Presentation to the Financial Administrator Development Program MSU Financial Statements and External Audit

Transcription

1 Presentation to the Financial Administrator Development Program MSU Financial Statements and External Audit October 30, 2012 Katie A. Thornton, Associate, Plante Moran Gregory J. Deppong, Controller, MSU

2 Agenda Introductions Why this information is important to a financial administrator? Support decision making Passing what is learned on to staff Accountability placed at the Fiscal Officer role What else do you want to know? 2

3 Outline MSU Controller s Office, MSU Internal Auditors, and External Auditors roles defined Internal Control defined Account transaction roll up to financial statements Financial statement components External Audit of financial statements 3

4 Control & Audit Roles Controller s Office Establishes internal controls Reports to Chief Financial Officer MSU Internal Auditors Independent from Controller s Office Reports to President and Board of Trustees External Auditors Independent from MSU Hired by and reports to Board of Trustees Audit reports issued to State and Federal governments 4

5 Financial administrators establish policy Controller s Office and financial administrators Develops and enforces effective internal controls. Establishes policies and procedures. Monitors compliance with federal, state, or applicable laws and MSU policies and procedures. MAKES MANAGEMENT DECISIONS. Internal Audit Evaluates and provides reasonable assurance that internal controls are functioning as intended. Evaluates compliance with federal, state, or other applicable laws. Evaluates compliance with MSU internal policy. DOES NOT MAKE MANAGEMENT DECISIONS. 5

6 What is internal control? Internal control is a PROCESS of specific policies and procedures designed to provide reasonable assurance that an organization s fiscal objectives will be met. 6

7 Meeting fiscal objectives Promote efficient and effective operations Support compliance with policy Protect university assets Provide reliable financial reporting 7

8 Internal controls support reliable financial reporting Laws IRS Federal Grants External Endowment Spending Generally Accepted Accounting Principles (GAAP) Governmental Accounting Standards (GASB) Internal Sources and Uses of Funds Cost Monitoring Compliance Clean Financial Statements are the result of sound and effective internal controls 8

9 MSU annual financial report Management Discussion and Analysis Independent Auditor s Report MSU Financial Statements MSU Foundation Financial Statements Independent Auditor s Report on Internal Control Over Financial Reporting 9

10 Governmental Accounting Standards Board (GASB) Source of Generally Accepted Accounting Principles for State & Local Governments (and public universities) Public universities originally founded by state governments At least one public university in every state 10

11 Stewardship: report internally using funds Fund Description Example General Core institution operating GA General operations activities Auxiliary Separate business activities XA Athletics Designated Plant Self supporting institution operating activities Capital (fixed) assets and related debt; reserves DN Non credit instruction PT Reserves for future capital asset needs Expendable Restricted Contract & grants; RC Contracts and grants endowment spending Endowment Nonexpendable gifts NX Donor Endowments 11

12 Funds continued Fund Description Example Retirement & Insurance Student Loan Agency Administration of retirement and other benefits programs Federal and institutional loans to students Non university funds held for related entities TN Insurance LD Federal AS Student Groups 12

13 MSU s nine funds are consolidated Activity in all MSU funds combined Elimination of internal activity Consolidated Financial Statements 13

14 Statement of Net Assets (Amounts in Millions) June 30, Assets: Current assets: Cash and cash equivalents $ 14 $ 19 Investments Collateral from securities lending Accounts and interest receivable, net Student loans receivable, net 9 9 Pledges receivable, net Inventories and other assets Total current assets Noncurrent assets: Restricted cash and cash equivalents - 23 Restricted investments - 87 Endowment investments 1,369 1,395 Other investments Student loans receivable, net Pledges receivable, net Investments in joint ventures 7 7 Deferred outflows from hedging derivative instruments Unamortized bond origination costs 5 5 Capital assets, net 1,819 1,703 Total noncurrent assets 3,725 3,707 Total assets $ 4,169 $ 4,135 Liabilities: Current liabilities: Accounts and interest payable $ 67 $ 88 Accrued personnel costs Obligations under securities lending Accrued self-insurance liabilities Payroll taxes and other payroll deductions 7 22 Deposits held for others Deferred revenues Current portion of long term debt and other obligations Total current liabilities Noncurrent liabilities: Accrued personnel costs Accrued self-insurance liabilities 7 7 Hedging derivative instruments Net other postemployment benefit obligation Long term debt and other obligations Total noncurrent liabilities 1,057 1,003 Total liabilities 1,493 1,411 Net assets: Invested in capital assets, net of related debt Restricted: Nonexpendable Expendable Unrestricted Total net assets 2,676 2,724 Total liabilities and net assets $ 4,169 $ 4,135 14

15 Statement of Revenues, Expenses and Changes In Net Assets (Amounts in Millions) Year ended June 30, Operating revenues: Student tuition and fees, net of allowances $ 739 $ 661 Less: scholarship allowances Net student tuition and fees State of Michigan grants and contracts Federal grants and contracts Local and private sponsored programs Interest and fees on student loans 1 1 Departmental activities (net of scholarship allowances of $5 in 2012 and $4 in 2011) Auxiliary activities (net of room and board allowances of $20 in 2012 and $16 in 2011) Total operating revenues 1,503 1,389 Operating expenses: Instruction and departmental research Research Public Service Academic Support Student services Scholarships and fellowships Institutional support Operation and maintenance of plant Auxiliary enterprises Depreciation Other operating expenses, net 3 3 Total operating expenses 1,931 1,858 Operating loss (428) (469) Net nonoperating revenues (expenses): State operating appropriation State agrictultural expirament station appropriation State cooperative extension service appropriation Federal pell grant revenue Gifts Net investment income (loss) (22) 289 Interest expense on capital asset related debt (35) (39) Other nonoperating revenues, net 7 5 Net nonoperating revenues Income (loss) before other revenues (94) 221 State capital appropriations 1 - Capital grants and gifts Additions to permanent endowments Increase (decrease) in net assets (48) 256 Net assets, beginning of year 2,724 2,468 Net assets, end of year $ 2,676 $ 2,724 15

16 Sources investment income varies widely (in millions) $2,000 $1,600 $1,200 $800 $400 $0 $400 $1,912 $2,147 $2,004 $1, Departmental income Auxiliary activities Private gifts and grants State and federal grants State operating appropriation Tuition Investment income (loss) 16

17 Uses ($1.9B in 2012) $1.4B (73%) payroll & benefits and contractual services Payroll and benefits Contractual services Depreciation Repairs and maintenance Supplies and general Student financial aid Travel Contract and grant subawards Other operating expenses 17

18 GASB revenue reporting Sources: Tuition State appropriations State and federal grants Private gifts and grants Investment income (loss) Auxiliary activities Departmental income 18

19 GASB expense reporting Expense uses (shown by functional category): Instruction Research Public service Academic support Student services Scholarship and fellowships Institutional support Operation and maintenance of plant Auxiliary activities Depreciation 19

20 Accounts map to one function 20

21 MSU expense (GASB) (Amounts in Millions) Year ended June 30, Instruction $ 575 $ 561 $ 556 $ 551 Research Public service Academic support Student services Scholarships and fellowships Institutional support Operation and maintenance of plant Auxiliary activities Depreciation Other operating expenses Total GASB expense reporting $ 1,931 $ 1,858 $ 1,810 $ 1,775 21

22 Same total, different view: 2012 expenses natural classification Millions Payroll and benefits $ 1,271 Contractual services 156 Depreciation expense 128 Repairs and maintenance 116 Student financial aid 77 Travel 53 Contract and grant subawards 45 Supplies and general expenses 39 Telephone and postage 11 Rents and leases 7 Printing 5 Other operating expenses 23 Total expenses $ 1,931 22

23 Financial statement origins Income/Expense & Asset/Liability Object Code Object Type Code Financial Statement Group Financial Statement Line 23

24 Every transaction builds the financial statements Cash 1100 AS Asset Cash & Cash Equivalents 24

25 Transaction e doc identifies object code 25

26 Object level codes consolidate financial statement lines 26

27 Where is your account reported? Which fund? Which expense line on the financial statements? Where can you find this information? 27

28 Annual External Audit of Financial Statements 28

29 MSU annual financial report Management Discussion and Analysis Independent Auditor s Report MSU Financial Statements MSU Foundation Financial Statements Independent Auditor s Report on Internal Control Over Financial Reporting 29

30 What is an external audit? Process of gathering evidence By independent third party (Plante & Moran) To determine if the University s financial statements are accurate and fairly stated in accordance with the applicable financial reporting framework With the objective of issuing an opinion on the financial statements based on the evidence obtained 30

31 External audit clean opinion Financial statements are responsibility of management Includes MSU Foundation (and other external auditors) Test basis (sampling) Accounting principles generally accepted in US Present fairly, in all material respects Unqualified opinion 31

32 External audit report on internal control Basis of reliance on the University s processes and controls Test of compliance with laws & regulations Government Auditing Standards If problems, reports deficiencies (publicly!) Not an opinion 32

33 Financial statement assertions Accuracy Transactions & amounts are recorded at the right amount Cut off Transactions are recorded in the right period Existence or Occurrence Assets, liabilities, and equity reported do exist and recorded transactions have occurred Classification Transactions are recorded in the right account 33

34 Financial statement assertions continued Completeness No material transactions or accounts have been omitted Valuation or allocation Assets, liabilities, revenue, and expense items are correctly valued Rights and obligations Assets and liabilities are the rights and obligations, respectively, of the entity at the opinion date Presentation and disclosure Financial statement components are properly classified, described, and disclosed 34

35 Auditing internal controls Information technology (IT) Controls General controls Application controls (such as roles (initiator, approver, delegate & system access) Fully automated processes (are business rules providing sufficient checks and balances?) 35

36 Auditing internal controls continued Audit key processes, such as Cash coming in (revenue) Cash going out (expenses/assets) Commitments/promises (liabilities) 36

37 Auditing internal controls continued Audit key controls Documentation (e.g., policies & procedures; employee actions hiring and termination) Appropriate reviewer Segregation of duties Types of controls Preventative Detective 37

38 Auditing internal controls continued 38

39 Specific audit steps Obtain written procedures and policies Select a transaction throughout the fiscal year Obtain or view supporting documentation in paper or on screen (timesheet or time submission, purchase order, invoice, reimbursement request) Note preparer/initiator Note reviewer signature and date Bottom line were the rules followed? 39

40 What could go wrong? There are no written procedures and policies There is limited or no supporting documentation There is no documented review Same person prepares and reviews Review is late Initiating payment is late (cut off) 40

41 What could go wrong? continued Example of what could go wrong in accounts payable cycle Obligations for goods and services received are not recognized in the proper period AP amounts are not valid Expenditures are classified incorrectly Payments to vendors are applied incorrectly 41

42 Audit evidence Evidence in documentary form (whether paper, electronic, or other medium) Original documents in electronic form qualify as reliable audit evidence 42

43 Audit evidence continued What is the impact of these principles on the following types of evidence: Observation Confirmation Inspection of records or documents Recalculation/ Reperformance Analytics Inquiry 43

44 Example expenses/accounts payable IT Controls: Key Procedures / Controls Ability to set up new vendors involves an approval process limited to purchasing director approval. Observe the process for setting up a new vendor to ensure approvals are set up. How to test? Invoices and receivers are reviewed for date, quantity, nature of item, place of delivery, freight terms, payment terms and discounts and matched against the PO for accuracy before payment is made to appropriate vendor. If vendor ID# and invoice # have already been entered into the system, the system automatically rejects the invoice and prevents the continued entry of the transaction, thereby, preventing duplicate payment of the invoice. 44

45 Example expenses/accounts payable continued IT Controls: Key Procedures / Controls Departments initiate requisitions. Purchasing department obtains approval review before PO is completed. Classification of expenditures are input at time of purchase order. Purchase is only allowed if amount is available in the budget (ie. negative balances are not allowed) How to test? Access and level of approval to the online purchase order system is limited to MSU Net ID registered users. 45

46 Example expenses/accounts payable continued Controls: Key Procedures / Controls How to test? Select one voucher payable transaction to test. Verify proper approval is obtained before applying payments. Select one expenditure that includes an invoice to test. Verify proper approval is obtained before applying payments. Verify that a three way match is performed (purchase order, receiver or proof of service, invoice) before applying payments. Reconciliation of subsidiary ledger to general ledger Obtain year end accounts payable aging and tie to general ledger 46

47 Example expenses/accounts payable continued Controls: Key Procedures / Controls Unmatched invoices and purchase orders Obtain listing of unmatched purchase orders at year end and tie to general ledger How to test? General ledger is kept open after year end to record accounts payable into proper period. Procedures above are being performed by individuals with the appropriate skill and knowledge as it relates to the following: 1) Input of accounts payable 2) Initial classification of expenditures 47

48 If you were going to do an audit of your unit. What would you look at? 48

49 Related to this information upcoming presentations Next session today Expanded discussion on a unit s responsibility for internal controls and ethics. November session Using the financial system to facilitate financial reporting and sound fiscal management; Expanded discussion on sources and uses of funds in MSU s fund accounting environment. 49

50 Discussion Did we meet the goals of this session? Why this information is important to a financial administrator? Support decision making Passing what is learned on to staff Accountability placed at the Fiscal Officer role Questions? 50

51 Thank You! 51

52 Supplemental Slides 52

53 MSU revenue (GASB) (Amounts in Millions) Year ended June 30, Tuition and fees, net $ 640 $ 568 $ 542 $ 510 State appropriations State and federal grants Private gifts and grants Investment income (loss) (22) (244) Auxiliary activities Departmental income Total GASB revenue reporting $ 1,912 $ 2,147 $ 2,004 $ 1,484 53

54 10 year revenue trends $700 $600 $500 $400 $300 $200 $100 $0 $100 $200 Tuition and fees State appropriations State and federal grants Private gifts and grants Investment income (loss) Auxiliary activities Departmental income $

55 Income Statement (reformatted, not GASB) (Amounts in Millions) Year ended June 30, Revenues: Student tuition and fees, net of allowances $ 640 $ 568 $ 542 $ 510 $ 460 Grants and contracts Auxiliary activities State appropriations Investment income budgeted for operations Gifts Capital grants and gifts Additions to permanent endowments Other revenues, net Subtotal - revenues 1,967 1,893 1,878 1,786 1,746 Expenses: Instruction and departmental research Research Public Service Academic Support Scholarships and fellowships Institutional support Operation and maintenance of plant Auxiliary enterprises Depreciation expense Other expenses, net Subtotal - expenses 1,966 1,897 1,830 1,798 1,714 Revenues minus expenses, before investments 1 (4) 48 (12) 32 Other components of net income (loss): Net investment income (loss) (49) (278) 35 Net income (loss) $ (48) $ 256 $ 177 $ (290) $ 67 55

56 External auditors also.. Single Audit (aka A 133) Separate audit of federal contract and grant expenditures What was MSU s total expenditure for 2012? Corporation of Public Broadcasting Audit of WKAR television and radio What percent of WKAR revenues are gifts? NCAA Review of Athletics Department What is Athletics General Fund budget? 56