FALL 2006FALL 2006FOCUSFOCUS

November 14-15, 2006November 14-15, 2006

Higher Education Restructuring ActHigher Education Restructuring ActFinancial & Administrative StandardsFinancial & Administrative Standards

Bill Cole, Deputy AuditorBill Cole, Deputy AuditorAuditor of Public AccountsAuditor of Public Accounts

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 2.2-5004 – Financial and COV Section 2.2-5004 – Financial and

Administrative Management StandardsAdministrative Management Standards Unqualified opinion from the APAUnqualified opinion from the APA No significant audit deficienciesNo significant audit deficiencies Substantial compliance with all financial reporting Substantial compliance with all financial reporting

standards approved by the State Comptrollerstandards approved by the State Comptroller Substantial attainment of A/R standards approved by Substantial attainment of A/R standards approved by

the State Comptrollerthe State Comptroller Substantial attainment of A/P standards approved by Substantial attainment of A/P standards approved by

the State Comptrollerthe State Comptroller Such other financial and administrative management Such other financial and administrative management

standards as the Governor may establishstandards as the Governor may establish

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 23-38.88 B. 11 (Goal 11)COV Section 23-38.88 B. 11 (Goal 11)

… … meets the financial and administrative meets the financial and administrative standards as specified by the Governor standards as specified by the Governor pursuant to Section 2.2-5004 and included in pursuant to Section 2.2-5004 and included in the appropriation act, including best practices the appropriation act, including best practices for:for:• Electronic procurement and leverage purchasingElectronic procurement and leverage purchasing• Information technologyInformation technology• Real estate portfolio managementReal estate portfolio management• Diversity of suppliers through consideration of Diversity of suppliers through consideration of

SWAMSWAM

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards ……the Governor shall develop objective the Governor shall develop objective

measures of financial and administrative measures of financial and administrative management performance and related management performance and related institutional performance benchmarks for institutional performance benchmarks for the goals and objectives set forth in B 11.the goals and objectives set forth in B 11.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards 2006 Appropriation Act (4-9.02 K. 23)2006 Appropriation Act (4-9.02 K. 23)

The Governor or his designees … shall develop The Governor or his designees … shall develop additional standards to assess the extent to additional standards to assess the extent to which an institution is well-managed in the which an institution is well-managed in the areas of areas of information technologyinformation technology, , personnelpersonnel, , capital outlaycapital outlay, and , and procurementprocurement. The . The Governor shall report these standards no later Governor shall report these standards no later than October 1, 2006 for consideration by the than October 1, 2006 for consideration by the 2007 General Assembly.2007 General Assembly.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards

2006 Appropriation Act (4-9.02 K. 23)2006 Appropriation Act (4-9.02 K. 23) Until such additional standards are Until such additional standards are authorized by authorized by

the 2007 GAthe 2007 GA, all institutions shall be subject to , all institutions shall be subject to the following standards:the following standards:• Completes no < 75% of all non-exempt purchase Completes no < 75% of all non-exempt purchase

transactions through eVA and makes no < 75% of transactions through eVA and makes no < 75% of dollar purchases from vendors and suppliers who are dollar purchases from vendors and suppliers who are registered in eVA; and registered in eVA; and

• Completes no < 75% of dollar purchases through Completes no < 75% of dollar purchases through leveraged cooperative contracts such contract is leveraged cooperative contracts such contract is available, except when the institution can demonstrate available, except when the institution can demonstrate that the cost < available leveraged contractsthat the cost < available leveraged contracts

What is Happening with the What is Happening with the Standards in the Identified Areas?Standards in the Identified Areas?

Secretary of Finance working groupSecretary of Finance working group Secretaries of Finance and AdministrationSecretaries of Finance and Administration Deputy Secretaries (Finance, Admin, Deputy Secretaries (Finance, Admin,

Technology)Technology) House Appropriations staffHouse Appropriations staff Senate Finance staffSenate Finance staff APAAPA DGS, VITA, DHRMDGS, VITA, DHRM Institutions of higher education (UVA, VT, W&M, Institutions of higher education (UVA, VT, W&M,

LU, VSU, and VCCS)LU, VSU, and VCCS)

What is Happening with the What is Happening with the Standards in the Identified Areas?Standards in the Identified Areas?

Capital Outlay Capital Outlay Points for considerationPoints for consideration

• Projects on schedule based on budgetProjects on schedule based on budget• Comparison of GF to NGF projectsComparison of GF to NGF projects• Centralized vs. decentralizedCentralized vs. decentralized

Subgroup is working! Nothing Finalized!Subgroup is working! Nothing Finalized!

What is Happening with the What is Happening with the Standards in the Identified Areas?Standards in the Identified Areas?

Procurement Procurement Points for considerationPoints for consideration

• eVAeVA• SWAMSWAM• Purchases from leveraged cooperative contractsPurchases from leveraged cooperative contracts

Subgroup is working! Nothing Finalized!Subgroup is working! Nothing Finalized!

What is Happening with the What is Happening with the Standards in the Identified Areas?Standards in the Identified Areas?

Information TechnologyInformation Technology Points for considerationPoints for consideration

• Information securityInformation security• Major information technology projectsMajor information technology projects

On scheduleOn schedule Within budgetWithin budget

Subgroup is working! Nothing Finalized!Subgroup is working! Nothing Finalized!

What is Happening with the What is Happening with the Standards in the Identified Areas?Standards in the Identified Areas?

PersonnelPersonnel Points for consideration Points for consideration

• Strategic workforce analysis and planStrategic workforce analysis and plan What are identified risks?What are identified risks? What is the institution doing to address the risks?What is the institution doing to address the risks?

Subgroup is working! Nothing Finalized!Subgroup is working! Nothing Finalized!

Who is Responsible for Who is Responsible for Evaluating the Institutions?Evaluating the Institutions?

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 30-133.1 – The APA shall COV Section 30-133.1 – The APA shall

promptly upon completion of the annual promptly upon completion of the annual audit for each institution, certify in writing audit for each institution, certify in writing to the BOV chair, Secretaries of to the BOV chair, Secretaries of Education, Finance, and Administration, Education, Finance, and Administration, and GA Money Committee Chairs whether and GA Money Committee Chairs whether or not the institution meets all of the or not the institution meets all of the financial and administrative management financial and administrative management standards currently in effect.standards currently in effect.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 30-133.1 (cont’d.) - In addition, COV Section 30-133.1 (cont’d.) - In addition,

for any institution required to develop and for any institution required to develop and implement a plan of corrective action under implement a plan of corrective action under Section 2.2-5004, the APA shall at the time of Section 2.2-5004, the APA shall at the time of making the certification provide a written making the certification provide a written evaluation of the institution’s progress in evaluation of the institution’s progress in implementation of the plan and in meeting all implementation of the plan and in meeting all the financial and administrative management the financial and administrative management standards currently in effect.standards currently in effect.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 2.2-5004 – Par. B and CCOV Section 2.2-5004 – Par. B and C

Any institution that does not meet all of the Any institution that does not meet all of the financial (par. B) and administrative (par. C) financial (par. B) and administrative (par. C) standards … shall develop and implement a standards … shall develop and implement a plan of corrective action for purposes of plan of corrective action for purposes of meeting such standards as soon as meeting such standards as soon as practicable. BOV chair shall provide copy of practicable. BOV chair shall provide copy of the written plan to the APA and Secretaries the written plan to the APA and Secretaries (E/F/A) promptly upon completion of the (E/F/A) promptly upon completion of the development of the written plan.development of the written plan.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 23-9.6:1.01 – Assessment of COV Section 23-9.6:1.01 – Assessment of

Institutional PerformanceInstitutional Performance Paragraph C – The State Council shall Paragraph C – The State Council shall

annually assess the degree to which each annually assess the degree to which each institution has met the financial and institution has met the financial and administrative management and educational-administrative management and educational-related performance benchmarks. The related performance benchmarks. The Council shall request assistance from the Council shall request assistance from the Secretaries of Finance and Administration for Secretaries of Finance and Administration for purposes of assessing the financial and purposes of assessing the financial and administrative management performance administrative management performance benchmarks.benchmarks.

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards COV Section 23-9.6:1.01- Paragraph C COV Section 23-9.6:1.01- Paragraph C

(cont’d.)(cont’d.) No later than June 1, the State Council shall No later than June 1, the State Council shall

provide a certified written report of the results provide a certified written report of the results of such annual assessmentof such annual assessment

Those institutions certified by the State Those institutions certified by the State Council as having met the financial and Council as having met the financial and administrative management and educational-administrative management and educational-related performance benchmarks shall be related performance benchmarks shall be entitled to the financial benefits set forth in entitled to the financial benefits set forth in Section 2.2-5005Section 2.2-5005

Higher Education Restructuring ActHigher Education Restructuring ActFinancial and Administrative StandardsFinancial and Administrative Standards 2006 Appropriation Act Section 4-9.02 - … the 2006 Appropriation Act Section 4-9.02 - … the

following education-related and financial and following education-related and financial and administrative management measures shall be administrative management measures shall be the basis on which SCHEV shall annually assess the basis on which SCHEV shall annually assess and certify institutional performance. Institutional and certify institutional performance. Institutional performance measures set forth in par. K shall be performance measures set forth in par. K shall be evaluated year-to-date by the Secretaries of evaluated year-to-date by the Secretaries of Finance and Administration, as appropriate, and Finance and Administration, as appropriate, and communicated to SCHEV before 6/1 of each year.communicated to SCHEV before 6/1 of each year.

So Who is Responsible for So Who is Responsible for Evaluating the Institutions?Evaluating the Institutions?

A.A. SCHEVSCHEV

B.B. Secretary of FinanceSecretary of Finance

C.C. Secretary of AdministrationSecretary of Administration

D.D. Auditor of Public AccountsAuditor of Public Accounts

E.E. All of the aboveAll of the above

Financial Management StandardsFinancial Management Standards Unqualified opinion from the APAUnqualified opinion from the APA No significant audit deficienciesNo significant audit deficiencies Substantial attainment of A/R standards Substantial attainment of A/R standards

approved by the State Comptrollerapproved by the State Comptroller Substantial attainment of A/P standards Substantial attainment of A/P standards

approved by the State Comptrollerapproved by the State Comptroller Substantial compliance with all financial Substantial compliance with all financial

reporting standards approved by the State reporting standards approved by the State ComptrollerComptroller

Audit DeficienciesAudit Deficiencies No No significant audit deficienciessignificant audit deficiencies – What – What

does that mean?does that mean?

New AICPA and Yellow Book DefinitionsNew AICPA and Yellow Book Definitions Material weaknessesMaterial weaknesses Significant deficienciesSignificant deficiencies

AICPA Standards, SAS No. 112, AICPA Standards, SAS No. 112, Communication of Internal Communication of Internal

Control MattersControl Matters New definitionsNew definitions

New thresholdsNew thresholds

New reporting timeframesNew reporting timeframes

DefinitionDefinition Control DeficiencyControl Deficiency – Exists when the – Exists when the

designdesign or or operationoperation of a control does not of a control does not allow management or employees, in the allow management or employees, in the normal course of performing their normal course of performing their assigned functions, to prevent or detect assigned functions, to prevent or detect misstatements on a timely basis.misstatements on a timely basis. Design – control is missing or existing control is not Design – control is missing or existing control is not

properly designedproperly designed Operation – properly designed control does not Operation – properly designed control does not

operate as designed or person does not have operate as designed or person does not have necessary authority or qualifications to perform the necessary authority or qualifications to perform the control effectivelycontrol effectively

SAS 112 DefinitionsSAS 112 Definitions

A A control deficiencycontrol deficiency with more than a with more than a remote likelihood that a misstatement:remote likelihood that a misstatement: Is greater than inconsequential = Is greater than inconsequential =

significant deficiencysignificant deficiency Is material = Is material = material weaknessmaterial weakness

SAS No. 112SAS No. 112Reporting ConsiderationsReporting Considerations

In writing to management and “those In writing to management and “those charged with governance”charged with governance”

Not later than 60 days after audit report Not later than 60 days after audit report issuedissued

Other issues - material audit adjustments, Other issues - material audit adjustments, prior year uncorrected, shock and horror to prior year uncorrected, shock and horror to our auditeesour auditees

Significant DeficienciesSignificant Deficiencies

Insufficient controls over, or expertise in, Insufficient controls over, or expertise in, selecting and applying accounting selecting and applying accounting principles in conformity with GAAPprinciples in conformity with GAAP

Insufficient antifraud programs & controlsInsufficient antifraud programs & controls Inadequate controls over non-routine and Inadequate controls over non-routine and

non-systematic transactionsnon-systematic transactions Inadequate controls over the period-end Inadequate controls over the period-end

financial reporting processfinancial reporting process

Significant Deficiencies, Significant Deficiencies, Likely Material WeaknessesLikely Material Weaknesses

Strong indicators of a material weakness in Strong indicators of a material weakness in internal controls:internal controls:

Ineffective internal control over financial Ineffective internal control over financial reporting.reporting.

Restatement of previously issued financial Restatement of previously issued financial statements.statements.

Audit adjustments to current financial Audit adjustments to current financial statements. statements.

Ineffective internal audit function.Ineffective internal audit function.

Significant Deficiencies, Significant Deficiencies, Likely Material WeaknessesLikely Material Weaknesses

Ineffective regulatory compliance function.Ineffective regulatory compliance function. Identification of fraud by senior Identification of fraud by senior

management.management. Failure by management to correct a Failure by management to correct a

previous significant deficiency.previous significant deficiency. An ineffective control environment with An ineffective control environment with

various control deficiencies.various control deficiencies.

Effect of the New DefinitionsEffect of the New DefinitionsOld Definitions New Definitions

Material Weakness

Material Weakness

Reportable Condition

Significant Deficiency

Management Letter Comment Other Control Deficiency

What is the Impact of SAS 112 on What is the Impact of SAS 112 on Financial Management Standards?Financial Management Standards? Does significant audit deficiencies = Does significant audit deficiencies =

AICPA significant deficiencies? AICPA significant deficiencies? NO!NO! Does significant audit deficiencies = Does significant audit deficiencies =

AICPA material weaknesses?AICPA material weaknesses? Probably!Probably! But not absolutely 100%!But not absolutely 100%! Decision is up to APA’s judgmentDecision is up to APA’s judgment

QUESTIONS?QUESTIONS?