MSU Financial Statements and External Audit

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

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

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

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

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

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

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

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

MSU annual financial report Management Discussion and Analysis Independent Auditor s Report MSU Financial Statements MSU Foundation Financial Statements Independent Auditor s Report on Internal Control Over Financial Reporting 10

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

GASB Stewardship: report internally using funds Fund Description Example General Core institution operating GA General operations activities Auxiliary Separate business activities XA Athletics Designated Plant Self supporting institution operating activities Capital (fixed) assets and related debt; reserves DN Non credit instruction PT Reserves for future capital asset needs Expendable Restricted Contract & grants; RC Contracts and grants endowment spending Endowment Nonexpendable gifts NX Donor Endowments 12

Funds continued Fund Description Example Retirement & Insurance Student Loan Agency Administration of retirement and other benefits programs Federal and institutional loans to students Non university funds held for related entities TN Insurance LD Federal AS Student Groups 13

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

Statements of Net Position (Amounts in Millions) June 30, 2014 2013 Assets: Current assets: Cash and cash equivalents $ - $ 44 Investments 327 286 Accounts and interest receivable, net 142 145 Student loans and pledges receivable, net 22 24 Inventories and other assets 16 14 Total current assets 507 513 Noncurrent assets: Restricted cash and cash equivalents 10 2 Restricted investments 6 99 Endowment investments 2,082 1,584 Other investments 235 361 Student loans and pledges receivable, net 64 60 Investments in joint ventures 7 7 Derivative instruments - swap asset - - Capital assets, net 1,995 1,901 Total noncurrent assets 4,399 4,014 Total assets 4,906 4,527 Deferred outflows of resources: 60 61 Liabilities: Current liabilities: Accounts and interest payable 75 63 Accrued personnel costs 56 53 Accrued self-insurance liabilities 15 14 Payroll taxes and other payroll deductions 25 27 Deposits held for others 26 24 Unearned revenues 125 120 Current portion of long term debt and other obligations 169 187 Total current liabilities 491 488 Noncurrent liabilities: Accrued personnel costs 34 34 Accrued self-insurance liabilities 6 8 Derivative instruments - swap liability 50 44 Net other postemployment benefit obligation 307 263 Long term debt and other obligations 905 926 Total noncurrent liabilities 1,302 1,275 Total liabilities 1,793 1,763 Net position: Net investment in capital assets 983 937 Restricted: Nonexpendable 487 436 Expendable 674 567 Unrestricted 1,029 885 Total net position $ 3,173 $ 2,825 15

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

GASB expense reporting Expense uses (shown by functional category): Instruction Research Public service Academic support Student services Scholarship and fellowships Institutional support Operation and maintenance of plant Auxiliary activities Depreciation 17

Statements of Revenues, Expenses and Changes In Net Position (Amounts in Millions) Year ended June 30, 2014 2013 Operating revenues: Student tuition and fees $ 861 $ 799 Less: scholarship allowances 108 102 Net student tuition and fees 753 697 State of Michigan grants and contracts 9 9 Federal grants and contracts 309 314 Local and private sponsored programs 71 73 Interest and fees on student loans 1 1 Departmental activities (net of scholarship allowances 174 179 of $5 in 2014 and $5 in 2013) Auxiliary activities (net of room and board allowances 303 305 of $20 in 2014 and $19 in 2013) Total operating revenues 1,620 1,578 Operating expenses: Instruction and departmental research 632 589 Research 312 329 Public Service 222 233 Academic Support 95 82 Student services 49 47 Scholarships and fellowships 60 56 Institutional support 115 113 Operation and maintenance of plant 139 143 Auxiliary enterprises 289 289 Depreciation 150 139 Other operating expenses, net 6 4 Total operating expenses 2,069 2,024 Operating loss (449) (446) Net nonoperating revenues (expenses): State operating appropriation 250 245 State AgBioResearch appropriation 30 29 State cooperative extension service appropriation 26 25 Federal Pell grant revenue 37 38 Gifts 55 46 Net investment income (loss) 324 187 Interest expense on capital asset related debt (41) (36) Other nonoperating revenues, net 6 6 Net nonoperating revenues 687 540 Income before other 238 94 State capital appropriations 30 2 Capital grants and gifts 36 15 Additions to permanent endowments 44 38 Increase in net position 348 149 Net position, beginning of year 2,825 2,676 Net position, end of year $ 3,173 $ 2,825 18

Accounts map to one function 19

MSU expense (GASB) (Amounts in Millions) Year ended June 30, 2014 2013 2012 2011 2010 Instruction $ 632 $ 589 $ 575 $ 561 $ 556 Research 312 329 319 294 277 Public service 222 233 210 221 228 Academic support 95 82 82 78 74 Student services 49 47 32 32 32 Scholarships and fellowships 60 56 55 53 50 Institutional support 115 113 103 94 91 Operation and maintenance of plant 139 143 149 138 143 Auxiliary activities 289 289 275 269 256 Depreciation 150 139 128 116 98 Other operating expenses, net 6 4 3 2 5 Total GASB expense reporting $ 2,069 $ 2,024 $ 1,931 $ 1,858 $ 1,810 20

Transaction e doc identifies object code 21

Object level codes consolidate financial statement lines 22

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

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

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

External audit report on internal control Basis of reliance on the University s processes and controls Test of compliance with laws & regulations Government Auditing Standards (GAS) If problems, reports deficiencies (publicly!) Not an opinion 27

Financial statement assertions Accuracy Transactions & amounts are recorded at the right amount Cut off Transactions are recorded in the right period Existence or Occurrence Assets, liabilities, and equity reported do exist and recorded transactions have occurred Classification Transactions are recorded in the right account 28

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

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

Specific audit steps Obtain written procedures and policies Select a transaction throughout the fiscal year Obtain or view supporting documentation in paper or on screen (timesheet or time submission, purchase order, invoice, reimbursement request) Note preparer/initiator Note reviewer signature and date Bottom line were the rules followed? 31

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

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

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

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

Thank You! 36

Supplemental Slides 37

Financial administrators establish policy Controller s Office and financial administrators Develops and enforces effective internal controls. Establishes policies and procedures. Monitors compliance with federal, state, or applicable laws and MSU policies and procedures. MAKES MANAGEMENT DECISIONS. Internal Audit Evaluates and provides reasonable assurance that internal controls are functioning as intended. Evaluates compliance with federal, state, or other applicable laws. Evaluates compliance with MSU internal policy. DOES NOT MAKE MANAGEMENT DECISIONS. 38

MSU revenue (GASB) (Amounts in Millions) Year ended June 30, 2014 2013 2012 2011 2010 Tuition and fees, net $ 753 $ 697 $ 640 $ 568 $ 542 State appropriations 306 299 294 346 357 State and federal grants 355 361 378 350 339 Private gifts, grants & capital approp. 236 174 163 147 179 Investment income (loss) 324 187 (22) 289 164 Auxiliary activities 303 305 293 280 276 Departmental income 174 179 165 167 147 Total GASB revenue reporting $ 2,451 $ 2,202 $ 1,911 $ 2,147 $ 2,004 39

Sources investment income varies widely (in millions) $2,250 $1,750 $1,250 $750 $250 $2,451 174 303 236 355 306 753 324 $2,202 179 305 174 361 299 697 187 $1,911 165 293 164 378 293 640 22 $2,147 167 280 147 350 346 568 289 $2,004 147 276 179 339 357 542 164 Departmental income Auxiliary activities Private gifts, grants, & capital approp. State and federal grants State operating appropriation Tuition Investment income (loss) $250 2014 2013 2012 2011 2010 40

10 year revenue trends $900 $700 $500 $300 $100 $100 Tuition and fees State appropriations State and federal grants Private gifts, grants & capital approp. Investment income (loss) Auxiliary activities Departmental income $300 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 41

Income Statement (reformatted, not GASB) (Amounts in Millions) Year ended June 30, 2014 2013 2012 2011 2010 Revenues: Student tuition and fees, net of allowances $ 753 $ 697 $ 640 $ 568 $ 542 Grants and contracts 389 396 404 373 373 Auxiliary activities 303 305 293 280 276 State appropriations 306 299 293 346 356 Investment income budgeted for operations 29 29 27 29 35 Gifts 55 46 52 46 53 Capital appropriations, grants and gifts 66 17 16 18 29 Additions to permanent endowments 44 38 30 17 25 Other revenues, net 218 224 212 216 189 Subtotal - revenues 2,163 2,051 1,967 1,893 1,878 Expenses: Instruction and departmental research 632 589 575 561 556 Research 312 329 319 294 277 Public service 222 233 210 220 228 Academic support 95 82 82 78 75 Scholarships and fellowships 60 56 55 53 50 Institutional support 115 113 103 94 91 Operation and maintenance of plant 139 144 149 138 143 Auxiliary enterprises 289 289 275 269 256 Depreciation expense 150 139 128 116 98 Other expenses, net 96 86 70 74 56 Subtotal - expenses 2,110 2,060 1,966 1,897 1,830 Net, before investments 53 (9) 1 (4) 48 Other components of net income (loss): Net investment income (loss) 295 158 (49) 260 129 Net income (loss) $ 348 $ 149 $ (48) $ 256 $ 177 42

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

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

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

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

External auditors also.. Single Audit (aka A 133) Separate audit of federal contract and grant expenditures What was MSU s total expenditure for 2012? Corporation of Public Broadcasting Audit of WKAR television and radio What percent of WKAR revenues are gifts? NCAA Review of Athletics Department What is Athletics General Fund budget? 47

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

Auditing internal controls continued 49

Example expenses/accounts payable IT Controls: Key Procedures / Controls Ability to set up new vendors involves an approval process limited to purchasing director approval. Observe the process for setting up a new vendor to ensure approvals are set up. How to test? Invoices and receivers are reviewed for date, quantity, nature of item, place of delivery, freight terms, payment terms and discounts and matched against the PO for accuracy before payment is made to appropriate vendor. If vendor ID# and invoice # have already been entered into the system, the system automatically rejects the invoice and prevents the continued entry of the transaction, thereby, preventing duplicate payment of the invoice. 50

Example expenses/accounts payable continued IT Controls: Key Procedures / Controls Departments initiate requisitions. Purchasing department obtains approval review before PO is completed. Classification of expenditures are input at time of purchase order. Purchase is only allowed if amount is available in the budget (ie. negative balances are not allowed) How to test? Access and level of approval to the online purchase order system is limited to MSU Net ID registered users. 51

Example expenses/accounts payable continued Controls: Key Procedures / Controls How to test? Select one voucher payable transaction to test. Verify proper approval is obtained before applying payments. Select one expenditure that includes an invoice to test. Verify proper approval is obtained before applying payments. Verify that a three way match is performed (purchase order, receiver or proof of service, invoice) before applying payments. Reconciliation of subsidiary ledger to general ledger Obtain year end accounts payable aging and tie to general ledger 52

Example expenses/accounts payable continued Controls: Key Procedures / Controls Unmatched invoices and purchase orders Obtain listing of unmatched purchase orders at year end and tie to general ledger How to test? General ledger is kept open after year end to record accounts payable into proper period. Procedures above are being performed by individuals with the appropriate skill and knowledge as it relates to the following: 1) Input of accounts payable 2) Initial classification of expenditures 53

External audit clean opinion Financial statements are responsibility of management Includes MSU Foundation (and other external auditors) Test basis (sampling) Accounting principles generally accepted in US Present fairly, in all material respects 54

What could go wrong? continued Example of what could go wrong in accounts payable cycle Obligations for goods and services received are not recognized in the proper period AP amounts are not valid Expenditures are classified incorrectly Payments to vendors are applied incorrectly 55

Audit evidence continued What is the impact of these principles on the following types of evidence: Observation Confirmation Inspection of records or documents Recalculation/ Reperformance Analytics Inquiry 56

Discussion Did we meet the goals of this session? Why this information is important to a financial administrator? Support decision making Passing what is learned on to staff Accountability placed at the Fiscal Officer role Questions? 57