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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