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 ILLINOIS HISTORICAL SURVEi
 
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 REPORTS AND RECOMMENDATIONS 
 
 TO 
 ILLINOIS BUDGETARY COMMISSION 
 
 with respect to investigation on behalf of the 
 Commission as to operations of the Auditor's 
 office under Orville E. Hodge. 
 
 Lloyd Morey 
 
 Auditor of Public Accounts 
 
 Albert E. Jenner, Jr. 
 Counsel 
 
 John S. Rendleman 
 Assistant Counsel
 
 Z^^^' '^ TABLE OF CONTENTS 
 
 (li.p.2. Pag< 
 
 Preface i 
 
 Findings 1 
 
 Fraudulent Warrants 2 
 
 Misappropriation from Trust Funds in the Custody of the Auditor . . 6 
 
 Improper Use of State Funds 10 
 
 Padded Payrolls and Other Payroll Abuses 10 
 
 Other Irrlproper Uses of State Funds 14 
 
 Conflicts of Interest 16 
 
 Interference with the Right of the Public to Inspect Public Records . 19 
 
 Remodeling in the Auditor's Office 21 
 
 The Statehouse Commission 22 
 
 Auditing Practices 24 
 
 Personal Loans of the Auditor 25 
 
 Supervision of Financial Institutions 26 
 
 Weaknesses in the State Fiscal System 26 
 
 Constitutional Weaknesses 26 
 
 Statutory Weaknesses 27 
 
 Adnninistrative Weaknesses 28 
 
 General 28 
 
 Auditor's Office 29 
 
 Recommendations 31 
 
 Preaudit 31 
 
 Separation of Preaudit and Postaudit 34 
 
 Budgetary Conrimission 36 
 
 Annual Legislative Sessions 42 
 
 Financial Reporting and Procedural Auditing 43 
 
 Procurement Practices 45 
 
 \^ Purchasing 45 
 
 _ Centralized Purchasing 48 
 
 «. Construction, Remodeling and Alterations 50 
 
 VJ^ Departnnent of Administrative Services 52 
 
 N State Treasurer 53 
 
 I Receipt, Custody and Disbursement of State Funds 53 
 
 ^^ Registration of Bonds 54 
 
 y Selection 55 
 
 V Postaudit 56 
 
 (K ^ Regulation of Financial Institutions 63 
 
 .^*^ Abolition of the Office of Auditor of Public Accounts 65 
 
 Personnel Policies 67 
 
 >( ^ Conflict of Interest Statute 69 
 
 ^ Campaign Contributions and Expenses 72 
 
 >^ The Auditor's Record Keeping Duties 74 
 
 "^ . Bonds of State Officers 75 
 
 t*" ^ Right of Inspection of Public Records 76 
 
 /\ <^ Crime Investigating Commission 77 
 
 Uniform Abandoned Property Act 78 
 
 Summary of Recommendations 81 
 
 Bibliography 84 
 
 ^r 
 
 \
 
 PREFACE 
 
 On July 5, 1956, Honorable William G. Stratton, Governor of Illinois, 
 transmitted to the Illinois Budgetary Commission his written request that the 
 Com>mission make a full investigation and study of the reported fiscal irregu- 
 larities in the office of the Auditor of Public Accounts of Illinois during the term 
 of office of Orville E. Hodge. This letter recites inter alia: 
 
 "I am, therefore, requesting this Commission to make a 
 full study and investigation of all operations in this field and to 
 report its findings, with recommendations for improvements of 
 operations and procedures, at the earliest date possible." 
 
 Upon receipt of Governor Stratton's request the Commission Chairman, 
 Honorable Everett R. Peters, conferred with Governor Stratton and Honorable 
 Latham Castle, Attorney General of Illinois. Mr. Castle appointed Albert E. 
 Jenner, Jr. , past president of the Illinois State Bar Association and chairman 
 of the Illinois Uniform State Laws Commission, and a member of the Chicago 
 Bar, as a Special Assistant Attorney General of Illinois to assist him and his 
 staff in the investigations they already launched in conjunction with Honorable 
 George P. Coutrakon, State's Attorney of Sangamon County, Illinois. Mr. Jenner 
 was also requested and he agreed, subject to the approval of the Connmission, to 
 serve as counsel for the Commission. Pending the initiad meeting of the Commis- 
 sion, Mr. Jenner proceeded with the preliminary work upon the agenda and staff 
 organization. 
 
 The Commission met on July 17, 1956, to outline and launch upon its 
 investigation. In the meamtime and at the instance and persuasion of Governor 
 Stratton and Mr. Castle, Mr. Hodge had resigned his office and Governor Stratton
 
 had promptly appointed Dr. Lloyd Morey, President Emeritus of the University 
 of Illinois, and for many years its Comptroller and principal officer, to succeed 
 Mr. Hodge as Auditor of Public Accounts of Illinois. Dr. Morey accepted the 
 appointment on July 16 and was sworn into office on July 18, 1956. 
 
 At its meeting on July 17, 1956, Mr. Jenner was formally appointed as 
 counsel for the Commission. He requested the selection and appointment of a 
 full time assistant and on his recommendation Mr. Castle appointed John S. 
 Rendleman, Esq. , of Carbondale, Illinois, a member of the Illinois Bar and 
 Legal Counsel for Southern Illinois University, a Special Assistant Attorney 
 General. Mr. Rendleman was thereupon also appointed as additional counsel, 
 the Board of Trustees of Southern Illinois University having in the interinn granted 
 him a leave of absence from his duties. 
 
 At the meeting of July 17, 1956, Mr. Jenner reported to the Commission 
 the then known facts and circumstances with respect to the maladministration of 
 the office of Auditor of Public Accounts under Mr. Hodge and presented an agenda 
 of recommendations for investigation and procedure. The recomnnendations and 
 the agenda were approved and Mr. Jenner was directed to proceed forthwith 
 together with Dr. Morey and Mr. Rendleman and independent public auditors, 
 to be selected after consultation with the Commission by Dr. Morey and Mr. 
 Jenner, to conduct the investigation. 
 
 At a subsequent nneeting of the Commission, held shortly after Dr. Morey 
 assumed office, the Commission appointed, after consultation with hinn and Mr. 
 Jenner, the public accounting firm of Peat, Marwick, Mitchell fc Co. , Chicago, 
 to serve as independent auditors and to conduct an exhaustive audit of the office 
 
 ii
 
 of Auditor of Public Accounts during Mr. Hodge's stewardship. 
 
 The Commission also requested Dr. Morey to work with Messrs. Jenner 
 and Rendleman in formulating recommended changes in the area of State auditing 
 and accounting. Dr. Morey appointed Mr. Eric Kohler, Certified Public Account- 
 ant, widely known and experienced in the accounting for public bodies, to assist 
 in this task. 
 
 The Illinois Budgetary Commission was created in 1937 by an Act of the 
 General Assembly. (HI. Rev. Stat., 1955, ch. 127, sees. 193-200) The Com- 
 mission is required by Sec. 6 of the Act (ch. 127, sec. 198) to "make a thor- 
 ough study and investigation of all State expenditures and income from any 
 source * * " and by Sec. 7 of the Act (ch. 127, sec. 199) "to present a report 
 including its recommendations, to the Governor * * " zmd "to report thereon 
 to the" General Assembly. Section 8 of the Act (ch. 127, sec. 200) provides 
 that "it shall be the duty of all departments, officers, institutions, boards, 
 commissions and other State agencies, to render to the Commission any assist- 
 ance that may be required by the Commission for the purpose of preparing their 
 report and recommendations pursuant to this Act." However, the Act does not 
 confer subpoena power on the Commission or authority to place witnesses under 
 oath. 
 
 This report reflects the composite efforts of the Commission, its counsel 
 and staff, Mr. Casde and his staff. Dr. Morey and his consultants and employees, 
 and Peat, Marwick, Mitchell 8i Co. , as well as various other persons and agencies 
 hereinafter mentioned. 
 
 The Commission requested that a complete study, investigation, and 
 
 111
 
 report be made of the factors determined to be responsible for the conditions and 
 events which had prompted the investigation; that State fiscal procedures be 
 investigated; that particular inquiry be made into State monies involved; that 
 counsel and Dr. Morey cooperate with other State and Federal agencies; and 
 that recommendations designed to prevent recurrence of irregularities in the 
 Auditor's office, as well as reconnmendations , if any, with respect to any other 
 operations and functions in other offices, be submitted to the Commission in 
 due course. 
 
 The report, therefore, suggests fiscal and administrative changes and 
 improvements (some of which have already been effected by Dr. Morey in his 
 office since the inception of the investigation), various statutory changes, and 
 a few proposals for revision of the Illinois Constitution. It is recognized that 
 of necessity there will be differentials in time within which the implementation 
 of such of the recomnnendations herein made that are approved and adopted may 
 be effected. Those with respect to adnninistrative «md fiscal procedures may 
 be implemented reasonably promptly. Those requiring legislation must await 
 consideration by and approval of the General Assembly. Those dependent upon 
 constitutional revision must await both action of the General Assembly and 
 approval of the electorate. However, much can be accomplished pending 
 constitutional change. 
 
 The recommendations hereinafter made relate to various governmental 
 deficiencies, practices, procedures, operations, and abuses which were noted 
 in the course of the investigation, and especially the changes needed to modernize 
 and improve the State fiscal organization and procedures. Understandably, the 
 
 iv
 
 recommendations are not confined to the office of the Auditor of Public Accounts. 
 Governor Stratton's letter invited a broader inquiry and Sec. 6 of the Act 
 creating the Connmission (111. Rev. Stat., 1955, ch. 127, sec. 198) places cm 
 the Commission the duty to "make a thorough study and investigation of all 
 State expenditures and income from any source". 
 
 Furthermore, the need for inquiry into and recommendations concerning 
 State governmental organization and fiscal procedures generally is required by 
 the interplay between the Auditor's office and the affected areas of recommenda- 
 tion, or by the fact that abuses and deficiencies discovered in the operations of 
 the Auditor's office might possibly be repeated in other areas of State govern- 
 ment. 
 
 The general approach to these problems has not been linnited merely to 
 "stopping leaks" in existing procedures. The framework of Illinois government 
 and many of the fiscal procedures still in vogue were established by the Con- 
 stitution of 1870. The last major revision of State fiscal and executive adminis- 
 trative organization was made in 1918 under the late Governor Frank O. Lowden 
 when the Code Departments were established under the Governor as chief of 
 the executive department and under the fiscal supervision of the Department of 
 Finance as the Governor's agency. Major changes in conditions and philosophy 
 of governmental administration have taken place since 1870. No private business 
 would today attempt to operate under the kind of procedures in effect in 1870. 
 Increase in volumve alone in the State's business is 300 to 400 times that existing 
 in 1870. This fact alone necessitates major readjustments.
 
 The pattern of independent, largely unintegrated, autonomous constitu- 
 tional offices provided by the Constitution of 1870 still remains. They were 
 attune perhaps to the needs and tenor of that era, but certainly not to present 
 day demands and problems. This circumstance served in substantial part, 
 though it was not by any nneans the sole contributing factor, opportunities for 
 the shocking misfeasances and irregularities and to delay discovery cind dis- 
 closure thereof during the adnninist ration of Mr. Hodge. 
 
 Much can and should be accomplished by meams of changes in existing 
 administrative procedures and by way of new legislation within the present frame 
 work of Illinois government and without constitutional revision. However, the 
 lessons of basic weaknesses in the fiscal structure of Illinois government so 
 painfully and expensively taught by the events of recent months will not bear 
 the full fruit which those lessons clearly warrant until in due course and upon 
 sober reflection the Constitution is appropriately revised. 
 
 A broad review of Illinois governmental organization as well as fiscal 
 procedures is needed in addition to specifics. We therefore wish to initially 
 recommend that a Commission be established to restudy the problem of State 
 governmental organization and to review the work of the Comnnission to Study 
 State Government (also known as the "Schaeffer Commission"). 
 
 A clear fundamental defect was that Illinois governmental structure 
 gave the appearcince that effective fiscad controls existed and were functioning. 
 
 1. Other contributing major governmental factors are conamented upon else- 
 where in this report. 
 
 VI
 
 But the apparent security was one of form only. As to the Auditor's office itself 
 there were no means of providing for regular, professionally competent and 
 independent auditing of the office. The refrain "Who takes care of the care- 
 taker's daughter while the caretaker's daughter is taking care" has rung painfully 
 upon the eardrums and seared the minds of the citizens of Illinois since June of 
 this year when the sensational and almost vmbelievable news first begem to break 
 in the public press. 
 
 The overall story of the "Hodge case" is primarily recorded in the daily 
 press of this State there to remain unless and until someone undertakes the 
 assignment of assennbling, correlating, reporting and publishing the sordid 
 history in one work. It is a task to which we were neither assigned nor which 
 we could discharge in the absence of full tinne devotion thereto over a consid- 
 erable period of time. We maintained and there is returned as a supplement to 
 this report a complete set of newspaper clippings, of day to day news items, 
 editorial comment, etc. , commencing with the first time intimations appeared 
 in the Chicago Daily news. This newspaper clipping file contains a wealth of 
 infornnation, much of which is fully verified by our files, which have been 
 deposited with the Connnnission. 
 
 We had benefit of consultation with the Public Administration Services 
 and the Council of State Governments, both of Chicago, Illinois, the Institute of 
 Government and Public Affairs at the University of Illinois, and the Illinois 
 Legislative Council and Illinois Legislative Reference Bureau. We have also 
 made use of studies and nnaterials written on the subjects encompassed in this 
 report and have attached to the report a Bibliography containing some of the 
 
 vii
 
 ■references which we have found most helpful. 
 
 The basic philosophy and the consideration that informed ajid guided these 
 studies may be summed up as follows: 
 
 (1) Authority must accompany responsibility. Accountability must attend 
 both authority and responsibility. We believe in the following formula: responsi- 
 bility coupled with authority, plus accountability equals sound governmental and 
 financial adnrunistration. 
 
 (2) Emphasis should be placed upon sound overall financial management 
 rather than on mere mechanical or ministerial checks upon individual transactione, 
 Substance rather than form is the object. The former is more likely to prevent 
 mismanagement than the latter. 
 
 (3) Duplication and repetition of fiscal functions within cind between 
 offices, departments and agencies, should be eliminated wherever possible. 
 The costs of sound fiscal management should be kept to a minimum consistent 
 with effective financial planning, management, execution eind review. Outmoded 
 fiscal offices and function should be eliminated. 
 
 (4) It is vital that executive budget planning as well as legislative review 
 of appropriations expenditures be a continuing process. 
 
 (5) Fiscal and other governmental procedures should be aids to elected 
 constitutional officers and agencies and departments under them in their dis- 
 charge of the high public trust and confidence given by the people of the State in 
 electing them to office. 
 
 (6) Weaknesses in one segment of governmental structure or in an 
 
 Vlll
 
 individual temporarily occupying high office should not lead U8 to haaty and unwise 
 conclusions and action as to other segnnents of the structure or blindness to the 
 fact that the overwhelming majority of elected public officials and of public 
 employees are men and women of honor, character and integrity who devote 
 themselves in full measure to the discharge of their public trust. 
 
 (7) Careful attention should be given to decentralization of fiscal, pro- 
 cedural and administrative operations so as to expedite the business of the State 
 and avoid bottlenecks, expense, unwieldiness and inefficiency that always attend 
 over -centralization. 
 
 (8) The independence of legislative and executive departments from each 
 other should be scrupulously observed. 
 
 (9) The executive department is responsible independent of the legis- 
 lative departnnenc for collection of State revenue, for financial planning and 
 budgeting and for the proper expenditure of State funds appropriated by the 
 legislature. 
 
 (10) The legislature is responsible, independent of the executive depart- 
 ment, but subject to the veto power of the governor, for study and review of 
 executive budget requests and for appropriating anticipated State revenues. 
 Since the legislature is the body which determines the uses and purposes to 
 which State revenues shall be applied and appropriates those revenues to those 
 uses and purposes, it has ajid should exercise the power to investigate by post- 
 audit and other means in order to determine whether State funds have been or 
 are applied as appropriated. 
 
 IX
 
 (11) Esprit de corps, encouragement of position in government as a career, 
 professional amd personal pride and competence on the part of staff members 
 
 and State employees at all levels should be nurtured and encouraged. 
 
 (12) Every effort should be made to separate fiscal functions that should 
 be independent of each other such as: 
 
 (a) Budget planning and making. 
 
 (b) Budget review and appropriations. 
 
 (c) Preaudit of expenditures of appropriated funds. 
 
 (d) Disbursing and accounting. 
 
 (e) State business operations - purchasing, printing, 
 construction, remodeling, property control amd 
 general housekeeping. 
 
 (f) Regulation and supervision of private financial institutions. 
 
 (g) Finally, an adequate reporting of financial operations and 
 procedures to the General Assembly, which, as the direct 
 representative of the people, is responsible for authorizing 
 expenditures of the public funds. 
 
 This report is written with full recognition of the impossibility of 
 legislating integrity in government or in the hearts and minds of men. In 
 the final analysis good government depends upon the character, integrity and 
 good purposes of those who occupy public office and of those who serve under 
 them in those offices. However, it is possible to encourage integrity, esprit 
 de corps, pride in accomplishment and healthy ambition for advancement in
 
 position and office. It is also possible and desirable to improve and nnodernize 
 the outmoded financial procedures and governmental organization under which 
 the State has been laboring and, by erecting additional safeguards, at least to 
 deter the few who would pervert public trust into personal gain. 
 
 LJoyd Morey 
 
 Auditor of Public Accounts 
 
 Albert E. Jenner, Jr. 
 Counsel 
 
 John S. Rendlenian 
 Assistant Counsel 
 
 XI
 
 FINDINGS 
 
 Orville E. Hodge was elected Auditor of Public Accounts for the State of 
 Illinois in the general election held Novenriber 3, 1952. He was inaugurated and 
 assumed the duties of this office on January 13, 1953. He served from that time 
 until July 16, 195 6, when he resigned as a result of revelations of improper conduct 
 on his part and on the part of employees in his office during his term. 
 
 During the 42 months Mr. Hodge served, there were numerous instances of 
 misfeasance and malfeasance in the office. We are pleased to report that the con- 
 spiracies that resulted in the depredation and misconduct in Mr. Hodge's office were 
 confined to him and a limited number of personnel in his office. We have found no 
 evidence that other public officials or employees conspired with hinn. 
 
 Many aspects of the misconducts have been obliterated by the rapid and 
 sensational developments that occurred during the course of the many investiga- 
 tions conducted in recent months by various State and public officials. We cannot 
 set forth in this report the evidence we accumulated in our investigation, nor do the 
 limitations of this report permit detailed summary thereof. The program and final 
 reports and audits of Messrs. Peat, Marwick, Mitchell t Co. , together with our own 
 abundant investigation files have been presented to and filed with the Commission. 
 They will supplement this report. 
 
 The following are the essential findings of our investigatory efforts. 
 
 We wish to acknowledge the assistance of the offices of the United States 
 Attorneys for the Southern and Northern districts of Illinois, the offices of the 
 State's Attorneys of Sangamon and Cook Counties, the Banking Committee of the 
 Senate of the United States, the United States Internal Revenue Service and 
 
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 the many others in public, private and personal life too numerous to mention who 
 were of assistance. 
 
 We are especially indebted to the public press and members of their report- 
 ing staffs. We dare say that never have representatives of the State had so far 
 flung an effective supplementary investigative aids at no expense to the State. 
 
 We are also much indebted to Peat, Marwick, Mitchell & Co. , and Messrs. 
 Waldo Mauritz, and Gordon Conaghan of that firm. They rendered material assist- 
 ance in guiding us through the mass of complicated financial transactions and 
 records. They have prepared expansive audit reports which envelop the specific 
 instances and amounts of Mr. Hodge's defalcations, as well as the procedures he 
 employed. 
 A. FRAUDULENT WARRANTS 
 
 One of the nnany sensational aspects in the Hodge case was the disclosure 
 that warrants, which are, in effect, checks drawn against State funds; were being 
 made and issued in favor of persons neither entitled to nor seeking payment of funds 
 from the State of Illinois and who were wholly unaware of their existence. All of 
 these warrants were cashed at the Southmoor Bank and Trust Company of Chicago. 
 The proceeds fronn these fictitious and fraudulent warrants were received by Mr. 
 Hodge personally. 
 
 Another device employed was to issue warrants to vendors in amounts ex- 
 ceeding the legitimate proper amounts due. These warrants were also cashed at 
 the Southmoor Bank and Trust Company of Chicago. The legitimate amounts were 
 either credited to the vendors' accounts or monies received by Mr. Hodge upon the 
 cashing of the warrants were delivered to certain of the vendors. In all instances
 
 in which there was an excess of funds received upon the cashing of the warrants over 
 and above the amounts credited or paid to the vendors, that excess was either re- 
 ceived directly by Mr. Hodge or deposited to the credit of a personal and private 
 memorandum checking account secretly maintained at the Southmoor Bank and 
 Trust Company by Edward A. Hintz, Executive Vice President of the bank. 
 
 These practices connmenced early in the year 1953 or early in Mr. Hodge's 
 term of office and continued through May, 1956. 
 
 Under the provisions of the Illinois Constitution, warrants may be drawn 
 and issued upon the State Treasury only by the Auditor of Public Accounts. In 
 cases other than payments for bills which the Auditor's office has incurred, the 
 preparation of the warrants is initiated by the submission to the Auditor of a vou- 
 cher, the correctness of which is certified by the State official to whom is entrusted 
 the expenditure of State funds against which the warrant is drawn. In the usuad 
 case, the voucher has been certified, the mathematical computations are correct 
 and that there exists an available balance in the appropriation account against 
 which the voucher is drawn. Approximately 15,000 warrants are drawn every work- 
 ing day in the Auditor's office and it is impossible for all vouchers to be examined 
 in detail. After the warrants are prepared they are transmitted to the Treasurer's 
 office. The Treasurer's sole function is to ascertain that the appropriation account 
 against which the warrant is drawn exists and that there is a balance in that account 
 with which to honor the warrant when presented for payment. Upon ascertaining these 
 
 1. Similar improper practices with respect to Trust Funds resulting from the 
 liquidation of financial institutions are reported under the following division of this 
 report. 
 
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 facts, the Treasurer countersigns the warrants and returns the same to the Aud- 
 itor's office for distribution. The counter -signature is not a certification of the 
 legitimacy of the warrant. The voucher upon the basis of which the warrant was 
 drawn by the Auditor is not transmitted to the Treasurer but is retained by the 
 Auditor. 
 
 In those instances in which illegal and fraudulent warrants were drawn, a 
 voucher was prepared in one department of the Auditor's office, the correctness 
 of that voucher was certified in another department of the office, and the warrant 
 itself was drawn in still another department of the office. The ficitious vouchers 
 were prepared at the direction of Edward A. Epping, a private public accountant 
 and fellow conspirator of Mr. Hodge, whom he served as "office manager". 
 The vouchers then proceeded in normal course axid routine through the warrant 
 preparation divisions of the office and were delivered to the Treasurer's office for 
 the formality of his counter -signature. They were thereupon returned by him to the 
 Auditor's office for distribution. The employees of the Auditor in charge of distri- 
 buting warrants were directed in advance by Epping to give either to himself or one 
 Lloyd Lane all so-called commercial warrants drawn against funds appropriated for 
 the Auditor's office. From the warrants given Epping the illegal ones were ex- 
 tracted and delivered by Epping to the confederating officer of the Southmoor Bank 
 and Trust Company of Chicago, Mr, Edward A. Hintz. He arranged for the cashing 
 and secret recording of the warrants. Either Epping would receive all or a part of 
 
 2. Excluded therefore were payroll warrants and the like (with exceptions noted 
 hereafter in this report), as well as all warrants originating in other state offices. 
 Those warrants followed the usual, regular and proper channels and were distri- 
 buted in the proper course. 
 
 4 -
 
 the cash proceeds of the warrants, or the proceeds would be deposited in whole or 
 in part in the "brown envelope account. " The audit report of Peat, Marwick, 
 Mitchell & Co. reveals that $934,77 1.26 was thus wrongfully disbursed fronn gen- 
 eral State funds appropriated by the General Assembly for the office of the Auditor 
 of Public Accounts. 
 
 Funds recorded in the "brown envelope account" were disbursed by Mr. 
 Hodge either by his personal check drawn on the Southmoor Bank and Trust Company 
 of Chicago or by cashier's checks purchased from the bank through Mr. Hintz. 
 When the checks drawn by Mr. Hodge on the bank were received from bank clearings 
 they were intercepted by Mr. Hintz who in turn arranged for the balancing of the 
 bank's clearing house account with the funds from the brown envelope. All of Mr. 
 Hodge's checks drawn on the Southmoor Bank and Trust Company and all cashier's 
 checks purchased were for private and personal uses and purposes of hinnself and 
 members of his family. 
 
 The personal checks drawn on the "brown envelope account" by Mr. Hodge 
 were in the normal form and appearance of checks drawn on personal checking 
 accounts. Payees of those checks were not put on notice by virtue of the form of 
 the checks that the funds upon which the checks were drawn were other than Mr. 
 Hodge's legitimate personal funds on deposit with the Southmoor Bank and Trust 
 Company of Chicago. One of the audit reports of Peat, Marwick, Mitchell & Co. 
 is devoted to an analysis of the "brown envelope account. " We have been unable to 
 
 3. However, included among these warrants are four warrants totaling $88,878.28 
 that were drawn upon funds appropriated by the General Assembly for the account 
 of the State House Commission. See division of this report entitled "Remodeling 
 in the Auditor's Office. " 
 
 - 5 -
 
 determine up to the present moment the identities of all of the persons, firms, and 
 corporations in whose favor checks were drawn on the "brown envelope account", 
 or the purposes for which the checks were delivered or the uses to which the pro- 
 ceeds thereof were ultimately put. That investigation work is continuing. Further- 
 more, substantial amounts of the proceeds of the fraudulent warrants were received 
 in the form of cash by Mr. Hodge and Mr, Epping and we have been unable to de- 
 termine the uses to which these funds were put or the persons in whose pockets the 
 monies finally came to rest. 
 
 Information respecting the ultimate resting place of some of the proceeds of 
 fraudulent warrants and of fraudulent checks drawn on the trust funds from liquidated 
 financial institutions has been reported, to the Attorney General, to the extent the 
 same becanne available to us and as well to other interested public officials. The 
 Attorney General has promptly undertaken legal and other action in each instance to 
 effect recovery for the State of these dissipated monies. In large part his efforts 
 have been effective and rewarding. It presently appears that eventually there will 
 have been recovered and returned to the State all or substantially all of the funds dis- 
 sipated by Mr. Hodge by way of fraudulent warrants drawn on the State treasury and 
 checks drawn on liquidated financial institution trust funds. 
 
 B. MISAPPROPRIATION FROM TRUST FUNDS IN THE CUSTODY OF THE 
 AUDITOR 
 
 Under existing Illinois Statutes whenever a private financial institution is 
 
 liquidated, if, after judicial or appropriate administrative proceedings, any assets 
 
 4. There is treated in the following division of this report the return by Mr. Hodge 
 of $528, 880. 28 misappropriated by him from the liquidated financial institution 
 trust funds. 
 
 - 6 -
 
 remain undistributed, the Auditor of Public Accounts is entrusted with their cus- 
 tody. The statutes provide for payment of those funds to the persons entitled to 
 their distributable shares. 
 
 Once the funds reached the Auditor's custody they were deposited by him in 
 a bank account open and maintained by him. Until the passage of the Disposition 
 of Unclaimed Funds and Property Act in 1955 (111. Rev. Stat. 1955, Ch. 22, 
 Sees. 32-39) these funds were not required to be and they were not deposited in the 
 State Treasury or in a special custody account in the control of the State Treasurer. 
 No audit was required to be made of the accounts and none is required to be made 
 under the terms of the 1955 Unclaimed Funds and Property Act. Until the passage 
 of that Act the Auditor was not required to report his stewardship to those funds. 
 Audits were customarily made, however, by incoming incumbents of the office of 
 Auditor of Public Accounts. The funds were subject to withdrawal by bank checks 
 in the usual and customary form with or without the imprint of the office on the 
 faces thereof. No countersignatures were or are required. The Auditor may trans 
 fer the funds from bank to bank at will. 
 
 Under the 1955 Unclaimed Funds and Property Act there is a presumption 
 of abandonment of such funds in the custody of the Auditor upon the lapse of two 
 years after the date fixed by any court for the payment, delivery or final distribu- 
 tion thereof, with exceptions immaterial hereto. The funds presumed abandoned 
 are required to be deposited by the Auditor with the State Treasurer. He in turn 
 holds the funds as ex officio custodian in a special account known as the Unclaimed 
 Property Trust Fund. The Auditor is required at least every six months to trans- 
 fer to the General Revenue Fund of the State any amounts in the Unclaimed Prop-
 
 erty Trust Fund in excess of $25,000. Mr. Hodge ignored the terms and provisions 
 of this Act. 
 
 The liquidating Financial Institutions Trust Fvmds on deposit in various 
 banks when Mr. Hodge took office aggregated $845,394.53. They were on deposit 
 in three banks, $111, 388. 19 in the Springfield Marine Bank of Springfield, Illinois, 
 $17,351.04 in The Millikin National Bank of Decatur, Decatur, Illinois and 
 $716, 655. 30 in the Northern Trust Company of Chicago, Illinois. One of Mr. 
 Hodge's first official acts upon assuming office was to have the accounts of the 
 Liquidating Financian Institutions formerly located in the Northern District of 
 Illinois audited. The audit revealed to hinn that one J. W.F. Smith, who was an 
 employee of the Auditor's office at the time Mr. Hodge assumed his duties had 
 received, while such employee during the period 1947 through 1952, in addition 
 to his salary, the sum of $173,692.85 as paynnent on a so-called "contract basis" 
 for distributing $1,422,209.30 of the bank liquidation Trust Funds to persons 
 entitled to receive payment thereof. This represented an average cost of 53^ per 
 check distributed, exclusive of other expenses and taking into account other ex- 
 penses in that connection assumed and paid by the Auditor's office. The 
 $173, 692.85 was paid to Mr. Smith from the Trust Funds. The expenses of the 
 Auditor in connection with the distribution was paid from State funds appropriated 
 for the Auditor's office. Mr. Hodge did not publicize the report. 
 
 As stated above, most of the funds ($716,655.30) were on deposit in the 
 Northern Trust Company in Chicago in 167 separate accounts, one for each 
 liquidated financial institution. In a series of withdrawals, Mr. Hodge transferred 
 those funds from that bank to the Springfield Marine Bank and co -mingled them 
 
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 into one lump account. Comnriencing on December 10, 1953 and continuing through 
 November 9, 1954, Mr. Hodge made a series of fraudulent withdrawals from the 
 new account in the Springfield Marine Bank, totaling $484, 935. 37. $379, 136. 60 of 
 the $484,935.37 was placed by him in his "brown envelope account" at the South- 
 moor Bank. The balance of $105,798.77 was either obtained by Hodge by cashing 
 of checks or by the purchase of cashiers checks drawn on the Southmoor Bank or 
 by the purchase from the Southmoor Bank of draits on other banks. Of the 
 $379, 136.60 deposited in the "brown envelope account", $27,476.00 consisted of 
 checks n:iade payable to payees other than the Southmoor Bank and recorded in an 
 informad mennorandum in the Auditor's office as expenses of distribution of the 
 Trust F\inds. Each of the payees of those checks when contacted denied that he 
 received the check made payable to him or the proceeds. 
 
 On January 19, 1953, Mr. Hodge opened an account at the Southmoor Bank 
 ajid Trust Company in his name as trustee of the aforesaid Trust Funds in which 
 he deposited the $110,765.86 that was on deposit in the Springfield Marine Bank at 
 the tinne he took office together with $12,715. 64 he had received as the undis- 
 bursed proceeds of the liquidation of a Pana, Illinois Building and Loan Association. 
 Fromi November 1, 1954, through February 22, 1955, he made illegal withdrawals 
 totaling $61,750. 00 from the aforesaid new Trust Fund Account established at the 
 Southmoor Bank. This account rennained inactive from February to July of 1955 
 at which time Hodge, in a desperate effort to conceal his misappropriations, 
 deposited in the account the sum of $528, 880. 28 which he apparently computed as 
 being the amount he had misappropriated from the Financial Institutions Trust 
 Funds. 
 
 - 9 -
 
 The illegal disbursements of Trust Funds from the above mentioned ac- 
 counts aggregated $546, 685. 37 and therefore Mr. Hodge's efforts at restitution 
 on July 3 and July 6, 1956, fell short in the sum of $17, 805. 09. Of the Trust 
 Funds aggregating $845,394.53 on hand when Mr. Hodge took office, $186,263.51 
 appeared either to have been distributed to persons entitled thereto or to have been 
 disbursed in payment of proper distribution expenses. 
 
 When Dr. Morey assumed office and took possession of the Financial 
 Institutions Trust Funds on deposit in the Southmoor Bank he immediately trans- 
 mitted them to the State Treasurer pursuant to dictates of the disposition of Un- 
 claimed Funds and Property Act. 
 
 C. IMPROPER USE OF STATE FUNDS 
 
 1. Padded payrolls and other payroll abuses. 
 
 Some of the employment practices in vogue during his term of office re- 
 flect Mr. Hodge's complete disregard of the responsibility of his high office. 
 Found on the Auditor's payroll were his relatives as well as employees whose only 
 service was to attend to Hodge's personal needs. For example, two persons whose 
 only services were to serve as caretakers, private chauffeur, housekeeper and 
 servants at Hodge's Lake Springfield honne received State funds as compensation 
 by means of warrants drawn on the appropriation for the Auditor's office. After 
 approximately a year had elapsed, the household servants were taken off the State 
 payroll and substantially contemporaneously therewith they began to and continued 
 to receive payment monthly of funds from F. M. Mersinger and Company of E. 
 St. Louis, Illinois, public auditing firm of which Edward A. Epping was a partner 
 
 - 10
 
 and to whom a majority of the State auditing work under the control of the Auditor's 
 office was given by Mr. Hodge. Mr. Hodge's personaJ. airplane pilot was also 
 placed on the payroll of the Auditor's office. 
 
 Many instances were discovered in which payroll warrants were issued to 
 persons as to whom, because of complete lack of personnel and time records in the 
 Auditor's office, it was impossible to determine whether they rendered service to 
 the State, even though we nnade inquiry of personnel in the Auditor's office. 
 
 J. Roy Browning, a member of the Illinois Bar practicing in Chicago, 
 Illinois, was hired by Mr. Hodge shortly after he took office to examine into the 
 matter of a merger of the Trust Company of Chicago with the Southmoor Bank. 
 Under existing Illinois law only the Attorney General or members of his staif or 
 special assistants appointed by the Attorney General are authorized to render legal 
 services to constitutional officers of the State. Despite that fact, Mr. Browning 
 accepted the aforesaid appointment and received on March 30, 1963, by way of three 
 State warrants the sum of $9, 865. 00 which he cashed and deposited in his personal 
 account at the Chicago National Bank of Chicago and which was charged against him 
 on the books of his firm of Browning and Parkin. According to a response to our 
 inquiry of Messrs. Browning and Parkin we were advised by them that Mr. Browning 
 continued to render legal services to the Auditor. In the spring of 1953, the 
 Auditor had occasion to close three banks in the Chicago area. He sought to retain 
 Mr. Browning in legaJ proceedings which resulted in the closing of said banks. 
 However, this could not be done because Mr. Browning was not a member of the 
 Attorney General's staff nor had he been appointed a special assistant attorney 
 general. Mr. Hodge ultimately prevailed upon the Attorney General to appoint 
 
 - 11 -
 
 Mr, Browning as a special assistant. This was done on May 23, 1953. In his 
 letter of appointment the Attorney General conditioned the appointment upon pay- 
 ment of any compensation that might become due Mr. Browning from funds ap- 
 propriated for the Auditor's office. Three days aiter the appointment was made, 
 Mr. Browning and each of his partners, were placed on a "special" payroll accoxint 
 in the Auditor's office as of February 1, 1953, and separate payroll warrants 
 aggregating $24, 000 dated May 26, 1953, were delivered to each of them on a 
 salary rate basis of $2, 000 per month for Mr, Browning and $1,000 per month 
 for the others. Shortly thereafter (June 2, 1953) Mr. Browning and the others 
 were placed upon another "special" payroll account in the Auditor's office for the 
 month of June, 1953, at the rates respectively of $4,000 per month for Mr. 
 Browning ajid $2, 000 per month for each of the others. Payroll warrants for the 
 month of June aggregating $12, 000 and payable to each of them were issued at the 
 rates per month above indicated. At the end of the month of June, Mr. Browning 
 and the others were placed on the regular payroll account in the Auditor's office 
 backdated as of June 13, 1953, and on July 2, 1953, payroll warrants aggregating 
 $6,000 were issued to Mr. Browning and the others. The result was that for the 
 last half of the month of June, of 1953, Mr. Browning and the others received 
 alleged payroll compensation at the rate of $8,000 per month for Mr. Browning 
 and $4, 000 per month for each of the others. In August, of 1953, a warrant in the 
 sum of $15, 000 and dated August 21, 1953, was drawn upon the Auditor's con- 
 tractual services appropriation and made payable to Browning and Parkin. There 
 appears in the records of the Auditor's office stapled to the voucher supporting 
 the August 21, 1953, warrant a half sheet of plain white paper upon which the 
 
 - 12 -
 
 following is typed: 
 
 "Browing (sic) and Parkin 
 Attorneys at Law 
 
 Legal services rendered the Auditor's office during the 
 months of July and August, 1953 $15,000.00" 
 
 The aggregate sums thus paid to Mr. Browning and his firnn in the year 1953, 
 were $66,865. In addition, Mr. Browning's son was placed on the Auditor's payroll 
 on September 1, 1953, at the rate of $600. 00 per month. He continued on the pay- 
 roll until May 31, 1954, and received payroll warrants during that period aggregat- 
 ing $5,400. Neither Mr. Browning's son nor any of Mr. Browning's partners had 
 been a^/pointed assistant attorneys general and thus were not authorized to render 
 legal services to the Auditor. 
 
 Attached to the three vouchers on the basis of which the three warrants ag- 
 gregating $9,865 were issued to Mr. Browning are Browning and Parkin letterhead 
 statements dated February 3, March 3, and March 30, 1953, respectively, and re- 
 citing that the statements were subnnitted "For contractual services rendered your 
 office from January 15, through January 31, 1953, the month of February, 1953, 
 and the month of March, 1953" respectively. 
 
 A vivid demonstration of employment irregularities is Dr. Morey's release 
 of over 100 employees at aji annual saving to the State of $200, 000 promptly after 
 he assumed the duties of Auditor and had had a personnel audit conducted. The 
 majority of these persons were rendering either no service or substantially no 
 service whatever in return for their compensation. 
 
 On the other hand we have found many employees in the Auditor's office 
 
 13
 
 whose performance has been professional in nature and who have obtained a high 
 degree of competence. Many of them are career people, devoted public servants 
 who have survived many changes of administration and upon whom the continuity of 
 the basis day-to-day operations of the Auditor's office depends. 
 2. Other Improper Uses of State Funds. 
 
 We have determined that Hodge extensively used State funds to defray personal 
 expenditures. 
 
 Numerous warrants were issued to the St. Nicholas and Abraham Lincoln 
 Hotels in Springfield and to the Drake Hotel in Chicago. Payments to the St. Nicholas 
 Hotel represented costs of refurbishing personsil quarters for the Auditor, bills for 
 liquor, and the advance payment of rent for his personaJ. accommodations. Re- 
 furbishing extensive quarters at the Dralte was the principal cause for substajitial 
 payments to that hotel. The suite at the Abraham Lincoln, for which State funds 
 were paid, was used initially as personal quarters smd at a subsequent time as his 
 campaign headquarters. 
 
 Over $5, 000 for personal dinners ajid catering was paid to the Mill Tavern 
 in Springfield. The owner of the Mill Tavern was and is Herman Cohen. Mr. Cohen 
 also leased a Springfield warehouse building to the Auditor at a monthly rental of 
 $1, 000. The rent was paid for two years in advance. The warehouse was used in 
 discharge of the Auditor's legitimate responsibilities. However, our investigation 
 has indicated that the rental payment was approximately $350 a month in excess of 
 the fair market rental value for the property, or a total excessive payment of $8,400 
 for the two years involved. 
 
 Records in the Auditor's office indicate that State funds were spent for partial 
 
 - 14 -
 
 J
 
 payment and maintenance of airplanes purchased in Hodge's name. Evidence shows 
 private telephone calls were placed by him aind paid for with State funds. Supplies 
 were purchased by the Auditor's office and used in the Esquire Hotel, an apartnnent 
 hotel Hodge owned in Fort Lauderdale, Florida. 
 
 In the 69th session of the General Assembly, the appropriations to the 
 Auditor were made by classifying them according to the functions which the office 
 performed. There was an appropriation for the administration of the State Property 
 Control Act, and for the divisions of administration, accounting, auditing, and 
 financial institutions. Payments were made from these various budgets without re- 
 gard to the purposes for which they had been appropriated. 
 
 Personnel in the office were often reimbursed for overtime work by pay- 
 ments nnade from appropriations for travel. In some cases, additional remunera- 
 tion for services was provided personnel by having thenn submit false travel vou- 
 chers. 
 
 In other instances employees' vouchers for legitimate travel expense were 
 required arbitrarily to be increased in amount and when cashed the increased 
 amount was paid over to Lloyd Lane. In some instances State warrants were issued 
 in the name of an ennployee of the office and cashed and the proceeds thereof em- 
 ployed to defray either personal expenses of Mr. Hodge or other items for which 
 State funds have not been appropriated. 
 
 Failure to require itemization of vouchers submitted for travel reimburse - 
 m£nt resulted in substantial payments to State employees in violation of existing 
 State law. These vmitemized payments totalled $327,505.82. 
 
 Many other examples of improper disbursements too numerous to detail 
 here are revealed in the audit report of Peat, Marwick, Mitchell & Co. 
 
 - 15 -
 
 D. CONFLICTS OF INTEREST 
 
 Hodge and some of his employees and consultants were guilty of serving 
 their private interests with their public responsibilities. 
 
 Edward A, Epping was technically retained by Hodge as a professional 
 accountant consultant. However, he actually served as the Auditor's executive 
 assistant with direction and control over the Auditor's employees, though he 
 was not carried on the payroll as a salaried employee. Payments of $l,000a 
 month were made to F. M. Mersinger and Co., of East St. Louis, Illinois, an 
 accounting firm in which Epping was a partner. At the same time that Epping 
 was serving as an executive assistant, F. M. Mersinger and Co. received over 
 $418,000 in fees from the Auditor for auditing various state agencies. This 
 represented 90% of all auditing done under the auspices of the Auditor during 
 the Hodge term. The combination of using a partner of an accounting firm as a 
 full time executive assistant and at the same time of using his firm for sub- 
 stantially all of the postauditing in the state were at odds with sound governmental 
 and professional practice. Forfeiture of the public interest understandably re- 
 sulted. 
 
 Epping was also personally interested in Cam-Record Company, Inc. , 
 which entered into an exclusive contract with the Auditor's office to microfilm 
 all state records retained by that office. Cam-Record paid $250 a month to 
 F. M. Mersinger and Co. for accounting work allegedly performed by Epping. 
 At one time Epping had in his possession all of the stock of the company endorsed 
 in blank. 
 
 There is recorded in the Brown Envelope Account the deposit each month 
 
 - 16 -
 
 by Hodge of a check of F. M. Mersinger and Co. payable to his order in the Bum 
 of $75. 00, As 18 reported heretofore herein, F. M. Mersinger and Co. made 
 regular monthly payments to Hodge's personal caretaker chauffeur and house- 
 keeper although they rendered no services to F. M. Mersinger and Co. Signifi- 
 cantly, F. M. Mersinger and Co. , when requested to confirm the payments, 
 confirmed the arrangement and payments and stated that the State was not billed 
 for the payments made to Hodge's servants. However, acknowledgment was 
 made of the receipt of State funds in excess of $418,000 in payment of auditing 
 fees. 
 
 J. Roy Browning, Chicago attorney, to whom reference has been made 
 earlier in this report, accepted professional employment from private interests 
 seeking the indulgence of the State although at the same time he was allegedly 
 serving the Auditor in his professional capacity with respect to the very subject 
 matter of his private employment and during a substantial portion of the period 
 was a special assistant Attorney General. Although Mr. Browning was ennployed 
 by the Auditor in 1953 to advise him as to the right, if any, of a trust company to 
 merge with a bank, and although the Attorney General issued his opinion that there 
 was no authority under Illinois law upon which to predicate such a merger, 
 Browning in June, 1953, accepted professional employment from Southmoor Bank 
 and Trust Company, or Leon Marcus, Chedrman of the board of that bank and 
 owner of the stock of Trust Company of Chicago to represent it or them to induce 
 the Attorney General, the Auditor and the Office of the Secretary of State to 
 approve, permit and authorize the merger of the Trust Company with the South- 
 moor Bank. The Attorney General remadned firm and the Secretary of State 
 
 - 17 -
 
 refused to approve the merger. Browning at the same time also accepted pro- 
 fessional employment from Southmoor Bank or Mr. Marcus or from the Trust 
 Company of Chicago or some combination thereof to represent them in their 
 effort to secure official approval of the Auditor to the drawing out of securities 
 that had been deposited by the Trust Company with the Auditor as required by 
 law to secure beneficiaries of trusts of which the Trust Company was or might 
 become trustee against misappropriations or dissipation of trust assets or mal- 
 administration of the trusts. In this he was successful in that the required consent 
 of the Auditor was secured by him in 1953. Mr. Browning submitted a fee state- 
 ment to his client for services on both matters and was paid the sum of $5,000 by 
 Southmoor Bank in March, 1954, in partial payment of the fee statement. 
 
 During the period he represented said private interests he was also a 
 special assistant Attorney General representing the Auditor in the Beutel bank 
 closings. 
 
 In 1954 Mr. Browning accepted private employment to assist persons 
 desiring to form a state bank to secure approval and authorization thereof from 
 the Auditor. The Auditor gave his approval and the bank was organized with 
 Mr. Browning as a stockholder and Chairman of the Board. 
 
 Lloyd Lane, a full time employee of the Auditor's office, was also part 
 owner of a company known at various times as Adams Sales and Service and Lane 
 Trailer Rental and Sales Company. This company had continuing contracts with 
 the Auditor for rental of automotive and motor truck equipment and trailers. 
 Other business relations with the Auditor's office are reported in the audit of 
 Peat, Marwick, Mitchell & Co. During the Hodge term this company received a 
 
 - 18
 
 total of $69, 325. 53 in state funds. 
 
 In the Spring of 1953 Hodge approved the closing of three banks known as the 
 Beutel banks -- the First State Bank of Elmwood Park, the Devon-North Town 
 State Bank and the West Irving State Bank. When the banks re-opened, Hodge 
 owned 3500 shares of stock in the Elmwood Park Bank though the certificates were 
 issued and recorded in the name of one of Mr. Browning's partners though 
 Browning was the attorney representing the State in the litigation that attended the 
 closing of the banks by the Auditor. Hodge subsequently acquired an additional 
 7000 shares of the stock so that at one time he owned 10,500 shares in the name of 
 a nominee which represented 1/3 of the total shares issued by this bank. A state- 
 ment of the facts respecting Mr. Browning's participation, despite his professional 
 obligations and trust to the State and the office of Auditor of Public Accounts, in 
 aiding the Auditor secretly to acqvure stock in the reorganized Elmwood Park State 
 Bank, would further unduly lengthen this already somewhat lengthy report. The 
 details will be found in our investigation files. 
 
 As Auditor, Hodge was entrusted with the responsibility for examining and 
 regulating the reorganized banks. The many conflicts of interest between Mr. 
 Hodge's private interests and his official duties as concerned the Southmoor Bank 
 are related elsewhere in this report. 
 
 Hodge owned a substantial interest in J. H. Adamson, Inc. , a hardware 
 
 and appliance store in Granite City. During his term substantial purchases were 
 
 made by the Auditor's office from this company. 
 
 E. INTERFERENCE WITH THE RIGHT OF THE PUBLIC TO INSPECT 
 PUBLIC RECORDS 
 
 The Auditor's office has, not only during Hodge's term, but also for 
 
 - 19 -
 
 some time previously refused general requests for public inspection of the recorda 
 of the office. A limitation has been placed on the disclosure of information by re- 
 quiring the person who requests the information to specify the precise records he 
 wishes to see. The particular record is then drawn from the files and made 
 available. This practice made extremely difficult the initial investigation into 
 irregularities in Hodge's office, and in fact almost prevented public disclosure. 
 When, attendant upon initial gleanings that began to appear in the public press 
 (initially at the instance of the Chicago Daily News), the State's Attorney of 
 Sangamon County commenced his investigation, Hodge refused all requests to in- 
 spect his office records on the pretext that his office, in cooperating with the 
 State's Attorney, could not make them available to both. 
 
 But for the dogged persistence of the Chicago Daily News in its clziim of 
 right to full inspecting of public records, and the adroit and imaginative work of 
 its representative, Mr. George Thienn, whereby he succeeded in obtaining by 
 indirection sufficient data to confirm his suspicions of grievous misfeasances and 
 malfeasances in the administration of the office and to alert Governor Stratton and 
 the law enforcing agencies having powers and jurisdiction in the premises Hodge 
 might have succeeded in snuffing the smoke, alleviating suspicions and postponing 
 through another term of office his astounding betrayal of his public trust. 
 
 The Auditor's office failed to keep a voucher file; and it was, therefore, 
 quite difficult to trace the various expenditures made by the office. The Auditor, 
 also, for obvious reasons, failed to cooperate with the State's Attorney of Sangannon 
 County in his investigation of the office. He was persistently obdurate with the 
 press which with the appearance of the initial rumblings joined in vigorous pursuit 
 
 - 20 -
 
 of and inquiry into the facts. 
 
 The records of the office were scattered in several places, misfiled, 
 fragmentary, and in most cases meaningless in the form in which presented. 
 Some documents that were of importance to the law enforcing agencies and to 
 our investigation are missing. 
 
 We have determined that when the information concerning the Auditor's 
 expenditures began to receive a certain notoriety, the Auditor made a wholesale 
 transfer of his staff in the Archives, since he felt that disclosures were emanating 
 from this source. 
 F. REMODELING IN THE AUDITOR'S OFFICE 
 
 Over a half of a million dollars of State funds were spent by the Auditor 
 in remodeling his official quarters m Springfield and Chicago. The part of the 
 funds expended on the offices in Chicago was spent on property not belonging to 
 the State of Illinois, but leased to the Auditor. The practice of leasing space in 
 Chicago was unfavorably commented upon by the Commission to Study State 
 Government, sometimes referred to as the Schaefer Commission. This Commis- 
 sion called for an end to the lease arrangement, but the practice continued under 
 Hodge and his predecessor. 
 
 Our investigation has shown that a substantial portion of the payments 
 allegedly made for remodeling were, in fact, fictitious. The proceeds eventually 
 found their way into Hodge's personal possession. 
 
 One of the companies which started working for the Auditor's office shortly 
 after Hodge took office was Mitchell -David, Inc. The president of this company 
 was William Lydon, a sometime policeman for the City of Chicago. An audit of 
 
 - 21 -
 
 the receipts of this company during 1953 and early 1954, while Lydon was associ- 
 ated with the firm, indicated that the firm failed to receive $33,000 for which 
 warrants were drawn and cashed. A search shows that the endorsements on 
 these particular warrants were irregular and that the warrants themselves were 
 cashed at the Southmoor Bank and not at the bank where the Mitchell -David 
 accounts were kept. 
 
 The remodeling work, even when legitimate payments were made, was 
 done without the benefit of competitive bidding or the execution of formal contracts. 
 Contractual arrangements were handled by private negotiation and the periodic 
 submission of uncertified bills for payment. These requests for payment were 
 never supported by an architect's or engineer's certificate stating that the work 
 covered by the bill had, in fact, been done and in a satisfactory manner, 
 1 . The Statehouse Commission 
 
 One of the most brazen deceits practiced by the Auditor involved the frauds 
 perpetrated upon the Statehouse Commission, Funds were appropriated to it by 
 the 69th General Assembly for the purpose of renovating the Statehouse. Hodge 
 appeared before the Connnnission and represented that he had encountered un- 
 foreseen structural difficulties in his remodeling work and as a result had 
 exhausted the funds appropriated to his office for the purpose. He asked the Com- 
 mission to underwrite necessary expenditures for the completion of the work. 
 The facts were that the appropriated funds had been dissipated through fraudu- 
 lent warrants. After ascertaining from an engineer that the Auditor had experi- 
 enced the difficulties which he claimed, the Commission granted his request, and 
 in compliance with the law establishing the Commission, advertised for bids. 
 
 - 22 -
 
 We have determined that all the supposedly sealed bids received by the 
 Statehouse Commission were secretly procured by William D. Lydon. He 
 approached Elmer J. Bretz, E. R. Jones, and H. H. Crost Co., of Chicago, re- 
 questing that they submit bids in amounts which he suggested. His request was 
 complied with by all the parties. The bidders were already rendering services 
 with respect to the remodeling, but were under the impression that the appropriated 
 funds were being exhausted and that only if funds could be obtained from the State- 
 house Commission appropriation could the work be connpleted and would they be 
 paid. Mr. Hodge personally delivered the bids (in sealed envelopes) to the 
 Commission. 
 
 The Comnrdssion, on the date stated in the request for bids, opened bids 
 and awarded the contract to Elmer J. Bretz. Bretz did not sign a contract with 
 the Connmission. However, Hodge and Lydon delivered to the Commission a fxilly 
 written contract allegedly signed by Bretz. In compliance with the contract and 
 upon vouchers prepared and submitted by the Auditor's office, periodic payments 
 were made in the name of Bretz for a total of $88,878.28. 
 
 These warrants were actually endorsed by Hodge, or at his direction, and 
 the proceeds deposited to his personal account at the Southmoor Bank. The 
 Commission, having in its possession a signed bid and contract, and periodically 
 receiving statements which were fictitious of amounts supposedly due on the 
 letterheads of Elmer J. Bretz, were unaware of the fraud being perpetrated 
 against funds appropriated to it. 
 
 Bretz has stated that his purported signature on the alleged contract and 
 his alleged endorsements of the warrants are forgeries, that he never saw and 
 
 - 23 -
 
 knew nothing about the contract or the warrants and received none of the proceeds 
 
 thereof. 
 
 G. AUDITING PRACTICES 
 
 The Auditor le entrusted with the responsibility for auditing all state 
 agencies, including his own. Hodge, following a traditional practice, did not have 
 his own accounts audited for the first three years of his term. After three years 
 and in response to public pressure attendant upon the rumblings of the initial 
 stages of the revelations he contracted with Lewis Tanner, CPA, of Champaign, 
 Illinois, an experienced and connpetent auditor of professional character and 
 integrity, to make an audit of his office expenditures, which had exceeded ten 
 million dollars in the period to be covered. This was undoubtedly a delaying 
 tactic designed to allay public suspicion and afford him tinne within which to re- 
 store funds and provided false statements to support the fictitious warrants. Be- 
 fore this audit could be completed, however, Dr. Morey had assumed the duties 
 of the office; and, at the request of the Budgetary Commission, Peat, Marwick, 
 Mitchell L Co. , were employed to audit the entire operation of the Auditor's office 
 during the Hodge term. The report and working papers of Tanner were made 
 available to this firm and were helpful to them and to Dr. Morey. 
 
 As stated heretofore, during the Hodge term 90% of the auditing was done 
 by F. M. Mersinger and Co. Payments to this firm represented over $418,000. 
 We have found that most of the audits performed by this company fail to conform 
 to criteria established by the American Institute of Accountants. 
 
 24 -
 
 H. PERSONAL LOANS OF THE AUDITOR 
 
 As Auditor of Public Accounts, Hodge was also in charge of the regulation 
 examining and supervdsion of certain financial institutions, i.e. , State banks. 
 State savings and loan associations, credit unions, currency exchanges, trust 
 companies. He was able to obtain loans from financial institutions under his juris- 
 diction with unusually favorable terms. 
 
 He obtained a loan of $24, 100 from the Southmoor Bank with interest of 
 3 1/2%. Margaret Hodge, his wife, had a total outstanding indebtedness to the 
 Southmoor at one time of $68,644.45 at 4% interest. In addition, one of Hodge's 
 concerns, the Alton-Wood River Development Co. , received a loan from South- 
 moor of $60, 000. 00 at 3 1/2% interest. 
 
 Hodge obtained a $200, 000 loan at low interest on the Esquire Hotel in 
 Fort Lauderdale, Florida, from one of C. Oran Mensik's Savings and Loan Associ- 
 ations. 
 
 He was also able to borrow from the Southmoor Bank through himself and 
 with the use of nominees, $70, 000 at 3 3/4% interest to finance his purchase of 
 Elmwood Park Bank stock. 
 
 25
 
 I. SUPERVISION OF FINANQAL INSTITUTIONS 
 
 During Hodge's tenure, Edward Epping licensed on his own volition two 
 currency exchanges in downstate Illinois. This he was without authority to do. 
 These were VDS #1 and VDS #2 currency exchanges. Our investigation has in- 
 dicated that the required procedure for licensing was not followed, because of 
 Epping's intervention. 
 
 In the Southmoor Bank through which fictitious state warrants were cashed, 
 it was disclosed that there had been established a Southmoor Foundation. The 
 Foundation received its assets by deducting 1% of all loans made by it to building 
 contractors. These funds were then used to defray charitable, political, and per- 
 sonal expenses of the owners of the bank. This fund was closed, however, prior 
 to the revelations in the Auditor's office, through the intervention of the Federal 
 Deposit Insurance Corporation. 
 
 We have heretofore reported upon the events respecting the Beutel Banks. 
 
 During Mr. Hodge's term the esprit de corps of the bank examination 
 career staff deteriorated upon Hodge's personal interference with its work. 
 
 J. WEAKNESSES IN THE STATE FISCAL SYSTEM 
 
 In summary form we present what we regard to be various weaknesses in 
 the State fiscal system. These weaknesses are in various instances (a) constitu- 
 tional, (b) statutory, and (c) administrative. 
 I. Constitutional Weaknesses 
 
 1. Undue reliance on centralized preaudit in which every item of expend- 
 iture is supposedly subjected to thorough check by a central fiscal office, i.e. , 
 the Auditor's office, which because of the tremendous volume of business and the 
 
 - 26 -
 
 inherent inefficiency of central preauditing became and is impossible of realiza- 
 tion beyond a perfunctory clerical check. 
 
 This point can be documented by citing the constitution and cases. Evidence 
 can be adduced also be reference to the growing volume of transactions since 
 1870. The marked increase in the 1930's in the volume of transactions with the 
 emergence of public assistance programs, the pressure of which forced the Audit- 
 or's office in the late 1940's to begin use of IBM equipment mechanically to process 
 warrants sufficiently demonstrates without further like examples the impossibility 
 of efficient and effective qualitative central preauditing. And it would be helpful to 
 illustrate other growth in volume by reference to the Auditor's reports, since 1870. 
 
 2. Combination of functions of centralized preaudit, disbursing, account- 
 ing, and postaudit, in a single office, i.e. , the Auditor's office, with the addition 
 of a management function (property control for all State agencies) and the super- 
 vision of financial institutions. 
 
 (Postaudit involves review of jJxgAuditjcleciaion. Combining these two 
 
 functions made impossible a genuinely disinterested review of preaudit determin- 
 ations. While a disinterested review was nominally sought by assigning postaudits 
 to independent certified public accountants, they were limited in their effective- 
 ness by having the scope of their assignments and frequency of audits determined 
 by the preaudit agency. ) 
 
 3. Unnecessary duplication in disbursing procedure between the offices of 
 Auditor and Treasnrer, and without making either office a true check on the other. 
 
 n. Statutory Weaknesses 
 
 4. Failure to include a substantial part of the State's financial operations 
 
 - 27 -
 
 within the over-view of a staff agency responsible to the State's chief executive, 
 e. g. , the Department of Finance, as to standards of financial management. 
 
 5. Failure to tie back the postaudit procedure to the General Assembly, 
 which is the appropriating body. (A growing number of states now have legislative 
 audit agencies. ) 
 
 6. Failure to provide for an independent professional post audit of the 
 Auditor's office, which was charged with disbursing, accounting, preaudit and 
 postaudit of all other State activities. 
 
 7. Failure to provide by law adequate standards for purchasing and con- 
 tracting to which all State agencies, and not merely those under the Governor, 
 would be bound. 
 
 8. Combination of State financial functions and examinations of private 
 financial institutions under one office, the State Auditor--two types of activities 
 calling for different professional qualifications and experience. 
 
 9. Failure to apply standards of merit system and personnel administration 
 generally applicable in State government to the two major financial offices (State 
 Auditor and State Treasurer), which at least in the case of the former encouraged 
 serious personnel abuse, destroyed esprit de corps discouraged healthy ambition 
 and career incentive, and made it difficult to attract and retain competent pro- 
 fessional personnel. 
 
 III. Administrative Weaknesses 
 A, General 
 
 10. Lack of a proper combination of responsibility with commensurate 
 authority for preaudit and financial management and comprehensive accountability 
 
 - 28 -
 
 on the part of the officers to whom appropriations were made. (Although classified 
 as an adnriinistrative weakness, this includes elements requiring both statutory 
 changes and constitutional revision.) The Governor, if he is to be held responsible 
 for proper fiscal management in all State offices, must be given authority to com- 
 pel that management. 
 
 11. Undue emphasis of central finance office (dealing with Code Depart- 
 ments and some other agencies) on accounting detail, leading to unnecessary dup- 
 lication of records and ultimately tending to weaken the sense of responsibility for 
 financial management in spending agencies. 
 
 B. Auditor's Office 
 
 12. There was a failure to distribute responsibilities with the result that 
 no single transaction or group of transactions could be carried through except by 
 action of two or more separately supervised employees in separate divisions of the 
 office. In the State Auditor's office these responsibilities had not been clearly 
 separated; authority and supervision were concentrated in one individual and he 
 exercised direct control over the activities of every employee. 
 
 13. Absence of internal controls, no approvals by supervisors on payrolls 
 were required; travel allowances were paid to some office employees without sup- 
 porting detail or proof of travel; personnel records were often fragmentary; tinne 
 reports were not consistently required from the field staff or from supervisors; 
 anything remotely resembling personnel classification was conspicuous by its 
 absence. 
 
 14. Laxness in warrant procedures. Warrants were often drawn without 
 clearing through established channels and without documentary support, and com- 
 mercial warrants after countersignature by the Treasurer (without presenting 
 
 - 29 -
 
 vouchers to him), were returned for mailing or other disposition to the person in 
 the Auditor's office who had authorized them in the first instance. After payment 
 by banks, such warrants were again returned for filing to the same person, Be- 
 cause of this faulty procedure, it was possible to destroy or conceal warrants after 
 their return without disturbing existing office routines. 
 
 15. Funds of liquidated financial institutions had not been transferred by 
 the Auditor to a trust fund in the custody of the Treasurer as required by law. 
 
 16. In procurement practices, what few legal requirements existed were 
 not consistently followed, and no procedures generally were established for com- 
 petitive bidding. 
 
 30
 
 RECOMMENDATIONS 
 A. PREAUDIT 
 
 The Auditor of Public Accounts is responsible at the present time for two 
 levels of audit conducted in connection with financial expenditures of the State of 
 Illinois. Although there might be disagreement as to terminology employed, these 
 audits are essentially a preaudit and a postaudit. The Auditor's responsibility for 
 preauditing has been held by the Illinois Supreme Court to be a constitutional right 
 and duty. The function of postauditing has been conferred by statute. 
 
 Under the present practice, the Auditor makes only the following examina- 
 tion in his preaudit: 
 
 (1) Is the money available in the account to be charged 
 for the contemplated expenditure? (This check is duplicated 
 in the Treasurer's office) 
 
 (2) Has the payment or transaction been properly author- 
 ized by the person or persons given this responsibility? and, 
 
 (3) Is the voucher clerically correct, including proper 
 footings and extensions ? 
 
 The procedure employed involves the submission to the Auditor of a voucher prop- 
 erly certified as provided by statute. Elected State officers have the responsi- 
 bility of certification of vouchers chargeable against appropriations to them. The 
 Department of Finance is charged with the responsibility of approving vouchers 
 from certain other officers, boards, commissions, and public and private agencies. 
 The function as to the latter group is primarily a bookkeeping one. For institu- 
 tions of higher education, the legislature, and the courts, the certifying officials 
 are designated by statute. 
 
 - 31
 
 After the vouchers have been submitted they proceed in routine manner 
 through the Auditor's office. A check is made to determine whether money is 
 available in the account which is to be charged, whether the proper accounting pro- 
 cedures and regulations have been followed, and whether the transaction has been 
 properly authorized. The checking is primarily as to form. The voucher is then 
 sent to the tabulating division in the Auditor's office, where warrants are drawn. 
 
 It would be noted that under present practice the Auditor's preaudit is not 
 a qualitative analysis of the expenditure to be made. It is not his function to 
 question the wisdom of the expenditure. Nor would this be a valid purpose of his 
 preaudit. This determination has been wisely delegated to the official responsible 
 for entering into the transaction. It would be unwise and contrary to best fiscal 
 administrative practices to increase the scope of the Auditor's preaudit and to 
 superimpose his judgment of each transaction upon the judgment of the official 
 authorized to make the transaction in the first instance. 
 
 Further, it is unrealistic to assume that there can be an efficient central 
 preaudit of all State accounts when this would entail the individual approval of 
 over 15,000 warrants drawn each day. A responsible preaudit, in addition to 
 those purposes presently satisfied by the Auditor's examination, should deter- 
 mine that the goods or services for which payment is to be made conform to the 
 commitment entered into and that the payment does not violate any law or regu- 
 lation governing the operation of the agency. This function is not one that lends 
 itself to central pre -auditing. It has not been and should not be a function of the 
 Auditor. Rather, it should be lodged with the agency authorizing the expenditure 
 with review thereof resting in procedural and post auditing. 
 
 - 32 -
 
 However, based upon superficial reading of the constitution it may be con- 
 tended that one of the general provisions, Article IV, Section 17, that "No money 
 shall be drawn from the Treasury except in pursuance of an appropriation made by 
 law, and on the presentation of a warrant issued by the Auditor thereon**" confers 
 power on the Auditor to make a qualitative preaudit analysis of all transactions. 
 We are of the opinion this view not only is not warranted by the language of the 
 Constitjjtion but that any effort on his part or the part of any other central auditing 
 agency to do so would seriously hamper the orderly administration of State govern- 
 ment. Most accountants and students of government agree that a qualitative ap- 
 proval at this level would be wasteful, inefficient, and unwise. But attempts in 
 this direction have been made in the past; and, with the retention of the present 
 Illinois system of an Auditor of Public Accounts as an independent constitutional 
 office further attempts may be made in the future. The hard facts are that for 
 these and other sound reasons, not the least of which is that the existence of the 
 offi"ce as a constitutional office interferes with rather than promotes sound fiscal 
 management, the office should be abolished. 
 
 The most efficient location for the preaudit is in the agency making the 
 expenditure. In the final analysis, it is with each individual agency that finan- 
 cial accountability must rest. In this connection, it should be noted that the De- 
 partment of Finance conducts preaudits, in addition to those now performed in 
 the Auditor's office, for the code departments and certain other agencies and 
 commissions. This practice is also an over centralization of a function which 
 could be more efficiently performed at the local level. 
 
 Preaudit is one of and inseparable from the several functions that should 
 be assumed by each agency as a part of responsible financial nnanagement. These 
 
 - 33 -
 
 include; 
 
 
 
 (1) Continuous budgetary control to assure con^pliance with constitutional, 
 statutory, and executive requirements, an avoidance of commitments in excess of 
 available funds; 
 
 (2) Maintenance of books of account and responsibility for their adequacy, 
 accuracy and general propriety, and for the reports flowing from them; 
 
 (3) Sound business management in control and use of supplies, property 
 and personnel. 
 
 Principles for financial management should be set by the Department of 
 Finance which should carry on a continuous review of the operations of all agencies 
 and have the authority to require competent financial standards in each agency. 
 
 We, therefore, recommend an elimination of the central preaudit function 
 now performed by the Auditor of Public Accounts and decentralization of the pre- 
 audit function performed by the Department of Finance for the code departments 
 and other agencies and commissions. We recommend that the function of preaudit 
 be performed by the agency to which the appropriation is made and that each agency 
 be made accountable for the expenditure of its funds. 
 1. Separation of Preaudit and Postaudit. 
 
 It is axiomatic that in sound governmental business practice the same 
 agency or officer should not be entrusted with the responsibility of both preaudit- 
 ing and postauditing the same transactions. To do so allows the agency to audit 
 transactions to which it was a party. Assuming that preauditing is a necessary 
 prerequisite to the consummation of a financial transaction, to call upon the au- 
 thority who has initially passed upon the transaction for an independent and ob- 
 
 34
 
 jective review, including the procedures within his own jurisdiction, is patently 
 unwise. The system in Illinois of combining the two is archaic. 
 
 As has been pointed out heretofore, the constitution places the responsi- 
 bility for preauditing with the Auditor of Public Accounts, However, the function 
 of postauditing is conferred by statute. Constitutional amendment is not needed to 
 transfer this function. 
 
 The inadvisability of connecting the two functions is evidenced by the dearth 
 of states in which the functions are performed in the same office. Illinois, Idaho, 
 Mississippi, Montana, Nebraska, New York, Ohio. Pennsylvania, South Dakota, 
 Vermont, and Washington, are the only states in which there is no separation of 
 the functions. 
 
 This practice would be similar to having the cashier or disbursing officer 
 of a business act in the capacity of the accountant to perform the annual financial 
 audit of the business. Such a system would be totally unacceptable in private 
 business, and there is a stronger reason for finding it unacceptable in govern- 
 mental fiscal control where public trust and funds are involved. It should be noted 
 that the fraud practiced in the Auditor's office would have been extremely difficult 
 if not impossible, if fusion of the functions had not existed as to that office. 
 
 The separation of the functions will also, we believe, give added emphasis 
 to the postaudit, a procedure which, if it is to be of value to the legislature and 
 thus to the people of the State of Illinois, cannot be over emphasized in this era 
 of increasing and expanding governmental operation. 
 
 35 -
 
 B. BUDGETARY COMMISSION 
 
 Three members of the House, three members of the Senate and the 
 Governor comprise the Budgetary Commission. The chairmen of the legislative 
 appropriation committees are designated as two of the six members to be chosen 
 from the General Assembly. Minority representation from both houses is pro- 
 vided. 
 
 The definition of the Budgetary Commission's present duties is extremely 
 broad and inclusive. It has the responsibility of: 
 
 (1) Making a thorough study and investigation of all State 
 expenditures and income; 
 
 (Z) Serving as the repository for copies of audits made by 
 the Auditor of Public Accounts; 
 
 (3) Recommending a plan for the standardization and classifi- 
 cation of all compensation for services rendered to the state; and 
 
 (4) Making a study of all fees for services rendered by the State. 
 The Commission is required to submit a report to the Governor with 
 
 reconnmendations not later than December 1 in the even numbered years. A 
 duplicate of this report is to be submitted to the legislature when it convenes 
 the following nnonth. 
 
 In actuality, the Commission has served as a legislative vehicle for 
 reviewing budgetary requests of the various governmental agencies before 
 presentation of the executive budget to the General Assembly. The Commission's 
 appropriations have not been sufficient to enable it to nnake an independent and 
 
 36 -
 
 exhaustive study of State income or budget requests. The Commission has relied 
 upon the Department of Finance to analyse and interpret the various detailed 
 budget request. 
 
 The Commission has served in a liaison capacity between the executive 
 and legislative branches of government. Joint policy decisions are arrived at as 
 a result of discussions held by this body and the interpretation of the executive 
 budget requests are relayed to the legislature as a result of its work. 
 
 In any discussion of the problems of the State's budget, it should be 
 borne in mind that there are three stages. The first stage is preparation, which 
 is an executive responsibility; the second stage is enactment, which is legislative 
 responsibility; and thirdly, the executive executes the budget. It is in the area 
 of budget enactment that the Budgetary Commission exerts its strongest influence. 
 
 The presence of the Governor on the Commission and the requirement 
 that he be the recipient of its reports clouds the real purpose of its work. It is 
 our recommendation that the inclusion of a member of the executive branch on 
 the Connmission be abolished, although their presence at hearings should be 
 encouraged, and that the Commission's reports be addressed primarily to the 
 General Assembly. 
 
 It appears necessary to increase the scope of the budget review function 
 perfornned by the Commission. In the 69th session of the General Assembly the 
 then Auditor of Public Accounts was allowed a deficiency appropriation of $52 5, 000, 
 The operating funds available for the biennium commencing July 1, 1955, for this 
 same office totaled $7,459,219.83. Our investigations have indicated that in 
 
 37
 
 addition to the funds from these accounts which were actually stolen, there were 
 a great number of fiscal abuses of other types. Travel vouchers were submitted 
 and warrants issued for travel expenses not actually incurred. Warrants were 
 issued to pay personal expenses, including entertainment, living expenses and 
 maintenance of personal automobiles and airplanes. Examples of irregular pay- 
 roll practices have been uncovered. Persons have appeared on the payroll who 
 did very little, if any, productive work. 
 
 When the present Auditor took office on July 27, 1956. with a little more 
 than one-half of the biennium past, there was available a balance of $2,472,865,98, 
 or approximately 33% of the original amount. The new Auditor has tentatively 
 announced that this will be a sufficient amount to operate satisfactorily the office 
 for the remainder of the biennium. These appropriations were made possible 
 because those passing upon the budget relied upon the representations of the Auditor 
 concerning the increased costs of operation resulting from additional programs 
 which the General Assembly had called upon his office to administer. 
 
 In order to detect and prevent future misrepresentations of this nature to 
 the legislature, we recommend that there be a continuing independent legislative 
 review of requests for funds by the Budgetary Commission. The Commission will 
 continue to examine the sources and amounts of State revenue, since this is an 
 indispensable ancillary function of budget examination. There needs to be assur- 
 ance that the receipts of the State will be sufficient to cover the commitments 
 recommended to the legislature. 
 
 38 •
 
 This recommendation necessitates a legislative redefinition of the duties 
 of the Budgetary Commission. A redefinition is further required by the addition 
 of the Legislative Audit Connmission. The division of function and responsibility 
 between the two Commissions should be clearly delineated. The Legislative 
 Audit Commission will determine if the expenditures of State funds have been in 
 accordance with the desires of the legislature, economical and efficient, not 
 subject to fraud or misappropriation, ajid if the agencies are adequately 
 reporting on their functioning. The Budgetary Commission will serve as cm 
 interim study and review body for the legislature of the costs of programs of 
 State government and of the advisability of adding additional programs or increas- 
 ing the scope of present ones. The function of the Budgetary Commission will be 
 for the legislature what the function of the budget division of the Department of 
 Finance is for the executive department. Thus, the work of the two Connmissions 
 will not be duplicative, but will supplement to each other. 
 
 Increasing the scope of budget examination will require the Budgetary 
 Commission to employ a technical staff including accountants and economists. 
 The technical staff should also serve the two appropriations connmittees during 
 legislative sessions. The staff's intimate knowledge of the state's financial 
 picture and the background of requests for funds will provide an invaluable 
 reservoir of information for the members of the legislature. The need for this 
 assistance during the sessions is further highlighted by the great number of 
 requests for funds which the legislature receives which are not included in the 
 executive budget. 
 
 39 -
 
 A continuous budget study under the auspices of the legislature is not 
 unusual. Twenty-two states presently employ such a system. The strongest 
 ones appear to be in California and Texas. 
 
 In California there is a Joint Legislative Budget Committee, which 
 operates primarily between sessions of the legislature. The Committee employs 
 a Legislative Auditor, a somewhat nnisleading title since his major function is 
 budget review. The Auditor is required to submit a published recommendation 
 on all proposed appropriations, including the background for such requests. 
 The staff further prepared a "cost bill" on all proposed bills. These "cost bills" 
 indicate in estimated amounts what proposed legislation will cost. The legis- 
 lature is then in a position to determine the financial wisdom of enacting the 
 legislation. There are other responsibilities of the Committee to the legislature, 
 but the above are the most significant budgetary review functions. 
 
 In Texas a Legislative Budget Board has been created which employs 
 a Legislative Budget Director. This Board is independent of the executive branch 
 of government, even to the extent of submitting its own proposed budget, in ad- 
 dition to the budget which the executive submits. The Board goes out of existence 
 during the legislative session, but the staffs are retained to work with the 
 appropriations committees. The Texas system seems too drastic for a State 
 such as Illinois where the two-party system operates and the division between the 
 legislative and executive branch need not be so acutely observed. 
 
 In soiTie states, such as New York, appropriation committees retain 
 their techjiical staffs between sessions as a means of continuing budget review. 
 
 40
 
 In Illinois, however, there is some question as to the power of expenditure by 
 legislative committees after adjournment of the legislature since they have no 
 continuing legal status. 
 
 In other states, such as Indiana, the responsibility for preparing a 
 budget is a mixed legislative-executive function. Our recommendation envisions 
 the continuance of executive preparation and legislative examination and enact- 
 ment of state budgets. We are of the opinion that greater objective analysis 
 of the State's program is available where there is a division of the responsi- 
 bilities and not a fusion of viewpoints. 
 
 In addition to the problem presented by the "Hodge case", the ever 
 increasing costs of government make it imperative that there be an independent 
 appraisal of the increases sought from the legislature. The Budgetary Com- 
 mission, if properly and adequately staffed, should: 
 
 (1) Report and recommend in detail on proposed items of the 
 executive budget; 
 
 (2) Prepare estimates or costs involved in bills which are 
 introduced during the Generail Assembly; 
 
 (3) Review the sources and amounts of State revenue. 
 
 We also recommend that the Budgetary Commission be specifically 
 given the power of subpoena. The question of this power arose during the 
 present investigation, and we are of the opinion that there is great doubt 
 that such power is implicit in the act creating the Commission. 
 
 41 -
 
 1. Annual Legislative Sessions 
 
 One of the major problems confronting the State's budget makers is 
 that of timing. Under the timetable now employed, State agencies must com- 
 pile and submit their budget requests in October and November of the year 
 preceding the biennial session of the legislature, which convenes on January 1. 
 Their budget requests must forecast their needs for the succeeding two years. 
 However, the funds which are finally appropriated do not becon^e effective 
 until July 1 of the year in which the legislature has met. Therefore, the 
 agencies are projecting their programs in detail for a period of thirty-three 
 months . 
 
 The Governor and the Department of Finance are also confronted with 
 the problem. Their recommended budget must be in the hands of the legis- 
 lature early in the session. Ideally, this would mean submission of the budget 
 by April 1 of a legislative year. Thus, the executive branch has from November 
 to April for evaluation of the various State programs and the translation of 
 administrative policy into specific figures. 
 
 This evaluation must be done with a view to the projected revenue 
 picture of the State for the period which the budget will cover. The amount of 
 revenue is, of course, dependent upon the economic health of the nation 
 generally and the State of Illinois in particular. Thus, the condition of the 
 economy and the needs of various State agencies must be predicted some thirty 
 to thirty-three months in advance. 
 
 An annued legislative session has been proposed as a solution to the 
 problem. We do not wish to make a recommendation on this suggestion since 
 
 - 42 -
 
 a Commission has been selected by the General Assembly to consider the 
 problem. We, therefore, defer to its report. 
 
 C. FINANCIAL REPORTING AND PROCEDURAL AUDITING 
 
 The elimination of central preauditing, which we have recommended, 
 does not obviate the necessity for other central financial controls. There 
 should be a continuous picture of the fiscal status of the State accounts avail- 
 able and assurance that the reports received froin the various State agencies 
 adequately reflect this status, that the operating procedures of the agency are 
 in accordeince with proper managerial criteria and that there is conformance 
 to executive policies and directives. At the present time none of these functions 
 18 adequately performed. 
 
 There is provision for the receipt of quarterly reports by the Depart- 
 ment of Finance showing the status of appropriations. These reports are not 
 uniformly required, nor are they frequent enough to assure an immediate 
 reflection of the State's financial position. 
 
 There is, havever, no provision made for procedural audits which would 
 assure the chief executive that the various reports which he does receive and 
 the operation of the various agencies conform to the executive direction. The 
 Department of Finance, by preauditing the Code Departments and certain other 
 agencies and commissions, can reflect a partial picture of State accounts, but 
 the assumption of this role duplicates what the agencies are or should be doing 
 for their own accounts. We believe that the chief executive should be contin- 
 uously and reliably informed as to the State's financial condition. There are 
 
 - 43
 
 times in the course of a biennium when executive decisions must be made in 
 view of economic exigencies. The supplying of this information can be 
 accomplished only by a central reporting agency, and the reliability of the 
 reporting can only be accomplished by a central procedural auditing agency. 
 
 The Department of Finance should not, however, establish and enforce 
 standards of financial administration and perfornn procedural audits for the 
 courts, corporate bodies or the legislature. This would create an undesirable 
 prominence of the executive bramch on the other distinct branches of the 
 government and would lead to fusion of the independent arms. The exempted 
 agencies will still be subject to requirements for financial reporting and 
 budgetary preparation standards established by the Department of Finance. 
 They will also be subject to the samie uniform procurement requirements 
 recommended elsewhere herein and to the postaudit surveillance of the 
 legislature. 
 
 We, therefore, recommend the gradual elimination of the preaudit 
 function performed by the Department of Finance for agencies other than 
 itself, and the assumption by it of the responsibility for determining the 
 current financial status of all agencies of the State government. This recom- 
 mendation connotes a change of the present function of the Department of 
 Finance to the function requiring periodic reports on the state of expenditures, 
 encumbrances and balances from State agencies and also of testing the validity 
 of these periodic reports by means of periodic procedurzd audits. 
 
 The extent and rapidity with which this recomnnendation is acconnplished 
 should depend on conditions in each agency as determined by the procedural 
 
 - 44 -
 
 over-view of the Department of Finance herein recommended. Meanwhile, 
 the way should be left open for the Governor to impose such external checks 
 by the Department of Finance as he may consider desirable in activities under 
 his supervision. 
 
 The Department of Finance is presently employed by the Governor as 
 the State agency charged with the responsibility for assisting in the preparation 
 of the executive budget, which is biennially submitted to the legislature for 
 approval. We recommend that the Department continue to function in this 
 area and that consideration be given to expanding the technical staff which 
 assists in formulating the State's budget. 
 
 D. PROCUREMENT PRACTICES 
 1. Purchasing 
 
 As a means of insuring economy in the use of State fxinds, the legislature 
 has provided that the principle of competitive bidding should be applicable to 
 certain purchases and contracts entered into on behalf of the State. The 
 principle has not been extended to the elective officers, independent boards and 
 commissions, and various other State agencies. Thus, millions of dollars in 
 State funds are expended with no assurance that advantage is taken of competi- 
 tive bidding . 
 
 The Civil Administration Code, which applies to the Code Departments, 
 provides that contracts for construction work in excess of $2, 500 shall be awarded 
 to the lowest responsible bidder. Contracts for services (other than personal 
 services) must result from competitive bidding if they are in eoccess of $1,000. 
 
 - 45 -
 
 All purchases of supplies are subject to competitive bids, except in cases of 
 emergencies and where the nature of the supply, i.e. , perishable goods, 
 does not lend itself to this type of acquisition. General exemptions to the act 
 are provided in cases of contracts: 
 
 (1) Requiring professioncil or artistic skill; 
 
 (2) For purchase or binding of nnagazines and other periodicals 
 and pamphlets; 
 
 (3) Utility services; 
 
 (4) Repair, nnaintenance , or remodeling of real property where 
 an emergency exists; and 
 
 (5) Where acquisition is only economically procurable from a 
 
 single source of supply. 
 
 The act further details the manner in which bids are to be solicited 
 by newspaper advertisennent. 
 
 Not being subject to this act, the Auditor did extensive remodeling in 
 his offices with no attempt to obtain connpetitive bids. In fact, no fornnal 
 contract was entered into between the Auditor and the persons doing the work 
 until investigations commenced concerning the funds of the office. At that 
 time there was an abortive attempt to arrange a contract covering work which 
 had already been done. 
 
 Purchasing abuses involving State funds were not limited to remodeling 
 contracts. Services and supplies were purchased in large quantities without 
 use of accepted bidding procedures. The authority to disregard competitive 
 
 46 -
 
 bidding was what made it possible for the Auditor to manipulate accounts and 
 issue bogus checks for work not performed. 
 
 With the combination in the Auditor's office of the functions of preaudit, 
 disbursement, and postaudit, it was less difficult to perpetrate this type of fraud 
 than it would be in amy other State office or agency. However, the expenditure of 
 $816,864,979.03 was authorized by the 69th General Assembly without provision 
 that purchases made result from competitive bidding. It is true, of course, 
 that a large portion of these funds so appropriated would be expended for purposes 
 such as employment of personnel amd disbursement of school aid, for which it 
 would not be appropriate to require competitive bidding. It is neither consistent 
 nor economical, however, to exact one standard for purchases from the Code 
 Departments and none at all from other State agencies. Assurance should be 
 had that all State funds will be expended economically and, where applicable, in 
 accordance with sound purchasing practices. 
 
 We, therefore, recommend that a comprehensive statute covering pur- 
 chases and contracts be enacted covering all agencies expending State funds. 
 The act should provide: 
 
 (1) The principle of competitive bidding shall be applicable to 
 purchases and contracts made with State funds. 
 
 (Z) Each State agency authorized to expend funds appropriated 
 
 by the General Assembly shall promulgate rules and regula- 
 tions governing practices and procedures. The rules shall 
 provide, among other things: 
 
 a. Solicitation for bids for purchases and contracts 
 shall be in conformance with modern practice. 
 The present statute requiring detailed and expensive 
 newspaper advertising in many locales is not in 
 
 - 47 -
 
 conformance with modem procurement practices 
 In some instances, such as notice of bids for construc- 
 tion work, newspaper advertising would continue to be 
 the manner employed, but with most of prospective 
 bidders would be the better practice. 
 
 b. Exceptions to the application of competitive bidding 
 should be allowed: 
 
 (1) When the goods or services are economically 
 procurable only fronn one source of supply; 
 
 (2) In construction or remodeling contracts 
 below $2, 000; 
 
 (3) In emergencies. 
 
 c. Award should be made to the lowest responsible 
 bidder considering conformity with specifications 
 and terms of delivery, quality and servicability con- 
 sidered. The agency may reject all bids if rejection 
 is determined to be in the best interests of the State. 
 
 d. The agency may suspend any bidder for one year for 
 violation of its rules or for failure to conform to 
 specifications upon delivering items. 
 
 e. Any contract enacted in violation of the act or of the 
 rules and regulations adopted in pursuance of it, 
 would be void and of no effect; and, if public funds 
 have been expended, the amount thereof should be 
 recoverable in the name of the State by any ap- 
 propriate action. 
 
 f. Any agency of the State or local governmental unit 
 should be able to make use, if it desires, of the 
 purchasing agent of the Department of Finance. 
 
 A. Centralized Purchasing 
 
 As the problem of improving the methods employed for purchasing with 
 
 State funds is considered, the question of centralized purchasing naturally arises. 
 
 We have considered this matter in connection with our investigation of the general 
 
 48
 
 acquisition procedure of the various State offices and agencies. The Departnnent 
 of Finance has a purchasing agent who is charged with the responsibility of being 
 the central procurer for the Code Departments. Other than this, there is no 
 mandatory provision for central purchasing within the framework of State op- 
 eration. 
 
 This problem continually confronts the students of State finauice. Pro- 
 ponents of centralized purchasing point out the economy which is effected by 
 quantity purchases. They contend that when there is general distribution of 
 the function to all the agencies authorized to expend State funds, there are a 
 great number of employees who must: 
 
 (1) Locate vendors; 
 
 (2) Become fanniliar with the various trade practices; 
 
 (3) Keep informed of the market conditions; 
 
 (4) Stay abreast of transportation problems and costs; 
 
 (5) Acquire a knowledge of products; 
 
 (6) Be aware of vendor perfornrieince . 
 
 The proponents point out that not only is it practically impossible ade- 
 quately to perform this task at all spending agencies but also that it is a waste- 
 ful use of personnel. 
 
 The proponents of limited centralized purchasing agree with the arguments 
 of the proponents of unlimited centralized purchasing, but contend that after a 
 certain level of centralization, there is no greater economy which can be 
 realized by quantity purchases. Their argument takes the line that when a 
 certain point of centralization is reached, any further attempts in this direction 
 disrupt the real purposes of the State's program by burdening the agencies with 
 limitless problems and red tape in their procurement of necessary tools to carry 
 
 49
 
 out their objectivea. In a State the size of Illinois there are also certain logistic 
 problems which would arise with the adoption of complete centralized purchasing. 
 
 We, therefore, recommend that the proposed Legislative Audit Commis- 
 sion and the proposed Legislative Auditor study the problem of centralized 
 purchasing and how it relates to the various agencies of the State. It is our 
 opinion that a detailed survey of this type will indicate instances where addi- 
 tional uses of centralized purchasing could be advantageous. However, the 
 complexity of the problem places a detailed recomnnendation beyond the scope 
 of this study. 
 2. Construction, Remodeling and Alterations 
 
 Orville E. Hodge's accounts when he was Auditor indicated that he had 
 spent excessive amounts for construction and remodeling work. Upon investi- 
 gation, it was discovered that most of this money had been stolen fronn the 
 State. In nnany instances the same work had purportedly been paid for several 
 times, when actually, this device had been employed to illegally extract the 
 funds from the State Treasury. If it had been required that all the work of this 
 nature which was performed should be under the supervision of an architect or 
 engineer, it would have been impossible to hypothecate the costs of one job 
 several times. There is no provision in the Illinois statutes which requires 
 that expenditures for capital improvements be made under professional super- 
 vision. 
 
 This practice is a violation of sound business procedure. It is not only 
 impractical but also wasteful to allow the expenditure of millions of dollars for 
 
 50
 
 major construction and repair in the State without requiring that competent pro- 
 fessional assistance be ennployed. 
 
 We recommend that no payment of State funds be nnade for any construc- 
 tion, remodeling, or alteration work without the written certification of am 
 architect or engineer licensed by the State of Illinois certifying that the work 
 to be paid for has, in fact, been done and in a satisfactory manner. 
 
 -T Of «<»»""••
 
 E. DEPARTMENT OF ADMINISTRATIVE SERVICES 
 
 The Department of Finance, in addition to its duties for erecting the 
 executive budget for the state, is also the state "housekeeper". It has the 
 responsibility for purchases of agencies and departments under the direct juris- 
 diction of the Governor. The State Office Building in Chicago is also under its 
 supervision. And the majority of state printing is done through its Division of 
 Printing. 
 
 The combining of these functions with the important task of conripiling a 
 state budget is incongruous. The former deals with the day to day business of the 
 state, while the latter is the evolvement of state policy at its highest level, the 
 translation of the executive program into specific recommended appropriations. 
 
 We, therefore, recommend the creation of a Departnnent of Adminis- 
 trative Services to be headed by a director to be appointed by the Governor with 
 the advice and consent of the Senate, and to be responsible for the administration 
 of state housing, printing and purchases which are under the jurisdiction of the 
 Governor. 
 
 Legislation req\uring central inventory of state property was adopted in 
 the 1949 session of the General Assembly. The Auditor of Public Accounts was 
 made responsible for the administration of the law. Extensive amendments were 
 made in 1955, giving the Auditor additional powers regarding the disposal of surplus 
 property. The act provides that every responsible officer of the state govern- 
 ment shall be accountable to the Auditor for the supervision, control and inventory 
 of cdl property under the jurisdiction of the agency which he heads. It is also pro- 
 vided that two master records of all property are maintained; one with the Auditor 
 
 - 52 -
 
 and one with the agency. The agency must make a complete inventory at least 
 once each year and report monthly any changes of their inventory. The adminis- 
 trator is authorized to make spot checks at the various agencies to ascertain the 
 agency's records are current. 
 
 The act authorized the Auditor to determine property which should be 
 transferred from any governmental agency due to non use. The property may 
 either be transferred to another governmental agency or with the approval of 
 the Governor, disposed of at public sale. 
 
 In view of the nature of the intended accomplishments of the act, we 
 recommend its administration be transferred to the suggested Department of 
 Administrative Services, 
 F. STATE TREASURER 
 1, Receipt, Custody and Disbursement of State Funds 
 
 The State Treasurer is in reality the banker for the funds of the State of 
 Illinois. He mjdces payments on warrants which have been drawn against the state 
 accounts, of which he has custody. He makes deposits of state funds in banks 
 throughout the state and in determining where the funds will be deposited, he 
 exercises the only major decision vested in his office. He also countersigns 
 warrants when they are issued and cancels them alter they have been cashed. 
 
 The procedure for the disbursement of state funds needs corrective action. 
 
 At the present time the Auditor of Public Accounts is required by the Con- 
 stitution to issue warrants for money to be drawn from the state treasury. Under 
 present statutory provisions, the State Treasurer countersigns all these warrants. 
 The Treasurer's office also retains a warrant register and keeps records of 
 
 - 53 -
 
 balances in appropriations. 
 
 There is, therefore, duplication in the work done by the Auditor and the 
 Treasurer. It is apparent from our investigation that the requirement of counter- 
 signing warrants and the maintenance of duplicate account books does not prevent 
 fraud. The countersigning is a mechanical process and no question is raised as to 
 affixing the Treasurer's signature. 
 
 We do not believe that any valid purpose is served by a division of re- 
 sponsibility for the preparation of warrants. It is evident that the disbursing 
 function should be centralized and that the present cumbersome system sho\ild 
 give way to a modern checkwriting operation. The central disbursing office 
 shoxild be responsible for extensions and footings on state accounts and for 
 ascertaining that funds are available in the appropriation to be charged for dis- 
 bursements which are made. 
 
 We, therefore, recommend that the State Treasurer assume the sole 
 responsibility for receipt, custody and disbursement of state funds, but that this 
 responsibility shotxld not entail an examination of the expenditure other than to 
 determine that fxinds are avjiilable and that the request for the disbursement has 
 been properly certified. It may be that it will be desirable, eventually, to de- 
 centralize the disbursement procedure under rules and regulations which the 
 Treasurer would prescribe. 
 2. Registration of Bonds 
 
 There are a number of state agencies which are authorized to issue bonds. 
 The agencies are required either to record the bonds issued with the Auditor or to 
 register each bond issued with him. The Illinois Armory Board and Medical 
 
 - 54 -
 
 District Center of Chicago simply furnish a record of bonds sold; while the 
 Board for Housing Facilities for State Employees, the Board of Trustees of 
 the University of Blinois, the Board of Trustees of Southern Illinois University, 
 and the Teachers College Board are required to register their bonds with the 
 Auditor. In the latter case, registration is required prior to delivery of the 
 bonds to the purchaser. 
 
 Although the function of recording bonds issued by various agencies of 
 the state connotes no power of approval or disapproval, it is desirable to have a 
 central state record of their existence and current information on the status of 
 the indebtedness. A default on any of these bonds would seriously injure the 
 credit and reputation of the state. It is, therefore, important that the state 
 continually ascertain whether default on any of the obligations is imminent. 
 The provisions for registering should be made uniform and apply equally to all 
 agencies issuing bonds. 
 
 Therefore, we recommend that the State Treasurer be designated as the 
 official to register all bonds issued by state agencies. Further, there should be 
 annual reports to the Treasurer from the agency showing the current state of the 
 indebtedness showing payments, receipts, expenses and reserves, and noting if 
 any default has occurred in payment of principal or interest. 
 3. Selection 
 
 It is obviously unnecessary to elect an officer who exercises as snnall an 
 amount of independent judgment as the State Treasurer. The arguments which 
 are advanced hereinafter for the abolishment of the Auditor as an elective 
 officer are just as valid in respect to this office. The costs of campaigning and 
 
 - 55 -
 
 the inability of the electorate to become fajniliar with the candidates and the duties 
 of the office are compelling reasons for eliminating the election of this officer and 
 providing for his appointment by the Governor. To have the appointment made by 
 the chief executive strengthens the concept of executive authority and responsibility 
 for the conduct and management of state affairs. 
 
 We, therefore, recommend that the State Treasurer be an appointed 
 official under the Governor and that the popular election for this office be discon- 
 tinued. 
 G. POSTAUDIT 
 
 As has been pointed out, the Auditor of Public Accounts is presently vested 
 by statute with the responsibility for conducting the postaudit of state accounts. 
 The purposes which a governmental postaudit serve are: 
 
 (1) Determining that the money which has been appropriated 
 by the legislature has been expended in accordance with the 
 purposes for which it was appropriated* 
 
 (2) Ascertaining that the performance obtained from the 
 expenditure contributed to the governmental agencies* 
 legitimate operations. 
 
 (3) Pointing to the possibilities of and deterring fraud 
 and dishonesty. 
 
 (4) An independent appraisal of the quality of financial 
 administration in government. 
 
 (5) Assistance to administrators in spotlighting areas in 
 their own organisations which are performing uneconom- 
 ically or inefficiently. 
 
 (6) An enlightened control of the activities of government 
 without interfering with the day-to-day operation of the 
 agencies. 
 
 Postaudit reports and the purposes which they serve will be most effective 
 
 if promptly rendered and placed near the representative body passing on requests 
 
 . 56 -
 
 for funds. The examination of executive performance should be located near the 
 situs where determinations will be nnade concerning funds for future administra- 
 tive action. Otherwise, the legislature may well decide without full knowledge to 
 continue, to expand, to lessen or to discontinue any state program. 
 
 The main purpose of a postaudit is a report on executive nnanagement. 
 Obviously the necessary degree of independence will be lacking if the functions is 
 performed in a capacity which is within the executive branch of government. We, 
 therefore, recommend that the function of postauditing be completely divorced 
 from the executive branch of government. 
 
 In the recent years since the Hoover Commission for the Reorganization 
 of the Federal Government undertook its studies, a number of states have instituted 
 "Little Hoover" commissions. These studies have, in the majority of cases, 
 recommended that the agency conducting postaudits be directly responsible to the 
 legislature. This recommendation reflects the difference between executive 
 responsibility and legislative responsibility. The legislature provides by appro- 
 priation for the activities of government. The executive is charged with the 
 responsibility of administering programs enacted into legislation. The need for 
 a legislative postaudit is thus consistent with the philosophy of checks and balances 
 inherent in oxir forin of separate branches of government. 
 
 Further, an effective post-audit must be independent, objective, couched 
 in such terms and with such continuity of observation that it provides an effective 
 vehicle for the legislature to determine whether expenditures are consistent with 
 the legislature's concepts of each governmental agency's role in state governnnent. 
 
 Since 1961 postaudit reports of the various governmental agencies in 
 
 - 57 -
 
 Illinois have been deposited with the Budgetary Commiesion by the Auditor of 
 Public Accounts, as recommended by the Schaefer Commission. This has not 
 proved to be an effective means of informing the legislature. First, the Com- 
 mission has been insulated from the persons actually performung audit by the 
 Auditor of Public Accounts, thereby preventing interpretation of the audit. 
 Second, the audits have lacked uniformity, thereby preventing a continuity of 
 observation. Last, there was a natural hesitancy about usurping the authority of 
 a constitutional officer and making detailed inquiries concerning matters which 
 were within his jurisdiction. 
 
 Seventeen states place the function of postauditing under an agency respon- 
 sible to the legislature. In twenty-one states because of historical considerations, 
 the postauditing function is the responsibility of an independently elected officer. 
 Illinois can be covinted in this group. In eight states the postaudit function is 
 under the Governor, However, in 1957 Minnesota, which is one of the states plac- 
 ing the- postaudit function under the Governor, will change the placement of the 
 function to the legislature. In Delaware, three members are elected by the 
 General Assembly and two members are appointed by the Governor. In Florida, 
 the Governor appoints the postauditor from three names recommended by the 
 Legislative Audit Committee; and in South Carolina the State Budget and Control 
 Board appoints the postauditor. 
 
 The figures relating to the method of selection are not particularly en- 
 lightening unless one considers the number of postauditors who only five years 
 ago were responsible to an agency other than the legislature. In 1952 only nine 
 postauditors were responsible to the legislature and nineteen were responsible to 
 
 - 58 -
 
 the Governor, while eighteen were under an independently elected officer. Since 
 1952 Delaware has taken the postauditing function from the Governor and placed it 
 under an independently elected officer, as have Louisiana, Missouri, New York, 
 Oklahoma, and Utah. Arizona changed from an appointment by a conrurnittee which 
 included the Governor to an agency entirely responsible to the legislature. 
 Arkansas removed their postauditor from the Governor's control and placed him 
 under legislative responsibility, as did California, New Hampshire, South Dakota 
 and Tennessee. West Virginia passed a bill which would have removed the post- 
 audit function from executive responsibility and made it directly responsible to 
 the legislature, but the Governor vetoed the act. 
 
 In placing the function of postauditing an analogy can be drawn to private 
 business. Generally, a postaudit for a corporation would be made to assist the 
 Board of Directors and stockholders in determining whether the capital and its 
 accruements were being employed in a wise and prudent manner. The audit 
 would thus be at the direction of the Board of Directors, acting for the stock - 
 holders. It is accepted governmental fiscal practice to expect that a postaudit of 
 a governmental agency will be addressed to the body which provides the funds for 
 the performance and activities undertaken by the agency. In this case, it would 
 be the legislature. 
 
 We, therefore, recommend that a Legislative Audit Commission be 
 established charged with the responsibility for selecting and employing a Legis- 
 lative Auditor. The Legislative Auditor will, under the direction of the Com- 
 mission, be responsible for postaudits and will be given the responsibility of 
 investigating all expenditures of appropriations by any officer, code department, 
 
 - 59 -
 
 agency, board, commission, institution, body politic and corporate, and any 
 other person or group receiving public funds. The Commission should be charged 
 with the duty of reporting cases of waste, inefficiency, mismanagement, or deviatior 
 from legislative intent. All reports submitted to the Commission should conform 
 to accepted practices and reflect the purposes which a postaudit should serve. 
 
 The Legislative Audit Commission should consist of six members, three 
 of whom would be selected from the Senate and three from the House of Representa- 
 tives, with a provision for minority representation from both houses. We recom- 
 mend that the entire membership be drawn from the Appropriation Committee since 
 this would provide a means for the reports from the Legislative Auditor being 
 readily available at the place and time where legislative decisions are made 
 regarding budgetary commitments of state funds. 
 
 In view of the investigatory nature of the Commission's work, we recom- 
 mend that the Cominission specifically be conferred with the power of subpoena. 
 
 The selection of a Legislative Auditor will be one of the primary duties 
 of the Legislative Audit Commission. The Legislative Auditor should be a certi- 
 fied public accountant with experience in a professional supervisory capacity. It 
 would be desirable to indicate that he should have been associated with govern- 
 mental accounting. However, with all qualifications, other than his being a 
 certified public accountant, the Connmission should be empowered to require 
 equivalent experience to allow for flexibility of selection. The nnost important 
 qualification of the Legislative Auditor will be his ability to report las findings 
 through the Commission to the legislature. This ability will in large measure 
 depend upon the confidence he enjoys from the membership of the Commission, 
 
 - 60 -
 
 and It would be impossible to legislate this intangible qualification into the act 
 creating the position. 
 
 The question of tenure for legislative auditors has often been debated. The 
 Comptroller General of the federal government, an analagous position to the recom- 
 mended Legislative Auditor, is selected for a fifteen year term. However, when 
 the question was reviewed during the study performed in the State of California, it 
 was decided not to establish a definite term. The proponents of the federal system 
 contend that permanency of position leads to independence of decision, and if a 
 position is charged with the responsibility of reporting on executive management 
 in government, there is necessity for job security. 
 
 The opposing viewpoint recognizes that not only the individual holding the 
 position, but the very position itself, depends upon the quality of performance. 
 Thus, the most effective means of insuring a continuously high level of performance 
 is to have the incumbent subject to continuous examination. 
 
 We are of the opinion that it is preferable to not establish a definite term 
 of office for the Legislative Auditor. 
 
 The general practice in the past for the auditing of state agencies has been 
 for the Auditor of Public Accounts to engage by contract private auditing firms to 
 perform this duty. We are of the opinion that in addition to these outside firms the 
 Legislative Auditor should be armed with a staff of his own selection to: 
 
 (a) Develop audit standards; 
 
 (b) Review incoming audits and follow up on them; 
 
 (c) Audit smaller state agencies 
 
 It would take many years for the Legislative Auditor to compile a staff 
 
 - 61 -
 
 sufficient to perform postaudits for all state agencies. 
 
 We recommend that the Legislative Auditor's staff be accorded the 
 benefits of the Personnel Code of the state as a means of insuring professional 
 career appointees. 
 
 Certain responsibilities in the field of local governmental postauditing 
 have been assigned to the Auditor. Under a 1953 amendment, the Auditor 
 administers the Illinois Municipal Auditing Law. This law requires municipalities 
 to file audits of their accounts in the manner and form of generally accepted 
 municipal accounting principles. If a municip^ility should fail to have an audit 
 within the time prescribed, then the Auditor may require an audit to be made. The 
 report of audits are filed with the Auditor. 
 
 In specific legislation, the Auditor is reqxiired to audit the accounts of the 
 Chicago Sanitary District. This was enacted as a result of a special situation and 
 is not typical of the local governmental auditing practice in the state. 
 
 In discussing local governmental units, it should be borne in mind that they 
 are all creatures of the state. For the most part, their powers and duties are 
 conferred upon them by the legislature. In most cases their very existence is by 
 grace of legislative action. 
 
 In addition to powers granted local units, the legislature makes specific 
 financial grants as in the cases of schools and for highways and roads. For the 
 1955-57 biennium these grants exceeded $176 million. 
 
 It appears that requests for additional grants of aid and powers of taxation 
 will be addressed to the General Assembly. If it is intelligently to apprcdse and 
 evaluate these requests, the legislature may wish to be more fully informed of the 
 
 - 62 -
 
 units* financial eituation. In thirty states provision is made for either state audits 
 or supervision of audits for municipalities. A majority of these states make the 
 provision mandatory. The recent trend has been for closer state supervision of 
 local finances. One of the great problems confronting the School Problems 
 Commission is the lack of uniformity of financial data which they obtain from 
 school districts. 
 
 In accordance with the duties o-f the Legislative Auditor, we recommend 
 that he be designated the recipient of audit reports required under the Municipal 
 Audit Law and such other audit reports from local governmental units as the 
 legislature may require now or in the future. 
 
 We also recommend that the Legislative Auditor make a complete study of 
 reimbursement for travel by the State in view of the enormous abuses which we 
 have found in the Auditor's office. It may well be that the State should adopt a 
 system of per diem reimbursement. 
 H. REGULATION OF FINANCIAL INSTITUTIONS 
 
 The Auditor of Public Accounts is designated as the officer responsible for 
 the regulation of certain businesses. The legislature has determined that these 
 businesses sufficiently atffect the public interest to require state supervision. 
 Essentially, this regxQation involves licensing to operate, examination of operation 
 and responsibility for curtailing the operation where there is unsatisfactory per- 
 formance. 
 
 It is evident that the Auditor's office assumed this responsibility in a 
 piece-meal fashion. As it was deemed advisable from time to time to regulate 
 businesses, they were added to the duties of the Auditor of Public Accounts. Now 
 
 - 63 -
 
 included in the List are: 
 
 (1) State banks 
 
 (2) Currency Exchanges 
 
 (3) Cemetery care trusts 
 
 (4) Savings and loan associations 
 
 (5) Trust companies 
 
 (6) Credit unions 
 
 (7) Business transmitting money to foreign countries 
 
 (8) Title guarantee companies 
 
 In addition to these businesses under the Auditor of Public Accounts, there is the 
 Department of Insurance, headed by a director responsible to the Governor, which 
 regulates insurance companies and small loan companies. Additional trade and pro- 
 fessional licensing is handled by the Supreme Court, by the Board of Trustees of 
 the University of Illinois and by the code Department of Registration and Education. 
 
 IXiring the period of Mr. Hodge's tenure as Auditor, our investigation 
 uncovered examples of impropriety in the area of business regulation. In one 
 instance Hodge caused the cessation of operation of the State Bank of Elmwood 
 Park. This was one of the three so-called Beutel Banks, which were all closed 
 at the same time. From our investigation, we have concluded that this action was 
 entirely appropriate. However, when the Elmwood Park Bank was re-opened 
 Hodge had acquired a substantial block of stock. These holdings were subse- 
 quently increased until he held in excess of 11,000 shares. 
 
 Another part of this report is devoted to the problem of use of public office 
 for personal gain. However, this is a manifestation of a situation where there is 
 the lack of continuing public examination of administration. This develops when 
 one state agency is overburdened with too many diverse and incongruous functions. 
 The discussion concerning executive responsibility contained in the section of this 
 report dealing with the abolition of the office of Auditor of Public Accounts is 
 
 - 64 -
 
 relevant in considering the disposition of this function. 
 
 The heart of the problem is that with an increasingly important and numer- 
 ically potent function (there are now 5500 financial institutions regulated by the 
 Auditor), there should not be dilution of its operation by other facets of state 
 government while at the sanne time preserving executive responsibility for 
 governing. The creation of a separate department to administer the laws relating 
 to financial institutions will pernnit concentrated attention to the regulation of 
 these institutions without the destruction of the proper administrative structure. 
 
 All but five states, place the responsibility for administering state banks 
 under an appointive official or board. In Florida, Illinois, Mississippi, New 
 Hampshire and New Jersey an independent elected official supervises state bank 
 operations. In all but these states the Governor appoints a comimissioner or 
 superintendent of banks. 
 
 We, therefore, wish to recommend that a Department of Financial Institu- 
 tions be established under the Governor to administer the laws regarding the 
 businesses presently under the Auditor of Public Accounts. 
 
 The regulation of small loan companies should be transferred from the 
 Department of Insurance and placed in the proposed Department of Financial 
 Institutions, We recommend the continuance of the Department of Insurance, 
 since there are basic differences between the problems of insurance companies 
 and other financial enterprises, particularly banking. 
 I. ABOLITION OF THE OFFICE OF AUDITOR OF PUBLIC ACCOUNTS 
 
 The Auditor of Public Accounts is a constitutional official, who is 
 popularly elected for a four -year term. The major duties performed by this 
 
 - 65 -
 
 officer are: 
 
 (1) Administration of state banking laws and other business 
 regulatory activities including currency exchanges, cemetery 
 care trusts, savings and lorn associations, trust companies 
 and credit unions; 
 
 (2) Authorization for receipt of money into the state treasury 
 and for payments made from the state treasury with duty of 
 preaudit; 
 
 (3) Preparation and issuance of warrants; 
 
 (4) Administration of the State Property Control Act; 
 
 (5) Administration of State Municipal Auditing Law; 
 
 (6) Miscellaneous record keeping activities , i.e., bond 
 records, land records, compilation of annual lists of all 
 persons employed by the state; 
 
 (7) Performance of postaudits for all state agencies. 
 
 It can readily be seen that the officer performs minor details of executive 
 responsibility. He has a relatively small amount of discretionary power and can 
 be classified as a "bookkeeper" for the state. 
 
 We believe that administrative and even political accountability should be 
 vested in as few officials as possible. This is desirable not only for the people 
 who qxiadrennially are called upon to select the stewards of their governmental 
 affairs, but also for the streamlined functioning of state government. Govern- 
 ment has become too complicated and complex for even a well-informed citizenry 
 intelligently to determine whether the operations of the Auditor's office are per- 
 formed satisfactorily and who is well-qualified for the position. It should be noted 
 that the present incumbent is the only Auditor of Public Accounts also to be a 
 certified public accountant. And his selection was by the Governor and not by 
 
 election, 
 
 - 66 -
 
 Generally, the reduction in the number of elective officers seems wise in 
 view of the rising costs of conducting a political campaign. In this connection it 
 should be observed that Mr. Hodge indicated that a principal motivation for his 
 peculations was the need to obtain sufficient funds for his campaign. 
 
 In this report we have recommended the transfer of duties and elimination 
 of the office of Auditor of Public Accounts, and establishment in its stead of two 
 additional offices: 
 
 (1) Legislative Auditor, appointed by a Legislative Comnnission 
 
 (2) Director of Examinations of Financial Institutions, appointed 
 by the Governor. 
 
 J. PERSONNEL POLICIES 
 
 One of the most unfortunate consequences of the events during the Hodge 
 term as Auditor was the effect his operation had on the morale of his employees. 
 In many instances, employees were hired through the patronage system. A few 
 held career positions without, however, the benefit of a merit system. In our 
 investigations, we found that the employees, whether appointees of Hodge or 
 holdovers, were forced to an unhealthy loyalty to the Auditor as a means of 
 holding their jobs. In some instances, employees with long tenure were forced 
 to manipulate false travel vouchers for the benefit of the Auditor. There was no 
 recourse for those employees wanting to perform in an honest and upright manner. 
 The resulting effect on the morale of the employees is not measurable, but could 
 not help lowering the general efficiency and operation of the office. 
 
 The original Illinois civil service legislation enacted at the turn of the 
 century apparently anticipated that employees in the Auditor's office, as well as 
 in the offices of the other elected officials, would be subject to civil service. 
 
 - 67 -
 
 The early legislation did, however, exempt clerks and watchmen in these offices, 
 and eill bank examiners, and examiners of building and loan associations. This 
 exemption still stands. Although in a few isolated instances employees of elective 
 officers have been brought under civil service, the great bulk of employees have 
 been exempted by classifying them as clerks and watchmen. In each of the elective 
 offices, there are a few employees who have long tenure through changes of ad- 
 ministrations, although not subject to civil service. The technical knowledge of 
 these employees has permitted the routine of the office to continue without inter- 
 ruption. 
 
 Although the employees under the elective officials are not directly 
 exempted from the civil service act, they are specifically excluded from the 
 coverage of the position classification (salary standardization) act. This act was 
 adopted in 1943 to establish an "equal pay for equal work"system for state employees. 
 Because employees under the elective officials are exempted from the act, the 
 salaries paid employees are established independently by each official (subject to 
 legislative approval in appropriation bills). Their salaries are generally estab- 
 lished without relation to salaries paid to other state employees. Likewise, the 
 conditions of employment of personnel in elected officers differ from office to 
 office. As a result, the vacation and sick leave vary, as do working hours. 
 
 The last session of the general assembly received a legislative commis- 
 sion report on personnel practices of state employment; and as a result, the new 
 Personnel Code was enacted. This code, which will become fully effective July 1, 
 1957, will supercede the present state civil service and position classification 
 acts. The new code does not bring the employees under elective officials within 
 
 - 68 -
 
 its proviaione, but does provide that an elective officer may voluntarily request 
 that his employees be brought under the code for one or more of the three juris- 
 dictional areas; hiring and firing on a merit basis; classification and compensa- 
 tion; and conditions of employment. Generally, the merit provisions of the code 
 cover all employees under the Governor, except those in top policy making posi- 
 tions. These positions are exempted so that the executive can fill them with 
 employees who are in complete sympathy with the programs and policies of the 
 administration, and who can act as personal advisors. 
 
 There appears to us to be no reason why the staff in a department under 
 the Governor should be subject to a merit system, while those under other elected 
 officials are given no such protection. Likewise, employees doing comparable 
 work in any state office should be given comparable pay, and should be subject to 
 the same conditions of emiployment. Giving the Auditor's employees the protection 
 of a merit system (but still making it possible to remove them for inefficiency 
 and incompetency) would have made it unnecessary for these persons to commit 
 illegal acts without any recourse in order to keep their jobs. 
 
 In the final analysis, the employees of the state should perforna for the 
 benefit of the taxpayers and not become pawns of any official. 
 
 Therefore, we recommend that the Personnel Code be amended to make 
 it mandatory that employees under the elected officials be subject to the provisions 
 of the Code to the same extent as similar employees in the Departments under the 
 Governor. 
 K. CONFLICT OF INTEREST STATUTE 
 
 In the course of investigating the operation of the Auditor's office under 
 
 - 69 -
 
 Orville Hodge, it appeared tlia.t certain employees and consultants, and even the 
 elective officer himself, had used their positions of pubUc trust for personal gain. 
 The case of the Auditor's interest in the Elmwood State Bank has been discussed. 
 
 The Auditor had also entered into extensive unusually favorable loan 
 arrangements with financial institutions subject to his regulation. 
 
 Edward Epping, Hodge's adimiistrative assistant, was a partner in an 
 accounting firm which did a large amount of business for the Auditor's office 
 during the Hodge term. 
 
 Lloyd Lane was both an assistant to the Auditor and connected with a 
 truck and trailer company which did extensive business with the Auditor's office. 
 
 J. Roy Browning, an attorney, represented the Auditor in official matters 
 and at the same time represented other clients in matters involving the Auditor's 
 office. 
 
 Not only did this condition of conflicting interest exist under Mr. Hodge's 
 administration, but an investigation of the activities in the office under the pre- 
 ceding administration disclosed that J. W. F. Smith, an employee of the office, 
 received approximately $173,000 on contracts entered into with the prior Auditor 
 for the distribution of trust funds from liquidated financial organizations. 
 
 It is an elementary principle of law that anyone in a fiduciary capacity 
 must deal at arm's length regarding his beneficiary's interest. This rule is 
 based on the realization that a man entrusted with the affairs of another cannot 
 adequately protect the interest of the parties which he represents when he assumes, 
 in different capacities, both sides of a bilateral agreement. Perforce, the 
 agreement becomes unilateral in nature. 
 
 - 70 -
 
 The legislature has recognized thia principle. Section 1 2 of "An Act to 
 revise the law in relation to state contracts" prohibits an employee in any of the 
 offices of state government from being interested either directly or indirectly in 
 a state contract. Both the constitution and the statutes of the state apply this 
 principle to members of the General Assembly. The legislature has invoked the 
 same prohibition on city councils and school boards. The Illinois Banking Act 
 reflects this policy in another direction by prohibiting loans to bank examiners. 
 Commissioners, assistant commissioners, secretaries, and employees of the 
 Commerce Commission are forbidden to have any direct or indirect interest in 
 any enterprise which is regulated to any degree by the Commission. 
 
 We recommend the enactment of a comprehensive statute which prohibits 
 elected officials, employees, and consultants of the various agencies, boards, 
 and commissions, aoid all other bodies which receive public funds from dealing 
 either directly or indirectly in other than their official capacity with these funds. 
 This statute should cover not only expenditures, but also areas where regulatory 
 activities take place. It should not be possible to use the public trust and position 
 for personal gain. We are of the opinion Aat the present statutory prohibitions 
 are not extensive enough to assure adherence to this principle. 
 
 - 71
 
 L. CAMPAIGN CONTRIBUTIONS AND EXPENSES 
 
 Besides expenditures for investments, the only motive Orville Hodge has 
 publically ascribed for his defalcations was political contributions and expend- 
 itures. Our investigation has borne out the validity of this confession. He spent 
 large sums of money not only for his own candidacy, but also for other political 
 aspirants. The receipts and expenditures of the Hodge campaigns of 1952 have 
 caused a great deal of speculation. We have been unable conclusively to determine 
 the correctness of these speculations, other than to ascertain that an inordinate 
 amount was spent by Hodge in campaigning for eui office with an annual salary of 
 $16,000. 
 
 Illinois is one of the three states which have no provision for public report- 
 ing of either campaign contributions or expenses. Thirty-six states require re- 
 porting of campaign expenditures. The states which have acted upon the matter 
 have done so for two primary reasons: to prevent abuses by the candidates in 
 securing votes, and to make public the source of campaign funds. In the course 
 of our investigation of Orville Hodge's public and private financial affairs, we 
 have discovered abuses of both types. There were instances of political contri- 
 butions by contractors and suppliers receiving public funds from the Auditor's 
 office. As a result of the defalcations of Hodge, supplementary investigations 
 have uncovered political contribution practices which appear to be, at best, 
 unsavory. 
 
 We believe the time has arrived for Illinois to join the progressive trend 
 and enact "corrupt practice" legislation to serve as a deterrent to undesirable 
 political activities. We, therefore, recommend that legislation be enacted re- 
 
 - 72 -
 
 quiring the reporting of political contributions and expenditures by all candidates 
 for public office. We do not recommend a limitation on expenditures because we 
 are of the opinion that this would be ineffective. It may be that a future re-exam- 
 ination of this recommendation should be made. The legislation should include 
 contributions to and expenditures not only by the candidates but also by the agencies 
 and committees working in his behalf. Provision should be made for the report 
 to be made public both prior to and following the election. 
 The proposed act should provide: 
 
 1. That each candidate for nomination or election to a political 
 office should, as a condition precedent to qualifying, appoint 
 a campaign treasurer and designate a campaign depository; 
 
 2. That all contributions and expenditures of money in pursuance 
 of the candidacy should be reported by the campaign treasurer 
 each week; 
 
 3. That no contribution should be received by the campaign 
 treasurer at any time less than five days before the election; 
 
 4. That all receipts by the campaign treasurer should be placed 
 in the campaign depository within twenty-four hours after his 
 receipt of the contributions; 
 
 5. That within fifteen days following the election in which the 
 candidate participates, there should be a complete report 
 of receipts and disbursements. 
 
 Penalty provisions for the failure to follow the provisions of the act shall cause, 
 
 in the case of a successful candidate, the office or nomination to be vacated; or, 
 
 in the case of an unsuccessful candidate, a criminal penalty. Should the campaign 
 
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 depository or campaign treasurer violate the provisions of the act or make a false 
 statement, they too, should be subject to similar criminal penalties. 
 M. THE AUDITOR'S RECORD KEEPING DUTIES 
 
 Over the years the Auditor's office has accumulated certain record keep- 
 ing activities which are not germane to the purposes of the office. Included in 
 the list of duties is the annual compilation of a list of all State employees, custo- 
 dianship of certain land records, and recording changes in township names. 
 
 The annual State employees list is alphabeticaily prepared by counties and 
 is used to inform the public of persons employed and their remuneration by the 
 State. The presence of the list is considered a safeguard against payroll padding. 
 We have recommended that the State Treasurer be responsible for the disbursing 
 of State funds, and since this would include the disbursement of payroll checks, 
 we recommend that the Treasurer also compile the annual employee list. 
 
 The Auditor is designated as the depository for the field notes of the 
 original United States survey of Illinois land. Since this is largely of historical 
 significance today, we recommend that the custody of these records be reassigned 
 to the State Records Commission and placed in the State Archives. 
 
 Changes or creation of township nannes are processed by the Auditor. 
 When a county desires to change or create a township najne it registers the de- 
 sired name with the Auditor. If no other township has the same name, then at 
 the expiration of one year, he certifies the new nanne to the board of supervisors 
 or commissioners of the county. This function can properly be performed by 
 the Secretary of State, who aiso perfornns it with regard to municipalities. 
 
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 N. BONDS OF STATE OFFICERS 
 
 After the defalcations of Orville E. Hodge were uncovered, the most avail- 
 able means of recouping the loss to the State was forfeiture of the bond which 
 Hodge had been required to give insuring the faithful performance of his duties. 
 The sureties on the bond made immediate payment to the State. However, at the 
 time payment was made, the amount of the bond, $50,000, was less than one-tenth 
 of the then known thefts from the State Treasury. 
 
 It appears obvious that for a State official entrusted with the expenditure 
 of over seven million dollars biennially and charged with the responsibility of 
 issuing nearly a billion dollars a year in State funds, a bond in the amount of 
 $50, 000 is inadequate. 
 
 The bonds for other State officers vary in amount. The Attorney General 
 provides a bond of $10, 000; the Superintendent of Public Instruction $25,000; the 
 Secretary of State $100,000; and the State Treasurer $500,000. The variance can 
 be in part explained by the amount of State funds with which each of these officers 
 is entrusted. However, any of the elected constitutional officers could be guilty 
 of defalcations greatly in excess of the amount for which they are now bonded. 
 
 We, therefore, recommend that the bond for the Attorney General and the 
 Superintendent of Public Instruction be increased to $50,000 each; that the bond 
 of the Secretary of State be increased to $25 0, 000 and that the bond of the Auditor 
 be increased to $500, 000, which will parallel that of the State Treasurer. 
 
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 O. RIGHT OF INSPECTION OF PUBUC RECORDS 
 
 When suspicion first began to center around the activities of the Auditor's 
 office during Mr. Hodge's term, the original deterrent which Hodge placed in the 
 path of the investigation by the newspapers, was denial of access to the office 
 records. The denial was mitigated with permission to see any particular record 
 which was specifically requested However, the person requesting the informa- 
 tion could not be present when the records were being withdrawn. General perusal 
 was denied. With the great number of transactions being handled and the volumi- 
 nous records maintained by this office, it would be impossible for even the most 
 informed persons to be able to specify pertinent records which would give them 
 all the information they desired. 
 
 The Auditor, however, maintained his position of refusing information 
 even in the face of an adverse ruling by the Attorney General of the State. Sub- 
 sequently, when the office was subject to an investigation which had been given 
 was denied on the grounds that the Auditor was cooperating with the grand jury 
 and any disclosure other than to them would be improper. 
 
 It would seem that the right to inspect public records is fundamental in 
 our form of government. To deny the right of access to those whose funds are 
 responsible for the very activities carried on by the State agencies is tantamount 
 to monolithic censorship and suppression of information. 
 
 It is contended that the right to inspect public records is an implicit 
 
 facet of citizenry and that additional legislation unnecessary. However, there 
 
 are too many refinements and definitions of what constitutes a "public record" 
 
 and the means of enforcement are too unsatisfactory to insure that the right can 
 
 be exercised without time -cons uining delay which would defeat the purpose of 
 
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 the inspection. 
 
 Twenty-four states have provided by the statute the right to general public 
 inspection of records. Illinois requires that the records of the county treasurer, 
 county clerk, and the clerks of the courts be open to inspection by the public. 
 But Illinois does not have a general public inspection statutory provision. 
 
 We, therefore, recommend that legislation be enacted which provides for 
 the free access to records by any citizen. In addition, the act should provide that 
 the failure of any employee or official charged with the custody of records will 
 subject him to removal or impeachment and guilty of a misdemeanor, with a fine 
 of S5 00 for each day of failing to respond to a written demand that records be made 
 available. 
 P. CRIME INVESTIGATING COMMISSION 
 
 It has been impossible within the scope of our investigation to determine 
 the extent of Hodge's connection with organized and syndicated crime. That there 
 were mutual business connections and acquaintanceships with this unsavory element 
 has been unquestionably established. But your investigators were not equipped with 
 either the staff or the powers necessary to conduct this type of inquiry. If this 
 type of inquiry could have been conducted it is possible that many of the unanswered 
 questions of the Hodge scandal would not remain. And it would have aided full dis- 
 closure to have had a trained and sufficient staff available when this investigation 
 commenced. 
 
 However, the people of the State of Illinois were confident that some or- 
 ganization or group was entrusted with the responsibility of keeping continual 
 vigil on crime and particularly its relationship with any public groups or servants. 
 
 It was assumed that there was a group with the powers sufficient to transcend 
 
 - 77 -
 
 county lines and make the broad surveillance which is necessary in a State as 
 wealthy and large as Illinois. This assumption was and is unwarranted. 
 
 The problem of dealing with criminal acts should be basically a local and 
 state responsibility. However, it now appears that to implicate some of the per- 
 sons responsible for the defalcations in the Auditor's office, it will be necessary 
 to resort to the efficiency of the Internal Revenue Service of the federal govern- 
 ment. There is no single state -wide authority capable of dealing with all of the 
 facets of the present inquiry. This situation alone places too great a burden on 
 local law enforcing agencies when confronted with larceny or misconduct on the 
 scale involved in the instant case. 
 
 Other states have found it desirable to keep their fingers on the pulse of 
 syndicated crinne. California was the first state to establish a Commission with 
 powers to inquire and devise remedial measures which we're necessary to deal 
 with the conditions disclosed. New York and Florida have followed suit. 
 
 We recommend the establishment of a permanent Crime Investigating Com- 
 mission to insure to the people of Illinois constant surveillance of the extent of 
 organized and syndicated criminal activity in the State and with the power to 
 make disclosures unferreted by geographical limitations. The Commission should 
 be provided with a staff sufficient to accomplish the Commission's purposes of 
 disclosure and recommended remedial action. 
 Q. UNIFORM ABANDONED PROPERTY ACT 
 
 Until the 69th General Assembly acted on the matter of the Auditor's 
 trust funds, their custody was not subject to specific legislation. In that session 
 the legislature provided that these funds be turned over to the State Treasurer, 
 
 - 78 -
 
 This was not done during the Hodge term, however. The legielative action came 
 as a result of discovering a fund which had escaped attention for a number of years. 
 There had not been a uniform method of disposal provided for funds which are in- 
 active and unclaimed. 
 
 This same situation of inactive funds have caused State bank examiners a 
 great deal of difficulty. One of the major sources of defalcations in individual 
 banks are inactive accounts which become known to unfaithful bank employees and 
 are plundered by them. 
 
 In view of recent United States Supreme Court decisions it is also possible 
 for the custodians of unclaimed funds to suffer multiple liability for their return 
 when there is variance between State laws where claims for the funds might be 
 pressed. 
 
 We are of the opinion that the present laws in Illinois dealing with abandoned 
 property, which provide either for the escheat of ;the property to 
 
 the State or for the unjust enrichment of the custodians of the funds need revision. 
 The property rights of the rightful owners should be protected, but in a manner 
 consistent with protection of custodians of the property. 
 
 A great number of states have enacted comprehensive legislation on the 
 subject of abandoned property and we recommend that Illinois follow suit. Inso- 
 far as the Auditor's trust funds, resulting from liquidated financial institutions, 
 are concerned the Act heretofore referred to passed by the 69th General Assembly 
 relating to their custody was an adaption of the uniform Act on abandoned property. 
 If it is the desirable for these funds it would seem to be desirable for all abandoned 
 property. 
 
 - 79 -
 
 We, therefore, recommend that the Uniform Act on Disposition of Un- 
 claimed Property be adopted. 
 
 - 80 -
 
 SUMMARY OF RECOMMENDATIONS 
 
 1. We recommend a change in the manner of preaudit: 
 
 A. Decentralization of preaudit by placing the responsibility with 
 the agencies authorizing and certifying vouchers, subject to 
 over-view by the Department of Finance. 
 
 B. Holding the state central preaudit by the Auditor of Public 
 Accounts to a minimum pending elimination of the office, 
 (Constitutional revision. ) 
 
 2. We recommend a revision in the mechanics of enacting a State budget: 
 
 A. The Department of Finance enlarge its activities in serving 
 
 as the executive agency for the formulation of the State budget. 
 
 B. The expansion of the staff of the Budgetary Commission on a 
 career and professional basis and a delineation of its function 
 to be limited to budget investigation and recommendation to 
 the General Assembly and study of State revenue. 
 
 3. We recommend a redefining of the responsibilities of the Department of 
 Finance to include in addition to its budget tasks: 
 
 A. Establishing and enforcing standards of financial administration 
 and conducting procedural audits on all State agencies, except 
 courts, corporate bodies and the legislature. 
 
 B. Establishing the methods and manner for financial reporting 
 by all State agencies. 
 
 4. We recommend that there be a strengthening of procurement practices by: 
 
 A. Extending the principle of competitive bidding to contracts and 
 
 purchases by all State officers, agencies, boards and commissions. 
 
 - 81 -
 
 B. Requiring that any construction, renovation or remodeling work 
 be supervised by an architect or engineer and that hie certificate 
 of satisfactory competition be required before payments for the 
 work are made. 
 
 C. Creation of a Department of Administrative Services headed by 
 a director appointed by the Governor with responsibility for: 
 
 (1) The functions now performed by the Department of 
 Finance in the areas of printing, purchasing and 
 agency housing. 
 
 (2) Administering the State Property Control Act. 
 
 5. We recommend that the State Treasurer: 
 
 A. Be solely responsible for the mechanics of disbursing State 
 funds. (Constitutional and Statutory. ) 
 
 B. Act as registrar for all State bonds. 
 
 C. Receive and have custody of and be responsible for the 
 safekeeping of all State funds. Be appointed by the Governor 
 in lieu of popular election. (Constitutional revision. ) 
 
 6. We recommend that the responsibility for postauditing State agencies 
 rest solely with the legislature and that there be established a Legis- 
 lative Audit Commission for this purpose which will: 
 
 A. Appoint a Legislative Auditor who with the aid of a career 
 
 staff will be responsible for the postaudit of all State agencies; 
 and cause to be audited such local governmental units as are 
 now or may be required by statute. 
 
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 7. We recommend the establishment of a Department of Financial Institutions, 
 headed by a director to be appointed by the Governor, to be responsible for 
 the regulation of financial institutions presently under the Auditor and of 
 small loan companies now regulated by the Department of Insurance. 
 (Statutory, except Teferendnm as to bank examination. ) 
 
 The result of the above recommendations, if all were approved, would be 
 the elimination of the office of Auditor of Public Accounts as now constituted, by 
 transfer of its duties to other offices existing or recommended. (Constitutional 
 revision. ) 
 
 8. We recommend that the personnel code be mandatorily extended to cover 
 employees of all State officers. 
 
 9. We recommend the enactment of a comprehensive statute prohibiting con- 
 flicts of interest by any State officer, employee, consultant, or other per- 
 son whose relation to the State by contract or otherwise, requires fidelity 
 to it. 
 
 10. We recommend the enactment of a statute requiring the reporting of politi- 
 cal contributions and expenditures by all candidates for public office. 
 
 11. We recomnnend that certain record keeping activities of the Auditor, i. e. , 
 township names and changes, land records and other miscellany, be 
 placed with other agencies of State government. 
 
 12. We recommend that the amount of fidelity bonds for all State officers be 
 substantially increased in amount. 
 
 13. We recommend a statute providing for public inspection of all State records. 
 
 14. We recommend the establishment of a permanent crime investigation com- 
 mission. 
 
 15. We recommend the adoption of the uniform Abandoned Property Act.
 
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 - 84 -
 
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 - 85 -
 
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 - 85 -
 
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 - 86 -
 
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