REPORT DIGEST

ILLINOIS POWER AGENCY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION
For the Year Ended June 30, 2012


Release Date:   June 19, 2013

Summary of Findings:
Total this audit: 17
Total last audit:  23
Repeated from last audit: 11

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 and Full Report are also available on
the worldwide web at www.auditor.illinois.gov

SYNOPSIS

• The Illinois Power Agency’s financial statements
contained inaccuracies, which would have resulted in a
material misstatement if not corrected.

• The Illinois Power Agency lacked controls to properly
record receivables and ensure the accuracy of
Alternative Compliance Payments remitted by Alternative
Retail Electric Suppliers.

• The Illinois Power Agency improperly allowed State
funds to be held in accounts outside the State Treasury
without statutory authority.

• The Illinois Power Agency did not assess adequate fees
to ensure the costs of the preparation of the annual
procurement plan were recovered.

• The Illinois Power Agency inaccurately reported
accounts receivable information to the Office of the
State Comptroller.

• The Illinois Power Agency did not establish a Planning
and Procurement Bureau or a Resource Development Bureau
as required by its enabling statute.

• The Illinois Power Agency did not adopt rules for
operation, administration, accounting and reporting as
specified in the Illinois Power Agency Act.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NEED TO IMPROVE FINANCIAL STATEMENT REPORTING

The Agency’s financial statements contained
inaccuracies.  These problems, if not corrected, would
have resulted in a material misstatement.

During the auditor’s testing of the Agency’s June 30,
2012 financial statements, the following errors were
noted:

• The Agency did not record $470,138 in accounts
receivable and deferred revenue.  These unrecorded
receivables related to billings made by the Agency in
fiscal year 2013 to re-coup expenses incurred for
Procurement Planning and Contract Mediation Services in
FY 2012.

• The Agency recorded $963,243 of revenue fees as a
credit to certain expense accounts.

These errors were considered material and Agency
management made adjustments to correct the financial
statements. (Finding Code No. 12-1, pages 16-17)

We recommended that the Agency enhance its accounting
and financial reporting procedures to ensure accounting
records are accurate and allow for the accurate
preparation of financial statements in accordance with
accounting principles generally accepted in the United
States of America.

Agency management agrees with the finding and
recommendation.

LACK OF CONTROLS OVER ALTERNATIVE COMPLIANCE PAYMENTS

The Agency did not establish controls to properly record
receivables and ensure the accuracy of payments remitted
by Alternative Retail Electric Suppliers.  The Agency’s
financial statements reported revenue of $5.7 million
during fiscal year 2012 and had accounts receivable of
$2.2 million at June 30, 2012, related to Alternative
Compliance Payments.

During fiscal year 2012, the Alternative Compliance
Payment process was administered by the Illinois
Commerce Commission (Commission).  However, the Agency
and the Commission did not have an agreement to document
each party's responsibilities for processing Alternative
Compliance Payments.  During fiscal year 2012, the
Alternative Compliance Payments were self-reported by
the Alternative Retail Electric Suppliers with their
annual report submission due to the Commission on
September 1.  Upon receipt of an Alternative Compliance
Payment, the Commission deposited the remittance into
the Illinois Power Agency Renewable Energy Resource Fund
(Fund 836).  Further, the Agency did not review the
Alternative Compliance Payments received for accuracy or
compliance with State law.

We noted the following internal control weaknesses and
noncompliance:

• The Agency did not administer the Illinois Power
Agency Renewable Energy Resource Fund by ensuring
revenues and receipts due to the State from Alternative
Compliance Payments were collected and remitted to the
proper fund in the State Treasury.

• The Agency did not have an interagency agreement with
the Commission detailing the specific functions, duties,
and responsibilities of both the Agency and Commission
for the accounting, recordkeeping, and deposit of
Alternative Compliance Payments.

• The Agency did not perform a review of Alternative
Compliance Payments to ensure the amounts remitted by
the Alternative Retail Electric Suppliers were in
accordance with State law.

Failure to establish controls over Alternative
Compliance Payments limits the Agency’s ability to
prepare accurate financial reports and may result in the
Agency not collecting all amounts due to the State from
Alternative Retail Electric Suppliers. (Finding 12-2,
pages 18-19)

We recommended the Agency implement controls to ensure
accurate payments are received.  In addition, the Agency
and the Commission should develop an interagency
agreement outlining the duties and responsibilities of
each entity.

Agency management agrees with the finding and
recommendation.

STATE FUNDS IMPROPERLY HELD OUTSIDE THE STATE TREASURY

The Agency improperly allowed State funds to be held in
accounts outside the State Treasury without proper
statutory authority.

As of June 30, 2012, one Procurement Administrator
continued to hold State funds (as instructed by the
former Director of the Agency) totaling an estimated
$497,000.

Failure to properly deposit State funds into a Treasury
held account could result in a loss of State resources.
(Finding 12-3, page 20)  This finding was first reported
in 2009.

We recommended the Agency implement the appropriate
procedures to receive and deposit State revenues and
collect interest.  Additionally, we recommended the
Agency obtain and properly deposit all funds held by the
procurement administrators, on behalf of the Agency, as
soon as possible.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #1.)

INADEQUATE FEE ASSESSMENT

The Agency did not assess adequate fees to ensure the
costs of the preparation of the annual procurement plan
were recovered.

During our audit, we noted the Agency did not assess an
adequate fee to each utility to ensure the cost of the
preparation of the annual procurement plan was
recovered.  Based on information provided by the Agency,
the indirect costs plus the costs of the procurement
planning consultants exceeds the amounts billed to the
utilities.  For fiscal year 2012, the total cost of the
preparation of the annual procurement plan was estimated
at $1,217,398 while the fees billed were $1,195,859.

Failure to assess adequate fees to cover the preparation
of the annual procurement plan is a violation of State
statute.  Additionally, this is poor management from a
fiscal standpoint. (Finding Code No. 12-4, page 21) This
finding was first reported in 2009.

We recommended the Agency improve its procedures to
ensure that appropriate fees are assessed in order to
cover the costs related to the preparation of the annual
procurement plan.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #2.)

NEED TO IMPROVE ACCOUNTS RECEIVABLE REPORTING

The Agency inaccurately reported accounts receivable
information to the Office of the State Comptroller.

During testing, the auditors noted the following errors
with the Quarterly Summaries of Accounts Receivable
Reports:

• One (50%) of two reports tested, inaccurately reported
accounts receivable, totaling approximately $1,578,000
under a revenue source that had not been established.

• The number of accounts reported in the aging of
receivables was inaccurate.  The Agency reported the
number based on individual invoices, not by number of
customers.

Failure to properly report accounts receivable to the
Office of the State Comptroller could result in
inaccurate accounting records at the State level.
(Finding 12-7, page 25)

We recommended the Agency implement controls to ensure
the accounts receivable are properly reported to the
Office of the State Comptroller in accordance with the
SAMS Manual.

Agency management agrees with the finding and
recommendation.

ESTABLISHMENT OF REQUIRED BUREAUS AND LACK OF ADEQUATE
STAFFING

The Agency did not establish a Planning and Procurement
Bureau or a Resource Development Bureau as required by
its enabling statute.

During our audit, we noted the Agency had not
established a Planning and Procurement Bureau or a
Resource Development Bureau.  Additionally, within each
bureau a chief was to be appointed.  Further, the Agency
lacked adequate staffing for most of the fiscal year in
order to carry out its mandated tasks.

Failure to create these required bureaus is a violation
of State statute.  In addition, because these bureaus
were not created, the Director/Acting Director and the
Chief Fiscal Officer had the sole responsibility for the
procurement processes, which could result in an abuse of
power.  (Finding 12-9,  pages 27-28)  This finding was
first reported in 2009.

We recommended the Agency establish the required bureaus
and appoint chiefs to these bureaus who meet the
qualifications of the statute in order to ensure the
Agency functions properly and in a cost-effective
manner.

Agency management agrees with the finding and
recommendation.  (For the previous agency response, see
Digest Footnote #3.)

FORMAL AGENCY RULES NOT ADOPTED

The Agency did not adopt rules for operation,
administration, accounting and reporting as specified in
the Illinois Power Agency Act.

During our audit, we noted the Agency had not adopted
formal agency rules, established procedures for
monitoring the administration of contracts, established
procedures for the recovery of costs incurred in
connection with the development and construction of a
facility, or implemented accounting rules.

Formal administrative rules provide a basis for a proper
accounting of the transactions of the agency, protect
agencies from legal challenges and give additional
legitimacy to agency actions and agency requests of
external parties.  Failure to adopt appropriate rules
and procedures could result in a lack of proper
reporting and failure to establish and adequately
monitor internal controls. (Finding 12-10, pages 29-30)
This finding was first reported in 2009.

We recommend the Agency draft and adopt formal agency
rules, establish procedures for monitoring the
administration of contracts, establish procedures for
the recovery of costs incurred in connection with the
development and construction of a facility, and
implement accounting rules.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #4.)

OTHER FINDINGS

The remaining findings were reportedly being given
attention by the Agency.  We will review the Agency’s
progress towards implementation of our recommendations
in our next engagement.

AUDITORS’ OPINION

The auditors stated the Illinois Power Agency financial
statements as of June 30, 2012 and for the year then
ended were fairly presented in all material respects.

A compliance examination of the Illinois Power Agency
was conducted as required by the Illinois State Auditing
Act.  The Accountant’s Report noted the Illinois Power
Agency did not comply in all material respects with
numerous State mandates, the SAMS Manual, general
internal control procedures, and other required rules.

WILLIAM G. HOLLAND
Auditor General

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SPECIAL ASSISTANT AUDITORS

Borschnack, Pelletier & Co. were our Special Assistant
Auditors for this engagement.

DIGEST FOOTNOTES

#1-STATE FUNDS IMPROPERLY HELD OUTSIDE THE STATE
TREASURY-Previous Agency Response
2011- The Agency agrees with the finding.  The Agency
notes that no current IPA staff member was employed by
the Agency or the State during the time at which the
incidents at the basis of this finding occurred.
During FY2011, the Agency substantially implemented
procedures that are documented in the current draft of
the IPA Fiscal Operations Manual (FOM).  The relevant
FOM section (Accounting and Financial Reporting Policies
and Procedures, subsection Revenue and Related Assets
(Receivables) Accounting) documents the specific
procedures related to the receipt and deposit of State
revenues.  Prior to the implementation of the current
draft of the FOM, the Agency ensured the procedures,
later documented in the current draft of FOM, were
followed once the CFO was hired in January 2011.
#2-INADEQUATE FEE ASSESSMENT-Previous Agency Response

2011-The Agency agrees with the finding.  In FY12,
utilities were billed for both direct and indirect costs
associated with the preparation of the procurement plan.
In addition, the recently hired Chief Legal Counsel is
in the process of completing the draft fees assessment
rules for submission for publication in the Illinois
Register to begin the formal rulemaking process.

#3-ESTABLISHMERNT OF REQUIRED BUREAUS AND LACK OF
ADEQUATE STAFFING-Previous Agency Response

2011-The Agency agrees with the finding.  The Agency is
making progress in its staffing efforts.  A Bureau Chief
of Planning and Procurement will begin work for the
Agency on August 16, 2012 and a new Acting Director was
appointed in October 2011.  To assist the Agency in
carrying out its administrative duties, a Chief Fiscal
Officer was hired in January 2011, Chief Legal Counsel
began work in March 2012 and an Administrative Analyst
was hired in July 2012 with additional staffing to occur
in FY13.

#4-FORMAL AGENCY RULES NOT ADOPTED-Previous Agency
Response

2011-The Agency agrees with the finding.  In March 2012,
the Agency hired a Chief Legal Counsel, who is in the
process of formalizing all Agency rules.  The Chief
Legal has worked with JCAR and the Secretary of State
Index Department on pre-First Notice review of
prioritized rules.

Additionally, the Agency hired a Chief Fiscal Officer in
January 2011 who is responsible for the Agency’s
financial accounting and reporting functions.  After
being hired, the CFO developed informal procedures over
the Agency’s financial operations.  These procedures are
currently being formalized with the development and
implementation of the IPA Fiscal Operations Manual (FOM)
that documents procedures over cash receipts, cash
disbursements, accounts payable and accounts receivable,
in addition to other financial areas.  The Agency is
also developing a GAAP Reporting Manual (GRM); both are
being developed with the assistance of outside
consultants.  While IPA has implemented the procedures
documented in the current draft FOM and GRM, the manuals
will not be finalized until a draft of both documents
has been completed, because the two documents are inter-
related, and additions/revisions are being incorporated
while this process is in progress.