REPORT DIGEST

STATE OF ILLINOIS

STATEWIDE FINANCIAL STATEMENT AUDIT
FOR THE YEAR ENDED JUNE 30, 2016

Release Date:  March 7, 2017

FINDINGS THIS AUDIT:  5

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 5 -- 5
Category 2:  0 -- 0 -- 0
Category 3:  0 -- 0 -- 0
TOTAL:  0 -- 5 -- 5

FINDINGS LAST AUDIT: 5

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

The Illinois Office of the State
Comptroller prepares the State of Illinois
Comprehensive Annual Financial Report
(CAFR).  The CAFR is the State’s official
annual report which provides the readers
with the financial position of the State
as of June 30, 2016, and results of
operations during the fiscal year.

The financial section of the CAFR includes
the Independent Auditors’ Report on the
basic financial statements, the management
discussion and analysis, the basic
financial statements, required
supplementary information, and individual
fund statements and schedules.

AUDITORS’ OPINION

The June 30, 2016 financial statements of
the State of Illinois are fairly presented
in all material respects.

The financial statements at June 30, 2016
reflect the following:

• The net position of governmental
activities continued to deteriorate and
the deficit increased by $6.3 billion from
FY15 to FY16.  Overall, the net position
of governmental activities is reported as
a deficit of $131.6 billion.  (Exhibit 1)

• The General Fund deficit increased by
$2.7 billion from FY15 to FY16.  The June
30, 2016 deficit was $9.6 billion.
(Exhibit 2)

Over time, increases and decreases in net
position measure whether the State’s
financial position is improving or
deteriorating.  A comparison of Illinois’
financial position to other states is
contained in Exhibit 3.

REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING AND ON COMPLIANCE

In accordance with Government Auditing
Standards, a report on our consideration
of the State of Illinois’ internal control
over financial reporting and our tests of
its compliance is also issued as part of
our financial statement audit.  This
report is a separate document and is
summarized in this document.  Our report
noted that the State’s decentralized
internal control system is not adequate.
We also reported significant financial
reporting deficiencies at several State
agencies.

STATE OFFICIALS

Governor: Bruce Rauner
Comptroller: Susana A. Mendoza
Speaker of the House: Michael J. Madigan
President of the Senate: John J. Cullerton
House Republican Leader: Jim Durkin
Senate Republican Leader: Christine
Radogno

FINANCIAL ANALYSIS OF THE STATE

The net position of the State’s
governmental activities declined $6.262
billion.  The following condensed
financial information was derived from the
government-wide Statement of Net Position
and reflects the State’s governmental
activities financial position as of June
30 for Fiscal Years 2009 through 2016.
(Please see Exhibit 1 in the pdf version
of this digest.)

The deficits reflected in Exhibit 1 are
presented on an accrual basis and
represent the excess of total liabilities
and deferred inflows of resources over
total assets and deferred outflows of
resources at a given point in time.  These
deficits represent the deferral of current
and prior year costs to future periods.

GENERAL FUND

Many programs are accounted for in the
General Fund.  The GAAP basis financial
position of the General Fund deficit
increased at June 30, 2016 from June 30,
2015.  The fund balance deficit in the
State’s General Fund increased by $2.737
billion on a GAAP basis.  The June 30,
2016 deficit was $9.6 billion.  Exhibit 2
reflects the General Fund deficit for
Fiscal Years 2009 through 2016. (Please
see Exhibit 2 in the pdf version of this
digest.)

STATE COMPARISON

Exhibit 3 provides an analysis of
Illinois’ Net Position at June 30, 2016
compared to other States. (Please see
Exhibit 3 in the pdf version of this
digest.)

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE FINANCIAL REPORTING PROCESS

The State of Illinois’ current financial
reporting process does not allow the State
to prepare a complete and accurate
Comprehensive Annual Financial Report
(CAFR) in a timely manner.  Reporting
issues at various individual agencies
caused delays in finalizing the financial
statements.  The lack of timely financial
reporting limits effective oversight of
State finances and may adversely affect
the State’s bond rating.

Accurate and timely financial reporting
problems continue to exist even though the
auditors have:  1) continuously reported
numerous findings on the internal controls
(material weaknesses and significant
deficiencies), 2) commented on the
inadequacy of the financial reporting
process of the State, and 3) regularly
proposed adjustments to financial
statements year after year.  These
findings have been directed primarily
towards major State agencies under the
organizational structure of the Office of
the Governor and towards the Office of the
State Comptroller.

The Office of the State Comptroller has
made significant changes to the system
used to compile financial information;
however, the State has not solved all the
problems to effectively remediate these
financial reporting weaknesses.  The
process is overly dependent on the post
audit program even though the Illinois
Office of the Auditor General has
repeatedly informed State agency officials
that the post audit function is not a
substitute for appropriate internal
controls at State agencies.

The State of Illinois has a highly
decentralized financial reporting process.
It was reported that 88 of 90 primary
units of government had 263 different
financial reporting systems that are used
by primary government agencies and only 16
percent of these financial reporting
systems are compliant with Generally
Accepted Accounting Principles (GAAP),
which drastically increases the amount of
time spent by agencies during the year-end
GAAP conversion process.  In addition, 53
percent of the financial reporting systems
are not interrelated which, consequently,
requires manual intervention to convert
data, increasing the likelihood of errors
and is time consuming.

The financial reporting to the Office of
the State Comptroller requires State
agencies to prepare a series of financial
reporting forms (SCO forms) designed by
the Office of the State Comptroller which
are utilized to prepare the CAFR.
Although these SCO forms are subject to
review by the Office of the State
Comptroller’s financial reporting staff
during the CAFR preparation process and
the Financial Reporting Standards Board
has adopted minimum qualifications for all
new GAAP Coordinators who oversee the
preparation of the SCO Forms, the current
process still lacks sufficient internal
controls at individual agencies.  (Finding
1, pages 7-9)

We recommended the Office of the Governor
and the Office of the State Comptroller
continue to work together to resolve the
State’s inability to produce timely and
accurate Generally Accepted Accounting
Principles basis financial information.

The Governor’s Office agreed with our
recommendation and stated that the
Governor’s Office and the Office of the
State Comptroller will continue to work
together to address the core issues of the
State’s inability to produce timely and
accurate GAAP basis financial information.
Both offices have begun a multi-year
implementation of an Enterprise Resource
Planning (ERP) system to develop an
integrated enterprise-wide application
system for financials, which will improve
the State’s control environment and
processes to produce accurate financial
statements in a timely manner.

The Comptroller’s Office agreed with our
recommendation and stated that they will
continue to work with the Governor’s
Office, the Auditor General’s Office and
agency GAAP Coordinators to improve the
timeliness, quality, and processing of
financial reporting for the State.

FINANCIAL REPORTING WEAKNESSES

The State of Illinois did not have
adequate controls to assess the risk that
information reported by individual
agencies of the primary government would
not be fairly stated and compliant with
generally accepted accounting principles
(GAAP).  The Office of the Auditor General
performed audits at 27 agencies of the
primary government, including five pension
systems and the State Board of Investment.
During these audits, we noted at 12
agencies there were a total of 10 material
weaknesses and 12 significant deficiencies
related to the internal controls over the
financial reporting process.

Material weaknesses and significant
deficiencies further extend financial
reporting timelines since additional
measurements and reporting are required.
Completion or substantial completion of
these audits is necessary in order for the
Auditor General to issue an opinion on the
State’s basic financial statements.

In addition to the deficiencies noted
above, material misstatements were
identified by the auditors at four
agencies.  The misstatements ranged from
$522 thousand to $38.8 million.  (Finding
2, pages 10-12)

We recommended the State continue its
efforts to improve internal control
procedures in order to assess the risk of
material misstatements to the financial
statements and to identify such
misstatements during the financial
statement preparation process.  The
internal control procedures should include
a formal evaluation of prior problems and
implementation of procedures to reduce the
risk of these problems reoccurring.

The Governor’s Office agreed with our
recommendation and stated that the
Governor’s Office will work with the
Office of the State Comptroller to
continue efforts to improve internal
control procedures to reduce the
likelihood of material misstatements to
the financial statements.

The Comptroller’s Office agreed with our
recommendation and stated that the Office
will continue to assist the Governor’s
Office in its efforts to increase the
quality of GAAP packages by providing
enhanced training and technical assistance
to State agencies.

FINANCES INCREASE RISKS

The State of Illinois did not have
sufficient controls over its finances.
This condition increases the risk that
liabilities will not be properly recorded.
Further, this condition increases risk and
diminishes the oversight and authority of
the budgeting and appropriation process.

We noted during our financial audit of the
State’s financial statements that the
State had transactions, totaling $5.113
billion, on hand at June 30, 2016 that had
been approved for payment by the State,
but remained unpaid at year end due to the
State’s cash flow difficulties.  Of this
amount, approximately $3.181 billion was
owed to external parties, the remaining
balance was related to intra-governmental
transactions and statutorily mandated
transfers.  Due to the State not being
able to pay external vendors in a timely
manner, the State paid approximately
$23.56 million in interest payments during
Fiscal Year 2016, and the State has paid
an additional $86 million during Fiscal
Year 2017 as of February 28, 2017.

We recommended the Governor work with the
General Assembly to improve the State’s
control over State finances in a manner
that eliminates significant payment delays
and unnecessary interest payments to State
vendors.

The Governor’s Office agreed with our
recommendation and stated they will work
with the General Assembly, the Office of
the State Comptroller and the Office of
the State Treasurer to improve the State’s
control over finances to eliminate
significant payment delays and unnecessary
interest payments to State vendors.

OTHER FINDINGS

The remaining findings included two
noncompliance issues.  We will review the
State’s progress towards the
implementation of our recommendations in
our next audit.

This financial audit was conducted by
staff of the Office of the Auditor
General.

BRUCE L. BULLARD
Division Director

This report is transmitted in accordance
with Section 3-14 of the Illinois State
Auditing Act.

FRANK J. MAUTINO
Auditor General

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