STATEMENT OF AUDITING STANDARDS 112 (SAS112) Communicating Internal Control Matters Identified in an Audit UC Riverside June

" Today's audit environment encourages transparency and accountability. Therefore, an integrated campuswide effort is needed to effectively steward the funds entrusted to UCR.” Chancellor Córdova 2

1- Why SAS What is SAS Impact of SAS112 SAS Internal Control 5- Minimizing risk -Sponsored -Sponsored Project Admin Project Admin -Dept. operations -Dept. operations 6- What to do? AGENDA 3

WorldComEnron - American Institute of Certified Public Accountants - American Institute of Certified Public Accountants For non-profit organizations (UCR) For non-profit organizations (UCR) - SAS 112 Why SAS112? - United States Federal Law and SEC For Public Companies For Public Companies -Sarbanes–Oxley (SOX): -Sarbanes–Oxley (SOX): Requires conducting an assessment of the effectiveness of internal controls by management, to be audited and approved by the company’s independent accountants SAS112 is our SOX 4

Northwestern University (2003). Fine = $5.5m Harvard University (2004). Fine = $2.6m Florida International University (2005). Fine= $11.5m University of Alabama Birmingham (2005). Fine =$3.4 m Non-Compliance Fine$ - Contract & Grants Mayo Foundation (Mayo Clinics). Fine = $6.5m University of California (2002). Fine =$1.8 m 5

What is SAS112? Establishes standards for communicating internal control issues relating to: -integrity of financial reporting -compliance with applicable laws and regulation Establishes standards that classifies communicated control issues as: - control deficiencies - significant deficiencies - significant deficiencies - material weaknesses - material weaknesses SAS112 standards have been adopted by the federal agencies and the Government Audit Standards has been updated to incorporate SAS112 6

Impact of SAS 112 on UCR Due to significant changes in the evaluation of control exceptions and more stringent audit standards, UCR is more likely to encounter control issues being identified and reported - - Increased scrutiny - Larger audit samples - More evidence and documentation required during audits -Lower audit materiality thresholds SAS 112 requires disclosure of deficiencies to Regents and others 7

Impacts of deficiencies and weaknesses disclosures: -negative impact on reputation -increased internal and external audits -audit disallowances, fines and penalties -potential impact on resource allocation -negative impact on sponsored project funding 8

Control Issues with - Ledger reconciliation & review - Ledger reconciliation & review - Certified effort reports - Certified effort reports - Cost Transfers - Cost Transfers - Expenditure monitoring - Expenditure monitoring - Budget variance analysis - Budget variance analysis - Cash handling/ Revenue monitoring - Payroll processing - Payroll processing - Timekeeping & billing - Timekeeping & billing - Fiscal Year End Processes - Fiscal Year End Processes Generally, internal controls at UCR are in order and adequate, but there are departments, functions and areas where we noted…. 9

Internal Control Internal control is broadly defined as a process, effected by the UC Regents, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations. Reliability of financial reporting. Compliance with applicable laws and regulations. INTERNAL CONTROL 10 1

Who is responsible for implementing internal controls? 11

PrincipalInvestigator&ProjectPersonnel Departments (Chair/ Director, MSO, Staff) Central Offices Offices ( Accounting, Audit & Advisory Services, AP&B, OR, etc.) PARTNERSHIP Control Units (Deans/VC & CFAO) & CFAO) 12

SourceFY03/04FY04/05FY05/06 1 Year % Increase/D ecrease 2 Year % Increase/Decrea se Federal Government$36,970,256$47,197,544$53,447,91113%45% Local Government$1,553,189$1,936,147$2,217,44415%43% Private$14,358,686$14,711,554$13,544,906-8%-6% State Agencies$5,788,019$5,985,849$4,950,031-17%-14% Total$58,670,150$69,831,094$74,160,2926%26% Source: Annual Report on Contract & Grant Expenditures Growth in Direct Contract and Grant Expenditures Fiscal Year 2003/04 to Fiscal Year 2005/06 (a) (a) 26% increase from FY03/04 13

UCR’s Challenge Increasing extramural support while managing risk Our Goal Facilitating Faculty Success! 14

effortreporting cost transfers overdraft review of monthly statements cost sharing physical inventory sub-recipient monitoring award close-out POTENTIAL RISKS RISKS IN C&G AREA 15

FALL

C&G Risk: Effort Reports  Symptoms of deficiencies Incomplete or missing reports Late reporting  Major area of concern for Federal Government  Current Efforts New on-line system coming  Resolution of deficiency Remove unsubstantiated costs 17

C&G Risk: Cost Transfers  Symptom of Deficiency High volume Late transfers (may require revised effort reports) Improper documentation and/or allocation methodology  Major area of concern for Feds  Current Efforts Enhancing Business Rules  Resolution of deficiency Reversal of charges 18

C&G Risk: Award Closeout  Symptom of Deficiency Delinquent Financial Reports Delinquent Technical Reports  Area of concern for Feds  Current Efforts Improving notification process  Resolution Future funding withheld for specific awards Funding to institution withheld 19

Minimizing Risks in Sponsored Project Administration  Training C&G Workshops (to be expanded) Ethics Awareness  Tools Enterprise Reporting System Ledger Recon/Review System (coming soon)  Policies C&G Manual UCR Research Administration Roles & Responsibilities (in development) 20

Minimizing Risks in Sponsored Project Administration  Timely review of monthly statements Budget to Actual  Anticipate unspent balances or overdrafts Review payroll transactions Regularly meetings/discussion between PIs administrative staff  Immediately report discrepancies Communication Timely resolution 21

Minimizing Risks in Sponsored Project Administration  Timely return of certifications: Effort Reports Cost sharing Reports Impacts Financial Reports and Award Close-Out  Monitor Sub-recipient’s progress on project compared to billing statements Potential impact on award close-out  Timely submission of Technical Reports 22

SAS112-Campus Departments General Internal Controls to Minimize Risk 23

Minimizing Risk-Departmental  Department Head: Oversees and is integrated into the financial management process Ensures proper controls and monitoring procedures are in place Ensures financial reports are accurate and meaningful Ensure SAAs, transactors and reviewers are appropriately trained and supported in their key business process roles 24

Minimizing Risks-Departmental  Timely reconciliation and review of monthly ledgers Budget to Actual review  Analysis of causes for variances Review of payroll transactions by financial staff and responsible manager Regular review of financial reports by department manager and business officer Evidence of ledger reconciliation and review  Timely resolution of errors Frequent and late cost transfers can be a symptom of a deficiency 25

Minimizing Risks-Departmental  Ensure sufficient segregation of duties No one person should have complete control over the key processing functions for financial transactions Provides for prevention and detection  Errors  Inappropriate activities  Post Audit Notification (PAN) Reviews Payroll/Personnel System and UCRFS transactions Timely Adequate 26

What to do: TrainingTraining 1- Self-report 2-Assistance Everyone is responsible Control AssessmentControl Assessment When issues are identified: 3-Escalate/Remediate 4-Proactive Approach When control issues or policy non-compliance are recurring and systemic : It will be transparent and there will be consequences 27

Contacts  Gretchen Bolar, Vice Chancellor-Academic Planning & Budget  Bobbi McCracken, Asst. Vice Chancellor-Financial Services  Mike Jenson, Director-Audit & Advisory Services  Bruce Morgan, Asst. Vice Chancellor-Office of Research  Toffee Jeturian, Asst. Director-Audit & Advisory Services  Marc Guerra, Director-Financial Control & Accountability 28