Association of College and University Auditors (ACUA)

2. Association of College and University Auditors (ACUA) James E. Morley, Jr. September 23, 2002 Salt Lake City, Utah

3. Presentation Overview • Part I - Higher education in transition • Part II - Current national issues • Part III - Internal audit: Today and the future

4. Higher education in transition • Rapid change: Industry • Cost/price increases: Funding shortfalls • Accountability • Competition • Rapid change: Expectations

5. Higher education in transition Rapid change: Industry

7. Growth in Higher Education • Square Footage • 1950s - 500 million • 1980s - 3 billion • 1990s - 4 billion • New Construction • Between 1994 & 1996 - $12 billion • Projections for 2010 • Additional $200+ billion to build

8. Higher education in transition Cost/price increases: Funding shortfalls

11. Average Tuition Discount:Full Time Freshmen

12. Higher education in transition Accountability

13. Accountability • Scrutiny of costs, salaries, tenure, graduation rates, and curriculum • School-to-work transition • rise in professional education • Minority retention • For-profit comparisons • inefficient operations • unresponsive structure • underutilized technology

14. Higher education in transition Competition

15. A Competitive Environment • Competition for students and for resources • Increase in tuition discounting and faculty salaries as a result • Customers (students) expecting and demanding more from institution • Increased attention to student services • Market segments fragmenting • Increasing niche competition • Competition from distance learning • Rise of for-profit schools

16. Higher education in transition Rapid change: Expectations

17. Higher education in transition • A consumer-driven marketplace • Consumers (better called stakeholders) place constant and competing demands • Technology overlay • Globalization • Terrorism • Disease • Culture

18. Current national issues

19. Current national issues • War against terrorism & homeland security • Tax issues and accounting-related • Federal regulations • Technology

20. National issues War against terrorism and homeland security

21. Homeland security:Impact on colleges and universities • Foreign students and visitors • Sharing of information with law enforcement and privacy concerns • IT security • Laboratory security and treatment of biohazards

22. Homeland security: New federal laws • USA Patriot Act (enacted October 26, 2001) • Enhanced Border Security and Visa Entry Reform Act (enacted May 14, 2002) • Public Health Security and Bioterrorism Preparedness Act (enacted June 12, 2002)

23. Homeland security: USA Patriot Act Information sharing: This legislation provides simplification for federal officials to receive court orders for student records and amends FERPA to permit “emergency disclosure.” • Calls for full implementation of INS foreign student tracking system (SEVIS) • With court order, Feds investigating terrorism may obtain business and student records

24. Homeland security: USA Patriot Act (cont’d) Information sharing: Updates surveillance laws to cover today’s communications—e-mail, voice mail, etc. • Makes it easier for law enforcement to acquire “routing” information (pen registers, trap and trace), and relieves institutions of liability • May result in increased requests for information

25. Homeland security: Enhanced Border Security and Visa Entry Reform Act • Enhancements to SEVIS • Re-certification of all institutions w/ biennial reviews • Additional information on foreign students • Notification requirements between Department of State, INS, and institutions to track student entry, enrollment, and changes in status • Interim notification system by 9/14/02 • New background checks for visa applicants from countries that sponsor terrorism

26. Homeland security: Student and Exchange Visitor Information System (SEVIS) • Problems for campuses with large foreign student populations • Batch interface not yet available for institutions that will not key information directly into system • Web-based system for preliminary enrollment went live July 1; institutional reporting not mandatory before January 30

27. Homeland security: Public Health Security & Bio-terrorism Preparedness Act of 2002 • Select agent list to be reviewed at least biennially • Regulations will cover possession and use, not just transfers, of select agents • Tighter controls, including federal background checks on persons allowed access to select agents • Broad inspection authority for HHS

28. Homeland security: Social security requirements for INS verification • New guidance asks INS to issue verification based on review of passports and related documents for foreign applicants for SSNs • SSA estimates new step will add 3-12 weeks to receipt of SSN • Campus issuance of “temporary” nine-digit identifiers to address internal payroll unofficially acknowledged by SSA • Check SSA website for up-to-date guidance

29. Department of Homeland Security: Proposed • The administration’s five organizational categories proposed for the new department include 24 government entities • Border and Transportation • Emergency Preparedness and Response • Chemical, Biological, Radiological and Nuclear Countermeasures • Information Analysis and Infrastructure Protection • Secret Service • Sixty-one Congressional committees and subcommittees now have authority over the 24 organizations likely to be merged into the new department • And, at present, the House Government Reform and Senate Governmental Affairs committees have general oversight authority • Source: Congressional Quarterly

30. National issues Tax issues and accounting-related

31. Tax issues: Recent IRS actions • Memo on FICA withholding for medical residents • Final rules published for: • Intermediate sanctions • Corporate Sponsorships • Re-proposed rules on 1098-T reporting

32. Tax issues: FICA Rules for medical residents • Memo from IRS chief counsel indicates residents not eligible for student FICA exemption (January 24, 2002) • Rationale: • Most services provided by residents are treated as on-the-job training, not part of study program • Therefore not eligible for student FICA withholding exemption

33. Tax issues: Final rules on corporate sponsorships • Safe harbor for qualified sponsorship payments • Exclusive sponsorships allowed • Exclusive provider arrangements not in safe harbor—but not automatically subject to UBIT • EO’s web site can link to sponsor’s site, but not endorse it • Rules published 4/25/02 Federal Register, and are applicable for payments solicited or received after December 31, 1997

34. Tax issues: IRS Re-proposes 1098-T reporting requirements • Eases reporting burden • Repeals requirement to collect name / SSN of individuals claiming student as dependent • Allows reporting of aggregate amount of qualified tuition / expenses or amounts billed • Prior year reporting limited to adjustments to amounts previously reported—not all refunds • Removes requirement to report on individuals ineligible for benefit

35. Tax issues: IRS Re-proposes 1098-T reporting requirements (cont’d) • Comments due July 29 – see web site for NACUBO response • Effective date of new regulations will be for tax year 2003 (1098-Ts that will be filed in early 2004) • Final rules expected by end of 2002

36. Accounting-related: GASB Standards • GASB Statement No. 34 • Basic Financial Statements-And Management’s Discussion & Analysis-for State and Local Governments • GASB Statement No. 35 • Amends GASB34 to include Public Colleges and Universities

37. GASB Standards (cont’d) • GASB Reporting Model Implementation Guides • Two separate guides developed by GASB staff (April 2000 and January 2002) • Special NACUBO guide issued January 2001 for public colleges and universities • GASB Statement No. 37 - Omnibus Statement • Addresses problems created by GASB34 and GASB35

38. GASB Standards (cont’d) • GASB Statement No. 38 - Note Disclosures • Significantly modifies required disclosures • Eliminates some, adds others • Debt, legal issues, payables/receivables • GASB Statement No. 39 – Affiliated Organizations • Applies to foundations and other entities supporting public institutions

39. Accounting-related: GASB Projects • Deposit and investment risk disclosure • Other post-employment benefits • Conceptual framework

40. Accounting-related: FASB Standards • FASB Statement No. 141 - Business Combinations • Excludes not-for-profits • FASB Statement No. 142 - Goodwill and Intangible Assets • Application to NFPs deferred until NFP combination project is complete

41. FASB Standards (cont’d) • Not-for-profit business combinations • Measuring financial instruments at fair value

42. Accounting-related: AICPA Project • Exposure draft revises rules for Property, Plant & Equipment accounting • Specifies expenditures which qualify for capitalization

43. Accounting-related:Sarbanes-Oxley Act of 2002 • Creates new, independent regulatory body, the Public Company Accounting Oversight Board (PCOAB) • Changes to ensure FASB independence in setting national accounting standards • Auditor independence requirements mandated for audits of publicly traded companies • New corporate responsibilities and restrictions for CEOs and CFOs • Focus on greater disclosure and transparency in financial reporting, internal controls, ethics, audit committee expertise • Stricter provisions and for corporate fraud and white-collar crime

44. Possible future actions • Increased disclosure: GASB Statement 39 (issued 2002) • GASB performance measures “experiment”—coming (end—2002) • FASB mandated study of principles-based accounting financial reporting system (due July 2003)

45. Professional & standards-setting groups • AICPA • FASB • GASB • PCAOB

46. National issues Federal regulations

47. Federal regulations: ED – Title IV Program eligibility rules • Replace the 12-hour rule with a one-day rule • Clarify provisions for incentive compensation and identifies “safe harbor” activities for student recruiters • Clarify need to take attendance in order to comply with return of Title IV funds requirements • Amend overpayment rules to permit students owning small amounts to retain their program eligibility • Expand from 90 to 120 days for making late disbursements and require institutions to offer them to students who complete the period of enrollment • Eliminate the rule for institutions to confirm the receipt of notices sent to borrowers (or parents for PLUS loans) that loan funds have been credited to students’ accounts

48. Federal regulations:OMB Federal Financial AssistanceManagement Improvement Act of 1999 • Proposed revisions to Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations • Proposal for a standard format for federal agency use in announcing discretionary grant and cooperative agreement funding opportunities • Proposed standard data elements for federal agency use in creating grant funding opportunity announcement summaries under the E-Grants initiative • Proposed revisions to three OMB cost principles circulars (A-21, A-87, A-122) to clarify ambiguous language in the interpretation of similar costs • Proposed revision to Circular A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, et al

49. Federal regulations: New opportunity to assess regulatory costs, impacts • A new administrative policy will allow regulated entities and the public to challenge agency rules and the accuracy of the data behind them. • A little-known provision included as a rider in the FY2001 appropriations bill for Treasury and General Government requires all federal agencies to ensure “the quality, objectivity, utility, and integrity of information” they produce.

50. Issues in 2002: Status of Congress • Late July initiatives included approval of new Homeland Security Agency and passage of Corporate Accountability Bill • Corporate Accountability Bill affects only corporations directly, including creation of an independent oversight board loosely attached to the SEC