REPORT DIGEST

ILLINOIS FINANCE AUTHORITY

COMPLIANCE EXAMINATION AND SINGLE AUDIT
For the Year Ended: June 30, 2011

Release Date:  May 24, 2012

Summary of Findings this Audit Cycle:
• Compliance: 13
• Financial Audit (previously reported 3-22-12): 0
Total findings:	13
Total last audit: 8
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

SYNOPSIS

• The Illinois Finance Authority did not meet the
capitalization utilization requirements for the Economic
Adjustment Assistance Program.

• The Illinois Finance Authority did not exercise
adequate
controls over travel and marketing expenditures.

• The Illinois Finance Authority did not comply with
certain required contracting procedures.

• The Illinois Finance Authority did not timely submit
the
bond closing notifications to local legislative bodies
and
did not timely submit required transaction reporting for
its revenue bonds to the Illinois Office of the
Comptroller.

• The Illinois Finance Authority did not properly
monitor
the outstanding bonded indebtedness of the Illinois Farm
Development Bonds.

• The Illinois Finance Authority did not implement the
internal auditing program in accordance with the Fiscal
Control and Internal Auditing Act.

• The Illinois Finance Authority did not file the
required
reports with the General Assembly for its issuance of
Recovery Zone Bonds.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NONCOMPLIANCE WITH ECONOMIC ADJUSTMENT ASSISTANCE
PROGRAM

The Illinois Finance Authority (Authority) did not meet
the
capitalization utilization requirements of the Economic
Adjustment Assistance Program.

The Authority is a recipient of a grant from the U.S.
Department of Commerce Economic Development
Administration
(EDA) through the Illinois Department of Commerce and
Economic Opportunity.  The grant was used to establish
the
Title IX Revolving Loan Fund (RLF) to provide low-cost
supplemental financing to manufacturing companies
located
in areas declared eligible for economic adjustment
assistance.  The RLF fund was capitalized with a federal
grant of $424,000 and the Authority contributed $141,334
as
its share of the total project amount.

The program had been inactive since 1998 and the
Authority
had not been meeting the capital utilization
requirements
of the program.  In March 2002, EDA sequestered the
excess
cash of the program because of the Authority’s continued
noncompliance with the capital utilization requirement.
Discussions between the Authority and EDA occurred
subsequent to 2002 to either: 1) mutually terminate the
program, or 2) revitalize the program until a final
agreement could be reached. In 2008 the Authority paid
back
interest for sequestered excess cash from the time of
noncompliance up to 2008.   As of June 30, 2011, the RLF
fund has a cash balance of $748,763 which includes the
sequestered cash of $519,378.

During our audit of the Economic Adjustments Assistance
Program (program), we noted the following:

• The Authority did not pursue negotiations with EDA to
revitalize the program by submitting an updated
revolving
loan fund plan. In addition, the Authority continued to
be
noncompliant with the capitalization requirement of the
program beyond a reasonable period of time.  Although
the
Authority had discussions with EDA in prior years, no
further discussions or negotiations were made as to
whether
to continue or discontinue the program and return the
federal portion of the fund.

• The Authority did not remit to EDA the federal portion
of
interest from sequestered cash on a quarterly basis as
required.  The Authority remitted an interest of $278
for
first quarter ending September 30, 2010 on June 28,
2011,
241 days after it was due.

Authority management stated that the grant was initially
administered by predecessor authorities and the program
had
been inactive because the interest rates offered in the
program are not competitive with the market rates.  Due
to
other priorities that took precedence, negotiations with
EDA were put on hold.  (Finding #2, pages 20-22)

We recommended Authority management revisit the
requirements of the grant and reinitiate negotiations
with
EDA to determine whether to continue or terminate the
program and return the grant funds to EDA.

Authority officials accepted the Auditor’s
recommendation
and indicated they had been in contact with the EDA to
modify the requirements of the grant and the work plan.

INADEQUATE CONTROL OVER TRAVEL AND MARKETING
EXPENDITURES

The Illinois Finance Authority (Authority) did not
exercise
adequate control over travel and marketing expenditures
to
ensure compliance with the Travel Guide for State of
Illinois Employees (Travel Guide).

Based on our review of the Authority’s travel policy
(policy) and travel and marketing expenditures we noted
the
following:

• The Authority’s policy does not require seeking
approval
from the Governor’s Travel Control Board for any
exception
from the Travel Guide.  Exceptions to the travel
regulations are required to be approved by the
Authority’s
Chief Financial Officer in accordance with its policy.

• The Authority’s policy does not require seeking the
approval from the Governor’s Office of the Management
and
Budget (GOMB) prior to any out-of-state travel.  In our
review of 51 travel vouchers, 13 (26%) vouchers totaling
$18,317 were expenditures for out-of-state travel.

• Seven of 51 (14%) travel vouchers tested contained
unallowable travel expenses totaling $308.  Unallowable
travel expenses consist of food and beverage sales
taxes,
purchases from hotel restaurant and mini bar, gift shop
charges, airline perks such as early check-in fee and
boarding and flexibility package purchased during air
flights.

• Certification for the license and insurance of a
privately owned aircraft used on State travel was not
provided.  In fiscal year 2011, the Authority paid a
total
of $3,018 travel reimbursements related to charges for
the
use of a privately owned aircraft.

• Four of 51 (8%) travel vouchers and 1 of 16 (6%)
marketing expense reports did not have supporting
receipts
totaling $1,764 and $79, respectively. These expenses
which
individually exceeded $10 were for transportation and
lodging expenses.

• Eight of 51 (16%) travel vouchers and 1 of 16 (6%)
marketing expense reports had lodging reimbursements in
excess of the maximum allowed by the Governor’s Travel
Control Board.  The total excess payment made by the
Authority against the maximum allowed was $1,549.

According to Authority management they are undertaking a
comprehensive review of its travel policies.
Expenditures
without receipt and incomplete information on the travel
expense reports were due to oversight.  (Finding #3,
pages
23-26)

We recommended the Authority comply with the Travel
Guide
and strengthen its internal control over travel and
marketing expenditures to ensure expenditures comply
with
the Travel Guide.

Authority officials accepted the Auditor’s
recommendation
and indicated they planned to update is travel policies
and
procedures to be in compliance with the Governor’s
Control
Travel Guide.

NONCOMPLIANCE WITH CONTRACTING PROCEDURES

The Illinois Finance Authority (Authority) did not
comply
with certain required contracting procedures.

During our testing of 16 contracts, including 4
contracts
for real property leases, we noted the following:

• Seven (44%) contracts totaling $510,938 had not been
signed by all parties before the earliest service
allowed
under the contract agreement terms.  The length of time
between the beginning dates of the contractual
agreements
and dates of final signatures ranged from 18 to 393
days.


• Eight (50%) contracts each exceeding $10,000 were not
filed with the Illinois Office of the Comptroller.  The
contracts totaled $454,330.

Authority management stated that untimely execution of
contracts was due to vendor’s failure to timely return
signed contracts timely.  The non-filing of contracts
with
the Office of the State Comptroller was due to lack of a
designated person to handle filing of contracts as a
result
of staff turnover.   (Finding #4, pages 27-28)

We recommended Authority management take the necessary
steps to ensure contract agreements are signed by all
the
required parties before contract services begin.
Further,
management should designate a person to ensure contracts
exceeding $10,000 are filed with the Office of the State
Comptroller as required by the SAMS Manual.

Authority officials accepted the Auditor’s
recommendation
and indicated they had committed material resources to
compliance with the Procurement Code.

DELINQUENT REPORTING OF BOND ACTIVITY

The Illinois Finance Authority (Authority) did not
timely
submit the bond closing notifications to local
legislative
bodies and did not timely submit required transaction
reporting for its revenue bonds to the Illinois Office
of
the State Comptroller.

During our testing of conduit bond issuances, we noted
the
following:

• The Authority is required to notify local legislatures
for new bond issuances in accordance with its policies
and
procedures.   Notification letters to local legislative
bodies for all 12 new issuances tested were not timely
transmitted.  Notification letters were transmitted from
68
to 376 days after they were due.

• 25 of 223 (11%) Notice of Payment of Bond and/or
Principal accounting reports (form C-08) tested were not
submitted timely with the Office of the State
Comptroller.
The notices were submitted from 4 to 148 days after they
were due.

Authority management stated that staff assigned to
prepare
notification to local legislative bodies failed to do
so.
The bond trustees did not submit Form C-08 to the Office
of
the State Comptroller timely as required.  (Finding #5,
pages 29-30)

We recommended Authority management train new personnel
responsible for notifying the local legislative bodies
about the Authority’s policies and procedures related to
processing bond transactions.  Further, the Authority
should monitor its trustee’s submission of the form
C-08s
to the Office of the State Comptroller to ensure
compliance
with the Statewide Accounting Management System (SAMS)
requirements.

Authority officials accepted the Auditor’s
recommendation
and indicated they would train and provide the policies
and
procedures to new personnel.  Authority officials
further
indicated it receives over 7,000 C-08’s per fiscal year
and
if a C-08 has not been received within 10 calendar days
of
the “scheduled” payment date, an email reminder is sent
out
with weekly reminders until it’s received.

THE AUTHORITY FAILED TO MONITOR OUTSTANDING BONDED
INDEBTEDNESS OF THE ILLINOIS FARM DEVELOPMENT BONDS

The Illinois Finance Authority (Authority) did not
properly
monitor the outstanding bonded indebtedness of the
Illinois
Farm Development Bonds.

The Authority, as an issuer of bonds including conduit
Illinois Farm Development Bonds (bonds) is required to
annually report the aggregate outstanding bonded
indebtedness to the Illinois Office of the State
Comptroller.  In order to do this, the Authority uses a
loan database system to track bond issuances and
balances.
The database has been designed to generate verification
letters that are sent to the lender banks each fiscal
year
to determine outstanding balances of the bonds.  The
lender
banks are required to verify the principal, interest,
and
outstanding balance of a borrower.  This report is to be
submitted to the Office of the State Comptroller within
90
days after the year end.

During our testing of 25 loans issued under the Illinois
Farm Development Bonds program, we noted the Authority
did
not send verification letters to monitor and obtain an
updated outstanding bonded indebtedness on 3 (12%) loans
tested totaling $519,577.  The loan database system did
not
generate the annual verification letters.  As a result
these loans have not been verified since fiscal year
2008
and, therefore, the outstanding loan balances reported
to
the Office of the State Comptroller may not be accurate.

Authority management stated that the exceptions were due
to
errors in the loan database system not immediately
identified because of inadequate maintenance of the
system.
(Finding #6, pages 31-32)

We recommended Authority management strengthen controls
over the maintenance of its loan database system to
ensure
outstanding loans are properly verified and accurate
reports are submitted to the Comptroller.

Authority officials accepted the Auditor’s
recommendation
and indicated they are in the process of acquiring a
consultant to review and provide feedback on the loan
database system.

INTERNAL AUDITING PROGRAM NOT IMPLEMENTED

The Illinois Finance Authority (Authority) did not
implement the internal auditing program in fiscal year
2011
in accordance with the Fiscal Control and Internal
Auditing
Act.

Although the Authority contracted with an external firm
to
provide performance of internal auditing program in
fiscal
year 2010 for a three year term ending fiscal year 2013,
the Authority did not actually implement the internal
auditing program during the current fiscal year.  The
Authority did not prepare an internal audit plan and no
internal audits were undertaken in fiscal year 2011. The
Authority approved a two-year internal audit plan for
fiscal year 2012 and fiscal year 2013 created by the
external firm on June 27, 2011.

The Fiscal Control and Internal Auditing Act (30 ILCS
10/2001) (Act) states each designated State agency shall
maintain a full-time program of internal auditing.
Section
1003 of the Act defines designated State agencies to
include the Illinois Finance Authority.

Authority management stated that due to staff turnover,
the
development of the internal audit was not completed
within
the required timeframe.  (Finding #9, pages 37-38)

We recommended Authority management comply with the Act
and
implement an internal auditing program.

Authority officials accepted the Auditor’s
recommendation
and indicated they had an internal audit plan developed
by
the end of fiscal year 2011.  However, the internal
audit
plan was not completed within the required reporting
time.

FAILURE TO FILE REPORT REQUIRED BY THE AMERICAN RECOVERY
AND REINVESTMENT ACT

The Illinois Finance Authority (Authority) did not file
the
required reports with the General Assembly for its
issuance
of Recovery Zone Bonds in implementing the provisions of
the American Recovery and Reinvestment Act of 2009.

In accordance with the provisions of the American
Recovery
and Reinvestment Act of 2009 (ARRA), all counties and
municipalities of the State with a population of 100,000
or
more have received an allocation of recovery zone bonds
authorizations to spur economic development.  In
accordance
with the Federal law, the allocation maybe voluntarily
waived by counties and municipalities to the State for
reallocation to other jurisdictions and other projects
in
the State.

The Authority, on behalf of the State, will receive
unused
allocations and ensures that the incentive will be used
to
the fullest extent possible.

The Authority received a total reallocation cap of
$295,923,000 and issued eight bonds totaling
$211,488,000
from August 24, 2010 through December 31, 2010. In
accordance with the statute, the Authority is required
to
submit monthly reports to the General Assembly starting
September 15, 2010 detailing its implementation of the
ARRA
provision.  The Authority did not submit the monthly
reports as required.  The Authority filed a report
detailing its implementation of the ARRA provisions
regarding the recovery zone bonds on June 28, 2011.

According to Authority management, the failure to file
monthly reports was due to oversight.  (Finding #12,
pages
43-44)

We recommended Authority management improve its controls
over monitoring amendments to the Illinois Finance
Authority Act to ensure it complies with any new or
amended
provisions of the Act.

Authority officials accepted the Auditor’s
recommendation
and indicated it is implementing an agency wide
reporting
monitoring mechanism.

OTHER FINDINGS

The Authority accepted the remaining findings.  We will
review the Authority’s progress towards the
implementation
of our recommendations in our next State compliance
examination.

AUDITORS’ OPINION

The auditors conducted a compliance examination of the
Authority for the year ended June 30, 2011.  A financial
audit covering the year ended June 30, 2011 was issued
separately.

WILLIAM G. HOLLAND
Auditor General

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SPECIAL ASSISTANT AUDITORS

Our special assistant auditors for this compliance
examination and single audit were E.C. Ortiz & Co. LLP.