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Finance and Audit Subcommittee

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Finance and Audit Subcommittee

     EBD #4.3

    (2007-2008 Midwinter Meeting)

    Finance and Audit Committee

    Report to the Executive Board

    2008 Midwinter Meeting

    Philadelphia, PA

    Wednesday, January 16

The primary objectives of the meeting included a review and discussions on the following

    topics:

? FY 2007 Audit Report EBD #4.16

    ? Auditor Evaluation

    ? FY 2008 Budget Update EBD #4.17 ? Endowment Trustees Report EBD #13.1

     - 2007 Calendar Year Performance

     - Investment Policy Revision EBD #13.4 ? Controller’s Report – EBD #4.6

    ? FY 2009 Budget Instructions EBD Info #1 ? CHOICE Property Update

    FY 2007 Audit Report Ernst & Young Ken Herlin, Coordinating Partner, Susan Jones, Partner, and Serena Legatos, Audit Senior

    Manager of Ernst & Young met with the committee to discuss the 2007 audit results. It was

    reported that the ALA received an unqualified opinion on their audit results, which is the

    highest that can be received.

It was noted that the 2007 audit went very well. Issues related to staffing in the

    Accounting/Finance department in 2006 have been addressed, which in turn made the

    transition to this year’s audit process much smoother. It was noted that the A133 is also a part

    of the audit process but it would be completed in the spring. This is the same timeline as

    2006. The A133 requirements have increased the amount of work that is necessary to

    complete this audit and the switch to a spring completion date will likely become the norm.

K. Herlin led a discussion on the requirements necessary to complete the audit, which

    included a summary statement, regulations that Ernst & Young is required to operate, scope

    of the audit and any required communications. S. Legatos discussed the areas of emphasis.

    These areas include accounts receivable, inventory, investments, deferred revenue, IT controls,

    accounting for taxes, etc. Staff notified the committee that Ernst & Young was also asked to

    review the Association’s gift processing practice, in order to determine if it met established

    guidelines. It was noted that there were no adjustments made to the audit, as well as, no

    significant material weaknesses nor fraud found.

The following action was taken to approve the acceptance of the audit report:

    Finance & Audit Committee recommends the Executive Board’s approval of the Ernst & Young audit as reflected in the 2007-2008 EBD #4.16.

    For the record G. Calloway wanted to recognize the Accounting/Finance department for their outstanding effort and hard work to make sure that the audit process went smoothly and completed in a timely manner. They are: Russ Swedowski, Joanne Pak, Jennifer Tam, Doris McKelvin, John Cuculich, John McGovern, Amish Kadakia, Tihuana Spells, Nicole Aviles, Sharon Harris, Sandy Lee, Aleina Lee, Elaine Klimek and Keith Brown. G. Calloway also recognized that Ken Herlin of Ernst & Young is retiring and acknowledged his exemplary contribution to the ALA and ALA finances.

Auditor Evaluation Ernst & Young

    G. Calloway and R. Swedowski presented the committee with a management evaluation of the performance of the Ernst & Young audit team for this engagement. They were evaluated on ten criteria. The audit team was very professional and communicated effectively with staff. The audit team received an overall rating of strong.

    As a follow up to this discussion the question of an RFP was raised. Ernst & Young has been ALA’s auditor for approximately 15 years. Over that period there have been three different

    partners on the engagement. Next year, Sue Jones will be appointed as the senior partner since K. Herlin is retiring. It was suggested that ALA retain Ernst & Young for another year and see how the audit process goes with a new partner in charge.

FY 2008 Update EBD #4.17

    Greg Calloway updated the committee on the status of the FY 2008 budget based on the first quarter information ending 11-30-07.

Total ALA - Total ALA revenues for the period were $10.5 million, which is 7% or $757,000

    less than budget of $11.2 million. This compares to $7.7 million last year. Accounting for most of the shortfall against budget were the Divisions ($325,000) and Grants & Awards ($554,000). Total ALA expenses for the period are $10.5 million compares to $9.0 million last year. This is 14% or $1.7 million less than budget.

Endowment Trustee Report EBD #13.1

    2007 Calendar Year Results

    Robert Newlen, Senior Trustee, reported to the committee on the status of the ALA endowment report. For the twelve months ended 12-31-07 the portfolio returned 8.4% compared to its benchmark of 6.5%. It increased in value by $2.2 million to $31.2 million. Interest and dividends accounted for $939,000 of the gain. Most of the managers reported positive results. Alliance Bernstein reported the best results with a return of 14.4% compared to its benchmark of 5.5%. R. Newlen noted that Alliance was previously on the Trustees’ watch list, but patience with the manager paid off. Pimco, the fixed income manager also turned in a stellar performance returning 9.3% compared to its index of 7.0%. At $10.2 million investment the impact was favorable. This amount was reached after a number of asset allocations during the year as market conditions dictated. This is the first time in about five years that fixed income has outperformed equities.

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Investment Policy Revision

    The Trustees also presented a revised investment policy. It was noted that an annual review

    of the policy is standard for the Trustees. Although there were a number of changes, none

    was considered to be significant. Most of the changes related to giving the portfolio managers

    the flexibility to better meet and outperform their respective benchmarks. It was also noted

    that the recommended changes were in line with peer organizations and did not add

    significant risk to managing the portfolio. The following action was taken:

The Finance & Audit Committee moves that the Executive Board approve the revised

    ALA Investment Policy as approved by the Trustees on 1/4/08 with the deletion of a title

    change for the Senior Trustee.

R. Newlen closed the discussion by reminding the Executive Board of the Development

    Office’s “Planned Giving” efforts, and why the effort is important to the Association and the

    growth of the endowment fund.

    Controller’s Report – EBD #4.5 ALA Controller, Russ Swedowski, presented the Controller’s report which included the

    current status of the inventory, credit & collections and cash and short-term investments.

Inventory Inventory levels at 11-30-07 for ALA Editions and Products & Promotions were

    $671,000 and $676,000 respectively. The ALA Editions inventory reflects a $36,000 thvaluation for the 11 edition of Guide to Reference books. The largest item in the inventory for Products & Promotions are the “Read” products (42) valued at $83,000.

    The excess and obsolete inventory reserves for ALA Editions and Products & Promotions

    were $282,000 and $144,000 respectively, which are appropriate. To date there has been

    $47,000 (Editions) and $43,000 (Products & Promotions) of destruction of excess or obsolete

    inventory. Testing of reserves was performed as part of the year end closing process, which

    resulted in a reduction in reserves of $6,000 in Graphics and $5,000 in ALA Editions.

    Credit and Collections As of 11-30-07 trade receivables totaled $2.0 million as compared to $2.2 million. Trade receivables in the 150+ day category increased to

    $166,000 compared to $134,000 in FY06. The increase is a result of various

    Midwinter exhibitor billings that are outstanding.

Cash Management and Bond Fund As of 11-30-07 the balance for cash and short-term

    investment was $21.3 million due in large part to higher deferred revenue related to Meetings

    & Conferences/Grants & Awards. This compares to $17.3 million last year. Year to date

    interest income is $178,000, which is $33,000 less than the budget of $210,000 but $30,000

    more than last year. The Nueberger Berman bond fund balance is $12.2 million. This

    investment has generated over $6.6 million in interest income since December, 1991 and a

    cumulative net realized loss of $157,000.

    Postretirement Benefits For the FY07 audit ALA adopted the provisions of Statement of Financial Accounting Standards NO. 158, Employer’ Accounting for Defined-Benefit Pension

    and Other Postretirement Plans. This requires ALA to recognize the funded status i.e. the

    difference between the fair value of the plan assets and the projected benefit obligation. A

    detailed description of the effects of adopting FAS 158 is included in footnote 13, page 13 of

    the audit report.

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FY 2009 Budget Instructions EBD Info #1

    Staff highlighted the budget instructions, which were given to staff in preparation of their FY

    2009 budgets. It was noted that there will be a flat assumption for expenses in FY09

    excluding salary and depreciation. The budget will include a salary recommendation of 3%

    (2.5% merit and .5% individual incentive).

ACRL/CHOICE Property Update

    Irv Rockwood, CHOICE editor, updated the committee on the status of a new property

    proposal currently being considered by ACRL/CHOICE. CHOICE has been exploring for

    some time now the feasibility of purchasing office space in Middletown, Connecticut. After a

    number of attempts, CHOICE is now considering a project that involves CHOICE’s current

    landlord Harding Development Group. This is a new project two blocks from CHOICE’s

    current location i.e. SW corner of Main and Liberty streets. This will be a three story

    condominium type structure with CHOICE to occupy the third floor comprising

    approximately 7,000 square feet. On August 3, 2007 Choice/ACRL/ALA and Harding signed

    a non-binding Letter of Intent stipulating a price of $239 per square foot - $1,673,000.

    Neither party is legally obligated to complete the transaction. In the end there will be two

    owners of the property, ALA and Mackey II. Currently, a purchase and sell agreement is

    being developed.

Acknowledgement

    The Finance and Audit Committee wants to thank ALA Finance staff Greg Calloway, Keith

    Brown, Russ Swedowski, Sandy Lee and Elaine Klimek for all their help in preparing for and

    executing the meeting and activities of the 2008 ALA Midwinter Meeting.

Respectfully submitted,

     Rodney Hersberger - Treasurer

     Roberta Stevens

     Larry Romans

     Patricia Smith

     Marilyn Hinshaw BARC Chair

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