Association of College and University Auditors (ACUA)

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Association of College and University Auditors

(ACUA)

James E. Morley, Jr.

September 23, 2002

Salt Lake City, Utah

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Presentation Overview

• Part I - Higher education in transition

• Part II - Current national issues

• Part III - Internal audit: Today and the future

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Higher education in transition

• Rapid change: Industry

• Cost/price increases: Funding shortfalls

• Accountability

• Competition

• Rapid change: Expectations

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Rapid change: Industry

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Increasing Enrollm entIncreasing Enrollm entEnro llm ent in H igher E ducation ,

1940-2002Source : D e partme nt of Education v ia C hronicle of H ighe r Education Almanac

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1000012000140001600018000

Year

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rollm

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PublicPrivateTota l

Growth in Higher Education

• Square Footage– 1950s - 500 million– 1980s - 3 billion– 1990s - 4 billion

• New Construction– Between 1994 & 1996 - $12 billion– Projections for 2010

• Additional $200+ billion to build

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Cost/price increases: Funding shortfalls

9

In c reas in g T u itio nIn creas in g T u itio n

U n d erg rad u ate T u itio n a t C o lleg es an d U n ivers ities , 1940 - 2001

0

2000

4000

60008000

10000

12000

14000

16000

Year

Do

llar

s P u b lic

P rivate

Source: Chronicle of Higher Education Almanac 2001

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C o m p a r i s o n o f r e v e n u e f r o m m a j o r s o u r c e s f o r p u b l i c i n s t i t u t i o n s

0

1 0

2 0

3 0

4 0

5 0

1 9 8 0 - 8 1 1 9 8 5 - 8 6 1 9 9 0 - 9 1 1 9 9 6 - 9 7

T u i t io n a n d F e e s

S t a t e A p p r o p r ia t i o n s

S a l e s a n d S e r v ic e s

O t h e r

S o u r c e : D i g e s t o f E d u c a t i o n S t a t i s t i c s , 1 9 9 9 , N a t i o n a l C e n t e r f o r E d u c a t i o n S t a t i s t i c s

%

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Average Tuition Discount:Full Time Freshmen

15%

20%

25%

30%

35%

40%

45%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fin

anci

al A

id a

s a

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and

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Accountability

Accountability

• Scrutiny of costs, salaries, tenure, graduation rates, and curriculum

• School-to-work transition– rise in professional education

• Minority retention

• For-profit comparisons– inefficient operations– unresponsive structure– underutilized technology

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Competition

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A Competitive Environment

• Competition for students and for resources– Increase in tuition discounting and faculty salaries

as a result• Customers (students) expecting and demanding

more from institution– Increased attention to student services

• Market segments fragmenting– Increasing niche competition

• Competition from distance learning• Rise of for-profit schools

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Rapid change: Expectations

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• A consumer-driven marketplace• Consumers (better called stakeholders) place

constant and competing demands• Technology overlay• Globalization

– Terrorism– Disease– Culture

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Current national issues

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Current national issues

• War against terrorism & homeland security

• Tax issues and accounting-related

• Federal regulations

• Technology

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National issues

War against terrorism and

homeland security

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Homeland security:Impact on colleges and universities

• Foreign students and visitors

• Sharing of information with law enforcement and privacy concerns

• IT security

• Laboratory security and treatment of biohazards

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Homeland security: New federal laws

• USA Patriot Act (enacted October 26, 2001)

• Enhanced Border Security and Visa Entry Reform Act (enacted May 14, 2002)

• Public Health Security and Bioterrorism Preparedness Act (enacted June 12, 2002)

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Homeland security: USA Patriot Act

Information sharing:This legislation provides simplification for federal officials to receive court orders for student records and amends FERPA to permit “emergency disclosure.”

• Calls for full implementation of INS foreign student tracking system (SEVIS)

• With court order, Feds investigating terrorism may obtain business and student records

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Homeland security: USA Patriot Act (cont’d)

Information sharing:Updates surveillance laws to cover today’s communications—e-mail, voice mail, etc.

• Makes it easier for law enforcement to acquire “routing” information (pen registers, trap and trace), and relieves institutions of liability

• May result in increased requests for information

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Homeland security: Enhanced Border Security and Visa Entry Reform Act• Enhancements to SEVIS

– Re-certification of all institutions w/ biennial reviews

– Additional information on foreign students– Notification requirements between Department of

State, INS, and institutions to track student entry, enrollment, and changes in status

• Interim notification system by 9/14/02 • New background checks for visa applicants from

countries that sponsor terrorism

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Homeland security: Student and Exchange Visitor Information System (SEVIS)

• Problems for campuses with large foreign student populations

• Batch interface not yet available for institutions that will not key information directly into system

• Web-based system for preliminary enrollment went live July 1; institutional reporting not mandatory before January 30

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Homeland security: Public Health Security & Bio-terrorism Preparedness Act of 2002

– Select agent list to be reviewed at least biennially– Regulations will cover possession and use, not just

transfers, of select agents– Tighter controls, including federal background

checks on persons allowed access to select agents– Broad inspection authority for HHS

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Homeland security: Social security requirements for INS verification

• New guidance asks INS to issue verification based on review of passports and related documents for foreign applicants for SSNs

• SSA estimates new step will add 3-12 weeks to receipt of SSN

• Campus issuance of “temporary” nine-digit identifiers to address internal payroll unofficially acknowledged by SSA

• Check SSA website for up-to-date guidance

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Department of Homeland Security: Proposed The administration’s five organizational categories proposed for the new

department include 24 government entities Border and Transportation Emergency Preparedness and Response Chemical, Biological, Radiological and Nuclear Countermeasures Information Analysis and Infrastructure Protection Secret Service

Sixty-one Congressional committees and subcommittees now have authority over the 24 organizations likely to be merged into the new department

And, at present, the House Government Reform and Senate Governmental Affairs committees have general oversight authority

• Source: Congressional Quarterly

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National issues

Tax issues and accounting-related

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Tax issues: Recent IRS actions

• Memo on FICA withholding for medical residents

• Final rules published for:– Intermediate sanctions– Corporate Sponsorships

• Re-proposed rules on 1098-T reporting

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Tax issues: FICA Rules for medical residents

• Memo from IRS chief counsel indicates residents not eligible for student FICA exemption (January 24, 2002)

• Rationale:– Most services provided by residents are treated as

on-the-job training, not part of study program– Therefore not eligible for student FICA withholding

exemption

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Tax issues: Final rules on corporate sponsorships

• Safe harbor for qualified sponsorship payments• Exclusive sponsorships allowed• Exclusive provider arrangements not in safe harbor—

but not automatically subject to UBIT• EO’s web site can link to sponsor’s site, but not

endorse it• Rules published 4/25/02 Federal Register, and are

applicable for payments solicited or received after December 31, 1997

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Tax issues: IRS Re-proposes 1098-T reporting requirements• Eases reporting burden• Repeals requirement to collect name / SSN of

individuals claiming student as dependent• Allows reporting of aggregate amount of qualified

tuition / expenses or amounts billed• Prior year reporting limited to adjustments to amounts

previously reported—not all refunds• Removes requirement to report on individuals

ineligible for benefit

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Tax issues: IRS Re-proposes 1098-T reporting requirements (cont’d)

• Comments due July 29 – see web site for NACUBO response

• Effective date of new regulations will be for tax year 2003 (1098-Ts that will be filed in early 2004)

• Final rules expected by end of 2002

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Accounting-related: GASB Standards

• GASB Statement No. 34• Basic Financial Statements-And Management’s

Discussion & Analysis-for State and Local Governments

• GASB Statement No. 35• Amends GASB34 to include Public Colleges

and Universities

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GASB Standards (cont’d)

• GASB Reporting Model Implementation Guides– Two separate guides developed by GASB staff

(April 2000 and January 2002)– Special NACUBO guide issued January 2001 for

public colleges and universities

• GASB Statement No. 37 - Omnibus Statement– Addresses problems created by GASB34 and

GASB35

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GASB Standards (cont’d)

• GASB Statement No. 38 - Note Disclosures• Significantly modifies required disclosures• Eliminates some, adds others• Debt, legal issues, payables/receivables

• GASB Statement No. 39 – Affiliated Organizations• Applies to foundations and other entities

supporting public institutions

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Accounting-related: GASB Projects

• Deposit and investment risk disclosure

• Other post-employment benefits

• Conceptual framework

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Accounting-related: FASB Standards

• FASB Statement No. 141 - Business Combinations– Excludes not-for-profits

• FASB Statement No. 142 - Goodwill and Intangible Assets– Application to NFPs deferred until NFP

combination project is complete

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FASB Standards (cont’d)

• Not-for-profit business combinations

• Measuring financial instruments at fair value

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Accounting-related: AICPA Project

• Exposure draft revises rules for Property, Plant & Equipment accounting• Specifies expenditures which qualify for

capitalization

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Accounting-related:

Sarbanes-Oxley Act of 2002 • Creates new, independent regulatory body, the Public Company

Accounting Oversight Board (PCOAB)• Changes to ensure FASB independence in setting national

accounting standards• Auditor independence requirements mandated for audits of

publicly traded companies• New corporate responsibilities and restrictions for CEOs and

CFOs• Focus on greater disclosure and transparency in financial

reporting, internal controls, ethics, audit committee expertise• Stricter provisions and for corporate fraud and white-collar crime

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Possible future actions

• Increased disclosure: GASB Statement 39 (issued 2002)

• GASB performance measures “experiment”—coming (end—2002)

• FASB mandated study of principles-based accounting financial reporting system (due July 2003)

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Professional & standards-setting groups

• AICPA

• FASB

• GASB

• PCAOB

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National issues

Federal regulations

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Federal regulations: ED – Title IV Program eligibility rules

• Replace the 12-hour rule with a one-day rule• Clarify provisions for incentive compensation and identifies “safe

harbor” activities for student recruiters• Clarify need to take attendance in order to comply with return of

Title IV funds requirements• Amend overpayment rules to permit students owning small

amounts to retain their program eligibility• Expand from 90 to 120 days for making late disbursements and

require institutions to offer them to students who complete the period of enrollment

• Eliminate the rule for institutions to confirm the receipt of notices sent to borrowers (or parents for PLUS loans) that loan funds have been credited to students’ accounts

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Federal regulations:OMB Federal Financial AssistanceManagement Improvement Act of 1999

• Proposed revisions to Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations

• Proposal for a standard format for federal agency use in announcing discretionary grant and cooperative agreement funding opportunities

• Proposed standard data elements for federal agency use in creating grant funding opportunity announcement summaries under the E-Grants initiative

• Proposed revisions to three OMB cost principles circulars (A-21, A-87, A-122) to clarify ambiguous language in the interpretation of similar costs

• Proposed revision to Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, et al

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Federal regulations: New opportunity

to assess regulatory costs, impacts • A new administrative policy will allow regulated

entities and the public to challenge agency rules and the accuracy of the data behind them.

• A little-known provision included as a rider in the FY2001 appropriations bill for Treasury and General Government requires all federal agencies to ensure “the quality, objectivity, utility, and integrity of information” they produce.

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Issues in 2002: Status of Congress

• Late July initiatives included approval of new Homeland Security Agency and passage of Corporate Accountability Bill– Corporate Accountability Bill affects only

corporations directly, including creation of an independent oversight board loosely attached to the SEC

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National issues

Technology

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Technology: 2002 Issues

• Broadband access

• Distance education and federal student aid

• Information technology authorization

• Intellectual property

• Network security

• Privacy

• Workforce development

• FY’03 funding priorities

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Technology: Higher Education Information Technology Alliance (HEIT)

• Five years old; convened by NASULGC and EDUCAUSE

• Represents higher education’s collective interests in federal information technology policy

• Hosts annual forum to share information and formulate legislative issues agenda

• USA Patriot Act, cyber security legislation, and homeland security activities have far-reaching implications for higher education

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Technology: HEIT Alliance members

AACC Association of Research Libraries

NAICU

AASCU EDUCAUSE NASULGC

ACE Internet2 University Continuing Education Association

AAU NACUBO

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Could there ever be a better time to be an internal auditor?

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Internal audit: Today and the future

Two key themes…

• Senior financial/business officers’ perspectives on internal audit

• Adding value as an internal auditor

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Senior business/financial officers’ perspectives

• Budget range: $140 million to $2.4 billion (most over $1 billion)

• Five publics, five privates

• Staff size (professional)– 1-12– One institution fully outsourced except for Director– One institution had no internal audit function

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Senior business/financial officers’ perspectives (cont’d)

• Reporting relationships– Nine of ten IA directors report to a senior staff member for

administrative purposes– One reports directly to the Audit Committee

• In-house or outsourced?– One is fully outsourced but Director is internal staff– All have considered at one time

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Senior business/financial officers’ perspectives (cont’d)

Yearly plan development

– Internal development and review, Audit Committee approval

– Each has various approaches to risk assessment – many with multi-year planning

– Increasing emphasis on advisory and investigation work

– Proactive follow-up by senior management

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Adding value as an internal auditor

• Be a partner– Identifying risks– Identify solutions– Propose appropriate controls

• Follow best practices– Be “the” expert on process and good management

practices

• Effective communications

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Adding value as an internal auditor (cont’d)

• Provide management advisory services– Enterprise wide risk assessment– Policy interpretation and early procedural guidance

• Educational resource– Training– Systems development

• Member of cross functional teams– Support recommendation implementation

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Adding value as an internal auditor (cont’d)

From “The Extraordinary Higher Education Leader”

– Think like the President/Chancellor/CFO

– Unlearn what has made you successful

– Develop your total intelligence

– Build and manage key relationships

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Think like the President/Chancellor/CFO

• Effective resource gathering, allocation, and control– State and federal grants– Tuition discounting– Development

• Compliance– Tax-related– Research– Social legislation

• Technology related

• Homeland security– Business continuity

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Unlearn what has made you successful

• Ask others for feedback

• Let go of detail – think systemically

• Focus on design, facilitation, and motivation

• From problem-solving to capacity-building

• Build support before issuing a report

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Develop your total intelligence

• Develop and maintain a balanced lifestyle

• Heart knowledge– Know yourself emotionally– Ability to understand others’ intentions and

behaviors– Build on your strengths

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Build and manage key relationships

• Who are they? Find out!

– Audit committee, plus– President– CFO and senior staff– Departmental staff– External auditors– State and federal auditors– Regulators

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Success depends on:

• Regular, systematic innovation and change

• Influencing senior management and the governance process

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NACUBO Website

http://www.nacubo.org/presidents_corner

Association of College and University Auditors (ACUA)

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