Financial Statements Pilot BAR Academy

1. Financial Statements PilotBAR Academy October 17, 2013 Pierce College Fort Steilacoom

2. Today’s Key Topics This overview will not answer all your questions • Accreditation Standard • Additional Benefits of Financial Statements • Accreditation Cycle/Pilot Group • Proposed Financial Statement/Audit Cycle • Estimated Audit Costs • What does a Financial Statement Look Like • Preparing for Audit • Audit Results

3. Accreditation Standard • Accreditation standards were changed in 2010 and now require: • For each year of operation, the institution undergoes an external financial audit, in a reasonable timeframe, by professionally qualified personnel in accordance with generally accepted auditing standards. Results from the audit, including findings and management letter recommendations, are considered in a timely, appropriate, and comprehensive manner by the administration and governing board.

4. What Changed? • Previous Eligibility Requirement • The institution’s financial records are externally audited annually by an independent certified public accountant or on a regular schedule by a state audit agency. The audit must include an unqualified opinion on the financial statement. • Previous Standards and Guide for Self Study • If public institutions are, by law, audited by a state agency, an independent audit is not required except for any funds not subject to governmental audit.

5. Other Environmental Factors • Federal oversight of accrediting bodies • NWCCU is scheduled for review in Fall 2013 • Recent articles/issues – Feds being more stringent in their oversight • Timing of state accountability audits • No longer performed with an entity focus nor on a regular schedule

6. Types of Auditsand Related Auditing Standards • Financial Statement (GAAS, GAGAS = GAO Yellow Book) • Single Audit/Federal Program Reviews (OMB Circular A-133) • Accountability and Compliance (GAO Yellow Book) • Performance (GAO Yellow Book) • Internal Audits (Institute of Internal Auditor’s International Professional Practices Framework) • Subrecipient Monitoring (OMB Circular A-133) • Other internal, system-wide or state-wide processes may not be performed in accordance with a set of standards

7. GASB 35 • Of the 63 pages in GASB 35: • One paragraph/sentence that reads in its entirety: • This Statement supersedes footnote 3 of Statement 34, thereby including public colleges and universities in the scope of that standard. • Effective Date and Transition • Basis for Conclusions • Illustrations • As a result, we’ll speak in terms of GASB 34

8. Additional Benefits of Audited Financial Statements • Assure governing boards and the administration concerning the financial health of the college • Compare financial measures with other colleges – in Washington or nationally • Provide an audited financial statement to prospective grantors and banks • Make information available to interested members of the public and legislative decision-makers

9. Accreditation Cycle (Handout) • 7 colleges received letters • Two in February 2013 and 5 in July 2013 • “The college does not meet the Commission’s criteria for accreditation” • Must be “addressed and resolved within the proscribed two-year period” • 9 more to receive letters in February 2014 • 4 in July 2014 • 10 in February 2015 • 3 thereafter

10. Pilot Group Includes: • The 7 colleges that received letters to date • Plus one technical college • Includes BAC members and key BAR members for the 8 pilot colleges • Includes BAR chair and a ctcLink representative • SBCTC staff

11. Proposed Financial Statement and Audit Cycle (Handout) • Each year’s books must be audited • Two years may be audited at one time • Proposing two groups of 15 districts • Priority given based on accreditation cycle • Will complete two full audit cycles using FMS (Pilot and Group One) • In third year, Tacoma will serve as “mini-pilot” and prepare statements using ctcLink

12. Financial Statement and Audit Costs • Pilot group staff time to date • Staff time for SBCTC to compile preliminary statements • Staff time for colleges to complete financial statement package • Audit cost (SAO charges $89 per hour, plus travel) A 300 hour audit would be $26,700 plus travel costs • Auditors may need more time for first audit(s)? • Willing to incur additional auditor travel cost during pilot to gain consistency and experience • Staff time to monitor audit progress, answer questions, and make adjustments • Pilot group will monitor time spent, to inform other colleges • Colleges that choose to publish or print a “fancy” package will have additional graphics and printing costs

13. What does a Financial Statement Look Like? • Pass around copies • Fancy (CWU, EWU, TESC, UW, WSU) • Plain (WWU) • Links to community college statements • http://www.slcc.edu/accounts-payable/docs/2012%20Annual%20Report.pdf • http://www.fvcc.edu/wp-content/uploads/2012/02/Audit-Report.pdf • http://www.nic.edu/about/annualFinancialReport.pdf

14. General Approach • SBCTC uses available data (e.g., SMART/IPEDS, disclosure statements) to provide preliminary general financial statements, notes and management discussion and analysis • SBCTC/pilot group provides checklist or instructions • Colleges follow checklist/instructions to verify, adjust, fill in gaps • SBCTC/pilot group will contract with SAO for audits: cost, consistency, legal requirements • Don’t expect perfection in first attempt

15. What are the General Financial Statements? • Statement of Net Position • Aka “Balance Sheet” • Statement of Revenues, Expenses and Changes in Net Position • Aka “Income Statement” or “Profit and Loss Statement” • Statement of Cash Flows • Report as a Government engaged in Business Type Activities • Enterprise-wide financial statements, not presented by fund or fund type

16. Example • See spreadsheet (will review in detail with work group) • Formatted general financial statements • Criteria sheet shows rolled up G/Ls used for each line of the general financial statements • Data sheet shows G/Ls by fund that make up the rolled up balance • Includes almost all elements of the Statement of Net Position and Statement of Revenue, Expense and Changes in Net Position but may be missing some elements of the Statement of Cash Flows (SBCTC does not have org code level structure or balances) • Criteria sheet allows colleges to track any adjustments they make to the data provided by SBCTC – whether prior to the audit, or as a result of the audit.

17. What are the Notes to the Financial Statements? • Describe significant accounting policies • Describes, in narrative form, amounts reported in the general statements • Are an integral part of the Financial Statements • In some cases, include additional detail related to amounts presented on the face of the financial statements • SBCTC will provide a template with suggested language for the colleges’ notes, including options for things colleges may be doing differently • SBCTC will provide a preliminary version of any additional detail, based on information collected through the state CAFR disclosure process • No coincidence that disclosure statements include the information needed, since the state’s CAFR is also prepared in accordance with GASB 34

18. What is ‘Management’s Discussion and Analysis? • Intended to allow differences and not be cookie-cutter • …general rather than specific, to encourage financial managers to effectively report only the most relevant information and avoid “boilerplate” discussion • Eight proscribed areas • Includes condensed financial information, analysis of overall financial position, description of significant capital asset and long-term debt activity, etc. • SBCTC can develop some pieces, but colleges will have significant pieces to fill in.

19. Preparing for audit • Take advantage of any verification and monitoring that happens at SBCTC or OFM level • Where possible, any audit work that can be done once at SBCTC saves having to do it at multiple colleges • Colleges collect documentation that is readily available and supports specific balances • Filling in gaps and trouble spots • Auditors may choose to review some automated system process at SBCTC-IT

20. Examples • May be verified centrally: • Cash balances (tested for FY13 CAFR) • Investments if limited to LGIP • Compensated absences • Due To/Due from other agencies • Colleges may have ready access to: • Student Loan receivables • Endowments held by college (not Foundation) • Foundation financial statements if audited

21. Examples - What colleges will need to verify, research or estimate • Analyze your infrastructure • SBCTC to provide a tool • Look for cut off issues • Track any adjustments you make so you can provide them to the auditor • Actively manage your receivables • Non-LGIP Investments • Any unbooked inventories? Document inventory count procedures for inventories over $25,000 including Bookstore • Any unbooked deferred compensation (executives)? • Analyze your component units and whether they need to be included: Foundations, LLCs, • Net assets (aka “equity”) - restrictions

22. Adjustments and Presentation Questions we want to make sure we answer • What is presented to the auditor and in what format? • How are adjustments made and communicated among pilot colleges? • Once audited, how is final financial statement report package complied and published?

23. Financial Audit Results • Opinion on Financial Statements • Unqualified • Qualified • Disclaimer • Adverse • Auditor required to indicate if going concern • Opinion on Internal Controls Related to Financial Statements • Material Weakness • Significant Weakness • May include a management letter

24. Possible Qualifications • Pilot will prepare a single years’ financial statements. Notes and/or MD&A require some comparisons to prior year, which will be unaudited • Infrastructure – GASB allows use of estimates upon initial adoption (to be completed by 2007)