Auditor of Public Accounts Update

1. Auditor of Public Accounts Update Joseph Stepp, CPA CIA CGAP CGFM CFE Audit Director Higher Education Programs May 2011

2. Higher Education Programs Specialty Team

3. Discussion Topics • APA Audit Initiatives • Issues Identified During Audits • General Assembly Issues • Fraud at Universities • College President Fraud

4. APA AUDIT INITIATIVES

5. APA Audit Initiatives • Continue to Improve Banner Audit Approach • Revise Student Financial Aid Audit Approach • Revise NCAA Agreed-Upon Procedures Program • Diversify Project Manager and Staff Assignments • Accelerate Completion of Audits • Federal In-Cycle Reviews

6. APA Audit Initiatives • Diversify Project Manager and Staff Assignments • Continue to assign Project Managers with different specialties but retain continuity of assignments where possible • Assign staff from different specialties, including Court Auditors, to Student Financial Aid and NCAA assignments • Continue to provide support from Higher Education Specialty Team

7. APA Audit Initiatives • Accelerate Completion of Audits • Current Fall Audits completed by December 31, 2011 • UVa, VT, and VCU • Reaccreditation Audits – • FY10 GMU – FY11 ODU and RU • Complete FY12 audits by December 31, 2012 • UVa, VT, and VCU • CWM,GMU, JMU, and ODU • Accelerate Audits in Future Years • CNU, LU, NSU, RU, UMW, VMI, and VSU

8. APA Audit Initiatives Federal In-Cycle Reviews for FY11 • Research and Development • UVa, GMU, NSU • Student Financial Aid • CWM, JMU, LU, ODU, and VT • Blue Ridge CC, Dabney S. Lancaster CC, • Eastern Shore CC, J. Sargeant Reynolds CC, • New River CC, Southside Virginia CC, • Southwest Virginia CC, Thomas Nelson CC, • and Virginia Western CC

9. Issues IdentifiedDuring Audits

10. Issues Identified During Audits • Capital Asset Issues • Purchase Card Transactions • 1,500 hour rule and Overtime

11. Capital Asset Issues • Completing Capital Asset Inventories • Reconciling Capital Asset Inventories and Promptly Posting Corrections • Tracking and Resolving Lost or Stolen Assets • Accounting for Intangible Assets • Reporting Library Books • Art and Historical Treasures

12. Tracking and Resolving Lost or Stolen Assets • Discover Lost or Stolen Assets either through discovery or inventory • Promptly post deletion to capital asset records • Investigate reasons for loss and refer to law enforcement when necessary • Consider accumulating quantities of Lost or Stolen Assets • Consider follow-up with departments with significant quantities of Lost or Stolen Assets

13. Art and Historical Treasures • Paintings and Sculptures • Purchased or Donated Items of Significance • Student Art • Rare Books • Reference Materials • Historical Significance • Manuscripts and Memorabilia • University Records • Student Produced Research • Historical Items and Papers

14. Art and Historical Treasures • Three main issues • Stewardship • Accounting • Financial Reporting

15. Art and Historical Treasures • Stewardship • Physical Control • Prevention of loss or theft • Environmental Control • Limit deterioration or catastrophic loss • Risk Management • Complete records for insurance coverage

16. Art and Historical Treasures • Accounting • Inventory • Complete listing regardless of location • Valuation • Estimates of current value for insurance coverage • Review • Periodically confirming presenceand valuation

17. Art and Historical Treasures • Financial Reporting • Capitalization Policy • Follow general capitalization rules or use exceptions • Historical Cost Valuation • Purchase price, if available, or value at date of donation • Footnote Disclosures • Disclose any reasons as to whycollections are not capitalized

18. Purchase Card Transactions • Review procedures based on changes in purchase card vendor • Improve procedures for supervisory review • Revise training for cardholders and supervisors • Delete purchasing system access promptly for terminated employees • Improve SPCC Administration to include audit trail, purchase limits and potential split purchases

19. Part-time Employees and Overtime Hours • Limiting Hours of Part-Time Wage Employees • State Policy Limits Part-Time Wage Employees to 1,500 Hours per Year • Why is this important? • How to monitor this? • Limiting Overtime Hours • Why should colleges monitor and limit overtime hours? • At what point does increased work hours lower efficiency?

20. GENERAL ASSEMBLYISSUES

21. General Assembly Issues • Virginia Higher Education Opportunity Act of 2011 - TJ21 • Establish State Inspector General

22. Virginia Higher Education Opportunity Act • Recommends Higher Education funding policy : • Reaffirms state funding of basic operations at 67% for in-state students and commitment to fund faculty salaries at 60th percentile of peer universities. • A per student amount of General funds to the Virginia public or private university where the student enrolls. • Institutional funding of financial-aid to low and middle income families. • Targeted economic and innovative incentives based on criteria set by the Higher Education Advisory Committee with ten possible goals.

23. Virginia Higher Education Opportunity Act • Universities are required to develop a six-year plan every other year that includes: • Financial plans with possible tuition and general fund levels aligned with projected enrollment levels. • How the university will meet the financial-aid needs of students. • Degree conferral targets. • Optimal year-round facility usage plans. • Plans to share instructional resources with other universities. • Programs to meet the economic and innovative targets and incentives. • Identification of any new programs or targets.

24. Virginia Higher Education Opportunity Act • Creates a Higher Education Advisory Committee that will: • Review the higher education funding model. • Review the criteria to qualify students for financial aid programs. • Develop objective performance criteria (replacing criteria currently in the Appropriation Act) for universities to qualify for financial incentives. • Develop economic opportunity metrics. • Recommend additional authority and goals and objectives that should be attained under the Higher Education Restructuring Act.

25. Virginia Higher Education Opportunity Act • SCHEV will determine each year if the institutions have met performance criteria set up by the Committee beginning for FY14. FY11 certification carries forward through FY13. • Universities are to limit tuition increases to base operations funding and unavoidable increases. Universities must use any excess to fund financial aid and forgo any increase of appropriations above FY12 levels.

26. Virginia Higher Education Opportunity Act • Secretaries of Education and Finance are to create a STEM public-private partnership advisory committee to advance STEM education throughout the K-16 system. • VCCS is to create a one-year certificate where all credits are transferrable to any Virginia state-supported University.

27. Office of the State Inspector General • Replaces Division of the State Internal Audit • Appointed by Governor for four-year term • CPA or CIA with five years experience

28. Office of the State Inspector General • Duties • Receive complaints of fraud, waste, and abuse • Investigate state agencies and nonstate agencies • Coordinate current internal audit programs • Assess accounting, financial, and administrative controls • Conduct performance reviews • Administer Fraud Hotline and Whistle Blower Reward Fund

29. Office of the State Inspector General • Refers complaints of fraud at universities to their internal audit departments • All state agencies and employees shall promptly report any allegations of criminal acts or of fraud, waste, abuse, corruption, or mistreatment to the State Inspector General • State Inspector General may investigate any state agency at any time, without prior announcement • Can issue summonses and subpoenas

30. Office of the State Inspector General • Reports all problems, abuses, and deficiencies to seven executive branch and legislative officials • Directly supervises internal audit at VDOT, DBHDS, DJJ, and DOC • Governor may transfer appropriations

31. Office of the State Inspector General • Governor shall complete a plan for the coordination and oversight of internal audit programs to the State Inspector General by December 31, 2011 • Becomes effective July 1, 2012

32. FRAUDS AT COLLEGES AND UNIVERSITIES

34. Auditor of Public Accounts § 30-138. State agencies, courts, and local constitutional officers to report certain fraudulent transactions; penalty. A. Upon the discovery of circumstances suggesting a reasonable possibility that a fraudulent transaction has occurred involving funds or property under the control of any state department, court, officer, board, commission, institution or other agency of the Commonwealth, including local constitutional officers and appointed officials exercising the powers of elected constitutional officers, as to which one or more officers or employees of state or local government may be party thereto, the state agency head, court clerk or local official in charge of such entity shall promptly report such information to the Auditor of Public Accounts ("Auditor") and the Superintendent of State Police ("Superintendent").

35. Auditor of Public Accounts • What must be reported • Reasonable possibility • Fraudulent transaction • Involving state funds • Involving a state employee

36. What is fraud? • Any deception practiced to cause one to surrender something of value or a legal right. • Obtains property by false pretenses • Embezzles or commits larceny • Converts the property of another

37. Definition of Fraud Triangle

38. What is Not Fraud • Theft by non-employees • No concealment • Errors in financial documents not resulting in theft of assets • No theft • Using business assets for business purposes • No conversion

39. What May Be Fraud • Procurement irregularities • Kickbacks • Bribes • Gifts • Financial statement irregularities • Overstatement of revenues • Understatement of liabilities • Conflicts of Interest

40. Why does fraud occur?Classic Fraud Triangle

41. The Perfect Storm is Brewing Downsizing Fewer controls Decreasing budgets Layoffs Decreased home values Credit crisis Increased pressure and decreased controls

42. Why does fraud occur? • Opportunity • Poorly designed internal controls • Failure of internal controls • Management override • Collusion

43. Common Fraud Schemes • Forging checks payable to cash, oneself and/or to personal vendors • Pocketing cash receipts meant for deposit into university accounts • Issuing extra paychecks and/or bonus checks through payroll to oneself • Submitting fraudulent expense reports for reimbursement

44. Common Fraud Schemes • Submitting fraudulent invoices from phony or legitimate vendors • Abusing university credit card accounts for personal use • Transfers of university funds to personal accounts and/or vendors • Pilfering university equipmentand/or inventory

45. Current Fraud Areas • Cash Collections • Procurement Cards • Local Bank Accounts • Vendor Gifts

46. Cash Collections • Diverting cash received before it goes to the cash register or receipt book • Creating false refunds or voids to hide taking cash out of the register

47. Cash Collections • Are lesser amounts collected when certain employees are on duty? • Should two employees observe collections? • Are there more voids when certain employees are on duty?

48. Local Bank Accounts • Creating bank accounts for small activities such as selling room supplies • Not properly monitoring student activity or club bank accounts

49. Procurement Cards • Hiding Procurement Card Transactions • Poor Supervisory Review

50. Hiding Procurement Card Transactions • Using downloaded transactions to create facsimile card statements • Creating store receipts that rename or leave out certain purchased items