Financial Statements, Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards And OMB Circular A-133 For the

Transcription

1 Financial Statements, Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards And OMB Circular A-133 For the year ended June 30, 2013 EIN

2 Page(s) Independent Auditor s Report Statements of Financial Position...3 Statements of Activities Statements of Cash Flows.. 5 Notes to the Financial Statements Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 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 on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance Required by OMB Circular A Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings Corrective Action Plan

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4 Tel: Fax: Wisconsin Ave. Suite 800 Bethesda, MD Independent Auditor s Report Board of Trustees The Howard University Washington, DC Report on the Financial Statements We have audited the accompanying financial statements of The Howard University (the University ), which comprise the statement of financial position as of June 30, 2013, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 1

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Howard University as of June 30, 2013, 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. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations is presented for purposes of additional analysis and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the 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 financial statements as a whole. Prior Period Financial Statements The June 30, 2012 and 2011 financial statements of the University were audited by other auditors, whose report dated October 29, 2012 expressed an unmodified opinion on those statements. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 25, 2013 on our consideration of the University 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 University s internal control over financial reporting and compliance. November 25,

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7 Statements of Financial Position As of June 30, 2013, 2012 and 2011 (in thousands) June 30, 2013 June 30, 2012 June 30, 2011 Assets: Cash and cash equivalents $ 34,795 $ 35,146 $ 27,280 Operating investments 36,185 34,425 43,812 Deposits with trustees 17,625 38,150 48,622 Receivables, net 137, , ,939 Inventories, prepaids and other assets 29,974 23,739 14,665 Unexpended bond proceeds 71,670 87, ,429 Restricted investments 37,754 32,402 33,392 Endowment investments 514, , ,100 Property, plant and equipment, net 613, , ,352 Total Assets $1,492,987 $1,438,246 $1,458,591 Liabilities: Accounts payable and accrued expenses $ 108,077 $ 115,127 $ 94,835 Deferred revenue 9,691 9,938 8,454 Other liabilities 34,568 33,305 32,202 Accrued post retirement benefits 67, , ,017 Underfunded defined benefit pension plan 127, ,208 74,560 Reserves for self-insured liabilities 90,399 80,595 79,799 Notes payable 46,499 38,569 30,770 Capital lease obligations 47,355 43,431 43,547 Bonds payable 293, , ,057 Interest rate swap Refundable advances under Federal Student Loan Program 6,484 6,852 7,343 Total Liabilities 831, , ,688 Net Assets: Unrestricted 315, , ,160 Temporarily restricted 222, , ,045 Permanently restricted 123, , ,698 Total net assets 661, , ,903 Total liabilities and net assets $1,492,987 $1,438,246 $1,458,591 The accompanying notes are an integral part of these financial statements 3

8 Statements of Activities For Fiscal Years Ended June 30, 2013, 2012 and 2011 (in thousands) June 30, 2013 June 30, 2012 June 30, 2011 Academic services: Tuition and fees, net $ 162,491 $ 146,908 $ 143,376 Grants and contracts 58,284 59,766 61,422 Auxiliary services 62,174 60,109 61,135 Clinical services: Patient service - Hospital 241, , ,641 Patient service - Faculty medical practice 32,441 31,871 32,518 Patient service - Dental clinic 1,864 1,970 1,764 Public support: Federal appropriation 230, , ,073 Contributions 3,716 3,895 4,702 Endowment transfer 5,866 5,985 6,779 Operating investment income 4, ,856 Net assets released from restrictions 15,417 14,606 12,909 Other income 20,359 27,819 13,409 Total unrestricted operating revenue 838, , ,584 Federal appropriation 3,452 3,593 3,595 Contributions 4,077 5,111 4,118 Endowment transfer 6,265 6,404 7,000 Net assets released from restrictions (15,417) (14,606) (12,909) Other Total temporarily restricted operating revenue (918) 1,021 1,804 Contributions 5,770 1,076 1,555 Endowment transfer Other 83 (584) -- Total permanently restricted operating revenue 6, ,045 Total operating revenues 843, , ,433 Salaries and wages 374, , ,243 Employee benefits other than retirement plans 77,985 78,069 73,099 Retirement plans excluding amortization 20,004 32,783 31,655 Total employment expenses 472, , ,997 Telecommunications 9,208 8,921 9,479 Utilities 21,982 21,449 24,333 Medical and office supplies 44,411 45,523 49,787 Repairs and maintenance 20,108 18,321 18,933 Food service costs 11,550 11,988 11,582 Grant subcontracts 16,456 15,262 16,021 Insurance and risk management 31,089 19,722 21,287 Professional and administrative services 119, , ,218 Provision for bad debts 1,913 (11) 536 Total controllable expenses 748, , ,173 Interest expense 22,985 24,500 10,890 Depreciation 52,625 50,453 50,460 Amortization of retirement plan actuarial losses 9,838 10,120 9,792 Total operating expenses 834, , ,315 Operating revenues over (under) operating expenses 9,515 9,723 13,118 Investment income/(loss) in excess of amount designated for operations 20,004 (6,810) 38,187 Restructuring costs (1,808) (24,462) (516) Change in funded status of defined benefit pension plan 27,689 (119,274) 61,424 Change in obligation for post-retirement benefit plan 121,101 2,731 5,953 Loss on extinguishment of debt (11,695) Change in value of interest rate swap, net ,873 Other items, net (131) (270) (11,809) Total unrestricted non-operating income and expenses 166,876 (148,002) 83,417 Total temporarily restricted non-operating income and expenses, net 23,305 (9,603) 28,702 Total permanently restricted non-operating income and expenses, net 2,430 (1,035) 8,745 Total non-operating income and expenses 192,611 (158,640) 120,864 Unrestricted 171,074 (140,182) 92,686 Temporarily restricted 22,387 (8,582) 30,506 Permanently restricted 8,665 (153) 10,790 Change in net assets $ 202,126 $ (148,917) $ 133,982 The accompanying notes are an integral part of these financial statements 4

9 Statements of Cash Flows For Fiscal Years Ended June 30, 2013, 2012 and 2011 (in thousands) June 30, 2013 June 30, 2012 June 30, 2011 Cash flows from operating activities Change in net assets $ 202,126 $ (148,917) $ 133,982 Adjustment to reconcile change in net assets to net cash and cash equivalents provided by operating activities: Non-operating activities (192,611) 158,640 (120,864) Non-cash operating items: Depreciation 52,625 50,453 50,460 Retirement plan amortization 9,838 10,120 9,792 Non-cash joint venture gain -- (4,466) -- Investment appreciation (4,639) (211) (8,856) Changes in net assets adjusted for non-cash and non-operating items 67,339 65,619 64,514 Change in receivables (excluding notes) (18,735) (6,658) 9,617 Change in inventory, prepaid expenses and other assets (6,235) (4,607) (4,130) Change in deposits with trustees 20,525 10,471 (11,301) Change in accounts payable and accrued expenses (36,135) (39,620) (22,455) Change in deferred revenue (247) 1,484 1,397 Change in reserve for self-insured liabilities 9, (3,355) Change in other liabilities 1,263 1,103 2,513 Change in refundable advances under Federal Student Loan Program (368) (491) (527) Net cash and cash equivalents used in operating activities 37,211 28,097 37,273 Cash flows from investing activities Proceeds from sale of investments 388, , ,644 Purchases of investments (390,005) (198,182) (210,583) Change in unexpended bond proceeds 15,537 15,222 (102,387) Purchases and renovations of property, plant and equipment (55,720) (49,363) (39,651) Net cash and cash equivalents used in investing activities (41,943) (23,372) (148,977) Cash flows from financing activities Proceeds from notes payable 70, ,000 79,913 Payment on notes payable (62,070) (102,201) (94,696) Proceeds from bonds payable ,190 Payment on bonds payable (515) (489) (163,364) Payment on interest rate swap (3,606) Capital leases (payments) receipts, net (7,734) (4,818) (6,012) Student loans issued (2,537) (1,918) (1,016) Student loans collected 1,467 1,491 1,452 Proceeds from restricted contributions 5,770 1,076 1,555 Net cash and cash equivalents provided by financing activities 4,381 3, ,416 Net (decrease) increase in cash and cash equivalents (351) 7,866 (4,288) Cash and cash equivalents at beginning of year 35,146 27,280 31,568 Cash and cash equivalents at end of year $ 34,795 $ 35,146 $ 27,280 Supplemental cash flow information: Cash paid for interest $ 23,979 $ 23,469 $ 9,819 Supplemental non-cash investing activities: Acquisition of equipment under capital leases 11,659 4,702 25,372 Supplemental non-cash financing activities: Donated securities The accompanying notes are an integral part of these financial statements 5

10 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 1 Summary of Significant Accounting Policies (a) (b) (c) (d) General The Howard University (Howard) is a private, nonprofit institution of higher education (the University) which also operates Howard University Hospital (the Hospital) located in Washington, DC. The University provides academic services in the form of education and training, primarily for students at the undergraduate, graduate and postdoctoral levels, and performs research, training and other services under grants, contracts, and similar agreements with sponsoring organizations, primarily departments and agencies of the United States government. Howard also provides patient healthcare services at the Hospital and by certain members of the University s faculty as part of its academic clinical activities. Howard is exempt from Federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Basis of Presentation The financial statements of Howard have been prepared in accordance with accounting principles generally accepted in the United States of America. Use of Estimates The preparation of 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. These estimates also affect the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts realized or paid could differ significantly from the amounts reported for these assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of receivables, property, plant and equipment and investments whose fair values are not readily determinable; and the adequacy of reserves for professional liabilities, retirement benefits, self-insured health benefits, selfinsured workers' compensation and asset retirement obligations. Net Assets Net assets are classified based on the existence or absence of donor-imposed restrictions as follows: Unrestricted Net assets that are not subject to donor-imposed stipulations. Temporarily restricted Net assets subject to donor-imposed stipulations that either expire by the passage of time or can be fulfilled by actions pursuant to those stipulations. 6

11 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Permanently restricted Net assets subject to donor-imposed stipulations that do not expire with time. Generally, the donors of these assets permit Howard to use all or part of the income earned on related investments for general or specific purposes. Contributions are reported in the appropriate category of revenue, except that contributions with donor-imposed restrictions met in the same fiscal year are included in unrestricted revenues. Expirations of temporary restrictions (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as releases from temporarily restricted net assets to unrestricted net assets. Donor restrictions on gifts to acquire long-lived assets are considered fulfilled in the period in which the assets are acquired or placed in service. (e) Receivables and Revenue Recognition (1) Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the gift date. Howard has elected not to recognize or capitalize contributions of works of art, historical treasures, and similar assets held as part of collections. Contribution revenue for fiscal years ended June 30, 2013, 2012 and 2011 are shown below: Contribution Revenue June 30, 2013 June 30, 2012 June 30, 2011 Unrestricted $ 3,716 $ 3,895 $ 4,702 Temporarily restricted 4,077 5,111 4,118 Permanently restricted 5,770 1,076 1,555 Total contribution revenue $ 13,563 $ 10,082 $ 10,375 Unconditional promises to give with payments to be received after one year from the date of the financial statements are discounted. Allowance is made for creditworthiness of the donors, past collection experience, and other relevant factors. (2) Tuition and fees from student services are recognized ratably over the academic time period to which they apply. Student receivables represent unpaid tuition and fees assessed in current and prior periods that are generated when a student registers for classes through the University s formal registration process. Howard maintains a policy of offering qualified applicants admission to the University without regard to financial circumstance. Student financial aid is generally fulfilled through a combination of scholarships, fellowships, loans, and employment during the academic year. Tuition and fees are recorded net of discounts for scholarships (merit, talent and need based), fellowships and graduate 7

12 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) remission, and bad debt. Funding for financial aid may come from donor designated sources or from unrestricted operations and assets. Financial aid for fiscal years ended June 30, 2013, 2012 and 2011 was $85,787, $87,019 and $71,171, respectively. Need-based financial aid for fiscal years ended June 30, 2013, 2012 and 2011 include $3,266, $5,461 and $22 of receivables, respectively, originally billed to students, but determined to be uncollectible and not pursued for collection within the fiscal year. Net Tuition Revenue June 30, 2013 June 30, 2012 June 30, 2011 Gross tuition and fees $ 248,278 $ 233,927 $ 214,547 Financial aid: Merit 52,269 60,959 52,226 Need 26,292 19,542 11,986 Talent 7,226 6,518 6,959 Total financial aid 85,787 87,019 71,171 Total net tuition $ 162,491 $ 146,908 $ 143,376 (3) Other income represents income from activities other than normal business operations. During fiscal year 2013, the major component is electronic health record meaningful use incentive revenue of $6,418 related to the Hospital and the Faculty Practice Plan. During fiscal year 2012, the major components include a gain from Howard s joint venture with American Renal Association, LLC to form a dialysis center of $9,056, FICA refund from the Internal Revenue Service of $3,238 and prior year unrecorded receivables of $2,188. (4) Federal Appropriation revenue is recognized ratably over the award period. Howard receives a Federal appropriation that can be used for support of the University s educational mission, a portion of which is held as a temporarily restricted term endowment. For fiscal years ended June 30, 2013, 2012 and 2011, Howard received 28%, 27% and 28%, respectively of its revenue support from the Federal appropriation. The $3,452, $3,593 and $3,595, receivable as of June 30, 2013, 2012 and 2011, respectively, represents the portion to be collected on the Federal term endowment as defined in Note 13. (5) Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors and bad debt expense. The Hospital and University faculty physicians have arrangements with third-party payors that provide for payments at established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per-diem payments. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final 8

13 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) settlements are determined. Patient and third-party healthcare payor receivables are the amount due for patient care services rendered by the University s Faculty Practice Plan (FPP) and the Hospital. Effective July 1, 2010, Howard early adopted the applicable accounting standard for the presentation and disclosure for net patient service revenue, which requires patient revenue to be presented net of the provision for bad debts. Net Patient Service Revenue June 30, 2013 June 30, 2012 June 30, 2011 Gross Revenues $ 704,912 $ 722,582 $ 722,215 Third-party settlement revenue 54,559 43,315 35,940 Contractual allowances and adjustments (420,442) (384,762) (386,197) Charity services (35,986) (52,800) (51,658) Bad debt (27,602) (28,780) (30,377) Total net patient service revenue $ 275,441 $ 299,555 $ 289,923 % of contractual and charity services of gross revenues 65% 61% 61% (6) Grants and contracts revenue is recognized when reimbursable expenses are incurred (for cost plus contracts) or when deliverables or milestones are met (for fixed price contracts). These revenues include recoveries of eligible direct expenses and indirect costs for facilities and administration, which are generally determined as a negotiated or agreed-upon percentage of direct costs. Receivables under research grants and development agreements represent amounts due from Federal, state, local, private grants, contracts and others. Grants and contracts revenue June 30, 2013 June 30, 2012 June 30, 2011 Reimbursement of direct expenses $ 50,318 $ 51,421 $ 52,019 Recovery of indirect costs 7,966 8,345 9,403 Total grants and contracts revenue $ 58,284 $ 59,766 $ 61,422 Indirect costs recovery as a % of direct costs 16% 16% 18% Grants and contracts revenue by type is detailed in the table below. Grants and contracts revenue by type June 30, 2013 June 30, 2012 June 30, 2011 Research $ 31,036 $ 34,083 $ 37,530 Training 14,732 15,801 18,659 Service/other 12,516 9,882 5,233 Total grants and contracts revenue by type $ 58,284 $ 59,766 $ 61,422 9

14 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) (7) Auxiliary services revenue is generally recognized when services are rendered or as activities have been completed. Auxiliary receivables are comprised primarily of amounts due from advertisers on Howard s commercial radio station WHUR, bookstore vendors, and property rents. Auxiliary services revenue June 30, 2013 June 30, 2012 June 30, 2011 Student housing $ 29,517 $ 28,616 $ 27,189 Radio station 13,664 11,880 15,734 Meal plans 8,748 8,630 7,386 Bookstore 6,309 7,026 7,593 Property rentals 1,384 1,175 1,141 Parking fees Vending sales and fees Ticket sales Licensing Other Total auxiliary services revenue $ 62,174 $ 60,109 $ 61,135 (8) Notes receivable represent loans the University extended to students from institutional resources and Federal Student Loan programs with outstanding balances, which includes Federal Perkins Loans, approximating fair value at the report date. The notes have stated interest rates and repayment terms. Management regularly assesses the adequacy of the allowance for credit losses on student loans by performing ongoing evaluations of the student loan portfolio, including the financial condition of specific borrowers, the economic environment in which the borrowers operate, and the level of delinquent loans. Howard s Perkins receivable represents the amounts due from current and former students under the Federal Perkins Loan Program. Loans disbursed under this Program are able to be assigned to the Federal Government in certain non-repayment situations. In these situations, the Federal portion of the loan balance is guaranteed. (9) Other receivables includes checks pending deposit at period and year end, and certain vendor credit balances. (f) Cash and Cash Equivalents Short-term investments with maturities at date of purchase of nine months or less are classified as cash equivalents, except that any such investments purchased with funds on deposit with bond trustees, or with funds held in trusts or by external endowment investment managers are classified as Deposits with trustees or Investments, respectively. Cash equivalents include repurchase agreements, certificates of deposit, short-term U.S. Treasury securities and other short-term, highly liquid investments and are carried at approximate fair value. Howard s practice is to enter into repurchase agreements only when collateralized by government or other agency securities held in safekeeping by a bank. These 10

15 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) transactions are recorded on the Statements of Financial Position, with any earnings recorded as interest income. (g) Investments Investments are segregated between operating, restricted, and endowment investments and deposits with trustees on the Statements of Financial Position, all of which are stated at fair value and defined as follows: Operating Investments represent investments free of any donor or lender imposed restrictions. These investments are short-term in nature and can be liquidated at the discretion of the Board of Trustees (the Board ) to meet operational demands. Restricted Investments represent non-endowed investments whose principal and or income are restricted by external sources, including liquidation restrictions. The use of the principal and interest of these investments is not subject to the discretion of the Board and as such they are not available to meet the operational needs of the University. Endowment Investments represent the pooled endowment and the Federal matching endowment investments. The endowment investments are spread across various asset categories with the use of the income from these investments restricted based on stated donor stipulations. Deposits with Trustees represent short-term investments in various operating trusts, designed to meet certain obligations including professional liability, workers compensation, health insurance, capitalized interest and the debt service reserve funds. Investment balances may include some cash and cash equivalents held by investment managers for a specific purpose. Fair values of the University s investments are determined by the most relevant available and observable valuation inputs as defined in Note 12. Purchases and sales of securities are reflected on a trade-date basis. Gains and losses on sales of securities are based upon average historical value (cost of securities purchased or the fair market value at date of gift, if received by donation). Dividend and interest income are recorded on an accrual basis. Accrued but unpaid dividends, interest and proceeds from investment sales at the report date are recorded as investment receivables. Realized and unrealized investment gains and losses are allocated in a manner consistent with interest and dividends, to either unrestricted, temporarily restricted or permanently restricted net assets (distinguished between operating and nonoperating), based on donor intent or lack thereof. Such amounts may be expended for operations, for specified donor purposes if temporarily restricted, or held in 11

16 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) perpetuity at the donor s request. Realized and unrealized investment gains and losses on loan funds are accumulated in permanently restricted net assets. Operating investment income includes interest, dividends and operating investment returns. This balance is calculated using operating investments as a percentage of total Level 1 investments in common stock and mutual funds. (h) Inventories, Prepaids and Other Assets Inventories consist primarily of bookstore items and medical supplies, and are recorded at the lower of cost or realizable value on a first-in, first-out basis. Prepaids consist primarily of insurance, dues, subscriptions and other fees and are amortized over the useful period. Other assets consist primarily of unamortized bond issuance costs, deferred health charges, intellectual property and investment interest in joint ventures. (i) Property, Plant and Equipment Property, plant and equipment are stated at cost or at estimated fair value if received by gift, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. A half year of depreciation is recorded in the year of acquisition. The useful lives for fiscal years reported are as follow: Land and land improvements Building and building improvements Furniture and equipment Software Library books years 5-40 years 3-20 years 3-10 years 10 years Property, plant and equipment acquired under capital leases are amortized in a manner consistent with Howard s normal depreciation policy for owned assets. Lease obligations are amortized using the straight-line method, over the shorter period of the lease term or the estimated useful life. Property held for expansion consists of land and buildings acquired for future use in carrying out educational, research and other activities in line with the overall mission of Howard. Depreciation for buildings commences when property is converted to use. Title to certain equipment purchased using funds provided by government grants or contracting agencies is vested with Howard, and therefore is included in reported property balances. Interest costs eligible for capitalization are the costs of restricted borrowings, less any interest earned on temporary investment of the proceeds of those borrowings, from the date of borrowing until qualifying assets are intended for use. The recorded values of certain properties include the fair value of any asset retirement obligation necessary to meet contractual or

17 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) regulatory requirements for disposal or remediation of the property. primarily pertains to the cost of removal and disposal of asbestos. This (j) Refundable Advances under Federal Student Loan Program Funds provided by the United States Department of Education under the Federal Student Loan Programs are loaned to qualified students and may be re-loaned after collections. The portion of these funds provided by the Department of Education are ultimately refundable to the Department of Education and are reported as liabilities in the Statements of Financial Position and as cash flows from financing activities in the Statements of Cash Flows. Loans issued to students are reported as part of receivables in the Statements of Financial Position. (k) Functional Expenses Howard allocates its expenses on a functional basis among its various programs and institutional support. Expenses that can be identified with a specific program are charged directly. Costs related to the operation and maintenance of physical plant including utilities, depreciation of fixed assets and interest expense, are allocated among programs and institutional support based upon square footage. For the fiscal years ended June 30, 2013, 2012 and 2011, expenses were allocated across functions as follows: Functional expenses June 30, 2013 June 30, 2012 June 30, 2011 Program services: Instruction $ 205,891 $ 214,254 $ 214,949 Research 35,285 40,068 34,433 Public service 8,189 9,943 9,856 Academic support 40,589 38,625 38,827 Student services 27,154 26,872 23,525 Patient care 302, , ,164 Total program services expenses 619, , ,754 Supporting services: Institutional support 141, , ,378 Auxiliary Enterprises 73,148 74,826 73,183 Total supporting services 214, , ,561 Total program and supporting services expenses $ 834,428 $ 841,601 $ 824,315 13

18 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) (l) Reserves for Self-Insured Liabilities The reserve for self-insured liabilities is comprised primarily of amounts accrued for asserted medical malpractice claims and includes estimates of the ultimate cost to resolve such claims. The reserve also includes an estimate of the cost to resolve unasserted claims that actuarial analyses indicate are probable of assertion in the future. Medical malpractice claim reserves are stated at an undiscounted amount. (m) Other Liabilities Other liabilities are comprised primarily of asset retirement obligations, unclaimed property, student deposits, deposits held in custody for others, reserves for legal and other contingencies and miscellaneous items. (n) Compensated Absences Howard records an amount due to employees for future absences, which are attributable to services performed in the current and prior periods and subject to a maximum carryover. This obligation is recognized on the Statements of Financial Position as part of Accounts payable and accrued expenses. For the fiscal years ended June 30, 2013, 2012 and 2011 the obligation was $6,920, $11,172 and $12,558, respectively. (o) Pension and Post-Retirement Benefits The funded status of Howard s pension benefit (the plan ) is actuarially determined and recognized in the Statements of Financial Position as an asset to reflect an overfunded status, or as a liability to reflect an underfunded status. Howard s actuarially determined post-retirement benefit obligation is recognized on the Statements of Financial Position as a liability. Howard follows the Internal Revenue Service (IRS) guidelines in the administration of the Plan. (p) Measure of Operations Howard includes in its measure of operations all revenue and expenses that are integral to its continuing core program services with the key objective being predictability of indicated results. Such measures include the amortization of actuarial gains and losses previously recorded as non-operating items. Howard uses a spending rate methodology to determine the amount of endowment assets allocated to operations in a given year. Non-operating income and expenses include realized and unrealized appreciation (depreciation), investments, changes in retirement plan liabilities due to market factors, restructuring costs, and (charges) credits that do not pertain to continuing core program services. 14

19 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) (q) Non-operating Restricted Income and Expense The table below details the items of non-operating restricted income and expense summarized in the Statements of Activities at June 30, 2013, 2012 and Non-operating restricted income and expense June 30, 2013 June 30, 2012 June 30, 2011 Investment income (loss) in excess of amount designated for operations $ 25,462 $ (9,591) $ 24,016 Other items, net (2,157) (12) 4,686 Temporarily restricted non-operating income (expense) $ 23,305 $ (9,603) $ 28,702 Investment income (loss) in excess of amount designated for operations $ 146 $ (1,230) $ 7,416 Other items, net 2, ,329 Permanently restricted non-operating income (expense) $ 2,430 $ (1,035) $ 8,745 (r) Reclassification Certain prior year amounts have been reclassified to conform to the current year s presentation. Such reclassifications did not have any impact on the University s previously reported asset balances. Note 2 Fundraising Expenses For fiscal years ended June 30, 2013, 2012 and 2011, Howard incurred expenses of approximately $6,278, $6,276 and $6,598, respectively, in connection with its fundraising activities. These amounts are reflected on the accompanying Statements of Activities within each respective expense category, as appropriate. Note 3 Charity Care The Hospital provides services to patients who meet the criteria of its charity care policy, without charge, or at amounts less than established rates. The criteria for charity services are comprised of family income, net worth and eligibility at time of application. In addition the Hospital provides services to patients under the District of Columbia charity care program, DC Alliance. The total of charges forgone for services furnished under the Hospital s charity care policy and the DC Alliance program were $35,986, $52,800 and $51,658 for fiscal years ended June 30, 2013, 2012 and 2011, respectively. Total uncompensated care charges under all of Howard s clinical services which includes bad debt write offs as well as charity care, for fiscal years ended June 30, 2013, 2012 and 2011 were $63,588, $81,580 and $82,035, respectively. 15

20 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 4 Insurance and Risk Management Howard, along with 15 other institutions of higher education, is a subscriber in Pinnacle Consortium of Higher Education, a Vermont Reciprocal Risk Retention Group. Pinnacle provides commercial general and certain specific liability coverage. Howard s annual payments to Pinnacle for insurance coverage are based on actuarial studies and are charged to expense. Pinnacle reinsures 95% of its risk to Genesis, Ltd. (Genesis), an affiliated reinsurer. Genesis, a Class 2 reinsurer under the Insurance Act of 1978 of Bermuda, was jointly formed by Howard and 15 other higher education institutions. Genesis reinsures general liability and automobile liability risks of its shareholders. At June 30, 2013, Howard had an approximate 6% interest of Genesis and Pinnacle, respectively. Howard s interest in Genesis and Pinnacle is included in restricted investments. Liability insurance coverage in excess of the primary coverage has been purchased by Howard, with limits of $125,000 from commercial insurance companies. Howard is self-insured for initial layers of medical malpractice, worker s compensation, and employee health benefits. The reserves for self-insured risks are actuarially determined and Howard has set aside assets in revocable trusts to partially fund these self-insured risks. The self-insured program covers professional liability costs up to $7,500 per occurrence depending on the cause. In addition, there are two layers of excess insurance coverage. The first layer of the excess insurance coverage is up to $35,000 on a claims-made basis. This layer is purchased through a captive insurance company, Howard University Capitol Insurance Company Ltd. (HUCIC), organized under the laws of the Cayman Islands. HUCIC covers prior acts retroactive to two separate policy periods dating July 1, 1996 and January 1, 1986, and is completely reinsured. The second layer of excess liability insurance which also covers patient care related general liability and professional liability, is up to $50,000 on a claims-made basis. The second layer of excess coverage is provided by an independent excess insurance company. The types of insurance and risk management coverages are detailed in the table below: Insurance and Risk Management June 30, 2013 June 30, 2012 June 30, 2011 Malpractice claims expense $ 16,636 $ 7,479 $ 9,420 Malpractice excess insurance 1,640 1,837 2,083 Student sickness 6,646 4,657 4,609 General and other 6,167 5,749 5,175 Totals $ 31,089 $ 19,722 $ 21,287 16

21 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 5 Restructuring Costs Restructuring costs represent non-recurring expenses required to facilitate management, faculty and staff changes resulting from Howard's various renewal initiatives. In fiscal years 2013, 2012 and 2011, Howard implemented a reductionin-force to better align the number of administrative staff with expected needs and its financial capacity. Severance and other payments related thereto amounted to $1,808, $4,646 and $516, respectively. Additionally, Howard implemented a Faculty Phased Retirement Program with incentive payments of $19,816 payable between September 2012 and September 2017, which was accrued as of June 30, As of June 30, 2013, $9,125 is accrued, reflecting payment activity. Note 6 Concentration of Credit Risk Financial instruments that potentially subject Howard to significant concentrations of credit risk consist principally of deposits of cash, cash equivalents, and investments in financial institutions in excess of the applicable government insurance limits. The limit was $250 per account as of June 30, Concentrations of credit risk with respect to receivables pertain mainly to self-pay patients of Howard s clinical services, and to students. Note 7 Receivables Accounts receivable, prior to adjustment for doubtful collections, is summarized as follows at June 30, 2013, 2012 and 2011: Receivables June 30, 2013 June 30, 2012 June 30, 2011 Student $ 15,331 $ 11,663 $ 8,404 Notes 12,561 11,490 11,063 Federal appropriation 3,452 3,623 3,638 Patients and third-party payors - Hospital 103,544 83,011 78,927 Patients and third-party payors - FPP 12,171 10,271 8,923 Patients and third-party payors - Dental 1,629 2,186 1,001 Grants and contracts 16,739 18,956 19,822 Contributions 3,364 3,388 3,504 Insurance claims 16,896 16,254 14,397 Auxiliary services 4,300 2,892 4,800 Other 2,967 9,714 5,108 Totals $ 192,954 $ 173,448 $ 159,587 17

22 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Allowance for doubtful receivables is summarized as follows at June 30, 2013, 2012 and 2011: Allowance for Doubtful Receivables June 30, 2013 June 30, 2012 June 30, 2011 Student $ 7,396 $ 6,760 $ 2,295 Notes 3,210 3,287 2,516 Federal appropriation Patients and third-party payors - Hospital 32,300 31,984 29,078 Patients and third-party payors - FPP 3,041 4,178 4,915 Patients and third-party payors - Dental Grants and contracts 3,788 3,918 3,918 Contributions 1,738 1,599 1,620 Insurance claims 1,488 1,615 2,856 Auxiliary services Other 1, Totals $ 55,124 $ 55,424 $ 48,648 Total receivables, net $ 137,830 $ 118,024 $ 110,939 Provision for bad debt is summarized as follows at June 30, 2013, 2012 and 2011: Provision for Bad Debt June 30, 2013 June 30, 2012 June 30, 2011 Non-clinical and non-student services: Notes $ -- $ -- $ (17) Federal Appropriation Research grants and development agreements Contributions Insurance claims (127) (985) 686 Auxiliary services (166) Other 1, Total non-clinical and non-student services 1,913 (11) 536 Total student services 3,266 5, Clinical services: Patients and third-party payors - Hospital 20,754 20,677 22,092 Patients and third-party payors - FPP 6,777 7,590 8,285 Patients and third-party payors - Dental Total clinical services 27,602 28,780 30,377 Total provision for bad debt $ 32,781 $ 34,230 $ 30,935 Bad debt expense of $1,913, $(11) and $536 for fiscal years ended June 30, 2013, 2012 and 2011, respectively, reflected in total operating expenses on the Statements of Activities excludes bad debt expense related to certain clinical and student services determined to be uncollectible. Clinical services bad debt expense, as shown in the table above, has been netted against patient service 18

23 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) revenues. Student services bad debt expense, as shown in the table above, has been netted against tuition and fees on the Statements of Activities. Contributions receivable at June 30, 2013, 2012 and 2011 are expected to be received as follows: Contributions Receivable June 30, 2013 June 30, 2012 June 30, 2011 Within one year $ 2,969 $ 2,725 $ 2,694 Between one and five years Thereafter Contributions receivable gross 3,402 3,463 3,598 Unamortized discount on contributions receivable (1.1%-6.5%) (38) (75) (94) Contributions receivable, net of discounts 3,364 3,388 3,504 Allowance for uncollectible contributions (1,738) (1,599) (1,620) Contributions receivable, net of discounts and allowance $ 1,626 $ 1,789 $ 1,884 Note 8 Inventories, Prepaids and Other Assets Components of inventories, prepaids and other assets accounts at June 30, 2013, 2012 and 2011 are as follows: Inventories, Prepaids and Other Assets June 30, 2013 June 30, 2012 June 30, 2011 Inventories - Bookstore $ 1,076 $ 1,056 $ 1,272 Inventories - Hospital 5,912 5,194 4,359 Prepaid expenses 5,683 5,463 3,361 Unamortized bond issuance costs 4,993 5,207 5,422 Deferred health charges 1,621 1, Dialysis joint venture interest 4,800 4, Beneficial interest trust 4, Intellectual property costs 1, Other Total $ 29,974 $ 23,739 $ 14,665 19

24 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 9 Accounts Payable and Accrued Expenses Components of this liability account at June 30, 2013, 2012 and 2011 are as follows: Accounts Payable and Accrued Expenses June 30, 2013 June 30, 2012 June 30, 2011 Vendor invoices $ 58,769 $ 46,189 $ 44,286 Accrued salaries and wages 21,440 23,908 27,069 Accrued employee benefits 6,372 8,489 6,877 Accrued annual leave 6,920 11,172 12,558 Accrued faculty retirement incentive payments 9,125 19, Accrued interest 4,908 4,997 2,897 Other ,148 Total $ 108,077 $ 115,127 $ 94,835 Note 10 Other Liabilities and Deferred Revenue These obligations include the following at June 30, 2013, 2012 and 2011: Other liabilities June 30, 2013 June 30, 2012 June 30, 2011 Asset retirement obligation $ 12,687 $ 12,247 $ 11,806 Environmental remediation 3,000 3,000 3,000 Unclaimed property 2,588 2,582 3,026 Student deposits and refunds 4,974 5,051 3,944 Reserve for legal contingencies 6,690 7,119 6,880 Deposits held in custody for others 2, Other 2,369 2,600 2,675 Total $ 34,568 $ 33,305 $ 32,202 Deferred revenue June 30, 2013 June 30, 2012 June 30, 2011 Deferred tuition, room and board $ 3,159 $ 2,864 $ 2,114 Deferred grant revenue 5,924 6,410 4,573 Other ,767 Total $ 9,691 $ 9,938 $ 8,454 20

25 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 11 Deposits with Trustees and Self-insured Liabilities Dedicated Assets Liability June 30, 2013 June 30, 2012 June 30, 2011 June 30, 2013 June 30, 2012 June 30, 2011 Debt service reserve $ 12,880 $ 12,878 $ 12,967 NA NA NA Capitalized interest 3,737 12,061 19,782 NA NA NA Professional liability 239 6,520 10,385 $ 55,204 $ 42,863 $ 43,141 Workers compensation 14 3,292 3,290 30,306 32,799 30,830 Health insurance trust 755 3,399 2,198 4,889 4,933 5,828 Total $ 17,625 $ 38,150 $ 48,622 $ 90,399 $ 80,595 $ 79,799 NA = Not applicable (a) (b) Debt Service Reserve Fund As required by the 2011 Revenue Bonds, Howard maintains a debt service reserve fund in an amount greater than or equal to the Debt Service Fund Requirement of $12,634 for all periods reported. The assets in the debt service reserve fund consist primarily of cash, fixed income investments and other short-term securities. Capitalized Interest Fund As required by the 2011 Revenue Bonds, Howard established a capitalized interest fund of $19,782 for the fiscal year ended June 30, These funds are intended to satisfy bond interest payments through June 30, As of June 30, 2013, the capitalized interest fund balance is $3,737, reflecting interest payments of $16,045 from the fund. (c) Professional Liability Howard is involved in litigation arising in the ordinary course of business. Claims alleging malpractice have been asserted against the Hospital and certain faculty physicians and are currently in various stages of litigation. Additional claims may be asserted arising from services provided to patients through June 30, It is the opinion of management based on the advice of actuaries and legal counsel that estimated malpractice costs accrued at fiscal years ended June 30, 2013, 2012 and 2011 of approximately $55,204, $42,863 and $43,141, respectively, is adequate to provide for losses resulting from probable unasserted claims and pending or threatened litigation and is part of Reserves for self-insured liabilities. 21

26 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Professional liability activity is summarized as follows for fiscal years ended June 30, 2013, 2012 and 2011 in the table below. Professional Liability June 30, 2013 June 30, 2012 June 30, 2011 Beginning balance $ 42,863 $ 43,141 $ 44,955 Malpractice claims expense 16,636 7,479 9,420 Settlement payments (4,295) (7,757) (11,234) Ending balance $ 55,204 $ 42,863 $ 43,141 (d) Workers Compensation Prior to July 1, 2012, Howard had established a revocable trust fund to partially provide for the satisfaction of its liability under applicable workers compensation liability. The assets in the workers compensation trust fund consisted of U.S. Treasury Bills and obligations, as well as domestic and foreign corporate bonds. As of June 30, 2013, workers compensation liabilities are being satisfied as claims arise. Howard also maintains $9,860 in letters of credit, which serve as collateral for specific insurance carriers. These letters of credit are secured by Howard s principal lending bank. Howard is self-insured for workers compensation claims up to per occurrence retention of $500. The excess is covered through commercial insurance. For fiscal years ended June 30, 2013, 2012 and 2011 expenses related to workers compensation were $2,433, $3,372 and $1,629, respectively and are reflected in employee benefits. The total liability for future workers compensation liability claims was approximately $30,306, $32,799 and $30,830 at June 30, 2013, 2012 and 2011, respectively, and includes liabilities for claims covered under existing insurance policies. Reserves reflect actuarially determined estimates for losses on asserted claims, as well as unasserted claims arising from reported and unreported incidents. This liability is recorded on the accompanying Statements of Financial Position in reserves for self-insured liabilities. Estimated claims for which payments will be covered under existing insurance policies were $15,408, $14,639 and $11,541 at June 30, 2013, 2012 and 2011, respectively, net of allowances for uncollectible amounts and are reflected in other receivables. (e) Health Insurance Prior to July 1, 2012, Howard established a revocable self-insured trust fund for the purpose of partially funding group health benefits for its employees. The assets consisted primarily of investments in money market funds. As of June 30, 2013, health insurance claims are being funded as incurred. Deposits to the fund are amounts withheld from employees salaries and wages and Howard s contributions based on estimates established by the claims administrator. Disbursements from the fund are made in accordance with the payment plan established with the claims administrator. The total estimated liability for asserted and unasserted probable claims at June 30, 2013, 2012 and 2011, is 22

27 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) approximately $4,889, $4,933 and $5,828, respectively, and is part of Reserves for self-insured liabilities. Note 12 Fair Value Measurements Howard adopted the applicable accounting standards for fair value measurements, defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. These accounting standards establish three categories for fair value measurements based upon the transparency of inputs used to value an asset or liability as of the measurement date as follows: Level 1 quoted market prices for identical assets or liabilities in active markets. Level 2 quoted market prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other than quoted prices in which all significant inputs and significant value drivers are observable in active markets either directly or indirectly. Level 3 valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are not observable. Howard s financial assets and liabilities as of June 30, 2013, 2012 and 2011 are subject to fair value accounting. 23

28 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Fair value as of June 30, 2013 is as follows: Fair Value as of June 30, 2013 Level 1 Level 2 Level 3 Total Assets: Unexpended bond proceeds (6) $ -- $ 71,670 $ -- $ 71,670 Deposits with trustees (7) , ,625 Other assets (8) ,378 4,378 Total Asset (non investment) ,525 4,378 93,673 Operating investments Fixed Income-Government Bonds (2) 6, ,877 Common Stock (3) 28, ,217 Total operating investments 35, ,094 Restricted investments Money Market Instrument (1) -- 1, ,089 Common Stock (3) 34, ,074 Private Equity (4) ,341 2,341 Real Estate (4) Total restricted investments 34,074 1,089 2,591 37,754 Endowment Investments Money Market Instrument (1) , ,348 Commingled Funds Global Fixed Income (2) -- 30, ,200 International Equity (3) -- 53, ,378 US Common Stock (3) -- 17, ,788 Commodity Inflation Hedging (4) 17,357 17,357 Common Stock (3) 50, ,741 Fixed Income (2) Asset backed -- 2, ,054 Corporate Bonds -- 4, ,804 Hedge Funds (4) Distressed Debt -- 2, ,793 Equity Long/Short -- 4, ,866 Event Driven -- 3,123 3,562 6,685 Global Opportunities -- 4, ,399 Multi-strategy -- 26,802 2,369 29,171 Mutual Funds Investment Emerging Market Equity (3) 51, ,892 Domestic Common Stock (3) 20, ,320 Domestic Fixed Income (2) 54, ,883 International Equity Security (3) 32,114 32,114 Private Equity and Venture Capital (4) ,565 93,565 Real Estate (4) ,715 8,715 Total endowment investments 210, , , ,073 Total investment net asset 280, , , ,594 Liabilities: Interest rate swap (5) Assets not subject to fair value reporting 1, ,368 Liabilities not subject to fair value reporting (277) (277) Total assets and liabilities measured at fair value $ 281,683 $ 284,822 $ 115,180 $ 681,685 24

29 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Fair value as of June 30, 2012 is as follows: Fair Value as of June 30, 2012 Level 1 Level 2 Level 3 Total Assets: Unexpended bond proceeds (6) $ -- $ 87,207 $ -- $ 87,207 Deposits with trustees (7) 4,701 33, ,150 Total Asset (non investment) 4, , ,357 Operating investments Fixed Income-Government Bonds (2) 5, ,925 Common Stock (3) 28, ,500 Total operating investments 34, ,425 Restricted investments Money Market Instrument (1) Common Stock (3) 29, ,075 Private Equity (4) ,407 2,407 Real Estate (4) Total restricted investments 29, ,657 32,402 Endowment Investments Money Market Instrument (1) , ,008 Commingled Funds Global Fixed Income (2) -- 28, ,870 International Equity (3) -- 38, ,165 US Common Stock (3) -- 15, ,190 Commodity Inflation Hedging (4) -- 15, ,172 Common Stock (3) 62, ,946 Fixed Income (2) Asset backed -- 2, ,662 Corporate Bonds -- 5, ,765 Hedge Funds (4) Distressed Debt -- 2, ,298 Equity Long/Short -- 4, ,488 Event Driven -- 2,353 3,261 5,614 Global Opportunities -- 3, ,950 Multi-strategy -- 24,610 2,260 26,870 Mutual Funds Investment Emerging Market Equity (3) 28, ,165 Domestic Common Stock (3) 16, ,513 Domestic Fixed Income (2) 61, ,898 Private Equity and Venture Capital (4) ,138 93,138 Real Estate (4) ,000 9,000 Total endowment investments 170, , , ,712 Total investment net asset 238, , , ,896 Liabilities: Interest rate swap (5) Total assets and liabilities measured at fair value $ 238,634 $ 303,967 $ 110,316 $ 652,917 25

30 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Fair value as of June 30, 2011 is as follows: Fair Value as of June 30, 2011 Level 1 Level 2 Level 3 Total Assets: Unexpended bond proceeds (6) $ 102,429 $ -- $ -- $ 102,429 Deposits with trustees (7) 26,069 22, ,622 Total Asset (non investment) 128,498 22, ,051 Operating investments Fixed Income-Government Bonds (2) 4, ,592 Common Stock (3) 39, ,220 Total operating investments 43, ,812 Restricted Investment Money Market Fund (1) -- 5, ,008 Common Stock (3) 25, ,038 Private Equity (4) ,096 3,096 Real Estate (4) Total restricted investments 25,038 5,008 3,346 33,392 Endowment Investments Money Market Instrument (1) , ,975 Commingled Funds Emerging Market Equity (3) -- 25, ,483 Global Fixed Income (2) -- 26, ,563 International Equity (3) -- 41, ,367 US Common Stock (3) -- 14, ,643 Commodity Inflation Hedging (4) -- 17, ,306 Common Stock (3) 55, ,958 Fixed Income (2) Government Bonds 25, ,189 Asset backed -- 2, ,022 Corporate Bonds -- 5, ,900 Hedge Funds (4) Distressed Debt -- 2, ,494 Equity Long/short -- 4, ,146 Event driven -- 2,846 3,277 6,123 Global opportunities -- 4, ,009 Multi-strategy -- 48,058 1,918 49,976 Mutual Funds Investment Domestic Common Stock (3) 21, ,110 Domestic Fixed Income (2) 57, ,872 Private Equity and Venture Capital (4) ,324 85,324 Real Estate (4) ,640 8,640 Total endowment investments 161, ,906 99, ,100 Total investment net asset 358, , , ,355 Liabilities: Interest rate swap (5) Total assets and liabilities measured at fair value $ 358,383 $ 240,571 $ 102,505 $ 701,459 26

31 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) The following assumptions and estimates were used to determine fair value of each class of financial instruments listed above: (1) Money market instruments include investments in open ended mutual funds that invest in US treasury securities, US agency bonds, certificates of deposit and corporate bonds. Funds that are quoted daily in active markets are classified as Level 1. Funds that are not quoted daily with prices based on amortized cost are classified as Level 2. (2) For investments in government securities and corporate bonds, fair value is based first upon quoted market prices for those securities that can be classified as Level 1. For securities where an active market is not available, fair value is determined with reference to similar securities using market prices and broker quotes for similar instruments and are classified as Level 2. (3) Common stocks are largely valued based on the last sales price for identical securities traded on a primary exchange. These investments are classified as Level 1. Securities that trade infrequently, or that have comparable traded assets that trade in either active or inactive markets, are priced using available quotes and other market data that are observable as of the reporting date, and are classified as Level 2. Investments in comingled funds with underlying securities in common stock are classified as Level 2 because there is a readily determinable unit price and the units held can be redeemed in less than one month. (4) Alternative investments include Howard s limited partnership interests, hedge funds, private equity and real estate and commodity funds. Trading in this class of funds is infrequent and, as a result, market values are not readily determinable. The investments in privately held funds are valued based on valuation techniques that take into account each fund s underlying assets and include valuation methods such as market, cost and income approaches. In accordance with an accounting standard update governing the classification of certain investments which provide the option of NAV redemption value as Level 2, Howard has classified qualifying investments in Hedge Funds and Commodity Funds as Level 2. These investments can be redeemed on a quarterly basis with a 30 to 90 days redemption notice period. Hedge Funds and Commodity Funds with liquidation terms in excess of 90 days are classified as Level 3. Limited partnerships including private equity and real estate funds and other non-redeemable funds are categorized as Level 3. These investments cannot be redeemed or withdrawn prior to termination of the partnership. Instead, the distributions are received through liquidation of the underlying assets of the fund. No active market exists for these funds and their valuation is based on unobservable and/or 27

32 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) significantly adjusted inputs using the best available information provided by the partnership, including management assumptions. Due diligence procedures performed by management indicate that the values reported are reasonable. These investments are classified as Level 3. (5) Interest rate swaps are valued using observable and unobservable inputs, such as quotations received from counterparty dealers or brokers, whenever available and considered reliable. In instances where models are used, the value of the interest rate swap depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability and reliability of the observed inputs. Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, pre-payment rates, assumptions for nonperformance risk, and correlations of such inputs. Certain parts of the interest rate swap arrangements have inputs which can generally be corroborated by market data and are therefore, classified as Level 2 within the fair value hierarchy. (6) Unexpended bond proceeds include investments in government debt security funds. These funds are not quoted daily and are valued at amortized cost. These investments are classified as Level 2. (7) Deposits held with trustees, including workers compensation, professional and general liability, health insurance and bond debt service deposits, are comprised primarily of money market instruments, US treasury securities, mortgage-backed securities and corporate bonds. Money market investments are classified as either Level 1 or Level 2 based on whether their prices are quoted daily. Investments in US treasury securities are classified as Level 1 and other fixed income securities are classified as Level 2. (8) Other assets represent the university s beneficial interest in certain trust assets held by third parties. The fair value of this interest has been measured using the income approach as there is no active principal market trading in this interest. This interest was valued using the quoted market value for the underlying marketable securities of the Trust discounted for expected future cash flows to the University. These interest are classified as Level 3 assets as the reported fair values are based on a combination of observable and unobservable inputs. The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair value. Furthermore, while Howard believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different 28

33 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) estimate of fair value as of the reporting date and different income (loss) being recognized during the period. The following tables present the changes in amounts included in the Statements of Financial Position for financial instruments classified within Level 3 of the valuation hierarchy defined above. Changes in Level 3 assets for the period ended June 30, 2013 is as follows: Changes in Level 3 for the period ended June 30, 2013 Private Equity and Venture Capital Hedge Funds Real Estate Other Assets Total Balance July 1, 2012 $ 95,545 $ 5,521 $ 9,250 $ -- $ 110,316 Gain and Loss (Realized and unrealized) 13, (44) 14,647 Acquisitions 9, ,422 13,469 Sales (21,866) (293) (1,093) -- (23,252) Balance June 30, 2013 $ 95,906 $ 5,931 $ 8,965 $ 4,378 $ 115,180 Change in unrealized investments held $ 5,783 $ 703 $ 906 $ (44) $ 7,348 There were no transfers into or out of Level 3 during the fiscal year ended June 30, Changes in Level 3 securities for the fiscal year ended June 30, 2012 is as follows: Changes in Level 3 for the year ended June 30, 2012 Private Equity and Venture Capital Hedge Funds Real Estate Total Balance July 1, 2011 $ 88,420 $ 5,195 $ 8,890 $ 102,505 Gain and Loss (Realized and unrealized) 4, ,067 Purchases 14, ,689 Sales (11,559) -- (386) (11,945) Balance June 30, 2012 $ 95,545 $ 5,521 $ 9,250 $ 110,316 Change in unrealized investments held $ 424 $ 33 $ 573 $ 1,030 There were $293 transfers into Level 3 during fiscal year ended June 30,

34 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Changes in Level 3 securities for the fiscal year ended June 30, 2011 is as follows: Changes in Level 3 for the year ended June 30, 2011 Private Equity and Venture Capital Hedge Funds Fixed Income Common Stock Real Estate Total Balance July 1, 2010 $ 70,487 $ 4,467 $ 287 $ 300 $ 7,623 $ 83,164 Gain and Loss (Realized and unrealized) 15, (50) -- 1,044 17,411 Purchases 17, ,549 Transfer out and Sales (14,873) -- (237) (300) (209) (15,619) Balance June 30, 2011 $ 88,420 $ 5,195 $ -- $ -- $ 8,890 $ 102,505 There were $200 transfers out of Level 3 during fiscal year ended June 30, Net investment income (loss) is summarized as follows for fiscal years ended June 30, 2013, 2012 and 2011: Net Investment Income (Loss) June 30, 2013 June 30, 2012 June 30, 2011 Interest and dividends $ 12,553 $ 7,870 $ 7,433 Net realized gains (losses) 28,165 3,838 18,887 Net unrealized gains (losses) 26,329 (15,862) 64,740 Other investment (expenses) income (270) 1,617 3,625 Investment expenses (4,014) (1,505) (1,941) Net investment income (loss) $ 62,763 $ (4,042) $ 92,744 Current year unrestricted operating return 4, ,856 Current year non-operating investment return: Unrestricted 25,256 (825) 44,966 Restricted 32,868 (3,428) 38,922 Total current year investment return 62,763 (4,042) 92,744 Prior year return designated for current operations: Unrestricted (5,866) (5,985) (6,779) Restricted (6,647) (6,794) (7,490) Total designated for current operation $ (12,513) $ (12,779) $ (14,269) Net non-operating investment return: Unrestricted $ 19,391 $ (6,810) $ 38,187 Restricted 26,221 (10,222) 31,432 30

35 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Investment Commitments - Howard s investment commitments as of June 30, 2013, 2012 and 2011, are summarized below. These investments do not have readily ascertainable market values and may be subject to withdrawal restrictions. Investment Commitments June 30, 2013 June 30, 2012 June 30, 2011 Private Equity and Venture Capital Funds $ 141,703 $ 136,703 $ 136,703 Real Estate Funds 15,000 15,000 15,000 Total financial commitment 156, , ,703 Amounts funded 133, , ,833 Unfunded commitment $ 23,102 $ 27,149 $ 41,870 Note 13 Net Assets Temporarily restricted net assets consist of the following at June 30: Temporarily Restricted Net Assets June 30, 2013 June 30, 2012 June 30, 2011 Scholarships $ 47,271 $ 41,362 $ 46,179 Professorships 29,758 24,815 27,093 Student loans Federal term 114, , ,403 General operations and other 30,197 28,878 30,834 Total $ 222,850 $ 200,463 $ 209,045 The Federal term endowment restriction is for 20 years for each contribution beginning in Howard transfers the amount of the original contribution plus accumulated investment returns to unrestricted net assets at the end of each 20 year period. For fiscal years ended June 30, 2013, 2012 and 2011, the transfer amounts were $8,300, $5,933 and $6,174, respectively. Permanently restricted net assets are held in perpetuity and the income there from is only expendable for the noted purposes at June 30. Permanently Restricted Net Assets June 30, 2013 June 30, 2012 June 30, 2011 Scholarships $ 52,863 $ 51,694 $ 50,700 Professorships 23,530 17,041 16,613 Student loans 35,925 35,346 35,692 General operations and other 10,892 10,464 11,693 Total $ 123,210 $ 114,545 $ 114,698 31

36 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Net assets were released from donor restrictions due to the passage of time or by incurring expenses satisfying the restricted purpose specified by the donors as noted for fiscal years ended June 30, 2013, 2012 and Net Assets Released from Restrictions June 30, 2013 June 30, 2012 June 30, 2011 Federal term $ 8,300 $ 5,933 $ 6,174 Restrictions released based on time Restrictions released based on purpose: Scholarships and fellowships 4,130 5,562 4,088 Professorships Student loans General operations and other 2,130 2,231 1,646 Total $ 15,417 $ 14,606 $ 12,909 Note 14 Endowment Fund Howard s endowment includes approximately 800 individual accounts established to fund scholarships, professorships, student loans, general operations and other purposes. Effective July 1, 2008, Howard adopted Financial Accounting Standards Board Staff Position Endowments of Not-for-profit Organizations: Net Asset Classifications of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for All Endowment Funds. Howard is subject to the District of Columbia Uniform Prudent Management of Institutional Funds Act of 2008 (DC UPMIFA). Interpretation of Relevant Law Net Asset Classification - The Board of Trustees of Howard has interpreted the UPMIFA as requiring the preservation of the fair value of the original gift, as of the gift dates of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result of this interpretation, Howard classifies as permanently restricted net assets: 1. The original value of gifts with permanent donor-directed use restrictions. 2. The value of accumulations in accordance with the applicable donor gift instrument at the time the accumulation occurs. Any portion of the donor-restricted gift that is not classified as permanently restricted is classified as temporarily restricted until those amounts are appropriated for expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. 32

37 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Spending - In accordance with UPMIFA, Howard considers the following factors in making a determination to spend or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund 2. The purposes of Howard 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 appreciation of investments 6. Other resources of Howard 7. The investment policies of Howard Management and Investment - In accordance with UPMIFA, Howard considers the following factors in making investment, as well as other management decisions regarding donor-restricted endowment funds: 1. General economic conditions 2. The possible effect of inflation and deflation 3. The expected tax consequences, if any 4. The role of an investment/action in context of the entire portfolio 5. The expected total income and appreciation 6. Other University resources 7. The needs to preserve capital and make distributions 8. An asset s special relationship or value to the University s charitable purpose. As of June 30, 2013, 2012 and 2011, total endowment funds classified as permanently restricted and temporarily restricted net assets were: Restricted Endowment June 30, 2013 June 30, 2012 June 30, 2011 Permanently Restricted Net Assets The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by UPMIFA $ 78,771 $ 75,326 $ 74,530 Temporarily Restricted Net Assets Time restricted funds $ 129,425 $ 118,338 $ 118,789 The portion of perpetual endowment Funds subject to a time restriction under DC UPMIFA: Without purpose restrictions 3,921 3,077 3,972 With purpose restrictions 54,471 45,627 56,094 Total endowment funds classified as temporarily restricted net assets $ 187,817 $ 167,042 $ 178,855 33

38 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) The change in value and the composition of amounts classified as endowment as of June 30, 2013 is as follows: Endowment Change in Value For period ended June 30, 2013 Unrestricted Temporarily Restricted Permanently Restricted Endowment net assets, beginning of year $ 221,937 $ 167,042 $ 75,326 $ 464,305 Investment return: Investment income 5,158 6, ,412 Net appreciation (realized and unrealized) 22,478 24, ,169 Total investment return 27,636 30, ,581 Contributions 376 3,513 1,068 4,957 Appropriation of endowment assets for operations (7,350) (5,073) (89) (12,512) Other changes: Match release 8,300 (8,300) Transfer and other changes ,090 2,194 Endowment net assets, end of year $ 250,937 $ 187,817 $ 78,771 $ 517,525 Donor-restricted endowment funds $ (5,182) $ 187,817 $ 78,771 $ 261,406 Board-designated endowment funds 256, ,119 Endowment net assets, end of year $ 250,937 $ 187,817 $ 78,771 $ 517,525 Total The change in value and the composition of amounts classified as endowment as of June 30, 2012 is as follows: Endowment Change in Value For year ended June 30, 2012 Unrestricted Temporarily Restricted Permanently Restricted Endowment net assets, beginning of year $ 223,310 $ 178,855 $ 74,530 $ 476,695 Investment return: Investment income 4,067 3, ,742 Net depreciation (realized and unrealized) (4,691) (7,477) (721) (12,889) Total investment return (624) (3,969) (554) (5,147) Contributions 350 3,628 1,316 5,294 Appropriation of endowment assets for operations (7,072) (5,599) (108) (12,779) Other changes: Match release 5,933 (5,933) Transfer and other changes Endowment net assets, end of year $ 221,937 $ 167,042 $ 75,326 $ 464,305 Donor-restricted endowment funds $ (3,915) $ 167,042 $ 75,326 $ 238,453 Board-designated endowment funds 225, ,852 Endowment net assets, end of year $ 221,937 $ 167,042 $ 75,326 $ 464,305 Total 34

39 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) The change in value and the composition of amounts classified as endowment as of June 30, 2011 is as follows: Endowment Change in Value For year ended June 30, 2011 Unrestricted Temporarily Restricted Permanently Restricted Endowment net assets, beginning of year $ 177,846 $ 157,408 $ 72,257 $ 407,511 Investment return: Investment income 4,276 2, ,626 Net appreciation (realized and unrealized) 39,090 31, ,046 Total investment return 43,366 33, ,672 Contributions 318 3,777 1,273 5,368 Appropriation of endowment assets for expenditure (4,339) (9,807) (123) (14,269) Other changes: Match release 6,174 (6,174) Transfer and other changes (55) Endowment net assets, end of year $ 223,310 $ 178,855 $ 74,530 $ 476,695 Donor-restricted endowment funds $ (4,990) $ 178,855 $ 74,530 $ 248,395 Board-designated endowment funds 228, ,300 Endowment net assets, end of year $ 223,310 $ 178,855 $ 74,530 $ 476,695 Total Howard s endowment net assets include receivables related to the federal term endowment, which have not been received and therefore not included as part of endowment investments. For fiscal years ended June 30, 2013, 2012 and 2011 receivables of $3,452, $3,593 and $3,595, respectively were recorded, and represent the difference between endowment investments reflected on Statements of Financial Position and endowment net assets reported above. Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the donor or the Trustees require Howard to retain as a fund of perpetual duration. Deficiencies of this nature, so called underwater accounts, are reported in unrestricted net assets and totaled $5,182, $3,915 and $4,990 as of June 30, 2013, 2012 and 2011, respectively. Howard has adopted a policy allowing spending in certain situations from underwater, donor-restricted endowment funds, absent overriding provisions in donor agreements. Howard s investment and spending policy is intended to conform with the UPMIFA which allows spending in underwater endowments, in support of an endowment s purpose. Return Objectives and Risk Parameters - Howard 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 minimize the risk associated with obtaining such income streams. Endowment assets include those that the organization must hold in perpetuity or for a donorspecified period(s), as well as board-designated endowment funds. Under these policies the endowment assets are invested through a well-diversified investment program designed to exceed the risk-adjusted performance of the market benchmark representative of each asset class over rolling five to seven year 35

40 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) periods. Howard s objective, over time, is to obtain an average total real rate of return (inflation adjusted) that exceeds its targeted distribution amount over rolling five to seven year periods. Howard s investment strategy aims for a low to moderate level of investment risk. Actual returns in any given year may significantly vary from this objective. Strategies Employed for Achieving Objectives - To satisfy its long-term rate-ofreturn objectives, Howard relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and yield (interest and dividends). Howard targets a diversified asset allocation which places greater emphasis on global public equity-based investments complimented by private markets, real estate and fixed income strategies to achieve its long-term return objectives within prudent risk constraints. The endowment s long-term target asset allocation is approved by the Investment Committee of the Board of Trustees. Spending Policy and How the Investment Objectives Relate to Spending Policy - Howard s spending policy allows for distribution each year of up to 5 percent of its endowment fund's market value, excluding Federal term and Islamic Funds, based upon a three-year moving average with the most recent year removed. In establishing this policy, Howard considered the long-term expected return on its endowment consistent with its general goal of facilitating the ability of endowments (specifically permanent and time specific endowments) to best fulfill the purposes for which they were designed. Note 15 Estimated Third-Party Settlements Certain services rendered by the Hospital are reimbursed by third-party payors at cost, based upon cost reports filed after year-end. Contractual allowances are recorded based upon preliminary estimates of reimbursable costs. Net patient service revenue recorded under cost reimbursement agreements for the current and prior years is subject to audit and retroactive adjustments by significant thirdparty payors for the following years: Medicare Medicaid Final settlements and changes in estimates related to Medicare and Medicaid third-party cost reports for prior years resulted in an increase in net patient service 36

41 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) revenues of approximately $2,756, $5,179 and $1,382 for fiscal years ended June 30, 2013, 2012 and 2011, respectively. Third-party settlement revenue June 30, 2013 June 30, 2012 June 30, 2011 Medicare appeals $ 2,114 $ (1,007) $ 1,049 Medicare pass-through 11,895 10,493 8,889 Disproportionate Share Hospital 34,656 29,513 23,525 Graduate Medical Education 5,719 4,272 2,393 Other Total third-party settlement revenue $ 54,559 $ 43,315 $ 35,940 Note 16 Property, Plant and Equipment Property, Plant and Equipment June 30, 2013 June 30, 2012 June 30, 2011 Land and land improvements $ 27,911 $ 27,911 $ 27,711 Buildings and building improvements 834, , ,547 Property held for expansion 57,013 57,013 57,007 Furniture and equipment 285, , ,232 Library books 90,758 90,093 89,777 Equipment under capital leases 74,557 62,898 63,463 Software 107,464 97,429 94,416 Software in progress 3,228 3,635 3,222 Construction in progress 31,973 27,399 29,757 Property, plant and equipment, gross 1,513,650 1,457,934 1,411,132 Accumulated depreciation and amortization (900,569) (849,493) (806,780) Property, plant and equipment, net $ 613,081 $ 608,441 $ 604,352 For fiscal year ended June 30, 2013, there were $55,946 in additions and adjustments and $230 in disposals and retirements. Property, Plant and Equipment Roll forward June 30, 2012 Additions/ Adjustments Disposals/ Retirements June 30, 2013 Land and land improvements $ 27,911 $ -- $ -- $ 27,911 Buildings and building improvements 816,208 18,913 (152) 834,969 Property held for expansion 57, ,013 Furniture and equipment 275,348 10,507 (78) 285,777 Library books 90, ,758 Equipment under capital leases 62,898 11, ,557 Software 97,429 10, ,464 Software in progress 3,635 (407) -- 3,228 Construction in progress 27,399 4, ,973 Property, plant and equipment, gross $ 1,457,934 $ 55,946 $ (230) $ 1,513,650 37

42 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Depreciation expenses for fiscal years ended June 30, 2013, 2012 and 2011 were $52,625, $50,453 and $50,460, respectively. For fiscal years ended June 30, 2013, 2012 and 2011, respectively, net interest costs of $905, $1,069 and $360, were incurred during construction and capitalized as part of the cost of capital projects. Howard s asset retirement costs and obligations are reported in property, plant and equipment and other liabilities in the Statements of Financial Position, respectively. The asset retirement obligation has been discounted using a rate of 4.9%. Amounts for the reporting periods ended were as follows: Asset Retirement Costs and Obligations June 30, 2013 June 30, 2012 June 30, 2011 Asset retirement costs $ 4,565 $ 4,565 $ 4,565 Accumulated depreciation 2,147 2,091 2,033 Asset retirement obligation 12,687 12,247 11,806 Howard incurred costs related to asbestos abatement during fiscal years ended June 30, 2013, 2012 and 2011 of $87, $356 and $16, respectively. Note 17 Leases Lease Obligations Howard is obligated under capital leases for office and medical equipment that extend through 2017 and the chiller plant that extends through 2031 (see below) in the amounts of $47,355, $43,431 and $43,547, respectively at June 30, 2013, 2012 and The assets are amortized over their estimated useful lives. Accumulated amortization related to the leased assets is $36,845, $27,641 and $26,165, respectively. At June 30, 2013, Howard has remaining capacity to draw an additional $18,815 under an existing lease financing arrangement primarily to finance medical and information technology equipment. The lease periods commence in future months and continue for a period of five years after the start date. Howard entered into an agreement in March 2010, to construct an air conditioning system (so-called "chiller plant") for a price of $14,500. The construction was completed and the asset placed into service in May The purchase of the chiller plant will be paid over 20 years through a commodity supply agreement which requires Howard to purchase minimum quantities of output from the facility, which will be owned and operated by third-parties. The facility is accounted for as a capital lease asset with a corresponding capital lease obligation. The minimum payments due under the commodity purchase agreement approximate $21,

43 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Howard has several non-cancelable operating leases for office space and equipment that expire by Rental payments are recognized on a straightline basis and reflected in the Statements of Activities within professional and administrative services expense. Rent expense related to building space and equipment for fiscal years ended June 30, 2013, 2012 and 2011 was $5,832, $7,702 and $9,161, respectively. The minimum lease payments under capital leases and non-cancelable operating leases (with initial or remaining lease terms in excess of one year) for future years ending June 30 are as follow: Lease Obligations Capital Leases Operating Leases 2014 $ 12,698 $ 2, ,521 1, , , and thereafter 32, Obligation, gross 69,633 5,918 Amounts representing interest rates from 2% to 10% (22,278) -- Total Lease Obligations, net $ 47,355 $ 5,918 Lease Income Howard leases property to several area businesses, non-profit organizations and individuals under non-cancelable operating leases. Howard receives monthly income under these lease agreements, which have termination dates through 2017 and thereafter. Total lease income received for fiscal years ended June 30, 2013, 2012 and 2011 was $1,384, $1,175 and $1,141, respectively. The future minimum lease income for years ending at June 30 is as follows: Future minimum lease income June $ and thereafter 999 Total minimum lease income receipts $ 4,370 39

44 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 18 (a) Bonds and Notes Payable Bonds Payable Howard is obligated with respect to the following bond issues at June 30: Bonds Payable June 30, 2013 June 30, 2012 June 30, 2011 District of Columbia issues: 2010 Revenue bonds, 5.05% Serial due 2010 through 2025 $ 9,159 $ 9,674 $ 10, A Revenue bonds 5.00% to 6.50% Serial due 2020 through , , , B Revenue bonds 4.31% to 7.63% Serial due 2015 through ,065 65,065 65,065 Total bonds payable, gross $ 299,474 $ 299,989 $ 300,478 Unamortized bond premium (discount) (5,978) (6,204) (6,421) Total bonds payable, net $ 293,496 $ 293,785 $ 294,057 (1) 2010 Revenue Bonds In August 2010, Howard issued $10,400 of Series 2010 bonds. The bonds bear interest at 5.05% repayable from 2010 to A portion of the proceeds were used to retire an expiring equipment note. The remaining proceeds will be used to fund energy related projects. (2) 2011 Revenue Bonds In April 2011, Howard issued $225,250 of tax exempt revenue bonds (Series 2011A) and $65,065 of taxable revenue bonds (Series 2011B) to refund the Series 1998 and Series 2006 bonds and to finance new capital improvements. The interest rate on the tax exempt bonds range from 5.25% to 6.50% and the bonds are repayable from 2020 to The taxable bonds bear interest between 4.31% and 7.63% and are repayable from 2015 to The average coupon is 6.57%. The 2011 bonds require Howard to maintain a debt service fund of $12,634. For fiscal year ended June 30, 2013 the fund balance was $12,880. The Series 2011A Bonds maturing on or after October 1, 2021 are subject to optional redemption by the District of Columbia, at the written direction of Howard, in its sole discretion, on or after April 1, 2021 in whole or in 40

45 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) part at any time, at a redemption price equal to the principal amount of the Series 2011A Bonds being redeemed, plus accrued interest, if any, to the redemption date. The Series 2011B Bonds are subject to optional redemption prior to maturity in whole or in part on any Business Day at the Make-Whole Redemption Price at the direction of Howard Bond proceeds of $19,782 have been used to create a deposit for capitalized interest. The remaining balance of this fund is $3,737 and is reflected in deposits with trustees on the Statements of Financial Position. (3) Fair Value of Bonds The estimated fair value of Howard s bonds is determined based on quoted market prices. At June 30, 2013, 2012 and 2011, the estimated fair value was approximately $330,776, $344,872 and $297,806, respectively. Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of judgment. Howard is not required to settle its debt obligations at fair value and settlement is not possible in most cases because of the terms under which the debt was issued and legal limitations on refunding tax-exempt debt. (b) Notes Payable Howard is obligated with respect to the following notes payable at June 30: Notes Payable June 30, 2013 June 30, 2012 June 30, 2011 Bank of America Commercial Loan Due monthly, July 2007 through June 30, 2013 fixed interest rate of Libor plus.75% $ -- $ 780 $ 1,833 Bank of America Property Loan Due monthly, through February 28, 2014 fixed interest rate of 5.01% 6,499 7,647 8,795 Multi-bank Credit Agreement Due June 24, 2014, variable interest rate at daily LIBOR plus 1.25% 40,000 30,142 20,142 Total Notes Payable $ 46,499 $ 38,569 $ 30,770 In June 2011, Howard replaced its annually renewable revolving credit facilities that aggregated $65,000 with a $135,000 Multi-bank Credit Agreement that extends through June, Outstanding borrowings under that agreement at June 30, 2013, 2012 and 2011 were $40,000, $30,142 and $20,142, respectively. 41

46 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) On July 21, 2011, Howard entered into an interest rate cap with SunTrust Bank to protect against one-month Libor rising above 2% over the next three years on a notional value of $20,000. (c) Compliance with Contractual Covenants In May 2011, Howard s debt covenants were amended in conjunction with the 2011 Bond issuance and Multi-bank Credit Agreement execution. The 2011 Bond and Credit Agreement contain restrictive financial covenants as summarized in the table below as of June 30, Covenant Instrument Measurement Date Criteria Debt Service Coverage Ratio 2011 Revenue Bonds June 30 each year 1.10:1.00 Debt Service Coverage Ratio Multi-bank Credit Agreement June 30 each year 1.25:1.00 Liquidity Ratio Multi-bank Credit Agreement June 30 and December :1.00 At June 30, 2013, 2012 and 2011 Howard was in compliance with the Debt Service Coverage Ratio and Liquidity Ratio. (d) Scheduled Bond and Note Repayments At June 30 the scheduled principal repayments of bonds and notes payable, including sinking fund requirements, is as follows: Aggregate Annual Maturities June 30, 2013 June 30, 2012 June 30, NA NA $ 2, NA $ 2,444 2, $ 47,041 37,182 27, ,998 1,998 1, ,544 2,544 2,544 Thereafter 293, , ,821 Subtotal 345, , ,248 Bond premiums/(discounts) (5,978) (6,204) (6,421) Total $ 339,995 $ 332,354 $ 324,827 NA = Not applicable (e) Interest Rate Swaps Howard uses variable rate debt to finance certain activities. These debt obligations expose Howard to variability in interest payments, due to changes in 42

47 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. In April 1998, Howard entered into an interest rate swap agreement, a derivative instrument, with Bank of America, N.A., whereby Howard agreed to pay Bank of America a 6.7% fixed rate of interest on $17,233 in exchange for the receipt of a floating interest payment based on the 30-day London Interbank Offered Rate (LIBOR) plus 75 basis points. (LIBOR at June 30, 2013 was 0.19%). This agreement ended June 30, In December 2004, Howard entered into an interest rate swap agreement, a derivative instrument with Goldman Sachs, whereby Howard agreed to pay Goldman Sachs a 3.5% fixed rate of interest on $42,675, subject to an annual adjustment which began October 1, 2007, in exchange for the receipt of a floating interest payment based on sixty-seven percent of the 30-day LIBOR rate. This agreement, previously tied to the 2006B Bonds, was terminated in May The gains and losses recognized under the interest rate swap agreements for fiscal years ended June 30, 2013, 2012 and 2011 were as follows: Interest Rate Swaps June 30, 2013 June 30, 2012 June 30, 2011 Cumulative gain (loss) at beginning of year $ (21) $ (104) $ (5,582) Gain (loss) during the year ,873 Extinguishment of interest rate swap ,605 Cumulative gain (loss) at end of year $ -- $ (21) $ (104) Note 19 Retirement Plans Pension Plan - Howard has a noncontributory defined benefit pension plan (the Plan) available to substantially all full-time employees. In accordance with government funding regulations, Howard s policy is to make annual contributions to the Plan at least equal to the minimum contribution. Based upon years of service and other factors, the Plan s benefit formula provides that eligible retirees receive a percentage of their final annual pay, based upon years of service and other factors. Plan assets consist primarily of common equity securities, U.S. Treasury securities, corporate bonds, and private investment funds. Effective July 1, 2010 the Plan no longer accrues benefits. Post-retirement Plan - Howard provides post-retirement medical benefits and life insurance to employees who, at the time they retire, meet specified eligibility and service requirements. Howard pays a portion of the cost of such benefits depending on various factors, including employment start date, age, years of service and either the date of actual retirement or the retirement eligibility date of 43

48 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) the participant. The post-retirement benefit plan is unfunded and has no plan assets. Effective April 1, 2013 Howard eliminated the subsidy for post-65 medical and dental coverage for Class II and Class IV participants. This plan change is considered a significant event, and triggered a plan amendment as of the re-measurement date. The action resulted in (1) revised expense for the final quarter of the fiscal year ended June 30, 2013, which included amortization of the new prior service credit generated from the negative plan amendment and (2) reduction to the APBO of $113.0 million. Supplemental Retirement Plan Howard also has a supplemental retirement plan available to certain retired executives. The plan is noncontributory, unfunded and has a June 30 measurement date. The projected benefit obligation is $1,737 at June 30, 2013, $1,814 at June 30, 2012, and $2,235 at June 30, The amounts not yet reflected in operating expenses, but included in unrestricted net assets pertain to accumulated losses of $882 as of June 30, 2013, $862 as of June 30, 2012 and $1,193 as of June 30, The actuarial cost method and the assumption on discount rate used to determine the benefit obligation and net periodic cost in the actuarial valuation for the year ended June 30, 2013 are consistent with the method and assumptions used for the defined benefit pension plan. Savings Plan Howard supplements its pension plan by offering employees a defined contribution plan under Section 403(b) of the Internal Revenue Code. Eligible employees received a contribution of 6% of base salary and are also permitted to contribute up to 15% of their base pay to the plan. The administration of the plan is provided by three financial administrators: Teachers Insurance and Annuity Association/College Retirement Equities Fund, American International Group Variable Annuity Life Insurance Company, and Lincoln Financial. Effective July 1, 2011 Lincoln Financial has been replaced as a financial administrator by ING Financial Advisors. These administered plans provide additional retirement benefits including the purchase of annuity contracts for eligible employees. Total costs recognized in the Statements of Activities were $16,180, $23,528 and $22,118 for fiscal years ended June 30, 2013, 2012 and 2011, respectively. The fair value of plan assets for the savings plan for fiscal years ended June 30, 2013, 2012 and 2011 were $859,653, $810,202 and $812,031, respectively. These investments are held by Howard on behalf of its employees and excluded from the Statements of Financial Position. Effective July 1, 2010, the Savings Plan was modified such that Howard will automatically, upon hire, contribute 6% of any eligible employee s base pay, regardless of tenure or election into the Savings Plan. Howard will contribute a matching contribution of up to 2% of employee elected self contributions. 44

49 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Effective March 1, 2013 employer base (6%) and matching (2%) contributions have been suspended. Employees are still able to contribute to the Savings Plan. This suspension was ended effective July 1, Howard recognizes a plan s overfunded or underfunded status as an asset or liability, with an offsetting adjustment to unrestricted net assets. The reconciliation of the Plan s funded status to amounts recognized in the financial statements at June 30, 2013, 2012 and 2011 are as follows: Pension Medical and Life Insurance Savings Plan and Supplemental Retirement Benefits 6/30/2013 6/30/2012 6/30/2011 6/30/2013 6/30/2012 6/30/2011 6/30/2013 6/30/2012 6/30/2011 Change in benefit obligation: Projected benefit obligation at beginning of year $ 629,163 $ 537,993 $ 544,255 $ 189,430 $ 185,017 $ 183,192 $ 1,814 $ 2,235 $ 2,191 Service cost Interest cost 26,180 29,980 30,299 6,631 10,163 10, Actuarial (gain)/loss (7,185) 88,935 (10,140) (8,894) 3, (231) 115 Benefits paid (31,703) (27,745) (26,421) (13,656) (14,978) (12,993) (244) (307) (188) Special termination benefits Medicare Part D subsidy Employee contributions ,825 4,927 4, Prior service amendment Plan amendments (112,955) Projected benefit obligation at end of the period $ 616,455 $ 629,163 $ 537,993 $ 67,852 $ 189,430 $ 185,017 $ 1,737 $ 1,814 $ 2,235 Change in plan assets: Fair value of plan assets at beginning of year 460, , , Actual return on plan assets 42,383 (2,733) 79, Employer contributions 17,365 28,000-7,018 9,631 8,985 16,424 23,835 22,306 Employee contributions ,825 4,927 4, Medicare Part D subsidy Benefits paid (31,703) (27,745) (26,421) (13,656) (14,978) (12,993) (244) (307) (188) Fair value at end of the period $ 489,000 $ 460,955 $ 463,433 $ - $ - $ - NA NA NA Total $ (127,455) $ (168,208) $ (74,560) $ (67,852) $ (189,430) $ (185,017) NA NA NA NA = Not Applicable 45

50 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Components of net periodic benefit cost and other amounts recognized in unrestricted net assets at June 30, 2013, 2012 and 2011: Pension Medical and Life Insurance Savings Plan and Supplemental Retirement Benefits 9/30/2013 9/30/ /30/2013 6/30/2012 9/30/2013 9/30/ /30/2013 6/30/2012 9/30/2013 9/30/ /30/2013 6/30/2012 Recognized in Statements of Activities: Amortization of transition obligation $ - $ - $ - $ - $ - $ 947 $ 2,841 $ 3,774 $ - $ - $ - $ - Amortization of prior service cost (3,197) 521 (1,634) 2, Amortization of net actuarial loss 1,993 2,015 8,058 3, Total amortization 1,993 2,015 8,058 3,892 (3,042) 1,548 1,705 6, Service cost ,667 5,608 16,180 23,528 Interest cost 7,190 6,545 26,180 29, ,953 6,631 10, Expected return on plan assets (6,821) (7,484) (29,937) (31,479) Recognized in operating expenses $ 2,362 $ 1,076 $ 4,301 $ 2,393 $ (2,128) $ 3,678 $ 8,994 $ 16,775 $ 5,704 $ 5,657 $ 16,328 $ 23,745 Amortization of transition obligation (947) (2,841) (3,774) Amortization of prior service cost ,197 (521) 1,634 (2,137) Amortization of actuarial loss (1,993) (2,015) (8,058) (3,892) (155) (80) (498) (228) (19) (31) (75) (100) Total amortization (1,993) (2,015) (8,058) (3,892) 3,042 (1,548) (1,705) (6,139) (19) (31) (75) (100) Net actuarial (gain) loss during the year (7,329) 2,786 (19,631) 123, ,142 (6,441) 3, (231) 95 (231) New prior service cost arising during period (112,955) Total recognized in other changes in unrestricted net assets $ (9,322) $ 771 $ (27,689) $ 119,274 $ 3,431 $ 3,594 $ (121,101) $ (2,731) $ 5 $ (262) $ 20 $ (331) Total recognized in Statements of Activities $ (6,960) $ 1,847 $ (23,388) $ 121,667 $ 1,303 $ 7,272 $ (112,107) $ 14,044 $ 5,709 $ 5,395 $ 16,348 $ 23,414 Amounts included in unrestricted net assets at June 30, 2013, 2012 and 2011: Pension Medical and Life Insurance Retirement Benefits FY2013 FY2012 FY2011 FY2013 FY2012 FY2011 Net actuarial loss $ (249,900) $ (277,589) $ (158,315) $ (12,818) $ (19,757) $ (16,577) Prior service cost ,712 (39,663) (41,800) Transition obligation (3,787) (7,561) Total $ (249,900) $ (277,589) $ (158,315) $ 57,894 $ (63,207) $ (65,938) The estimated net actuarial gain, prior service cost, and transition obligation for the pension and post-retirement plans that were accounted for as a part of net periodic benefit cost over the next fiscal year are $8,671, $(12,785) and $0, respectively. Contributions of $17,365, $28,000, and $0 were made in fiscal years 2013, 2012 and 2011, respectively. A $12,000 contribution is expected to be made in fiscal year

51 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) The weighted average assumptions used to determine the benefit obligation in the actuarial valuations for fiscal years ended June 30, 2013, 2012 and 2011 were as follows: Pension Benefits Post-retirement Benefits Actuarial Assumptions FY2013 FY2012 FY2011 FY2013 FY2012 FY2011 Discount rate 4.82% 4.29% 5.76% 4.89% 4.25% 5.69% Expected return on plan assets 7.00% 7.50% 7.50% 0.00% 0.00% 0.00% Rate of compensation increase % 3.50% 3.50% The weighted average assumptions used to determine net periodic cost in the actuarial valuations for fiscal years ended June 30, 2013, 2012 and 2011 were as follows: Pension Benefits Post-retirement Benefits Actuarial Assumptions FY2013 FY2012 FY2011 FY2013 FY2012 FY2011 Discount rate 4.29% 5.76% 5.75% 4.25% 5.69% 5.75% Expected return on plan assets 7.00% 7.50% 7.50% 0.00% 0.00% 0.00% Rate of compensation increase To age % 3.50% 3.50% Thereafter % 3.50% 3.50% The overall long-term rate of return for the pension plan assets was developed by estimating the expected long-term real return for each asset class within the portfolio. An average weighted real rate of return was computed for the portfolio which reflects the Plan s targeted asset allocation. Consideration was given to the correlation between asset classes and the anticipated real rate of return and was added to the anticipated long-term rate of inflation. 47

52 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Pension plan investments as of June 30, 2013 were as follows: Pension Plan Investments as of June 30, 2013 Level 1 Level 2 Level 3 Total Pension Plan Investments Assets: Money Market Instrument (1) $ -- $ 5,486 $ -- $ 5,486 Commingled Funds Emerging market equity (3) -- 48, ,256 US Common Stock (3) -- 26, ,683 Commodity Inflation Hedging (8) -- 16, ,015 Common Stock (3) 46, ,606 Fixed Income (2) Asset backed -- 6, ,281 Corporate Bonds -- 2, ,131 Government Bond 46, ,547 Hedge Funds (4) Distressed Debt -- 2, ,793 Equity Long/short -- 4, ,866 Event driven -- 2,561 2,849 5,410 Inflation hedge Multi-Global opportunities -- 3, ,752 Multi-strategy -- 25,060 2,369 27,429 Mutual Funds Investment Domestic common stock (3) 34, ,388 Emerging market equity (3) 22, ,242 International equity (3) 27, ,856 Domestic Fixed Income (2) 60, ,998 Private Equity and Venture Capital (4) ,450 93,450 Real Estate (4) ,743 8,743 Total assets $ 238,637 $ 143,884 $ 107,411 $ 489,932 Liabilities: Financial Derivatives Option Contracts $ -- $ (239) $ -- $ (239) Total liabilities $ -- $ (239) $ -- $ (239) Total pension plan investments $ 238,637 $ 143,645 $ 107,411 $ 489,693 Assets not subject to fair value reporting 3, ,197 Liabilities not subject to fair value (3,890) (3,890) Total plan assets $ 237,944 $ 143,645 $ 107,411 $ 489,000 Refer to Note 12 Fair Value Measurements for explanation of financial instrument classifications. 48

53 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Pension plan investments as of June 30, 2012 were as follows: Pension Plan Investments as of June 30, 2012 Level 1 Level 2 Level 3 Total Pension Plan Investments Money Market Instrument (1) $ 821 $ 13,151 $ -- $ 13,972 Commingled Funds (3) Emerging market equity -- 37, ,839 US Common Stock -- 22, ,785 Common Stock (3) 103, ,138 Fixed Income (2) Asset backed -- 3, ,783 Corporate Bonds 17 1, ,387 Government Bond 45, ,128 Hedge Funds (4) Distressed Debt -- 2, ,298 Equity Long/short -- 4, ,488 Event driven -- 1,861 2,629 4,490 Inflation hedge -- 13, ,741 Multi-Global opportunities -- 3, ,389 Multi-strategy -- 23,030 1,988 25,018 Mutual Funds Investment Domestic common stock (3) 13, ,508 Emerging market equity (3) 10, ,198 Domestic Fixed Income (2) 53, ,307 Private Equity and Venture Capital (4) ,070 93,070 Real Estate (4) ,000 9,000 Total pension plan investments $ 226,117 $ 127,735 $ 106,687 $ 460,539 Assets not subject to fair value reporting 1, ,593 Liabilities not subject to fair value (1,177) (1,177) Total plan assets $ 226,533 $ 127,735 $ 106,687 $ 460,955 49

54 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Pension plan investments as of June 30, 2011 were as follows: Pension Plan Investments as of June 30, 2011 Level 1 Level 2 Level 3 Total Pension Plan Investments Money Market Instrument (1) $ 401 $ 11,919 $ -- $ 12,320 Commingled Funds International Equity (3) -- 42, ,782 US Common Stock (3) -- 21, ,965 Common Stock (3) 102, ,604 Fixed Income (2) Asset backed -- 8, ,639 Corporate Bonds -- 4, ,999 Government Bond 4, ,432 Hedge Funds (4) Distressed Debt -- 2, ,494 Equity Long/short -- 4, ,146 Event driven -- 2,276 2,622 4,898 Inflation hedge -- 15, ,671 Multi-Global opportunities -- 3, ,432 Multi-strategy -- 45,240 1,919 47,159 Mutual Funds Investment Domestic common stock (3) 17, ,192 Domestic Fixed Income (2) 75, ,773 Private Equity and Venture Capital (4) ,327 85,327 Real Estate (4) ,640 8,640 Total pension plan investments $ 200,402 $ 163,563 $ 98,508 $ 462,473 Assets not subject to fair value reporting 1, ,386 Liabilities not subject to fair value (426) (426) Total plan assets $ 201,362 $ 163,563 $ 98,508 $ 463,433 The following table presents changes in amounts for financial instruments classified within Level 3 of the valuation hierarchy previously defined, at June 30, Changes in Level 3 for the period ended June 30, 2013 Equity Private and Venture Capital Hedge Funds Real Estate Total Balance July 1, 2012 $ 93,070 $ 4,617 $ 9,000 $ 106,687 Gain and Loss (Realized and Unrealized) 13, ,190 Purchases 8, ,858 Transfer out and sales (22,231) -- (1,093) (23,324) Balance at June 30, 2013 $ 93,450 $ 5,218 $ 8,743 $ 107,411 Change in unrealized investments held $ 5,003 $ 601 $ 934 $ 6,538 50

55 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) The following table presents changes in amounts for financial instruments classified within Level 3 of the valuation hierarchy previously defined, at June 30, Changes in Level 3 for the year ended June 30, 2012 Equity Private and Venture Capital Hedge Funds Real Estate Total Balance July 1, 2011 $ 85,327 $ 4,541 $ 8,640 $ 98,508 Gain and Loss (Realized and Unrealized) 5, ,960 Purchases 14, ,182 Transfer out and sales (11,486) -- (477) (11,963) Balance at June 30, 2012 $ 93,070 $ 4,617 $ 9,000 $ 106,687 Change in unrealized investments held $ 424 $ 76 $ 573 $ 1,073 The following table presents changes in amounts for financial instruments classified within Level 3 of the valuation hierarchy previously defined, at June 30, Changes in Level 3 for Fiscal Year Ended June 30, 2011 Equity Private and Venture Capital Hedge Funds Fixed Income Common Stock Real Estate Total Balance July 1, 2010 $ 68,392 $ 3,897 $ 232 $ 310 $ 7,373 $ 80,204 Gain and Loss (Realized and Unrealized) 15, (41) -- 1,113 17,666 Purchases 17, ,707 Transfer out and sales (16,290) -- (191) (310) (278) (17,069) Balance at June 30, 2011 $ 85,327 $ 4,541 $ -- $ -- $ 8,640 $ 98,508 51

56 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Pension Plan Investment Commitments Howard s investment commitments as of June 30, 2013, 2012 and 2011 are summarized below. Additionally, some of these investments do not have readily ascertainable market values and may be subject to withdrawal restrictions and are less liquid than Howard s other investments. Pension Plan Investment Commitments June 30, 2013 June 30, 2012 June 30, 2011 Private Equity Funds $ 139,203 $ 136,703 $ 136,703 Real Estate Funds 15,000 15,000 15,000 Total financial commitment 154, , ,703 Amounts funded 133, , ,833 Unfunded commitment $ 20,791 $ 27,149 $ 41,870 The asset allocation of the Plan is analyzed annually to determine the need for rebalancing to maintain an allocation that is within the allowable ranges. The investment strategy is to invest in asset classes that are negatively correlated to minimize overall risk in the portfolio. Interim targets outside of the allowable ranges were set to allow for flexibility in reaching the long-term targets in the private equity and real estate categories. The actual allocation of the plan for the period ended June 30, and the allowable range is as follows: Pension Plan Asset Allocation June 30, 2013 June 30, 2012 June 30, 2011 Allowable Range Mid-Large Cap U.S. Equity 13.6% 18.0% 16.6% 10-20% Small Cap U.S. Equity 4.8% 4.5% 4.8% 0-10% International Equity - Developed 15.5% 13.1% 15.8% 10-20% Private Equity/Venture Capital 19.1% 20.0% 16.3% 5-15% Hedge Funds 9.0% 8.7% 13.8% 5-15% Inflation Hedging 8.6% 7.9% 9.3% 10-15% Emerging Markets Equity 4.5% 2.2% 0.0% 5-15% U.S. Core Bonds 23.7% 22.6% 20.8% 25-35% Cash and Cash Equivalents 1.2% 3.0% 2.6% 0-5% Total 100% 100% 100% The trend rate for growth in health care costs, excluding dental, used in the calculation for fiscal year 2013 is 8.14%. This growth rate was assumed to decrease gradually to 4.5% in 2030 and to remain at this level thereafter. The growth rate in the trend rate dental care costs used in the calculations for fiscal year 2013 is 5.7%. The growth rate was assumed to decrease gradually to 4.5% by 2030 and to remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the obligations reported for the health care plans. 52

57 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) A one-percentage change in assumed annual health care cost trend rate would change the service and interest components of retiree medical expense by approximately $100 - $200, and the post retirement obligation by approximately $1,000 - $2,000 in each year presented. The following benefit payments, which reflect expected future service as appropriate, are expected to be paid over the next ten years as follows: Expected Future Benefit Payments Pension Benefits Excluding Subsidy Post-retirement Benefits Subsidy Payments Net of Subsidy Year ending June 30: 2014 $ 39,579 $ 4,980 $ (95) $ 4, ,726 4,981 (97) 4, ,591 4,917 (98) 4, ,446 4,878 (98) 4, ,155 4,800 (97) 4,703 Years ,765 22,374 (456) 21,918 Total $ 414,262 $ 46,930 $ (941) $ 45,989 Note 20 (a) (b) (c) Commitments and Contingencies Federal Awards Howard receives substantial revenues from government grants, contracts, and Federal student financial assistance programs authorized by Title IV and Title VII of the Higher Education Act of Previous compliance audits have reported certain deficiencies in the administration of both the University s Title IV and Title VII programs and its federal grants and contracts. The ultimate determination of amounts received under these programs generally is based upon allowable costs reported to and audited by the government or its designees. Litigation and Other Claims During the ordinary course of business, Howard is a party to various litigation and other claims in the ordinary course of business including claims of malpractice by the Hospital and faculty physicians. It is also subject to potential future claims based on findings or accusations arising from past practices under governmental programs and regulations and tort law. In the opinion of management and Howard s general counsel, an appropriate monetary provision has been made to account for probable losses upon ultimate resolution of these matters. Collective Bargaining Agreements Howard has several collective bargaining agreements currently in effect with unions representing approximately 1,800 employees. Certain of these agreements are in negotiations and have been extended beyond the stated expiration date. 53

58 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 21 Related Party Transactions (a) Howard University Charter Middle School Howard University Board of Trustees founded Howard University Charter Middle School of Mathematics and Science, which operates from premises owned by Howard. For fiscal years ended June 30, 2013, 2012 and 2011, Howard has contributed to the Middle School as follows: Related Party Transactions June 30, 2013 June 30, 2012 June 30, 2011 Cash operating support $ 764 $ 500 $ 769 Donated computer equipment Facility leased (market value) 1,009 1,009 1,009 Total $ 2,009 $ 1,713 $ 2,009 (b) The Howard Dialysis Center Howard and American Renal Associates, LLC (ARA) entered into a joint venture to form and operate Howard University Dialysis Center LLC (LLC). The member interests of the LLC are 51% for ARA and 49% for Howard. In conjunction with the creation of the joint venture, the LLC was capitalized with $4,590 from ARA and the LLC purchased from Howard: 1) the assets and contracts associated with the Hospital outpatient dialysis services which had a book value of $40, 2) entered into an agreement for Howard not to compete, 3) obtained a guarantee from Howard to jointly back the LLC s debt arrangements. In May 2012, the LLC entered into a term loan to finance construction for $1,699 and a working capital revolving loan for $300 with ARA. The value of the initial investment in the LLC at the date of the transaction is reflected at the fair value of the LLC at the creation of the joint venture. A gain of $9,056 has been recognized on this transaction reflecting cash received of $4,590 and a 49% equity interest in the LLC of $4,466. Howard will account for its interest in the LLC using the equity method which requires Howard to record a proportional share of the LLC s net income (loss) as increase (decrease) to the initial investment received (after adjusting for the LLC s fair value accounting). On March 1, 2012, the LLC commenced a lease with Howard for the current space, employees, and Medical Director associated with its Hospital outpatient dialysis services which will result in monthly rental income for Howard in addition to its proportionate share of earnings (losses) of the LLC. 54

59 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) As of June 30, 2013 and 2012 the Statement of Financial Position for the LLC is as follows: Howard Dialysis Center, LLC Statement of Financial Position As of June 30, 2013 and 2012 June 30, 2013 June 30, 2012 Total Assets $ 11,919 $ 11,119 Total Liabilities 2,123 2,066 Equity Partner 9,322 9,000 Retained earning Total Equity 9,796 9,053 ARA interest $ 4,996 $ 4,617 Howard interest $ 4,800 $ 4,436 (c) Residence Halls The University entered into a 40-year ground lease with Provident Group Howard Properties, LLC and Provident Resources Group, Inc ( Owner, Borrower ) in which the Owner will design, construct, and furnish two Student Dormitory Facilities ("Dorms") for the benefit of the University. The Owner issued $113.9m in revenue bonds through the District of Columbia to finance the construction of the dorms. The University and Owner entered into a management agreement such that the University will be responsible for managing, operating, and maintaining the dorms in conjunction with general business. In general, revenues and expenses associated with the dorm are the responsible of the Owner. The bonds will be repaid solely from revenues from the Dorms. A management fee and ground lease payment will be paid only upon settlement of various expenses and minimum cash requirements are made. Reimbursement of utilities expense will be subordinate to debt service. Ownership of the Dorms will revert to Howard upon termination of the Ground Lease and full repayment of the debt. Given the structure and level of involvement of the University in the construction and finance of the Dorms, the University is not required to record any of the activities during the construction period. The Dorms are scheduled to be completed and placed in service in August

60 Notes to the Financial Statements For Fiscal Years Ended June 30, 2013, 2012 and 2011 (amounts in thousands) Note 22 Subsequent Events Moody s Investors Service has downgraded Howard s Series 2011A and 2011B bonds to Baa1 from A3, concluding the review initiated July 8, The downgrade is largely driven by pressure on all of the University s major revenue sources. Howard has put into motion a strategy to boost operational efficiency and make long-term structural changes to Howard and the Hospital. Howard performed an evaluation of subsequent events through November 25, 2013, which is the date the financial statements were issued, noting no additional events which affect the financial statements as of June 30,

61 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

62 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures ANNUAL APPROPRIATION DEPARTMENT OF EDUCATION Annual Appropriation A $ 233,691,268 TOTAL ANNUAL APPROPRIATION 233,691,268 FEDERAL ENDOWMENTS DEPARTMENT OF JUSTICE Constitutional Law Chair Endowment ,840,689 SUBTOTAL FOR THE DEPARTMENT OF JUSTICE 4,840,689 DEPARTMENT OF HEALTH AND HUMAN SERVICES Excellence in Health Professional Education Endowment ,490,905 SUBTOTAL FOR THE DEPARTMENT OF HEALTH AND HUMAN SERVICES 4,490,905 DEPARTMENT OF EDUCATION Matching Endowment ,187,990 Law School Clinical Endowment D 9,463,646 SUBTOTAL FOR THE DEPARTMENT OF EDUCATION 129,651,636 TOTAL FEDERAL ENDOWMENTS 138,983,230 STUDENT FINANCIAL AID CLUSTER DEPARTMENT OF EDUCATION Federal Supplemental Educational Opportunity Grants ,154 Federal Work Study ,369 Federal Perkins Loan (FPL) Federal Capital Contribution ,059 Federal Pell Grant Program ,376,996 Federal Direct Loans ,870,813 Teacher Education Assistance for College and Higher Education Grants (TEACH) ,000 SUBTOTAL FOR THE DEPARTMENT OF EDUCATION 185,787,391 DEPARTMENT OF HEALTH AND HUMAN SERVICES Scholarship for Disadvantaged Students ,592,959 SUBTOTAL FOR THE DEPARTMENT OF HEALTH AND HUMAN SERVICES 2,592,959 TOTAL FOR THE STUDENT FINANCIAL AID CLUSTER 188,380,350 TRIO CLUSTER DEPARTMENT OF EDUCATION TRIO - Student Support Service ,831 McNair Post - Baccalaureate Achievement ,234 Office of Postsecondary Education Upward Bound Program A 509,850 Upward Bound Program ,804 Upward Bound Program Math and Science ,414 Subtotal for the Office of Postsecondary Education 903,068 TOTAL FOR THE TRIO CLUSTER $ 1,339,133 57

63 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures RESEARCH AND DEVELOPMENT CLUSTER Direct Research and Development Awards DEPARTMENT OF AGRICULTURE NIMH Outreach Partnership Program $ 4,500 SUBTOTAL FOR THE DEPARTMENT OF AGRICULTURE 4,500 DEPARTMENT OF COMMERCE Polymer Hydrogel Structure of Nnanorod Encapsulation Using Small Angeneutron ,930 Nanometrology Green Electronics for Research and Education ,086 55,016 National Oceanic and Atmospheric Administration NOAA Center for Atmospheric Sciences at Howard University ,297,307 NOAA Center for Atmospheric Sciences at Howard University ,557 Subtotal for the National Oceanic and Atmospheric Administration 2,372,864 SUBTOTAL FOR THE DEPARTMENT OF COMMERCE 2,427,880 DEPARTMENT OF DEFENSE Experimental and Computation Determination of the Ion Density in a Flame ,480 Infrared Analysis in Counterfeit ,402 Feasibility Study to Evaluate Candidate Materials of Nano Filled Block Co-Polymers for use in Ultra High Density Pulsed Power Capacitors ,372 Ag-Si Nano composite Films for Infrared and Photovotaic Applications ,428 US Army Medical Command A Partnership Training Program: Studying Targeted Drug Delivery Using Nanoparticles in Breast Cancer Diagnosis and Therapy ,096 Breast Cancer Protein Markers in African Americans ,379 Global Epigenetic Changes May Underlie Ethnic Differences and Susceptibility to Prostate Cancer ,045 Analysis of Serine Protease Inhibitor Kazal Type 1 (SPINK1) in Prostate Cancer in African American Men ,552 Acquisition of Biaxial (Torsion -Tension) Testing System to Advance Research, Education and Training at Howard University ,000 Subtotal for the US Army Medical Command 475,072 US Army Materiel Command Extracting Social Meaning From Linguistic Structures in African Languages ,587 Microstructure-Sensitive Fatigue Design of Notched Components ,224 Probing of Fast Chemical Dynamics at High Pressures and Temperature Using Pulsed Laser Techniques ,261 Bayesian Imaging and Advanced Signal Processing for Landmine and IED Detection ,291 Dynamic Failure of Aluminum-Based and Polymer Matrix Composites at High Strain Rates ,933 Ultrafine Nanostructed Composites for Energy Applications ,665 Analysis of Risk Information Derived from Geospatial Data ,518 Subtotal for the US Army Materiel Command 1,481,479 SUBTOTAL FOR THE DEPARTMENT OF DEFENSE 2,596,233 DEPARTMENT OF THE INTERIOR Archaeological Filed School to Document African American Settlement Period at NICO ,685 SUBTOTAL FOR THE DEPARTMENT OF THE INTERIOR 8,685 DEPARTMENT OF TRANSPORTATION Identity Management for Interoperable PTC Systems in Bandwidth-Limited Environments ,920 SUBTOTAL FOR THE DEPARTMENT OF TRANSPORTATION 251,920 NATIONAL AERONAUTICS AND SPACE ADMINISTRATION Howard University Beltsville Center for Climate System Observation 43.AAA 987,373 A Multi-Year Direct Detection Dopplar Lidar Tropospheric Wind Measurement Program to Assess Instrument Performance in a Wide Variety of Atmospheric Conditions ,010 Science NFR/Research Opportunities in Space and Earth Sciences (ROSES 2007) ,309 Lidar Support, Analysis and Collaboration Studies Using Raman Lidar ,146 Subtotal for the Science 57,455 SUBTOTAL FOR THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION $ 1,073,838 58

64 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures NATIONAL ENDOWMENT FOR THE HUMANITIES NEH Challenge Grants $ 17,658 From Classical Civilization to Ancient Mediterranean Studies ,414 SUBTOTAL FOR THE NATIONAL ENDOWMENT FOR THE HUMANITIES 28,072 NATIONAL SCIENCE FOUNDATION URM: Howard University Environment Biology Scholars ,644 SEP Alignment of Small Molecules for collision Dynamics Studies seeding a new Collaboration between Howard University (US) and Heriot Watt University (UK) ,262 Howard University - Karolinska ,782 Engineering Grants Efficient Operation and Control of Power System Networks with Increased DG Penetration ,946 Workshop: Sustainable Energy ,085 EPNES: Designing an Effective & Secure Power System Using Interdisciplinary Research/Educational Approach ,437 NIRT: Metal Ion Complaxation by Dendritic Nanoscale Ligands: Fundamental Investigation and Application to Water Purification ,036 CAREER: Passive Seismic Protective Systems for Nonstructural System and Components in Multistory Building ,116 Collaborative Research: PSERC: Collaborative Proposal for Phase III Industry University Cooperative Research Center Program ,753 MRI: Acquisition of Biaxial Test System to Advance Research, Education, and Training at Howard University ,500 Partnership for Reduced Dimensional Materials ,663 A Pre-College for Engineering Systems (PCES) Outreach Program ,331 Subtotal for the Engineering Grants 1,143,867 Mathematical and Physical Sciences Ramsey Theory: Central Sets and Related Combinatorially Rich Sets ,215 Collaborative Research Carbon Nanohorns: Adsorption Kinetic and Equilibrium Experiments and Simulations , Dr. David Blackwell Memorial Conference ,962 Subtotal for the Mathematical and Physical Sciences 157,195 Geosciences Collaborative Research: Understanding Continental/Oceanic Transition of Meoscale Convective Systems and Tropical Cyclogenesis during the African Multidisciplinary Analysis ,382 Local, National, and International Research Field Experiences in the Atmospheric Sciences for Underrepresented Groups ,037 Understanding Northern Hemisphere (NH) Summer Season Tropospheric Ozone Variability Across the Northern Tropical Atlantic Through Focused Upstream/Downstream Campaigns ,396 Fossil Sirenians from Mexico and Puerto Rico ,467 Collaborative Proposal: Track 1 Increasing Diversity in the Geosciences through Experimental Learning ,560 EAGER: Evolutionary History and Paleoecology of the Last Old World Hipparion Superlineage ,260 Subtotal for the Geosciences 151,102 Computer and Information Science and Engineering Career: A Complete System for Protein Identification With Computational Approaches ,130 CS 10K: The Partnership for Early Engagement in Computer Sciences High School Program ,077 XPLR: Scheduling and Routing in Pigeon Networks ,635 Subtotal for the Computer and Information Science and Engineering $ 174,842 59

65 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures Education and Human Resources Crest Nonoscale Analytical Sciences Research and Education Center $ 797,384 LSAMP - Washington Baltimore Hampton Roads Alliance ,863 Education Research Grant: Examining Post - Baccalaureate Decisions on Stem Students ,068 Collaborative Research: Expanding and Sustaining Research Capacity in Engineering and Technology Education ,750 Increasing the Participation and Advancement of Women in Academic Science and Engineering Careers ,168 Global Education Awareness and Research Undergraduate Program ,669 Education Research Grant - Understanding the Persistence of African American Male Engineering Students at HBCUs ,084 Collaborative Proposal: Pathways of Blacks and Hispanics in Engineering Education ,332 What Works in Producing African - American Science & Math Teachers at Black Colleges and Universities ,022 Plant Science as Stem Education at HBCU ,516 Graduating Engineers in the US: Genius Scholarship Program ,700 Graduate Research Fellowship ,823 Baltimore Washington Alliance AGEP Planning Grant ,109 Planning Grant for the Howard University Institute of Psychological Science Excellence in STEM Workforce Development and Education of Women and Girls ,910 Enhancement of the Undergraduate Physics Program in the Department of Physics and Astronomy at Howard University ,879 Broadening Stem Participation of African American Males ,244 Building Connections and Learning Communities among Educators and Researchers at HBCUs ,702 Mentoring by Example ,109 ACE Implementation Grant: STEM Global Undergraduate Research Initiative ,768 Subtotal for the Education and Human Resources 3,657,100 SUBTOTAL FOR THE NATIONAL SCIENCE FOUNDATION 5,476,794 NUCLEAR REGULATORY COMMISSION Development of a New Course on Nuclear Power with Emphasis on Safety Critical Application in Digital Instrumentation and Control ,815 HU Critical Mass Project: Increasing the Number of African Americans Receiving Doctoral Degrees In Nuclear Physics ,500 SUBTOTAL FOR THE NUCLEAR REGULATORY COMMISSION 69,315 DEPARTMENT OF ENERGY Utilization of Renewable Energy to Meet New National Challenges in Energy and Climate Change ,556 SUBTOTAL FOR THE DEPARTMENT OF ENERGY 19,556 DEPARTMENT OF HEALTH AND HUMAN SERVICES Howard University Medical Reserve Corps ,000 Surface Initiated Polymerization ,942 High Strength Bioresorbable Polyactide/Calcium Phosphate Composites ,221 National Institutes of Health Mental Health Research Grants Using Olfactory Epithelial Tissue to Define Molecular Mediators of Lithium Action ,137 Behavioral and Psychological Determinants of Behavior ,753 Sleep and Processing Traumatic Memory ,783 Subtotal for the Mental Health Research Grants 756,673 Alcohol Research Programs Efficacy of Novel Triple Uptake Inhibitors in Treating Alcoholism and Depression ,327 Mechanism of Alcohol Induced Cardiomyopathy ,933 Developing Capacity for Biomedical Signal Processing and Integration of Cognitive and Behavioral Function Data in a Candidate Gene Study of Neurobehavioral Response to Alcohol Challenge at HU ,124 Subtotal for the Alcohol Research Programs $ 307,384 60

66 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures Drug Abuse and Addiction Research Programs The Role of Orexin in the Co-Occurrence of Binge Eating and Drug Addiction $ 118,442 Violence, Drug Use & AIDS in South African Youth: A U.S./South Africa Research Collaboration ,344 Subtotal for the Drug Abuse and Addiction Research Programs 226,786 Minority Health and Health Disparities Research Loan Repayment for Health Disparities Research ,366 Violence Exposure, Immune Function and HIV Aids Risks in African American Young Adults ,561 Sleep Adaptation and Urban Stress ,469 Scientific Conference R ,561 Subtotal for the Minority Health and Health Disparities Research 981,957 Trans-NIH Research Support Research Training in the Prevention of Drug Abuse and AIDS in Communities of Color ,626 Research Training in the Prevention of Drug Abuse and AIDS in Communities of Color ,414 Research Training in the Prevention of Drug Abuse and AIDS in Communities of Color ,245 Subtotal for the Trans-NIH Research Support 225,285 National Center for Research Resources Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,927 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,488 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,712 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,261 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,927 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,165 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,050 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,017 Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI ,820 Subtotal for the National Center for Research Resources 1,874,367 National Cancer Institute Howard University Cancer Center - Johns Hopkins Cancer Center Partnership ,779 Use of Allogenicity to Stimulate Effector Responses Against Multiple Myeloma ,914 Subtotal for the National Cancer Institute 74,693 Trans-NIH Recovery Act Research Support ARRA - Effects of Standardized Aerobic Exercise - Training on Neurocognitive and Neurodege ,741 Subtotal for the Trans-NIH Recovery Act Research Support 200,741 Cardiovascular Diseases Research Nocurnal Blood Pressure and Post Traumatic Stress Disorder ,031 NHLBI Research Center at Howard University ,898 Howard University Research Scientist Award ,555 The Role of PPAR - Alpha During Angiotensin II Hypertension ,084 Subtotal for the Cardiovascular Diseases Research 243,568 Extramural Research Programs in the Neurosciences and Neurological Disorders RCMIA Role for Glycosphingolipids in Regulatory Mechanisms ,305 Subtotal for the Extramural Research Programs in the Neurosciences and Neurological Disorders 38,305 Biomedical Research and Research Training Molecular Analyses of RECQ1 Functions in Genome Maintenance ,392 The Howard University Score Program ,875 The Howard University Score Program ,054 Regulation of HIV-1 Transcription by CDK ,135 The Howard University Score Program ,517 The Howard University Score Program ,448 The Howard University Score Program ,361 Molecular Analyses of RECQ1 Functions in Genome Maintenance ,302 Biodegradable Polymeric Nonoshpere Drug Delivery System for Cancer Chemotherapy ,670 Mass Spectrometry of Proteome, Phosphoproteome and Phosphatase-targeted drug design ,212 Subtotal for the Biomedical Research and Research Training 1,059,966 Subtotal for National Institutes of Health $ 5,989,725 61

67 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures Health Resources and Services Administration Special Projects of National Significance Health Information Technology Capacity Building Imitative for Ryan White HIV/AIDS Program Providers $ 19,360 Subtotal for the Special Projects of National Significance 19,360 SUBTOTAL FOR THE DEPARTMENT OF HEALTH AND HUMAN SERVICES 6,103,248 DEPARTMENT OF HOMELAND SECURITY The Graduating Engineers in the U.S. (GENIUS) Research Program: Infusing DHS Research into Undergraduate Education at Howard University ,439 SUBTOTAL FOR THE DEPARTMENT OF HOMELAND SECURITY 52,439 Subtotal for the Direct Research and Development Awards 18,112,480 Federal Pass-Through Research and Development Awards DEPARTMENT OF AGRICULTURE Labor and Macroeconomic Research AFL ,663 Community Voices for Health Expansion Project PO ,680 SUBTOTAL FOR THE DEPARTMENT OF AGRICULTURE 155,343 DEPARTMENT OF COMMERCE Implementation of the GCOS Reference Upper Air Network (University of Maryland at College Park) Z ,664 SUBTOTAL FOR THE DEPARTMENT OF COMMERCE 18,664 DEPARTMENT OF DEFENSE An Investigation of the Structure-Property Relationship (Massachusetts Institute of Technology) W911NF-07-D ,390 Reduced -Order Spectral Technologies for Three Dimensional Navier-stokes Transport Phenomena with Applications to Turbo machines 10-S C ,489 Joint High Speed Vessel Mission Bay Flow Field Characterization (The Pennsylvania State University) N D ,175 Emerging Technologies Intelligence Community Center for Academic Excellence ( ICCAE)- Virginia Polytechnic Institute and State University ,185 Emerging Technologies Intelligence (Virginia Polytechnic Institute and State University) ,498 Tunable Nanoscale Thermal And Electrical Transport Via Surface Polaritons 13-S C ,134 SUBTOTAL FOR THE DEPARTMENT OF DEFENSE 182,871 NATIONAL AERONAUTICS AND SPACE ADMINISTRATION Microphysical Observation in Support of the Genesis and Rapid Intensification Processes (University Corporation for Atmospheric Research) NNX09AW04G ,068 SUBTOTAL FOR THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION $ 25,068 62

68 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures NATIONAL SCIENCE FOUNDATION Computational Sustainability (Cornell University) $ 5,012 Materials Research Science and Engineering Center on Polymer (University of Massachusetts) D ,759 Interactive Transfer Learning in Dynamic Environments ( Carnegie Mellon University) ,034 Partnership for International Research and Education in Cognitive, Computational and Systems Neuroscience (Georgetown University) RX HU ,864 Women's International Research Collaborations (WIRS) for Minority Serving Institutions (MSIs) NSF ,623 Engineering Grants NNIN National Nanotechnology Infrastructure Network (Cornell University) ,951 NEESR-CR: Full-Scale Structural and Nonstructural Building System Performance (University of California San Diego) ,686 NSF Engineering Research Center for Smart Lighting (Rensselaer Polytechnic Institute) EEC ,350 Mini Wave Flume - Operation and Maintenance at Howard University (Purdue University) CMMI ,464 Subtotal for the Engineering Grants 789,451 Computer and Information Science and Engineering Emerging Frontiers of the Science of Information (Purdue University) CCF ,055 Subtotal for the Computer and Information Science and Engineering 55,055 Biological Sciences Center for the Environmental Implications of Nanotechnology (Duke University) 09-NSF ,936 Center for the Environmental Implications of Nanotechnology (Duke University) EF ,556 Subtotal for the Biological Sciences 215,492 Social, Behavioral, and Economic Sciences The National Professional and Research Ethics Portal (University of Illinois) ,572 Collaborative Research: Stereotype Validation and Intellectual Performance BCS ,709 Subtotal for the Social, Behavioral, and Economic Sciences 57,281 Education and Human Resources IGERT: Educating and the Interface: Nanomaterial Environmental Impacts and Policy (Carnegie Mellon University) DGE ,564 IGERT: Water, Climate and Health ( Johns Hopkins University - Bloomberg School of Public Health) ,491 Dynamics of Behavior Shifts in Human Evolution (George Washington University) DGE ,181 Subtotal for the Education and Human Resources 132,236 SUBTOTAL FOR THE NATIONAL SCIENCE FOUNDATION 1,503,807 ENVIRONMENTAL PROTECTION AGENCY Nannie Helen Burroughs Green Highways Water (District of Columbia - District Department of Transportation) PO ,047 SUBTOTAL FOR THE ENVIRONMENTAL PROTECTION AGENCY. 52,047 DEPARTMENT OF ENERGY Consortium Risk Evaluation with Stakeholder Participation III (Vanderbilt University) S ,529 In-Situ Neutrib Scattering Determination of #D Phase-Morphology Correlations in Fullerene- Block Copolymer Systems (University of Akron) DE-SC ,244 ARRA - A Nation-Wide Consortium of Universities to Revitalize Electric Power Engineering Education by State-of-the-Art Laboratories (University of Minnesota) DE-OE ,228 SUBTOTAL FOR THE DEPARTMENT OF ENERGY 84,001 DEPARTMENT OF EDUCATION Mathematics and Science Partnership 22366B ,006 Mathematics and Science Partnership 32366B B 70,794 DC Area Writing Project- Leadership Development 95-DC01-SEED D 6,329 Pinehurst Elementary School PO # ,981 SUBTOTAL FOR THE DEPARTMENT OF EDUCATION $ 242,110 63

69 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures DEPARTMENT OF HEALTH AND HUMAN SERVICES TLC - PLUS: A Study to Evaluate the Feasibility of an Enhanced Test link to Care Plus Treatment for IV Prevention in the US Hospital and Care Site (Family Health International) FCO / $ 180,596 Evaluation of Technologies to Control Odor and Corrosion in DCWASA's Sewer System (District of Columbia Water and Sewer Authority) ,008 Risk Evaluation and Education for Alzheimer's Disease (REVEAL IV) (Boston University) 2R01HG ,538 Adaptation of Effective Depression Screening Tools for HIV Positive and Low-Income African American Urban DC Residents 12XS ,253 DC City-Wide Patient Navigator Network (George Washington University) 11-M108R ,738 Protection of Developing White Matter During Cardiac Surgery ,804 New Approaches for Empowering Studies of Asthma in Populations of African Descent (Johns Hopkins University) ,262 African American Rheumatoid Arthritis Network (AARAN) (University of Alabama at Birmingham) UAB-HU School Base Health Center - HUH Colts Wellness Center at Coolidge HS (District of Columbia Department of Health) TCTH3/ ,545 Treatment of Preserved Cardiac Heart Failure With an Aldosteron Antagonist (TOPCAT) (New England Research Institutes) ,583 National Institutes of Health Alcohol Research Programs Reducing Alcohol-Related HIV Risks in African American Females (Emory University) 5RO1AA ,764 Subtotal for the Alcohol Research Programs 10,764 National Center for Advencing Translational Sciences Center for Clinical and Translational Sciences - (Georgetown University) 8UL1tr ,879 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-BI ,116 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-EVAL ,158 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-RETCD ,729 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-REKS ,671 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-DBPS ,048 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-KL ,270 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-TTR ,762 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-PCIR ,926 Center for Clinical and Translational Sciences - (Georgetown University) 1UL1RR ,186 Center for Clinical and Translational Sciences - (Georgetown University) ADVANCE-CER ,101 Center for Clinical and Translational Sciences - (Georgetown University) 1UL1RR ,707 Center for Clinical and Translational Sciences - (Georgetown University) 1UL1RR ,032,674 Subtotal for the National Center for Advencing Translational Sciences 1,495,227 Allergy, Immunology and Transplantation Research The Effect of Pediatric SIV Infection on the Integrity of the Hippocampus - District of Colombia Development Center for AIDS Research DC D-CFAR ,061 A City -Wide Cohort of HIV-Infected Person in Care in the District of Colombia (George Washington University) 13-M23R A City-Wide Cohort of HIV Infected Persons in Care in the District of Colombia (George Washington University) 12-M32R ,972 A City-Wide Cohort of HIV Infected Persons in Care in the District of Colombia (George Washington University) 12-M31R ,324 The District of Columbia Developmental Center for AIDS Research (DCD-CFAR) (George Washington University) 11-M56R ,261 The District of Columbia Developmental Center for AIDS Research (DCD-CFAR) (George Washington University) 10-M ,950 Subtotal for the Allergy, Immunology and Transplantation Research 212,776 Drug Abuse and Addiction Research Programs Drug Policy, Incarceration, Community Re-entry and Race Disparities in HIV / AIDS ,075 HIV, Buprenorphine, and the Criminal Justice System (Yale University) A08167 (M11A11068) ,497 Subtotal for the Drug Abuse and Addiction Research Programs $ 276,572 64

70 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures National Center for Research Resources Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) RX HU-PCSP $ 25,422 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,625 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) ADV-RX HU-PC ,646 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,286 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,066 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,868 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,294 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,969 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,945 Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) 1UL1RR ,587 Clinical and Translational Science Institute at Children's National (Children's Research Institute) ,527 Subtotal for the National Center for Research Resources 815,235 Trans-NIH Recovery Act Research Support ARRA- Treatment of Sickle Cell Circes with Inhibitor of NKT Cell Activation (Dana- Farber Cancer Institute, Inc.) Subtotal for the Trans-NIH Recovery Act Research Support 350 Aging Research Alzheimer's Disease Neuroimaging Initiative - Execution Phase (University of California, San Diego) ADNI ,375 Phase II Study to Evaluate the Impact on Biomarkers of Resveratrol Treatment in Patients with mild to moderate Alzheimer's Disease (University of California, San Diego) ADC ,764 Subtotal for the Aging Research 66,139 Blood Diseases and Resources Research Respect, Trust, and Patient out comes in Sickle Cell Diseases (John Hopkins University) ,630 Respect, Trust, and Patient out comes in Sickle Cell Diseases (John Hopkins University) ,595 Subtotal for the Blood Diseases and Resources Research 99,225 National Institute on Minority Health and Health Disparities Center of Excellence for Health Disparities in the Nation's Capital (Georgetown University) HU ,852 Subtotal for the National Institute on Minority Health and Health Disparities 11,852 National Institute of Neurological Disorders & Strokes Stroke Disparities Program - Protect DC RX HU-TROUTH 93.UNKNOWN 14,696 Subtotal for the National Institute of Neurological Disorders & Strokes 14,696 Center for AIDS Research Synthesis of Novel Betulinic Acid Analogs as Entry and Maturation Inhibitors of HIV IXXS90297N 93.UNKNOWN 2,033 Subtotal for Center for AIDS Research 2,033 Subtotal for the National Institutes of Health 3,004,869 SUBTOTAL FOR THE DEPARTMENT OF HEALTH AND HUMAN SERVICES 3,756,644 DEPARTMENT OF HOMELAND SECURITY Center of Excellence for Command, Control and Interoperability ,286 An Examination of Resilience and Role Conflict Among First Responders in the Midst of Crisis (Johns Hopkins University) ,811 A Web-Based Application for Estimation of Personal Vulnerability in Disasters (University of Southern California) ,924 SUBTOTAL FOR THE DEPARTMENT OF HOMELAND SECURITY 53,021 Subtotal for the Federal Pass-Through Research and Development Awards 6,073,576 TOTAL FOR THE RESEARCH AND DEVELOPMENT CLUSTER $ 24,186,056 65

71 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures AGING CLUSTER DEPARTMENT OF HEALTH AND HUMAN SERVICES DC Office on Aging Senior Services Network Continuing Professional Development (District of Columbia Office of Aging) HOW $ 21,385 DC Office On Aging Staff Development & Training For Aging Network 2013 HOW ,511 Ward 6 Senior Wellness Center HU-1SW ,529 Ward 6 Senior Wellness Center HOW16W-W6-13 HU-ISW ,052 TOTAL FOR THE AGING CLUSTER 366,477 CHILD CARE AND DEVELOPMENT FUND DEPARTMENT OF HEALTH AND HUMAN SERVICES Pre-Kindergarten and Child Care Subsidy Program Enhancement and Expansion Services ECE-GD R ,681 Pre-Kindergarten and Child Care Subsidy Program Enhancement and Expansion Services ECE-GD R ,738 TOTAL FOR THE CHILD CARE AND DEVELOPMENT FUND CLUSTER 758,419 HIGHWAY PLANNING AND CONSTRUCTION CLUSTER DEPARTMENT OF TRANSPORTATION Research Support and Administration (District of Columbia Department of Transportation) DCKA-2011-R ,897 Document Management System - Phase 2 (District of Columbia Department of Transportation) DCKA-2011-R ,706 Quick Response Research Project (District of Colombia Department of Transportation) PO Task Order #11 D ,942 Evaluation Strength and Permeability of Previous Concert (District of Colombia Department of Transportation) PO Task Order # ,080 Research Website Share Point Update Intern Program (District of Colombia Department of Transportation) PO Task Order # ,386 National Summer Transportation Institute Program (District of Colombia Department of Transportation) PO Task Order # , peer Exchange Program and Development of Research Strategic Plan (District of Colombia Department of Transportation) PO Task Order # ,882 Nannie Helen Burroughs Green Highways Water Quality Monitoring Project ( District of Colombia Department of Transportation) ,363 Inventory and Evaluation of Transportation Library Records - Phase 2 (District of Columbia Department of Transportation) PO ,621 Development Review Project Management (District of Columbia Department of Transportation) PO Task/O#1-DC ,649 Development of DDOT Policy Toolbox - Phase 2 (District of Columbia Department of Transportation) DCKA-2011-R ,098 Howard University Traffic Data Center (District of Columbia Department of Transportation) PO , Internship Program (District of Columbia Department of Transportation) DCKA-2011-R ,579 Semester Research Intern Program- District of Columbia Department of Transportation PO ,266 Transpiration Research Support- District of Columbia Department of Transportation DCKA R , Summer Transportation Institute (District of Columbia Department of Transportation) PO ,994 Transportation Statistical Fact Book for DC (District of Columbia Department of Transportation) PO Task/O#10-D ,555 TOTAL FOR THE HIGHWAY PLANNING AND CONSTRUCTION CLUSTER $ 1,120,568 66

72 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures AIDS EDUCATION AWARDS Direct AIDS Education Awards DEPARTMENT OF HEALTH AND HUMAN SERVICES AETC National Multicultural Center $ 249,640 National AIDS Education and Training Centers ,881 AETC National Multicultural Center ,092 Subtotal for the Direct AIDS Education Awards 672,613 Federal Pass-Through AIDS Education Awards DEPARTMENT OF HEALTH AND HUMAN SERVICES Pennsylvania Midatlantic AIDS Education Training Center ( ) ,993 AIDS Education and Training Center ( ) Subtotal for the Federal Pass-Through AIDS Education Awards 290,155 TOTAL FOR THE AIDS EDUCATION AWARDS 962,768 HIV AND RYAN WHITE AWARDS Direct HIV and Ryan White Awards DEPARTMENT OF HEALTH AND HUMAN SERVICES HRSA RYAN White Part F Dental Reimbursement Program ,845 Health Resources and Services Administration HUH Center for Infectious Disease Management and Research (CIDMAR) ,100 Ryan White Part C Outpatient EIS Program ,963 Subtotal for the Health Resources and Services Administration 349,063 Subtotal for the Direct HIV and Ryan White Awards 547,908 Federal Pass-Through HIV and Ryan White Awards DEPARTMENT OF HEALTH AND HUMAN SERVICES Laboratory Science Programs: Planning, Implementation and Assessment (American Society for Clinical Pathology) ASCP ,538 Centers for Disease Control and Prevention Routine HIV Screening Program (District of Columbia Department of Health) 11U ,583 Subtotal for the Centers for Disease Control and Prevention 6,583 Health Resources and Services Administration Coordinated Services and Access to Research for Women, Infants, Children, and Youth Ryan White Title IV Part D: Grants for Coordinated HIV Services and Access to Research for Women, Infants, Children and Youths (CSWICY) (Children's National Medical Center) ADV ,984 Subtotal for the Coordinated Services and Access to Research for Women, Infants, Children, and Youth 140,984 HIV Emergency Relief Project Grants Ryan White Care and Modernization Act Part A: An HSE/UMC Collaborative HIV/AIDS Care and Treatment Program (District of Columbia Department of Health) 12V ,493 Ryan White Care and Modernization Act Part A: An HSE/UMC Collaborative HIV/AIDS Care and Treatment Program (District of Columbia Department of Health) 13W011A ,800 Subtotal for the HIV Care Formula Grants 800,293 HIV Care Formula Grants Ryan White Part B (District of Columbia Department of Health) 12V ,606 HIV Care Medical Service and /or HIV Support Services 13W409A ,546 Subtotal for the HIV Care Formula Grants 177,152 Subtotal for the Health Resources and Services Administration 1,118,429 Subtotal for the Federal Pass-Through HIV & Ryan White Awards 1,134,550 TOTAL FOR THE HIV AND RYAN WHITE AWARDS $ 1,682,458 67

73 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures OTHER FEDERAL AWARDS DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Community Uplift $ 49,541 Community Development ,255 Enriching Communities ,681 SUBTOTAL FOR THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 323,477 DEPARTMENT OF JUSTICE Men of Faith Preventing Violence Against Women ,503 Howard University Campus Safety First Program ,689 SUBTOTAL FOR THE DEPARTMENT OF JUSTICE 177,192 DEPARTMENT OF LABOR Computer Training for Providence Hospital (The Catholic University of America) Sub ,443 SUBTOTAL FOR THE DEPARTMENT OF LABOR 81,443 U.S. DEPARTMENT OF STATE Charles B. Rangel Foreign Affairs Fellowship and Summer Enrichment Program , Rangel Fellowship and Summer Enrichment Programs , Charles B. Rangel Fellowship ,860 Preparing Minorities for Careers in International Affairs 19.UNKNOWN 61,549 SUBTOTAL FOR THE U.S. DEPARTMENT OF STATE 1,561,742 DEPARTMENT OF TRANSPORTATION Design and Implementation of an ALS Protection and Power Quality Control Scheme with Improved Performance ,000 Tier 1 Transit-Focused University Transportation Center (San Jose State University) HU ,863 SUBTOTAL FOR THE DEPARTMENT OF TRANSPORTATON 174,863 SMALL BUSINESS ADMINISTRATION OSBDC Program Announcement for Calendar Year ,304 OSBDC Program Announcement for Calendar Year ,066 Small Business Development Centers Small Business Jobs Act of ,160 SUBTOTAL FOR THE SMALL BUSINESS ADMINISTRATION 631,530 DEPARTMENT OF ENERGY DOE Chair of Excellence Professorship in Environmental Discipline ,364 SUBTOTAL FOR THE DEPARTMENT OF ENERGY 107,364 DEPARTMENT OF EDUCATION Howard University Summer Research Institute (Educational Testing Services) ETS ,033 US - Brazil Higher Education Consortia Program ,744 Enhancing the Teaching and Learning of Science and Engineering in a Cyber Infrastructure P120A A 9,761 Graduate Assistance in Areas of National Need P200A A 34,916 District of Columbia Area Writing Project ,828 Building Knowledge and Capacity in the Rehabilitation and Recovery of African Americans Suffering from Severe Mental Illness (Dartmouth College) A 109,748 Office of Innovation and Improvement Ready to Teach U350c ,818 Subtotal for the Office of Innovation and Improvement 332,818 Office of Special Education and Rehabilitative Services Combined Priority for Personnel Development ,445 Subtotal for the Office of Special Education and Rehabilitative Services 302,445 SUBTOTAL FOR THE DEPARTMENT OF EDUCATION $ 875,293 68

74 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Program Description Pass-Through Award / Contract Number CFDA Number Expenditures DEPARTMENT OF HEALTH AND HUMAN SERVICES Sustained Comprehensive HIV/AIDS Response Through Partnerships (SCHARP) (Achieving Health Nigeria Initiative) 1U2GGH $ 195,138 Centers of Excellence 1 D34HP ,677 Pennsylvania / District of Columbia Nursing Education Collaborative (Drexel University) U1KHP ,495 ARRA - Training in Primary Care Medicine and Dentistry: Physician Assistant Training in Primary Care D5BHP ,165 Howard University Health Careers Opportunity Program 1 D18HP ,337 Baby Hug Follow-up Study II: Clinical Sites HHSN C ,641 Howard University Hospital Routine HIV Screening Program (District of Columbia Department of Health) 12V ,641 Centers for Disease Control and Prevention Global AIDS Program Supporting the Scale-up of High Quality HIV Care and Treatment Programs 5U2GPS ,084,358 Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief 5U2GPS ,398,886 Surveillance of HIV Positive Pre-arts persons by HU in partnership with SANAC 5U2GGH ,198 Surveillance of HIV Positive Pre-Arts Persons by HU in Partnership with SANAC 1U2GGH ,301 Supporting the Scale Up of High Quality HIV Care and Treatment Programs 1U2GPS ,856 Subtotal for the Global AIDS Program 4,519,599 Health Emergency Preparedness and Response Administration RQ UNKNOWN 25,035 Subtotal for the Centers for Disease Control and Prevention 4,544,634 Health Resources and Services Administration Maternal and Child Health Federal Consolidated Programs MCH Pipeline Training Program 5T16MC ,589 Subtotal for the Maternal and Child Health Federal Consolidated Programs 164,589 Grants for Training in Primary Care Medicine and Dentistry Post-Doctoral Training in Pediatrics D88HP ,599 Subtotal for the Grants for Training in Primary Care Medicine and Dentistry 993,599 Subtotal for the Health Resources and Services Administration 1,158,188 Substance Abuse and Mental Health Services Administration Substance Abuse and Mental Health Services Projects of Regional and National Significance Howard University (SBIRT) Screening, Brief Intervention, Referral and Treatment Medical Residency Program 5U79TI ,305 Howard University SBIRT Medical Residency Program 5U79T ,039 Howard University SBIRT Medical Residency Program 1U79TI ,597 Enhancing the Continuum of Suicide Prevention Services at Howard University 5U79SM ,578 Subtotal for the Substance Abuse and Mental Health Services Projects of Regional and National Significance 383,519 Drug-Free Communities Support Program Grants University - Communities Drug Free Coalitions 5H79SP ,514 University - Communities Drug Free Coalitions 5H79SP ,667 University - Communities Drug Free Coalitions 1H79SP ,269 Subtotal for the Drug-Free Communities Support Program Grants 117,450 Subtotal for Substance Abuse and Mental Health Services Administration 500,969 SUBTOTAL FOR THE DEPARTMENT OF HEALTH AND HUMAN SERVICES 7,994,885 AGENCY FOR INTERNATIONAL DEVELOPMENT USAID Foreign Assistance for Programs Overseas Strengthening Integrated Delivery of HIV AIDS Services (SIDHAS) - Nigeria (Family Health International) AID-620-A ,359,750 Road to a Healthy Future - Tanzania (Family Health International) 621-A ,239 Strengthening Pharmaceutical Care Services in Rwanda (Family Health International 360) Rwanda ,101 Road to a Healthy Future - Rwanda (Family Health International) 696-A ,664 Sudan HIV AIDS Project (SHAP) (Family Health International) GHH ,205 Strengthening Integrated Delivery of HIV / AIDS Services (SIDHAS) Nigeria ADV-SIDHAS-YR ,911 Road to a Healthy Future - Zambia (Family Health International) 611-A ,443 Road to a Healthy Future - Kenya (Family Health International) Kenya ,681 Roads II - DRC & Rwanda (Family Health International) 623-A ,050 Foreign Service Diversity Fellowship Program ,524 SUBTOTAL FOR THE AGENCY FOR INTERNATIONAL DEVELOPMENT $ 2,705,568 69

75 Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Pass-Through Award / CFDA Program Description Contract Number Number Expenditures CORPORATION FOR NATIONAL AND COMMUNITY SERVICE Jumpstart for Young Children at Howard University (AmeriCorps) $ 51,252 SUBTOTAL FOR THE CORPORATION FOR NATIONAL AND COMMUNITY SERVICE 51,252 TOTAL FOR THE ALL OTHER FEDERAL AWARDS 14,684,609 TOTAL EXPENDITURES OF FEDERAL AWARDS $ 606,155,336 See accompanying notes to the schedule of expenditures of federal awards. 70

76 Notes to Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) presents the expenditures of The Howard University ( Howard ) under programs of the federal government for the year ended June 30, Because the Schedule presents only a portion of the operations of Howard, it is not intended to and does not present the financial position, changes in net assets, and cash flows of Howard. For purposes of the Schedule, federal awards include all grants, contracts, and similar agreements entered into directly between Howard and agencies and departments of the federal government and all subawards made to Howard by nonfederal organizations pursuant to federal grants, contracts, and similar agreements. CFDA numbers and pass through numbers are provided when available. Howard was the recipient of federal funds awarded through the American Recovery and Reinvestment Act (ARRA). These funds were expended by the federal government with the intent to stimulate the American economy, supplement existing federal programs and create new programs. There are additional compliance and reporting matters associated with these awards. These awards are presented in bold print in the Schedule and the title "ARRA" precedes each award title. (1) Summary of Significant Accounting Policies for Federal Award Expenditures (a) Basis of Presentation The accompanying Schedule has been prepared using the accrual basis of accounting. (b) Expenditures Expenditures for federal student financial aid programs are recognized as incurred and include Pell program grants to students, the federal share of students Federal Supplemental Educational Opportunity Grant ( FSEOG ) program grants and Federal Work-Study ( FWS ) program wages paid, certain other federal financial assistance grants for students, administrative cost allowances, and loan disbursements. Expenditures for other federal awards are determined using the cost accounting principles and procedures set forth in OMB Circular A-21, Cost Principles for Educational Institutions. Under these cost principles, certain types of expenditures are not allowable or are limited as to reimbursement. (2) Federally Funded Assets Preservation of the Miner Normal School Building In October 2009, Howard received a non-r&d cluster award #11-09-HC-18112, CFDA # totaling approximately $800,000 from the National Park Service of the Department of the Interior for the purposes of rehabilitating and renovating the Miner Normal School building. For the year ended June 30, 2013, Howard did not incur any rehabilitation and renovation related costs. All costs incurred in prior years were capitalized in Howard s financial statements and therefore are not included on the Schedule of Expenditures of Federal Awards. (3) Facilities and Administrative Costs (F&A Costs) Expenditures for non-financial aid awards include indirect costs, relating primarily to facilities operation and maintenance, general, divisional, and departmental administrative services, which are allocated to direct cost objectives (including federal award programs) based on negotiated formulas commonly referred to as indirect cost rates, which were negotiated with the Department of Health and Human Services. A portion of indirect costs allocated to some awards for the year ended June 30, 2013 were based on individual grantor rates. Howard operates under predetermined F&A cost rates which are effective from July 1, 2007 to June 30, 2012 and provisional rates from July 1, 2012 to June 30, The predetermined fixed rates are based on 2005 financial information. The base rate for off-campus research and on-campus research are respectively 26% and 48% for the year ended June 30, Base rates for other F&A cost recoveries ranged from 8% to 48% for the year ended June 30,

77 Notes to Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 The base rates for off-campus research and on-campus research have been amended effective July 1, 2013 to June 30, 2014 to 26% and 50%, respectively and effective July 1, 2014 to June 30, 2016 to 26% and 51%, respectively based on 2012 data. (4) Subrecipients Of the federal expenditures presented in the Schedule, Howard provided federal awards to subrecipients as follows: Child Care and Development Fund Research & Development Highway Planning and Construction Agency CFDA Numbers Other Total Department of Commerce $ - $ 551,587 $ - $ - $ 551,587 Department of Defense , , ,164 Department of Education ,017-21,017 Department of Health and Human Services , , , , , , , 93,307, , , , ,264-1,269,444 Department of Housing and Urban Development ,000-70,000 Department of Transportation , ,994-97, ,322 National Aeronautics and Space Administration 43.AAA - 118, ,483 National Science Foundation , , , , , ,805 Small Business Administration , ,360 U.S. Department of State , ,082 Grand Total $ 50,775 $ 2,510,438 $ 942,723 $ 97,328 $3,601,264 72

78 Notes to Schedule of Expenditures of Federal Awards For the Fiscal Year Ended June 30, 2013 (5) Federal Student Loan Programs Howard receives awards to make loans to eligible students under the Federal Perkins and William D. Ford Federal Direct Student Loan Programs of the Department of Education, and Health Professions and Nursing Student Loan Programs of the Department of Health and Human Services. Campus-based loan programs which include the Federal Perkins Loan Program are administered directly by Howard. Balances and transactions relating to these programs are included in Howard s basic financial statements. These administrative allowances related to these loan programs for the year ended June 30, 2013 was zero. Additional information regarding these programs for the year ended June 30, 2013 is summarized below: Campus-Based Loan Programs FY 2013 Loans Issued FY 2013 Loans Cancelled Outstanding June 30, 2013 Federal Perkins Loans $ 810,059 $ 41,409 $ 3,259,062 Health Professional and Disadvantaged Students - - 2,338,630 Nursing Student Loans ,843 Total Campus-Based Loan Programs $ 810,059 $ 41,409 $ 5,857,535 Howard is responsible for the performance of certain administrative duties with respect to federal direct loans disbursed by the Department of Education on behalf of Howard's students under the direct loan programs (Federal Stafford, Federal Parents Loans for Undergraduate and Graduate Students, and Unsubsidized Federal Stafford Loans). These loan programs collectively are CFDA # and disclosed on the Schedule in amount of $169,870,813. It is not practical to determine the balance of loans outstanding to students and former students of the University under these federally guaranteed loan programs at June 30,

79 Tel: Fax: Wisconsin Ave. Suite 800 Bethesda, MD 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 To the Board of Trustees The Howard University Washington, DC 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 financial statements of The Howard University (the University ), which comprise the statement of financial position as of June 30, 2013, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 25, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the University s internal control over financial reporting (internal control) to determinate the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control. Accordingly, we do not express an opinion on the effectiveness of the University s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies. 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 financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies identified below and described in greater detail in the accompanying schedule of findings and questioned costs as items through to be material weaknesses. Finding Number Description Governance Considerations Employee On-boarding Process Procurement Policies Segregation of Duties BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 74

80 Finding Number Description Logical Access User Administration Accrual Process Journal Entries - Hospital 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. We consider the deficiencies identified below and described in greater detail in the accompanying schedule of findings and questioned costs as items through to be significant deficiencies. Finding Number Description Physical Security Back-up and Recovery Retention of Documentation Cross-training of Professionals Application Security (nvision) Logical Access Segregation of Duties (Banner) Information Systems Training System Capabilities Financial Reporting Disaster Recovery and Business Continuity Program Change Management Information Technology Governance and Organization Logical Access (Network and Lawson) Account Reconciliation Process - Hospital Employee Terminations - Hospital Compliance and Other Matters As part of obtaining reasonable assurance about whether the University's financial statements are free of 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 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 an instance of noncompliance or other matters that is required to be reported under Government Auditing Standards and which is described in the accompanying schedule of findings and questioned costs as item The University s Response to Findings The University s response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The University s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 75

81 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 result 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. November 25,

82 Tel: Fax: Wisconsin Ave. Suite 800 Bethesda, MD Independent Auditor s Report on Compliance For Each Major Federal Program and Report on Internal Control Over Compliance Required by OMB Circular A 133 To the Board of Trustees The Howard University Washington, DC Report on Compliance for Each Major Federal Program We have audited The Howard University s (the University ) compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on each of the University s major federal programs for the year ended June 30, The University s major federal programs are 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 University 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 OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 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 University s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the University s compliance. We did not audit the University s compliance with the billing, collection, and due diligence student loan repayment compliance requirements specified by the Federal Perkins Loan Program ( Perkins Loan ) and described in the OMB Circular A-133 Compliance Supplement. Compliance with these requirements was audited by other auditors whose report thereon has been furnished to us, and our opinion expressed therein, insofar as it relates to the University s compliance with those requirements, is based solely on the report of the other auditors. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 77

83 Basis for Qualified Opinion on USAID Foreign Assistance for Programs Overseas, Global AIDS Programs, and Research and Development Cluster As described in item in the accompanying schedule of findings and questioned costs, the University did not comply with requirements regarding the following: Finding CFDA Compliance Program (or Cluster) Name Number Number Requirement USAID Foreign Assistance for Programs Overseas Allowable Costs/Cost Principles Global AIDS Programs Allowable Costs/Cost Principles Various Research and Development Cluster Allowable Costs/Cost Principles Compliance with such requirements is necessary, in our opinion, for the University to comply with the requirements applicable to those programs. Qualified Opinion on USAID Foreign Assistance for Programs Overseas, Global AIDS Programs, and Research and Development Cluster In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, based upon our audit and the report of other auditors for the Perkins Loan Program, the University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on USAID Foreign Assistance for Programs Overseas, Global AIDS Programs, and Research and Development Cluster for the year ended June 30, Unmodified Opinion on Each of the Other Major Federal Programs In our opinion, based upon our audit and the report of other auditors for the Perkins Loan Program, the University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its other major federal programs identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs for the year ended June 30, Other Matters The results of our auditing procedures disclosed other instances of noncompliance, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as follows: Finding CFDA Compliance Program (or Cluster) Name Number Number Requirement Excellence in Health Professional Education Endowment Allowable Costs/Cost Principles Student Financial Aid Cluster Special Tests and Provisions (Return of Title IV Funds) Student Financial Aid Cluster Eligibility USAID Foreign Assistance for Programs Overseas Matching, Level of Effort, Earmarking 78

84 Our opinion on each major federal program is not modified with respect to these matters. The University s response to the noncompliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and/or corrective action plan. The University s response was not subjected to our auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of the University 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 University 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 each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, 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 University s internal control over compliance. We did not audit the University s compliance with the billing, collection, and due diligence student loan repayment compliance requirements specified by the Federal Perkins Loan Program ( Perkins Loan ) and described in the OMB Circular A-133 Compliance Supplement. Compliance with these requirements was audited by other auditors whose report thereon has been furnished to us, and our opinion expressed therein, insofar as it relates to the University s compliance with those requirements, is based solely on the report of the other auditors. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and significant deficiencies. 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 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. We consider the deficiency in internal control over compliance described in the accompanying schedule of findings and questioned costs as item to be a material weakness. 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. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as items , , and to be significant deficiencies. 79

85 The University s response to the internal control over compliance findings identified in our audit are described in the accompanying schedule of findings and questioned costs and/or corrective action plan. The University s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. 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 OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. March 24,

86 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Schedule of Findings and Questioned Costs 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? _ X yes no Significant deficiency(ies) identified? _ X yes none reported Noncompliance material to financial statements noted? _ X yes no Federal Awards Internal control over major programs: Material weakness identified? _ X yes no Significant deficiencies identified? _ X yes none reported Type of auditor s report issued on compliance for major programs: Qualified for the following major programs: USAID Foreign Assistance Programs Overseas Global AIDS Programs Research and Development Cluster Unmodified for the following major programs: Annual Appropriation Constitutional Law Chair Endowment Excellence in Health Professional Education Endowment Matching Endowment Law School Clinical Endowment Student Financial Aid Cluster Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMB Circular A-133? _ X yes no 81

87 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Identification of major programs: CFDA Number(s) A D Various Various Name of the Federal Program or Cluster Annual Appropriation Constitutional Law Chair Endowment Excellence in Health Professional Education Endowment Matching Endowment Law School Clinical Endowment Student Financial Aid Cluster Research and Development Cluster Global AIDS Programs USAID Foreign Assistance for Programs Overseas Dollar threshold used to distinguish between type A and type B programs: $3,000,000 Auditee qualified as low-risk auditee? yes X no 82

88 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Section II Financial Statement Findings Finding : Governance Considerations Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: As we consider the results of our testing, we have noted that the overall structure and governance environment at the University is not designed to best enable the University to achieve key components of its stated vision which includes becoming a top-50 research university and providing an environment of open discourse. The governance structure at the University is highly decentralized without the open communication, collaboration, and unifying tone that is essential if the University wishes to operate in a seamless fashion and make the attainment of its strategic vision more feasible. At an institution the size of Howard, a certain degree of decentralization is necessary for successful management of day-to-day operations in its various academic and administrative departments as well as service units. However, the degree of decentralization at Howard has weakened the internal control environment and in some cases resulted in circumvention of approved policies and procedures (as further described in other points). The governance structure is further hampered by: A lack of an approved and agreed-upon organization chart that defines the direct reporting hierarchy, indicates whether there is an appropriate allocation of operating and supervisory responsibilities, depicts whether segregation of duties are adequate, and allows for the proper monitoring of operations; and An overall impression by many throughout the University that there is a continued lack of accountability and overall lack of enforcement of certain policies and procedures. Recommendation: We recommend that management and the Board of Trustees: Reevaluate the overall decentralized structure of the University through the development of an updated overall organization chart and formal job descriptions for key University leaders that clearly define areas of responsibility and addresses segregation of duties concerns. The organization chart should be in sufficient detail to indicate all major areas of operations, the person responsible for each area, and a clear direct reporting hierarchy. As a part of this process, management and the Board of Trustees should also reexamine whether the current structure for which departments report to specific leadership positions makes the most sense; Reevaluate the internal control environment and identify which policies and procedures are circumvented because they no longer meet the operating needs of the University, as opposed to those policies and procedures which remain necessary and should be enforced to prevent serious internal control breaches; Develop clear consequences and actions that will be taken for a lack of following key policies and procedures at Howard. Such consequences should be strictly enforced once agreed to by leadership. 83

89 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: The Board of Trustees (BOT) and management are committed to an institution distinguished by excellence in teaching, research and service. Howard leadership recognizes good governance is characterized by open communication and collaboration starting at the top and instilled throughout the organizational culture at all levels. In addition, delivery of a quality education, must be supported by an administrative structure pillared by operational efficiency and strong internal controls. The BOT has taken immediate action to move toward their vision of excellence. In October 2013, the BOT appointed an Interim President, replaced the contracted CFO with a Howard employee as Interim, and appointed two Deputy Provost to strengthen the management of the Health Sciences and Academic Affairs Divisions. In November 2013, the BOT approved an updated organizational chart identifying key leaders that was circulated to senior managers in December 2013 during the President s Workforce Transition meeting. The University is working towards further organizational charts that define the key functions of the operating units and job descriptions. The BOT also established an Enterprise Risk Management (ERM) Committee comprised of cross-functional senior and mid-level management. The ERM Committee has completed ERM awareness training, and retained a law firm with specialized ERM expertise to establish framework for moving forward. The ERM Committee has also inventoried risk campus-wide, prioritized the risk items, and assigned risk owners. The top five risk priorities closely align with adherence to policies and procedures and process deficiencies. The ERM Committee makes status reports at each BOT meeting. The University is currently reviewing existing policies for reevaluation and update where necessary. Key policies will be updated and revised by June The revised policies will be followed with written operational procedures that are codified as standard operating procedures with online access to the University community. Senior leadership will establish enforcement and corrective actions for noncompliance with the revised policies. In addition, the University has contracted an accounting firm with specialized expertise to fill the internal audit role focused on strengthening internal controls and process improvement. These actions serve as the roadmap to help achieve the key components of the strategic vision. 84

90 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Employee On-boarding Process Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Howard s on-boarding and hiring process is decentralized and performed at the department or unit level. When a new employee is hired, that employee s information should be entered in the epar system in order to ensure that the employee is paid and their payroll expense is coded to the correct department. We have noted instances where there are individuals whose information was not entered correctly. As a result, the payroll expense for that employee was not charged to the appropriate department and was instead held in a payroll suspense account. The Finance Department has to undergo considerable efforts every pay period in order to determine the correct department for coding the employee s payroll expense and ensure that the individual is paid. The suspense account issue for a particular employee will continue to recur until the department corrects the erroneous information in epar. This issue potentially skews department or unit level financial information for the period of time amounts are being reconciled. We further noted that in some instances there are individuals that are working for various departments whose information was never entered into epar. As a result, they have performed work but were not paid timely, and in some cases they were not paid for multiple pay periods. This issue is known by Human Resources, which has been forced to identify unknown employees by placing ads in The Hilltop student newspaper publication and speaking on this issue at faculty and staff meetings. As a result of this issue, payroll and benefits expense can be understated at various times. The problems noted above may stem from a lack of training on the epar system as well as differing expectations of Human Resources role in employee on-boarding. The decentralization of the on-boarding process and issues with the epar system results in other problems, such as: Evidence of approval for new hires in a specific role or position when the new hire information is uploaded to PeopleSoft using the auto-term process instead of epar. The lack of a central repository for employee contracts, which exposes Howard to potential allegations, complaints or legal actions for which it would not have the necessary documentation to defend itself. A formal process strictly adhered to by Human Resources to ensure that new employees are enrolled in employee benefits on a timely basis. Overall inability to quantify employee headcount and determine the impact of changes in headcount to the departmental budget as well as any third-party contracts such as health insurance, life insurance, retirement plans, etc. Timely approval and processing of pay increases. Evidence of approval for supplementary employee pay for additional services performed. 85

91 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Recommendation: We recommend that Howard should: Force the centralization of the employee on-boarding process through Human Resources prior to the commencement of the new employee performing any work. This is critical for a number of reasons, including preventing any potential liability that the University could face. An additional benefit of centralizing this function is that appropriate criminal and background checks can be performed on potential employees so that this information is a part of the hiring decision. Centralization will also allow Human Resources to perform a three-way match of the employment requisition, the information entered in epar and personnel files so that the suspense account issue is remediated. Further, having Human Resources own the on-boarding process will prevent individuals from beginning employment with the University without the knowledge of anyone outside of their department. From a Finance standpoint, this is of critical importance as it is also a preventative control addressing whether a department received the necessary approvals or has the budgetary dollars necessary to hire any additional personal; Maintain executed copies of all executive employee contracts within the Human Resources function. The failure to retain copies of employee contracts is a serious failure of internal control procedures and could result in various legal complications in the event of corporate noncompliance with a contract. Employment contracts serve as a record of the various agreed-upon terms and conditions of employment and their locations should be known at all times. Complete and current personnel files should be established and maintained for each employee and copies of contracts should be maintained in the personnel files of all executive-level employees. In addition, the employment contracts for key personnel should also be maintained by the University s Office of General Counsel; and, Maintain evidence of department and budget approval for pay increases or supplemental pay through epar or other documentation. View of Responsible Officials and Planned Corrective Actions: Management agrees with the auditors recommendation. A cross functional team under the leadership of the Chief Operating Officer and Chief Financial Officer has been assembled to redesign the entire hiring and onboarding process. In addition, teams have been formed to ensure that all employee data records are accurate and reflect the most current roles and responsibilities of each employee. Managers will be given the opportunity to validate the information for his/her department to assure accuracy of the baseline data recorded as a result of the team data cleanup effort. The University is committed to implementing new policies designed to inform the entire community on the hiring and onboarding process, including sanctions for non-compliance. Management will ensure consistent administration of and adherence to recruitment and hiring policies, assure the University s compliance with applicable laws and regulations, and uniformly record all employee information in the ERP systems. The University will develop new business processes designed to efficiently, accurately, and timely onboard all employees. The University will design a comprehensive training and change management plan designed to educate all hiring managers on the appropriate procedures. As evidenced by the audit, there were no audit adjustments for payroll and benefit expense proving that the mitigating and compensating controls currently in effect have proven effective. The above initiatives are expected to occur by December As the University moves towards taking the above steps, it has already identified and corrected a segregation of duties issue within the ERP that would allow certain key individuals to change their own salary information, etc. 86

92 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Management agrees with the auditors recommendation to maintain all executive and key employee contracts with Human Resources and the Office of General Counsel. The University currently maintains a comprehensive contracts database. Management will identify which contracts are missing and update them in the central contracts database. As part of the cross functional team these contracts will be included in the scope. This will be in place by December Finding : Procurement Policies Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: The University s existing procurement policies require that the Office of Strategic Sourcing and Asset Management should acquire all goods and services on behalf of the University in order to adhere to certain guidelines in Circulars A-21, A-110, and A-133, negotiate strategic vendor relationships, and ensure appropriate controls are maintained for the procurement process. However, in many cases we noted that there appears to be deliberate circumvention of the procurement policies through the use of payment requests and purchasing cards, or failure to obtain bids for services or contracts. For example, employees within the University can forgo the purchase requisition and purchase order process through PeopleSoft Finance, and instead order goods or services directly and then submit the invoice for payment with a payment request. This results in assets that are not tagged as Howard University property, missed opportunities for volume discounts and savings, inaccurate asset records, a weak control environment for asset acquisition, and increased risk for misappropriation of assets. With respect to purchasing cards, the policy specific to purchasing cards notes which types of purchases are appropriate using purchasing cards and which are not. In addition, receipt documentation is required to support the purchase. We noted through our auditing procedures that the receipt documentation provided for some purchases were for types of goods that specifically were deemed as inappropriate for obtaining through purchasing cards, such as catering. In addition, we noted 192 purchases totaling approximately $463k that exceeded the $1,500 purchasing card threshold. There were also instances where the support provided did not clearly disclose the nature of the purchase, and no further explanation was obtained prior to approval. In addition, the Assistant Treasurer could enter into construction contracts on Howard s behalf without going through the Office of Strategic Sourcing and Asset Management to obtain bids and proposals. 87

93 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Recommendation: We recommend that the University: Clarify the procurement process of all goods and services other than IT equipment and services to be the main responsibility of the Office of Strategic Sourcing and Asset Management, and reorganize the current structure so that the department has sufficient resources to carry out its responsibilities. This includes enforcement of the documented process for obtaining bids and obtaining appropriate approvals before legally obligating the University to a contract. Furthermore, management should have a more centralized receiving department to ensure the timely matching of purchase orders with invoices and receiving documents. In addition, this department should be responsible for the tagging of all assets purchased with University funds if/as appropriate; Enforce the clarified and revised procurement process to require employees to submit purchase requisitions and purchase orders through PeopleSoft Finance for purchases of goods and services. Consider reducing the number of individuals with authority to approve purchase requisitions. In those instances where goods or services are ordered without following the process, the University should implement some form of penalty and/or enforcement measure over such personnel; Enforce the purchasing card policy by requiring that all receipt documentation be submitted and that a comprehensive review of the type of purchases is performed prior to approval to determine that purchases comply with the purchasing card policy. When necessary, additional support or explanation should be obtained to explain the nature of items purchased (if receipt or invoice documentation is not sufficient for this purpose). In addition, if the University is not going to take advantage of offered discounts, in order to determine the volume of cash discounts that are lost due to lags in paying vendor invoices, we suggest recording purchases at the net amount and charging lost discounts to a separate account to track such impacts to Howard s cost structure. The balance in this new account will reflect the total of lost discounts. View of Responsible Officials and Planned Corrective Actions: Procurement will undergo a reorganization in FY2014. The reorganization is focused on developing the required roles to execute the appropriate level of internal controls including a P-card Administrator. Procurement is also focused on reviewing, implementing, and the execution of updated policies and systems. Key policies include developing contracting policy by February 2014 and amending the current Procurement policy by February Procurement has launched Howard University P-card website in December 2013 which will require each cardholder to reconcile their accounts online by reviewing, approving, and providing support for each transaction. 88

94 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Segregation of Duties Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Howard s existing policies require that authorization and approvals for wire transfers follow the documented Accounts Payable process. However, there are times when this process is circumvented such as for emergency payments. Whenever such a need arises, the Assistant Treasurer transmits wire transfers outside of the documented Accounts Payable process. In addition, the wire transfer process through the bank does not provide the same level of segregation of duties found in a typical check-writing process. The Assistant Treasurer has the ability to both enter and approve wires. There are no controls in place at the bank or within the Treasurer s Office to limit to whom or how much the Assistant Treasurer can disburse. It was noted that while the current bank cannot provide the controls necessary to ensure that appropriate authorizations are obtained prior to funds being released, there are banks that provide for segregation of duties between persons that can enter wires and persons that can approve wires. Finally, the Assistant Treasurer has the responsibility for oversight of Howard s on-going construction projects. As a part of this role, the Assistant Treasurer could approve subcontractors independent of the documented procurement process for bids and could approve construction-related payments through wires or ACH drafts. Recommendation: We recommend that Howard implement the following controls: Require documented approval from either the Controller or the Chief Financial Officer for all wire transfers before funds can be released by the Treasurer s Office. This approval should be obtained even in the event of the need for an emergency wire; Determine a threshold over which all wires should require approval by both the Controller and Chief Financial Officer prior to funds being released; and Discuss with the bank whether it s possible to program specific roles so that individuals granted access to approve wires do not also have the capability to enter wires. Move the construction oversight role to an appropriate party that does not have authority to initiate payments. Require that all contracts follow the documented process for obtaining and approving bids. View of Responsible Officials and Planned Corrective Actions: Howard implemented a new policy in December 2013 to address the issues as recommended. The new policy requires: Approval from the Controller and Accounts Payable before the Treasurer Office executes any wire transfers including emergency payments. Sets threshold for CFO approval at $250,000 for wire transfers. Moved construction project oversight to Physical Facilities Management Division for execution of the procurement bid/contract process. The Treasurer Office is no longer involved in this process. 89

95 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Requires two individuals to execute wire transfers, one enters wire transfer data and the other approves/releases the wire. The same individual does not both enter and release. Also, we are working with the bank to establish systemic controls that impose disbursement limits. Finding : Logical Access User Administration (Banner, PeopleSoft and Invision) Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that access logs are not enabled within the Banner application; therefore, the University cannot track new users who have been granted access rights or existing users who had their access rights modified within the application. Furthermore, access requests are not logged and tracked using a centralized list that identifies which users requested which access rights on which date. Finally, users' access rights for Banner, PeopleSoft and Invision are not formally reviewed on a periodic basis (e.g., monthly, bi-monthly, quarterly) to identify any terminated users or the appropriateness of existing users access permissions based on their role/job function. Recommendation: We recommend that: Access logs be enabled and configured to record changes in access rights for new users and existing users so that any unauthorized access may be effectively detected if necessary; A formal procedure and any necessary tools/mechanisms for logging access requests should be established so that users' access requests can be tracked for management's review and audit purposes. Access to the log/list of access requests should be limited to appropriate personnel; and, A formal procedure should be developed and implemented so that the leadership within each department reviews the access rights of its users to detect any terminated users who still have access and any users with access rights that exceed the requirements of their role/job function. This will reduce the risk of unauthorized access to applications. View of Responsible Officials and Planned Corrective Actions: ETS will activate the access logs by June The logs had not been activated in the past given storage limitations. Access requests are managed by each application team. It is currently a manual process and is stored in such that we can identify which users requested access rights on which date. ETS has identified the need to automate this process June The current process generally occurs annually. ETS will work with the application owners to develop a more frequent review of this data by March

96 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Accrual Process Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: As noted previously, there are lengthy time lags for individuals to remit invoices to the Finance Department for payment. This time lag forces the Finance Department to record an estimated accrual for unpaid invoices that were not entered into accounts payable at year-end. Purchase orders often differ from the final invoice and it is unclear that all purchase orders/invoices are ultimately identified, which could result in an understatement of the accrual. Further, as also noted in a prior observation, many employees circumvent the procurement process entirely and do not create a purchase requisition or purchase order, and also delay remitting invoices to the Finance Department for payment. This creates an unknown element of the accrual that places the Finance Department in the position of having to estimate the population of invoices that may be outstanding throughout Howard and for which there are no purchase orders to provide a general idea of the dollar amount of goods ordered. Recommendation: In order to improve the invoice accrual process, we recommend that the University: Continue to implement enforcement policies with consequences (as discussed in our previous comments) for those who do not remit invoices to the Finance Department in a timely fashion; and, Train the budget specialists employed by or shared between academic Schools to serve as financial liaisons to keep the Finance Department abreast of financial trends, including those linked to procurement activities. View of Responsible Officials and Planned Corrective Actions: The Finance group will continue to proactively reach out to the community to request invoices and monthly activity to ensure more they are entered into or activity is captured in the system in a timely fashion. The Finance team is implementing an electronic workflow system which would require vendors to directly enter invoices into a vendor portal, which would be monitored by finance, and be integrated with the current Procurement system and general ledger by September The enhanced vendor payable system will provide a complete picture of payments owed and will facilitate a timely accounting of vendor payables and accruals without the current manual processes. Procurement is working collaboratively with the Finance team to update policies and procedures and coordinate budget office training on the purchase requisition and purchase order process. Updated policies will specify consequences for failure to follow the approved procedures, in accordance with the University Policy approval process. 91

97 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Journal Entries Hospital Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: During our audit procedures, we noted instances in which individuals can both create and post manual journal entries to the general ledger. We also noted no formal review/approval process in place surrounding the journal entry process. Recommendation: As a result, we recommend the following process improvements: Restrict user access such that only certain users may create manual journal entries in the general ledger. Require a secondary level of review or sign-off within the system before the entry can be posted to the general ledger. Implement authority limits based on employee's position, tenure, job responsibilities, etc. for type and dollar threshold of an entry that an individual has the authority to create. Implement segregation of duties so that the same individual is not responsible for the creation, approval, and/or monitoring of manual journal entries. View of Responsible Officials and Planned Corrective Actions: Hospital Management has noted the recommendations and agrees from a conceptual basis with the comments. It must be noted that in FY 13, there were three individuals including the Controller who had the ability to create and post manual journal entries. During the closing process even though journal entries were not approved, there is constant review of the individual accounts for appropriateness and validity of transaction in regards to financial statement preparation. In FY14, Management will implement division of duties and the appropriate supervisory review of the entries. 92

98 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Physical Security Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that certain physical access points to Enterprise Technology Services ( ETS ) facilities and the primary data center are not monitored and operated effectively. During the physical security walkthrough and during the weeks after, an exterior door on the back side of the ETS building was impaired and unlocked, allowing for unauthorized entry into the ETS building. It was noted that this door provides direct access to a stairwell through which the audit team was able to bypass failed card readers and gain access to any floor of the building, including Howard's primary data center. Recommendation: We recommend that the University perform a comprehensive physical security audit of all of its facilities to evaluate any and all deficiencies in its current physical security program. A physical security audit will ensure that the proper physical security controls have been developed and implemented, and are being performed effectively. This will help reduce the risk of intruders and unauthorized access to Howard s facilities and buildings. View of Responsible Officials and Planned Corrective Actions: ETS is working with Auxiliary Services to add Wonder Plaza to the scope of the Blackboard Transact project. The project is scheduled to begin in February 2014 that will repair the doors and put them on the new Blackboard Transact access control system. 93

99 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Back-up and Recovery Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted during our procedures that the University s back-up site and equipment is currently housed in the same facility as the primary data center. If the data center was lost due to a physical disaster or catastrophic event, all data and IT systems would be irrecoverable and permanently lost. The backup and recovery process supporting Howard's systems and applications lacks formally documented policy(s) and procedure(s). Instead of any formally documented policy, the process is internalized amongst network and computer operations personnel responsible for the management and administration of the backup and recovery process. Recommendation: Howard should implement a backup site that is located outside of the primary data center and beyond the geographic area of the campus within a reasonable distance that will limit the potential for a single point of failure. Additionally, a formal policy with procedures should be developed and implemented that prescribes the process and workflows supporting backup and recovery of Howard's data and systems. This will help create a stand-alone process that does not require institutionalized knowledge amongst a small group of personnel who, depending on their role, could significantly impact the backup and recovery process. View of Responsible Officials and Planned Corrective Actions: In October 2013, ETS completed the disaster recovery project and moved the backup equipment to the College of Medicine. Although not outside of the geographic area, the risk is reduced significantly. The University will continue to explore additional opportunities for backup and disaster recovery sites. ETS is working on developing Standard Operating Procedures that will meet this recommendation. The target for implementing the procedures is March

100 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Retention of Documentation Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that the University had difficulty locating certain records that were requested as a part of the audit process. We understand that per discussion with management, many of these records were lost in the transition from the FRS system to PeopleSoft. Others were purposefully purged. Further, Howard s electronic document repository is currently inaccessible by current Howard employees. In addition, we have learned that numerous older employee files still needed to support pension and other post-retirement liabilities are housed in a condemned building with no organization. The lack of appropriate safeguards around this information, which presumably contains the personally identifiable information of former employees, is a potential liability for the University. We would highlight that the availability of records and documentation can be critical to an organization in meeting the needs of an external audit, as well as in the event of an audit by federal agencies, a lawsuit, the need to provide proof of ownership, an insurance claim, etc. Recommendation: We recommend that the University pursue a project to complete its records by contacting its attorneys, banks, and other parties with whom such information may have been shared in order to obtain copies of property records, deeds, debt agreements, etc. as determined missing and still relevant to Howard; and We recommend that the University prioritize the safeguard of the older employee files, and devise a strategy going forward for the appropriate recordkeeping of that data. View of Responsible Officials and Planned Corrective Actions: Key records are housed by the University in various offices. Senior officials will coordinate with the Secretary of the Board to ensure all key documents are properly stored and available. In addition, we will review our Records Retention Policy to codify the organization, storage and time retention of critical documents and update as necessary by March As the above process is being implemented we will obtain secure document storage to safeguard the information. 95

101 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Cross-training of Professionals Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that personnel within the Finance Department perform highly manual processes that are heavily dependent on the presence of specific individuals. In the absence of these individuals, related business functions cease until their return. This can lead to risk as no one other individual within the department can perform certain (or has knowledge of certain) functions, other than the single individual assigned such function within the department. In addition, there are many manual processes that are performed by an insufficient number of personnel within the Finance Department which increases the risks of errors. Recommendation: We recommend that management: Consider assigning appropriate personnel to be cross-trained on other processes in order to increase department-wide knowledge and improve skill sets; Designate individuals to serve in a back-up capacity when specific personnel are absent; Review opportunities for placing more reliance on the systems in place to reduce the amount of manual day-to-day processes necessary; and, Develop a more formal training program for Finance Department employees based on job function and requirements. View of Responsible Officials and Planned Corrective Actions: We are in the process of reorganizing the Finance Department, including documenting roles and responsibilities, as well as designated backup staff, who will be cross trained to perform functions by May We are in the process of developing a plan to implement several new systems, as well as perform an assessment of our existing systems in order to eliminate a number of manual processes by September We are developing a formal training plan for the Finance Department to better utilize existing systems, and also gain expertise on newly implemented systems starting June

102 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Application Security (nvision) Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that with respect to nvision, first-time, temporary password change is not enforced upon first login for new users. This can result in users never changing their passwords, thus increasing the risk of unauthorized access to the Invision application. Additionally, we noted that password parameters lack complexity, history requirements, and automated expiration. This increases the risk of brute force attacks and compromise of user passwords, which could potentially result in unauthorized access to the Invision application. Recommendation: The University should coordinate with the vendor to explore whether Invision can be configured to enforce first-time password changes through an automated process within the system. Furthermore, the University should coordinate with the vendor to explore whether password parameters within Invision can be configured to promote greater complexity and security. View of Responsible Officials and Planned Corrective Actions: The nvision application does not have the capability to enforce the users to change their password the first time they log in. We will arrive at a compensating control to ensure user change their passwords periodically. Finding : Logical Access Segregation of Duties (Banner) Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Database Administrators (DBAs) have access to the root account and generic system accounts within the production environment of the Banner application so as to support password changes for power user accounts and vendor driven upgrades/support, respectively. By having access directly to the database, the root account, and the generic system accounts, the DBAs have excessive administrative privileges that increase the risk of unauthorized changes and/or access to the system. The Manager - Student Applications has excessive access rights by having system administrator privileges, access to the generic system accounts, and access to system jobs and job schedules. Without periodic review of her activity, the risk of unauthorized changes to the Banner application increases. 97

103 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Recommendation: We recommend that DBAs' access to the root account be revoked and a system administrator, aside from those that manage power user accounts, should be granted access to root accounts so as to enforce proper segregation of duties. Activity performed and changes made by the root account should be reviewed on a periodic basis to confirm the appropriateness of the changes within the Banner application. In an oversight and management role, the Manager - Student Applications should not have system administrator privileges, access to the generic system accounts, and access to the system jobs and job schedules. Rather, the Manager - Student Applications should primarily be responsible for overseeing and monitoring the administration and support of the Banner application to ensure that access and program changes are being handled appropriately by her system analysts and support staff. View of Responsible Officials and Planned Corrective Actions: Banner is hosted by Ellucian (the Banner vendor), and this is the recommended configuration as agreed upon when the contract was signed. ETS does not see this as a risk since both the DBA and System Administrators are 3rd parties and they need the ability to back each other up in case of an issue. The Student Applications manager does not have System Administrator privileges. The System Administrator privileges are managed by the vendor Ellucian. The Student Applications manager does have access to generic accounts to run jobs and schedules. This access is necessary given how the team is staffed. Finding : Information Systems Training Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: The University has several systems in place that record financial data. In the ordinary course of business, these systems will require updates, patches, or replacement with other systems that meet Howard s evolving needs. When these necessary changes occur, Enterprise Technology Services offers user acceptance testing and training. However, there is not a policy in place requiring individuals within the various departments to perform user acceptance testing to ensure that the changes continue to meet the University s needs or receive training on any new or changed functionalities. The lack of policy results in very few employees actually performing user acceptance testing or receiving training. Within the Finance Department, this resulted in issues within PeopleSoft Finance after an upgrade was performed. On a University-wide level, the lack of required training for the new EPAR system led to issues with hiring and employee changes. Similarly, Enterprise Technology Services proceeds with implementing upgrades without having full user participation in user acceptance testing and training. 98

104 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Recommendation: We recommend that the University implement a policy that when it is necessary to make changes to key systems, Enterprise Technology Systems should communicate the nature and timing for making the change, schedule required training for the users of the relevant system, and provide a timeline for completing required user acceptance testing. Additionally, the designated System Administrators (i.e. Chairs, Deans, Directors, etc.) should be held accountable for employees within their departments attending training and participating in user acceptance testing as applicable. View of Responsible Officials and Planned Corrective Actions: Although there is no formal policy, ETS undergoes a rigorous User Acceptance Testing and Training for all updates to the system. User Acceptance testing and training is documented thoroughly and maintained with other key project documents. Finding : System Capabilities Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Howard is a multi-layered and complex organization with several different operational revenue streams. Organizations of a similar size or structure utilize appropriate IT solutions to assist with providing an appropriate level of financial data to appropriate users in a timely fashion. We noted that while PeopleSoft Finance has the capabilities to provide different levels of aggregated or disaggregated financial data, it is not fully utilized to enable its full capabilities. As a result, we have found that: The overall financial statement consolidation process is performed manually, which is a laborintensive process that increases the risk of errors. Various process owners cannot produce stand-alone financial reports from PeopleSoft to allow for timely review of data as well as ownership responsibility for the results. Stakeholders cannot obtain relevant and timely budget to actual data in real-time that is customized to their needs or at the appropriate level of detail in order to better manage operations. We also note that in order for this information to be relevant there should be training of how the financial data captured is presented in the reports as well as how to customize the reports to the needs of the users. Recommendation: We recommend that management collaborate with Enterprise Technology Services to determine the various stakeholder needs for financial data and take the necessary steps to allow systems to provide such data to users. The end result of any necessary steps should be that PeopleSoft Finance can perform the financial statement consolidation, the system is able to produce stand-alone statements for each entity within Howard, and other stakeholders can obtain the necessary information, such as budget-to-actual reports. Management should consider add-on software as necessary to achieve these goals. 99

105 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: The Finance Department in conjunction with Enterprise Technology Services is developing a plan which includes ETS performing, or contracting services to perform a systems utilization assessment by June The assessment will document current processes within the finance group and identify possible training needed, system reconfiguration and/or third party add on software that could streamline the monthly accounting process. During the 2015 budget process, the chart of accounts and/or University consolidation process will be updated to allow separate accounting for significant business units. This reconfiguration will facilitate a more timely and transparent consolidation. Budgets for fiscal year 2015 will be uploaded in PeopleSoft to allow for system originated budget versus actual reports to the stakeholders to allow improved management and accountability. Finding : Financial Reporting Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: While the University s Finance Department has made strong improvements in the accounting and reporting functions, we noted that certain account reconciliations were not performed on a regular basis, and appropriate documentation for those reconciliations was not always maintained. Furthermore, we noted that the process to review journal entries is inconsistent or evidence of review or support for the amount ultimately recorded is not always maintained. Finally, we noted that reconciliations between PeopleSoft and the systems that interface with PeopleSoft are not consistently performed for all systems. Recommendation: We recommend that management should: Determine which accounts should be reconciled on a monthly, quarterly, or annual basis and document this determination. We also recommend that particular attention be given to reconciling pledges receivable as well as contribution revenue, including reconciling the pledge schedule and contribution revenue with the donor database in order to retain information necessary for appropriate record retention; Require Directors and Assistant Controllers to review all reconciliations, with the Controller providing an additional layer of review for accounts that are deemed significant and/or are based on a high degree of estimate or judgment; and, Develop a consistent policy for review of manual journal entries. We suggest that the Controller review all journal entries that exceed a predetermined threshold, or that are based on judgment or estimate. The Controller review of reconciliations and journal entries can be coordinated for greater efficiency. 100

106 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: We will perform a risk analysis to determine which accounts will be reconciled at what frequency and by whom. This process will be documented in a policy by March Reconciliations will be reviewed the appropriate level of management based on this established policy. We are formalizing a policy for the review of manual journal entries, which will include dollar thresholds that are consistently applied. Finding : Disaster Recovery and Business Continuity Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Overall, Howard lacks a formal disaster recovery plan (DRP) that prescribes a disaster, categorizes the levels of impact (e.g., usually based on outage duration/loss of operations), defines the roles and responsibilities, and prescribes the respective response procedures. Recommendation: We recommend that a formal disaster recovery and business continuity plan should be developed and implemented that prescribes the a disaster, categorizes the levels of impact (e.g., usually based on outage duration/loss of operations), defines the roles and responsibilities, and prescribes the respective response procedures. The disaster recovery plan developed should be tested on at least an annual basis to verify its effectiveness and make adjustments as necessary. View of Responsible Officials and Planned Corrective Actions: A Disaster Recovery Plan was developed in We will update the Plan by June

107 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Program Change Management (PeopleSoft Financials/HCM and nvision) Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that the change management process for the PeopleSoft Financials/HCM application appears to lack formally documented policy(s) and procedure(s). Instead, the process is internalized amongst application owners and those responsible for the management and administration of the PeopleSoft Financials/HCM application. Furthermore, with respect to nvision, we noted a lack of segregation of duties for system administrators with access to develop changes and migrate into production. The appropriateness of program changes made to the Invision application are not reviewed directly from the system; thus increasing the risk of unauthorized changes. Recommendation: We recommend Howard develop a formal policy that prescribes the process and workflows supporting program changes administered for the PeopleSoft Financials/HCM application. This will help create a standalone process that does not require institutionalized knowledge amongst a small group of personnel who, depending on their role, could significantly impact the administration and support of the PeopleSoft Financials/HCM application. Furthermore, users with access to develop program changes for nvision should not have access to promote program changes into the production environment. Given current resource constraints, proper segregation of duties may not be feasible; in which case, a periodic review of program changes should be performed on a periodic basis (i.e., monthly, bi-monthly, quarterly) to confirm the appropriateness of changes made to the nvision application. View of Responsible Officials and Planned Corrective Actions: ETS is working on developing Standard Operating Procedures that will meet this recommendation. The target for implementing the procedures is March

108 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Information Technology Governance and Organization Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: The current governance and reporting structure between Howard s different Information Technology groups from the University, Hospital, and Radio Station does not enable them to effectively monitor and oversee Information Technology operations on an enterprise-wide basis. With such a decentralized governance and reporting structure, Information Technology leadership from the University, Hospital, and Radio Station is challenged with managing risks, controlling operations, monitoring conformance with standards, and leading strategic initiatives in a consistent manner across the enterprise. Recommendation: Howard s executive leadership should evaluate the current governance and reporting structure for its Information Technology operations and: Consider defining a leader responsible for managing and controlling Information Technology operations across Howard, and; Forming a centralized Information Technology Steering Committee (similar to the Hospital) who guides the strategic direction and ensures information technology is aligned with the mission objectives of Howard. View of Responsible Officials and Planned Corrective Actions: University leadership is currently reviewing the IT organization and will make a determination of the best structure for Howard. 103

109 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Logical Access (Network and Lawson) Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: Similar to issues previously noted, we noted that the user administration process for granting new users network/ad access and revoking terminated users network/ad access lacks formally documented policy(s) and procedure(s). Instead of a formal process, the process is internalized amongst application owners and those responsible for management and administration of the network/ad. Recommendation: We recommend that a formal policy be developed and implemented that prescribes the process and workflows supporting user administration of Lawson and network/ad user accounts. This will help create a stand-alone process that does not require institutionalized knowledge amongst a small group of personnel who, depending on their role, could significantly impact user administration and support related to access. View of Responsible Officials and Planned Corrective Actions: ETS is working on developing Standard Operating Procedures that will meet this recommendation. The target for implementing the procedures is March Finding : Account Reconciliation Process - Hospital Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: In general, account reconciliations are being performed by the Hospital on a monthly basis. However, we noted for some account reconciliations that research and resolution of certain reconciling items is not being performed timely. Some examples include: Accounts payable reconciliation has debit balances that are greater than 120 days. The Received But Not Invoiced Report (RNI) includes approximately $1.3 million of balances greater than 360 days. Operating bank reconciliation includes checks outstanding greater than 3 years of approximately $256K, which may need to be settled in accordance with District of Columbia escheat laws. Furthermore, during our review of various account reconciliations, we noted that there was no evidence to support that the reconciliations were being properly reviewed and approved. Although we were advised that all reconciliations are reviewed and approved by a responsible employee, no indication of such review was evident on many reconciliations selected for review. 104

110 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Recommendation: We recommend that management should perform the necessary procedures and follow up to resolve reconciling items that are identified during the month-end close process. We recommend this research and resolution should be completed on a monthly basis if possible and no later than on a quarterly basis, and that indication of review and approval of such reconciliations is noted. View of Responsible Officials and Planned Corrective Actions: Hospital Management agrees that research and resolution should be completed no later than on a quarterly basis. It must be noted that both the accounts payable credits ($418k vs. $7.6 million total) and the outstanding escheats ($256k vs. $3.1 million total) did not represent material misstatements. The RNI reconciliation will be executed during FY2014. Management agrees with recommendation that the reconciliations which are done monthly be signed and dated as an indication of review and approval. Finding : Employee Terminations - Hospital Criteria: The Committee of Sponsoring Organizations framework describes that control activities are the actions established through policies and procedures that help ensure that management s directives to mitigate risks to the achievement of objectives are carried out. Condition/Effect/Cause: We noted that the Hospital s processing of employee terminations appears to be significantly delayed. For example, we noted two instances where an employee was paid subsequent to termination. Recommendation: We noted that the Hospital should enforce the formal policy for employee terminations requiring a Personnel Action Form (PAF) to be submitted in a timely manner to the Human Resources Department in advance of the employee termination date. Additionally, the Hospital should implement a procedure whereby all terminated employees must participate in a final exit conference/meeting with the Human Resource Department personnel. This will facilitate HR to initiate the formal termination process to allow for timely system access removal and proper removal within the payroll system. View of Responsible Officials and Planned Corrective Actions: Hospital Management through the Human Resources department has been working to ensure strict adherence to the timely and consistent submission of the Personnel Action forms by the department and has implemented periodic reviews in addition to promoting strict compliance by the departments. 105

111 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Section III Federal Award Findings and Questioned Costs Part A - BDO Findings Finding : Awards Federal Agency: Program: CFDA # Award #: Award year: Pass-through: Special Tests and Provisions - Schedule of Expenditures of Federal Various Research and Development Cluster (R&D) Various Various Various Various Criteria: OMB Circular A Section_.310 (b) sets forth that the auditee shall prepare a Schedule of Expenditures of Federal Awards (the Schedule" or SEFA ) for the period covered by the auditee's financial statements. At a minimum, the Schedule shall list individual Federal programs by federal agency. For Federal programs included in a cluster of programs, the Schedule shall list individual Federal programs within a cluster. For R&D, total Federal awards expended shall be shown either by individual award or by Federal agency and major subdivision within the Federal agency. Also, OMB Circular A-133 does not require non-federal awards to be presented in the Schedule of Expenditures of Federal Awards. Condition: Howard prepares the Schedule on the accrual basis of accounting. The process used by Howard to prepare the Schedule uses data gathered from its General Ledger. During our testing of a sample of 72 project awards from the preliminary Schedule, we noted 6 projects with inappropriate identification of CFDA numbers and 1 project with inappropriate classification between federal expenditures and non-federal expenditures. CFDA Numbers During the review for appropriate classification of CFDA numbers, we noted that the CFDA number was incorrectly recorded for 6 grants included in the Schedule. For the following federal grants, the two-digit agency number was properly identified, however the extension contained within the Schedule did not agree to the extension provided in the agency-approved award notification. Management subsequently corrected the CFDA numbers to ensure that they are appropriately disclosed in the Schedule. Project # Agency Award Description 6957 Pass-through from Georgetown University 6798 National Science Foundation 106 CFDA Per Draft SEFA CFDA Per Final SEFA Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) Partnership for Reduced Dimensional Materials

112 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Project # Agency Award Description 6549 Department of Identity Management for Interoperable PTC Transportation Systems in Bandwidth-Limited Environments 6954 Pass-through from Georgetown University 7760 Department of Education 6737 Nuclear Regulatory Commission Classification of Expenditures Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) CFDA Per Draft CFDA Per SEFA Final SEFA Mathematics and Science Partnership B HU Critical Mass Project: Increasing the Number of African Americans Receiving Doctoral Degrees In Nuclear Physics While testing the overall completeness of the preliminary Schedule, we noted 1 grant was misclassified as a federal award and included in the Schedule. We identified that the following award was determined to be non-federal and should be excluded from the Schedule. Management subsequently corrected the classification of the non-federal award to ensure that it is appropriately excluded from the Schedule. Project Agency # 7769 Department of Education Award Description Educational Administration and Guided Leadership Experiences (Eagle ILL): Partnership Cohort Doctoral Program For Educational Leaders in the Prince George's County Public Schools Amount $109,517 Questioned Costs: None noted. Context: This condition was identified through the review of the Schedule of Expenditures of Federal Awards to ensure Howard s compliance with the provisions of OMB Circular A-133. Effect: The incorrect coding of CFDA extensions in Howard's accounting system results in inaccurate information reported on the Data Collection Form. This may cause a delay in Howard's A-133 report delivery to the appropriate individuals at their respective agencies. Further, the incorrect and lack of coding of CFDA extensions and numbers could lead to inaccuracies in the Schedule and misclassification of grants for the purposes of determining programs to be audited in the OMB Circular A -133 audit. The inability to properly classify grants can also result in compliance requirements and special provisions not being accurately applied. 107

113 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Cause: Internal control policies and procedures for the proper recognition of CFDA numbers within the General Ledger are not consistently followed. Howard has implemented controls and procedures over the new award set-up process in response to the prior year findings. This included the use of a new award checklist which included the verification of all key elements of the executed award, i.e. CFDA#, determination of Federal vs. Non-Federal, budget and cost sharing requirements. In preparation of the interim Schedule, including the preparation of a detailed reconciliation to General Ledger, Howard performed validation procedures as part of its monitoring over the accuracy of the award data recorded during the set-up process through selecting a sample of significant and new awards. Although these procedures were performed, the above items were identified from the sample selected during the audit process. Recommendation: The volume of awards and award transactions necessitates the development and implementation of comprehensive policies, procedures and processes over the recording of such transactions in the General Ledger and subsequent preparation of a Schedule that is complete and accurate and compliant with the requirements of OMB Circular A-133. Specifically, we recommend Howard consider: Updating its policies and procedures related to the Award Acceptance and Set-Up process. The formal policies and procedures should include implementation of controls to ensure the CFDA number and classifications of grants are properly entered into Howard's accounting system by the Office of Sponsored Programs personnel. We also recommend that Research Administrative Services perform a periodic review of the grant information within Howard's accounting system to ensure that all information is accurate and up-to-date. Strengthening and enforcing its existing policies and procedures to ensure federal and non-federal expenditures are properly classified in the Schedule. View of Responsible Officials and Planned Corrective Actions: Formal policies and procedures regarding the SEFA preparation process were created during FY Examples include process documentation and implementation of a SEFA preparation checklist. Other significant improvements include implementing a monthly review of existing data and all new awards; training for grant personnel responsible for inputting data used in the SEFA; and a more rigorous quality control review during award set-up. A resource was also identified to prepare the SEFA and reconcile expenditures to the accounting records monthly. We believe that these initiatives greatly improved the SEFA preparation process from the prior year. The above procedures were fully implemented during FY2014 and we expect greater SEFA accuracy going forward. 108

114 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Federal Agency: Program: Allowable Costs/Cost Principles Department of Health and Human Services Excellence in Health Professional Education Endowment CFDA #: Award #: Award Year: 1522-MD /08/ Continuous Criteria: OMB Circular A-21 section J. General provisions for selected items of cost under paragraph 22. Goods or services for personal use, states that costs of goods or services for personal use of the institution s employees are unallowable regardless of whether the cost is reported as taxable income to the employees. Condition: During a review of 25 sample transactions selected for testing, we noted that 3 transactions included a total amount of $20 for purchases of goods for personal consumption. Questioned Costs: Below reporting threshold. Context: This condition was identified during a review of grant expenditures to ensure Howard s compliance with the provisions of OMB Circular A-21 requirements for allowable costs. Effect: Howard s failure to properly identify personal expenses resulted in unallowable expenditures charged to the Federal program. Cause: Howard personnel did not properly identify personal expenses that were included in the itemized receipts and incorrectly charged the expenditures to the Federal program. This is due to lack of review and approval for purchases using P-Cards. Recommendation: We recommend that Howard strengthen its policies and procedures to ensure that amounts charged to Federal programs do not include unallowable costs. In addition, Howard should enhance internal controls over review and approval of purchases using P-Cards. 109

115 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: Initiatives are underway to improve internal controls. These include adding a P-card administrator to be responsible for oversight of P-Card purchases. Additionally, Procurement will launch the University s P-Card website in FY 2014, which will require each cardholder to reconcile their accounts online with supporting receipts and approval for the allowability of each item charged to a federal award. We believe that these improvements will address the auditor s recommendations. Finding : Federal Agency: Program: Special Tests and Provisions (Return of Title IV Funds) Department of Education Student Financial Aid Cluster CFDA #: , Award #: Award Year: Various Various Criteria: 34 CFR (j) - Timeframe for Return of Title IV Funds states (1) An Institution must return the amount of Title IV funds for which it is responsible as soon as possible but no later than 45 days after the date of the Institution's determination that the student withdrew. Condition: Out of the 18 students selected for testing, we noted that 1 refund submission, in the total amount of $4,475, was returned 122 days after determining that the student withdrew. Questioned Costs: None noted. Context: This condition was identified through the review of the specific compliance requirements to ensure Howard s compliance with the provisions of OMB Circular A-133 and CFR requirements regarding return of Title IV funds. Effect: Due to the late submission of Title IV refunds, SFA funds were not readily available for use elsewhere. Cause: Due to a manual error, certain Title IV refunds were returned late. Recommendation: Howard should ensure that controls for implementing the established withdrawal and refund policies are more diligently executed to ensure that all refunds are returned to the lender in a timely manner. 110

116 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: Howard agrees with this finding and underscores that the return of Title IV funds calculation was completed timely and the majority of funding returned timely. The total amount of the return (i.e. SEOG, $1,700 and PELL $2,775) was completed 122 days after the deadline due to manual error. The following action items have been implemented to serve as internal controls. The Student Financial Aid team will be conducting monthly peer audits for every return of Title IV funds to ensure compliance and timely returns. This finding is not expected to be found in future audits. Finding : Eligibility Federal Agency: Program: Department of Education Student Financial Aid Cluster CFDA #: Award #: Award Year: Various Various Criteria: Each year, based on the maximum Pell grant established by Congress, the Department of Education provides to institutions Payment and Disbursement Schedules for determining Pell awards which include the following criteria: 34 CFR 690.8(c)(1) A student who would be a less-than-half-time student based solely on his or her correspondence work or a combination of correspondence work and regular course work that is greater than zero, but less than 6 hours is considered a less-than-half-time student. 34 CFR (c)(2)(ii) If the student is enrolled in less than 6 credit hours that commence and are completed in that term, the Disbursement Schedule for a less-than-half-time student is used to calculate the payment for the payment period ( 34 CFR (b)(2) If the student s enrollment status changes from one academic term to another term within the same award year, the Institution shall recalculate the Federal Pell Grant award for the new payment period taking into account any changes in the cost of attendance. Condition: Out of the 24 recipients selected for testing eligibility requirements specific to Federal Pell Grant, we noted that 1 recipient was over-awarded in the amount of $694 for the academic calendar. Questioned Costs: Known questioned costs associated with this finding are $

117 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Context: This condition was identified through a review of the specific compliance requirements to ensure Howard s compliance with the provisions of OMB Circular A-133 and CFR requirements regarding Federal Pell Grant. Effect: Not manually confirming recipient s eligibility before awarding funds could result in ineligible recipients receiving funds, and thereby, creating questioned costs. Cause: Howard did not have a system or a module in their system to calculate Pell awards to eligible less-thanhalf-time recipients. Recommendation: We recommend that Howard implement a system that would properly calculate Pell awards to eligible lessthan-half-time recipients. In addition, Howard should enhance internal controls over review and approval of student status changes and recalculation of Pell awards prior to disbursement of awards. View of Responsible Officials and Planned Corrective Actions: Howard agrees with the finding but notes that this incident was extremely isolated. The finding as listed represents a negligible percentage of the eligibility testing sampled (only 1.6%) and even less than the number of Pell recipients (less than.003%). Howard completed an exhaustive review of all Pell recipients to ensure that this incident was isolated, and did not find any students similarly situated. Howard highlights that funds were returned to the Department of Education and the student did not suffer any loss of aid because Howard replaced the previous award with institutional funds. To avoid future errors with Pell, Howard implemented a Less than half-time module in our Banner system. This will prevent disbursement of Pell funds if a student is considered at less than half-time. 112

118 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Federal Agency: Allowable Costs/Cost Principles Agency for International Development Program: Strengthening Integrated Delivery of HIV AIDS Services (SIDHAS) Nigeria (Family Health International) CFDA #: Award #: AID-620-A Award Year: 10/5/2011-5/31/2016 Pass through: Family Health International * * * * * Federal Agency: Centers for Disease Control and Prevention Program: Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief CFDA #: Award #: 1U2GPS001938; 5U2GPS Award Year: 9/30/2009-9/29/2014 Federal Agency: Various * * * * * Program: CFDA #: Award #: Award Year: Research and Development Cluster Various Various Various Criteria: According to OMB Circular A-133 Subpart C, Section.300, the auditee has the responsibility to "maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs." OMB Circular A-21 section E.2 states that a base period for distribution of Facilities and Administrative (F&A) costs is the period during which the costs are incurred. The base period normally should coincide with the fiscal year established by the Institution. 113

119 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 OMB Circular A-21 section J.10.f states that fringe benefits are allowable provided such costs are distributed to all institutional activities in proportion to the relative amount of time or effort actually devoted by employees. Condition: During our testing for compliance with applicable F&A and fringe benefit cost rates based on the terms and conditions of the awards, we noted that the F&A and fringe benefit costs for the following programs were not properly charged to the period during which the costs had incurred resulting in overcharges and undercharges of F&A and fringe benefit costs on the preliminary Schedule. Management corrected the overcharged amounts for the programs related to the Agency for International Development and Centers for Disease Control and Prevention to ensure that the amounts were properly excluded from the Schedule. Federal Agency: Agency for International Development Program: Strengthening Integrated Delivery of HIV AIDS Services (SIDHAS) Nigeria (Family Health International) Project # Award # Program Agency Ref # Overcharge 6834 AID-620-A Strengthening Integrated Delivery of HIV AIDS Services (SIDHAS) Nigeria (Family Health International) Pass-through from Family Health International A $582,366 Total overcharge $582,366 Federal Agency: Centers for Disease Control and Prevention Program: Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief Project # Award # Program Agency Ref # Overcharge U2GPS U2GPS Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief Centers for Disease Control and Prevention Centers for Disease Control and Prevention A $6,801 A $16,

120 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, U2GPS Supporting the Scale Up of High Quality HIV Care and Treatment Programs in Malawi Through a Strengthened Laboratory Infrastructure Under the President's Emergency Plan for AIDS Relief Centers for Disease Control and Prevention A $8,408 Total overcharge $31,350 Federal Agency: Program: Various Research and Development Cluster Project # CFDA # Program Agency Ref # Overcharge (Undercharge) NOAA Center for Atmospheric Sciences at Howard University Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) Department of Commerce Department of Health and Human Services A ($7,848) B $17, Loan Repayment for Health Disparities Research Department of Health and Human Services B $1, LSAMP - Washington Baltimore Hampton Roads Alliance National Science Foundation A $2, Partnership for Reduced Dimensional Materials National Science Foundation A $ Extracting Social Meaning From Linguistic Structures in African Languages Using Olfactory Epithelial Tissue to Define Molecular Mediators of Lithium Action Department of Defense Department of Health and Human Services A ($16,272) A $4, Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI Department of Health and Human Services A ($168,234) Molecular Analyses of RECQ1 Functions in Genome Department of Health and Human Services A $1, Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI Department of Health and Human Services A ($147,965) Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI Department of Health and Human Services A $71, Identity Management for Interoperable PTC Systems in Bandwidth-Limited Environments 115 Department of Transportation A $2,843

121 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) Georgetown-Howard Universities Center for Clinical and Translational Science (Georgetown University) Department of Health and Human Services Department of Health and Human Services A $765 B $7, Computational Biology, Bioinformatics, Imaging and Proteomics Research - RCMI Department of Health and Human Services A $65, NFR/Research Opportunities in Space and Earth Sciences (ROSES 2007) NFR/Research Opportunities in Space and Earth Sciences (ROSES 2007) National Aeronautics and Space Administration National Aeronautics and Space Administration A $688 B $4,981 Net undercharge ($159,221) A F&A Costs B Fringe Benefit Costs Questioned Costs: None noted. Context: This condition was identified during the review of grant expenditures to ensure Howard s compliance with the provisions of OMB Circular A-21 requirements regarding allowable costs. Effect: Lack of appropriate management oversight on charging and recording of F&A and fringe benefit costs to the correct period could result in loss of funding and termination of a program. Cause: Howard s accounting system incorrectly charges F&A and fringe benefit costs in the period during which the costs are incurred. Also, there is lack of management oversight and review of F&A and fringe benefit costs charged to each program. Recommendation: We recommend that Howard strengthen its policies and procedures to ensure that F&A and fringe benefit costs are charged to the period during which the costs are incurred. In addition, Howard should fix its accounting system to ensure costs are charged to the program s appropriate period. 116

122 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: Howard agrees with the auditor s recommendation. Prior to submitting a request for reimbursement or financial report, all F&A and fringe benefit charges are recalculated for accuracy and any adjustments are made to ensure that all amounts are accurate and allowable prior to reimbursement. We will implement additional review procedures to ensure that F&A and fringe benefit charges are recorded in the appropriate accounting period by performing a quarterly review of F&A and fringe benefit charges on active projects to ensure that charges are posted in the appropriate accounting period. It should be noted that the F&A and fringe benefit charges noted above were corrected on the first day of FY 2014, within the same award period and on the final version of the SEFA; therefore there was no impact to the overall expenditures reimbursed or reported on this award. 117

123 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Finding : Federal Agency: Program: Matching, Level of Effort, Earmarking Agency for International Development Strengthening Integrated Delivery of HIV AIDS Services (SIDHAS) Nigeria (Family Health International) CFDA #: Award #: AID-620-A Award Year: 10/5/2011-5/31/2016 Pass through: Family Health International Criteria: Per the subagreement between Family Health International and Howard University, Howard s cost share contribution will be 2% of the total obligated funding. Howard s cost share contribution for fiscal year 2013 shall be $45,354. Condition: We noted that Howard was only able to match the cost share contribution in the amount of $29,739. Howard did not meet the required cost share contribution for the fiscal year 2013 in the amount of $15,615. Questioned Costs: Known questioned costs associated with this finding are $15,615. Context: This condition was identified during the review of grant expenditures to ensure Howard s compliance with the provision of the grant agreement s matching requirements. Effect: Lack of oversight from management to meet matching requirements could result in loss of funding and termination of a program. Cause: Policies and procedures were not appropriately adhered to in order to monitor the required matching compliance requirements. Recommendation: We recommend that Howard strengthen its policies and procedures over monitoring of matching requirements to ensure that the required cost share requirements are met. 118

124 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 View of Responsible Officials and Planned Corrective Actions: Howard agrees with the auditor s recommendation and will implement additional monitoring controls to ensure that applicable matching requirements on federal awards are met. Research Administrative Services will implement quarterly reviews over those awards with matching requirements including reaching out to program staff and reviewing expenditures for compliance. Additionally, a message will be distributed to the research community to re-educate Principal Investigators on the importance of remaining compliant with all matching requirements. 119

125 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 Section III Federal Award Findings and Questioned Costs Part B Other Auditor Reports Below is a summary of communications with federal agencies that sponsor grant programs at Howard, as provided by University management, and not audited by BDO. Department of Health and Human Services (DHHS) In January 2013, Howard received an inquiry from DHHS s Office of Inspector General (OIG) regarding the FY 2009 audit. Howard responded to DHH S inquiry in February 2013 and considers the matter closed. In August 2012, Howard received an inquiry from DHHS OIG regarding the FY 2010 audit. Responses were provided in January 2013 and DHHS notified Howard that the matter was closed in February In May 2012, Howard received a letter from DHHS regarding the FY 2011 audit. Howard responded to the inquiry in May 2012 and DHHS notified Howard that the matter was closed in February In May 2013, Howard received a request for additional information related to findings from the FY 2012 A-133 audit. Howard replied to this request in July 2013 and DHHS notified Howard that the matter was closed in August Department of Education (DoED) To address a long standing audit finding (most recently, FY 2011 finding ), Howard requested clarification from DoED regarding audit requirements for the Matching Endowment. In September 2012, DoED confirmed that Howard s annual OMB Circular A-133 audit and financial statement audit fulfilled the agreement s audit requirements. Per DoED s explanation, the finding has been addressed and resolved. In August 2012, DoED requested information and support for audit findings noted in Howard s FY OMB Circular A-133 reports. Howard responded to the request in January 2013 and considers the matter closed. In April 2013, Howard received a notification from the Office of Postsecondary Education (OPE) describing their implementation strategies to mitigate and manage risk for grants awarded to Howard. This letter is a routine communication issued annually by OPE to any institution that received new or continuing awards in the prior fiscal year. Howard responded to OPE in May 2013, and informed relevant Principal Investigators of the correspondence. No additional follow-up is required and Howard considers the matter closed. Health Resources and Services Administration (HRSA) Howard received a November requesting follow-up and support for FY 2010 OMB Circular A-133 audit findings related to HRSA. The HRSA request was a subset of inquires received from DHHS noted in the comments above. In December 2012, Howard provided responses and support and addressed follow-up inquires in February The matter was resolved in a letter received from HRSA in March In January 2013, Howard received an inquiry regarding the FY 2009 OMB Circular A-133 audit findings as they related to HRSA. The HRSA request was a subset of inquires received from DHHS noted in the comments above. Howard replied to the inquiry in February 2013 and HRSA closed the matter in February

126 Schedule of Findings and Questioned Costs For the Fiscal Year Ended June 30, 2013 National Aeronautics and Space Administration (NASA) In November 2012, Howard received an inquiry regarding findings associated with NASA awards in our FY 2010 OMB Circular A-133 audit report. Howard responded to the inquiries in November 2012 and considers the matter closed. Howard received an inquiry from the NASA OIG in April 2013 regarding the citizenship of students participating in the University Research Center (URC) Program. This inquiry was part of a general review of all universities with URC programs (groups 4 and 5). Howard replied to this request along with two follow-up questions in June Department of the Army US Army Medical Research Acquisition Activity (Army) In March 2012, Howard received a letter from Army regarding the FY 2007, 2008 and 2010 OMB Circular A-133 audits. Howard responded to Army s inquires with letters, support and teleconferences in April, May, September and October In October 2012, the matter was settled and closed. National Science Foundation (NSF) In March 2013, Howard received an inquiry from the NSF OIG requesting support for certain expenditures on five NSF awards covering the period July 1, 2006 February 28, Howard submitted all available information to NSF in May 2013, and is awaiting the OIG determination. In July 2011, NSF requested information regarding findings contained in Howard s FY 2010 OMB Circular A-133 audit report. Later, in September 2012, NSF requested information regarding findings in the FY 2011 audit report. Howard worked closely with NSF throughout FY 2013 in order to resolve these issues. In June 2013, NSF removed Howard s special payment restrictions and no longer requires Howard to submit a 270 for reimbursement. In addition, Howard is now authorized to use ACM$ for requesting funds. This change is the result of Howard s efforts in resolving findings from FY 2010 and FY In July 2013, Howard received an request for information on findings contained in Howard s FY 2012 OMB Circular A-133 audit report. Howard replied to this request in December 2013 and is waiting on resolution confirmation from NSF. 121

127 Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2013 Finding : Improve Grant Receivable Accounting and Analysis Per Finding , it was noted that there were concerns over accounting and analysis of grants receivable, particularly the age and characterization of credit balances and the assessment of the collectability of the balance. The auditor recommended that management perform a thorough analysis of the grants detailed listing and clear all credit balances Status Update: Significant improvements were made in the process for accounting for grant receivable balances in FY 2013 including a more robust monthly closing process with enhanced monthly reviews of credit balances and a comprehensive and ongoing assessment of the collectability of receivable balances. During FY 2013, all historical credit balances were cleared from the detailed listing and any new credit balances are analyzed on a monthly basis and reclassified to a liability account. The grants monthly closing analyses are prepared in a timely manner and reviewed by a Director and/or Assistant Controller prior to finalization. Additional accounting resources were also added during the year to assist with grant accounting. Finding : Adhere to Review Policies Finding noted instances where the account review process during the annual close process may not have operated effectively to detect errors in the financial statements. The auditor recommended an enhancement of the supervisory and review practices including evidence of such review Status Update: Significant enhancements were made to the monthly and annual closing process including formalization of supervisory review for all key analyses. All key analyses are reviewed, at a minimum by the responsible Director or Assistant Controller and may involve others such as the Controller and Chief Financial Officer. In addition, we started the process of preparing a monthly Controller s Management Report in FY 2014 that is presented to and reviewed by the Controller and Chief Financial Officer that serves as a quality review report. The report is designed to document the assessment of the appropriateness of significant balances and serve as supervisory review. Finding : Revisit Project Plan and Establish Timeline for Implementing Internal Controls Finding noted that Howard relies heavily on detective controls rather than preventative controls. The auditor recommended that Howard revisit its formal plan to implement a strong system of internal controls and enhance coordination with non-finance personnel to implement action plans Status Update: During FY2014, a steering committee of responsible officers was formed to create a control environment that is based on clear expectations and accountabilities. The progress of the steering committee is focused on the most critical areas requiring improvement and is being monitored by the Board of Trustees. 122

128 Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2013 Finding (2011-2, , , , ): Special Tests and Provisions Schedule of Expenditures of Federal Awards Finding noted items relating to the preparation of the Schedule of Expenditures of Federal Awards (SEFA) including inappropriate identification of CFDA numbers, misclassification between federal expenditures and non-federal expenditures, and unrecorded federal expenditures. The auditor recommended that comprehensive policies, procedures and processes over the recording of award transactions be implemented to strengthen the accuracy of the SEFA Status Update: Significant efforts were made to improve the SEFA preparation process including implementing a monthly review of existing data and data for all new awards; training for grant personnel responsible for inputting data used in the SEFA; and a more rigorous quality control review during award set-up. Additionally, a resource was identified to prepare the SEFA monthly and reconcile expenditures to the accounting records. The above procedures were fully implemented during FY2014 and we expect that this will greatly improve the accuracy of the SEFA going forward. Partially corrected: See current year Finding (2011-4, , , ): Allowable Costs/Cost Principles: Cost Transfers Finding noted the following as it relates to cost transfers: untimely processing of transfers; transfers recorded not within the grant period; transfers recorded relating to prior fiscal years and transfers missing documentation. The auditors recommended that Howard continue to strengthen its formal procedures to identify costs charged in error and to ensure that transfers are completed timely Status Update: Research Administrative Services continued to enhance its cost transfer process by updating the cost transfer form to standardize the documentation required prior to transfer, adding additional reviews to ensure OMB Circular A-21 compliance and implementing the new retro distribution process to ensure that corrections are being made to the source data for consistency. Further, additional monitoring is being performed in order to identify transfers more timely and the new effort reporting system requires certifications quarterly and not just at year-end. Finding (2011-9): Overall Timing and Other Matters Finding notes instances where the SEFA expenditures in the current year were incurred in prior years or expenditures that were corrected in the next year due to the delays in processing of invoices. The auditors recommended that Howard establish monitoring procedures for a quarterly reconciliation of the SEFA to the Financial Statements and enhance cut-off procedures to ensure that transactions are recorded timely Status Update: Extensive efforts were put forth to detect out-of-period expenditures and prevent cut-off issues. Monthly reviews have been enhanced to include a reconciliation of the SEFA data to the financial statements and increased communication and outreach to the community to reduce cut-off issues and improve the timely recordation of expenditures going forward. 123

129 Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2013 Finding : Effort Certification Process Finding noted that Howard experienced some challenges during the effort certification process due to the implementation of new effort certification system including discrepancies between the effort certificates and payroll records and issues with some of the functionality in the system. The auditors recommended that a reconciliation between the effort certification system and payroll records be performed to prevent such issues going forward Status Update: Howard implemented its effort certification system during the year and experienced some initial challenges with the system roll-out, which were subsequently resolved after go-live. The issues noted by the auditors were identified during the first certification cycle and were remediated prior to initiating subsequent cycles. Therefore, we believe we have fully addressed the auditor s concerns. Finding : Special Tests and Provisions (Human Subjects) Finding noted instances where participants did not have a valid signed consent form in a study because participants were asked to sign consent forms with a pre-stamped date that had expired. This occurred because of the ongoing annual repetition of the focus groups conducted during the study. The auditor recommended that documentation be obtained to ensure that signed consent forms cover the period the testing will be performed Status Update: In this instance, personnel inadvertently used a form with a prior year s expiration date. Management reinforced its existing policies and procedures to ensure that consent forms are signed timely with the appropriate expiration dates printed on the form. Additionally, communications were distributed to the community to reiterate the importance of discarding expired blank forms to prevent such issues in the future. Finding (2011-6, ): Eligibility Finding noted four participants in the Charles B. Rangel International Affairs program did not appear to meet the eligibility requirements of the program, which resulted in $39,522 of questioned costs. The auditor recommended that Howard improve its controls and procedures to ensure that documentation supports eligibility in accordance with the terms of the award Status Update: Eligibility requirements have been relayed to applicable grant personnel. In June 2013, Howard returned the questioned costs to the Department of State relating to this eligibility issue and had an open dialogue with program staff to ensure additional eligibility procedures are implemented. Mitigation is the result of continued coordination between accounting, Research Administrative Services (RAS) and program personnel and that coordination continues to be emphasized. Additionally, a Research Alert was distributed to the research community to reiterate Howard s responsibility for maintaining compliance with eligibility requirements. 124

130 Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2013 Finding : Agency for International Development Overall Award Administration Finding noted questioned costs totaling $35,184 relating to unallowable costs, out-of-period expenses being reported on financial reports, lack of formal process for calculating foreign currency translations for transactions in foreign currency, variances with the indirect cost and fringe benefit recalculation and missing supporting documentation for progress reports submitted to verify the date of submission. The auditor recommended that Howard enhance its controls and procedures around processing of transactions for the program by training field staff to ensure comprehensive understanding of the compliance requirements. Additionally, the auditor recommended that an appropriate filing system be developed to maintain appropriate audit evidence for each applicable compliance requirement Status Update: A Global Business Steering Committee was established in FY 2013 to oversee all foreign operations and to develop formal policies and procedures to administer foreign transactions. A formal policy and process for calculating the exchange of foreign currency is currently being documented and additional reviews of grant expenditures have been implemented to prevent similar findings in the future. Additionally, Research Administrative Services and other Finance personnel have ongoing communications with the program staff to reinforce regulatory requirements. Partially corrected: See current year finding Finding ( ): Reporting Finding noted that one quarterly ARRA report submitted included inaccurate financial data due to an input error. The auditor recommended an enhancement to the internal control procedures around reporting, including formal training programs Status Update: Howard enhanced its supervisory review and approval process to ensure that all reports are submitted with accurate information. It should be noted that this was an isolated incident and the report was updated, resubmitted to the sponsor and accepted as accurate and timely. Finding ( ): Special Tests and Provisions (Title IV Refunds) Finding noted instances where refund submission of Title IV funds was returned late. The auditor recommended that controls be implemented to establish withdrawal and refund policies to ensure that refunds are issued timely Status Update: The Student Financial Services (SFS) Department and Treasury communicated with the Department of Education regarding the letter of credit (LOC). Additionally, SFS implemented a routine review of returns to monitor compliance and timeliness in order to ensure that all Title IV funds are returned timely. See current year finding

131 Summary Schedule of Prior Audit Findings For the Fiscal Year Ended June 30, 2013 Finding ( , ): Special Tests and Provisions (Student Financial Aid Other) Finding noted that Howard s systems and processes did not ensure that all student changes were reported and recorded within 60 days as required and that Howard has not maintained all required student records for loans, deferments and collections. The auditor recommended that Howard implement procedures to ensure that all student status changes are communicated timely and all student files be maintained to ensure consistent monitoring Status Update: SFS addressed through their review and routine procedures. System enhancements have occurred which automated timely detection of missing or incomplete documentation as well as relevant reporting associated with changes. 126

132 Corrective Action Plan

133 March 24, 2014 Federal Audit Clearinghouse 1201 E. 10 th Street Jeffersonville, IN Subject: OMB Circular A-133 ( A-133 ) Corrective Action Plan of The Howard University ( Howard ) for the Fiscal Year ended June 30, 2013 To Users of Howard s A-133 Report: This document describes the Corrective Action Plan ( CAP ) of Howard University as it relates to audit findings for the fiscal year ( FY ) ended June 30, 2013, under OMB Circular A-133. The CAP includes descriptions of corrective actions and anticipated time needed to implement the corrective actions. This CAP covers audit findings related to over $606 million of federal program expenditures in FY2013. Background and Recent History In FY2013, Howard continued its extensive renewal of University programs, facilities and functions. As part of this effort, significant attention and resources were devoted to improving Howard s federal award compliance. Principal investigators were provided with additional resources for proposal development and program management. Howard s accounting and grants management information systems were enhanced for federal program reporting capacity. As a result of these efforts, Howard experienced a marked improvement in overall grants management and compliance. Evidence of this improvement is clearly demonstrated in the trend of reduced compliance findings and questioned costs in Howard s A-133 audit reports over the last three fiscal years. Total questioned costs for FY amounted to only 1% of the total questioned costs for FY Further evidence of Howard s progress includes the remediation of findings from FY2012. For example, the FY2012 findings pertaining to cost transfers, effort reporting and grant reporting which had been findings for several years; were not repeated in the FY2013 audit report. The remaining findings from FY2012 will be fully addressed through the implementation of the corrective action plan. Corrective Actions Taken To-Date Howard continued to improve compliance oversight over federal programs in FY2013 by installing a number of new system tools. The HR process improvement initiative started in FY2014 will streamline the employee onboarding process, improve the accuracy of employee time charged to federal grants and will reduce the need for cost transfers. The HR initiative builds on the success of the e-procurement tool launched in FY2013. By automating steps in the procurement process, the new tool has improved grants procurement integrity and inventory management th Street, NW (202) Washington, DC (E) john.gordon@howard.edu

134 Additionally, a new electronic tool is currently in development to enhance Howard s proposal procedures. Once implemented, this tool will assist Principal Investigators with proposal preparation and improve the overall quality of Howard s grant proposals. The system is designed to automatically populate the proposal with data and compliance criteria directly from sponsor websites. As a result, grant set-up upon award will benefit from improved accuracy by reducing the potential for human error and increased automation in the SEFA preparation process. Finally, the Electronic Effort Certification System implemented FY2012 transitioned an inefficient manual process to an electronic solution with ease of use and quality control features. The upgrade improved record retention and timeliness of effort certification in FY2013 and remediated related prior years audit findings. Ownership of FY2013 Corrective Action Plan Ownership of Howard s corrective action plan resides with the officers of the University. The President, Chief Financial Officer, Chief Operating Officer and other officers take responsibility for the remediation of audit findings and for reinvigorating the control and accountability model. Toward that end, a committee of key executives (with the participation and counsel of the Chairman of the Board of Trustees and the Chairman of its Audit and Legal Committee) has been formed to drive organizational and process change, and to minimize the risk of noncompliance with federal regulations. Financial Statement Findings, Section II Findings through : We note the auditors conclusion that the findings, in aggregate, did not result in a material misstatement of Howard s financial statements. In response to these findings, Howard s Board of Trustees (BOT) took immediate action to move toward their vision of excellence. In October 2013, the BOT appointed an Interim President, an Interim Chief Financial Officer (CFO), Chief Operating Officer (COO) and Interim Provost & Chief Academic Officer while the search for a permanent President is underway. Additionally, contracted employees at the executive level were replaced by full-time University employees. The BOT also established an Enterprise Risk Management (ERM) Committee to evaluate and mitigate Howard s exposure to risk. The ERM Committee is comprised of cross-functional senior and mid-level management to ensure a wide spectrum of possible risks is identified. The ERM Committee provides a status update to the BOT at each regularly scheduled Board meeting and will work closely with executive leadership and the Policy Committee to evaluate policies and procedures across the University to address the audit recommendations. Additionally, Howard will continue a long-running project to assess design and test operational effectiveness of key accounting and program controls. Please refer to the attached table for Howard s corrective action for each finding. 128

135

136 Section II Summary of Financial Statement Findings Finding Governance Considerations Employee Onboarding Process Procurement Policies Segregation of Duties Various Agencies and Programs Accrual Process Journal Entries Hospital Physical Security Back-up and recovery Corrective Action The auditor recommended that the University reevaluate the organizational structure and internal control environment to clearly define roles, responsibilities and accountability to prevent internal control breaches. To address this finding, The Board of Trustees (BOT) approved a new organizational structure in November Additionally, an Enterprise Risk Management (ERM) Committee was established to assess overall exposure to risk and the effectiveness of University policies and procedures. The auditor recommended that the employee on-boarding process be centralized with HR, and that HR should maintain copies of all executed employment agreements. In response, the University has launched an HR process improvement initiative to remediate process gaps and design a comprehensive training and change management plan to educate hiring managers on the appropriate procedures by December The auditor recommended Howard clarify and enforce the procurement process. To address the finding, the procurement function will be reorganized and procurement policies will be updated to include key contracting policies and address controls over P-Cards. The auditor recommended that contracts follow a documented bidding process and new controls to be implemented to ensure segregation of duties for wire transfers. Howard implemented a new policy in December 2013 requiring additional approvals for wire transfers to address the issues as recommended by the auditor. To control user access rights, the auditor recommended that access logs be enabled in order to detect unauthorized access. In response, Enterprise Technology Services (ETS) will work with departmental leaders to increase the routine review frequency of user access rights by March 2014 and will activate access logs by June To improve the invoice accrual process, the auditors recommended that the University implement enforcement policies and train budget specialists to perform additional analytical reviews. In response, Finance will continue community outreach to engage and receive timely information from the community to record accurate accruals. Additionally, we will implement an electronic workflow system that requires vendors to upload invoices directly into a vendor portal to integrate with the current Procurement system and general ledger. This system will automate the accrual preparation process. The auditors recommended the University enhance user access restrictions and secondary reviews to strengthen controls over journal entries. To address the finding In FY14, Hospital management will implement the appropriate supervisory review of journal entries. To improve physical security of data and equipment in ETS, the auditor recommended that the University perform a comprehensive physical security audit of all facilities. In response, ETS will repair or replace doors on the new Blackboard Transact access control system (via Wonder Plaza) by February To improve system back-up and recovery, the auditor recommends that a backup site be established outside of the primary data center. To address this finding, ETS moved backup equipment to the College of Medicine in October Additionally, ETS will develop Standard Operating Procedures in accordance with the auditors recommendation by March

137 Finding Retention of Documentation Cross-training of Professionals Application Security (nvision) Logical Access Segregation of Duties (Banner) Information Systems Training System Capabilities Financial Reporting Disaster Recovery and Business Continuity Corrective Action To address records retention, the auditors recommended that the University pursue a project to complete its records by contacting 3 rd parties with which the information may have been shared. To remediate this finding, the Records Retention Policy will be reviewed and updated as necessary in March Secure document storage will be obtained for the interim period until a long term solution is identified. To improve the overall knowledge and skill sets of Howard finance employees, the auditors recommended cross-training staff and leveraging system improvements to reduce day-to-day manual processes. In response, the Finance Department will be reorganized to include documentation of roles and responsibilities and designating backup staff that will be cross trained to perform multiple finance functions. The existing system will be assessed to find ways of eliminating manual processes and a formal training plan will be developed by June To increase system security, the auditors recommended coordinating with vendor to automatically enforce first-time password changes for nvision users, as well as requiring greater password complexity. ETS will develop a compensating control to ensure user change their passwords periodically in order to address this finding. The auditors recommended that access controls for DBA s be enhanced to enforce proper segregation of duties. In response, ETS notes that the current system configuration is necessary given the team s structure to provide adequate back-up coverage for each function and will continue to identify potential additional opportunities for improvement in this area by creating compensating controls to mitigate the risks. To minimize disruptions during system upgrades, the auditors recommended that ETS communicate the nature and timing of changes, and provide comprehensive user training. ETS noted in response that they undergo a rigorous User Acceptance Testing and Training for all updates to the system. User Acceptance testing and training is documented thoroughly and maintained with other key project documents but we will revisit our policy and document any necessary updates. The auditors recommended that management collaborate with ETS to review PeopleSoft capabilities and define stakeholder needs in order to maximize system potential and reduce the need for manual processes. In response, ETS will conduct a systems utilization assessment and the Finance department will leverage the budget module in the system to enhance the annual budget process by June The auditors recommended strengthening controls over account reconciliation by including supervisory review in the reconciliation process and developing a consistent policy for review of manual journal entries. To address the finding, the Finance department will perform a comprehensive risk analysis to develop determine the key accounts for analysis/reconciliation which will be documented in an updated policy by June A policy for the review of manual journal entries will be formalized, and will specify dollar thresholds which shall be consistently applied. The auditors recommended that a formal disaster recovery and business continuity plan be developed and implemented. In response to the finding, Howard notes that a Disaster Recovery Plan was developed in The existing plan will be reviewed and updated by June

138 Finding Program Change Management Information Technology Governance and Organization Logical Access (Network and Lawson) Account Reconciliation Process - Hospital Employee Terminations - Hospital Corrective Action The auditors recommended that a formal change management policy be developed including the process and workflows in support of program changes administered for the PeopleSoft Financials/HCM application. To address this finding, ETS and HU management will implement Standard Operating Procedures in accordance with the auditors recommendation by March To enable better monitoring of information technology, the auditor recommended that Howard consider defining a leader responsible for managing Information Technology operations across the University, and forming a centralized Information Technology Steering Committee. In response, University leadership is currently reviewing the IT organization and will make a determination of the best structure for Howard moving forward. The auditors recommended that a formal policy be developed and implemented that prescribes the process and workflows supporting user administration of Lawson and network/ad user accounts. In response to this finding, ETS will implement Standard Operating Procedures in accordance with the auditors recommendation by March The auditors recommended that Hospital management perform the necessary procedures to resolve reconciling items that are identified during the month-end close process. To address the finding, the RNI reconciliation will be performed each quarter and monthly bank reconciliations will be signed and dated to evidence review and approval. The auditors recommended that Hospital management enforce the policy for employee terminations. In response to this finding, Hospital management and HR are working to ensure consistent submission of Personnel Action forms and periodic reviews have been implemented to ensure departmental compliance. 132

139 Section III Summary of Federal Award Findings Finding Special Tests and Provisions - SEFA Federal Agency Various Corrective Action The auditors recommended updating policies and procedures related to award acceptance and set-up, and to enforce internal controls to ensure proper classification on the SEFA. Additional resources and new procedures were developed in FY2013 and were fully implemented in FY2014 to address this finding. Questioned Costs None Noted Allowable Costs/Cost Principles Department of Health and Human Services The auditors recommended that Howard strengthen internal controls over review and approval of P-Card transactions. In response to the finding, Howard will establish a P-card administrator to enhance reviews of P-Card transactions to support allowability on federal awards. Below reporting threshold Special Tests and Provisions (Return of Title IV Funds) Department of Education The auditor recommended that controls withdrawal and refund policies be enhanced to ensure that all refunds are returned to the lender in a timely manner. To address the finding, the Student Financial Aid team will be conducting monthly peer audits for every return of title IV funds to ensure compliance and timely returns. None Noted Eligibility Department of Education The auditor recommended implementing a system that properly calculates Pell awards to eligible less-than-half-time recipients. They also recommended enhancing internal controls over review and approval of student status changes. In response, the Banner system was updated to prevent disbursement of Pell funds if a student s status is less-than-half-time. $ Allowable Costs/Cost Principles Various The auditor recommended that Howard update its accounting system to ensure indirect costs and fringe benefits are charged within the appropriate period. In response, Howard notes that a new procedure to review F&A and fringe benefit charges on a quarterly basis will be implemented in FY2014. None Noted Matching, Level of Effort, Earmarking US Agency for International Development The auditor recommends that Howard strengthen policies and procedures over monitoring of matching requirements to ensure that the required cost share requirements are met. To address the finding, Research Administrative Services will implement quarterly reviews over those awards with matching requirements, and will reach out to program staff to ensure compliance. $15,