ILLINOIS DEPARTMENT OF CORRECTIONS - CORRECTIONAL INDUSTRIES

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For the Two Years Ended June 30, 2008

APPROPRIATION EXPENDITURE STATISTICS – Working Capital Revolving Fund (Fund No. 301)		FY 2008		FY 2007
Total Expenditures...............................................................		$40,181,754		$38,481,788
Personal Services............................................................		$10,095,992		$9,694,201
% of Total Expenditures...................................................		25.1%		25.2%
Average Number of Employees........................................		151		158
Inmate Compensation.......................................................		$1,733,220		$1,814,662
% of Total Expenditures...................................................		4.3%		4.7%
Other Payroll Costs (FICA, Retirement & Insurance).........		$4,662,119		$4,038,900
% of Total Expenditures...................................................		11.6%		10.5%
Commodities....................................................................		$19,995,691		$19,344,414
% of Total Expenditures...................................................		49.8%		50.3%
Contractual Services.........................................................		$2,131,939		$2,091,130
% of Total Expenditures...................................................		5.3%		5.4%
State Property..................................................................		$203,784		$127,350
% of Total Expenditures...................................................		0.5%		0.3%
Operation of Automotive Equipment..................................		$1,212,418		$1,077,154
% of Total Expenditures...................................................		3.0%		2.8%
All Other Items................................................................		$146,591		$293,977
% of Total Expenditures...................................................		0.4%		0.8%
FINANCIAL OPERATIONS (expressed in thousands)		FY 2008		FY 2007
Operating Revenues................................................................		$42,953		$38,433
Operating Expenses.................................................................		41,728		38,699
Operating Income (Loss) ...................................................		$ 1,225		$ (266)
Net Non-Operating (Expenses)................................................		(2)		(34)
Transfers to Other Funds.........................................................		$ 0		(580)
Net Income (Loss) ............................................................		$ 1,223		$ (880)
Net Assets, Beginning of the Year............................................		16,417		17,297
Net Assets, End of the Year....................................................		$17,640		$16,417
SALES BY CUSTOMER CLASSIFICATION (unaudited)	FY 2008		FY 2007
Illinois Department of Corrections ............................	$30,266,816		$27,275,922
All Other State Agencies .........................................	12,272,725		10,330,056
Colleges and Universities .........................................	592,705		740,603
Local Government Units ..........................................	155,686		177,014
Not-for-Profit Organizations ....................................	474,347		943,385
Other Customers.......................................................	1,040,190		1,136,999
Less Correctional Industries intershop sales...............	(1,850,012)		(2,171,100)
Total Operating Revenue..........................................	$42,952,457		$38,432,879
SELECTED ACTIVITY MEASURES (unaudited)	FY 2008		FY 2007
Average Number of Inmate Workers...................................... Number of Industry Operations at June 30,.............................. Industry Operations reporting a profit...................................... Industry Operations reporting a loss.........................................	916 36 16 20		913 36 16 20
CORRECTIONAL INDUSTRIES' CHIEF EXECUTIVE OFFICER
During Audit Period: James R. Underwood Currently: Donna Lindemulder, Acting (effective 9-1-2008)

Accounts payable overstated $861,626

Monthly reconciliations not performed

Compensated absences did not include earned holiday hours

Reclassification entry of depreciation expense

Officials accepted the recommendation

Detailed listing of property additions and deletions does not support Comptroller reports

State property quarterly reports did not agree to supporting documentation

Property expenditures were not recorded in property control systems

Management noted problems were due to staffing limitations

Officials accepted the recommendation

Agency was unable to provide report

Information reported to the State Comptroller did not agree to general ledger system

Officials state the recommendation is implemented

Temporary assignments for extended periods

Employees were working in temporary assignments during FY 08 and FY 07

Time limitations for temporary assignments

Officials accepted the recommendation

No progress made to implement system

Only three of ten system modules are being used

Significant costs have been incurred for computer hardware, software and consulting services

Officials accepted the recommendation

Occupancy costs are not included

Subsidizing ICI’s occupancy costs

Officials accepted the recommendation

INTRODUCTION

Our report covers the financial audit of the Department of Corrections - Correctional Industries (Agency or ICI) for the fiscal year ended June 30, 2008 and a compliance examination for the two years ended June 30, 2008. Correctional Industries is a division of the Illinois Department of Corrections and operates manufacturing and service industries within the adult correctional centers.

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

NEED TO IMPROVE CONTROLS OVER FINANCIAL REPORTING

The Agency did not ensure financial records used to prepare: 1) the year-end financial statements, and 2) the Office of the Comptroller (Comptroller) Generally Accepted Accounting Principles (GAAP) accounting reports were accurate for the Working Capital Revolving Fund (Fund 301). The auditors noted the following:

· The amount reported as accounts payable and accrued expenses as of June 30, 2008 in the financial statements and Comptroller’s GAAP package was overstated by $861,626.

· There were no monthly reconciliations performed between the cash balance per Fund 301 accounting records and the cash balance per the State Comptroller’s records.

· The total compensated absences balances reported in the financial statements and Comptroller’s GAAP accounting report did not include compensable holiday hours earned by employees totaling $85,910 and the related cost of benefits of $6,572.

· Audit testing identified exceptions in the computation of depreciation expense. A reclassification entry was made for $129,498 to correctly present the transactions.

Management indicated the current exceptions were due to miscommunication and misunderstanding of the status of lapse payments, limited staffing, and oversight.

We recommended the Agency devote sufficient resources to its financial accounting function such that the Fund 301 financial information is properly recorded and accounted for to permit the preparation of reliable financial statements and Comptroller GAAP accounting reports. (Finding 08-1, pages 15-17) This finding was first reported in 2006.

Agency officials accepted our recommendation and stated they will make every effort to ensure the financial reports are accurate and timely. (For previous agency response, see Digest Footnote #1.)

INADEQUATE CONTROL OVER PROPERTY AND EQUIPMENT

The Agency did not have internal controls in place to ensure property additions and deletions were properly recorded and quarterly property reports due to the State Comptroller were accurate and adequately supported. During testing of Fund 301 property and equipment the auditors noted the following:

§ The Agency did not maintain a detailed listing of property additions and deletions to support the quarterly additions and deletions reported to the State Comptroller for fiscal years 2007 and 2008. Without detailed support we were unable to perform testing to determine whether additions or deletions reported were accurate.

§ The total State property quarterly reports for June 30, 2007 and June 30, 2008 did not agree to agency supporting documentation. The quarterly reports overstated State property by $103,389 and $ 91,258 respectively for fiscal years 2007 and 2008 compared to the supporting documentation.

§ During testing we identified $101,798 and $1,579 of expenditures for fiscal years 2008 and 2007 respectively, charged to the telecommunications and equipment appropriations that should have been recorded in the property control system, but were not.

According to management, the above problems were due to staffing limitations. Staff assigned to maintain the property control records had left and were not replaced during the audit period.

We recommended the Agency provide adequate resources to ensure State property is accurately recorded in the property records and required reports are timely and accurately submitted to the State Comptroller. (Finding 08-2, pages 18-20)

Agency officials accepted our recommendation and stated they will make every effort to ensure accurate and timely fixed asset records are maintained.

NEED TO IMPROVE Quarterly Accounts Receivable Reporting

The Agency did not file accurate quarterly accounts receivable reports with the State Comptroller. During testing of Fund 301 accounts receivable reports the auditors noted the following:

· The Agency was unable to provide the June 30, 2007 Accounts Receivable Activity Report for our testing.

· For the quarters ended 9/30/07, 12/31/07, and 3/31/08, information such as net receivables and number of accounts in the reports submitted to the Comptroller’s Office did not agree to the supporting information generated by the general ledger system. Net receivables for 9/30/07 differed by $209,000, 12/31/07 differed by $94,000 and 3/31/08 differed by $61,000.

According to management, errors noted above on quarterly reporting of accounts receivable were due to multiple iterations of general ledger reports used for the testing and the reporting.

We recommended the Agency implement a process to have a person independent of the preparation of the quarterly accounts receivable reports compare the reports to supporting documentation prior to submission to the State Comptroller to ensure accurate information is reported. (Finding 08-3, pages 21-23)

Agency officials indicated the recommendation has been implemented.

CONTINUED USE OF TEMPORARY ASSIGNMENTS

ICI continues to place union employees on temporary assignment for periods beyond time limits specified by State administrative rules as well as the union agreement.

During testing the auditors noted 9 employees working in temporarily assigned positions during fiscal years 2008 and 2007. Four of 9 employees had been working in temporarily assigned positions from 2-6 years. Another 4 of the 9 employees had stopped working on temporary assigned positions during fiscal year 2008 after working 4 months to 6 years on temporary assignment. All of the employees temporarily assigned were union members.

The Illinois Administrative Code and union agreement with the State set specific time limits for temporary assignments, depending on the reason for the temporary assignment. According to the union agreement, if the assignment extends beyond the set time limit, then an extension should be mutually agreed upon. None of the temporarily assigned employees identified had signed a mutual agreement to extend the temporary assignments.

Agency 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 those employees on temporary assignment, ICI should comply with the State’s administrative rules and where applicable the union agreement requirements. Further, ICI should complete all the required documentation for employees that are temporarily assigned. (Finding 08-5, pages 26-28) This finding was first reported in 1998.

Agency officials accepted our recommendation and indicated they have developed plans that would help address these issues, including reorganizations and hiring of staff. (For previous response, see Digest Footnote #2)

MANAGEMENT PRACTICES - MANAGEMENT INFORMATION SYSTEM

ICI has made no further progress in its plan to completely install an automated management information system (system).

Since fiscal year 2000, ICI has only been using three of the system’s ten software modules and these modules were only used in the Central Office. The system’s purpose of connecting different sites to the Central Office for real time information was not implemented and there was no progress in its implementation during the current engagement period.

ICI paid the vendor $340,000 of a $420,000 contract that was to include software plus training and installation at the time of implementation. Since the installation of the system in 2000, ICI has continued to use and pay the vendor for technical support of the 3 modules utilized. During the fiscal years 2007 and 2008, ICI paid the vendor $54,067 and $4,612, respectively for technical support. Since fiscal year 2000 the total paid to implement and maintain the system amounts to approximately $1.3 million.

Management stated the need to further utilize the system for its intended purpose was not re-examined during the current engagement period because other priorities took precedence.

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 08-7, pages 31-32) This finding was first reported in 2000.

Agency officials accepted our recommendation and indicated they will evaluate the need and practicality of the system. (For previous response, see Digest Footnote #3)

FAILURE TO INCLUDE All costs In the computation of manufacturing costs

The Agency 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 for Fund 301. 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.

Agency policies and procedures do not address what should be included in the computation of the costs of its products. 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.

According to ICI management, their plan to integrate occupancy costs in the computation of the manufacturing costs of ICI products was put on hold as other projects took precedence.

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 08-10, pages 37-38)

ICI management accepted our recommendation and stated they will work to determine the value of the excluded costs and perform a cost benefit analysis of the inclusion of the cost in the price of the items.

OTHER FINDINGS

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

AUDITORS' OPINION

Our auditors stated the June 30, 2008 financial statements of the Illinois Department of Corrections - Correctional Industries Working Capital Revolving Fund are fairly presented.

_____________________________________

WILLIAM G. HOLLAND, Auditor General

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SPECIAL ASSISTANT AUDITORS

The public accounting firm of E.C. Ortiz & Co., LLP was our special assistant auditor for this engagement.

DIGEST FOOTNOTES

#1 NEED TO IMPROVE CONTROLS OVER FINANCIAL REPORTING – Previous Response

2007: Recommendation accepted. The Department takes the reporting of financial information very seriously. As such, the Department has centralized the financial reporting, reconciliation and other accounting processes into one area. The staff involved in the reporting and other accounting functions will receive any needed training and will work to present accurate and complete financial information for the Department and ICE in the future statements.

#2 CONTINUED USE OF TEMPORARY ASSIGNMENTS – Previous Response

2006: Recommendation accepted. ICI has temporarily assigned the employees and rotates the assignments as permitted. ICI will review the need for the temporary assignments.

#3 MANAGEMENT PRACTICES - MANAGEMENT INFORMATION SYSTEM – Previous Response

2006: Recommendation Implemented. ICI is currently in process of a business redesign evaluation and implementation. ICI fiscal transactions have been aligned with those of the Fiscal Services Unit in order to leverage existing staff and expertise. ICI has established a core team to review the implementation of the final modules for inventory. Based upon this review, the Department will make an informed decision regarding the system and its future.