REPORT DIGEST DEPARTMENT OF REVENUE FINANCIAL
AUDIT AND COMPLIANCE
EXAMINATION For the Year Ended: June 30, 2004 Summary of Findings: Repeated from last audit 3 Release Date: May 4, 2005
State of Illinois Office of the Auditor General WILLIAM G. HOLLAND AUDITOR GENERAL
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SYNOPSIS ¨ The Department made payments for efficiency initiative billings from improper line item appropriations. The Department paid a total of $7,687,709 for efficiency initiative billings. ¨ The Department has not performed proper monitoring of a major contract with an outside vendor. ¨ The Department operated a “prize closet” containing electronics and other merchandise donated by broadcasting stations without maintaining proper documentation and accountability. ¨ The Department has not adequately segregated duties for Lottery investments and Lottery cash receipts and disbursements of locally held funds. ¨ The Department does not perform a complete reconciliation of its investment portfolio to the total amount owed to Lottery Prizewinners. ¨ The Department has not implemented various automated reconciliation and cross-match procedures to ensure that information included in certain automated systems reconciles to other Department information system records or data available externally. ¨ The Department does not have an efficient electronic system to track cases/taxpayer correspondence it receives. ¨ The Department’s Withholding Income Tax System is not efficient in regard to liabilities that can be offset by credits.
{Expenditures and Activity
Measures are summarized on the next page.} |
DEPARTMENT OF REVENUE
EXPENDITURE STATISTICS |
FY 2004 |
FY 2003 |
|
(in thousands) |
|
! Total Expenditures (All Funds)........................................... |
$7,955,664 |
$7,004,147 |
OPERATIONS
TOTAL.......................................................... % of Total Expenditures..................................................... |
$233,531 2.94% |
$174,574 2.49% |
Personal Services................................................................ % of
Operations Total Expenditures.................................. Average
Number of Employees........................................ |
$117,593 50.36% |
$114,299 65.47% 2,032 |
Other Payroll Costs (FICA,
Retirement)............................... % of
Operations Total Expenditures.................................. |
$31,537 13.50% |
$28,577 16.37% |
Contractual Services........................................................... % of
Operations Total Expenditures.................................. |
$41,267 17.67% |
$14,108 8.08% |
All Other Operations Items.................................................. % of
Operations Total Expenditures................. |
$43,134 18.47% |
$17,590 10.08% |
|
|
|
AWARDS
& GRANTS, REFUNDS TOTAL.......................... % of Total Expenditures..................................................... |
$4,066,930 51.12% |
$3,701,139 52.84% |
NON-APPROPRIATED
FUNDS........................................... % of Total Expenditures..................................................... |
$3,655,203 45.94% |
$3,128,434 44.67% |
! Total Deposits Remitted to the State Treasury |
$27,221,961 |
$24,186,482 |
Income Taxes......................................................................... % of Total Revenues......................................................... |
$10,667,656 39.19% |
$9,749,850 40.31% |
Sales Taxes............................................................................. % of Total Revenues......................................................... |
$10,155,179 37.30% |
$9,710,785 40.15% |
Motor Fuel
Taxes.................................................................... % of Total Revenues......................................................... |
$1,352,198 4.97% |
$1,324,820 5.48% |
Public
Utilities Taxes............................................................... % of Total Revenues......................................................... |
$1,705,742 6.27% |
$1,558,662 6.44% |
Other
Collections..................................................................... % of Total Revenues.......................................................... |
$3,341,186 12.27% |
$1,842,365 7.62% |
!
PROPERTY AND EQUIPMENT at June 30, |
$29,733 |
$23,633 |
!
SELECTED ACCOUNT BALANCES at June 30, Taxes
Receivable.................................................................. Allowance for Uncollectible Taxes......................................... Net Taxes Receivable........................................................ |
$1,966,841 (753,464) $1,213,377 |
$1,757,167 (687,757) $1,069,410 |
! DEPARTMENT
DIRECTOR(S) During Audit Period: Brian A. Hamer Currently: Brian A. Hamer |
Department did not
receive guidance or documentation with the billings from CMS
Efficiency initiative
payments totaled $7,687,709 Proper monitoring not
performed on major contract
Vendor payments made
using estimates 13 invoices totaling
$2.1 million tested lacked the appropriate supporting documentation
Vendor did not submit
the required end-of-year detailed accounting Lottery solicits donations from broadcasting
stations from which Lottery purchased advertising Hard goods utilized as incentives to create
excitement and rewards
Lottery received over
1,000 individual items from broadcasting stations for the “prize closet” as
part of the Fall 2003 solicitation Perpetual inventory
maintained 8 instances where the Department could not provide
evidence reflecting ultimate recipient
Lottery personnel received incentives as part of
Lottery promotional activities Recommendation Department officials state they have suspended
practice of soliciting or receiving hard goods and have returned related
items in their possession
Many accounting
functions of the Lottery are assigned to one individual $32 million discrepancy Lottery Prizewinner
system and Lottery Prizewinner investment system have never been reconciled
to each other in total
Two independent systems
should balance
1 of 20 prizewinners
selected for review reflected a $400,000 discrepancy
Additional automated
reconciliation and cross-match procedures should enhance the process to
collect taxes owed to the State
Six different inventory
systems used to track cases/taxpayers correspondence WIT System is not effective or efficient due to the
additional resources utilized to review accounts that could be offset by
credits |
FINDINGS, CONCLUSIONS, ANDRECOMMENDATIONS PAYMENTS WERE MADE FOR EFFICIENCY INITIATIVE BILLINGS FROM IMPROPER
LINE ITEM APPROPRIATIONS
The Department made payments for efficiency initiative billings from improper line item appropriations. Public Act 93-0025, in part, outlines a program for efficiency initiatives to reorganize, restructure, and reengineer the business processes of the State. The State Finance Act details that the amount designated as savings from efficiency initiatives implemented by the Department of Central Management Services (CMS) shall be paid into the Efficiency Initiatives Revolving Fund. The Act further requires State agencies to pay these amounts from line item appropriations where cost savings are anticipated to occur. The Department did not receive guidance or documentation with the billings from CMS detailing from which line item appropriations savings were anticipated to occur. The Department is uncertain if any FY04 savings were achieved since CMS has not provided any such information to the Department. The only guidance received was the amount of payments that should be taken from General Revenue Funds versus other funds for the September 2003 billings. The Department made payments for billings not from line item appropriations where the cost savings were anticipated to have occurred but from line items that simply had available monies from which to make payments. The Department used: · $3,207,000 from appropriations made by the General Assembly from the Motor Fuel Tax Fund (Fund #0012) to make part of the payments for invoices relative to savings from the Procurement and Information Technology Efficiency Initiatives. · $4,236,452 from personal services line item appropriations from multiple divisions to make payments for the four CMS billings – Vehicle Fleet Management Initiative (the entire $75,308 billing), Procurement Efficiency Initiative, Information Technology and Facilities Management Initiatives. A Department official explained that a quick analysis of where the payments could be afforded by the Department was the basis for using personal services appropriations. · $15,200 of appropriations from the Underground Storage Tank Fund (Fund #0072) to make payments for the Procurement Efficiency Initiative. · $20,000 from an appropriation for Group Insurance from the State Gaming Fund (Fund #0129) to make payments for the Procurement Efficiency Initiative. · $200 from an appropriation from the Tobacco Settlement Recovery Fund (Fund #733) to make part of the payment for the Procurement Efficiency Initiative. The Department paid a total of $7,687,709 for the efficiency initiative billings. (Finding 1, pages 13-17) We recommended that the Department only make payments for efficiency initiative billings from line item appropriations where savings would be anticipated to occur. Further, the Department should seek an explanation from the Department of Central Management Services as to how savings levels were calculated, or otherwise arrived at, and how savings achieved or anticipated impact the Department’s budget. Department officials accepted our finding and recommendation and stated they will make future savings payments from appropriations lines for which it anticipates obtaining savings. NEED TO IMPROVE CONTRACT MONITORING The Department has not performed proper monitoring of a major contract with an outside vendor. The Department entered into an agreement for advertising with an outside vendor. The amount of the contract was approximately $10 million. The contract permits billing for media based upon estimates with the vendor submitting final detailed bills as soon as possible after the actual expense is incurred. The contract also calls for the vendor to submit a detailed analysis at the end of the year so that there is an adequate accounting of the estimates billed versus actual amounts incurred. Throughout the contract period, numerous estimated media bills were submitted and paid in a timely fashion. These bills contained certain approvals for processing voucher payments. However, actual invoice amounts, which were later submitted, lacked adequate details. Our testing indicated out of 20 invoice vouchers selected for detail testing, 13 did not have appropriate supporting documentation provided in a timely basis. Approximately $2.1 million out of $3.0 million tested could not adequately be supported with the information on the invoice from the vendor. Further, the vendor did not submit the required end-of-year detailed accounting. (Finding 7, pages 27-28) We recommended that the Department adhere to established internal controls and contractual provisions in reviewing and authorizing invoices for payment. Also, the Department should require vendors to submit sufficient documentation to support billings and the Department should maintain that documentation for any subsequent review. Further, with regard to the marketing contract, the Department should reconcile payments to any supporting documentation and seek reimbursement from the vendor for payments that are not adequately supported. Department officials accepted our finding and recommendation and stated that they will adhere to internal controls and contractual provisions in reviewing and authorizing invoices for payment. Moreover, the Department has implemented numerous procedures to thoroughly review the outside vendor invoices and to ensure proper payments. LOTTERY’S USE OF INCENTIVE PROGRAMS NEED IMPROVEMENT The Lottery operated a
“prize closet” containing electronics and other merchandise donated by
broadcasting stations without maintaining proper documentation and accountability. During this engagement it came to our attention that the Lottery has operated a “prize closet” dating back to1989 and possibly longer. We noted that in the fall of 2003, Lottery’s then general marketing contractor was directed by Lottery to solicit donations of ‘hard goods” from broadcasting stations from which Lottery purchased advertising. Acceptable “hard goods” were defined as “electronics (televisions, sound systems, MP3 players, etc.), travel/entertainment (airline ticket vouchers, hotel packages) or gift certificates from statewide retailers.” According to the letter sent to broadcasting stations requesting the donations, “these hard goods will be utilized as incentives to create excitement and rewards within the Lottery’s team of dedicated employees.” As a result of the fall 2003 solicitation, Lottery received over 1,000 individual items which were placed into a “prize closet.” Donations included gift certificates to restaurants and electronic stores, DVD’s and CD’s and video game systems. Receipts of donations to the prize closet continued through December 4, 2004 when the Director of Revenue made a decision to stop the “prize closet” operation associated with the Lottery operations. Lottery maintained a perpetual inventory of items placed in and removed from the prize closet. When items were removed from the prize closet, a request form showing the date, the item, the person requesting the item and the recipient of the item were completed. In eight instances, the Department could not provide evidence reflecting who the ultimate recipient was. Department officials indicated that Lottery personnel did, in fact, receive incentives as part of promotional activities associated with the Lottery. However, the Department maintained that during this audit period, the incentive awards were not made from the prize closet but, rather, were purchased by the Lottery’s advertising and public relations agencies for this purpose and the value of those incentives were included in each recipient employee’s W-2 wage reporting. (Finding 9, pages 30-31) We recommended the Department maintain appropriate records on distributions from the prize closet or through other incentive programs. We further recommended the Department follow State property laws and regulations for any items placed into or taken from the prize closet or otherwise received from vendors and distributed to employees, agents and others. Finally, the Department should establish clear legal authority for, and follow rules pertaining to, the distribution of items of value received from Lottery vendors. Department officials stated that they have suspended the practice of soliciting or receiving hard goods in conjunction with media buys, and have returned related items in their possession. In the future, if the Lottery resumes this practice, the Lottery will maintain appropriate records and will follow the State Property Control Act (30 ILCS 605/1 et. seq.) and regulations promulgated there under (44 Ill. Adm. Code Part 5010). The Department will also obtain a legal opinion from General Counsel and CMS as to the appropriateness of establishing clear legal authority for, and follow rules pertaining to, the receipt and distribution of items of value received from Lottery vendors. Also, if the “incentive” practice is re-established, procedures will be established that require the Lottery retailer (or in the case of an approved employee incentive program, the receiving employee) sign for the award and that the signed receipt be returned to Lottery Central to supplement inventory records. SEGREGATION OF DUTIES NOT ADEQUATE The Department has not adequately segregated duties for Lottery investments and Lottery cash receipts and disbursements of locally held funds. The Lottery takes in revenues in excess of $1.7 billion annually, makes disbursements for operating purposes of $1.1 billion and is responsible for managing investments and other assets in excess of $1.2 billion. Many of the accounting functions of the Lottery are assigned to one individual. The following functions relating to Lottery investments are all performed by the Lottery Division’s Manager of Financial Accounting:
The following functions relating to Lottery cash receipts and disbursements for locally held funds are all performed by the same individual noted above: · Receipt of activity reports from independent third party, private company responsible for administering Lottery operations · Summarize activity for Lottery receipts and disbursements · Record in the Lottery general ledger Lottery revenues earned and receivables from Lottery agents · Record in the Lottery general ledger payments to certain winners, Lottery agents, and vendors · Authorize certain payments to Lottery agents and vendors · Transfer funds to execute certain payments (Finding 2, pages 18-19) We recommended, in order to strengthen controls, that conflicting duties be identified and appropriate changes in procedures be made to ensure an adequate segregation of duties.
Department
officials accepted our finding and recommendation and stated that certain
changes with respect to segregation of duties were made prior to the close of
the audit period. Additional transfers of duties have
occurred during
AMOUNTS
OWED TO LOTTERY PRIZEWINNERS NOT RECONCILED TO INVESTMENT PORTFOLIO The Department does not perform a complete reconciliation of its investment portfolio to the total amount owed to Lottery Prizewinners. As of June 30, 2004, the total amount owed to Lottery Prizewinners was $1.202 billion and the total amount of the investments for the Lottery Prizewinner’s Fund was $1.234 billion (par value) leaving a discrepancy of $32 million. The amount owed to Lottery Prizewinners should equal the amount of investments that have been purchased and set aside to pay Lottery Prizewinners. The records for the amounts due to Lottery Prizewinners are kept in one computerized system and the records of the Lottery Prizewinner’s investments are kept in another separate computerized system. The Department has established procedures to ensure data entered into each system is in balance at the time of data entry. The procedures include assurances that investments purchased for Lottery Prizewinners match the amount owed according to the winning jackpot. The Department also has procedures in place to ensure both systems are in balance when a payment is being made. These reconciliations only involve individual transactions, however, not the entire system. These two independent systems have never been reconciled in total. If the designated procedures for balancing receipts and disbursements are followed properly, the two independent systems should be in balance. During the current audit period, we performed a sample reconciliation of amounts owed to 20 separate prizewinners. We compared their signed winning certification statements and the actual winning tickets to the amount of investments that have been specifically acquired and earmarked for their benefit. One exception dating back to 1998 was noted out of the 20 items tested. For this particular exception, the winning ticket called for a total winning jackpot amount of $26.0 million, however, the investment records indicated that $25.6 million in investments had been acquired and earmarked for this individual, a discrepancy of $400,000. (Finding 6, pages 25-26) We
recommended the Department perform a 100% reconciliation of all active
prizewinners to ensure adequate funds have been obtained and earmarked for
every prizewinner that still has funds due from the Lottery. This reconciliation should further ensure
that all amounts due to prizewinners according to their signed statements and
winning tickets agree to the investments that have been earmarked for each
winner. The Department should adopt
procedures to perform the reconciliation of these two systems on a regular
basis. Department officials accepted our finding and recommendation and stated that they will conduct an annual, manual reconciliation of the investment records maintained electronically by the Finance Division and the Claims Unit. By July 31, 2005, procedures will be developed to perform this reconciliation on an annual basis. NEED TO IMPLEMENT INFORMATION SYSTEM RECONCILIATION PROCEDURES The Department has not implemented various automated reconciliation and cross-match procedures to ensure that information included in certain automated systems reconciles to other Department information system records or data available externally. During a review of the Department’s internal audit reports, we noted the following: · The Department is not entering all the data that is received to allow it to accurately verify certain tax information from individual taxpayers or businesses. · The Department has not performed a reconciliation or cross-match between certain tax information available internally to tax information available externally for individuals who only report wages on the individual’s tax return or have not filed a tax return, but have received wages from an employer. · The Department has not performed additional reconciliations and cross-matching between the Department’s Withholding Income Tax and Individual Income Tax and Business Income Tax systems in order to realize associated compliance benefits. (Finding 10, page 32-33) This finding was first reported in 2003. Internal controls could be enhanced if the Department entered additional tax information into its systems to allow automated cross-match and reconciliation procedures. These measures should enhance the process to collect taxes owed to the State. We recommended the Department perform additional information system reconciliations and cross-matches and take appropriate action to ensure the Department collects tax revenues that are owed to the State. Department officials accepted our recommendation and state that in the process of administering the Illinois Tax Code, the Department verifies and cross matches the information that taxpayers provide on their returns with a number of outside data sources, including the Department of Employment Security, the IRS, the State Board of Education, Social Security Administration, and Departments of Professional Regulation and Public Aid, as well as with information previously provided to the Department of Revenue. (For previous agency response, see Digest Footnote #1.) INEFFICIENT
TRACKING OF CASES/TAXPAYER CORRESPONDENCE The
Department does not have an efficient electronic system to track
cases/taxpayer correspondence that it receives and maintains. During a review of the Department’s
internal audit reports, we noted that the Department's Individual Income Tax
Division utilized six different inventory systems to track cases/taxpayer
correspondence. The Department’s
tracking of cases/inventory is not effective due to the following: ·
The
true aging of accounts is difficult to determine when inventory is closed on
one system and set-up on another system.
The aging of the correspondence starts over every time it is moved to
a new inventory system. ·
Movement
of cases between areas requires closure on one inventory system and set-up on
another inventory system. This means
that employees must re-enter all information in the new system. ·
The
Department must look in several inventory systems to find a case file or
taxpayer correspondence. ·
Information
services must maintain several different systems. ·
Employees
must be trained on different systems and given access to several different
systems. ·
Management
must review several different inventory reports. (Finding 11, page 34-35) This finding was first
reported in 2003. Department personnel indicated
that a Tax Response Monitoring system has been selected to be upgraded to
take over all of the functions of the other five inventory systems. The Department, however is still in the
process of implementing this system. We
recommended the Department continue their progress in the development of an
inventory system that can track cases/taxpayers correspondence from the time
it is received by the Department until it is set up in the collection process
or sent to files. Department
officials accepted our recommendation and stated that they continue to make
significant progress toward total implementation of TRM as a processing-wide
inventory/tracking system for IIT. (For previous
agency response, see Digest Footnote #2.)
NEED
TO MODIFY SYSTEM TO ALLOW CREDIT OFFSETS The
Department’s Withholding Income Tax (WIT) System is not efficient in regard
to liabilities that can be offset by credits. During our review of the Department’s internal audit reports,
we noted that the WIT System allows for individual accounts to be sent to the
Illinois Collection System (ICS) even though the individual accounts have
outstanding credits. These credits
could be used towards the individual’s liability. The WIT System is not cost effective or efficient due to the
additional resources utilized to review accounts that could be offset by
credits. (Finding 12, page 36)
This finding was first reported in 2003. We
recommended the Department modify the Withholding Income Tax System to allow
for accounts that have credits to offset the liabilities to reduce the need
for additional resources. Department
officials accepted our recommendation and state they continue to progress
toward automatic offset of Withholding Income Tax liabilities with available
Withholding Income Tax credits. (For
previous agency response, see Digest Footnote #3.) OTHER
FINDINGS The
remaining findings are reportedly being given attention by the
Department. We will review progress
toward implementation of all recommendations in our next compliance
examination. AUDITORS’ OPINION Our
auditors stated the financial statements of the Department of Revenue as of
June 30, 2004, and for the year then ended are fairly presented in all
material respects. ____________________________________ WILLIAM G. HOLLAND, Auditor
General WGH:TLD:pp SPECIAL ASSISTANT AUDITORS
Our special assistant auditors on this audit were McGladrey & Pullen, LLP. DIGEST FOOTNOTES
#1 NEED TO IMPLEMENT INFORMATION SYSTEM RECONCILIATION PROCEDURES
– Previous Department Response
2003: Although many systemic processes
(including some reconciliation between internal and external data) are
already in place to ensure collection of tax revenues owed to the State, we
acknowledge that there are additional reconciliations and cross-checks that
could be performed. The
issue--especially given the current budgetary environment of doing more with
less--becomes one of sufficient resources and cost-benefit. #2 INEFFICIENT TRACKING OF CASES/TAXPAYER CORRESPONDENCE –
Previous Department Response
2003: We concur. #3 NEED TO MODIFY SYSTEM TO ALLOW CREDIT OFFSETS – Previous
Department Response
2003: We concur and have initiated corrective action via Service Request
03-0769. |