This is the ninth in a series of 10 blog posts related to the Top 10 Audit Findings of the U.S. Department of Education.

A qualified auditor’s opinion cited in the audit report is one of the top 10 audit findings by the U.S. Department of Education. Serious deficiencies and areas of concern included:

• - R2T4 violations
• - Inadequate accounting systems and/or procedures
• - Lack of internal controls

Receiving anything other than an unmodified (unqualified) opinion is a disturbing experience, but it does occur from time to time. It might help to know you’re not alone. Receiving a modified (qualified) audit opinion offers the opportunity to focus improvement efforts in identified areas of weakness in operations, financial reporting and compliance.

For 2015, ED received unmodified audit opinions on financial management and reporting. The audit reports indicated one significant deficiency in internal control over financial reporting and one instance of reportable noncompliance, but this was not always the case. For their 1999 year end, ED received a qualified opinion for both ED and Student Financial Aid (SFA) on the Balance Sheet, Statement of Net Cost, Statement of Changes in Net Position, and Statement of Budgetary Resources, and they received a disclaimer of opinion for both ED and SFA on the Statement of Financing.

My point: ED was able to turn this scenario around. Their improvements over the years were due to concentrated and focused hard work by ED’s managers and staff, its contractors, and auditors. Whether the improvements came as a result of stated findings in reports can’t necessarily be proven, but it enabled them to identify sooner rather than later the various areas of operations and reporting that needed attention.

Considering drivers of unmodified verses modified audit reports on financial reporting and compliance, let’s briefly review some related regulation.

Audit Opinion According to Regulation: 34 C.F.R. § 668.171(d)(1):

According to the Code of Federal Regulations, with respect to audit opinions, even if an institution satisfies all of the general standards of financial responsibility under 34 C.F.R. § 668.171(d)(1), the Secretary does not consider an institution to be financially responsible if in the institution's audited financial statements, the opinion expressed by the auditor was an adverse, qualified, or disclaimed opinion, or the auditor expressed doubt about the continued existence of the institution as a going concern, unless the Secretary determines that a qualified or disclaimed opinion does not have a significant bearing on the institution's financial condition.

R2T4 Violations

The FSA Handbook indicates that information in a school’s accounting system must be able to provide documentation that for each Return of Title IV Funds required under 34 CFR 668.22, within the time frame allowed by regulation, cash has been transferred from the student’s account to the school’s federal funds account and then has either been returned to the Department or reallocated and disbursed to other eligible students.

Inadequate Accounting Systems and/or Procedures

According to the FSA Handbook, participating schools must account for the receipt and expenditure of Title IV, HEA program funds in accordance with GAAP. Schools must establish and maintain the following:

• - Financial records that reflect each HEA, Title IV program transaction.
• - General ledger control accounts and related subsidiary accounts that identify each Title IV, HEA program transaction and separate those transactions from all other institutional financial activity.
• - Adequate accounting and internal control systems.

Internal Controls—A System of Checks and Balances

In addition to having a well-organized financial aid office staffed by qualified personnel as indicated in the FSA Handbook, a school must ensure that its administrative procedures for the FSA programs include an adequate system of internal controls, or checks and balances.

Internal control is an integral component of an organization’s management. An effective internal control structure includes a school’s plan of organization and all the policies, procedures, and actions taken by the school to provide reasonable assurance that the school will achieve its objectives in the following areas:

• - Effectiveness and efficiency of operations
• - Accuracy of operating data
• - Reliability of program reporting
• - Protection of funds against fraud and misuse
• - Compliance with organizational policies and applicable

Here, internal control consists of five interrelated components derived from the way a school is managed. The components are derived from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Framework:

• 1. Control Environment – Top down approach that drives the other components.
• 2. Risk Assessment - Identification and analysis of risks that have the potential to negatively affect a school’s satisfactory management of the FSA programs, its financial strength, its public image, and the overall quality of its programs and services.
• 3. Control Activities - The policies and procedures that help ensure a school’s administrative directives are followed.
• 4. Information and Communication - Pertinent information must be identified, captured, and communicated in a form and time frame that enables employees to carry out their responsibilities.
• 5. Monitoring Activities - Internal control systems need to be monitored— a process that assesses the quality of the system’s performance over time. This can be accomplished through ongoing monitoring activities, separate evaluations, or a combination of the two.

Even though receiving an audit report other than unmodified is an unpleasant experience, it allows an opportunity to turn a negative into a positive. It allows the opportunity to structure your monitoring and process improvement efforts in a more focused manner so you can strengthen areas of weakness and improve operations and financial reporting systems. In doing so, it’s important to remember all of the applicable regulations and requirements that come into play, especially the requirements related R2T4 procedures, accounting systems and procedures, and internal controls.

If you need assistance with fixing issues related to a modified audit opinion or other accounting, auditing or consulting issues related to your institution of higher learning contact me at sbastardi@frazerllp.com or call 714.990.1040.

Sources and references

• Regulation: 34 C.F.R. § 668.171(d)(1)
• FSA Coach
• FSA Assessments
• FSA Handbook, Volume 4, Chapters 5 and 6; Appendix A
• S. Department of Education