REPORT DIGEST

INTERMEDIATE SERVICE CENTER #2
WEST COOK

FINANCIAL AUDIT (IN ACCORDANCE WITH THE SINGLE AUDIT ACT
AND OMB CIRCULAR A-133)
FOR THE YEAR ENDED: JUNE 30, 2011



Release Date:   December 20, 2012


Summary of Findings:
Total this audit: 3
Total last audit:  0
Repeated from last audit: 0

State of Illinois, Office of the Auditor General
WILLIAM G. HOLLAND, AUDITOR GENERAL

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Ash Street, Springfield, IL 62703
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the worldwide web at www.auditor.illinois.gov


The Intermediate Service Center #2:

• did not maintain adequate time and effort statements
to allocate indirect costs in accordance with OMB
Circular A-87.

• used grant balances to cover deficit cash balances in
other programs.

• did not have adequate controls over the financial
reporting process.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE DOCUMENTATION FOR PAYROLL EXPENDITURES

Office of Management and Budget (OMB) Circular A-87,
Cost Principles for State, Local and Indian Tribal
Governments, establishes principles and standards for
determining costs for federal awards carried out through
grants, cost reimbursement contracts and other
agreements with State and local governments and
federally recognized Indian tribal governments.  To be
allowable under federal awards, costs must meet certain
general criteria.  Those criteria require that
expenditures be allocable, reasonable and supported by
adequate documentation.

OMB Circular A-87 requires that all employee salaries
and wages charged to federal grants maintain time and
effort reporting.  There are two types of required time
and effort records: semi-annual certifications and
detailed monthly reports.  The type of record that must
be kept is based on the job responsibilities of the
individual charged to the grant.

Intermediate Service Center #2 did not maintain adequate
time and effort statements to allocate indirect costs in
accordance with OMB Circular A-87.  Salary and benefits
for administrative employees were charged to the Title
I-School Improvement and Accountability and the ARRA
Title I Grants to Local Educational Agencies, Recovery
Act programs based on amounts calculated for budget
purposes rather than costs based on actual time and
effort reports.

Intermediate Service Center #2 allocated a total of
$74,542 of indirect compensation costs to the above
programs.  While these costs were approved in the grant
budgets, without acceptable documentation of the basis
for, and rationale behind, the allocations, the amounts
over or undercharged to the programs cannot be readily
determined.  Based on the total amount of allocated
costs charged to the programs, any amount deemed to be
overcharged most likely would be considered immaterial.
(Finding 11-1, pages 11-12)

The auditors recommended that the Intermediate Service
Center #2 should develop and implement adequate policies
and procedures to ensure compliance with applicable
federal OMB requirements.  These policies and procedures
should include requiring staff involved in multiple
programs to submit time sheets by program or a time and
effort report by program.  Intermediate Service Center
#2 should also establish a payroll cost allocation
procedure that allows for computation and comparison of
actual time charged with budgeted time or allocation
rates on a regular basis.  Payroll charges by program
should be based on the time devoted and identified
specifically to the performance of those programs.

The Intermediate Service Center #2 responded that after
reviewing the finding, they agreed with this finding and
began updating and implementing adequate policies and
procedures to ensure compliance with the Allowable
Costs/Cost Principles of the OMB Circular A-133
Compliance Supplement and Cost Principles of OMB A-87
for Compensation for Personnel Services.  Starting
fiscal year 2012, Intermediate Service Center #2 noted
that they will be modifying the time and effort
reporting and subsequent cost allocation procedures to
more accurately reflect the time devoted to grant
activities across multiple grant programs.

USE OF DESIGNATED GRANT BALANCES

Intermediate Service Center #2 runs several grant funded
programs.  Programs funded by State and federal grants
must be tracked and maintained separately.  Intermediate
Service Center #2 pooled program and local revenue into
the same bank account.  Cash that was granted to the
Service Center, and designated for specific grant
purposes, was used to cover deficit cash balances in
programs other than those for which the cash was
granted.

According to ISC #2 officials, because the Intermediate
Service Center is primarily funded on a reimbursement
basis, the delay in funding received from the State of
Illinois has caused programs which the Intermediate
Service Center was already in the midst of operating to
have severe cash deficits.  The ISC officials stated
that, to continue operating as the grant agreement
stipulates, cash had to be used from other sources in
order to fund expenditures that were to be reimbursed by
the State.  (Finding 11-2, page 13)

The auditors recommended that the Intermediate Service
Center #2 should not use cash designated for specific
grant purposes to cover deficit cash balances in
programs other than those for which the cash was
granted.

The Intermediate Service Center #2 responded that due to
an unprecedented delinquent receipt of State grant funds
for FY11 from the State of Illinois, they were forced to
use cash designated for specific purposes to cover
deficit cash balances in programs other than those for
which the cash was granted- i.e. for cash flow.  ISC #2
noted that on a quarterly basis the State of Illinois
was in arrears in its payments by these amounts:  1st
quarter ($19,083) due to some front loading of budgets;
2nd quarter ($160,032); 3rd quarter ($322,082); and 4th
quarter ($347,492).  The ISC also noted that all of the
outstanding balances due Intermediate Service Center #2
from the State of Illinois at the end of the FY11 were
paid during the 1st quarter of FY 12.

ISC #2 also stated that the small size of their budget
cannot accommodate unreliable payments from their
grantors.  If unreliable payments continue, the Service
Center will seek outside financing to cover any
shortfalls that may exist.  ISC #2 noted that cash funds
will be expended only for those specific grant purposes
for which they were designated.

CONTROLS OVER FINANCIAL STATEMENT PREPARATION

Intermediate Service Center #2 is required to maintain a
system of controls over the preparation of financial
statements in accordance with generally accepted
accounting principles (GAAP).  Intermediate Service
Center #2’s internal controls over GAAP financial
reporting should include adequately trained personnel
with the knowledge and expertise to prepare and/or
thoroughly review GAAP based financial statements to
ensure that they are free of material misstatements and
include all disclosures as required by the Governmental
Accounting Standards Board (GASB).

Intermediate Service Center #2 did not have sufficient
internal controls over the financial reporting process.
The Service Center maintains its accounting records on
the cash basis of accounting.  While the Service Center
maintains controls over the processing of most
accounting transactions, there are not sufficient
controls over the preparation of the GAAP based
financial statements for management or employees in the
normal course of performing their assigned functions to
prevent or detect financial statement misstatements and
disclosure omissions in a timely manner.  For example,
auditors, in their review of the Service Center’s
accounting records, noted that material adjusting
entries were required to present the financial
statements in accordance with generally accepted
accounting principles.

According to Intermediate Service Center #2’s officials,
although they employed a part-time Certified Public
Accountant (CPA) on staff, there was not adequate
funding to devote to employing a full-time CPA. (Finding
11-3, pages 14-15)

The auditors recommended that as part of its internal
control over the preparation of financial statements,
including disclosures, the Intermediate Service Center
#2 should implement comprehensive preparation and/or
review procedures to ensure that financial statements,
including disclosures, are complete and accurate.  Such
procedures should be performed by a properly trained
individual(s) possessing a thorough understanding of
applicable generally accepted accounting principles,
GASB pronouncements, and knowledge of the Intermediate
Service Center’s activities and operations.

The Intermediate Service Center #2 responded that they
had a part time CPA on staff for FY11.  They noted that
budget constraints would not permit employment of a full
time CPA who could provide the increasingly stringent
GAAP based controls over financial statement preparation
that are considered necessary.  ISC #2 noted that the
CPA employee left the agency at the beginning of the
FY13 year and ongoing financial concerns will prohibit
her replacement.

ISC #2 noted that they are confident in the abilities of
the accounting/bookkeeping staff to prepare cash basis
financial information as needed for reporting purposes
throughout the year.  In addition, the Lyons Township
Treasurer’s Office is involved in all financial
statement preparation.  ISC #2 noted that management
will pursue additional training when it is considered
cost beneficial since training costs would take away
from the funds available to provide educational services
for the schools in the region.

AUDITORS’ OPINION

Our auditors state the Intermediate Service Center #2’s
financial statements as of June 30, 2011 are fairly
presented in all material respects.

WILLIAM G. HOLLAND
Auditor General

WGH:KJM

AUDITORS ASSIGNED:  Bass, Solomon, and Dowell, LLP were
our special assistant auditors for this audit.