REPORT DIGEST

 

DEPARTMENT OF REVENUE

 

FINANCIAL AUDIT

AND

COMPLIANCE EXAMINATION

For the Year Ended:

June 30, 2004

 

Summary of Findings:

Total this audit                       13

Total last audit                       22

Repeated from last audit          3

 

Release Date:

May 4, 2005

 

 

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 is also available on

the worldwide web at

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

 

 

 

 

 

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

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION

For The Year Ended June 30, 2004

 

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, AND

RECOMMENDATIONS

 

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:

 

  • Selecting and approving investment firms to solicit for securities

  • Contacting investment firms for quotes

  • Accepting quotes from investment firms to purchase securities

  • Recording the acquisition of securities

  • Tracking of security maturities

  • Receiving statements from investment custodians

  • Recording activity of matured securities

  • Recording the disbursement of funds

  • All accounting and bookkeeping relating to the investments of the Lottery Prizewinners Fund

 

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
FY 05, and the Department believes that there is now an appropriate segregation of duties with respect to both the Lottery’s investment functions and its locally held funds.  

 

 

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.