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Presentation to theFinancial Administrator Development Program
MSU Financial Statements and External Audit
October 30, 2012Katie A. Thornton, Associate, Plante Moran
Gregory J. Deppong, Controller, MSU
Agenda
• Introductions• 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
• What else do you want to know?
2
Outline
• MSU Controller’s Office, MSU Internal Auditors, and External Auditors roles defined
• Internal Control defined• Account transaction roll up to financial statements• Financial statement components• External Audit of financial statements
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Control & Audit Roles• Controller’s Office
• Establishes internal controls• Reports to Chief Financial Officer
• MSU Internal Auditors• Independent from Controller’s Office• Reports to President and Board of Trustees
• External Auditors• Independent from MSU• Hired by and reports to Board of Trustees• Audit reports issued to State and Federal governments
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Financial administrators establish policyFinancial administrators establish policy
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.
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.
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What is internal control?
Internal control is a PROCESS of specific policies and procedures designed to provide reasonable assurancethat an organization’s fiscal objectives will be met.
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Meeting fiscal objectives
•Promote efficient and effective operations •Support compliance with policy•Protect university assets
•Provide reliable financial reporting
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Internal controls support reliable financial reporting• Laws
• IRS • Federal Grants
• External • Endowment Spending• Generally Accepted Accounting Principles (GAAP)• Governmental Accounting Standards (GASB)
• Internal • Sources and Uses of Funds• Cost Monitoring Compliance
‘Clean’ Financial Statements are the result of sound and effective internal controls
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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
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Governmental Accounting Standards Board (GASB)
• Source of Generally Accepted Accounting Principles for State & Local Governments (and public universities)
• Public universities originally founded by state governments
• At least one public university in every state
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Stewardship: report internally using “funds”
Fund Description Example
General Core institution operating activities
GA – General operations
Auxiliary Separate business activities XA – Athletics
Designated Self‐supporting institution operating activities
DN – Non‐credit instruction
Plant Capital (fixed) assets and related debt; reserves
PT – Reserves for future capital asset needs
Expendable Restricted Contract & grants; endowment spending
RC – Contracts and grants
Endowment Nonexpendable gifts NX – Donor Endowments
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“Funds” continued
Fund Description Example
Retirement & Insurance Administration of retirement and other benefits programs
TN – Insurance
Student Loan Federal and institutionalloans to students
LD ‐ Federal
Agency Non‐university funds heldfor related entities
AS – Student Groups
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MSU’s nine funds are consolidated
Activity in all MSU ‘funds’
combined
Elimination of ‘internal’ activity
Consolidated Financial
Statements
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Statement of Net Assets(Amounts in Millions)
2012 2011Assets:Current assets:
Cash and cash equivalents 14$ 19$ Investments 217 175 Collateral from securities lending 15 13 Accounts and interest receivable, net 143 170 Student loans receivable, net 9 9 Pledges receivable, net 28 24 Inventories and other assets 18 18 Total current assets 444 428
Noncurrent assets:Restricted cash and cash equivalents - 23 Restricted investments - 87 Endowment investments 1,369 1,395 Other investments 402 378 Student loans receivable, net 36 36 Pledges receivable, net 21 37 Investments in joint ventures 7 7 Deferred outflows from hedging derivative instruments 66 36 Unamortized bond origination costs 5 5 Capital assets, net 1,819 1,703 Total noncurrent assets 3,725 3,707
Total assets 4,169$ 4,135$
Liabil i ties:Current liabilities:
Accounts and interest payable 67$ 88$ Accrued personnel costs 41 49 Obligations under securities lending 15 20 Accrued self-insurance liabilities 14 15 Payroll taxes and other payroll deductions 7 22 Deposits held for others 28 32 Deferred revenues 102 86 Current portion of long term debt and other obligations 162 96 Total current liabilities 436 408
Noncurrent liabilities:Accrued personnel costs 33 32 Accrued self-insurance liabilities 7 7 Hedging derivative instruments 66 36 Net other postemployment benefit obligation 217 170 Long term debt and other obligations 734 758 Total noncurrent liabilities 1,057 1,003
Total l iabil i ties 1,493 1,411 Net assets:
Invested in capital assets, net of related debt 967 991 Restricted: Nonexpendable 390 353 Expendable 547 591 Unrestricted 772 789
Total net assets 2,676 2,724 Total l iabi l ities and net assets 4,169$ 4,135$
June 30,
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Statement of Revenues, Expenses and Changes In Net Assets(Amounts in Millions)
2012 2011Operating revenues:
Student tuition and fees, net of allowances 739$ 661$ Less: scholarship allowances 99 93 Net student tuition and fees 640 568 State of Michigan grants and contracts 10 10 Federal grants and contracts 330 297 Local and private sponsored programs 64 66 Interest and fees on student loans 1 1 Departmental activities (net of scholarship allowances 165 167 of $5 in 2012 and $4 in 2011)Auxiliary activities (net of room and board allowances 293 280 of $20 in 2012 and $16 in 2011)
Total operating revenues 1,503 1,389 Operating expenses:
Instruction and departmental research 575 561 Research 319 294 Public Service 210 220 Academic Support 82 78 Student services 32 32 Scholarships and fellowships 55 53 Institutional support 103 94 Operation and maintenance of plant 149 138 Auxiliary enterprises 275 269 Depreciation 128 116 Other operating expenses, net 3 3
Total operating expenses 1,931 1,858 Operating loss (428) (469)
Net nonoperating revenues (expenses):State operating appropriation 241 284 State agrictultural expirament station appropriation 28 33 State cooperative extension service appropriation 24 29 Federal pell grant revenue 39 43 Gifts 52 46 Net investment income (loss) (22) 289 Interest expense on capital asset related debt (35) (39) Other nonoperating revenues, net 7 5
Net nonoperating revenues 334 690 Income (loss) before other revenues (94) 221
State capital appropriations 1 - Capital grants and gifts 15 18 Additions to permanent endowments 30 17
Increase (decrease) in net assets (48) 256 Net assets, beginning of year 2,724 2,468
Net assets, end of year 2,676$ 2,724$
Year ended June 30,
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Sources ‐ investment income varies widely (in millions)
‐22
289 164
‐244
640
568542
510
295
346357
359
379
350339
289
162
147179
158
293
280276
275
165
167147
137
‐$400
$0
$400
$800
$1,200
$1,600
$2,000
2012 2011 2010 2009
Departmental income
Auxiliary activities
Private gifts and grants
State and federal grants
State operatingappropriationTuition
Investment income (loss)
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$1,912 $2,147 $2,004 $1,484
Uses ($1.9B in 2012) – $1.4B (73%) payroll & benefits and contractual services
Payroll and benefits
Contractual services
Depreciation
Repairs and maintenance
Supplies and general
Student financial aid
Travel
Contract and grant subawards
Other operating expenses
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GASB revenue reporting
• Sources:• Tuition • State appropriations• State and federal grants• Private gifts and grants • Investment income (loss)• Auxiliary activities• Departmental income
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GASB expense reporting
• Expense uses (shown by functional category):• Instruction• Research• Public service• Academic support• Student services• Scholarship and fellowships• Institutional support• Operation and maintenance of plant• Auxiliary activities• Depreciation
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Accounts map to one ‘function’
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MSU expense (GASB)
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(Amounts in Millions)2012 2011 2010 2009
Instruction 575$ 561$ 556$ 551$ Research 319 294 277 262 Public service 210 221 228 212 Academic support 82 78 74 77 Student services 32 32 32 31 Scholarships and fellowships 55 53 50 41 Institutional support 103 94 91 90 Operation and maintenance of plant 149 138 143 158 Auxiliary activities 275 269 256 257 Depreciation 128 116 98 91 Other operating expenses 3 2 5 5
Total GASB expense reporting 1,931$ 1,858$ 1,810$ 1,775$
Year ended June 30,
Same total, different view: 2012 expenses –natural classification
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MillionsPayroll and benefits 1,271$ Contractual services 156 Depreciation expense 128 Repairs and maintenance 116 Student financial aid 77 Travel 53 Contract and grant subawards 45 Supplies and general expenses 39 Telephone and postage 11 Rents and leases 7 Printing 5 Other operating expenses 23
Total expenses 1,931$
Financial statement origins
Income/Expense & Asset/Liability
Object Code
Object Type Code
Financial Statement Group
Financial Statement Line
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Every transaction builds the financial statements
Cash
1100
AS
Asset
Cash & Cash Equivalents
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Transaction e‐doc identifies object code
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Object level codes consolidate financial statement lines
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Where is your account reported?
• Which fund?• Which expense line on the financial statements?• Where can you find this information?
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Annual External Audit of Financial Statements
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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
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What is an external audit?
• Process of gathering evidence• By independent third party (Plante & Moran)• To determine if the University’s financial statements are accurate and fairly stated in accordance with the applicable financial reporting framework
• With the objective of issuing an opinion on the financial statements based on the evidence obtained
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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• Unqualified opinion
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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• If problems, reports deficiencies (publicly!)• Not an opinion
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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
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Financial statement assertions continued• Completeness — No material transactions or accounts have been
omitted
• Valuation or allocation — Assets, liabilities, revenue, and expense items are correctly valued
• Rights and obligations — Assets and liabilities are the rights and obligations, respectively, of the entity at the opinion date
• Presentation and disclosure — Financial statement components are properly classified, described, and disclosed
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Auditing internal controls
• Information technology (IT)• Controls
• General controls• Application controls (such as roles (initiator, approver, delegate & system access)
• Fully automated processes (are ‘business rules’ providing sufficient checks and balances?)
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Auditing internal controls continued
• Audit key processes, such as• Cash coming in (revenue)• Cash going out (expenses/assets)• Commitments/promises (liabilities)
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Auditing internal controls continued
• Audit key controls• Documentation (e.g., policies & procedures; employee actions – hiring and termination)
• Appropriate reviewer• Segregation of duties
• Types of controls• Preventative • Detective
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Auditing internal controls continued
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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?
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What could go wrong?
• There are no written procedures and policies• There is limited or no supporting documentation• There is no documented review• Same person prepares and reviews• Review is late• Initiating payment is late (cut‐off)
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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
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Audit evidence
• Evidence in documentary form (whether paper, electronic, or other medium) • Original documents in electronic form qualify as reliable audit evidence
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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
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Example – expenses/accounts payable
IT Controls:
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Key Procedures / Controls How to test?
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.
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.
Example – expenses/accounts payable continued
IT Controls:
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Key Procedures / Controls How to test?
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)
Access and level of approval to the online purchase order system is limited to MSU Net ID registered users.
Example – expenses/accounts payable continued
Controls:
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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
Example – expenses/accounts payable continued
Controls:
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Key Procedures / Controls How to test?
Unmatched invoices and purchase orders ‐ Obtain listing of unmatched purchase orders at year‐end and tie to general ledger
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 payable2) Initial classification of expenditures
If you were going to do an audit of your unit.…
• What would you look at?
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Related to this information ‐ upcoming presentations
• Next session today – Expanded discussion on a unit’s responsibility for internal controls and ethics.
• November session – Using the financial system to facilitate financial reporting and sound fiscal management; Expanded discussion on sources and uses of funds in MSU’s ‘fund accounting’ environment.
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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?
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Thank You!
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Supplemental Slides
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MSU revenue (GASB)
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(Amounts in Millions)2012 2011 2010 2009
Tuition and fees, net 640$ 568$ 542$ 510$ State appropriations 295 346 357 359 State and federal grants 379 350 339 289 Private gifts and grants 162 147 179 158 Investment income (loss) (22) 289 164 (244) Auxiliary activities 293 280 276 275 Departmental income 165 167 147 137
Total GASB revenue reporting 1,912$ 2,147$ 2,004$ 1,484$
Year ended June 30,
10 year revenue trends
‐$300
‐$200
‐$100
$0
$100
$200
$300
$400
$500
$600
$700
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Tuition and fees
State appropriations
State and federalgrants
Private gifts and grants
Investment income(loss)
Auxiliary activities
Departmental income
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Income Statement (reformatted, not GASB)
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(Amounts in Millions)2012 2011 2010 2009 2008
Revenues:Student tuition and fees, net of allowances 640$ 568$ 542$ 510$ 460$ Grants and contracts 404 373 373 340 319 Auxiliary activities 293 280 276 275 274 State appropriations 294 346 357 359 391 Investment income budgeted for operations 27 29 35 35 34 Gifts 52 46 53 55 48 Capital grants and gifts 15 18 28 12 31 Additions to permanent endowments 30 17 25 16 21 Other revenues, net 212 216 189 184 168
Subtotal - revenues 1,967 1,893 1,878 1,786 1,746 Expenses:
Instruction and departmental research 575 561 556 551 521 Research 319 294 277 262 260 Public Service 210 220 228 212 200 Academic Support 82 78 75 77 75 Scholarships and fellowships 55 53 50 41 36 Institutional support 103 94 91 90 83 Operation and maintenance of plant 149 138 143 158 145 Auxiliary enterprises 275 269 256 256 253 Depreciation expense 128 116 98 91 85 Other expenses, net 70 74 56 60 56
Subtotal - expenses 1,966 1,897 1,830 1,798 1,714
Revenues minus expenses, before investments 1 (4) 48 (12) 32
Other components of net income (loss):Net investment income (loss) (49) 260 129 (278) 35
Net income (loss) (48)$ 256$ 177$ (290)$ 67$
Year ended June 30,
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?
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