STATE OF OHIO - Ohio Auditor of State

STATE OF OHIO SINGLE AUDIT REPORT FOR THE YEAR ENDED JUNE 30, 2005

STATE OF OHIO

SINGLE AUDIT REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2005

TABLE OF CONTENTS

Page

Executive Summary ........................................................................................................................ i

FINANCIAL SECTION

Independent Accountants' Report ..................................................................................................... 1

Management's Discussion and Analysis ........................................................................................... 5

Basic Financial Statements

Government-wide Financial Statements: Statement of Net Assets ............................................................................................................. 21 Statement of Activities ................................................................................................................ 23

Fund Financial Statements: Balance Sheet -- Governmental Funds ....................................................................................... 25 Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets....... 28 Statement of Revenues, Expenditures and Changes in Fund Balances ? Governmental Funds ............................................................................................................... 29 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balances of Governmental Funds to the Statement of Activities ............................................ 31 Statement of Revenues, Expenditures and Changes in Fund Balances -- Budget and Actual (Non-GAAP Budgetary Basis) -- General Fund and Major Special Revenue Funds .............. 33 Statement of Net Assets -- Proprietary Funds -- Enterprise ....................................................... 37 Statement of Revenues, Expenses and Changes in Fund Net Assets ? Proprietary Funds -- Enterprise ............................................................................................... 39 Statement of Cash Flows -- Proprietary Funds -- Enterprise ..................................................... 41 Statement of Fiduciary Net Assets -- Fiduciary Funds ................................................................ 45 Statement of Changes in Fiduciary Net Assets -- Fiduciary Funds............................................. 48

Discretely Presented Component Unit Financial Statements: Combining Statement of Net Assets............................................................................................ 49 Combining Statement of Activities............................................................................................... 51

Notes to the Financial Statements.................................................................................................. 54

Required Supplementary Information On Infrastructure Assets Accounted for on the Modified Approach .................................. 126

SUPPLEMENTARY SCHEDULES OF EXPENDITURES OF FEDERAL AWARDS

Supplementary Schedule of Expenditures of Federal Awards Summarized by Federal Agency...... 129

Supplementary Schedule of Expenditures of Federal Awards by Federal Agency and Federal Program ............................................................................................................................. 131

Notes to the Supplementary Schedule of Expenditures of Federal Awards...................................... 141

STATE OF OHIO

SINGLE AUDIT REPORT FOR THE FISCAL YEAR ENDED JUNE 30, 2005

TABLE OF CONTENTS

Page

INDEPENDENT ACCOUNTANTS' REPORTS ON COMPLIANCE AND INTERNAL CONTROLS

Independent Accountants' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Required by Government Auditing Standards ............................. 147

Independent Accountants' Report on Compliance with Requirements Applicable to Each Major Federal Program and Internal Control over Compliance in Accordance with OMB Circular A-133 ................................................................................................................................ 151

Schedule of Findings and Questioned Costs:

Summary of Auditors' Results .................................................................................................... 155

Major Federal Awards Programs ................................................................................................ 157

Summary of Findings and Questioned Costs ............................................................................. 162

Summary of Questioned Costs by Federal Agency ................................................................... 164

Schedule of Findings and Questioned Costs by State Agency Ohio Department of Development (DEV).............................................................................. 165 Ohio Department of Education (EDU) .................................................................................. 167 Ohio Department of Health (DOH) ....................................................................................... 173 Ohio Department of Job and Family Services (JFS) ............................................................ 183 Ohio Department of Mental Health (DMH) ........................................................................... 291 Ohio Department of Mental Retardation and Developmental Disabilities (DMR) ................ 295 Ohio Department of Public Safety (DHS) ............................................................................. 299

SUPPLEMENTAL INFORMATION

Status of Prior Single Audit Findings ................................................................................................ 301

NOTE:

The State of Ohio Comprehensive Annual Financial Report for fiscal year ended June 30, 2005, has been issued in a separate report by the Ohio Office of Budget and Management. This report can be viewed at the following website: state.oh.us/obm/

EXECUTIVE SUMMARY 2005 STATE OF OHIO SINGLE AUDIT

AUDIT OF BASIC FINANCIAL STATEMENTS

There are 12 separate opinion units included in the basic financial statements of the State of Ohio for the fiscal year ended June 30, 2005. Four of the 12 opinion units are audited entirely or primarily by independent accounting firms under contract with the Auditor of State. The remaining eight opinion unit audits are performed by audit staff of the Auditor of State. This division of responsibility is described in our Independent Accountants' Report on page 1.

We audited the basic financial statements of the State of Ohio as of and for the period ended June 30, 2005, following generally accepted auditing standards and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the Single Audit Act Amendments of 1996, and the provisions of Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The objective of our audit was to express our opinion concerning whether the financial statements present fairly, in all material respects, the financial position of the State of Ohio, and the results of its operations, and cash flows of the proprietary and similar trust funds, in conformity with accounting principles generally accepted in the United States of America. We issued an unqualified opinion on 10 opinion units and a disclaimer on two opinion units, as described below.

As described on page 2, we did not express an opinion on the Workers' Compensation Enterprise Fund and the business-type activities opinion units. The financial statements of the Ohio Bureau of Workers' Compensation and Industrial Commission of Ohio (BWC) were not audited. This audit was commenced but not completed by independent public accountants under contract with the Auditor of State. The BWC comprises the Workers' Compensation opinion unit, a major enterprise fund, and represents 87 percent and 44 percent of the total assets and total revenue, respectively, of the business-type activities financial statements.

In addition to our opinions on the basic financial statements, we issued an Independent Accountants' Report on Internal Control over Financial Reporting and on Compliance and Other Matters Required by Government Auditing Standards. This letter is commonly referred to as the yellow book letter. The letter for the fiscal year ended June 30, 2005, included two reportable conditions. These two internal control weaknesses are described on the third page of this Executive Summary.

AUDIT RESPONSIBILITIES AND REPORTING UNDER CIRCULAR A-133

The Single Audit Act requires an annual audit of the State's federal financial assistance programs. The specific audit and reporting requirements are set forth in U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations.

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State of Ohio Executive Summary Page 2

The Schedule of Expenditures of Federal Awards (the Schedule) reports federal expenditures for each federal financial assistance program by federal agency, as identified by the Catalog of Federal Domestic Assistance (CFDA) number. As detailed on pages 131 through 139, the State administered 325 federal programs with total federal expenditures of $16.4 billion in fiscal year 2005, received from 22 Federal agencies.

The Schedule is used for identifying Type A and Type B programs. For fiscal year 2005, Type A federal programs for the State of Ohio were those programs with annual federal expenditures exceeding $30 million. There were 36 programs at or above this amount. The remaining 289 programs were classified as Type B programs. The identification of Type A and B programs is used to determine which federal programs will be tested in detail for compliance with federal laws and regulations. Under Circular A-133, the auditor uses a risk-based approach to testing. Once programs are classified as Type A or B, they are then assessed as either high or low risk programs. All high-risk Type A programs are considered major programs and are tested in detail for compliance with federal regulations. One high-risk Type B program is then selected for testing to replace each low-risk Type A program. The State of Ohio had 32 high-risk Type A programs and four high-risk Type B programs selected for testing as major programs in fiscal year 2005.

With the approval of our federal cognizant agent, the Auditor of State includes the Department of Job and Family Services programs administered at the county level as part of State Single Audit even though county financial information is not otherwise incorporated into the State's financial statements. We selected six of the 88 counties in fiscal year 2005 and performed testing related to the Department of Job and Family Services' major programs. The results of our county level audit procedures are included in the Schedule of Findings and Questioned Costs.

In accordance with A-133, we issued an Independent Accountants' Report on Compliance with Requirements Applicable to Each Major Federal Program and Internal Control Over Compliance in Accordance with OMB Circular A-133. Our report on compliance includes our opinion on compliance with the 36 major federal financial assistance programs and describes instances of noncompliance with Federal requirements we detected that require reporting per Circular A-133. This report also describes any reportable conditions we identified related to controls used to administer Federal financial assistance programs, and any reportable conditions we determined to be material weaknesses.

As described on pages 151 and 152, we identified four federal programs where compliance objectives were not met. The compliance requirement for subrecipient monitoring was not achieved for the Department of Education's Charter Schools program and the Department of Public Safety's State Domestic Preparedness Equipment Support program. Additionally, the earmarking requirement for the Department of Job and Family Services' Social Service Block Grant program and the federal reporting requirement for the Department of Job and Family Services' Unemployment Insurance program were not met.

SUMMARY OF FINDINGS AND QUESTIONED COSTS

The fiscal year 2005 Schedule of Findings and Questioned Costs, beginning on page 162, contains 62 findings related to seven state agencies. Of these findings, 20 resulted in questioned costs, 12 were noncompliance, four were identified as material weaknesses, and 26 were reportable conditions. The findings with questioned costs over $1 million are summarized as follows:

? The Department of Public Safety had questioned costs of $61,893,834 related to the State Domestic Preparedness program. This program provides monies from the U.S. Department of Homeland Security through the Department to state and local governments for preparedness equipment support. This was a new federal program and the Department did not have an effective system to monitor its subrecipients. They performed limited site visits but did not maintain adequate documentation. Although their subrecipients were state and local governments, the Department had no established procedures for tracking A-133 audits completed by their auditors. The finding and related client corrective action plan are included on page 299.

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State of Ohio Executive Summary Page 3

? The Department of Education had questioned costs of $20,027,966 related to the Charter Schools program. The Department lacked effective subrecipient monitoring. Although there are a number of potential monitoring tools (such as site visit reports, community school sponsors, annual performance reviews, and monitoring of A-133 audits), the Department did not effectively utilize these monitoring controls. The finding and related client corrective action plan are included on page 167.

? The Department of Job and Family Services had questioned costs of $10,840,460 related to the Social Service Block Grant (SSBG) program. The Department is permitted by federal law to transfer a portion of TANF monies to the Social Service Block Grant (SSBG) program to be earmarked to provide assistance for needy families with children. The questioned costs represent SSBG funds earmarked for needy families with children used for adult protective services which are predominately for the elderly. These services are not allowable under TANF requirements. The finding and related client corrective action plan are included on page 183.

? The Department of Job and Family Services had questioned costs of $2,478,148 related to the Medicaid program. Every provider of Medicaid services must be an "eligible provider" who is licensed by the State. Utilizing audit software, we determined that 669 providers were inactive or not currently licensed with the Ohio Medical Board. The Department paid $2,478,148 to these 669 providers in fiscal year 2005. The finding and related client corrective action plan are included on page 185.

In addition, the 2004 State of Ohio Single Audit included an undetermined questioned cost related to the Hamilton County Department of Job and Family Services. The Auditor of State is near completion of a special audit of Hamilton County which will provide more information concerning potential federal questioned costs. The 2005 Schedule of Findings and Questioned Costs included $638,993 in questioned costs for Hamilton County related to similar issues. This finding and related client corrective action plan are included on page 187.

Of the four material weaknesses in internal control identified in the Schedule of Findings and Questioned Costs, two were also noted as reportable conditions in the Independent Accountants' Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Required by Government Auditing Standards. The comments are summarized below:

? The Department of Job and Family Services has not remedied a long-standing weakness in internal controls related to manual overrides of the Client Registry Information System-Enhanced (CRIS-E) system. The Department utilizes CRIS-E at the county level to determine eligibility for various public assistance programs such as Food Stamps, TANF, and Medicaid. County level caseworkers notify the Department of necessary program changes to the system. At the end of fiscal year 2005, there were 527 open program change requests. In these situations, county level caseworkers are required to make manual overrides to CRIS-E in order to complete transactions. This increases the risk of inconsistent application, a great deal of judgment by supervisors, and potential benefit errors to recipients. The finding and related client corrective action plan are included on page 240.

? In August 2004, the Department of Job and Family Services began a new computer application, the Ohio Job Insurance (OJI) program, to replace the Benefits System used to determine benefits and issue payments for the Unemployment Insurance program. We noted six instances where multiple payments were made in error. There were 19 instances where duplicate warrants with the same warrant number were mailed. These transactions were subsequently corrected by the Department. In November 2004, the OJI system erroneously produced 191 refund warrants for $93,351 which resulted in questioned costs. There were over 3,000 programming corrections made to OJI in fiscal year 2005. The finding and related client corrective action plan are included on page 233.

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State of Ohio Executive Summary Page 4

The schedule below identifies the number of reportable conditions included in the State of Ohio Single Audit from fiscal year 2001 through this report. The schedule is divided by state agency and does include findings which were repeated over a number of years.

State Agency Department of Job & Family Services Department of Education Department of Health Department of Mental Retardation Office of Criminal Justice Services Other State Agencies Total

2005 47 3 6 3 0 3 62

2004 57 6 6 5 2 3 79

2003 62 6 3 4 2 1 78

2002 70 14 2 3 1 5 95

2001 69 14 4 3 3 6 99

In addition to the reportable conditions included in this report, each state agency receives a management letter which includes internal control comments and legal citations that do not rise to the level of a reportable condition. These state agency management letters are not part of this report.

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