Institutions of Higher Education Audit Guidance FY2006

By Zachary Spencer,2014-05-16 17:49
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Institutions of Higher Education Audit Guidance FY2006

    Institutions of Higher

    Education Audit Guidance

    FY 2006

Executive Summary

    This guide is meant to compliment the Government Accounting Standards Board

    (GASB) Statement 35 implementation guide issued in 2002, which is documented in

    various other policies and procedures, including, but not limited to, fixed assets

    guidance. This guide is being issued to implement GASB Statement 39 for fiscal year

    2004 and forward and to reissue policies on required documentation with regard to

    the Commonwealth’s issuance of its Comprehensive Annual Financial Report (CAFR).


    The Office of the Comptroller prepares a CAFR annually.

    Reporting standards require that all Higher Education Institutions’ financial statements be included as part of the Higher Education discrete presentation. Due

    to the tight timetable of completing the CAFR and the large number of

    Higher Education Institutions, we are requesting that each audited

    Institution read and complete the financial statement package.

Statement 39 requires that private foundations related to Institutions of Higher

    Education and other related entities (hereafter referred to as “Component Units”) of

    the Institutions of Higher Education be reported in the audited financial statements

    of the Institutions. To facilitate this reporting, these entities’ audited financial

    statements are recommended to be submitted on a timely basis to the Institution,

    (typically one month prior to October 15, the due date for the Institution’s completed audited financial statements to be received at the Office of the Comptroller).

    Completed audits are defined as audits in final form, represented to the Office of the Comptroller as ready for acceptance by or accepted by the Board of

    Trustees of the Institution. Various reporting changes and footnote disclosures are

    necessary for proper reporting.


    Reporting Requirements

Reporting requirements require entities that receive federal funding must

    be audited in accordance with generally accepted governmental auditing

    standards. The audit opinion of these entities should read, “audited in

    accordance with Governmental Auditing Standards.

The Commonwealth is required to complete its Statutory Basis Financial Report

    (SBFR) no later than October 31 annually. Included in these statements are all the

    financial information related to Leases and Fixed Assets. This information is a copy of the Institution’s applicable footnotes. In order to complete these statements

    on time, the due date for submitting the information is September 15 for leases


    and for fixed assets, (again, typically those draft footnotes,) in advance of the submission of an annual report from the Institution represented to the

    Office of the Comptroller as ready for acceptance by or accepted by the Board of Trustees of the Institution.

The Commonwealth is scheduled to issue its audited CAFR no later than stDecember 31, annually. As the Institution’s audited financial statements

    will be included as part of the Commonwealth’s, the Institution’s copy of the financial statements must be submitted to the Office of the Comptroller by

    the due date of October 15 annually. The financial statements of the

    Institution must be received by the Office of the Comptroller in a form ready

    for acceptance by the Board of Trustees or audited and have received an

    unqualified audit opinion. The Commonwealth’s financial statements are at

    risk of being qualified by our auditors if you do not meet the above


Independence Letter

The Institution’s audited financial statements must be transmitted to the Office of

    the State Comptroller with an Independence Letter (Attachment A.) It is

    necessary for your auditors to confirm to our auditors, (currently Deloitte) their

    independence with regard to your financial statements. This requirement is

    mandatory and any lack of response may result in a qualification of the

    Commonwealth’s CAFR audit opinion. As the component units of the Institution are

    also audited, these component units must also transmit their audits to the

    Institution’s auditor containing a similar letter. The letter that the Institution needs

    to transmit to the Commonwealth’s auditors and the component unit(s) need(s) to

    transmit to the Institution can be found at the end of this document. In the case of

    a letter from the Institution’s auditor to the Commonwealth, the addressee would

    change if addressed from the component unit of the Institution to the Institution’s


Relevant GASB Standards

The financial statements must be prepared in accordance with Generally Accepted

    Accounting Principles (GAAP) as promulgated by the Governmental Accounting

    Standards Board (GASB). All relevant standards must be followed.

Standardized Financial Reporting Items

For Institutions receiving federal funding:

Reporting requirements require entities that receive federal funding need to be

    audited in accordance with generally accepted governmental auditing standards. The

    audit opinion of these entities should read, “audited in accordance with

    Governmental Auditing Standards.”


Specific Implementation Guidance for GASB Statement 39

GASB Statement 39 brings the concept of component units to Institutions of Higher

    Education. Typically these component units will include, but are not limited to,

    private foundations that support the Institutions’ activities. In no way is the legally

    separate status of the foundation being called into question. The guidance for the

    implementation of this statement is as follows:

Fiscal Year End of Component Unit

Statement 39 allows a fiscal year end of a component unit to be different than the

    Institution’s. The financial statements of the component unit can be issued as much thas 11 months prior to June 30 and still be eligible for inclusion. The fiscal year end

    of the component unit must be disclosed in a new “reporting entity” section of the

    Institution’s summary of significant accounting policies footnote.

All component units are combined and presented in a single column. Should a

    combining schedule be necessary, one should be presented as other supplementary

    information, following the footnotes to the financial statements.

Required Elimination Schedule

Eliminating entries are necessary for transactions between the Institution and the

    component unit to forestall the possibility of doubling revenue and expenses. A

    schedule of these eliminating entries, including the accounts they effect and amounts

    must be forwarded to the Office of the State Comptroller on or before October 15 as

    part of the package of audited financial statements. It is not necessary to have this

    schedule audited.

Reformatting of Component Unit Financial Statements

In all likelihood, the financial statements of the component unit are presented in

    accordance with Financial Accounting Standards Board (FASB) Statements 116 and

    117. Reformatting is sometimes necessary to be presented in accordance with GASB

    standards. Do not change the underlying basis of accounting for the Component Unit

    from FASB to GASB. These entries will largely consist of geographical moves of

    information within the statement of net assets. The independent auditor of the

    Institution will take responsibility for these changes in disclosure. Communication

    between the auditor of the Institution and the auditor of the component unit is

    absolutely vital for an unqualified opinion for the Institution.

Management’s Discussion and Analysis

The Management’s Discussion and Analysis (MD&A) of the Institution is typically

    limited to discussion of the Institution’s activities. Only a very significant or unusual transaction involving the Component Unit needs to flow up to the MD&A of the

    Institution. For all years, the relationship and the nature of transactions between the

    Institution and the Component Unit should also be discussed.


Audit Opinion

The opinion for all years will reference the work of the auditor of the Component

    Units and the level of reliance on that work. Finally, the component unit’s opinion must reference Government Auditing Standards.

    A draft opinion for the Institution is attached as Attachment B.

    Footnote Disclosures from Component Units

Statement 34 and Statement 14 require that an overview of the Institution should

    distinguish between the Institution and the Component Unit(s). For each major

    component unit, the nature and amount of significant transactions with the

    Institution should be disclosed, along with any other transactions between

    Component Units.

Disclosures for the Component Units should be limited to those that are essential to

    the fair presentation of the Institution’s basic financial statements. This needs to be

    done on a case-by-case basis. Typically though, for a foundation, cash, investments,

    receivables, fixed assets, payables and debt, if applicable, would be disclosed. The

    focus on disclosure needs to be on information from only major Component Units.

    Finally, a reference needs to be made in the Institution’s footnotes as to how to

    obtain the Component Unit’s audited financial statements in describing the Component Unit relationship.

Other Financial Reporting Guidance

    The financial statements should include all of the Institution's activities, which is to say it should include all appropriated and non-appropriated activity as

    measured and reported in conformity with GAAP, including any component

    unit(s) of the Institution.

The following items should be excluded from the Institution’s financial statements:

? For State Colleges, the State College Building Authority should be excluded from

    an individual Institution's financial statements. These authorities are included in

    the Commonwealth’s CAFR as blended component units. However, individual

    State College financial statements should reflect payments to the State College

    Building Authority in the appropriate expenditure category. In some cases, this

    may be reported in auxiliary enterprises. Please review this with your auditor.

? Employee deferred compensation plan assets will be carried by the

    Commonwealth as an Expendable Trust fund item. Individual Institutions should

    not carry the assets on their Financial Statements.


The following items must be included in the Institution’s financial statements:

? Accounts Payable - The portion of this liability to be paid from state

    appropriations should be offset by an asset labeled "Cash held by The State


    ? Compensated Absences - Institutions must accrue the vacation and sick leave

    buyback liability related to all employees, i.e., employees paid from appropriated

    and non-appropriated funds without regard to the future funding mechanism. This

    liability should be calculated in accordance with GASB Statement No. 16, Accounting

    for Compensated Absences, and displayed consistent with the guidance in GASB

    Technical Bulletin 92-1, Display of Governmental College and University

    Compensated Absences Liabilities. The HRCMS statewide system includes all

    Institutions of Higher Education and is the official books and records of the

    Commonwealth with regard to payroll. Compensated Absences are reported from

    this system on the report HMBEN008 on view direct.

    ? Fringe benefit expenditures - Institutions must record expenditures for the cost

    of fringe benefits. For employees paid from non-appropriated funds, fringe benefits

    have already been charged against these funds at the approved fringe benefit rate.

    ? Liability for Workers’ Compensation - Institutions must record this information

    derived from reports prepared from information available from the Human

    Resources Division. This information is disseminated to Institutions in early


Forthcoming GASB Standards

The following standards have been issued as of the date of posting and will be

    implemented in the following fiscal years:

    Statement Description Implementation FY

    40 Deposit and Investment 2005

    Risk Disclosures an

    amendment to GASB

    Statement No. 3

    42 Accounting and Financial 2006

    Reporting for Impairment

    of Capital Assets and for

    Insurance Recoveries

    44 Economic Condition 2006


    46 Net Assets Restricted by 2006

    Enabling Legislation

    GASB Statement 40 Deposit and Investment Risk Disclosures amends GASB 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements),

    and Reverse Repurchase Agreements and GASB 28, Accounting and Financial

    Reporting for Securities Lending Transactions. GASB 40 updates the custodial credit

    risk disclosure requirements of GASB 3 and addresses other investment risks,

    including credit concentration, interest rate and foreign currency risks. Portions of

    the traditional statement 3 disclosures have been modified or eliminated. The


custodial credit risk portion (the traditional 3 category disclosure) has been modified

    greatly, limiting required disclosures to:

    ? Deposits that are not covered by FDIC / DIFM and are (a) uncollateralized, (b)

    collateralized with securities held by the pledging financial institution, or (c)

    collateralized with securities held by the pledging financial institution’s trust

    department or agent, but not in the government’s name.

    ? Securities that are unregistered or uninsured and are held by either (a) the

    counterparty or (b) the counterparty’s trust department or agent but not in

    the government’s name.

These two items are the traditional category 3 GASB 3 investment disclosures. The

    statement however, does not change the required disclosure of authorized

    investments or the requirements for reporting repurchase agreements or reverse

    repurchase agreements. Most of the level of detail disclosure requirements of GASB

    3 also remain. Implementation is for periods beginning after June 15, 2004


GASB Statement 42 Accounting and Financial Reporting for Impairment of Capital

    Assets and for Insurance Recoveries: This Statement establishes accounting and financial reporting standards for impairment of capital assets. A capital asset is

    considered impaired when its service utility has declined significantly and

    unexpectedly. This Statement also clarifies and establishes accounting requirements

    for insurance recoveries. The provisions of this Statement are effective for fiscal

    periods beginning after December 15, 2004. Earlier application is encouraged.

GASB Statement 44 Economic Condition Reporting: The Statistical Section: This

    Statement amends the portions of NCGA Statement 1, Governmental Accounting and

    Financial Reporting Principles, that guide the preparation of the statistical section. The statistical section presents detailed information, typically in ten-year trends, that

    assists users in utilizing the basic financial statements, notes to basic financial

    statements, and required supplementary information to assess the economic

    condition of the government.

The statistical section is a required part of a comprehensive annual financial report

    (CAFR), although governments are not required to prepare a statistical section if

    they do not present their basic financial statements within a CAFR. These

    circumstances are not altered by this Statement. However, this Statement does

    apply to any statistical section that accompanies a government’s basic financial

    statements. The provisions of this Statement are effective for statistical sections

    prepared for periods beginning after June 15, 2005.

GASB Statement 46 Net Assets Restricted by Enabling Legislation: GASB

    Statement No. 34, Basic Financial Statements - and Management’s Discussion and

    Analysis for State and Local Governments, requires that limitations on the use of

    net assets imposed by enabling legislation be reported as restricted net assets. In

    the process of applying this provision, some governments have had difficulty

    interpreting the requirement that those restrictions be “legally enforceable.” The

    confusion over this phrase has resulted in a diversity of practice that has diminished


This Statement clarifies that a legally enforceable enabling legislation restriction is

    one that a party external to a government such as citizens, public interest groups,


or the judiciary can compel a government to honor. The Statement states that the

    legal enforceability of an enabling legislation restriction should be reevaluated in any

    of the resources raised by the enabling legislation are used for a purpose not

    specified by the enabling legislation or if a government has other cause for

    reconsideration. Although the determination that a particular restriction is not

    legally enforceable may cause a government to review the enforceability of other

    restrictions, it should not necessarily lead a government to the same conclusion for

    all enabling legislation restrictions.

This Statement also specifies the accounting and financial reporting requirements if

    new enabling legislation replaces existing enabling legislation or if legal enforceability

    is reevaluated. Finally, this Statement requires governments to disclose the portion

    of total net assets that is restricted by enabling legislation. The requirements of this

    Statement are effective for financial statements for periods beginning after June 15,


Reconciliation of the Institution’s Financial Statements to the MMARS

    appropriated fund activity

In order to prepare the Institutions of Higher Education audited financial statements,

    the Institutions must combine internal activity (non-appropriated) with the activity

    posted to MMARS (appropriated) and controlled by the State Comptroller. The

    Comptroller’s Office then compiles all audited financial statements for the CAFR. An

    important part of this process is to have the same activity reported consistently

    between Institutions. The footnotes refer to the fact “no right to offset exists under

    State statute” and therefore no “offsetting” is done. The authoritative literature

    referencing “offsetting” relates only to balance sheet items where two entities owe

    each other money. In addition, the Institutions of Higher Education are not separate

    legal entities (Component Units) but are presented as business type activities on

    an aggregate basis by system in the Commonwealth’s CAFR.

    An example is attached as Attachment C.


    FUND 900 / 901 ACTIVITY)

Guidance was released in February 2004 on whether or not schools qualify for removal

    of fixed asset information from MMARS. In general, Institutions of Higher Education

    that issue separate, independent audits, completed and filed with the Office of the thComptroller on or before October 15 annually, may choose not to record fixed

    assets on MMARS or NewMMARS. These eligible Institutions must have an auditable

    fixed assets system available for inspection by the State Auditor’s Office and / or the

    Office of the State Comptroller. At a minimum, the system must be capable of

    tracking additions, betterments, changes, disposals, with gains and loses thereon.

    Institutions must follow other guidance related to fixed assets issued by the Office of

    the Comptroller with regard to, but not limited to:

    ? Acquisition

    ? Recording

    ? Accounting and Management


    ? Reporting

    ? Software

    ? Infrastructure (if applicable)

    ? Depreciation and Useful Lives

Via their independent audits and their footnote disclosure, Institutions are

    representing that they comply with these practices.

Non Compliance

If an Institution decides not to comply with these practices, they must use MMARS as

    the record repository for their fixed asset information.

Choosing Not to Use MMARS / NewMMARS for Fixed Asset Reporting

Effective July 1, 2004, the majority of institutions have confirmed to us that

    they will not use MMARS / NewMMARS for their fixed asset recordkeeping.

Choosing to remain using MMARS

If an Institution decides to continue using MMARS, MMARS will be the official record

    of the Commonwealth. All information on MMARS must be reconciled to information

    that is kept in Institution financial systems. All applicable MMARS policies and

    procedures must be followed. The fixed asset balances in MMARS must be the GAAP

    fixed asset balances reported in the Institution’s audited financial statements.

Instructions for Facilities to be Constructed by, or in conjunction with, the Division of

    Capital Asset Management (DCAM)

Because long term construction in process (CIP) will still be audited at the

    Commonwealth, slightly different reporting, accounting and MMARS set-up will need

    to occur based on the anticipated project spending. The two scenarios are below.

    Institution Projects less than $1 Million where DCAM delegates Authority

If an Institution is delegated by DCAM to construct a project that is less than $1

    million, DCAM and the Executive Office for Administration and Finance (ANF) will

    create a major program and appropriations on NewMMARS for this construction for

    the purpose of controlling allotments and spending. However, the setup of this

    program will not create a fixed asset in NewMMARS. It is up to the Institution to

    record this construction in process activity as it is spending these funds. The audit of

    this activity will also be done at the Institution level.

     Projects greater than $1 Million

If an Institution is approved for a project that is GREATER than $1 million, DCAM and

    ANF will create a major program in NewMMARS, again not resulting in a fixed asset.

    DCAM will also be responsible with ANF to create spending accounts and work with

    OSC to record revenue that is contributed by Institutions to help facilitate the project.

    If a betterment project is constructed on an asset that was removed from MMARS,


DCAM will assign the old statewide fixed asset number for its internal tracking


     stAnnually, on or about August 31, DCAM will certify to each Institution the amount of

    construction in process by project to help facilitate the audit of CIP. Upon

    completion of the project, DCAM will send a final certification to the Institution

    detailing the following:

    1. The required asset identification number that is needed for DCAM

    purposes for the project.

    2. The cost of the project.

    3. The date of the memo which will serve as the “in service date” for

    depreciation purposes.

It will be on this certification date that the construction in process is intended to be

    transferred from NewMMARS.

Impairment of Fixed or Other Assets and Insurance Recoveries


The Government Accounting Standards Board (GASB) has released Statement No. 42

    Accounting and Financial Reporting for Impairment of Capital Assets and for

    Insurance Recoveries, applicable starting in FY06. The Commonwealth is required to

    evaluate prominent events or changes in circumstances affecting fixed or other

    assets, such as cash, to determine whether impairment has occurred.

In the case of theft, fire, flood, obsolescence or other event regarding the usefulness

    of an asset, be it fixed or non-fixed such as cash, departments need to evaluate the

    usefulness or availability of that asset in the future. This may require outside

    assistance from an appraiser and or the Office of the Comptroller (CTR) to determine

    significance and applicability. Impairment must be conspicuous e.g. known to the

    Commonwealth that a material event has occurred. These events may be known by

    management or the media.


All impaired assets if significant (greater than $100,000 in value) need to be

    reported to the CTR General Accounting Bureau within 7 days of event occurrence.

    For all unaccounted for variances, losses, shortages or thefts of funds or property,

    the rules established under Chapter 647 of the Acts of 1989 apply. The CTR General

    Accounting Bureau will work with you to determine if impairment exists and if there

    is an event that needs to occur in MMARS.

Other Footnote Disclosure Requirements of a Higher Education Institution

Please be reminded that the financial statements must, at a minimum, include the

    following footnote disclosures:

? Summary of Significant Accounting Policies


    With respect to the Component Unit, the Summary of Significant Accounting Policies should include:

? A description of the Component Unit

    ? The relationship between the Component Unit and the Institution ? The criteria for inclusion of the Component Unit in the financial statements of the


    ? How the separately audited financial statements may be obtained. This is a general

    reference to the Chief Financial Officer of the Institution.

    If there are different fiscal year ends for the Component Unit and the Institution, a reconciliation of significant transactions between the Component Unit and the

    Institution needs to be included for the period between the Component Unit’s year-end thand June 30.

    Other GASB note disclosures for the Component Unit are generally NOT required. If there are significant items that are found in the Component Unit’s footnotes, they would translate up to the Institution’s footnotes in their applicable sections. If they

    are presented, do NOT reformat their footnote from FASB to GASB format. Instead, present a separate subsection within the footnote clearly labeled “discretely

    presented component unit(s).”

Other footnotes for the Institution should be:

    ? Disclosures for Cash Deposits and Investments ? Receivables

    ? Fixed Assets

    ? Advance Refunding and Short and Long Term Debt ? Leases

    ? MMARS Reconciliation (see above)

    ? Related Party Disclosures

    ? Subsequent Events

    ? Commitments and Contingencies

    This should include lawsuits pending against the Institution and a disclosure of the lawsuits possibility of success categorized as probable or reasonably possible. Suits categorized as remote can be ignored. The estimated costs of lawsuits deemed

    probable must be accrued as a liability.

If an attorney other than a special assistant attorney general represents the

    Institution, note this in a transmittal to the Comptroller. Note that other attorneys have no authority to represent the Commonwealth.

? HEFA Agreements

    The agreements within Massachusetts Health and Educational Facilities Authority will be treated as a lease purchase of fixed assets. In other words, the asset and the liability for the payment should be recorded as a fixed asset and a capital lease payable. Fees pledged to support principal and interest payments should also be recorded.


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