KECK GRADUATE INSTITUTE OF APPLIED LIFE SCIENCES Claremont, California EIN Report of Independent Auditors Uniform Guidance and Financial

Transcription

1 KECK GRADUATE INSTITUTE OF APPLIED LIFE SCIENCES Claremont, California EIN Report of Independent Auditors Uniform Guidance and Financial Statements

2 CONTENTS Independent Auditor's Report 1-2 Page Financial Statements and Related Footnotes 3-23 Report of Independent Auditors 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 Report of Independent Auditors on Compliance for the Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Management's Corrective Action Plan Supplemental Information Schedule of Expenditures of Federal Awards 37 Notes to Schedule of Expenditures of Federal Awards 38

3 REPORT OF INDEPENDENT AUDITORS To the Board of Trustees Keck Graduate Institute of Applied Life Sciences Report on the Financial Statements We have audited the accompanying financial statements of Keck Graduate Institute of Applied Life Sciences (the Institute), which comprise the statement of financial position as of, and the related statement 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. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keck Graduate Institute of Applied Life Sciences as of, 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 Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis and is not a required part of the 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 basic 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 18, 2017 on our consideration of the Institute 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 Institute s internal control over financial reporting and compliance. Los Angeles, California October 18,

5 STATEMENT OF FINANCIAL POSITION 2017 Assets: Cash and cash equivalents $ 3,395,246 Accounts receivable, net (Note 3) 5,294,134 Prepaid expenses and deposits 3,518,508 Contributions receivable, net (Note 4) 6,841,220 Funds held in trust by others 264,756 Investments (Note 5) 76,337,936 Buildings and equipment, net (Note 7) 12,849,587 Total assets $ 108,501,387 Liabilities: Accounts payable and accrued liabilities $ 3,025,617 Deposits and deferred revenues 8,266,213 Funds held in trust for others 213,559 Notes payable (Note 8) 35,928,340 Net Assets: (Note 9) Total liabilities 47,433,729 Unrestricted 24,482,351 Temporarily restricted 16,427,714 Permanently restricted 20,157,593 Total net assets 61,067,658 Total liabilities and net assets $ 108,501,387 The accompanying notes are an integral part of these financial statements. 3

6 STATEMENT OF ACTIVITIES For the year ended Temporarily Permanently Unrestricted Restricted Restricted Total Revenues and releases of net assets: Tuition and fees $ 23,798,699 $ - $ - $ 23,798,699 Less tuition discount (4,311,715) - - (4,311,715) Net tuition and fees revenues 19,486, ,486,984 Private gifts and grants 779,146 1,963,403-2,742,549 Private contracts 2,290, ,290,130 Federal grants and contracts 893, ,154 Investment income 2,343,003 1,855,841-4,198,844 Other revenues 427, ,495 Releases of restricted net assets 2,396,087 (2,396,087) - - Total revenues and releases of net assets 28,615,999 1,423,157-30,039,156 Expenses: Instruction 11,573, ,573,747 Research 2,834, ,834,899 Academic support 3,903, ,903,695 Student services 2,634, ,634,780 Institutional support 9,026, ,026,489 Total expenses 29,973, ,973,610 Excess (deficiencies) of revenues over (under) expenses (1,357,611) 1,423,157-65,546 Other changes in net assets: Actuarial adjustment 2,531 7,054-9,585 Net realized and unrealized gain on investments 5,418,048 1,116,118-6,534,166 Transfers to CUC (19,446) - (19,446) Redesignation of net assets (6,000) 6, Change in net assets 4,037,522 2,552,329-6,589,851 Net assets, beginning of year 20,444,829 13,875,385 20,157,593 54,477,807 Net assets, end of year $ 24,482,351 $ 16,427,714 $ 20,157,593 $ 61,067,658 The accompanying notes are an integral part of these financial statements. 4

7 STATEMENT OF CASH FLOWS For the year ended Cash flows from operating activities: Change in net assets $ 6,589,851 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation expense 553,879 Accretion/amortization expense 3,118 Actuarial adjustment (9,585) Net realized and unrealized gains on investments (6,534,166) Contributions restricted for long-term purposes (996,661) Changes in operating assets and liabilities: Accounts receivable (3,785,194) Contributions receivable 651,258 Prepaid expenses and deposits (1,152,491) Funds held in trust for others 122,794 Accounts payable and accrued liabilities 513,649 Deposits and deferred revenue 5,853,056 Net cash provided by operating activities 1,809,508 Cash flows from investing activities: Purchases of investments (2,700,197) Proceeds from sales of investments 2,694,181 Purchases of buildings and equipment (1,542,773) Net cash used in investing activities (1,548,789) Cash flows from financing activities: Proceeds from borrowings on notes payable 2,274,288 Principal payments for notes payable (2,509,283) Contributions for restricted purposes 996,661 Net cash provided by financing activities 761,666 Net increase in cash 1,022,385 Cash and cash equivalents at beginning of year 2,372,861 Cash and cash equivalents at end of year $ 3,395,246 Supplemental disclosure of cash flows: Interest paid $ 648,088 The accompanying notes are an integral part of these financial statements. 5

8 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION: Keck Graduate Institute of Applied Life Sciences (the Institute), founded in 1997 as the newest member of The Claremont Colleges (Note 13), is an independent institution dedicated to education and research aimed at translating into practice, for the benefit of society, the power and potential of the life sciences. The Institute grants graduate and undergraduate degrees and offers various certificate and professional training courses in the life sciences and social sciences. The Institute enrolled the first students in its School of Applied Life Sciences (SALS) in fiscal year , the first students in its School of Pharmacy in fiscal year and the first students in The Minerva Schools at KGI in fiscal year During the course of normal operations, faculty and staff of the Institute perform translational research in the life sciences which may occasionally develop into marketable technologies. The Institute is a nonprofit corporation exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and corresponding California provisions. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The following accounting policies of the Institute are in accordance with those generally accepted for not-for-profit colleges and universities: Basis of Presentation: The accompanying financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). Net Asset Categories: The accompanying financial statements present information regarding the Institute s position and activities according to the following net asset categories: Unrestricted net assets: Unrestricted net assets include all support that is not subject to donor-imposed restrictions. The Board of Trustees has designated a portion of unrestricted net assets to function as endowment (Note 9, Net Assets). Income from the funds designated by the Board of Trustees to function as endowment investments, under the Institute's spending policy (Note 2, Investments), supports general operating purposes. Plant facilities and other net assets include all long-lived assets, net of related long-term debt, and other support. Temporarily restricted net assets: Temporarily restricted net assets include gifts of cash, accumulated earnings on permanently restricted endowments, and other assets subject to donor-imposed restrictions that either lapse through the passage of time, or can be satisfied. When a donor restriction expires, temporarily restricted net assets are released to unrestricted net assets (Note 2, Gifts). Permanently restricted net assets: Permanently restricted net assets include gifts subject to donor-imposed restrictions that the Institute maintain the assets permanently. The donors of endowment funds generally allow the Institute to use the income and a portion of the gains earned on these assets for general or specific purposes under the Institute s spending policy. 6

9 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Revenue Recognition: The Institute's revenue recognition policies are as follows: Tuition and fees: Student tuition and fees are recorded as revenue in the year in which the related academic services are provided. Student tuition and fees received in advance of services to be provided are recorded as deferred revenue. Gifts: Gifts from donors, including contributions receivable for unconditional promises to give, are recorded as revenues in the year received. Contributions receivable more than one year in the future are discounted at a credit-adjusted interest rate. Gifts of long-lived assets with no donor-imposed time restrictions are reported as unrestricted revenue in the year received. Gifts restricted to the acquisition or construction of long-lived assets are reported as temporarily restricted revenue. Temporarily restricted net assets resulting from gifts are released to unrestricted net assets when the donor-imposed restrictions are fulfilled. Conditional promises to give are not recognized until they become unconditional, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the date of gift. Gifts of marketable securities are sold immediately upon receipt. Contributions receivable: Contributions receivable are presented on the Statement of Financial Position net of estimated uncollectible amounts. The Institute records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual contributions receivable appears doubtful. Contributions to be received in future periods are discounted at an appropriate discount rate. Grants and contracts: Revenue from grants and contracts are reported as increases in unrestricted net assets, as allowable expenditures under such agreements are incurred. Investment income: Investment income is recorded as earned and gains and losses on investments are recorded on the trade date, and reported as increases or decreases to the appropriate net asset category. Expenses: Expenses are reported as decreases in unrestricted net assets. The financial statements present expenses by functional classification in accordance with the overall educational and research mission of the Institute. Depreciation, interest, and plant operation and maintenance expenses are allocated to functional classifications based on building square footage used for each function. Operating Revenues and Expenses: The Institute reports operating revenues and expenses in the unrestricted net asset section of the Statements of Activities. Operations are defined as activities which support the core mission of the Institute. Operating revenues include charges for tuition, net of aid, gifts and grants, private contract income from the "Team Masters" academic capstone project, spending policy income, royalty income, other investment related income, and releases of temporarily restricted net assets for operations. Operating expenses include salaries and benefits, departmental expenses, depreciation, amortization and interest. 7

10 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Cash and cash equivalents: Resources invested in money market funds and short-term investments with original maturities of three months or less are classified as cash and cash equivalents. Any such assets held by external investment managers are classified as investments, as cash and cash equivalents in the investment portfolio are intended to fund purchases of additional equity and fixed income investments. For purposes of reporting cash flows, cash and cash equivalents include demand deposit bank accounts. The Institute's cash and cash equivalent accounts at times may exceed federally insured limits. The Institute has not experienced any losses in such accounts. Allowances for Doubtful Accounts: Collectability of student accounts, notes receivable, and contributions receivable is reviewed both individually and in the aggregate. Allowances have been established based on experience, and balances deemed uncollectible are written off through a charge to bad debt expense or the provision for doubtful accounts and a decrease to accounts, notes, or contributions receivable. Investments: The Institute pools investments for management purposes as permitted by law. Pooled investments and allocation of pooled investment income are accounted for on a unit value method. The remaining investments are managed separately. Investments are reported at fair value, except for certain miscellaneous assets, which are stated at cost. The cost of securities sold is determined by the average cost method and is used to compute realized gains and losses. Unrealized gains and losses reflect the changes in the fair value of investments from the prior year. The Institute follows an investment policy that anticipates a greater long-range return through investing for capital appreciation while accepting lower current yields from dividends and interest. To determine the amount of investment return available for current operations, the Board of Trustees has adopted a spending policy that equals 5.0% of the trailing twelve-quarter average of the market value of pooled investments. If the ordinary income portion of pooled investments return is insufficient to provide the full amount of investment return specified, the balance is appropriated from realized gains of the pooled investments or unrestricted net assets functioning as endowment. Cumulative net realized gains and transfers of ordinary income in excess of the spending policy are recorded in unrestricted and temporarily restricted net assets and are available for appropriation under the Institute's spending policy. These cumulative gains totaled approximately $5,422,000 at. 8

11 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Investments, continued: Investment in Commercial Real Estate: The Institute owns and leases property adjacent to the campus to several third parties (Note 14, Future Rental Revenue). The assets are carried at fair value. The Institute holds various investments, including fixed income funds and equity funds. The underlying investment securities in the funds are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of the investment securities, it is at least reasonably possible that changes in risks in the near term would materially affect the Institute's account balances and the amounts reported in the Statement of Financial Position and Statement of Activities. Funds with Deficiencies: Declines in market value sometimes reduce the fair value of certain endowments to less than the historic cost basis of the original gifts. There were no funds with deficiencies at. Endowment Funds: The Board of Trustees of the Institute interpreted the California Uniform Prudent Management of Institutional Funds Act (UPMIFA) to state that the Institute, in the absence of explicit donor stipulations to the contrary, may appropriate for expenditure or accumulate so much of an endowment fund as the Institute determines prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. As a result of this interpretation, the Institute classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by California UPMIFA. In accordance with California UPMIFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the donor-restricted endowment fund (2) The purposes of the Institute and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the Institute (7) The investment policies of the Institute 9

12 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Fair Value Measurements of Financial Instruments: A financial instrument is defined as a contractual obligation that ultimately ends with the delivery of cash or an ownership interest in an entity. Disclosures included in these notes regarding the fair value of financial instruments have been derived from external market sources, present value estimates, or other valuation techniques. The Institute carries most investments and its beneficial interest in trusts held by a third party at fair value. Under GAAP, fair value is defined as the price that would be received to sell an asset (i.e., the exit price) in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under GAAP are as follows: Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Institute has the ability to access at the measurement date; Level 2 - Inputs other than quoted prices that are observable for the asset either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 - Inputs that are unobservable. Inputs are used in applying the valuation techniques and broadly refer to the assumptions that the Institute uses to make valuation decisions, including assumptions about risk. Inputs may include quoted market prices, recent transactions, manager statements, provisions within agreements with investment managers and other factors. An investment's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Institute's perceived risk of that investment. The investments in cash and cash equivalents, mutual funds, fixed income securities, and certain domestic and international equities are valued based on quoted market prices, and are therefore typically classified within Level 1. The Institute utilizes the market approach in establishing a circumstantial fair exit value for its commercial real estate investments. The significant unobservable inputs used in the fair value measurement of the Institute's beneficial interest in trusts are the mortality rate and risk factor used in the rate to discount the cash flow of the trusts. The mortality rate was 12.4 years and the risk rate was 3.03%. Significant increases (decreases) in any of the inputs would result in a significantly lower (higher) fair value measurement. Beneficial interest in trusts, classified as Level 3, are valued based on the discounted cash flow of the income and expenses from the underlying assets and liabilities in the trusts over the estimated lives of the income beneficiaries of the trusts. Although the Institute uses its best judgment in determining the fair value, there are inherent limitations in any methodology. Future confirming events could affect the estimates of fair value and could be material to the financial statements. These events could also affect the amount realized upon liquidation of the investments. 10

13 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Collections: The Institute captializes its collections of works of art at their appraised or estimated current market value upon date of gift. Construction in Progress: Construction in progress represents costs incurred on the construction of assets that have not been completed or placed in service as of the end of the year. Buildings and Equipment: Buildings and equipment consist of property, plant and equipment. The assets are carried at cost, consisting of the original purchase price or the fair market value at the date of the gift, less accumulated depreciation. The assets are depreciated on a straight-line basis over the estimated useful lives of 40 years for buildings and permanent improvements and 7 years for land improvements and equipment. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and the related gains or losses are included in the Statement of Activities. Asset retirement obligations are recorded based on estimated settlement dates and methods. Expenditures for maintenance, repairs, and renewals are charged to expense as incurred. Buildings and equipment greater than $5,000 and with an estimated useful life in excess of one year are capitalized as additions. Proceeds from the disposal of equipment acquired with federal funds will be transferred to the federal awarding agency. No equipment acquired with federal funds was disposed of during the year ended. No property or equipment has been acquired with restricted assets where title may revert to another party. Student Loan Securitizations: From fiscal years to , the GATE student loan program originated private student loans and placed them in trusts known as special purpose entities (SPEs) which issued securities in the form of senior and subordinated notes. The Institute owns a residual interest in the SPEs. Student loan securitizations must meet specific credit enhancement requirements in the form of overcollateralization before the Institute receives cash flows for each residual interest. As the student loans sold into SPEs generate cash flows, the funds are used to pay down the senior and subordinated notes issued by the SPEs until the ratio of securitized student loans to SPE debt reaches the overcollateralization requirements of each securitization. After the overcollateralization and other requirements in the pooling and servicing agreement are met, the Institute will begin to receive periodic cash flows from any residual interests, generally at the end of the 17 year duration of each SPE. The Institute has not and will not recognize an asset for this residual interest until such time as an amount to be realized can be reasonably determined and is probable of recovery. The Institute is also obligated to fund student loan defaults to a maximum amount specified in each SPE (Note 15). The Institute includes the expected cash outflows resulting from this default pledge obligation as a component of accounts payable and accrued liabilities in the Statement of Financial Position. Income Taxes: The Institute had no unrecognized tax benefits, and no uncertain tax positions at. 11

14 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure 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 results could differ from those estimates. Change in Accounting Estimate: Effective, the Institute obtained certain new information regarding a future income stream related to a real asset previously held at historical cost and classified as a real asset held for operating purposes. Management has evaluated this new information and has determined a change in use of the real asset and application of the fair value accounting method is appropriate in accordance with the guidance in ASC 250 Accounting Changes and Error Corrections. Accordingly, the prospective application of a change in accounting estimate is required to accurately represent the present status and expected future benefit associated with the real asset. Application of this change in accounting estimate resulted in the reclassification of approximately $825,000 from Buildings and Equipment to Investments, and an unrealized gain, reflective of the change from cost to fair value at, of approximately $3,735,000. Deferred Rent: In conformity with GAAP, leases that have escalating rents are recorded as an expense on a straight-line basis of the life of each lease. The difference between GAAP rent expense and the actual lease payments are reflected as deferred rent in the accompanying Statement of Financial Position. NOTE 3 - ACCOUNTS RECEIVABLE: Accounts receivable at are as follows: Grants and contracts $ 636,772 Tenants 138,953 Students 3,921,831 Claremont Colleges and other 613,710 5,311,266 Less allowance for doubtful accounts receivable (17,132) Total accounts receivable $ 5,294,134 12

15 NOTES TO THE FINANCIAL STATEMENTS NOTE 4 - CONTRIBUTIONS RECEIVABLE: Unconditional promises to give from donors at were discounted at rates ranging from 1.7% to 4.9% and are expected to be collected in the following periods: In one year or less $ 1,367,067 Between one year and five years 4,031,990 More than five years 2,701,190 8,100,247 Less discount (484,027) Less allowance for doubtful contributions receivable (775,000) Net contributions receivable $ 6,841,220 Contributions receivable at are intended for the following purposes: Endowment $ 1,501,510 General Support 6,114,710 Total $ 7,616,220 NOTE 5 - INVESTMENTS: Pooled investments and allocation of pooled investment income are accounted for on a unit value method. The following is a summary of data pertaining to this method for the year ended : Unit market value at end of year $ Units owned: Unrestricted net assets 198,127 Temporarily restricted net assets 24,198 Permanently restricted net assets 220,190 Total units 442,515 Income related to Institute investments for the year ended is as follows: Pooled investment income $ 1,727,544 Other investment income 2,471,300 Total income 4,198,844 Realized and unrealized gains 6,534,166 Total net income and gains $ 10,733,010 13

16 NOTES TO THE FINANCIAL STATEMENTS NOTE 5 - INVESTMENTS, CONTINUED: It is the Institute's policy to invest in and maintain a diversified investment portfolio. The fair value of investments by asset class, investment program and category at are as follows: Investments by asset class: Cash and cash equivalents $ 1,127,693 Fixed income funds 11,796,361 Equity funds 35,802,901 Commercial real estate 27,570,000 Other investments 40,981 Total by asset class $ 76,337,936 Investments by program: Pooled investments $ 48,726,955 Separate investments 27,610,981 Total by program $ 76,337,936 Investments by category: Endowment $ 63,801,624 Other 12,536,312 Total by category $ 76,337,936 The Institute holds certain investments at original cost and does not revalue the assets on a recurring basis. At, investments held at original cost were $40,981. Cash and cash equivalents are carried at cost which is considered to approximate fair value. 14

17 NOTES TO THE FINANCIAL STATEMENTS NOTE 6 - FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS: The following tables present the investments and beneficial interests in trusts held by athird party carried on the Statement of Financial Position by level within the valuation hierarchy as of : Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 1,127,693 $ - $ - 1,127,693 Fixed income funds 11,796, ,796,361 Equity funds Domestic 28,765, ,765,795 Global/international 7,037, ,037,106 Commercial real estate - 27,570,000-27,570,000 Beneficial interest in trusts held by third party ,007 57,007 Total $ 48,726,955 $ 27,570,000 $ 57,007 $ 76,353,962 The following table includes a rollforward of the amounts for the year ended for assets classified within Level 3: Beneficial Interest in Trusts Balance at June 30, 2016 $ 49,953 Actuarial Adjustment 7,054 Balance at $ 57,007 15

18 NOTES TO THE FINANCIAL STATEMENTS NOTE 7 - BUILDINGS AND EQUIPMENT: Buildings and equipment consist of the following at : Land $ 1,806,560 Land improvements 214,443 Buildings 15,188,110 Equipment 5,828,711 Collections 23,800 Construction in progress 132,139 23,193,763 Less accumulated depreciation (10,344,176) Buildings and equipment, net $ 12,849,587 The Institute has recorded obligations related to disposal of regulated materials upon eventual retirement of the campus buildings. The obligations are included as a component of accounts payable and accrued liabilities. The asset retirement obligation activity for the year ended is as follows: Beginning balance $ 65,957 Accretion expense 3,118 Ending balance $ 69,075 Accretion expense in the table above is reflected in unrestricted expenses on the Statement of Activities for the year ended June 30,

19 NOTES TO THE FINANCIAL STATEMENTS NOTE 8 - NOTES PAYABLE: In October 2015, the Institute entered into a term note with a trustee in the amount of $2,000,000. The note is secured by a building, and bears interest at a rate of 3% per year, payable quarterly, with a maturity date of October 1, The outstanding principal amount at, was $2,000,000. In December 2015, the Institute entered into a term note with a trustee in the amount of $4,500,000. The note is secured by land, and bears interest at a rate of 3% per year, payable quarterly, with a maturity date of December 30, The outstanding principal amount at, was $4,500,000. In March 2014, the Institute entered into a mortgage note with EverBank in the amount of $8,596,000. The note is secured by a building held for investment (Note 2, Investment in Commercial Real Estate), and bears interest at a rate of 5.49% per year. Principal and interest are payable with a fixed monthly payment of $70,191, with a maturity date of January 1, The outstanding principal amount at, was $7,281,653. In September 2015, the Institute entered into a non-revolving line of credit convertible to term loan agreement ( line of credit ) with California Bank and Trust, a division of ZB, N.A. The line of credit permits the Institute to draw up to a total of $6,750,000 if draws are completed prior to September 8, In December 2016, the Institute drew $2,000,000 from this line of credit and applied the proceeds to reduce other existing notes payable. The Institute immediately elected to fix the interest rate upon draw at 4.37% per year, which is payable monthly along with a fixed principal amount of $6,666 through the maturity date of December 15, The line of credit agreement requires compliance with certain financial covenants and is collateralized by certain business assets of the Institute. The outstanding principal amount at, was $1,960,000. The maturity of notes payable at is as follows: Principal Fiscal Years Ending June 30, Amount 2018 $ 451, , , ,032, ,440 Thereafter 26,900,371 $ 35,928,340 The Institute maintains a line of credit for working capital with the bank that manages and maintains custody of the Institute s endowment investments. The line of credit is secured by the value of the Institute s unrestricted pooled endowment investments, which at amounted to $21,816,532. Of the total borrowings of $20,186,687 outstanding at, $8,000,000 was in fixed rate contracts maturing in June 2020 at a rate of 3.646% per year, and the remaining $12,186,687 was incurring interest in a variable rate account at 2.72% at, equal to the 30-day London Interbank Offered Rate (Libor) plus 1.5%. The fixed rate contracts have a rollover provision at maturity, and there is no fixed maturity date on the variable rate account while total borrowings remain less than the value of the Institute s unrestricted endowment investments. Accrued interest on both the fixed rate contracts and the variable rate account is added to principal. Accordingly, the entire balance has been included in "Thereafter" in the table above. 17

20 NOTES TO THE FINANCIAL STATEMENTS NOTE 9 - NET ASSETS: Net assets consist of the following at : Unrestricted: Endowment $ 39,110,937 Plant facilities and other (14,628,586) Total unrestricted 24,482,351 Temporarily restricted: Restricted for operations and specific purposes 11,111,103 Endowment 5,259,604 Annuity and life income contracts and agreements 57,007 Total temporarily restricted 16,427,714 Permanently restricted: Endowment 20,157,593 Total permanently restricted 20,157,593 Total net assets $ 61,067,658 Endowment net assets consist of the following at : Unrestricted endowment: Endowment $ 39,111,119 Funds with deficiencies (182) Total unrestricted endowment 39,110,937 Temporarily restricted: For term endowment 1,171,139 Portion of perpetual endowment fund subject to a time restriction under California UPMIFA Without specific purpose - With specific purpose 4,088,465 Total temporarily restricted 5,259,604 Permanently restricted: Endowment 20,157,593 Total endowment net assets $ 64,528,134 At June 30, 2013, several donors signed waivers to lift the restrictions on their earlier gifts of permanently restricted endowment for a period of ten years. The Institute has redesignated those endowments as unrestricted to serve as collateral for borrowings of the Institute. 18

21 NOTES TO THE FINANCIAL STATEMENTS NOTE 10 - FUND RAISING EXPENSE: Institutional support expenses in the Statement of Activities for the year ended include $416,196 of expenses related to fund raising. NOTE 11 - ENDOWMENT: The net assets of the Institute include permanently restricted endowments and unrestricted funds functioning as endowment. Permanent endowments are subject to the restrictions of gift instruments requiring that the principal be invested in perpetuity and the income only be utilized as provided for under California UPMIFA. Unrestricted funds designated by the Board of Trustees to function as endowment are expendable. Changes in the Institute's endowment for the year ended are as follows: Temporarily Permanently Total Unrestricted Restricted Restricted Endowment Investment returns: Earned income $ 1,832,884 $ 1,855,841 $ - $ 3,688,725 Change in realized and unrealized net appreciation of investments 1,032,774 1,115,858-2,148,632 Net investment returns 2,865,658 2,971,699-5,837,357 Endowment returns distributed for operations (1,922,081) (1,855,841) - (3,777,922) Net investment returns 943,577 1,115,858-2,059,435 Other changes in endowed net assets: Net transfers and expense 135, ,578 Net change in endowed net assets 1,079,155 1,115,858-2,195,013 Endowed net assets, beginning of year 38,031,782 4,143,746 20,157,593 62,333,121 Endowed net assets, end of year $ 39,110,937 $ 5,259,604 $ 20,157,593 $ 64,528,134 At, endowed net assets consists of the following assets: Contributions receivable, net of discount $ - $ 726,510 $ - $ 726,510 Investments 21,850,937 4,533,094 20,157,593 46,541,624 Building investment 17,260, ,260,000 Total endowed net assets $ 39,110,937 $ 5,259,604 $ 20,157,593 $ 64,528,134 19

22 NOTES TO THE FINANCIAL STATEMENTS NOTE 12 - EMPLOYEE BENEFIT PLANS: The Institute participates with other members of The Claremont Colleges (Note 13) in a defined contribution retirement plan that provides retirement benefits for employees through Teachers Insurance and Annuity Association and The College Retirement Equity Fund (TIAA-CREF). Under this defined contribution plan, Institute contributions are used to purchase individual annuity contracts and investments equivalent to retirement benefits earned. Vesting provisions are full and immediate. Benefits commence upon retirement, and pre-retirement survivor death benefits are provided. Institute contributions to the plan for the year ended totaled $1,283,350. NOTE 13 - AFFILIATED INSTITUTIONS: The Institute is a member of an affiliated group of institutions known as The Claremont Colleges. Each member is a separate corporate entity governed by its own Board of Trustees. Claremont University Consortium, a member of this group, is the central coordinating institution that provides common student and administrative services and certain central facilities for all The Claremont Colleges. The costs of these services and facilities are shared by the members of the group. The Institute paid $1,144,671 for these services and facilities, which included $443,959 for library operations and acquisitions, for the year ended. NOTE 14 - FUTURE RENTAL REVENUE: At, the Institute had signed leases to rent commercial real estate holdings to third parties. The lease agreements terminate in 2018, 2019, and The tenants are committed to pay the following rent to the Institute: Fiscal Years Ending June 30, Rental Revenue 2018 $ 1,225, ,261, ,275, ,311, ,355,004 Thereafter 3,287,462 Total rental revenue $ 9,717,248 Rental income received for the year ended was $1,190,318. The leased properties are classified as investments, and the associated rental revenue is included as a component of investment income on the Statement of Activities (Note 2, Investment in Commercial Real Estate). 20

23 NOTES TO THE FINANCIAL STATEMENTS NOTE 15 - COMMITMENTS AND CONTINGENCIES: The Institute, in the regular course of business, enters into lease agreements for the use of personal and real property. Management evaluates the conditions of each lease agreement for appropriate treatment under ASC Leases. In March 2016, the Institute entered into a five year facility lease agreement with an unrelated party, concluding in March 2021, for approximately 11,000 square feet of commercial office space adjacent to the main campus. Future monthly rent payments are fixed at $20,846 per month plus an annually adjusted common area maintenance charge of approximately $5,500. In April 2017, the Institute entered into long term ground and facility leases with NCCD-Claremont Properties, LLC (NCCD), an unrelated non-consolidating entity, to facilitate the development of approximately 220,000 square feet of high density mixed use facilities (i.e. the "housing project") on land owned by the Institute. Under the terms of the ground lease which began in April 2017 and concludes in February 2052, NCCD is responsible and liable for the planning, construction and operation of the housing project with the Institute as lessor of the land and NCCD as lessee of the land. Under the terms of the facility lease, the lessee, the Institute is obligated to compensate NCCD at market rates for approximately 11,000 square feet of academic use space within the housing project. The facility lease agreement was entered into in April 2017, is contingent upon the completion of the aformentioned "housing project", and has a rent commencement date of September 2018, with a minimum required monthly rent of $24,000/month, increasing by 3% per annum. The facility lease term concludes in September 2046, 28 years from the rent commencement date. NCCD, in consideration for the ground lease, is obligated to compensate the Institute on the basis of net available cash flow of the housing project. As the entirety of the projected ground lease income to the Institute is variable and undeterminable at, and subsequent to,, management has excluded any potential income related to this ground lease from the figures in Note 14 - Future Rental Revenue. At, the Institute has committed to pay the following lease amounts to various lessors: Real Personal Property Property Total Lease Lease Lease Fiscal Years Ending June 30, Expense Expense Expense 2018 $ 315,552 $ 71,599 $ 387, ,659 45, , ,480 3, , , , , ,928 Thereafter 12,567,834-12,567,834 Total lease expense $ 15,357,045 $ 120,636 $ 15,477,681 The Institute holds $400,000 in restricted cash, which is a component of cash and cash equivalents on the Statement of Financial Position, to cover contractual obligations related to the purchase of commercial real estate at 121 S. Indian Hill Blvd (Note 5). After five years from purchase date, the Institute must return any unused portion of the restricted cash to the seller as additional purchase price of the property. The corresponding $400,000 liability is included as a component of accounts payable and accrued liabilities in the Statement of Financial Position. The Institute has remaining contract commitments to complete renovation of exisitng buildings totaling approximately $101,

24 NOTES TO THE FINANCIAL STATEMENTS NOTE 15 - COMMITMENTS AND CONTINGENCIES, CONTINUED: The Institute has two lease agreements with third party tenants, both commenced on Deember 17, 2015 and run for two year terms through December 17, One of the two tenants has exercised their option to extend the lease term for an additional one year period, ending December 17, The existing tenant remains in effect and unaltered from prior periods. This lease renewal amendment requires the Institute to pay for certain tenant improvements after the commencement date of the lease renewal amendment. Certain federal research and development grants and federal student loan funds which the Institute administers and for which it receives reimbursements, are subject to audit and final acceptance by federal granting agencies. Current and prior year costs charged to federal funds are subject to adjustment upon audit. The amount of expenditures that may be disallowed by the grantor, if any, cannot be determined at this time, although the Institute expects such amounts, if any, would not have a significant impact on the financial position of the Institute. The Institute is occasionally involved in lawsuits arising in the ordinary course of its operations. The Institute s management does not expect the ultimate resolution of pending legal actions to have a material effect on the financial position or results of operations of the Institute. The Institute is obligated to make payments as a result of GATE private student loan defaults (Note 2), and has recorded the present value of expected default payments as a component of accounts payable and accrued liabilities. The total amount accrued at was $20,691. In management's opinion, the difference between any potential additional liability and the recorded liability would not have a material impact on the financial position of the Institute. The Institute entered into an agreement with an affiliated institution, Claremont University Consortium (CUC) (Note 13), to administer a private international student loan program commencing in fiscal year CUC is responsible for administering the new loan program with funding provided by a third party. The funding from the third party is structured similar to a line of credit and provides for funding a maximum of $6,000,000 of student loans. The Institute has agreed to pay CUC a management fee per student loan per fiscal year for its services for administering the program. CUC maintains the student loan receivable accounts and corresponding loan payable account to the third party in its financial statements. The balance of student loans issued by CUC under this program is approximately $3,907,000 at. The Institute has agreed to guarantee the loan program and indemnify CUC for any student loan defaults, including accrued interest, that may arise in the future from the program. The Institute has also granted to CUC a pledge and security interest of $750,000 of the Institute s unrestricted net assets functioning as endowment. At, the Institute has recorded an allowance of $50,000 for future student loan defaults in the program. The allowance is a component of accounts payable and accrued liabilities. At, there were no student loans in default under this program. NOTE 16 - RELATED PARTY TRANSACTIONS: The Institute receives contributions and promises to give from members of the Board of Trustees. Total contributions from trustees for the year ended were $208,728, and contributions receivable from members of the Board of Trustees totaled $4,550,000 at. The Institute entered into two term notes with a trustee in 2015 (Note 8). The outstanding principal amount at was $6,500,

25 NOTES TO THE FINANCIAL STATEMENTS NOTE 17 - SUBSEQUENT EVENTS: Subsequent events are events or transactions that occur after the Statement of Financial Position date but before financial statements are available to be issued. The Institute recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the Statement of Financial Position, including the estimates inherent in the process of preparing the financial statements. The Institute's financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the Statement of Financial Position but arose after the Statement of Financial Position date and before financial statements are available to be issued. The Institute has evaluated subsequent events through October 18, 2017, which is the date the financial statements are issued, and concluded that there were no events or transactions requiring disclosure. 23

26 REPORT OF INDEPENDENT AUDITORS 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 Keck Graduate Institute of Applied Life Sciences 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 Keck Graduate Institute of Applied Life Sciences (the Institute), which comprise the statement of financial position as of, 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 October 18, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Institute s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Institute s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institute s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 24

27 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Institute s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 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. Los Angeles, California October 18,

28 REPORT OF INDEPENDENT AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Trustees Keck Graduate Institute of Applied Life Sciences Report on Compliance for the Major Federal Program We have audited Keck Graduate Institute of Applied Life Science s (the Institute) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Institute s major federal program for the year ended. The Institute s major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the Institute s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Institute 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 the major federal program. However, our audit does not provide a legal determination of the Institute s compliance. 26

29 Opinion on the Major Federal Program In our opinion, the Institute complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, Report on Internal Control Over Compliance Management of the Institute 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 Institute's internal control over compliance with the types of requirements that could have a direct and material effect on the major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Institute s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified certain deficiencies in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as items , and that we consider to be significant deficiencies. The Institute s responses to the internal control over compliance findings in our audit are described in the accompanying schedule findings and questioned costs and/or corrective action plan. The Institute s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses. 27

30 The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Los Angeles, California October 18,

31 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended Financial Statements Section I Summary of Auditor s Results Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP: Internal control over financial reporting: Unmodified Material weakness(es) identified? Yes No Significant deficiency(ies) identified? Yes None reported Noncompliance material to financial statements noted? Yes No Federal Awards Internal control over major federal programs: Material weakness(es) identified? Yes No Significant deficiency(ies) identified? Yes None reported Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? Yes No Identification of major federal programs and type of auditor s report issued on compliance for major federal programs: CFDA Number(s) Name of Federal Program or Cluster Type of Auditor s Report Issued on Compliance for Major Federal Programs Various Student Financial Assistance Cluster Unmodified Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? Yes No None reported Section II Financial Statement Findings 29

32 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended Section III Federal Award Findings and Questioned Costs FINDING Special Tests and Provisions Enrollment Reporting - Significant Deficiency in Internal Controls CFDA Number Federal Agency/Pass-through Entity - Program Name Award Number Award Year Various U.S Department of Education Student financial assistance cluster Various Year Ended Questioned Costs $0 Criteria: The National Student Loan Data System (NSLDS) is the Department of Education s (ED) centralized database for students enrollment information. It is the Institute s responsibility to update this information timely and accurately. The Institute determines how often it receives the Enrollment Reporting roster file with the default set at every 60 days. Under the loan programs, schools must complete and return within 15 days the Enrollment Reporting roster file placed in their Student Aid Internet Gateway (SAIG) mailboxes sent by ED via NSLDS. Unless the school expects to complete its next roster within 60 days, the school must notify the lender or the guaranty agency within 30 days, if it discovers that a student who received a loan either did not enroll or ceased to be enrolled on at least a half time basis (34 CFR section ). Condition/Context: We selected a sample of 11 students who had received Federal aid and had withdrawn or graduated from the Institute during the fiscal year. We compared the enrollment information and withdrawal or graduation date per the Institute s records to the information reported to NSLDS. We noted an exception with 3 out of the 11 students tested. The students status changes were reported timely, however the effective date of their withdrawals were not reported accurately. The students reported effective withdrawal dates were reported as being in the prior fiscal year (2016) when their actual withdrawal dates had been during the current fiscal year (2017). Effect: This information is utilized by ED, the Direct Loan program, lenders, and other institutions to determine in school status. NSLDS also uses the newly submitted enrollment data to recalculate a student s 150% limit for direct subsidized loans to determine if loss or protection of the subsidy should occur. Therefore, this significant deficiency in enrollment reporting could result in incorrect future eligibility for undergraduate aid, as well as impact future subsidy loss or protection related to the 150% limit. Cause: This exception occurred due a lack of internal controls and oversight of the Institute s enrollment reporting process and conversion of its student information software during the current fiscal year. As a result of the conversion several students status information was erroneously altered during migration and this incorrect information was then uploaded to NSLDS. Recommendation: We recommend that the Institute follow procedures to monitor the enrollment reporting process and implement internal controls to prevent non compliance. In addition, the Institute should create procedures to outline the necessary steps needed to accurately migrate student information between different systems in order to prevent errors from being reported. Views of responsible officials and planned corrective actions: See the attached Management s Corrective Action Plan prepared by the Institute. 30

33 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended FINDING Special Tests and Provisions Verification - Significant Deficiency in Internal Controls CFDA Number Federal Agency/Pass-through Entity - Program Name Award Number Award Year Various U.S Department of Education Student financial assistance cluster Various Year Ended Questioned Costs $0 Criteria: When a student completes a Free Application for Federal Student Aid (FASFA), it may be selected for review by the Federal Government; in which case, the Institute is required to verify that certain information reported on the FASFA is accurate and can be supported by appropriate documentation. Additionally, to ensure that students are made aware of what is expected during this process, the Institute is required to establish written policies and procedures for verifying information contained in a student aid application. In accordance with 34 Code of Federal Regulations (CFR) these policies and procedures must include (1) The time period within which an applicant shall provide the documentation; (2) The consequences of an applicant s failure to provide required documentation within the specified time period; (3) The method by which the institution notifies an applicant of the results of verification if, as a result of verification, the applicant s [Expected Family Contribution] EFC changes and results in a change in the applicant s award or loan; (4) The procedures the institution requires an applicant to follow to correct application information determined to be in error; and (5) The procedures for making referrals under (b) The institution s procedures must provide that it shall furnish, in a timely manner, to each applicant selected for verification a clear explanation of (1) The documentation needed to satisfy the verification requirements; and (2) The applicant s responsibilities with respect to the verification of application information, including the deadlines for completing any actions required under this subpart and the consequences of failing to complete any required action. Condition/Context: We selected a sample of 3 students whose applications were selected for verification during the fiscal year. Additionally, we reviewed the Institute s published verification policy to determine if it was in compliance with Federal Regulations. We noted an exception with 1 out of the 3 students tested. The Institute did not perform income verification for the selected students. Additionally, we noted that the Institute did not have a published policy for income verification. Effect: The Institute did not perform the required verification procedures for students selected for income verification by the Federal Government. Additionally, the Institute did not have a published policy on income verification to ensure that students were made aware of what is expected during the verification process. Cause: As this was the first year the Institute was subject to the requirements of the verification program they were not aware of the requirements. 31

34 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended FINDING Special Tests and Provisions Verification - Significant Deficiency in Internal Controls (continued) Recommendation: We recommend that the Institute design procedures to perform the income verification process and implement internal controls to prevent non compliance. Additionally, we recommend that the Institute publish a verification policy is in compliance with Federal Regulations so that applicants are aware of all potential implications if selected for verification. Views of responsible officials and planned corrective actions: See the attached Management s Corrective Action Plan prepared by the Institute. FINDING Eligibility - Significant Deficiency in Internal Controls CFDA Number Federal Agency/Pass-through Entity - Program Name Award Number Award Year Various U.S Department of Education Student financial assistance cluster Various Year Ended Questioned Costs $572 Criteria: The determination of Student financial assistance (SFA) award amounts is based on financial need. Financial need is generally defined as the student s cost of attendance (COA) minus financial resources reasonably available. The Institute must also take into account other information that it has regarding the student s financial status. For Title IV programs, the financial resources available is generally the Expected Family Contribution (EFC) that is computed by the central processor and included on the student s Student Aid Report (SAR) and the Institutional Student Information Record (ISIR) provided to the institution. Awards must be coordinated among the various programs and with other Federal and non- Federal aid (need and non-need based aid) to ensure that total aid is not awarded in excess of the student s financial need (34 CFR section , FWS, 34 CFR sections and 673.6; Direct Loan, 34 CFR section ). Condition/Context: We selected a sample of 40 students who had received Federal aid during the fiscal year. For students who received Federal aid, we compared the amount awarded and disbursed to the student s COA to determine if they were over-awarded for the award year. We noted an exception with 1 out of the 40 students tested. The student had initially been offered to receive Federal work study during Fall 2016 but had turned down the award. During the Spring 2017 semester the student re-applied for the award and was awarded Federal work study funds. The financial aid office did not correspondingly adjust the amount of the student s direct loan awards to compensate for the additional work study award and as a result the student was over-awarded Federal work study funds for the fiscal year. 32

35 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended FINDING Eligibility - Significant Deficiency in Internal Controls and Instance of Noncompliance (continued) Questioned Costs: $572. The Institute returned the excess $572 to ED in September Cause: This occurred due to a lack of monitoring internal controls to prevent non-compliance. As the student was awarded additional funds outside the customary packing timeline the Institute s internal controls did not properly prevent this error. Effect: The student was awarded and disbursed more Federal work study funds than they were eligible for. Recommendation: We recommend that the Institute design procedures to monitor on-going disbursements of federal aid in order to identify any over-awards after students have been initially packaged. Views of responsible officials and planned corrective actions: See the attached Management s Corrective Action Plan prepared by the Institute. 33

36 Keck Graduate Institute of Applied Life Sciences Schedule of Findings and Questioned Costs For the Year Ended There were no reported audit findings for the Keck Graduate Institute of Applied Life Sciences (the Institute ) for the year ended June 30,

37 September 26, 2017 Keck Graduate Institute provides the following corrective action plan for the findings identified by Moss Adams LLP during the Institute s audit for the year ending. The Institute acknowledges the findings and the recommendation from Moss Adams regarding improving procedures. FINDING Special Tests and Provisions Enrollment Reporting Significant Deficiency in Internal Controls Responsible Offices Improving procedures to ensure timely enrollment reporting to the Department of Education is a joint responsibility of the Financial Aid and Registrar Offices Improved Process or Protocol 1) The major student information system conversion that occurred in 2016 was an extraordinary, non-recurring event, therefore Management believes that future occurrences stemming from this event are unlikely to occur. However, Management recognizes the importance of improving the system conversion protocol and thus, the Offices of the Registrar and Financial Aid will jointly review and update their system conversion protocols to ensure this type of data inaccuracy is caught and corrected, should the Institute elect to migrate systems again in the future. 2) An additional level of review of individual instances appearing on the NSLDS error file will take place by an employee other than the employee responsible for submitting the error correction. FINDING Special Tests and Provisions Verification Significant Deficiency in Internal Controls Responsible Offices Improving procedures to ensure compliance with verification requirements is the responsibility of the Office of Financial Aid. Improved Process or Protocol The Office of Financial Aid has updated its policies and protocols to comply with Federal Verification requirements and has publically posted these policies and protocols adopted in accordance with the Code of Federal Regulations (a) on its Financial Aid FAQ webpage. 35