REPORT DIGEST

REGIONAL OFFICE OF EDUCATION #56: WILL COUNTY

Financial Audit (In Accordance with the Single
Audit Act and OMB Circular A-133)
For the Year Ended June 30, 2014

Release Date:  March 26, 2015

FINDINGS THIS AUDIT:  3

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 2 -- 2
Category 2:  0 -- 0 -- 0
Category 3:  1 -- 0 -- 1
TOTAL:  1 -- 2 -- 3

FINDINGS LAST AUDIT: 3

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 #56
did not have sufficient internal controls over
the financial reporting process.

• (14-2) The Regional Office of Education #56
did not report payroll according to IRS
regulations.

• (14-3) The Regional Office of Education #56
did not comply with statutory requirements for
the Institute Fund.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS


CONTROLS OVER FINANCIAL STATEMENT PREPARATION

The Regional Office of Education #56 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 #56 did not
have sufficient internal controls over the
financial reporting process.  The Regional
Office maintains its accounting records on the
cash basis of 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 #56’s financial information prepared
by the Regional Office, auditors 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
#56’s grant activity, such as posting grant
receivables.

According to Regional Office officials, they
did not have adequate funding to hire and/or
train their accounting personnel in order to
comply with these requirements.  (Finding
2014-001, pages 13a-13b) This finding was
first reported in 2010.

The auditors recommended that, as part of its
internal control over the preparation of
financial statements, the Regional Office of
Education #56 should implement comprehensive
preparation procedures to ensure 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 #56’s activities and
operations.

The Regional Office of Education #56 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 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. (For previous Regional Office
response, see Digest Footnote #1.)

PAYROLL REPORTING

Internal Revenue Code Regulation §31.3121(d)-1
establishes that an individual is an employee
if the person for whom the services are
performed has the right to control and direct
the individual who performs the services, not
only as to the result to be accomplished by
the work but also as to the details and means
by which that result is accomplished.  Revenue
Ruling 87-41 further establishes the 20-factor
common law test for employment status, which
looks at attributes such as instruction,
training, integration, services rendered
personally, hiring/supervision/paying
assistants, continuing relationship, set hours
of work, full time required, doing work on the
employer’s premises, order or sequence test,
oral or written reports, payment by the
hour/week/month, payment of business and/or
travel expenses, furnishing tools and
materials, significant investment, realization
of profit/loss, working for more than one firm
at a time, making services available to the
general public, right to discharge, and right
to terminate.

In an effort to provide further guidance on
this matter, the Internal Revenue Service
(IRS) recently revised the 20-factor common
law test for determining the proper
classification of workers between independent
contractors and employees by condensing the
prior 20 factors into eleven main tests and
organizing those tests into three main groups:
1) behavioral control; 2) financial control;
and 3) the type of relationship of the
parties. These three groups and corresponding
tests are further detailed in IRS Publication
15-A.

During testing, auditors noted the following:

• An employee of the Regional Office was also
paid as an independent contractor for
accounting and clerical services related to
the McKinney Education for Homeless Children
grant.

• The program director of the McKinney
Education for Homeless Children grant is being
treated as an independent contractor; however,
under the current IRS tests, this individual
should be classified as an employee for the
following reasons:

1. Behavioral control group:  the Regional
Office provides instructions to the program
director by dictating when and where the grant
will be administered, hiring all personnel
that work on the grant, and providing the
supplies, equipment, and location that the
grant will utilize during its administration.

2. Financial control group: there is no
significant investment of resources by the
program director other than time spent working
on the grant.

3. Type of relationship group:  the program
director is providing a service (grant
administration) that is a key aspect of the
Regional Office’s regular business.  All other
program directors that work for the Regional
Office are classified as employees rather than
independent contractors.  In addition, the
enacted contract with the program director
included a covenant not to compete clause,
restricting employees from seeking employment
with other organizations during their duration
of employment with the Regional Office.

The Regional Office of Education #56 believed,
based on IRS rules and regulations governing
the classification of employees and
independent contractors, the individuals
tested were considered to be independent
contractors.  (Finding 2014-002, pages
13c-13d)

The auditors recommended that the Regional
Office of Education #56 should develop
policies and procedures, such as completing
IRS form SS-8, Determination of Worker Status
for Purposes of Federal Employment Taxes and
Income Tax Withholdings for all employees, to
ensure that all IRS rules and regulations are
followed with regard to employee
classification and that the appropriate
payroll taxes are withheld and remitted to the
proper federal and State authorities.

The Regional Office of Education #56 responded
that it has implemented the auditor’s
recommendation.  As of November 1, 2014, the
employees identified above have been
classified as Regional Office grant employees
and all related payroll taxes have been
withheld and remitted to the federal and state
authorities.

CONTROLS OVER INSTITUTE FUND EXPENDITURES

The Illinois School Code 105 ILCS 5/3-12
states that all certificate registration fees
and a portion of renewal and duplicate fees
shall be used by the Regional Superintendent
to defray expenses connected with improving
technology necessary for the efficient
processing of certificates, to defray all
costs associated with the administration of
teaching certificates, and to defray expenses
incidental to teachers’ institutes, workshops
or meetings of a professional nature that are
designed to promote the professional growth of
teachers or for the purpose of defraying the
expense of any general or special meeting of
teachers or school personnel of the region,
which has been approved by the Regional
Superintendent.

The Regional Office of Education #56 expended
$2,622 of funds generated from certification,
renewal, and duplicate fees for two student
field trips.

According to the Regional Office of Education
#56, it was unaware that these purchases were
not made in accordance with the Illinois
School Code 105 ILCS 5/3-12.  (Finding
2014-003, page 13e)

The auditors recommended that the Regional
Office of Education #56 should ensure that
funds generated from certification, renewal,
and duplicate fees are expended in accordance
with the Illinois School Code 105 ILCS 5/3-12.
Additionally, the Institute Fund should be
reimbursed from other Regional Office sources
of funds for the unallowable expenditures.

The Regional Office of Education #56 responded
that it will ensure that funds generated from
certification, renewal, and duplicate fees are
expended in accordance with the Illinois
School Code 105 ILCS 5/3-12.  The Institute
Fund will be reimbursed from other Regional
Office of Education #56 funds.

AUDITORS’ OPINION

Our auditors state the Regional Office of
Education #56’s financial statements as of
June 30, 2014 are fairly stated 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 #56 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 noted that
it will continue to work with the other
Regional Offices of Education to determine the
most effective method of ensuring that their
employees possess the knowledge required to
compile the necessary GAAP based financial
statements.