The Illinois Racing Board was created by the Illinois Horse Racing Act of 1975. The primary function of the Board is the regulation of horse racing in Illinois. Effective June 1, 2003, Executive Order Number 9 (2003) transferred all powers, duties, rights and responsibilities vested in the Illinois Racing Board to the Illinois Department of Revenue. As a means of easing the transition of the Illinois Racing Board into the Department of Revenue, management decided to report activity of the Illinois Racing Board through the fiscal year ended June 30, 2003.

The Board did not perform audits of major systems of internal accounting and administrative controls at least once every two years as required by State law.

During our audit testing, we noted that 7 major areas had not been audited within the last two years.

The Fiscal Control and Internal Auditing Act (30 ILCS 10/2003) requires that all major systems be reviewed at least once every two years. (Finding 1, pages 11-12)

We recommended that the successor agency (Department of Revenue) ensure that the internal auditor complete audits of its major systems of internal accounting and administrative controls once every two years.

The Board agreed with the recommendation and stated that pursuant to Executive Order 2003-10, all state agencies’ internal audit functions will be consolidated into the Department of Central Management Services (CMS). All Board internal auditing will now be performed under the direction and supervision of the consolidated CMS, Office of Internal Audits.

The Board did not have adequate controls over equipment record keeping, reporting and proper approval of equipment purchases. There is also a lack of segregation of duties over equipment purchases.

We noted the property control officer was not always aware of new equipment purchases. Purchase orders were not forwarded to the property control officer to inform the employee of impending new purchases. Property was not timely entered on the property records. In addition, the fiscal officer, in some instances, ordered, received, recorded and approved equipment purchases. This process does not allow for an adequate segregation of duties. (Finding 2, pages 13-15)

We recommended that the successor agency (Department of Revenue) allocate sufficient staff to ensure equipment purchases are timely and accurately added to the equipment records. We further recommended the Board properly segregate the duties for equipment purchases and that there is timely notification of equipment purchases to the property control officer.

The Board accepted our recommendation and stated that in accordance with Executive Order 2003-9, effective June 1, 2003, the Illinois Racing Board was consolidated into the Illinois Department of Revenue and that they will utilize the same inventory control procedures and mechanisms that are in place at the Illinois Department of Revenue.

The Board did not have adequate control over payroll expenditures.

During our review of payroll vouchers we noted the Board did not ensure that there were proper segregation of duties in the preparation and the approval of payroll vouchers. One employee input payroll vouchers and also approved payroll vouchers for payment.

We also noted that the same employee who approved three out of twelve payroll vouchers that were tested, was overpaid $2,322. In May 2003, the employee was paid for four sick days, totaling approximately $827, for which no accrued sick time was available. In addition, this employee took a leave of absence from the Board and filed a worker’s compensation claim, but was still paid for eleven days of work during that same period totaling approximately $1,495. (Finding 6, Pages 23-24)

We recommended that the successor agency (Department of Revenue) ensure that all payroll vouchers are properly reviewed and approved. In addition, we recommended that the successor agency recover the overpayments inappropriately made.

The Board accepted this finding and recommendation and stated that the Illinois Department of Revenue is currently performing all Board payroll functions.

The Board did not obtain reviews of the computerized totalisator systems used at racetracks under the Board’s jurisdiction. Without a third party audit, the Board does not have complete assurance that the controls necessary to prevent errors or irregularities from occurring are established and are operating effectively at all times.

According to the Board's Annual Report, the totalisator systems calculated total calendar year wagers of $1.13 billion for 2002. Of the total wagers, combined State and local government tax revenues received were approximately $26 million for calendar year 2002.

Totalisator systems are the means for the racetracks to accept bets and cash winning tickets. These systems also are the Board’s primary source of information for monitoring tax revenues. The totalisator systems vendors have the responsibility to ensure that all processing is complete and accurate.

The Auditing Standards Board (ASB) issued statement no. 70 (AU 324) entitled "Reports on the Processing of Transactions by Service Organizations". This standard provides guidance in a number of areas including internal controls. A service organization is an entity (like a totalisator company) which provides services to a user entity (like the Board). In this case, totalisator company transactions affect the Board's financial reporting, however, policies and procedures of totalisator companies are physically and operationally separate from those of the Board.

When a totalisator company executes the Board's transactions it maintains the related accountability. Consequently, there is a lower degree of interaction between both organizations (service organization and user organization). Since it is not practical for the Board to implement effective internal control structure policies and procedures for transactions processed by totalisator companies the Board should obtain an independent review of the internal controls of each totalisator company it is doing business with.

The Illinois Horse Racing Act of 1975 vests the Board with the power to prescribe reasonable rules and regulations to provide for the prevention of practices detrimental to the public and to promote the best interest of racing. (Finding 7, pages 25-28)

We recommended that the Board require that each of the totalisator system vendors, as a requirement for licensure, engage independent auditors to perform an annual independent SAS 70 review on their controls placed in operation and the tests of their operating effectiveness

&#Board management accepted the recommendation but disagreed with the finding. Board officials stated that they conditioned both totalisator vendors’ 2003 licenses by requiring an audit and/or third party review of the applicants totalisator systems. The Board received independent reviews from both totalisator vendors satisfying the conditions of its license.

In an auditor comment we acknowledged that the Board did receive reports from independent auditors for both totalisator vendors, however, the reports were received solely as a result of the 2002 Breeder’s Cup incident. The reports were classified as confidential and are not available for public inspection. Furthermore, both reports were limited scope reviews and did not cover all aspects that an independent SAS 70 report would entail.

Board employees are simultaneously signing "in" and "out" on their timesheets at their time of arrival.

During our testing of per diem racetrack employees, it was noted that some of these employees are signing out for their departure time when the work day begins. Four out of seven employees signed out before the work day ended. One employee had not signed out but her normal time worked was approved by her supervisor. The Department Supervisor approved the timesheets when the work day began.

Board employees stated that the office where the sign in sheets are located is at the opposite end of the track where they perform their duties and it is inconvenient to go back to the office to sign out. (Finding 8, Page 29)

We recommended the Board have employees sign out at the end of their work day. The supervisors should approve the time worked only after the work day is completed.

Board officials accepted the finding and recommendation.

The remaining findings are less significant and are reportedly being given attention by the Board. We will review the Board’s progress toward the implementation of our recommendations in our next audit of the Department of Revenue.

Ms. Shelley Kalita, General Counsel/Director of Administration of the Illinois Racing Board, provided the Board’s responses.

We conducted a compliance audit of the Illinois Racing Board for the year ended June 30, 2003 as required by the Illinois State Auditing Act. We have not audited any financial statements of the Board for the purpose of expressing an opinion because the Board does not, nor is it required to, prepare financial statements.

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WILLIAM G. HOLLAND, Auditor General

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McGreal, Johnson, and McGrane were our special assistant auditors for this audit.