ILLINOIS STATE TOLL HIGHWAY AUTHORITY
For the Year Ended:
December 31, 2006
For the Year Ended:
December 31, 2006
Summary of Findings:
Total this audit 6
Total last audit 9
Repeated from last audit 5
October 4, 2007
State of Illinois
Office of the Auditor General
WILLIAM G. HOLLAND
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Springfield, IL 62703
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• The Toll Highway Authority does not have sufficient controls over the financial reporting process.
• The Toll Highway Authority’s practices and procedures for recording and maintaining capital assets records needs improvement.
• The Toll Highway Authority has not timely exercised their rights to pursue collection of the toll violations.
• The Toll Highway Authority failed to audit any major systems of internal accounting and administrative controls for the year ended December 31, 2006
ILLINOIS STATE TOLL HIGHWAY AUTHORITY
For The Year Ended December 31, 2006
FINANCIAL OPERATIONS (GAAP BASIS)
Toll Evasion Recovery......................................................
Total Operating Revenue.................................................
Depreciation and Amortization..........................................
Services and Toll Collection..............................................
Insurance and Employee Benefits......................................
Engineering and Maintenance of Roadway and Structures..
Traffic Control, Safety Patrol, and Radio Communications..
Procurement, IT, Finance and Administration.....................
Total Operating Expenses................................................
SIGNIFICANT ACCOUNT BALANCES (GAAP Basis)
Cash and Cash Equivalents (Unrestricted)..........................
Cash and Cash Equivalents Restricted For Debt Service.....
Cash and Cash Equivalents – IPASS Accounts..................
Cash and Cash Equivalents – Construction.........................
Accounts Receivable (net).................................................
Investments Restricted For Debt Service............................
Capital Assets (net)...........................................................
Revenue Bonds Payable and Unamortized Bond Premium
During Audit Period: Mr. Jack Hartman – Through February 23, 2006
Acting Executive Director: Ms. Marilyn Johnson – February 24, 2006 through March 29, 2006
Acting Executive Director – Mr. Brian McPartlin - March 30, 2006 to December 20, 2006
Executive Director – Mr. Brian McPartlin – December 21, 2006 through current
Insufficient controls over financial reporting
52 accounts were adjusted subsequent to April 2007
Adjustments to beginning net assets totaled $9 million
Repurchase agreements totaling $2.8 million were written off
Interfund balances did not balance
Amounts were out of balance throughout the year
Unsubstantiated balance of $6 million was written off
Worker’s compensation accrual was understated by $600,000
Unamortized bond discounts and premiums were overstated by $512,000
General Account bank reconciliation did not include $5.6 million in timing differences for warrants
The software system used by the Tollway does not allow invoices to be entered into system after year-end
Improvements needed in recording and maintaining capital asset records
Property control department did not update inventory listing for items that were obsolete or were missing
Dates were entered incorrectly in the capital asset software
458 items totaling $720,000 could not be located initially by the property control department
Some of the assets dated back to 1991 and 80% were over 5 years old
57 items were located totaling $113,000
The Tollway is still searching for the remaining items
Inaccurate dating of capital assets resulted in accumulated depreciation being overstated by $728,000
Placed in service date changes resulted in an overstatement of ending accumulated depreciation of $42,200
Toll violators not billed timely
Toll violation revenue decreased $14 million in 2006
Audits of major systems not performed
Authority interaction with Illinois Office of Internal Audit
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
INSUFFICIENT CONTROLS OVER FINANCIAL REPORTING
The Illinois State Toll Highway Authority (Tollway) does not have sufficient controls over the financial reporting process.
During our audit, we noted that numerous adjustments were made to the initial trial balance provided to the auditors. Fifty-two accounts were adjusted subsequent to April 2007. Some of the more significant adjustments noted during our review are as follows:
· Beginning net assets were adjusted by approximately $9 million. These adjustments were necessary to properly reverse prior year audit entries and correct beginning capital asset balances. In addition, amounts that should have been charged to current operations were recorded directly to net assets.
· Repurchase agreements totaling $2.8 million were written off. These balances were recorded as a passed adjustment in 2005.
· Interfund balances did not balance. The variance totaling $1,640,829 was identified by Tollway accounting personnel and consisted of accounting errors for items throughout the year. Rather than recording these identified amounts accurately in the general ledger, the net difference of $1,640,829 was posted via journal entry to a selected interfund account in order to balance. The workpaper provided to the auditors supporting the interfund account balance indicated that the amounts were out of balance monthly throughout the year, not just at year-end.
· The Tollway had a balance of approximately $6 million in the “Due to From Liability” account (a component of accounts payable in the financial statements) that was unsubstantiated and was not corrected until May 2007 (five months after year-end). This account was noted in the prior audit and the auditors proposed an adjustment for $1.5 million at that time. At the end of 2006 the balance had increased to $6 million and was ultimately written-off to non-operating project expense.
· The account reconciliations prepared by Tollway staff for the worker’s compensation accrual did not agree to amounts recorded in the general ledger. The amount recorded in the general ledger was understated by approximately $600,000. The auditors proposed an adjustment for this amount.
· The unamortized bond discounts and premiums recorded in the general ledger were overstated by $512,000 in the initial trial balance. The supporting schedules provided for the individual accounts were accurate however the necessary adjustments were not properly recorded in the financial statements. An adjustment was made to the final financial statements.
· We also noted the following deficiencies within the General Account Bank Account reconciliation: 1) the initial bank reconciliation completed for the General Account was not prepared correctly and did not include approximately $5.6 million in reconciling items representing timing differences for warrants; and 2) reconciling items totaling $658,838 (General Account) could not be identified by the Tollway. An adjustment was made in the final financial statements for the $5.6 million of timing differences relating to the warrants. As for the unidentified reconciling items, upon further review by Tollway personnel, the amount that could not be identified at year-end totaled approximately $22,000.
· During our examination of year-end accruals we discovered that a majority of the December 31, 2006 liability for accounts payable and other accrued liabilities was recorded using journal entries. These adjustments, totaling approximately $17 million, were recorded manually by adjusting journal entry to general ledger, Accrued Expenses -Other, as opposed to using an automated accounts payable system. The Tollway’s present automated system only contains vouchers that have been submitted to the State Comptroller’s office for payment as of December 31 (“pay order liabilities”) and does not support other liabilities for which vendor invoices were received after December 31 pertaining to the prior fiscal year (2006). The software system utilized by the Tollway does not allow invoices to be entered into the system after year-end. (Finding 1, Pages 74-77)
We recommended that internal control over financial reporting be strengthened. Individuals preparing account reconciliations should cross-check all amounts to ensure that the supporting workpaper (including all detail) agrees to the balance recorded in the general ledger and trial balance. In addition, an individual other than the preparer should review all significant trial balance accounts to ensure supporting documentation exists, amounts agree to the trial balance and that all posted adjustments are accurate. All unresolved reconciling items should be researched and properly recorded prior to the month-end close.
We further recommend that the Tollway use an automated accounts payable system to track all vendor invoices. This would also include other routine bills received such as utilities and other re-occurring expenses for which the Tollway is billed. Journal entries should only be used in circumstances where an invoice is not available such as for recording estimates and retainages related to construction projects.
Tollway officials agreed with our recommendations and stated that they are continuously improving their reconciliation processes.
The Illinois State Toll Highway Authority’s (Tollway) practices and procedures for recording and maintaining capital asset records needs improvement. The following items were noted during our review of the capital asset records:
· The property control department did not remove/reclassify capital assets from the detailed capital asset inventory for certain items that were considered scrap/obsolete or which could not be located during the annual capital asset inventory.
· Certain transferred building assets were dated incorrectly within the newly-adopted capital asset software. These assets were transferred from the infrastructure category to the building category during 2006.
· Certain machinery and equipment capital assets were depreciated incorrectly within the newly-adopted capital asset software as a result of Tollway personnel changing the “placed in service” date.
During our initial testing of existence relating to capital assets we noted the following:
1. Certain capital assets were categorized in a “lost department” code on the Fixed Asset by Asset Number report (the Tollway’s detailed inventory listing). The report detail included 458 items, totaling approximately $720,000 (historical cost), which could not be located during various internal physical inventory counts performed by the Tollway’s property control department. As a result on the inability to initially locate these items, the items were re-categorized to a department entitled “lost” until such time that there were sufficient resources to broaden the search.
· Some of the “lost” items included hand-held items such as computers, computer software, printers, radios, chargers, and telecommunications equipment such as a hands-free mobile phone kit.
· Some of these capital assets identified as “lost” date back to 1991.
· 80% of the items classified as “lost” are over 5 years old.
· The current net book value of these assets is approximately $41,000.
· During our physical observations of warehoused inventory, we noted a number of items not in use that appeared to be obsolete and that should have been written-off the capital asset listing.
Upon presenting these exceptions to Tollway personnel, additional searches were performed to locate some of these “lost department” items. Fifty-seven (57) items, with historical cost totaling approximately $113,000 were subsequently located by Tollway personnel. Tollway personnel are still in the process of searching for the remaining items missing.
2. During our testing we noted that certain capital assets totaling approximately $36 million were incorrectly dated when transferred from the infrastructure category to the building category within the newly-adopted capital asset software. These capital assets were recorded in the software with an incorrect “placed in service date”. The inaccurate dates resulted in an error in the depreciation calculation and an overstatement of building accumulated depreciation of approximately $728,000. Upon bringing this to the Tollway’s attention, the errors were subsequently corrected.
3. The placed in service date for 43 machinery and equipment assets changed from the prior year due to the fact that the Tollway entered current capital asset additions to already existing assets, which were either fully or partially depreciated. When capital assets were entered into the software as an addition to an already existing asset, the original “placed in service” date was changed within the software for the original portion of the asset. We noted that the new software accounted for the modified asset (original plus current addition) as if the entire asset was a new addition. As a result of this dating issue, the machinery and equipment ending accumulated depreciation balance was overstated by approximately $42,200. (Finding 2, Pages 78-81)
We recommended that the Tollway follow its written process and procedures document pertaining to the removal of capital assets from the accounting records for items that have been deemed lost or obsolete. The property control department should investigate all lost assets on a timely basis. Items subsequently located should be reassigned to a specific department. All other items should be removed from the inventory records if deemed un-locatable after a reasonable search. Property control should report these items to the accounting department on a timely basis so that they can be removed from the financial accounting records.
We further recommended that the Tollway designate a person to review the information entered into the capital asset software on a regular basis in order to ensure that the amounts have been entered and dated accurately and in accordance with the Tollway’s capital asset policy. This would include entering each capital addition into the software as a new asset, with its own identification number. Each addition would then be separately depreciated over its estimated useful life. Additionally, we recommended that all capital asset entries be reviewed by a responsible supervisor to ensure that all entries are prepared correctly prior to posting them to the trial balance.
Tollway officials agreed with our recommendations and stated that their property control unit is currently investigating all items deemed lost.
UNTIMELY VIOLATION SYSTEM IMPLEMENTATION
The Illinois State Toll Highway Authority (Tollway) has not exercised their right to pursue collection of the toll violators.
The Toll Highway Act (605 ILCS 10/3) authorizes the Tollway to enforce a violation enforcement system that seeks reimbursement from Toll violators. To obtain maximum results, the system must be functioning properly and enforced in a timely manner.
The Tollway has not been able to bill toll violators on a timely basis. The Tollway is implementing a new violation system and the last billings occurred in July 2006. As of mid-July 2007, the Tollway was still implementing the system and had not resumed issuing notices to violators. The notices pertaining to violators since the last billing in 2006 have been delayed but not forgiven and will be billed when the system is fully implemented.
Toll violation revenue recorded for 2005 was approximately $26 million and in 2006 the amount decreased 54% to approximately $12 million. (Finding 4, Page 83)
We recommended the Tollway fully implement its new system and resume billing all toll violators in accordance with their right established by state statute.
Tollway officials agreed with our recommendation and stated that the violation enforcement conversion is expected to be completed in 2007.
INTERNAL AUDITS OF MAJOR SYSTEMS NOT PERFORMED
The Illinois State Toll Highway Authority (Tollway) failed to audit any major systems of internal accounting and administrative controls of the Tollway for the year ended December 31, 2006.
The Tollway completed one internal audit during the fiscal year, however the Tollway did not complete any internal audits of the major systems of internal accounting and administrative controls during calendar year 2005 or 2006. The Fiscal Control and Internal Auditing Act (30 ILCS 10/2003) requires that the Tollway’s chief executive officer ensure that “audits of major systems of internal accounting and administrative control be conducted on a periodic basis so that all major systems are reviewed at least once every two years.”
Tollway management stated that Executive Order #10 required most state agencies to transfer the internal audit function to the Illinois Office of Internal Audit (IOIA), a division of the Department of Central Management Services. The nature of the Tollway’s governance created uncertainty as to whether the Tollway was required to comply. However, the Tollway entered into negotiations with the IOIA to perform this service but could not reach agreement on a reasonable fee and scope of service. (Finding 5, Pages 84-85)
We recommended the Tollway complete all required internal audits on a timely basis.
Tollway officials agreed with our recommendation and stated that they expect to complete all required audits by the end of 2008.
The other findings are reportedly being addressed by Tollway management. We will review progress toward implementation of all our recommendations during the next audit.
Our auditors stated the Illinois State Toll Highway Authority’s financial statements as of December 31, 2006 and for the year then ended were presented fairly in all material respects.
WILLIAM G. HOLLAND, Auditor General
SPECIAL ASSISTANT AUDITORS
Our special assistant auditors for this audit were McGladrey & Pullen LLP.