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, 2012

Release Date: June 19, 2014

Summary of Findings:
Total this audit: 6
Total last audit:  6
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 Regional Office of Education #19:

• did not have sufficient internal controls over
the financial reporting process;

• did not have adequate internal control
procedures;

• had expenditure reports that did not agree to
general ledger;

• did not have adequate documentation of payroll
expenditures;

• paid unallowable costs and had improper
maintenance of records; and

• had improper application of matching
principle.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

CONTROLS OVER FINANCIAL STATEMENT PREPARATION

The Regional Office of Education #19 is required
to maintain a system of controls over the
preparation of financial statements in
accordance with generally accepted accounting
principles (GAAP).  Regional Office 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).

The Regional Office did not have sufficient
internal controls over the financial reporting
process.  The Regional Office maintains their
accounting records on the cash basis of
accounting during the fiscal year and posts year
end accrual entries for audit purposes.  The
Regional Office did not have 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, review of the
Regional Office’s accounting records noted the
following:

• The Regional Office did not maintain adequate
internal controls over the processing of all
financial transactions and adjustments were
required to present financial statements in
accordance with generally accepted accounting
principles.

• The Regional Office did not have a reporting
mechanism to identify the specific expenditures
that should be applied to each grant year when
program grants have overlapping grant terms and
are accounted for in the same trial balance.

While the Regional Office did hire an
independent audit firm to prepare its financial
statements, material adjustments were necessary
due to the Regional Office’s reporting mechanism
not tracking expenditures accurately by fiscal
year.  (Finding 12-01, pages 15-16)

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

The Regional Office of Education #19 responded
that it will continue its relationship with a
private Certified Public Accounting Company to
prepare (GAAP based) financial statements that
will include all disclosures required by the
Governmental Accounting Standards Board.  The
Project Managers will play a key role because
they will be responsible along with the Finance
Office in the review of their respective
financial documents.  The ROE stated that these
reviews will be completed at the end of each
quarter.  In addition, the Regional Office’s
accounting personnel will receive training in
detecting disclosure omissions and misstatements
in a timely manner.

INADEQUATE INTERNAL CONTROL PROCEDURES

The Regional Office of Education No. 19 is
required to maintain a system of controls over
receipts, disbursements, and reporting to
prevent errors and fraud.  The Regional Office
has not established sufficient controls over its
accounting functions.  Auditors, in their review
of the Regional Office’s accounting records,
noted the following:

• There is a lack of segregation of duties in
the cash disbursements and accounting process.
The fiscal staff has full, unrestricted access
to the accounting software and also can affix
the Regional Superintendent’s electronic
signature to checks.

• There is a lack of segregation of duties in
the cash receipts and accounting process.  The
accountant opens mail, has full, unrestricted
access to the accounting software, and is
responsible for monitoring accounts receivable.

• The Regional Office did not adhere to its
policy of requiring the Regional
Superintendent’s approval of purchases.  In 18
of 75 (24%) instances, purchase orders were not
completed or signed by the Regional
Superintendent.  Further, in 1 of 75 (1%)
instances, an expenditure was paid prior to
receiving appropriate approvals.

• In 4 of 75 (5%) expenditures examined, the
Regional Office failed to provide adequate
supporting documentation.

• In 1 of 75 (1%) expenditures examined, the
Regional Office charged an expenditure to an
incorrect account.

• The Regional Office failed to properly accrue
expenses in 2 of 75 (3%) expenditures examined.

According to Regional Office officials,
employees were not aware, at that time, what
duties should be segregated to have a more
effective process.  (Finding 12-02, pages 17-18)

The auditors recommended that the Regional
Office of Education #19 should adequately
segregate duties so that one individual is not
involved in all aspects of the cash receipts and
disbursement processes.  Additionally, the
Regional Office should implement a system of
internal controls that ensures expenditures are
properly approved, supported, accrued and posted
to the correct account before disbursements are
made and posted to the accounting software
correctly.

The Regional Office of Education #19 responded
that it has completed a thorough review to
accomplish the maximum segregation of duties
possible with the two full time and two part
time members in the Finance Office.  The
Regional Office stated that segregation of
duties concerning cash receipts and accounting
process occurred immediately after the FY11
audit became available to the Regional Office.
Policy 4:50 concerning Purchase Orders, Process
Steps, and Payment Procedures was written in
June 2013 with implementation beginning July
2013.  The ROE noted that beginning later in the
Spring of 2014, training will be provided in the
on-line purchase order process so that purchase
order approvals and processing can be done
electronically.  In order to streamline the
procedure, the FileMaker process for Purchase
Orders will no longer be used effective July
2014.  Once the system is implemented, an
updated policy will be written.

EXPENDITURE REPORTS DID NOT AGREE TO GENERAL
LEDGER

 Expenditure reports and reimbursement requests
 for education programs submitted to the
 Illinois State Board of Education (ISBE) and
 the Will County Regional Office of Education
 #56 should agree with the expenditures reported
 on the Regional Office of Education #19’s
 general ledger.

A comparison of expenditure reports to the
Regional Office of Education #19’s general
ledger revealed instances where the totals on
the final 2012 expenditure reports submitted to
the Illinois State Board of Education did not
agree with the Regional Office’s general ledger.
Additionally, a comparison of reimbursement
requests submitted to the Will County Regional
Office of Education #56 also revealed instances
where the amounts requested for reimbursement
did not agree to the general ledger amounts.
Instances noted by auditors included the
following:

• The expenditure report submitted to ISBE for
the Career and Technical Education Improvement
program (2012-3220-00) reported total
expenditures related to supplies and materials
of $31,542 while the general ledger reported
total supplies and materials expenditures of
$20,985, a difference of $10,557.  Further,
$9,900 of costs charged as support services
under purchased services had no documentation
other than the program budget to support these
costs.

• The expenditure report submitted to ISBE for
the Truants Alternative Optional Education
program (2011-3695-00) reported total
expenditures related to employee benefits of
$17,871 and purchased services of $14,160 while
the general ledger reported total employee
benefits expenditures of $16,151 and purchased
services expenditures of $5,704 in fiscal years
2011 and 2012 (duration of grant period), a
total difference of $10,176.

• The expenditure report submitted to ISBE for
the Technology for Success program
(2012-3780-00) reported total expenditures
related to employee benefits of $8,177 and
purchased services of $44,257 while the general
ledger reported total employee benefits
expenditures of $8,052 and purchased services
expenditures of $44,146, a total difference of
$236.  However, $4,545 of costs charged as
support services under purchased services had no
documentation other than the program budget to
support the costs.

•	In 1 of 6 (17%) monthly reimbursement
requests examined that were submitted to the
Will County Regional Office of Education #56 for
the Title I - Grants to Local Educational
Agencies, the request did not agree to general
ledger detail in total and/or by category.  The
July 2011 reimbursement request reported
expenditures related to salaries of $3,563 and
employee benefits of $643 while the general
ledger reported salaries and employee benefits
expenditures of $1,960 and $354, respectively, a
total difference of $1,892.  Total unsupported
costs were $1,892.

• The Regional Office’s final 2012 reimbursement
request to Will County Regional Office of
Education #56 for the Title I - Grants to Local
Educational Agencies requested an additional
$51,358 of costs that could not be supported by
general ledger detail for the final monthly
reimbursement request (June 2012) or for the
entire grant period.  An adjusting entry was
necessary to reduce accounts receivable and
deferred revenue for the unsupported costs of
$51,358.

According to Regional Office officials, the
Regional Office personnel responsible for
expenditure reports prepared the reports based
on numbers that were not adjusted for year-end
entries and previous audit entries. (Finding
12-03, pages 19-22)

The auditors recommended that the Regional
Office of Education #19 personnel responsible
for preparing the expenditure reports should
ensure all expenditure reports are supported by
the appropriate documentation and by the
adjusted general ledger maintained in the
Regional Office’s accounting software.

The Regional Office of Education #19 responded
that it will require quarterly reviews to be
completed by each of the Project Managers to
review and correct items charged to the grant in
error.  The Regional Office stated that any
necessary journal entries will be written
promptly and adequately explained and identified
to the proper year on the general ledger report.
A reconciliation will be prepared thoroughly
documenting the differences between the
expenditure report and the general ledger
report, including all accruals for the previous
year and upcoming year.  General ledger accounts
specifying the correct grant year have been
implemented after the delivery of the fiscal
year 2011 audit.

INADEQUATE DOCUMENTATION OF 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,
among other things, require the expenditures
must be allocable, reasonable, and supported by
adequate documentation.

During review of 15 payroll transactions for 15
separate employees, auditors noted the
following:

• 1 of 15 (7%) payroll transactions was not
supported by a personnel activity report signed
by the applicable employee.
• 2 of 15 (13%) payroll transactions were not
supported by an authorized pay rate.
• 6 of 15 (40%) payroll transactions were not
adequately supported by personnel activity
reports or equivalent documentation.  Further,
the Regional Office did not have a system in
place to allocate the salaries of individuals
that assist in the administration of multiple
programs.

The Regional Office did not have established
policies and procedures regarding salaries and
benefits that incorporate the requirements of
Allowable Costs/Cost Principles of OMB Circular
A-87, Cost Principles for State, Local and
Indian Tribal Governments for compensation for
personnel services. (Finding 12-04, pages 23-26)

The Regional Office of Education #19 should
develop and implement adequate policies and
procedures to ensure compliance with the
Allowable Costs/Cost Principles of OMB Circular
A-87, Cost Principles for State, Local and
Indian Tribal Governments for compensation for
personnel services.  These policies and
procedures should include requiring staff
involved in multiple programs to submit and sign
personnel activity reports by program or a time
and effort report by program.  The Regional
Office should also establish a payroll cost
allocation procedure that allows for computation
and comparison of actual time charged with
budgeted or pre-determined 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.  Further, all authorized pay
rates should be documented in writing to provide
sufficient documentation of payroll charges to
each program.

The Regional Office of Education #19 responded
that the Payroll Cost Allocation Policy 4:51 was
written June 2013 and implemented after a series
of meetings for training purposes with all
employee groups and service providers
(consultants) in October 2013 with
implementation for the time sheets effective
November 2013.  The ROE noted that the meetings
were to insure compliance with all of the
requirements of the OMB Circular A-87.
Furthermore, time logs then also were required
to be provided on a monthly basis to indicate
the work done by each person whether employee or
service provider.  The Regional Office stated
that in order to obtain consistency for the time
logs, the DuPage County Chief Auditor was
consulted in developing a work log specifically
for the Regional Office, with implementation
July 2014.

PAYMENT OF UNALLOWABLE COSTS AND IMPROPER
MAINTENANCE OF RECORDS

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,
among other things, require the expenditures
must be allocable, reasonable, and supported by
adequate documentation.  Further, the specific
requirements for activities allowed or unallowed
are unique to each federal program and are found
in the laws, regulations, and provisions of
contract or grant agreements pertaining to the
program.

While OMB Circular A-87, Cost Principles for
State, Local and Indian Tribal Governments
considers charges to federal awards for salaries
and wages allowable, the Regional Office did not
expend grant funds in accordance with Public Law
No. 111-226 and applicable grant terms.  The
Regional Office lacked documentation to support
it expended $229,140 of $338,115 of total
Education Jobs funds to pay the salaries of
teachers and other employees who provide school-
level educational and related services.
Additionally, the Regional Office did not
separately identify and account for these
Recovery Act funds in its accounting software.

According to Regional Office officials, fiscal
staff did not completely understand the grant
terms and interpreted the grant requirements
incorrectly.  (Finding 12-05, pages 27-29)

The auditors recommended the Regional Office of
Education #19 should implement procedures to
ensure that specific grant terms and applicable
OMB circulars and federal regulations are
evaluated and understood before incurring grant
expenditures.

The Regional Office of Education #19 responded
that the corrections and adjustments have been
made to the grant; however, ISBE still will need
to be contacted specifically asking that per
counsel of the auditors, the grant expenditure
report be opened in order for the grant
expenditure report be in agreement with that of
the Regional Office general ledger detail.

IMPROPER APPLICATION OF MATCHING PRINCIPLE

According to generally accepted accounting
principles, revenues should be recognized when
they are realized and realizable and are earned,
no matter when cash is received.  When applying
the matching principle, expenses are incurred
and offset against recognized revenues which
were generated from those expenditures,
regardless of when cash is paid out.

The Regional Office did not always properly
apply the matching principle. As noted in
finding 12-01, the Regional Office did not have
a reporting mechanism to identify the specific
expenditures that should be applied to each
grant year when program grants have overlapping
grant terms and are accounted for in the same
trial balance.  This makes the matching
principle difficult to apply and calculation of
any overstatement or understatement of revenue
very difficult to determine.

According to the Regional Office, fiscal staff
lacks the training and understanding of
generally accepted accounting principles
regarding the application of the matching
principle. (Finding 12-06, pages 30-31)

The auditors recommended that the Regional
Office of Education #19 should implement
procedures to track grant expenditures by each
grant and fiscal year when grant terms overlap
to ensure the matching principle is applied
properly and the appropriate amount of grant
revenue is recognized.  The Regional Office
should also ensure its fiscal staff is
knowledgeable of generally accepted accounting
principles.

The Regional Office of Education #19 responded
that effective July 2013, grant expenditures and
revenue have been identified to the proper year
making it possible to apply the GAAP Matching
Principle.  The Regional Office stated that
accounting personnel have been trained in the
applicable GAAP Standards.

AUDITORS’ OPINION

Our auditors state the Regional Office of
Education #19’s financial statements as of June
30, 2012 are fairly presented in all material
respects.

WILLIAM G. HOLLAND
Auditor General

WGH:KJM

AUDITORS ASSIGNED:  Sikich LLP were our special
assistant auditors.