1. STATEMENT OF AUDITING STANDARDS 112 (SAS112)
Communicating Internal Control Matters Identified in an Audit
UC Riverside June 2007 1

2. " 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

3. AGENDA 1- Why SAS112 2- What is SAS112 3- Impact of SAS112
4- Internal Control
5- Minimizing risk
-Sponsored
Project Admin
-Dept. operations
6- What to do? 3

4. Why SAS112? SAS112 is our SOX - United States Federal Law and SEC
For Public Companies
-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
WorldCom
Enron
Why SAS112?
SAS112 is our SOX
- American Institute of Certified Public Accountants
For non-profit organizations (UCR)
- SAS 112 4

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

6. 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
- material weaknesses
SAS112 standards have been adopted by the federal agencies and the Government Audit Standards has been updated to incorporate SAS112 6

7. SAS 112 requires disclosure of deficiencies to Regents and others
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

8. 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

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

10. Effectiveness and efficiency of operations.
INTERNAL CONTROL
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. 10 1

11. implementing internal controls?
Who is responsible for
implementing internal controls? 11

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

13. Growth in Direct Contract and Grant Expenditures
Fiscal Year 2003/04 to Fiscal Year 2005/06
Source
FY03/04
FY04/05
FY05/06
1 Year % Increase/Decrease
2 Year % Increase/Decrease
Federal Government
$36,970,256
$47,197,544
$53,447,911
13%
45%
Local Government
$1,553,189
$1,936,147
$2,217,444
15%
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
$74,160,292 6%
26%
(a)
Source: Annual Report on Contract & Grant Expenditures
(a) 26% increase from FY03/04 13

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

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

16. FALL 2006 16

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. SAS112-Campus Departments
General Internal Controls to Minimize Risk 23

24. 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

25. 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

26. 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

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

28. 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