Presentation to the Financial Administrator Development Program

MSU Financial Statements and External Audit

What’s Your Role?

October 16, 2015

Katie A. Thornton, Senior Manager, Plante Moran Gregory J. Deppong, Controller, MSU

Outline

• MSU Financial Administrators, MSU Controller’s Office, MSU Internal Auditors, and External Auditors have varying, yet connected, roles.

• Account transactions roll up to financial statements.

• Financial statement components.

• External Audit of financial statements.

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Stewardship…

Strong Controls

(Colleges & Units, Controller’s Office,

Internal Audit)

Appropriate Transactions

Reliable Reporting

Reporting Rules/GASB

External Audit (Test controls)

Audited Annual Financial Report

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Internal Controls

Colleges & Depts.

Controller’s Office

Internal Auditors

External Auditors

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Creating an Environment of Compliance

‘Local’ policies/

procedures & FO

accountability

Create, Monitor

& Enforce

‘University’

policies/

procedures

Evaluates

compliance –

reports to President

Independent

examination

– hired by

Board

What is internal control?

Internal control is a PROCESS

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Specific policies and

procedures…

…designed to provide

reasonable assurance…

…that an organization’s

fiscal objectives will be met.

Reasonable Assurance

• Hiring staff with the proper skill sets

• Training….early and often

• Accountability understood & practiced

• Communicate the importance of compliance

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Meeting fiscal objectives

•Promote efficient and effective operations

•Support compliance with policy

•Protect university assets

•Provide reliable financial reporting

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Internal controls support strong stewardship & reliable financial reporting

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‘Clean’ Financial

Statements

are the result of sound and

effective internal controls

Laws

• IRS

• Federal Grants

External • Endowment Spending

• Generally Accepted Accounting Principles (GAAP)

• Governmental Accounting Standards (GASB) Internal

• Sources and Uses of Funds

• Cost Monitoring Compliance

MSU’s financial reporting

• Financial statements audited annually by external audit firm

• Auditors are Plante Moran

• More on the audit later….but first:

• What are the financial statements made of?

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The Rule Book: Governmental Accounting Standards Board (GASB)

• Source of Generally Accepted Accounting Principles for State & Local Governments (including public universities).

• MSU’s financial statements are prepared under the rules of GASB.

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GASB Stewardship: report internally using “funds” Fund Description Example

General Core institution operating activities

GA – General operations

Auxiliary Separate business activities XA – Athletics

Designated Self-supporting institution operating activities

DN – Non-credit instruction

Plant Capital (fixed) assets and related debt; reserves

PT – Reserves for future capital asset needs

Expendable Restricted Contract & grants; endowment spending

RC – Contracts and grants

Endowment Nonexpendable gifts NX – Donor Endowments

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“Funds” continued

Fund Description Example

Retirement & Insurance Administration of retirement and other benefits programs

TN – Insurance

Student Loan Federal and institutional loans to students

LD - Federal

Agency Non-university funds held for related entities

AS – Student Groups

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MSU’s nine funds are consolidated

Activity in all MSU ‘funds’

combined

Elimination of ‘internal’

activity

Consolidated Financial

Statements

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Statements of Net Position(Amounts in Millions)

2015 2014

Assets:

Current assets:

Cash and cash equivalents 9$ -$

Investments 312 327

Accounts and interest receivable, net 168 142

Student loans and pledges receivable, net 25 22

Inventories and other assets 20 16

Total current assets 534 507

Noncurrent assets:

Restricted cash and cash equivalents 207 10

Restricted investments - 6

Endowment investments 2,242 2,082

Other investments 241 235

Student loans and pledges receivable, net 74 64

Investments in joint ventures and other 7 7

Derivative instruments - swap asset - -

Capital assets, net 2,107 1,995

Total noncurrent assets 4,878 4,399

Total assets 5,412 4,906

Deferred outflows of resources: 62 60

Liabil ities:

Current liabilities:

Accounts and interest payable 80 75

Accrued personnel costs 52 56

Accrued self-insurance liabilities 14 15

Payroll taxes and other payroll deductions 28 25

Deposits held for others 34 26

Unearned revenues 137 125

Current portion of long term debt and other obligations 214 169

Total current liabilities 559 491

Noncurrent liabilities:

Accrued personnel costs 33 34

Accrued self-insurance liabilities 7 6

Derivative instruments - swap liability 55 50

Net other postemployment benefit obligation 350 307

Long term debt and other obligations 1,091 905

Total noncurrent liabilities 1,536 1,302

Total l iabil ities 2,095 1,793

Net position:

Net investment in capital assets 1,055 983

Restricted:

Nonexpendable 530 487

Expendable 691 674

Unrestricted 1,103 1,029

Total net position 3,379$ 3,173$

June 30,

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GASB revenue reporting

• Sources: • Tuition

• State appropriations

• State and federal grants

• Private gifts and grants

• Investment income (loss)

• Auxiliary activities

• Departmental income

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GASB expense reporting

• Expense uses (shown by functional category): • Instruction

• Research • Public service • Academic support

• Student services • Scholarship and fellowships • Institutional support

• Operation and maintenance of plant • Auxiliary activities • Depreciation

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Statements of Revenues, Expenses and Changes In Net Position(Amounts in Millions)

2015 2014

Operating revenues:

Student tuition and fees 909$ 861$

Less: scholarship allowances 112 108

Net student tuition and fees 797 753

State of Michigan grants and contracts 10 9

Federal grants and contracts 324 309

Local and private sponsored programs 81 71

Interest and fees on student loans 1 1

Departmental activities (net of scholarship allowances 203 174

of $6 in 2015 and $5 in 2014)

Auxiliary activities (net of room and board allowances 326 303

of $23 in 2015 and $20 in 2014)

Total operating revenues 1,742 1,620

Operating expenses:

Instruction and departmental research 669 632

Research 328 312

Public Service 227 222

Academic Support 105 95

Student services 52 49

Scholarships and fellowships 63 60

Institutional support 128 115

Operation and maintenance of plant 129 139

Auxiliary enterprises 307 289

Depreciation 155 150

Other operating expenses, net 4 6

Total operating expenses 2,167 2,069

Operating loss (425) (449)

Net nonoperating revenues (expenses):

State operating appropriation 264 250

State AgBioResearch appropriation 32 30

State cooperative extension service appropriation 28 26

Federal Pell grant revenue 38 37

Gifts 73 55

Net investment income (loss) 93 324

Interest expense on capital asset related debt (37) (41)

Other nonoperating revenues, net 1 6

Net nonoperating revenues 492 687

Income before other 67 238

State capital appropriations 48 30

Capital grants and gifts 54 36

Additions to permanent endowments 37 44

Increase in net position 206 348

Net position, beginning of year 3,173 2,825

Net position, end of year 3,379$ 3,173$

Year ended June 30,

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Accounts map to one ‘function’

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MSU expense (GASB)

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(Amounts in Millions)

2015 2014 2013 2012 2011

Instruction 669$ 632$ 589$ 575$ 561$

Research 328 312 329 319 294

Public service 227 222 233 210 221

Academic support 105 95 82 82 78

Student services 52 49 47 32 32

Scholarships and fellowships 63 60 56 55 53

Institutional support 128 115 113 103 94

Operation and maintenance of plant 129 139 143 149 138

Auxiliary activities 307 289 289 275 269

Depreciation 155 150 139 128 116

Other operating expenses, net 4 6 4 3 2

Total GASB expense reporting 2,167$ 2,069$ 2,024$ 1,931$ 1,858$

Year ended June 30,

Next up…the Audit

• 2 minute break out

• What does the audit mean to you?

• Have you encountered an auditor at MSU or elsewhere?

• What do you think auditors should look at?

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Annual External Audit of Financial Statements

MSU financial statements:

ctlr.msu.edu/COFA/FinancialStatement.aspx

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MSU annual financial report

• Management Discussion and Analysis

• Independent Auditor’s Report

• MSU Financial Statements

• MSU Foundation Financial Statements

• Independent Auditor’s Report on Internal Control Over Financial Reporting

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What is an external audit?

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Process of gathering evidence By independent third party

(Plante & Moran)

To determine if the University’s financial

statements are accurate and fairly stated in accordance

with the applicable financial reporting framework

With the objective of issuing an opinion on the financial statements based on the

evidence obtained

External audit - report on internal control

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Basis of reliance on the University’s processes and

controls

Test of compliance with laws & regulations

Government Auditing Standards

(GAS)

If problems, reports deficiencies

(publicly!)

Not an opinion

Financial statement assertions

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• Transactions & amounts are recorded at the right amount Accuracy

• Transactions are recorded in the right period Cut-off

• Assets, liabilities, and equity reported do exist and recorded transactions have occurred

Existence or Occurrence

• Transactions are recorded in the right account Classification

Financial statement assertions continued

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• No material transactions or accounts have been omitted Completeness

• Assets, liabilities, revenue, and expense items are correctly valued

Valuation or allocation

• Assets and liabilities are the rights and obligations, respectively, of the entity at the opinion date

Rights and obligations

• Financial statement components are properly classified, described, and disclosed

Presentation and disclosure

Auditing internal controls continued

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Audit key processes

Cash coming in (revenue)

Cash going out (expenses/

assets)

Commitments/promises

(liabilities)

Audit key controls

Documentation (e.g., policies & procedures;

employee actions – hiring and

termination)

Appropriate reviewer

Segregation of duties

Types of Controls

Preventative

Detective

Specific audit steps

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Bottom line – were the rules followed?

Note reviewer signature and date

Note preparer/initiator

Obtain or view supporting documentation in paper or on screen (timesheet or time submission, purchase order, invoice, reimbursement request)

Select a transaction throughout the fiscal year

Obtain written procedures and policies

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What could

go wrong?

No written procedures and policies

Limited or no supporting

documentation

No documented

review

Same person

prepares and reviews

Review is late

Initiating payment is

late (cut-off)

Audit evidence

• Evidence in documentary form (whether paper, electronic, or other medium) • Original documents in electronic form qualify

as reliable audit evidence

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If you were going to do an audit of your unit.…

• What would you look at?

• Two minute group table exercise…discuss one process a

unit should audit. What should you look for? Why?

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Related to this information - upcoming presentations

• Later today – Internal Audit presentation. Expanded discussion on a unit’s responsibility for internal controls and ethics.

• Future sessions – Using the financial system to facilitate financial reporting and sound fiscal management; Financial reporting in RHS - how a major unit reports.

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Thank You!

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