MSU Financial Statements and External Audit

Transcription

1 Presentation to the Financial Administrator Development Program MSU Financial Statements and External Audit What s Your Role? October 28, 2014 Katie A. Thornton, Senior Manager, Plante Moran Gregory J. Deppong, Controller, MSU

2 Outline MSU Financial Administrators, MSU Controller s Office, MSU Internal Auditors, and External Auditors have varying, yet connected, roles. Account transactions roll up to financial statements. Financial statement components. External Audit of financial statements. 2

3 3

4 Stewardship Strong Controls (Colleges & Units, Controller s Office, Internal Audit) Appropriate Transactions Reliable Reporting Reporting Rules/GASB External Audit (Test controls) Audited Annual Financial Report 4

5 Creating an Environment of Compliance Independent examination hired by Board External Auditors Colleges & Depts. Internal Controls Local policies/ procedures & FO accountability Controller s Office Evaluates compliance reports to President Internal Auditors Create, Monitor & Enforce University policies/ procedures 5

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

7 Reasonable Assurance Hiring staff with the proper skill sets Training.early and often Accountability understood & practiced Communicate the importance of compliance 7

8 Meeting fiscal objectives Promote efficient and effective operations Support compliance with policy Protect university assets Provide reliable financial reporting 8

9 Internal controls support strong stewardship & reliable financial reporting Laws IRS Federal Grants External Endowment Spending Generally Accepted Accounting Principles (GAAP) Governmental Accounting Standards (GASB) Clean Financial Statements are the result of sound and effective internal controls Internal Sources and Uses of Funds Cost Monitoring Compliance 9

10 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 10

11 The Rule Book: Governmental Accounting Standards Board (GASB) Source of Generally Accepted Accounting Principles for State & Local Governments (including public universities). MSU s financial statements are prepared under the rules of GASB. 11

12 GASB 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 12

13 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 13

14 MSU s nine funds are consolidated Activity in all MSU funds combined Elimination of internal activity Consolidated Financial Statements 14

15 Statements of Net Position (Amounts in Millions) June 30, Assets: Current assets: Cash and cash equivalents $ - $ 44 Investments Accounts and interest receivable, net Student loans and pledges receivable, net Inventories and other assets Total current assets Noncurrent assets: Restricted cash and cash equivalents 10 2 Restricted investments 6 99 Endowment investments 2,082 1,584 Other investments Student loans and pledges receivable, net Investments in joint ventures 7 7 Derivative instruments - swap asset - - Capital assets, net 1,995 1,901 Total noncurrent assets 4,399 4,014 Total assets 4,906 4,527 Deferred outflows of resources: Liabilities: Current liabilities: Accounts and interest payable Accrued personnel costs Accrued self-insurance liabilities Payroll taxes and other payroll deductions Deposits held for others Unearned revenues Current portion of long term debt and other obligations Total current liabilities Noncurrent liabilities: Accrued personnel costs Accrued self-insurance liabilities 6 8 Derivative instruments - swap liability Net other postemployment benefit obligation Long term debt and other obligations Total noncurrent liabilities 1,302 1,275 Total liabilities 1,793 1,763 Net position: Net investment in capital assets Restricted: Nonexpendable Expendable Unrestricted 1, Total net position $ 3,173 $ 2,825 15

16 GASB revenue reporting Sources: Tuition State appropriations State and federal grants Private gifts and grants Investment income (loss) Auxiliary activities Departmental income 16

17 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 17

18 Statements of Revenues, Expenses and Changes In Net Position (Amounts in Millions) Year ended June 30, Operating revenues: Student tuition and fees $ 861 $ 799 Less: scholarship allowances Net student tuition and fees State of Michigan grants and contracts 9 9 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 2014 and $5 in 2013) Auxiliary activities (net of room and board allowances of $20 in 2014 and $19 in 2013) Total operating revenues 1,620 1,578 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 6 4 Total operating expenses 2,069 2,024 Operating loss (449) (446) Net nonoperating revenues (expenses): State operating appropriation State AgBioResearch appropriation State cooperative extension service appropriation Federal Pell grant revenue Gifts Net investment income (loss) Interest expense on capital asset related debt (41) (36) Other nonoperating revenues, net 6 6 Net nonoperating revenues Income before other State capital appropriations 30 2 Capital grants and gifts Additions to permanent endowments Increase in net position Net position, beginning of year 2,825 2,676 Net position, end of year $ 3,173 $ 2,825 18

19 Accounts map to one function 19

20 MSU expense (GASB) (Amounts in Millions) Year ended June 30, Instruction $ 632 $ 589 $ 575 $ 561 $ 556 Research Public service Academic support Student services Scholarships and fellowships Institutional support Operation and maintenance of plant Auxiliary activities Depreciation Other operating expenses, net Total GASB expense reporting $ 2,069 $ 2,024 $ 1,931 $ 1,858 $ 1,810 20

21 Transaction e doc identifies object code 21

22 Object level codes consolidate financial statement lines 22

23 Next up the Audit 2 minute break out What does the audit mean to you? Have you encountered an auditor at MSU or elsewhere? What do you think auditors should look at? 23

24 Annual External Audit of Financial Statements MSU financial statements: ctlr.msu.edu/cofa/financialstatement.aspx 24

25 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 25

26 What is an external audit? Process of gathering evidence By independent third party (Plante & Moran) With the objective of issuing an opinion on the financial statements based on the evidence obtained To determine if the University s financial statements are accurate and fairly stated in accordance with the applicable financial reporting framework 26

27 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 (GAS) If problems, reports deficiencies (publicly!) Not an opinion 27

28 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 28

29 Financial statement assertions continued Completeness No material transactions or accounts have been omitted Valuation or allocation Rights and obligations Presentation and disclosure Assets, liabilities, revenue, and expense items are correctly valued Assets and liabilities are the rights and obligations, respectively, of the entity at the opinion date Financial statement components are properly classified, described, and disclosed 29

30 Auditing internal controls continued Audit key processes Audit key controls Types of Controls Cash coming in (revenue) Documentation (e.g., policies & procedures; employee actions hiring and termination) Preventative Cash going out (expenses/ assets) Appropriate reviewer Detective Commitments/ promises (liabilities) Segregation of duties 30

31 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? 31

32 No written procedures and policies Initiating payment is late (cut off) Review is late What could go wrong? Limited or no supporting documentation No documented review Same person prepares and reviews 32

33 Audit evidence Evidence in documentary form (whether paper, electronic, or other medium) Original documents in electronic form qualify as reliable audit evidence 33

34 If you were going to do an audit of your unit. What would you look at? Two minute group table exercise discuss one process a unit should audit. What should you look for? Why? 34

35 Related to this information upcoming presentations Later today Internal Audit presentation. Expanded discussion on a unit s responsibility for internal controls and ethics. Future sessions Using the financial system to facilitate financial reporting and sound fiscal management; Financial reporting in RHS how a major unit reports. 35

36 Thank You! 36

37 Supplemental Slides 37

38 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. 38

39 MSU revenue (GASB) (Amounts in Millions) Year ended June 30, Tuition and fees, net $ 753 $ 697 $ 640 $ 568 $ 542 State appropriations State and federal grants Private gifts, grants & capital approp Investment income (loss) (22) Auxiliary activities Departmental income Total GASB revenue reporting $ 2,451 $ 2,202 $ 1,911 $ 2,147 $ 2,004 39

40 Sources investment income varies widely (in millions) $2,250 $1,750 $1,250 $750 $250 $2, $2, $1, $2, $2, Departmental income Auxiliary activities Private gifts, grants, & capital approp. State and federal grants State operating appropriation Tuition Investment income (loss) $

41 10 year revenue trends $900 $700 $500 $300 $100 $100 Tuition and fees State appropriations State and federal grants Private gifts, grants & capital approp. Investment income (loss) Auxiliary activities Departmental income $

42 Income Statement (reformatted, not GASB) (Amounts in Millions) Year ended June 30, Revenues: Student tuition and fees, net of allowances $ 753 $ 697 $ 640 $ 568 $ 542 Grants and contracts Auxiliary activities State appropriations Investment income budgeted for operations Gifts Capital appropriations, grants and gifts Additions to permanent endowments Other revenues, net Subtotal - revenues 2,163 2,051 1,967 1,893 1,878 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 2,110 2,060 1,966 1,897 1,830 Net, before investments 53 (9) 1 (4) 48 Other components of net income (loss): Net investment income (loss) (49) Net income (loss) $ 348 $ 149 $ (48) $ 256 $

43 Uses ($2.1B in 2014) $1.5B (72.7%) payroll & benefits and contractual/computing services Payroll and benefits Contractual and computing services Depreciation Repairs and maintenance Supplies and general Student financial aid Travel Contract and grant subawards Other operating expenses 43

44 Same total, different view: 2014 expenses natural classification Millions Payroll and benefits $ 1,367 Depreciation expense 150 Contractual and computing services 137 Student financial aid 96 Supplies and general expenses 81 Repairs and maintenance 80 Travel 59 Contract and grant subawards 39 Rents and leases 8 Telephone and postage 7 Continuing education 6 Printing 4 Other operating expenses 35 Total expenses $ 2,069 44

45 Every transaction builds the financial statements Cash 1100 AS Asset Cash & Cash Equivalents 45

46 Financial statement origins Income/Expense & Asset/Liability Object Code Object Type Code Financial Statement Group Financial Statement Line 46

47 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? 47

48 Auditing internal controls Information technology (IT) IT Controls Fully automated processes (are business rules providing sufficient checks and balances?) General controls Application controls (such as roles (initiator, approver, delegate & system access) 48

49 Auditing internal controls continued 49

50 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. 50

51 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. 51

52 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 52

53 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 53

54 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 54

55 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 55

56 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 56

57 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? 57