REPORT DIGEST

REGIONAL TRANSPORTATION AUTHORITY – NORTHEASTERN ILLINOIS

FINANCIAL AUDIT AND FEDERAL SINGLE AUDIT
(In Accordance with the

Single Audit Act and
OMB Circular A-133)

For the Year Ended:

December 31, 2005

Summary of Findings:

Total this audit 1

Total last audit 0

Repeated from last audit 0

Release Date:

June 22, 2006

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

http://www.state.il.us/auditor

SYNOPSIS

In the audit of the Regional Transportation Authority (RTA), we noted a matter involving internal control over financial reporting and its operation that we consider to be a reportable condition. Specifically, the RTA did not have adequate internal controls over its Transit Benefit Program. Further, we noted certain other matters, which we have reported to management of the RTA in a separate letter.

This report digest covers our financial audit and federal single audit for the year ended December 31, 2005. Our performance audit and compliance attestation examination covering the RTA as directed by House Resolution Number 650 will be issued separately at a later date.

{Expenditures and Activity Measures are summarized on the reverse page.}

REGIONAL TRANSPORTATION AUTHORITY

FINANCIAL AUDIT AND FEDERAL SINGLE AUDIT

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

For The Year Ended December 31, 2005

(In Thousands)

STATEMENT OF ACTIVITIES	2005	2004
GOVERNMENTAL ACTIVITIES Program revenues: Operating grants and contributions......... Program expenses: Capital grants....................................... Financial assistance to Service Boards... Interest expense................................... Regional, administrative and technology.. Governmental activities, net (expenses)........ BUSINESS-TYPE ACTIVITIES Program revenues: Charges for services............................. Program expenses: Insurance financing............................... Business-type activities, net (expenses).. Program activities, net................. GENERAL REVENUES Public Transportation Fund.......................... State assistance.......................................... Sales taxes................................................. Investment income and other....................... Change in net assets...................	$ 55,118 277,130 222,328 126,027 26,276 651,761 (596,643) - 4,624 (4,624) (601,267) 175,668 111,419 105,059 25,842 417,988 $ (183,279)	$ 1,033 323,869 179,799 114,574 24,600 642,842 (641,809) - 5,319 (5,319) (647,128) 170,397 86,785 101,344 30,107 388,633 $ (258,495)
STATEMENT OF NET ASSETS	2005	2004
Cash and cash equivalents................................. Investments...................................................... Intergovernmental receivables........................... Unamortized bond issue cost.............................. Capital assets, net............................................. Other assets..................................................... Total assets................................................ General obligation bonds payable........................ Unamortized bond premium............................... Deferred revenue............................................. Intergovernmental payables............................... Other liabilities.................................................. Total liabilities................................................... Total net assets (deficit)....................................	$ 17,214 442,281 105,357 11,836 6,877 9,260 592,825 2,156,155 130,833 53,016 43,130 68,269 2,451,403 $(1,858,578)	$ 17,725 715,404 79,511 11,406 5,629 8,242 837,917 2,201,915 136,200 53,121 56,726 65,254 2,513,216 $(1,675,299)
AUTHORITY DIRECTOR
Executive Director: Stephen E. Schlickman

Transit vouchers issued on an annual basis are in excess of $50 million

A third party service provider is paid $1 million annually to administer the Transit Benefit Program

No SAS 70 Service Auditor’s Report was provided to provide some assurance internal controls were in place or operating effectively

Potential conflict of interest

Write down of $96,000 in transit voucher inventory

Transit-check account receivable was overstated $2.2 million

Expired transit checks were shred with no accounting for the numbers of the shredded documents

Reports were not adequate

INTRODUCTION

House Resolution Number 650, adopted October 27, 2005, directed the Office of the Auditor General to conduct financial, compliance, and performance audits of the Regional Transportation Authority (RTA). This report digest covers our financial audit and Single audit. Our performance audit and compliance attestation examination covering the RTA will be issued separately at a later date.

The Regional Transportation Authority (RTA) was established in 1974 upon approval of a referendum in its six-county Northeastern Illinois region. As originally established, the RTA was an operating entity responsible for providing day-to-day bus and rail transportation services. In 1983 the Illinois General Assembly reorganized the structure and funding of the RTA from an operating entity to a planning, funding and oversight entity. The reorganization placed all operating responsibilities in the Chicago Transit Authority (CTA) and two operating divisions of RTA: Commuter Rail Division (Metra) and the Suburban Bus Division (Pace), each having its own independent board of directors. These three entities are defined by the Act as the “Service Boards”.

FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

INADEQUATE INTERNAL CONTROL OVER TRANSIT BENEFIT PROGRAM

The Authority did not have adequate internal controls over its Transit Benefit Program.

The Authority administers a Transit Benefit Program whereby businesses can provide their employees an opportunity to purchase transit vouchers for transit fares on a pre-tax basis. Businesses purchase the transit vouchers from RTA then resell transit fare to employees on a pre-tax basis. The volume of transit vouchers issued on an annual basis is in excess of $50 million.

The Transit Benefit Program is not meant to generate profits for the RTA. It is a “break even” service provided by the RTA to facilitate transit in the region. Accordingly, the accounting for the Transit Benefit Program is primarily a “pass-through” to the service boards with no significant impact on the income or expenses of the Authority. The only income generated from the program is when transit vouchers expire after 13 months. At that time expired transit vouchers are no longer considered a liability and are recognized as income. A third party service provider is paid $1,000,000 annually to administer the Transit Benefit Program. All internal staff costs of administering the program are charged to RTA operations and are not separately identified.

During our audit testing we noted several internal control issues relating to the Transit Benefit Program including:

The third party service organization did not have a SAS 70 Service Auditor’s Report to provide some assurance that internal controls are in place and operating effectively and the RTA did not perform any testing of the internal controls of the service organization.
In an apparent conflict of interest, the third party service organization acts as an administrator of the program for some companies purchasing the transit checks and cards.
During our audit of the account balances relating to the Transit Benefit Program there was a write down of approximately $96,000 in the ending balance of transit voucher inventory. The cause of this problem is unknown and is currently being investigated by the RTA.
The transit-check liability was understated by approximately $200,000 and the transit-check account receivable balance was overstated by $2.2 million. An audit adjustment was necessary to correct the financial statements. It appears from the limited audit evidence available to date that this misstatement arose from a lack of control over the processing of expired transit checks by the internal Transit Card Department. Essentially, it appears that RTA has been recognizing income for expired transit vouchers that have been subsequently paid or replaced.
The policy in effect during the audit period permitted the RTA to “shred” expired transit checks with no accounting for the numbers of the shredded documents. Accordingly, if a voucher were not shredded, it could be subsequently presented and honored as if it were cash. This would not be detected by current procedures at RTA.

The Authority’s management stated that it receives inadequate reports from the service organization, the bank and the internal Transit Card Department. The reports received were difficult to reconcile due to timing differences and a lack of coordination among the three entities. The entries made by the RTA Controller Department are based on assumptions of other account activities. (Finding 1, pages 9-10)

We recommended that internal control testing be performed at the third party service organization. The RTA should coordinate with the third party service organization and the bank to implement procedures to provide the Controller Department with relevant and reliable information for proper recording and reconciliation of transactions relating to the Transit Benefit Program.

RTA officials accepted our recommendation and stated that arrangements have been made to perform internal control testing at the third party service organization and that it should coordinate with the third party service organization and the bank to implement procedures to improve proper recording and reconciliation of transactions relating to the Transit Benefit Program.

OTHER FINDINGS

We noted certain other matters, which we have reported to RTA management in a separate letter.

AUDITORS’ OPINION

The auditors stated the financial statements for the Regional Transportation Authority as of and for the year ended December 31, 2005 are fairly presented in all material respects.

____________________________________

WILLIAM G. HOLLAND, Auditor General

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AUDITORS ASSIGNED

McGladrey & Pullen, LLP were our special assistant auditors for this audit.