BOARD of REGENTS

AUDIT COMMITTEE MEETING

Wednesday, December 5, 2012 at 1:00 pm Scholes Hall, Roberts Room

November 28, 2012

UNIVERSITY OF NEW MEXICO Special Meeting of the Audit Committee

Notice & Agenda for the Board of Regents’ Special Audit Committee Meeting

Wednesday, December 5, 2012 1:00 p.m. Roberts Room

The University of New Mexico Audit Committee will hold a special meeting on Wednesday December 5, 2012, from 1:00 p.m. until completed in the Roberts Room in Scholes Hall on the main campus of the University of New Mexico, Albuquerque, New Mexico, 87131-0001. The agenda of the meeting is as follows:

1. Confirmation of a quorum and adoption of agenda 2. Approval of Meeting Minutes from October 18, 2012 3. Presentation of FY12 External Financial Statements Audit:

a. University of New Mexico Medical Group, Inc. (Moss Adams) b. University of New Mexico Hospital (Moss Adams) c. University of New Mexico (KPMG)

4. Draft Resolution – Other Post-Employment Benefits (OPEB) – David Harris, EVP Administration

5. Director’s Report 6. Vote to close the meeting and proceed in Executive Session as follows:

a. Schedule of Audits in Process, pursuant to exceptions at Sections 10-15-1H(2 and 7) b. Vote to re-open the meeting

7. Certification that only those matters described in agenda item #6 were discussed in Executive Session and if necessary ratification of action, if any, taken in Executive Session

8. Adjournment

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THE UNIVERSITY OF NEW MEXICO Board of Regents Special Audit Committee Meeting

October 18, 2012 – Meeting Minutes Members Present: Chairman J.E. “Gene” Gallegos, Vice Chair Lt. Gen. Bradley Hosmer, Regent

James Koch (Quorum). Other Attendees: Robert Frank, David Harris, Ava Lovell, Liz Metzger, Breda Bova, Dianne

Anderson, Lee Peifer, Chris Vallejos, Gina Urias-Sandoval, Troy Clark, Ellen Wenzel, Cynthia Reinhart (KPMG), Francisco Archuleta (KPMG), Jennifer Hall (KPMG), Jaime Clark (KPMG), Steve Keene (Moss Adams), Brandon Fryer (Moss Adams), Purvi Modi (Moss Adams), Ella Watt, Amy Neel, Manu Patel, Chien-chih Yeh, Lisa Wauneka, Avedona Lucero, Lola Neudecker, Victor Griego, Amy O’Donnell.

Chairman Gallegos called the meeting to order at 8:06 a.m. in ROBERTS ROOM, Scholes Hall, UNM. Chairman Gallegos noted this meeting will be truncated because Regents Hosmer and Koch need to wrap up at 11:00. Therefore, there will be an open session with a couple of business items, the meeting will go into Executive Session, and after that go back into open session for information items. ACTION ITEMS:

• The Committee approved the minutes from September 20, 2012 by unanimous consent.

• The Committee considered the renewal of REDW’s UNM Hospital contract for 2013. Last October, the Committee approved a 3 year REDW contract for internal audits of the UNM Hospital, with a yearly renewal approval process. The contract renewal is effective January 1, 2013, runs on a calendar year, and includes approximately 1500 hours per year at a price of $184,000 (includes gross receipts tax). Chairman Gallegos stated there was discussion at the last audit committee meeting about scope, and the role that Internal Audit and the Audit Committee have regarding audits conducted under this contract. Internal Audit Director Patel stated he participates in setting the scope, the entrance and exit conferences, and the final report. Therefore, the relationship is functioning in the way the Committee requested.

Regent Koch moved to approve the renewal; Regent Hosmer seconded. The contract renewal was approved by unanimous consent.

The meeting went into Executive Session for the reasons stated in the agenda. (Motion: Regent Hosmer, Second: Regent Koch).

a. Presentation of FY12 External Financial Audit pursuant to exceptions at Section 10-15-1H NMSA (1978) and Section 12-6-5 NMSA (1978) (Moss Adams, KPMG, and Ava Lovell, Senior Executive Officer for Finance and Administration for UNM Health Sciences Center).

b. Discussion of Final Internal Audit Reports, pursuant to limited personnel matters exception at

Section 10-15-1.H(2) NMSA (1978) and exception for matters subject to attorney-client privilege pertaining to threatened or pending litigation at Section 10-15-1.H(7), NMSA (1978).

c. Schedule of Audits in Process, pursuant to exceptions at Sections 10-15-1H(2 and 7), NMSA

(1978). d. Proposed FY13 Audit Workplan exceptions at Sections 10-15-H(2 and 7), NMSA (1978).

Summary of the Regent’s Audit Committee October 18, 2012

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e. Vote to re-open the meeting.

The meeting returned to open session at 10:46 AM. President Frank joined the meeting.

The Committee approved the following Internal Audit Department audits for publication:

• 2012-02, Robert Wood Johnson Foundation Center for Health Policy at the University of New Mexico Audit of Business Practices and Procedures (Motion: Regent Hosmer, Second: Regent Koch).

• 2012-05, Championship and North Golf Course Revenue and Receipt Audit (Motion: Regent Koch, Second: Regent Hosmer).

• Chairman Gallegos stated the committee combined the discussion on the Internal Audit status

report and audit planning. They have recognized the audits in fieldwork – College of Arts and Sciences and the belated Internal Audit Peer Review. The Physical Plant Department, Purchasing Card, and UNM Medical Group audits are assigned audits. The IT Firewalls audit will be removed from the audit plan and replaced with an audit of data centers. Per Director Patel, it will probably be about the same amount of budget hours. The Chairman asked Director Patel to state the reason for the switch. Director Patel responded that he had a discussion with UNM’s CIO, who indicated that the data centers would be a more useful audit at this time. The Committee is also interested in devoting management request audit hours regarding security of student information, especially given the widespread identity theft problem occurring nationally. Regent Hosmer stated that at a national level students at Universities have been identified as a target; we owe students a review of the level of vulnerability. Chairman Gallegos asked Director Patel to come up with a plan and amount of budget hours.

Chairman Gallegos informed President Frank that the Committee also discussed the President’s travel and entertainment expenses. The President’s contract requires that these expenses are reviewed by this Committee. Chairman Gallegos updated President Frank on his request for review of the College of Arts and Sciences. The fieldwork is in progress. Regent Hosmer suggested the scope of the audit be expanded to not only include financial auditing, but performance auditing as well. The Department is already looking into the workloads of professors, etc., but perhaps it should include graduation rates and degrees being granted. President Frank would support that; however, he knows that the University has not been diligent in building a database. We need to be more proactive. If we don’t start now, we will not have that information in the future. The data will not be as strong now as we want it to be, but we need to look at it to get it for the future. Chairman Gallegos asked how we can do that. Director Patel said we should look at other universities that have that kind of data system and find best practices. We can make a recommendation to the University regarding what information the database should include. Future audit plan suggestions from the Committee include the Center on Alcoholism, Substance Abuse and Addictions (CASAA) because of the risk involved there and it has been six years since the last audit. The Committee would also like to include the Taos and Los Alamos branches. Regent Hosmer suggested, because of the role of the University in addressing the problems with K-12 education in our state, pushing the College of Education

Summary of the Regent’s Audit Committee October 18, 2012

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audit forward on the schedule as a performance audit. Regent Koch noted the Legislative Finance Committee may be doing the same thing, and if they do, they will do a thorough job. We should wait to see what they do. The Committee moved to approve the present audit plan (Motion: Regent Koch, Second: Regent Hosmer).

INFORMATION ITEMS:

• Director Patel presented the Committee with the Internal Audit Department’s Annual Report. The annual report is complete, and will be finalized and submitted to the University Secretary’s office. The report details the data for the last 5 years, including where the Department spends its hours. For FY12, most audit hours were spent on the completion of 4 to 5 audits. Management and advisory services includes two audits resulting from complaints. There were about 2300 hours spent on complaints and investigations; the Department received over 90 complaints. The annual report includes a summary of audits completed. In FY12, the Department completed 36% of audits on the audit plan. This is an increase over FY11, where the Department completed 20% of audits on the audit plan. The low completion rate is due to the scope of work on audits becoming larger than originally planned and vacancies in the audit staff. Internal Audit should be fully staffed in FY 13, and should complete at least 75% of audits. The audit that included performance auditing was the Provost General Administration audit. The Department implemented the new electronic work paper system and the staff received training. The Department is using the software for the current College of Arts & Sciences audit. Future audits will be performed using the software. The Annual Report lists the Department’s achievements. The Department worked with Anderson School of Management to hire its first student intern, and plans on continuing this relationship. Internal Audit is collaborating closely with the Health Sciences Center Compliance Office and UNMH’s Internal Audit Department. The after-audit survey scores increased over the prior year. The Audit Manager position was open in FY12, but the Department filled it at the beginning of FY13. There is another vacant auditor position that is currently posted; it should be filled in November. The Department also needs to create a position and advertise for a compliance staff person; the FY14 proposed budget request to fill this position is included in the Committee’s meeting packet. However, the Department is out of space and is working with the Space Allocation Committee to obtain more space.

Plans for improvement include: incorporating more performance auditing; improving productivity with the use of the new electronic work paper software; and, enhancing the complaint database to better analyze data.

• Internal Audit Manager Chien-chih Yeh presented the status of audit findings. There are no past due items at this time. The second section includes findings that have been addressed and verified since last month’s meeting; they are cleared. The final report includes four pages of items still outstanding that are not past due. The Department will continue to work with management and will continue to report the status to the Committee. Chairman Gallegos stated the follow up reminds him about the ACC ground lease and auditing the final cost. There was an amendment to the lease adopted by the Board that stated what the rental would be. Director Patel stated there is a FY13 audit for Lobo Development and it will cover this issue. President

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Frank asked what determined the final rental costs. Director Patel stated his recollection is initially there was an estimate of construction costs. Based on that estimate the land lease payment would be a certain amount. If the cost exceeded that estimate, the lease amount would reduce. Chairman Gallegos further explained that is only to a certain point; there was a floor of approximately $309,000. If the construction cost was less, the rental would go up. Mid-stream it was decided instead of ACC getting their own utilities brought in, they would hook up to our utility system. That would save ACC money. It became a negotiation. Since ACC would save on utilities, they would give UNM a break from 7.5 to 7.15 on the return.

• Director Patel reviewed the Internal Audit budget request and space request with Chairman Gallegos. Director Patel explained there are currently 10 FTE positions in FY13. The addition of the compliance staff person would bring it to 11. The salary budget requirement would be $809,000, with an operating budget of $60,000. The total budget would be $869,000. The Department’s current allocation is $759,000. The Department will have to use $110,000 from reserves due to vacancy savings. The Internal Audit Department office space is full and the Department will find out in November if it will get additional space from an attached building.

• Director Patel covered remaining items in the Director’s Report (most were already covered earlier in this meeting). The next scheduled Audit Committee meeting is February 21, 2013, but the Committee has requested a Special Meeting in December. Chairman Gallegos explained to President Frank that the external audit of the financial statements should be back from the State Auditor’s office in about a month. The Committee would like the chance to review it. The Full Board meets on December 11th, so this Committee should meet sometime in the first week of December. Director Patel stated this is all pending on when the State Auditor releases the report.

There are currently 16 audits in process for FY13. So far in FY13, the Department has received 22 complaints. Director Patel told President Frank that he can provide him some data as to where most complaints are coming from and the nature of the complaints. Chairman Gallegos asked if any complaints end up in Legal. Director Patel stated we do have two or three in litigation, but they happened earlier than the time period of this report. The Department’s financial report shows an expenditure of 676,000 as of the end of September. Director Patel estimates there will be a carry forward balance of about $200,000. The Peer Review team will come to the Internal Audit Department in the last week of October or early November.

There being no further business, the Chairman declared the meeting adjourned at 11:20 a.m. Approved: ____________________________ Audit Committee Chairman

INFORMATION

TO

BE

SUPPLIED

AT

MEETING

BOARD OF REGENTS OF THE UNIVERSITY OF NEW MEXICO

RESOLUTION REGARDING UNFUNDED ACTUARIAL ACCRUED LIABILITY OF

UNIVERSITY OF NEW MEXICO POSTEMPLOYMENT BENEFIT PLAN WHEREAS, the University of New Mexico’s 2012 Independent Audit Report has been released by the State Auditor and is now a matter of public record pursuant to Section 12-6-5 of the New Mexico Audit Act and regulations promulgated by the State Auditor; and, WHEREAS, the University of New Mexico provides postemployment health care benefits to eligible participants enrolled in University sponsored plans; and, WHEREAS, the 2012 Independent Audit Report, as required by the Governmental Accounting Standards Board, contains an estimate of the present and future impact of “other postemployment benefits”; and, WHEREAS, as of July 1, 2011, the actuarial accrued liability (present value of future benefits attributable to past service) for the University’s postemployment benefit plan is $152.6 million and there are no plan assets (segregated and restricted financial assets) to offset it, resulting in an unfunded actuarial accrued liability of $152.6 million; and, WHEREAS, this unfunded actuarial accrued liability must be reported on and affects the balance sheet of the University of New Mexico, NOW, THEREFORE, BE IT RESOLVED that President Robert G. Frank is hereby directed to assemble a team of administrators, current retirees, faculty and staff to identify alternatives for reduction or elimination of the unfunded actuarial accrued liability and its impact on the finances of the University of New Mexico. BE IT FURTHER RESOLVED that this required plan be brought forward through an appropriate committee of the Board of Regents sufficiently in time to be integrated into FY 2014 annual budget cycle. PASSED, APPROVED AND ADOPTED BY A VOTE OF THE BOARD OF REGENTS OF THE UNIVERSITY OF NEW MEXICO AT A DULY CALLED AND NOTICED REGULAR MEETING OF THE BOARD OF REGENTS OF THE UNIVERSITY OF NEW MEXICO ON ___________ __, ____. By: ________________________________________ Jack L. Fortner President Board of Regents

Internal Audit Director’s Status Report Special Meeting

December 5, 2012

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ACTION ITEMS External Financial Audit for Fiscal Year (FY) Ended 2012. KPMG and Moss Adams will present the following Annual Financial Statement Audit Reports:

1. University of New Mexico Medical Group, Inc. (Moss Adams) 2. University of New Mexico Hospital (Moss Adams) 3. University of New Mexico (KPMG)

Other Post-Employment Benefits (OPEB). David Harris, Executive Vice President for Administration, will discuss a draft resolution regarding unfunded actuarial accrued liability of the University of New Mexico Post-Employment Benefit Plan. The actuarial accrued liability for the University’s Post-Employment Benefit Plan was $152.6 million as of July 1, 2011. INFORMATION ITEMS Audit Committee Meeting Calendar for Fiscal Year 2013. The following dates are the approved dates for remaining FY13 meetings. The Committee meets at 8:30 AM in the Roberts Room. This schedule will accommodate the entrance conference in May 2013 for the 2013 financial audit. February 21, 2013 May 16, 2013 Audit Plan Status. The Fiscal Year 2013 (FY13) audit plan consists of 16 audits, including those carried over from FY12, and audits added because of concerns brought to Internal Audit. The budget to actual report for the current audit plan is at Tab #6a. The status of the plan as of November 27, 2012 is:

Completed 3 Report Writing 1 Fieldwork 1 Assigned/Planning 4 Subtotal 9 Unassigned/Delayed 7 Total 16

Complaints. Since July 1, 2012, the department received 51 reports of misconduct or fraud; and, as of November 28, 2012, the department has 44 open complaints.

Carry Forward from FY10 2 Carry Forward from FY11 4 Carry Forward from FY12 56 Complaints Opened in FY13 33

Internal Audit Director’s Status Report Special Meeting

December 5, 2012

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Total Complaints Open in FY13 95 Complaints Closed in FY13 51 Total Open Complaints 44

Following is the status of open complaints:

Referred to HSC Compliance Office 1 Referred to HSC Clinical Affairs 1 Referred to HSC Information Security 1 Referred to Human Resources 8 Referred to Human Resources & Provost 1 Referred to Interim VP of Research 1 Referred to Office of Equal Opportunity 6 Referred to Office of Equal Opportunity & Human Resources

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Referred to Office of Equal Opportunity & Vice Provost 1 Referred to Parking and Transportation Services 1 Referred to Senior Vice Provost 1 Referred to Senior Vice Provost & Human Resources 1 Referred to Special Assistant Branch Affairs 2 Referred to Special Assistant Branch Affairs, Human Resources

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Internal Audit Open Review 4 Pending 13 Total 44

Department Financial Report. At Tab #5 is the Internal Audit Department’s FY13 budget status report for your review. The FY13 adjusted budget is $804,320 and actual expenditures including encumbrances are $688,350 as of November 27, 2012. The department will have carry over reserves of an estimated $220,000 on June 30, 2013. Audit Vacancies. The department has one Internal Auditor III position vacant at this time. The Department has reclassified the position as Auditor II. The Department posted the position in UNMJobs. The department has received 43 applications for this position and is expecting to complete the hiring process by December 14. Peer Review. We have the signed agreement for the Quality Assessment Review (QAR). We have completed and e-mailed all needed QAR self-assessment documents to the QAR team. The QAR team will visit the Internal Audit Department December 3 through 7, 2012.

EXECUTIVE

SESSION