The John Marshall Law School. Reports Required by the Uniform Guidance and Government Auditing Standards August 31, 2016

Transcription

1 Reports Required by the Uniform Guidance and Government Auditing Standards August 31, 2016

2 Contents Part I Financial Independent auditor's report 1-2 Financial statements Consolidated statement of financial position 3 Consolidated statement of activities 4 Consolidated statement of cash flows 5 Notes to consolidated financial statements 6-15 Supplementary information Schedule of expenditures of federal awards 16 Notes to schedule of expenditures of federal awards 17 Part II Government Auditing Standards Independent auditor's report on internal control over financial reporting and on compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards Part III Uniform Guidance Independent auditor's report on compliance for the major federal program and report on internal control over compliance Part IV Schedule of Findings and Questioned Costs Part V Summary Schedule of Prior Audit Findings 24

3 Part I Financial

4 Independent Auditor's Report To the Board of Trustees The John Marshall Law School Report on the Financial Statements We have audited the accompanying consolidated financial statements of The John Marshall Law School, which comprise the consolidated statement of financial position as of August 31, 2016, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The John Marshall Law School as of August 31, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. 1

5 Report on Summarized Comparative Information We have previously audited The John Marshall Law School s 2015 consolidated financial statements, and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated February 1, In our opinion, the summarized comparative information presented herein as of and for the year ended August 31, 2015, is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. Other Matters Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 3, 2017 on our consideration of The John Marshall Law School s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering The John Marshall Law School s internal control over financial reporting and compliance. Chicago, Illinois February 3,

6 Consolidated Statement of Financial Position August 31, 2016 (With Comparative Totals for 2015) Assets 2016 Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Total Cash and cash equivalents $ 5,370,190 $ - $ - $ 5,370,190 $ 14,442,297 Investments 19,345,302-19,883,085 39,228,387 37,219,346 Student accounts receivable (net of allowance for doubtful accounts of $930,000) 3,948, ,948,864 3,372,627 Student loan funds reimbursement receivable 8,046, ,046,220 4,014,102 Pledges receivable (net of allowance for uncollectibles of $53,995) - 105, , , ,100 Other assets 466, , ,779 Deferred charges 629, , ,319 Interfund balances 7,025,126 6,029,378 (13,054,504) ,831,708 6,135,178 7,069,062 58,035,948 60,269,570 Land, building, equipment and books, net 47,932, ,932,685 50,606,464 $ 92,764,393 $ 6,135,178 $ 7,069,062 $ 105,968,633 $ 110,876,034 Liabilities and Net Assets Accounts payable and accrued expenses $ 3,545,755 $ - $ - $ 3,545,755 $ 5,171,883 Other liabilities 92, ,917 56,466 Student deposits and credits 4,053, ,053,575 5,534,170 Deferred grant revenue 2,101, ,101,725 2,396,065 Deferred tuition income - fall semester 15,748, ,748,185 17,408,664 25,542, ,542,157 30,567,248 Net assets 67,222,236 6,135,178 7,069,062 80,426,476 80,308,786 See notes to consolidated financial statements. $ 92,764,393 $ 6,135,178 $ 7,069,062 $ 105,968,633 $ 110,876,034 3

7 Consolidated Statement of Activities Year Ended August 31, 2016 (With Comparative Totals for 2015) 2016 Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Total Revenue: Tuition and fees (net of scholarships and discounts of $11,104,568) $ 33,829,706 $ - $ - $ 33,829,706 $ 37,618,108 Contributions 178, , ,081 1,114, ,139 Other grants 99, , , ,747 Government grants 995, ,649-1,130,343 1,213,207 Rental income (net of rental expense) 23, ,038 (46,165) Investment income (net of management fees of $73,328) 1,297, ,371-1,998,231 1,009,236 Conferences 25,291 55,639-80, ,345 Other revenue 341, ,825 78,687 Net assets released from restrictions 1,717,155 (1,717,155) ,508,336 (157,581) 410,081 38,760,836 41,318,304 Expenses: Program: Instruction 19,721, ,721,031 25,637,665 Student services 4,468, ,468,036 4,746,055 Library 5,038, ,038,320 5,364,394 Conferences 300, , ,581 Fundraising 916, , ,167 Administrative 8,198, ,198,801 8,841,495 38,643, ,643,146 46,029,357 Increase (decrease) in net assets (134,810) (157,581) 410, ,690 (4,711,053) Net assets: Beginning of year 67,357,046 6,292,759 6,658,981 80,308,786 85,019,839 End of year $ 67,222,236 $ 6,135,178 $ 7,069,062 $ 80,426,476 $ 80,308,786 See notes to consolidated financial statements. 4

8 Consolidated Statement of Cash Flows Year Ended August 31, 2016 (With Comparative Totals for 2015) Cash flows provided by operating activities: Increase (decrease) in net assets $ 117,690 $ (4,711,053) Adjustments to reconcile increase (decrease) in net assets to net cash (used in) provided by operating activities: Depreciation of land, building, equipment and books 4,684,120 4,647,692 Realized gain on investments (367,929) (1,519,183) Unrealized (gain) loss on investments (625,535) 1,518,849 Realized loss on the sale of land, building, equipment and books Contributions restricted for investment in endowments (410,081) (202,037) Receipt of deferred grant revenue (294,340) 420,857 Changes in: Student accounts receivable (576,237) 906,986 Student loan funds reimbursement receivable (4,032,118) (3,329,862) Pledges receivable (72,181) 4,641 Other assets (38,611) 74,532 Deferred charges (110,297) 52,454 Accounts payable and accrued expenses (1,626,128) 1,777,556 Other liabilities 36,451 32,851 Student deposits and credits (1,480,595) 5,236,391 Deferred tuition income (1,660,479) (2,014,829) Net cash (used in) provided by operating activities (6,456,270) 2,896,185 Cash flows used in investing activities: Additions to land, building, equipment and books (2,010,341) (1,680,518) Proceeds from sale of building, equipment and books Purchases of investments (11,042,648) (7,668,333) Proceeds from sale of investments 10,027,071 7,627,260 Net cash used in investing activities (3,025,918) (1,721,051) Cash flows provided by financing activities: Contributions restricted for investment in endowments 410, ,037 Net cash provided by financing activities 410, ,037 (Decrease) increase in cash and cash equivalents (9,072,107) 1,377,171 Cash and cash equivalents: Beginning of year 14,442,297 13,065,126 End of year $ 5,370,190 $ 14,442,297 See notes to consolidated financial statements. 5

9 Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies The John Marshall Law School (the School) is a private, nonprofit educational institution emphasizing the teaching of law at both undergraduate and graduate levels, primarily to students in the Chicago area. The accompanying consolidated financial statements of the School have been prepared on the accrual basis of accounting and include The John Marshall Law School Foundation, Inc. (the Foundation), a notfor-profit corporation. A summary of significant accounting policies is as follows: Basis of presentation: The consolidated financial statements have been prepared in conformity with accounting principles applicable to nonprofit educational institutions. All contributions are considered to be available for unrestricted use unless specifically restricted by the donors. Amounts received that are designated for future periods or restricted by the donors for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net asset classes. The accounting guidance applicable to not-for-profit organizations requires that net assets and related revenue, expenses, gains and losses be classified into three classes of net assets - unrestricted, temporarily restricted and permanently restricted, based upon the existence or absence of donor-imposed restrictions. A description of each net asset class follows: Unrestricted Net Assets: Net assets that are not subject to donor-imposed restrictions, including the carrying value of all physical properties (property and equipment). Items that increase or decrease this net asset category include amounts received from tuition and fees and all expenses associated with the core activities of the School. In addition to these transactions, changes in this category of net assets include unrestricted contributions and investment income if not otherwise restricted by donor stipulation or applicable law. Certain funds functioning as an endowment within unrestricted net assets have been designated by the board to support the Edward T. and Noble W. Lee Chair in Constitutional Law. Temporarily Restricted Net Assets: Net assets restricted by the donor for a specified purpose or time period are reflected as revenue of the temporarily restricted fund in the period of receipt of the gift. When the donor's restrictions are fulfilled, the funds are transferred (released) to the unrestricted fund. Permanently Restricted Net Assets: Net assets subject to donor-imposed restrictions which require they be maintained permanently (i.e., in perpetuity) by the School. The School is required to maintain the historical value of the initial investment, with earnings from the investment available for restricted purposes or general operations. Principles of consolidation: Not-for-profit accounting guidance on reporting of related entities requires not-for-profit organizations with a controlling financial interest in other organizations to consolidate those other organizations. Accordingly, the consolidated financial statements include the accounts of the School and the Foundation. All intercompany balances and transactions have been eliminated in consolidation. Cash and cash equivalents: Cash and cash equivalents are comprised of cash in banks, cash on hand and overnight investments. The School maintains its cash balance in bank and money market accounts which, at times, may exceed the federal insured limit. The School has not experienced any losses in such accounts, and the School's administration believes that the School is not exposed to any significant credit risk on cash. Investments: The School carries investments at fair value. Purchased securities are recorded at cost. Investment contributions are recorded at fair value at the date of the gift. 6

10 Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Realized and unrealized gains and losses are reported as increases and decreases in net assets and are reflected as changes in unrestricted, temporarily restricted or permanently restricted net assets, as appropriate. The School invests in various investments. Such investments are exposed to various risks such as interest rate, market, and credit risk. Due to the level of risk associated with certain investments, it is at least reasonably possible that changes in the values of investments will occur in the near term and that such changes could materially affect the amounts reported in the consolidated statement of financial position. Student accounts receivable: Student accounts receivable are carried at original invoice amount, net of an allowance for doubtful accounts, determined based on the administration's analysis of specific accounts. Student loan funds: The School participates in the Federal Direct Loan Program (the Program). Student loan funds reimbursement receivable represents funds distributed to students in advance of reimbursement from the Program as of August 31, Deferred charges: The School records expenses for the fall term in the fiscal year in which the program is predominately conducted. Deferred charges represent expenses incurred prior to August 31 which relate to the fall term. Land, building, equipment and books: Land, building and improvements, equipment and library books are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of depreciable assets. The estimated useful lives of the depreciable assets are as follows: Building and building improvements Equipment Library books years 3-10 years 7-15 years Student deposits and credits: Student deposits and credits represent advanced deposits received from students and refunds due to students as a result of credit balances in student accounts. A credit balance results when the total payments, financial aid, loan disbursements and scholarships posted to student accounts exceeds the total of the tuition and fees charged to the accounts for a specific term or semester. Deferred grant revenue: The School received a $3,277,704 grant from the Illinois Board of Higher Education for the renovation of the building at 19 West Jackson. The grant comprised of three installments, of which were received in fiscal years 2012 ($1,531,960), 2013 ($951,758) and 2015 ($793,986). The installments include 10-year refund periods where the School is required to refund the pro rata outstanding grant amount if the building fails to meet the requirements of an eligible capital project or the School fails to meet the definition of an independent college. The grant revenue is recognized over the 10-year periods. Tuition revenue: The School records tuition revenue for the fall, spring and summer terms in the fiscal year in which the program is predominately conducted. Deferred tuition income represents tuition charges billed prior to August 31 which relate to the fall term. Student receivables recorded at year-end that are related to the fall term are offset by deferred tuition income. 7

11 Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies (Continued) Contribution revenue: Contributions, including unconditional promises to give, are recorded as revenue in the period the contribution or promise is received. Contributions received are recorded as unrestricted, temporarily restricted or permanently restricted support, depending on the existence or nature of any donor restrictions. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. Advertising: Advertising is recorded as expense when incurred. Advertising expense for fiscal year 2016 was $203,603. Tax status: The School and the Foundation are exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. The accounting standard for uncertainty in income taxes addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the School may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination from taxing authorities, based on the technical merits of the positions. Examples of tax positions include the tax-exempt status of the School and various positions related to the potential sources of unrelated business taxable income. The tax benefits recognized in the financial statements from such a position, if any, are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. At August 31, 2016, there were no unrecognized tax benefits identified or recorded as liabilities. The School and the Foundation each file form 990 in the U.S. federal jurisdiction. The School and the Foundation are no longer subject to examination by the Internal Revenue Service for fiscal years before Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue, expenses, gains and losses during the reporting period. Actual results could differ from those estimates. Comparative totals: The consolidated financial statements include certain prior-year summarized comparative information in total but not by net asset class or by change in net asset class. This information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, this information should be read in connection with the School's consolidated financial statements for the year ended August 31, 2015, from which the summarized information was derived. Reclassifications: Certain prior-year amounts have been reclassified to conform to current-year presentation without affecting total net assets. 8

12 Notes to Consolidated Financial Statements Note 2. Investments A summary of investments is as follows: Cost Unrestricted: Fixed income: State of Israel bonds 14,300 Fair Value $ $ 14,300 U.S. bond funds 8,350,637 8,399,874 Equities: U.S. common stocks 8,345,401 10,306,035 International stocks 231, ,352 Money market mutual funds 363, ,741 17,305,164 19,345,302 Permanently restricted: Fixed income: U.S. bond funds 6,820,182 6,844,507 Equities: U.S. common stocks 9,486,255 12,387,596 International stocks 261, ,255 Money market mutual funds 321, ,727 16,889,398 19,883,085 Investment income consists of the following: $ 34,194,562 $ 39,228,387 Realized gain $ 367,929 Unrealized gain 625,535 Interest and dividends 1,078,095 Management fees (73,328) $ 1,998,231 9

13 Notes to Consolidated Financial Statements Note 3. Fair Value Measurements The accounting guidance on fair value measurements and disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined under the guidance as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy under the guidance are described below: Level 1. Level 2. Level 3. Quoted market prices in active markets, such as the New York Stock Exchange, for identical assets or liabilities. Observable market-based inputs or unobservable inputs that are corroborated by market data. Unobservable inputs that are not corroborated by market data. For the fiscal year ended August 31, 2016, the application of valuation techniques applied to similar assets and liabilities has been consistent. The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis: Investment Securities Common stocks, bonds, mutual funds and government obligations are recorded at fair value based on quoted market prices in an active market, if available. State of Israel bonds are recorded at face value, which approximates fair value. Changes in the fair value of securities are recorded as unrealized gains and losses. In determining the appropriate levels, the School performs a detailed analysis of the assets and liabilities that are subject to fair value measurements on a recurring basis. The School had no Level 3 assets as of August 31, The School assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the School s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. For the year ended August 31, 2016, there were no such transfers. 10

14 Notes to Consolidated Financial Statements Note 3. Fair Value Measurements (Continued) The table below presents the balances of assets and liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 Total Money market mutual funds $ 668,468 $ - $ - $ 668,468 Fixed Income: State of Israel bonds - 14,300-14,300 U.S. bond funds 15,244, ,244,381 Equities: U.S. common stocks 22,693, ,693,631 International stocks 607, ,607 Total assets $ 39,214,087 $ 14,300 $ - $ 39,228,387 Note 4. Pledges Receivable Pledges have been discounted using an interest rate of 5 percent and are payable as follows: Less than one year $ 231,846 One year to five years 180,671 Greater than five years 9, ,311 Discount to net present value (22,035) Allowance for doubtful pledges (53,995) $ 346,281 Note 5. Land, Building, Equipment and Books Land, building, equipment and books are as follows: Land $ 1,985,494 Building and building improvements 52,816,397 Equipment 15,280,869 Library books 13,736,909 83,819,669 Accumulated depreciation (35,886,984) $ 47,932,685 11

15 Notes to Consolidated Financial Statements Note 5. Land, Building, Equipment and Books (Continued) The School does not have any outstanding commitments related to ongoing projects as of August 31, Depreciation expense was $4,684,120 for fiscal year Note 6. Restricted Net Assets Temporarily restricted net assets were available for the following uses: Scholarships and student aid $ 3,098,884 Conferences 497,622 Library 25,515 Instruction 2,183,450 Construction 329,707 $ 6,135,178 The following permanently restricted net assets are invested in perpetuity, and the income from the related investments is expendable to support the following activities: Scholarships and student aid $ 6,331,813 Conferences 363,466 Library 59,608 Instruction 314,175 $ 7,069,062 Note 7. Lease Commitments The School leases space at 55 East Jackson Boulevard under an operating agreement expiring December 31, Total approximate future minimum rental payments are as follows: 2017 $ 134, , ,000 $ 304,000 Rent expense was $146,012 for fiscal year The School owns nine floors of the building at 321 South Plymouth Court and is operating a portion of this space as rental property under leases extending through The cost and related accumulated depreciation of the 321 South Plymouth Court property at August 31, 2016, was $6,756,090 and $3,191,531, respectively. 12

16 Notes to Consolidated Financial Statements Note 7. Lease Commitments (Continued) The total approximate net minimum future rentals receivable are as follows: 2017 $ 421, , , , , ,000 $ 1,789,000 Rental income for fiscal year 2016 was $407,193. Rental income is offset by sublease rental expense of $384,155 on the 2016 consolidated statement of activities. Note 8. Retirement Programs Retirement benefits for the academic staff are provided through agreements with Teachers Insurance and Annuity Association (TIAA), a national organization which manages pension benefits for educational institutions. Under these agreements, the School and plan participants make annual contributions to TIAA to purchase individual annuities under the separate agreements. Past service cost has been fully funded. The School's share of the cost for these benefits during fiscal year 2016 was approximately $1,590,853. In the fiscal years ended August 31, 2016 and August 31, 2015, the Board of Trustees made available voluntary retirement benefit packages for faculty members who were over 55 and had 10 years of service at the school. These packages provided benefits payable over 24 months or 18 months and were sufficiently attractive that 17 faculty members decided to take advantage of the benefits and retire. The accrued expenses included $1,398,192 of the liability related to these retirement packages at August 31, Note 9. Endowment Funds The School s endowment includes both donor-restricted and board-designated endowment funds. Net assets associated with the endowment fund are classified and reported based on the existence or absence of donor-imposed restrictions. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) governs endowment funds in the state of Illinois. UPMIFA eliminates the historic dollar value rule with respect to endowment fund spending, updates the prudence standard for the management and investment of charitable funds, and amends the provisions governing the release and modification of restrictions on charitable funds. Interpretation of Relevant Law The School has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result of this interpretation, the School classified as permanently restricted net assets (a) the original value of the gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation was added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the School in a manner consistent with the standard of prudence prescribed by UPMIFA. 13

17 Notes to Consolidated Financial Statements Note 9. Endowment Funds (Continued) In accordance with UPMIFA, the School considers the following factors in making a determination to appropriate or accumulate earnings on donor-restricted endowment funds: 1. The duration and preservation of the fund; 2. The purpose of the School and the donor-restricted endowment fund; 3. General economic conditions; 4. The possible effect of inflation and deflation; 5. The expected total return from income and the appreciation of investments; 6. Other resources of the School; and 7. The investment policies of the School. The School s endowment net asset composition by type of fund is as follows for the year ended August 31, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Board-designated $ 180,761 $ - $ - $ 180,761 Donor-restricted (1,864) 2,806,369 7,069,062 9,873,567 Total funds $ 178,897 $ 2,806,369 $ 7,069,062 $ 10,054,328 The changes in endowment net assets for the School were as follows for the year ended August 31, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 168,751 $ 3,108,775 $ 6,658,981 $ 9,936,507 Investment return: Investment income 10, , ,099 Contributions , ,081 Appropriation of endowment assets for expenditure - (859,359) - (859,359) Endowment net assets, end of year $ 178,897 $ 2,806,369 $ 7,069,062 $ 10,054,328 14

18 Notes to Consolidated Financial Statements Note 9. Endowment Funds (Continued) Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or Illinois UPMIFA requires the School to retain as a fund of perpetual duration. Deficiencies of this nature that are reported in unrestricted net assets were $1,864 as of August 31, These deficiencies resulted from unfavorable market fluctuations that occurred after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by management. Return Objectives and Risk Parameters The School has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the School must hold in perpetuity or for a donor-specified period(s) as well as boarddesignated funds. Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objectives, the School relies on a total return strategy through which returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The School targets a diversified asset allocation to achieve its long-term return objectives within prudent risk constraints. Overall target asset allocation is 50 percent fixed income, 50 percent equities, with the balance invested in cash equivalents. Spending Policy and How the Investment Objectives Relate to Spending Policy The School has a policy of appropriating an estimate of expenditures each year as part of a formal, annual budget. Changes to appropriation are also approved during the year as unexpected needs arise. In establishing this policy, the School considered the long-term expected return on its endowment. Accordingly, over the long term, the School expects to use all of the investment earnings from the endowment for donor-designated purposes while maintaining the value of the original gift. This is consistent with the School s objective to maintain the original donor value of the endowment assets held in perpetuity. Note 10. Contingencies The School is a defendant in various litigation matters arising in the normal course of its activities. In the opinion of the administration, the ultimate resolution of all such litigation matters will not have a material effect on the School's financial position or results of activities. Note 11. Subsequent Events The School has evaluated subsequent events for potential recognition and/or disclosure through February 3, 2017, the date the consolidated financial statements were available to be issued. 15

19 Supplementary Information

20 Schedule of Expenditures of Federal Awards Year Ended August 31, 2016 Grantor's Contract/ Federal Pass-Through Total Expenditures CFDA Entity Identifying of Federal Contract Period Number Number(s) Awards U.S. Department of Education: Student Financial Aid Cluster: Federal Direct Student Loans 9/1/15-8/31/ N/A $ 37,896,588 Federal Work Study Program 7/1/15-6/30/ P033A ,581 Federal Work Study Program 7/1/16-6/30/ P033A ,042 Total U.S. Department of Education 38,130,211 U.S. Department of Housing and Urban Development: Fair Housing Initiatives and Administrative Enforcement Initiative Program 1/1/16-12/31/ FH700G ,009 Education and Outreach Initiatives 12/15/14-6/14/ FH400G ,049 Private Enforcement Initiatives 8/1/14-7/31/ FH700G ,579 Passed through the State of Illinois: Community Development Block Grant Program 10/1/14-9/30/ ,000 Passed through the Chicago Department of Public Health: Community Development Block Grant Program 1/1/15-12/31/ ,649 Total Community Development Block Grant Program 134,649 Total U.S. Department of Housing and Urban Development 439,286 $ 38,569,497 See notes to schedule of expenditures of federal awards. 16

21 Notes to Schedule of Expenditures of Federal Awards Note 1. Basis of Presentation The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal award activity of The John Marshall Law School (the School) under programs of the federal government for the year ended August 31, The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the schedule presents only a selected portion of the operations of the School, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the School. No funds were identified as having been provided to subrecipients by the School, and accordingly, no funds identified in the Schedule are attributable to subrecipient entities. There were no federal awards expended for non-cash assistance or insurance at year-end. Note 2. Summary of Significant Accounting Policies Expenditures reported in the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowed or are limited as to reimbursement. The School has not elected to use the 10-percent de minimis indirect cost rate as allowed under the Uniform Guidance. Note 3. Federal Student Loan Program During the fiscal year ended August 31, 2016, the School issued new loans to students under the Federal Direct Student Loan Program (FDLP). The loan program includes unsubsidized Stafford Loans and PLUS Loans for graduate and professional students. The value of loans issued for the FDLP is based on disbursed amounts. The loan amounts issued during the year are disclosed on the Schedule. The School is responsible only for the performance of certain administrative duties with respect to the federally guaranteed student loan programs and, accordingly, balances and transactions relating to these loan programs are not included in the School s consolidated financial statements. Therefore, it is not practicable to determine the balance of loans outstanding to students and former students of the School at August 31, Note 4. Federal Work Study Program A portion of Federal Work Study awards has been carried forward from fiscal year 2016 to fiscal year

22 Part II Government Auditing Standards

23 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor's Report To the Board of Trustees The John Marshall Law School We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of The John Marshall Law School (the School), which comprise the consolidated statement of financial position as of August 31, 2016, and the related statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated February 3, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the School's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the School s internal control. Accordingly, we do not express an opinion on the effectiveness of the School s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s consolidated financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the School's consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 18

24 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Chicago, Illinois February 3,

25 Part III Uniform Guidance

26 Independent Auditor's Report on Compliance for the Major Federal Program and Report on Internal Control Over Compliance To the Board of Trustees The John Marshall Law School Report on Compliance for the Major Federal Program We have audited The John Marshall Law School s (the School) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the School s major federal program for the year ended August 31, The School s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the School s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the School s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the School s compliance. Opinion on the Major Federal Program In our opinion, the School complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on the major federal program for the year ended August 31,

27 Report on Internal Control Over Compliance Management of the School is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the School s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the School s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Chicago, Illinois February 3,

28 Part IV Schedule of Findings and Questioned Costs

29 Schedule of Findings and Questioned Costs Year Ended August 31, 2016 Section I. Summary of Auditor's Results Financial Statements Type of auditor's report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes No X Significant deficiency(ies) identified that are not considered to be material weakness(es)? None Reported Noncompliance material to consolidated financial statements noted? Yes No X Federal Awards Internal control over major programs: Material weakness(es) identified? Yes No X Significant deficiency(ies) identified that are not considered to be material weakness(es)? Type of auditor's report issued on compliance for major programs: None Reported Unmodified Any audit findings disclosed that are required to be reported in accordance with section 2 CFR (a)? Yes No X Identification of major programs: CFDA Number Name of Federal Program or Cluster , Student Financial Aid Cluster Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? Yes X No 22

30 Schedule of Findings and Questioned Costs (Continued) Year Ended August 31, 2016 Section II. Findings Relating to the Financial Statements None. Section III. Findings and Questioned Costs for Federal Awards None. 23

31 Part V Summary Schedule of Prior Audit Findings

32 Summary Schedule of Prior Audit Findings Year Ended August 31, 2016 There were no findings in the prior year. 24