Califonria Community College Trustees' Annual Conference Presentation
April 30, 2005
Fulfilling Your Fiduciary Monitoring Role
by: Michael E. Hill
Vice Chancellor,
Administrative Services
San Jose-Evergreen CCD
&
William McGinnis
Trustee
Butte-Glenn CCD
Outline of Slides:
1) Definition of "Fiduciary"
One who holds something in trust for another, a person who stands in a special relation of trust, confidence or responsibility in his/her obligations to others. Legal Requirements of fiduciary responsibility (see Ed Code Section 70902) and standards (Title 5).
2) Financial Monitoring
Areas of Emphasis:
Annual Budget
Budget Administration Policies
Quarterly Financial Reports
Annual Audit
Multi-Year Measurements
Hiring of Well Qualified Staff
3) Annual Budget
Implements organizational direction
Must be balanced & establishes budgetary limits
Process & details must be transparent to the public
Must comply with state law and system regulations (i.e. 5% reserve limit)
(Note: Never look at just one year’s budget in isolation – each budget should be viewed as to its potential impact upon future budgets)
4) Budget Administration Policies
What are the policies: (Example: A BOT Policy on the % of annual expenditures to be in the College’s General Fund Reserve Account)
Why have such policies: (To guide the administration on the development and implementation of the budget).
When do you test: (Periodically, with the proposed budget, with quarterly financial reports, and with the annual financial audit).
5) Quarterly Financial Reports
Periodic reports of management about adherence to the Annual budget and any changes that may impact future expenditures and revenues.
Covers financial quarters – Generally available in October, January, April, and August (may vary by district).
Must be provided to system office, trustees, and public.
Depending on your District’s structure & practice may have Audit Committee review & comment thereon.
6) Why Audit
Required by Law but beyond that:
To assure Accuracy of Financial Reports
To assure Compliance with laws, regulations and trustee policies.
To assure trustee Compliance with federal and state requirements.
Can be used to test college systems to assure security of funds and important resources (data security).
NOTE: Audits are based upon sampling and review of internal control procedures. No audit will provide a complete validation of the above mentioned items.
7) Trustees’ Audit Committee Role(working with the College’s Administration & Auditors)
To select an independent auditor.
To review and understand the District’s financial statements (possibly including the District’s quarterly financial reports).
To assure to the full Trustee Board that the financial statements reflect the District’s financial condition.
8) Trustees’ Audit Committee Role (con’t)
To determine the adequacy of internal controls, including those established for financial information systems.
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.
May provide oversight for review of Conflict of Interest information.
9) Audit Committee’s Duties (working with the College’s Administration & Auditors)
Select the independent auditor.
Meet with the auditor before starting audit.
Meet again with the auditors to review the completed audit and any reports (adequacy of internal controls, management letter of recommendations, and other findings).
Schedule additional meetings with the administration if the auditor has issued a letter identifying any internal control weaknesses.
Present the audit report to the full Board.
Review follow up responses by administration to management letter recommendations.
May monitor the institution’s conflict of interest policy.
10) Sample Questions to ask Auditors
Where is our District financially vulnerable?
How can the Trustees and senior management of the District establish an improved financial environment in the District?
Are there any areas of the audit that District management and the auditor disagree upon?
11) Sample Trustee Audit Concerns
Does the audit find that the District’s financial statements comply with the required governmental Accounting Standards?
Has the auditing firm issued any Findings within the financial audit?
Are there any Notes on Internal Controls concerning the District’s management of the budget and accounting systems?
Is the audit of the District’s financial statements qualified or unqualified?
12) Sample Trustee Audit Concerns
If the District has approved capital improvement project bonds, 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.
13) Questions all Trustees Should Ask
Has your District completed an annual financial audit of the past year’s financial information? If not – why not?
Does the audit find that the District’s financial statements comply with the required governmental Accounting Standards Board Statements No. 34? If not – why not?
Within the Statement of Cash Flows section of the audit is there a net decrease in cash? If yes, what is the District’s plan for overcoming this problem in the next fiscal year?
Has the auditing firm issued any Findings within the financial audit? If so, what will the District’s response be to the findings?
14) Sample of Possible Financial Benchmarks
The % of annual payments for long term debt divided by annual revenues budget should be less than 5%.
The % of the value of deferred maintenance divided by value of entire plant should be less than 10%.
A 5 to 10 year trend line for the total revenues budget.
15) Multi-Year Trends
Measurements:
Deficit Spending
Impacts upon the General Fund Balances
Costs of Retirees Health Insurance Coverage
Long Term Costs of Labor Agreements
Long Term Costs of Debt Service
Enrollment & productivity trends
Condition of Facilities
Example: The % of $ value of total out years for labor agreements divided by current value of labor agreements as compared to the projected COLA % changes.
16) Hire a Well Qualified Staff
The management of the financial program and records of a college is complicated and a college’s financial program is only as good as the people who manage and implement the program. By looking for the lowest cost alternative to manage your program may cost you in the long run.
Take the necessary time needed to hire well qualified staff
Hire for Talent
Respect the staff
17) Key Points
Annual Budget – Establishes college’s direction and expenditure limitations in compliance with Trustee’s vision and policies, state law and system regulations.
Quarterly financial reports – report changes to adopted budget and future financial impacts.
Annual Financial Audit – Evaluates management’s financial information provided during the year and to test compliance with policies, laws, and regulations.
Multi-year Trending – Tracks progress towards future vision of college.
Hire a Well Qualified Staff.
18) Summary
While the financial responsibilities of the Board are not your most important – they are critical to the success of your college and more importantly to your students!
Additionally, most often it is the financial difficulty of a District that has the greatest impact upon the tenure of trustees and senior administrators.
19) Questions
Direct to: mcginnisbi@butte.edu
The following Presentation Notes were also made available at the presentation:
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.
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