Annual Finanical Audit Recommendations

Annual Financial Audit Reports.
The fiduciary responsibilities of Trustees cannot be completely satisfied without an annual audit of the financial reports for the District. While Trustees must rely primarily upon the financial reports prepared by District staff including the annual budget and quarterly financial reports, Trustees cannot be sure of the accuracy of such reports without a periodic evaluation to test whether such financial reports are accurate. An annual financial audit by an independent auditor can provide the Trustees with an evaluation of the financial reports provided by the district staff (i.e. are they correct or not in the opinion of the auditor). The use of financial benchmarks based upon the budget or quarterly reports are only as accurate as the financial reports they are based upon. Therefore, the annual audit will provide to the Trustees the assurance whether the financial statements (and thus the benchmarks) are accurate or not.
A Trustee Board can best carry out this responsibility by appointing an Audit Committee (a sub-committee of Trustee Board members). Some typical responsibilities of an Audit committee are as follows:
1. To select an independent auditor.
2. To review and understand the District’s financial statements (possibly including the District’s quarterly financial reports).
3. To assure to the full Trustee Board that the financial statements reflect the District’s financial condition.
4. To determine the adequacy of internal controls, including those established for financial information systems (some committees may enlarge the scope and review security for District computer systems).
5. To assure to the full Trustee Board that any significant noncompliance with regulatory matters have been brought to their attention and that a plan for correction is in place.
6. To ensure adherence by the Trustees to the District’s conflict of interest policy.
The Trustee’s Audit Committee will need to take the following actions in order to carry out their responsibilities to the District:
1. The committee shall select an independent auditor to perform the annual financial audit of the District. (Please note that either the firm should be changed periodically or the accountants performing the actual audit).
2. The committee should meet with the auditor before commencing the annual audits of the District’s financial statements. (This permits the committee to review the general scope of the audit and to select any topics for special attention).
3. The committee should meet again with the auditors at the completion of the audit in order to review the report and the financial statements and the report on the adequacy of internal controls and other findings. (The review of the financial statements should include an accompanying narrative known as the management discussion and analysis).

4. The committee should also review the auditor’s management letter at the follow up meeting. (If the auditor has issues a letter that identifies any internal control weaknesses the audit committee should schedule additional meetings with the administration on progress towards correcting such problems). Any additional audit reports should also be reviewed during this meeting.
5. Once the post-audit review is completed, the audit committee should prepare to present the audit report to the full Trustee Board at its next scheduled open meeting.
6. The committee should also monitor the institution’s conflict of interest policy including how it pertains to Trustee Board members. (Specific actions could include reviewing the annual conflict of interest statements required of all Trustees to assure that the reports are completed and no conflicts are occurring or reviewing periodic travel claims submitted by senior management and Trustees to assure compliance with District policies.)
Questions that Trustees on the Audit Committee may want to ask the administration and/or the auditor include:
1. Do our District’s independent auditors have an expertise in college financial issues?
2. Does our District periodically change auditing firms to enlist a fresh set of eyes?
3. Does the District staff help the audit committee take a broad view of its responsibilities?
4. Is the District’s annual financial report understandable? Does it present an accurate financial picture of our District?
5. Does our District have an adequate risk management program in place?
6. Where is our District financially vulnerable?
7. Are there areas of our District’s financial statements that could be more explicit?
8. Are there any areas of the audit that District management and the auditor disagree upon?
9. How can the Trustees and senior management of the District establish an improved financial environment in the District?
10. Is there a pattern of lawsuits brought against our District?
11. Does our District have a succession plan for senior management?
12. What is our District’s contingency plan for a sustained computer failure?
13. Does our District have adequate financial controls in place?
14. Are there other threats our District should be concerned with?
Other questions Trustees can ask to assure that the audit requirements for their District are being properly implemented:
1. Each District is required to complete an annual audit of the District’s financial statements. Has your District completed the required annual audit of the past year’s financial information within 6 months of the close of the fiscal year? If not – why not?
2. Does the audit find that the District’s financial statements comply with the required governmental Accounting Standards? If not – why not?
3. Within the Financial and Attendance Highlights section of the audit, are there any comments or issues? If so, what is the District’s plan for resolution of these issues?
4. Within the Statement of Cash Flows section of the audit was there any unplanned net decreases or significant increases in cash? If yes, what is the District’s plan for correcting this problem in the next fiscal year?
5. Has the auditing firm issued any Findings within the financial audit? If so, what will the District’s response be to the findings?

6. Does the District’s Audit Findings Response require future action(s) on the part of the District? If yes, then coordinate between the Board and the District’s Superintendent / President (or Chancellor) to develop a schedule when the administration will report to the Board about the completion of the responses to the audit findings.
7. Does the audit include in the Statement of Revenues Expenses and Changes in Net Assets any unplanned increase or a decrease in the District’s net assets? If this is a declining number, the BOT needs to determine the cause of the reduction and assure the administration is taking steps to improve the situation.
8. Does the audit find any unplanned decrease or an increase in the Statement of Cash Flows for the District? If there is a decrease in the cash and cash equivalents within this statement, the BOT needs to determine the cause and whether the situation can be corrected.
9. Within the Notes to the Financial Statement section of the Audit there is a portion concerning Long Term Debt obligations. The Trustees need to assure that the District can reasonably continue to meet its’ long term debt obligations in the future.
10. Does the Audit contain any obligations for Post Retirement Benefits for the District’s employees? If so, is the District making progress towards conforming to the plan?
11. Are there any Notes on Internal Controls concerning the District’s management of the budget and accounting systems? If so, is there a District response? If a District response is provided and it identifies future actions of the District, you should coordinate with the Superintendent / President for the BOT to receive periodic reports of the District’s response to such findings. Also, does the audit include any Notes on Internal Controls? If so, do any of the notes indicate any problems that the BOT need to address with the Superintendent / President? Can all the notes be addressed and resolved in the coming year? If not – why not?
12. Is the audit of the District’s financial statements qualified or unqualified? If the audit is qualified, the BOT need to determine the reason for such qualification and assure that the District can obtain an unqualified audit in the following year.
13. If the District has approved special bonds for capital improvement projects, a separate audit of such Bond Funds should be provided. Of special interest is to assure that these funds match the financial plan that the District provided to the voters at the time of the Bond Election. If there are significant differences between the actual expenditures and the original plan, the BOT need to address such potential problems as soon as possible.
14. If fraud was discovered as a result of the audit, what actions is the District taking to remedy the situation?

Additional information on audits can be obtained from the Community College League of California training guide for Trustees. The Association of Governing Boards of Universities and Colleges also publishes information on the audit committee and the audit process. An excellent work book that audit committee members may wish to consult is the Audit Committee Toolkit published by the American Institute of Certified Public Accountants. This work book includes steps to follow in the audit process and typical questions committee members should ask of auditors and senior management. Although the work book is directed to corporate boards, the process and most of the questions are relevant to community colleges as well.