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

Auditor of Public Accounts UpdateJoseph Stepp, CPA CIA CGAP CGFM CFEAudit Director

Higher Education Programs

May 2011

Higher Education Programs Specialty Team 2

Discussion Topics

• APA Audit Initiatives• Issues Identified During Audits• General Assembly Issues• Fraud at Universities• College President Fraud

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APA AUDIT INITIATIVES

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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 5


• 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

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• 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 VSU7


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 8

ISSUES IDENTIFIEDDURING AUDITS

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Issues Identified During Audits

•Capital Asset Issues•Purchase Card Transactions•1,500 hour rule and Overtime

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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 11

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 12

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

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• Three main issues• Stewardship• Accounting• Financial Reporting

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• Stewardship• Physical Control

• Prevention of loss or theft• Environmental Control

• Limit deterioration or catastrophic loss• Risk Management

• Complete records for insurance coverage15


• Accounting• Inventory

• Complete listing regardless of location• Valuation

• Estimates of current value for insurance coverage

• Review• Periodically confirming presence

and valuation16


• 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

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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

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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?19

GENERAL ASSEMBLYISSUES

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General Assembly Issues

• Virginia Higher Education Opportunity Act of 2011 - TJ21

• Establish State Inspector General

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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. 22

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.

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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.

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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.

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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.

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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

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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 Fund28

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 subpoenas29

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

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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

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FRAUDS AT COLLEGES AND UNIVERSITIES

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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").

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Auditor of Public Accounts

•What must be reported• Reasonable possibility• Fraudulent transaction• Involving state funds• Involving a state employee

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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

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Definition of Fraud Triangle

Theft

Concealment

Conversion

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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 38

What May Be Fraud

• Procurement irregularities• Kickbacks• Bribes• Gifts

• Financial statement irregularities• Overstatement of revenues• Understatement of liabilities

• Conflicts of Interest 39

Why does fraud occur?Classic Fraud Triangle

Opportunity

Motive

Rationalization

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The Perfect Storm is Brewing

Internal Controls

Internal and External Pressures

Opportunity to Commit Fraud

DownsizingFewer controlsDecreasing budgets

Increased pressure and decreased controls

LayoffsDecreased home valuesCredit crisis

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Why does fraud occur?

• Opportunity• Poorly designed internal controls• Failure of internal controls• Management override• Collusion

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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

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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 equipment and/or inventory

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Current Fraud Areas

•Cash Collections•Procurement Cards•Local Bank Accounts•Vendor Gifts

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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

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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?

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Local Bank Accounts

•Creating bank accounts for small activities such as selling room supplies

•Not properly monitoring student activity or club bank accounts

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Procurement Cards

•Hiding Procurement Card Transactions

•Poor Supervisory Review

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Hiding Procurement Card Transactions•Using downloaded transactions to

create facsimile card statements•Creating store receipts that rename

or leave out certain purchased items

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Hiding Procurement Card Transactions•Supervisors should only review

original card statements•Supervisors should be alert to

receipts that don’t look right or don’t add up

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Poor Supervisory Review

•Not reviewing statements or receipts in detail

•Not questioning purchases from inappropriate vendors

•Not questioning recurring large purchases

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Poor Supervisory Review

• Cardholders notice when supervisors do not perform a thorough review

• Problems when using residential vendors and not commercial vendors or wholesalers

• Should recurring purchases be made in bulk or through procurement

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Vendor Gifts

•Employees receiving gift cards or other gifts from vendors or potential vendors

• Inappropriate to accept these even if used for the university or department activities

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Solutions

•Better training for purchase cardholders and supervisors

•Better procedures for cash collections including reconciliations

•Let employees know of university policies relating to creating bank accounts and accepting gifts

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FRAUD BYCOLLEGE PRESIDENTS

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Perception vs. Reality 57

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Fraud by College Presidents

• Income/Bonuses•Employment Contract Provisions•Personal Expenses•Housing•Gifts (giving and receiving)

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Fraud by College Presidents

•Contract Renewals/Terminations•Entertaining•Personal Travel•Contracting/Consulting•Outside Employment•Discretionary Funds

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Kansas City University of Medicine and Biosciences•Created Board minutes authorizing

12 bonuses of $65,000 each ($780,000)

•Had University reimburse her for charitable donations that she deducted from her taxes or did not actually make

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Kansas City University of Medicine and Biosciences•Received reimbursement for

personal travel and other expenses ($51,297)

•Money laundering

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University of Central Arkansas

•President falsified a letter from several VPs to the Board stating that there were local funds available to pay his $300,000 deferred compensation

•Money laundering

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American University

•President had “severe expense account violations”• French chef• Weekends abroad• Extravagant parties for friends• House renovations and supplies

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Texas Southern University

•President (Ph.D. in accounting) used more than $650,000 in university funds for personal expenses• Landscaping• Kitchenware• Massive bar tab ($100,000)

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Holmes Community College

•Audit accused President of using more than $10,000 in university funds for personal expenses• Car tires• College employees working at his

house in preparation for a wedding

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Iona College

•Vice President of Finance embezzled over $800,000 over 10 years• Submitted false invoices• Had college pay personal bills• Personal use of college purchase

card• Catholic nun

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St. John’s University

•Dean embezzles about $1 million• Personal expenses• Gambling at casinos• Son’s college tuition• Created phony foundation that

received contributions intendedfor the university

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Questions

Joseph Stepp, Audit [email protected]

mailto:[email protected]

Documents

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