REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #19

DUPAGE COUNTY

FINANCIAL AUDIT

(In Accordance with the Single Audit Act and OMB Circular A-133)

For the Year Ended:

June 30, 2008

Summary of Findings:

Total this audit                       1

Total last audit                       3

Repeated from last audit        0

Release Date:

May 14, 2009

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

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Springfield, IL 62703

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SYNOPSIS

·         The Regional Office of Education #19 did not properly record certain lease transactions and capital asset acquisitions. 

{Expenditures and Revenues are summarized on the reverse page.}

The Regional Office of Education #19 did not properly record certain lease transactions and capital asset acquisitions.

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

RECORDING OF LEASE TRANSACTIONS AND CAPITAL ASSET ACQUISITIONS

         The Regional Office of Education #19 did not properly record certain lease transactions and capital asset acquisitions.  Generally accepted accounting principles (GAAP) require that a lease be capitalized if any one of the following four criteria is a characteristic of the lease transaction:  (1) the lease transfers ownership of the property to the lessee by the end of the lease term, (2) the lease contains bargain purchase options, (3) the lease term is equal to 75 percent or more of the estimated economic life of the leased property, or (4) the present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair value of the leased property.  Capital leases are treated as an acquisition of assets and the incurrence of obligations by the lessee.

         The Illinois Administrative Code (74 Ill. Adm. Code 420.320 (c) (1) and (2)) requires that each Regional Office of Education (ROE) maintain the accounting records necessary to prepare financial statements in accordance with generally accepted accounting principles.  In addition, Appendix B. Fixed Asset Accounting of the Illinois Program Accounting Manual (IPAM) and GAAP also require that capital assets be reported based on the invoiced cost plus any applicable transportation and installation charges necessary to make the capital asset ready for its intended use.  During the auditors’ review they found that:

• Payments on leases were improperly treated as operating leases and recorded as purchased services.  The leases met two of the criteria requiring them to be capitalized:  the lease terms of the equipment were equal to the estimated economic lives of the equipment, and the present values of the minimum lease payments at the inception of the leases were more than 90 percent of the fair value of the equipment ($44,519).  As of June 30, 2008, the total net book value of the leased equipment and the present value of the related lease payable were $89,755 and $92,550, respectively.

• Installation and shipping costs totaling $40,250 for the purchase of computers were recorded as purchased services instead of being recorded as a capitalized cost of the equipment.

         The Regional Office financial statements were subsequently revised to include the required adjustments and disclosures necessary to apply the appropriate GAAP.

         Failure to use the applicable GAAP may result in inaccurate and incomplete financial statements.  In addition, transactions were not recorded in accordance with the Illinois Program Accounting Manual and ROE Accounting Manual.  Financial reports prepared by the Regional Office required additional analysis in order to be comparable and consistent with reporting requirements and GAAP.

         According to Regional Office management, the ROE generally does not keep the equipment items through the end of the lease term and, therefore, considered the recording of the lease transactions as operating expenses proper.  The installation costs of the equipment were erroneously recorded as purchased services instead of capitalized cost due to oversight.   (Finding 08-1, pages 12-13) 

         Auditors recommended that the DuPage County Regional Office of Education #19 establish procedures to ensure lease transactions and capital asset acquisitions are properly accounted for and reported in accordance with GAAP.  If necessary, accounting and reporting guidance should be obtained from technical resources to be in conformity with GAAP.  Further transactions should be carefully reviewed for proper accounting and recognition as required by the Illinois Administrative Code and the ROE Accounting Manual. 

         The Regional Office responded that it agreed with the finding.  The ROE noted that it will hold a workshop for the Finance Department of the ROE #19 regarding the proper accounting principles to follow.  This will be to accomplish both placement of the purchase, shipping and installation costs in the appropriate category and to ensure that this is also properly recorded in the ROE #19’s inventory record.  The ROE also responded that it will be noted as leased equipment in this inventory record.

AUDITORS’ OPINION

         Our auditors state the Regional Office of Education #19’s financial statements as of June 30, 2008 are fairly presented in all material respects.

___________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:KJM

SPECIAL ASSISTANT AUDITORS

         Our special assistant auditors were E. C. Ortiz & Co., LLP.