REPORT DIGEST ILLINOIS DEPARTMENT OF REVENUE Financial Audit For the Year Ended June 30, 2015 Release Date: January 28, 2016 FINDINGS THIS AUDIT: 2 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 0 -- 0 -- 0 Category 2: 1 -- 1 -- 2 Category 3: 0 -- 0 -- 0 TOTAL: 1 -- 1 -- 2 FINDINGS LAST AUDIT: 1 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 FRANK J. MAUTINO, 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 INTRODUCTION This digest covers our financial audit of the Department of Revenue (Department) for the year ended June 30, 2015. A two year compliance attestation examination and a one year financial statement audit will be performed for the period(s) ending June 30, 2016. The auditors identified 2 findings involving the internal control over financial reporting. The findings are presented in the report beginning at page 66. Following is a summary of one finding included in this report digest. SYNOPSIS • (15-001) The Department’s initial year-end financial reporting in accordance with generally accepted accounting principles (GAAP) to the Illinois Office of the Comptroller contained inaccuracies. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS INACCURACIES IN THE DEPARTMENT’S YEAR- END FINANCIAL REPORTING PROCESS During the audit of the Department’s June 30, 2015 financial statements, the auditors noted errors regarding the reporting of financial information. A summary of some of the errors identified are as follows: • During testing of the Department’s taxes receivable, it was noted the Department did not perform an analysis of the percentages used in the calculation of uncollectible taxes receivable balances during the fiscal year. Prior to the GenTax processing system being placed in service during fiscal year 2007 the Department had a methodology for determining the aging categories and percentages on an annual basis. The Department ceased performing the annual analysis after GenTax was put in service because the same information as used previously was not readily available. The Department continues to use the same percentages through fiscal year 2015 with no analysis to determine if the percentages should be adjusted based upon current information. As the Department reports $2.6 billion in taxes receivable and a $921 million allowance for uncollectible taxes, a small change to the allowance percentages could have a material impact on the Department’s financial statements and could cause the net taxes receivable balances to be misstated. Department personnel indicated they are attempting to update the accounts receivable analysis after the rollout of the final taxes (June 30, 2015) and general ledger implementation planned for March 1, 2016. • During testing of the Department’s unearned revenue, the Department determined its original calculation for unearned revenue related to business income taxpayer refunds carried forward for credit on future returns contained errors. The program used to generate the data to calculate the unearned revenue for the Department’s financial statements contained errors. Upon reanalyzing the data, the Department determined unearned revenue was overstated by $21.7 million. The misstatement was not considered material by the Department and no adjustment was made to the financial statements. Department personnel stated the calculation of the credit carry forward estimate requires analyzing detailed transaction data of multiple tax return types. A system report is used to facilitate this process and an update was made during the year that inadvertently caused it to not be properly populated. • Auditor testing identified one sales tax (ROT) account where the negligence penalty was incorrectly deducted from the account balance twice during the Department’s audit process understating the tax receivable balance by $19.5 million. The duplication of the negligence penalty was caused by a processing indicator not being applied to the account within the tax system. The effect of this understatement was not considered material by the Department and no adjustment was made to the financial statements. The exceptions noted have the potential to misstate the Department’s financial statements. Accurate preparation of the Department’s financial information for GAAP and financial reporting purposes is important due to the impact adjustments have on the Statewide financial statements. (Finding 1, pages 66-68) This Finding has been repeated since 2012. We recommended the Department take steps to improve the review process of the underlying data that helps compile the financial statements. In addition, the Department should work with the appropriate parties to establish an accounting / financial reporting system that is integrated with its operational systems to reduce errors associated with manual intervention. The Department agreed with the finding and recommendation. The Department indicated they are taking steps to improve the financial reporting process and the underlying data used to compile the financial statements. The Department recognizes that human error will always be inherent in manual compilation processes and strives to allocate sufficient resources for the review of financial data within the time allowed for GAAP financial reporting. The Department also noted they are currently working to convert from an outdated receipt and fund deposit allocation system to the general ledger module of their integrated tax system. The Department will continue to work with the Governor’s Office and the Illinois Office of the Comptroller through the ERP project to implement a statewide, integrated general ledger system. Together these solutions will assist the Department to streamline processes and help eliminate manual calculation errors. (For the previous Department response, See Digest Footnote #1) OTHER FINDING The remaining finding is reportedly being given attention by the Department. Auditors will review the Department’s progress toward implementation of all the recommendations in the next engagement. AUDITOR’S OPINION The auditors stated the basic financial statements of the Department as of and for the year ended June 30, 2015 were fairly presented in all material respects. FRANK J. MAUTINO Auditor General FJM:RPU SPECIAL ASSISTANT AUDITORS Our Special Assistant Auditors for this audit were Sikich LLP. DIGEST FOOTNOTES #1 - INACCURACIES IN THE DEPARTMENT’S YEAR-END FINANCIAL REPORTING PROCESS 2014: The Department agrees that it should always be taking steps to improve the financial reporting process and the underlying data used to compile the financial statements. The Department recognizes that human error will always be inherent in manual compilation processes and strives to allocate significant resources for the review of financial data in the short time allowed for GAAP financial reporting deadlines. The Department is currently working to convert an antiquated receipt and fund deposit allocation system from DOS databases and spreadsheets to a GenTax general ledger module. While this is not a full, integrated general ledger needed to calculate and prepare all information for GAAP reporting, this will reduce some of the manual calculation/transposition errors. The Department will continue to work with the Governor’s Office and Illinois Office of the Comptroller to implement a statewide, integrated general ledger system which will further assist in eliminating many manual calculation errors.