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Presentation to theFinancial Administrator Development Program

MSU Financial Statements and External Audit

What’s Your Role?

October 28, 2014Katie 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 objectiveswill 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 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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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 institutionalloans to students

LD ‐ Federal

Agency Non‐university funds heldfor 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)

2014 2013Assets:Current assets:

Cash and cash equivalents -$ 44$ Investments 327 286 Accounts and interest receivable, net 142 145 Student loans and pledges receivable, net 22 24 Inventories and other assets 16 14 Total current assets 507 513

Noncurrent assets:Restricted cash and cash equivalents 10 2 Restricted investments 6 99 Endowment investments 2,082 1,584 Other investments 235 361 Student loans and pledges receivable, net 64 60 Investments in joint ventures 7 7 Derivative instruments - swap asset - - Capital assets, net 1,995 1,901 Total noncurrent assets 4,399 4,014

Total assets 4,906 4,527

Deferred outflows of resources: 60 61

Liabi l i ties:Current liabilities:

Accounts and interest payable 75 63 Accrued personnel costs 56 53 Accrued self-insurance liabilities 15 14 Payroll taxes and other payroll deductions 25 27 Deposits held for others 26 24 Unearned revenues 125 120 Current portion of long term debt and other obligations 169 187 Total current liabilities 491 488

Noncurrent liabilities:Accrued personnel costs 34 34 Accrued self-insurance liabilities 6 8 Derivative instruments - swap liability 50 44 Net other postemployment benefit obligation 307 263 Long term debt and other obligations 905 926 Total noncurrent liabilities 1,302 1,275

Total l iabil ities 1,793 1,763 Net position:

Net investment in capital assets 983 937 Restricted: Nonexpendable 487 436 Expendable 674 567 Unrestricted 1,029 885

Total net position 3,173$ 2,825$

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)

2014 2013Operating revenues:

Student tuition and fees 861$ 799$ Less: scholarship allowances 108 102 Net student tuition and fees 753 697 State of Michigan grants and contracts 9 9 Federal grants and contracts 309 314 Local and private sponsored programs 71 73 Interest and fees on student loans 1 1 Departmental activities (net of scholarship allowances 174 179 of $5 in 2014 and $5 in 2013)Auxiliary activities (net of room and board allowances 303 305 of $20 in 2014 and $19 in 2013)

Total operating revenues 1,620 1,578 Operating expenses:

Instruction and departmental research 632 589 Research 312 329 Public Service 222 233 Academic Support 95 82 Student services 49 47 Scholarships and fellowships 60 56 Institutional support 115 113 Operation and maintenance of plant 139 143 Auxiliary enterprises 289 289 Depreciation 150 139 Other operating expenses, net 6 4

Total operating expenses 2,069 2,024 Operating loss (449) (446)

Net nonoperating revenues (expenses):State operating appropriation 250 245 State AgBioResearch appropriation 30 29 State cooperative extension service appropriation 26 25 Federal Pell grant revenue 37 38 Gifts 55 46 Net investment income (loss) 324 187 Interest expense on capital asset related debt (41) (36) Other nonoperating revenues, net 6 6

Net nonoperating revenues 687 540 Income before other 238 94

State capital appropriations 30 2 Capital grants and gifts 36 15 Additions to permanent endowments 44 38

Increase in net position 348 149 Net position, beginning of year 2,825 2,676

Net position, end of year 3,173$ 2,825$

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)2014 2013 2012 2011 2010

Instruction 632$ 589$ 575$ 561$ 556$ Research 312 329 319 294 277 Public service 222 233 210 221 228 Academic support 95 82 82 78 74 Student services 49 47 32 32 32 Scholarships and fellowships 60 56 55 53 50 Institutional support 115 113 103 94 91 Operation and maintenance of plant 139 143 149 138 143 Auxiliary activities 289 289 275 269 256 Depreciation 150 139 128 116 98 Other operating expenses, net 6 4 3 2 5

Total GASB expense reporting 2,069$ 2,024$ 1,931$ 1,858$ 1,810$

Year ended June 30,

Transaction e‐doc identifies object code

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Object level codes consolidate financial statement lines

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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 StatementsMSU 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 periodCut‐off

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

Existence or Occurrence

• Transactions are recorded in the right accountClassification

Financial statement assertions continued

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• No material transactions or accounts have been omittedCompleteness

• 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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Supplemental Slides

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Financial administrators establish policyFinancial administrators establish policy

Internal Audit• Evaluates and provides 

reasonable assurance that internal controls are functioning as intended.

• Evaluates compliance with federal, state, or other applicable laws.

• Evaluates compliance with MSU internal policy.

• DOES NOT MAKE MANAGEMENT DECISIONS.

Controller’s Office and financial administrators• Develops and enforces

effective internal controls. • Establishes policies and 

procedures.• Monitors compliance with 

federal, state, or applicable laws and MSU policies and procedures.

• MAKES MANAGEMENT DECISIONS.

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MSU revenue (GASB)

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(Amounts in Millions)2014 2013 2012 2011 2010

Tuition and fees, net 753$ 697$ 640$ 568$ 542$ State appropriations 306 299 294 346 357 State and federal grants 355 361 378 350 339 Private gifts, grants & capital approp. 236 174 163 147 179 Investment income (loss) 324 187 (22) 289 164 Auxiliary activities 303 305 293 280 276 Departmental income 174 179 165 167 147

Total GASB revenue reporting 2,451$ 2,202$ 1,911$ 2,147$ 2,004$

Year ended June 30,

Sources ‐ investment income varies widely (in millions)

324187

‐22289 164

753697

640

568542

306

299

293

346357

355

361

378

350339

236

174

164

147179

303

305

293

280276

174

179

165

167147

‐$250

$250

$750

$1,250

$1,750

$2,250

2014 2013 2012 2011 2010

Departmental income

Auxiliary activities

Private gifts, grants, & capitalapprop.

State and federal grants

State operating appropriation

Tuition

Investment income (loss)

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$2,202

$1,911

$2,147$2,004

$2,451

10 year revenue trends 

‐$300

‐$100

$100

$300

$500

$700

$900

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Tuition and fees

State appropriations

State and federalgrants

Private gifts, grants &capital approp.

Investment income(loss)

Auxiliary activities

Departmental income

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Income Statement (reformatted, not GASB)

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(Amounts in Millions)2014 2013 2012 2011 2010

Revenues:Student tuition and fees, net of allowances 753$ 697$ 640$ 568$ 542$ Grants and contracts 389 396 404 373 373 Auxiliary activities 303 305 293 280 276 State appropriations 306 299 293 346 356 Investment income budgeted for operations 29 29 27 29 35 Gifts 55 46 52 46 53 Capital appropriations, grants and gifts 66 17 16 18 29 Additions to permanent endowments 44 38 30 17 25 Other revenues, net 218 224 212 216 189

Subtotal - revenues 2,163 2,051 1,967 1,893 1,878 Expenses:

Instruction and departmental research 632 589 575 561 556 Research 312 329 319 294 277 Public service 222 233 210 220 228 Academic support 95 82 82 78 75 Scholarships and fellowships 60 56 55 53 50 Institutional support 115 113 103 94 91 Operation and maintenance of plant 139 144 149 138 143 Auxiliary enterprises 289 289 275 269 256 Depreciation expense 150 139 128 116 98 Other expenses, net 96 86 70 74 56

Subtotal - expenses 2,110 2,060 1,966 1,897 1,830

Net, before investments 53 (9) 1 (4) 48

Other components of net income (loss):Net investment income (loss) 295 158 (49) 260 129

Net income (loss) 348$ 149$ (48)$ 256$ 177$

Year ended June 30,

Uses ($2.1B in 2014) – $1.5B (72.7%) payroll & benefits and contractual/computing services 

Payroll and benefits

Contractual and computing services

Depreciation

Repairs and maintenance

Supplies and general

Student financial aid

Travel

Contract and grant subawards

Other operating expenses

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Same total, different view: 2014 expenses –natural classification

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MillionsPayroll and benefits 1,367$ Depreciation expense 150 Contractual and computing services 137 Student financial aid 96 Supplies and general expenses 81 Repairs and maintenance 80 Travel 59 Contract and grant subawards 39 Rents and leases 8 Telephone and postage 7 Continuing education 6 Printing 4 Other operating expenses 35

Total expenses 2,069$

Every transaction builds the financial statements

Cash

1100

AS

Asset

Cash & Cash Equivalents

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Financial statement origins

Income/Expense & Asset/Liability

Object Code

Object Type Code

Financial Statement Group

Financial Statement Line

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External auditors also…..

• Single Audit (aka A‐133) ‐ Separate audit of federal contract and grant expenditures• What was MSU’s total expenditure for 2012?

• Corporation of Public Broadcasting Audit of WKAR television and radio• What percent of WKAR revenues are gifts?

• NCAA Review of Athletics Department • What is Athletics’ General Fund budget?

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Auditing internal controls

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Information technology (IT)

IT Controls

General controls

Application controls (such as roles (initiator, approver, delegate & 

system access)

Fully automated processes (are ‘business rules’ 

providing sufficient checks and balances?)

Auditing internal controls continued

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Example – expenses/accounts payable

IT Controls:

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Key Procedures / Controls How to test?

Ability to set up new vendors involves an approval process limited to purchasing director approval.  Observe the process for setting up a new vendor to ensure approvals are set up.

Invoices and receivers are reviewed for date, quantity, nature of item, place of delivery, freight terms, payment terms and discounts and matched against the PO for accuracy before payment is made to appropriate vendor.

If vendor ID# and invoice # have already been entered into the system, the system automatically rejects the invoice and prevents the continued entry of the transaction, thereby, preventing duplicate payment of the invoice.

Example – expenses/accounts payable continued

IT Controls:

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Key Procedures / Controls How to test?

Departments initiate requisitions.  Purchasing department obtains approval review before PO is completed.

Classification of expenditures are input at time of purchase order.  Purchase is only allowed if amount is available in the budget (ie. negative balances are not allowed)

Access and level of approval to the online purchase order system is limited to MSU Net ID registered users.  

Example – expenses/accounts payable continued

Controls:

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Key Procedures / Controls How to test?

Select one voucher payable transaction to test.  Verify proper approval is obtained before applying payments.

Select one expenditure that includes an invoice to test.  Verify proper approval is obtained before applying payments.  Verify that a three way match is performed (purchase order, receiver or proof of service, invoice) before applying payments.

Reconciliation of subsidiary ledger to general ledger ‐Obtain year‐end accounts payable aging and tie to general ledger

Example – expenses/accounts payable continued

Controls:

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Key Procedures / Controls How to test?

Unmatched invoices and purchase orders ‐ Obtain listing of unmatched purchase orders at year‐end and tie to general ledger

General ledger is kept open after year end to record accounts payable into proper period.

Procedures above are being performed by individuals with the appropriate skill and knowledge as it relates to the following:

1) Input of accounts payable2) Initial classification of expenditures

External audit ‐ clean opinion

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Financial statements are responsibility of management

Includes MSU Foundation (and other external auditors)

Test basis (sampling)

Accounting principles generally accepted in US

Present fairly, in all material respects

What could go wrong? continued

• Example of what could go wrong in accounts payable cycle• Obligations for goods and services received are not 

recognized in the proper period• AP amounts are not valid• Expenditures are classified incorrectly• Payments to vendors are applied incorrectly

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Audit evidence continued

What is the impact of these principles on the following types of evidence:

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Observation ConfirmationInspection of records or documents

Recalculation/ Reperformance Analytics Inquiry

Discussion

• Did we meet the goals of this session?• Why this information is important to a financial administrator?

• Support decision making• Passing what is learned on to staff• Accountability placed at the Fiscal Officer role

• Questions?

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