REPORT DIGEST

ILLINOIS STATE BOARD OF INVESTMENT

FINANCIAL AUDIT
FOR THE YEAR ENDED JUNE 30, 2018

Release Date:  December 27, 2018

FINDINGS THIS AUDIT:  1

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

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 the Illinois State Board
of Investment’s (Board or ISBI) financial
audit as of and for the year ended June 30,
2018.  The Board’s compliance examination
covering the year ended June 30, 2018 will
be issued at a later date.

SYNOPSIS

• (18-01) The Board has not established
adequate internal controls over the
financial reporting process related to
investments.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INACCURATE FINANCIAL REPORTING

The Illinois State Board of Investment
(ISBI) has not established adequate
internal controls over the financial
reporting process related to investments.

During our audit of the financial
statements we noted the following:

• For two private equity funds sampled in
our testing, the fair value of the
investments reported was understated by
$1,947,059.  Upon further review, we noted
ISBI reported preliminary estimated values
for these investments and did not have
procedures in place to evaluate and update
the final fair value amounts reported by
the manager.  In response to the error,
ISBI identified nine additional private
equity funds resulting in an understatement
of $1,132,314.  The errors were not
identified during ISBI’s preparation of
investment reconciliations or related
supervisory procedures.  Correcting
adjustments were made to the financial
statements by ISBI to account for these
errors.

• For one bank loan fund sampled in out
testing, the fair value of the investment
reported was overstated by $160,342.  Upon
further review, we noted ISBI reported the
value of the investment inclusive of the
applicable management fees and accrued
expenses instead of its fair value at year
end.  ISBI determined this error was not
material to the financial statements and a
correcting adjustment was not made to
account for this error.

ISBI’s private equity investments, bank
loan investments and total investments were
$706,768,270, $464,315,920, and
$18,320,775,728, respectively, as of June
30, 2018. (Finding 1, pages 32-33)

We recommended ISBI review its internal
control procedures and implement the
changes necessary to ensure investment
accounts are accurately reported in its
accounting records and in the financial
statements.  To the extent preliminary or
estimated balances are initially reported,
ISBI should establish procedures to
evaluate, monitor, and update (if
necessary) these items when final
valuations are received.

ISBI officials stated future controls will
be enhanced to eliminate the use of
estimated values and management will
proactively communicate with investment
managers to obtain final capital statements
as early in the cycle as possible.

AUDITOR’S OPINION

The auditors stated the financial
statements of the Board as of and for the
year ended June 30, 2018 are fairly stated
in all material respects.

This financial audit was conducted by KPMG
LLP.

Jane Clark
Division Director

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

FRANK J. MAUTINO
Auditor General

FJM:TLK