICI officials indicated they have implemented our recommendation and are in the process of a business redesign evaluation and implementation.In addition, it was noted a core team was established to review the implementation of the final modules for inventory.It was further indicated that based upon this teamís review, the Department will make a decision regarding the system and its future.(For previous ICI response, see Digest Footnote #1)

 

CONTINUED USE OF TEMPORARY ASSIGNMENTS

 

†††† ICI continues to place union employees on temporary assignment for periods beyond time limits specified by the union agreement.The lengthy assignments violate the union agreement and circumvent required steps in the hiring process.

 

During our testing, we noted 15 employees working in temporarily assigned positions during fiscal years 2005 and 2006.All of these employees were union members and were working in temporarily assigned positions beyond the time limits specified in the union agreement. One employee while on temporary assignment incurred approximately $14,500 in travel costs related to their temporary assignment.At June 30, 2006, 7 employees were still on temporary assignment, these employees have been on these temporary assignments from 3 to 45 months.

 

The union agreement with the State sets specific time limits of either 60 or 45 days for temporary assignments, depending on the reason for the temporary assignment.According to the union agreement, if the assignment extends beyond the set timeframe, then the extensions should be mutually agreed upon (we found only one signed mutual agreement to extend the temporary assignments beyond 60 days).ICI management stated that lengthy temporary assignments of employees were due to staffing limitations.

 

We recommended ICI reevaluate the propriety of its continued use of temporary assignments for long-term employment positions.For assignments to union positions, they should comply with the union agreementís requirement for mutual agreement of the assignments.We recommended the agreement be documented in writing.(Finding 3, pages 18-19)This finding was first reported in 1998.

 

†††† ICI management accepted our recommendation and stated they temporarily assign employees and rotate assignments as permitted.In addition,ICI management indicated they will review the need for the temporary assignments.†† (For previous ICI response, see Digest Footnote #2)

 

Untimely signing/execution of written contract agreements

 

†††† We noted 4 of 25 (16%) contractual agreements tested had not been signed by all required parties before the earliest date of service allowed by the contractual agreementís terms.The average length of time between the beginning date of the contractual agreements and their final required signature was 26 days (with a range of 5 to 57 days).These 4 contracts, totaling $126,899, were for computer support, and repairs and maintenance of various equipment.In addition, services for all the 4 referenced contracts began 1 to 31 days before the last required party signed and dated the contractual agreements.

 

†††† Good business practice dictates that all required parties sign a contract agreement prior to the beginning of the contract period.Further, all contracts entered into must be approved by all parties prior to the beginning of the services.

 

†††† ICI management stated the lack of staff in field offices and the fiscal office caused the delay in the processing of the contracts.In the above noted contracts, field office staff did not wait for the approval notification of the contract from the Central Office before they placed an order for services with the vendor resulting in services being performed by the vendor without a signed/executed contract.

 

†††† We recommended ICI management take the necessary steps to ensure contract agreements are signed/executed by all the required parties in a timely manner.Field office staff should be reminded that a contract should be signed /executed before goods or services are provided by the vendor.(Finding 5, pages 22-23)

 

†††† ICI management accepted our recommendation and stated they will make every effort to ensure that all contracts are executed timely.

 

All relevant costs are not being included in the computation of manufacturing costs

 

††† ICI does not include any occupancy costs for the production facilities they use at the Correctional Centers (Centers) in their computation of the manufacturing costs of its products.ICI has 19 facilities for manufacturing its products at various Centers.Occupancy costs should include at a minimum maintenance, utilities and any computed rent or depreciation for the facility being utilized.In addition, ICI policies and procedures do not address what should be included in the computation of the costs of its products.

 

†††† According to ICI management, ICI is not charged by the Centers or the Department of Corrections for occupancy costs, therefore occupancy costs are not included in the production cost computation.

 

†††† By not including any occupancy costs associated with the production facilities at the Centers the true cost of the production of the items is not being considered in determining the price of the products.The Department of Corrections or ultimately the State is subsidizing these costs of the ICI operation.

 

†††† We recommended ICI work with the Department of Corrections Central Office to identify and include occupancy costs relating to Center manufacturing facilities to provide a good estimate of the total cost of a product.In addition, ICI should include guidelines in its policies and procedures for the basis of valuation/estimate of these costs and their inclusion in the computation of product costs as a basis of setting a selling price.(Finding 7, pages 26-27)

ICI management accepted our recommendation and stated that with assistance from the Field Services Unit they will review the occupancy costs to determine the estimated cost to produce certain products.

OTHER FINDINGS

 

The remaining findings are reportedly being given attention by ICI management.We will review the ICIís progress towards the implementation of our recommendations during our next engagement.

 

AUDITORS' OPINION

 

†††† Our auditors state the June 30, 2006 financial statements of the Illinois Department of Corrections - Correctional Industries are fairly presented in all material respects.

 

 

 

 

_____________________________________

WILLIAM G. HOLLAND, Auditor General

 

WGH:RPU:pp

 

SPECIAL ASSISTANT AUDITORS

 

†††† Our special assistant auditors for this engagement were E.C. Ortiz & Co., LLP.

 

DIGEST FOOTNOTES

 

#1†††††† EXCESS COSTS FOR MANAGEMENT INFORMATION SYSTEM Ė Previous ICI Response

 

2004:Recommendation Implemented.ICI is currently in process of fully implementing the system (Marcola).Pilot installation of the final portions and testing has been completed.User training and final implementation is to be completed in March 2005.Additional modules and system revisions will be completed over the next few months with users being added and training as systems come on line.

 

#2†††††† CONTINUED USE OF TEMPORARY ASSIGNMENTSĖ Previous ICI Response

 

2004:Recommendation accepted.ICI will work to limit temporary assignments in accordance with labor contracts.Any supplemental agreements will be documented in writing.