REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #26
HANCOCK AND MCDONOUGH COUNTIES

Financial Audit for the Year Ended June 30,
2014

Release Date:  August 4, 2015

FINDINGS THIS AUDIT:  4
CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 3 -- 3
Category 2:  0 -- 0 -- 0
Category 3:  1 -- 0 -- 1
TOTAL:  1 -- 3 -- 4

FINDINGS LAST AUDIT: 4

Category 1:	Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2:	Findings that are
significant deficiencies in internal control
and noncompliance with State laws and
regulations.
Category 3:	Findings that have no
internal control issues but are in
noncompliance with State laws and
regulations.

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

• (14-1) The Regional Office of Education
#26 did not have sufficient internal
controls over the financial reporting
process.

• (14-2) The Regional Office of Education
#26 did not have adequate internal control
procedures.

• (14-3) The Regional Office of Education
#26 did not have adequate internal controls
over expenditures.

• (14-4) The Regional Office of Education
#26 was in noncompliance with reporting
grant requirements.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

CONTROLS OVER FINANCIAL STATEMENT
PREPARATION

The Regional Office of Education #26 is
required to maintain a system of controls
over the preparation of financial statements
in accordance with generally accepted
accounting principles (GAAP).  The Regional
Office’s internal controls over GAAP
financial reporting should include
adequately trained personnel with the
knowledge, skills, and experience to prepare
GAAP-based financial statements and include
all disclosures as required by the
Governmental Accounting Standards Board
(GASB).

The Regional Office of Education #26 did not
have sufficient internal controls over the
financial reporting process.  The Regional
Office maintains its accounting records on
cash basis accounting during the fiscal year
and posts year-end accrual entries for
financial statement purposes. While the
Regional Office maintains controls over the
processing of most accounting transactions,
there are not sufficient controls over the
preparation of 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.

During review of the Regional Office of
Education #26’s financial information
prepared by the Regional Office of Education
#26, the following were noted:

• The Regional Office did not have adequate
controls over the maintenance of complete
records of accounts receivable, accounts
payable, or unearned revenue.  While the
Regional Office did maintain records to
indicate the balances of accounts
receivable, accounts payable, and unearned
revenue, no entries were provided to
reconcile the Regional Office of Education
#26’s grant activity, such as posting grant
receivables and unearned revenue.
• $6,239 of local revenue was misclassified
as State revenue in the General Fund Hancock
McDonough Alternative Schools account.
• Activity in the General Fund Apex account
was recorded in error in the Hancock
McDonough Alternative Schools account.
• Numerous material adjustments were needed
to make the financial statements comply with
generally accepted accounting principles.
According to the Regional Office of
Education #26’s management, current funding
levels were not adequate to hire and/or
train accounting personnel in order to
comply with these requirements. In addition,
staff changes contributed to bookkeeping
difficulties in the current year.  (Finding
2014-001, pages 11a-11b) This finding was
first reported in 2007.

The auditors recommended that, as part of
internal control over the preparation of
financial statements, the Regional Office of
Education #26 should implement comprehensive
preparation procedures to ensure that the
financial statements are complete and
accurate.  These procedures should be
performed by a properly trained
individual(s) possessing a thorough
understanding of applicable GAAP, GASB
pronouncements, and knowledge of the
Regional Office of Education #26’s
activities and operations.

The Regional Office of Education #26
responded that it accepts the degree of risk
associated with this condition because the
additional expense to seek outside
accounting expertise to prepare and/or
review financial statements would take away
from the funds available to provide
educational services for the schools in the
region.  The Regional Office also noted that
it will continue to work with the other
Regional Offices of Education to determine
the most effective method of ensuring that
its employees possess the knowledge required
to compile the necessary GAAP-based
financial statements.  The organization will
also research the possibility of having
another accounting company prepare its
financial statements independent of the
auditors.  (For previous Regional Office
response, see Digest Footnote #1.)

INADEQUATE INTERNAL CONTROL PROCEDURES

The Regional Superintendent of Schools is
responsible for establishing and maintaining
an internal control system over accounting
transactions to prevent errors and fraud.

Auditors noted the following weaknesses in
the Regional Office of Education #26’s
internal control system for which there were
no mitigating controls:

A. There is inadequate segregation of duties
over cash receipts.  Payments received by
check are given to the individual who
records them in the accounting system.  The
individual who records receipts should not
have physical custody of the receipts.

B. Cash balances were overstated by $9,192
due to incorrect transferring of cash from
one fund to another.  Cash transferred in
was recorded as revenue in the receiving
fund and not transferred out from the
transferring fund.

C. Seventeen of 24 (71%) journal entries
examined were not supported by adequate
documentation, and of these, auditors could
not determine the validity of 5 entries.
Fourteen of 24 (58%) journal entries
examined had no evidence of review by
someone independent of the general ledger
process.

D. Administration costs and the associated
reimbursing transfer of cash were recorded
as revenues and expenditures in both the
special revenue fund that incurred the cost
and in a general fund account from which
expenses were paid, resulting in double-
booking of revenues and expenditures.

E. Capital asset additions totaling $29,342
were miscoded and not initially included on
the Regional Office’s asset listing.

F. Two out of 13 (15%) deliveries of
inventory by employees of the Western Area
Purchasing Co-op to Co-op members lacked
adequate documentation.

G. The October 2013 to June 2014 bank
reconciliations did not agree to the general
ledger cash balances. In addition, none of
the bank reconciliations were performed and
reviewed in a timely manner.

H. Education for Homeless Children and Youth
grant funding of $6,145 that remained
unspent in the Adult Learning Resource
Center Fund and was due back to the grantor
at the end of FY2013 had not been returned
to the grantor at the end of FY2014.

I. Credit card receipt activity for several
funds was tracked separately outside the
accounting system and was not recorded in
the Regional Office’s general ledger.  The
bank reconciliation did not agree to the
general ledger cash balance in the
Fingerprinting Fund because cash receipt
activity in the bank account used to process
credit card payments was not recorded in the
Regional Office’s general ledger.

J. The Western Area Purchasing Co-op did not
perform a physical inventory count at year
end; rather, they perform a physical count
after most inventory has been delivered to
Co-op members and calculate the year-end
inventory value from supporting documents,
such as vendor invoices, shipping manifests,
and receipts of delivery to Co-op members.
These documents did not support the
inventory value reported by the Co-op.

The Regional Office of Education #26 has not
established or documented sufficient
internal control procedures. (Finding
2014-002, pages 11d-11g) This finding was
first reported in 2012.

The auditors recommended that the Regional
Office of Education #26 should do the
following:

A. The individual responsible for the cash
recording process should not be given
physical access to cash receipts.  An
individual independent of the recording
process should make cash deposits and verify
that the amounts recorded agree to deposit
records.

B. Interfund cash transfers should be
recorded in both the fund from which cash is
transferred and the fund into which it is
transferred.

C. All journal entries should be accompanied
by supporting documentation and have
documented review and approval by someone
independent of the general ledger processes.

D. Administrative costs should be recorded
in the fund that incurred the expenses.  The
associated transfer of cash to reimburse the
fund that paid the costs should be recorded
as an offset to the associated expenditure
account in the reimbursed fund, or this
activity should be recorded in an internal
service fund.

E. The Regional Office should establish
procedures to ensure their capital asset
listing is maintained in accordance with the
Regional Office’s capital asset policy.

F. To provide documentation of the Regional
Office’s internal controls over inventory,
the Western Area Purchasing Co-op employees
should obtain the Co-op member’s signature
on the packing slip or shipping manifest
when inventory is delivered to Co-op
members.

G. Bank balances should be timely reconciled
to the general ledger and any discrepancies
identified and corrected.

H. Absent an extension or permission from
the grantor to carry unspent funding forward
to the next grant period, any unspent grant
funds at the end of the grant period should
be returned to the grantor in a timely
manner.

I. All receipts of the Regional Office
should follow the established internal
control procedures governing processing,
support, and review of receipts.  Receipts
of restricted funding for special revenue
funds should be recorded in the appropriate
fund.  All cash balances should be recorded
in the general ledger, and all bank account
balances should be reconciled to the general
ledger.

J. The Western Area Purchasing Co-op staff
should perform a physical inventory count on
or near the fiscal year end or should
maintain adequate documentation to support
the calculated year-end value.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendation and will revise the
Regional Office’s policies, procedures
and/or practices to address the findings
noted as needed.  (For previous Regional
Office response, see Digest Footnote #2.)

INADEQUATE INTERNAL CONTROLS OVER
EXPENDITURES

The Regional Superintendent of Schools is
responsible for establishing and maintaining
an internal control system over accounting
transactions, including disbursements, to
prevent errors and fraud.

During testing, auditors noted the
following:

A. In 1 out of 14 (7%) credit card
statements examined, original receipts were
not attached and reconciled to the
statements.  In addition, purchases on three
of the credit card statements included sales
tax totaling $6.24.

B. A duplicate Distributive Fund payment of
$68,788 was made to the Western Area Career
System in error.

C. Prepaid FY15 expenditures totaling
$10,577 were erroneously expensed in FY14 in
the General Fund Apex, Regional Programs,
and Hancock/McDonough Alternative Schools
accounts.

D. FY13 expenditures totaling $3,641 were
not accrued in the Teaching American History
grant program in the prior year, and because
the grant ended last year, these costs had
to be paid from the General Fund in the
current year.

E. A mileage reimbursement was miscalculated
so that an employee was over reimbursed
$15.84 in the Child and Family Connections
program.

F. There was no indication that original
vendor invoices were reviewed and approved
when payment requests from the Western Area
Purchasing Co-op are submitted for payment.

The Regional Office of Education #26 has not
established or documented sufficient
internal control procedures over
expenditures. (Finding 2014-003, pages
11h-11i)

The auditors recommended that the Regional
Office of Education #26 should do the
following:

A. All original credit card receipts should
be reviewed, approved, and reconciled to
credit card statements prior to the credit
card statement being paid.  Staff members
who are authorized to make credit card
purchases should provide the Regional
Office’s tax-exempt certificate or number to
vendors to avoid paying sales tax on
purchases.

B. Supporting documentation for all
transactions should be maintained in such a
way that it can be timely located in the
event of any questions or disputes from
vendors, grantors, clients, or auditors
about their occurrence, amount,
classification, timing, or obligations.  In
addition, before replacing a lost or missing
check, the Regional Office should determine
whether that check has already been cashed.

C. The Regional Office should observe proper
cutoff and record expenses in the fiscal
year in which they were or will be incurred.

D. Expenditure reports should be reconciled
to the general ledger to ensure that all
expenditures incurred within the grant
period are reported for reimbursement.
Prior to year end, program directors should
review program activity for costs incurred
during the grant period, but not yet
invoiced, so that funds can be appropriately
obligated for reimbursement.

E. The Regional Office should design and
implement internal control procedures to
ensure that payments are reviewed for
accuracy.

F. Original vendor invoices should accompany
all payment requests, and review and
approval of the invoices for payment should
be documented.  The Regional Office should
retain a copy of all invoices approved for
payment in its accounting records.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendations and will revise
the Regional Office of Education’s policies,
procedures and/or practices to address the
findings noted as needed.

NONCOMPLIANCE WITH GRANT REQUIREMENTS

The Regional Office of Education #26 must
comply with grant accounting and reporting
requirements established by grant agreements
with the Illinois State Board of Education
(ISBE) and other grantors in addition to the
requirements established by ISBE’s fiscal
policies and procedures for grantees.  Among
these requirements are accurate, current,
and complete disclosure of grant financial
activity and an amended program budget if an
expenditure line item exceeds the budgeted
amount by the greater of $1,000 or 20%.

During testing, auditors noted the
following:

A. Expenditure reports submitted for the
Family Violence, Truants Alternative
Optional Education Program (TAOEP) 3695-13
and 3695-14, Child and Family Connections,
and Early Childhood 3705-01 and 3705-00
grant programs did not agree to the
expenditures recorded in the Regional
Office’s accounting records.

B. Expenditures for purchased services in
the Truants Alternative and Optional
Education Program exceeded the budgeted
amount by more than ISBE’s permitted
threshold; however, an amended budget was
not submitted to ISBE.

C. Activity for the Title II-Teacher Quality
Leadership program was recorded in the
General Fund rather than tracked separately
in a restricted fund.

The Regional Office of Education #26’s grant
expenditure reports and budgetary
comparisons were not prepared using
information obtained from the Regional
Office’s accounting system.  The Education
Fund accounts established for the Title II
grant were not used for tracking this
grant’s activity. (Finding 2014-004, pages
11j-11k)

The auditors recommended that the Regional
Office of Education #26 should do the
following:

A. Grant reports that disclose financial
information should be prepared using current
and accurate financial data based on reports
obtained from the Regional Office’s
accounting system.

B. Budgets should be amended and resubmitted
to the granting agency whenever expenditures
by line item exceed thresholds established
by the grantor.

C. All grant activity should be recorded
using a separate set of accounts that allows
management and program directors to monitor
compliance with grant restrictions that
funding be used only for specific purposes.

The Regional Office of Education #26
responded that it will review the current
auditors’ recommendations and will revise
the Regional Office’s policies, procedures
and/or practices to address the findings
noted as needed.

AUDITORS’ OPINION

Our auditors state the Regional Office of
Education #26’s financial statements as of
June 30, 2014 are fairly presented in all
material respects.

WILLIAM G. HOLLAND
Auditor General

WGH:KJM

AUDITORS ASSIGNED:  Kemper CPA Group LLP
were our special assistant auditors.

DIGEST FOOTNOTE

#1: CONTROLS OVER FINANCIAL STATEMENT
PREPARATION – Previous Regional Office
Response

In its prior response in 2013, the Regional
Office of Education #26 responded that it
accepts the degree of risk associated with
this condition because the additional
expense to seek outside accounting expertise
to prepare and/or review financial
statements would take away from the funds
available to provide educational services
for the schools in the region.  The Regional
Office also noted that it will continue to
work with the other Regional Offices of
Education to determine the most effective
method of ensuring that its employees
possess the knowledge required to compile
the necessary GAAP-based financial
statements.  The organization will also
research the possibility of having another
accounting company prepare its financial
statements independent of the auditors.

#2: INADEQUATE INTERNAL CONTROL PROCEDURES –
Previous Regional Office Response

In its prior response in 2013, the Regional
Office of Education #26 responded that it
accepts the current auditors’
recommendations and has revised
Hancock/McDonough Regional Office of
Education policies, procedures and/or
practices to address the findings noted.