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James E. Morley, Jr.
September 23, 2002
Salt Lake City, Utah
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Presentation Overview
• Part I - Higher education in transition
• Part II - Current national issues
• Part III - Internal audit: Today and the future
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Higher education in transition
• Rapid change: Industry
• Cost/price increases: Funding shortfalls
• Accountability
• Competition
• Rapid change: Expectations
4

Higher education in transition
Rapid change: Industry
5

Enrollment in Higher Education,
1940-2002
Source: Department of Education via Chronicle of Higher Education Almanac
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
Year
19
80
19
85
19
90
19
95
20
00
20
02
Public
Private
Total
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Growth in Higher Education
• Square Footage
– 1950s - 500 million
– 1980s - 3 billion
– 1990s - 4 billion
• New Construction
– Between 1994 & 1996 - $12 billion
– Projections for 2010
• Additional $200+ billion to build

Higher education in transition
Cost/price increases: Funding shortfalls
8

Undergraduate Tuition at Colleges and
Universities, 1940 - 2001
16000
14000
12000
10000
8000
6000
4000
2000
0
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
01
Year
Source: Chronicle of Higher Education Almanac 2001
Public
Private
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Source: Digest of Education Statistics, 1999, National Center for Education Statistics
%
50
40
30
20
10
0
1980-81 1985-86 1990-91 1996-97
Tuition and Fees
State Appropriations
Sales and Services
Other
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45%
40%
35%
30%
25%
20%
15%
SCLT
SCHT
LCU
All
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Higher education in transition
Accountability
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Accountability
• Scrutiny of costs, salaries, tenure, graduation rates, and curriculum
• School-to-work transition
– rise in professional education
• Minority retention
• For-profit comparisons
– inefficient operations
– unresponsive structure
– underutilized technology

Higher education in transition
Competition
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A Competitive Environment
• Competition for students and for resources
– Increase in tuition discounting and faculty salaries as a result
• Customers (students) expecting and demanding more from institution
– Increased attention to student services
• Market segments fragmenting
– Increasing niche competition
• Competition from distance learning
• Rise of for-profit schools
15

Higher education in transition
Rapid change: Expectations
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Higher education in transition
• A consumer-driven marketplace
• Consumers (better called stakeholders) place constant and competing demands
• Technology overlay
• Globalization
– Terrorism
– Disease
– Culture
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Current national issues
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Current national issues
• War against terrorism & homeland security
• Tax issues and accounting-related
• Federal regulations
• Technology
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War against terrorism and homeland security
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Homeland security:
Impact on colleges and universities
• Foreign students and visitors
• Sharing of information with law enforcement and privacy concerns
• IT security
• Laboratory security and treatment of biohazards
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Homeland security:
New federal laws
• USA Patriot Act (enacted October 26, 2001)
• Enhanced Border Security and Visa Entry Reform Act
(enacted May 14, 2002)
• Public Health Security and Bioterrorism
Preparedness Act (enacted June 12, 2002)
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Homeland security:
USA Patriot Act
Information sharing:
This legislation provides simplification for federal officials to receive court orders for student records and amends FERPA to permit “emergency disclosure.”
• Calls for full implementation of INS foreign student tracking system (SEVIS)
• With court order, Feds investigating terrorism may obtain business and student records
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Homeland security:
USA Patriot Act (cont’d)
Information sharing:
Updates surveillance laws to cover today’s communications —e-mail, voice mail, etc.
• Makes it easier for law enforcement to acquire
“routing” information (pen registers, trap and trace), and relieves institutions of liability
• May result in increased requests for information
24

Homeland security:
Enhanced Border Security and
Visa Entry Reform Act
• Enhancements to SEVIS
– Re-certification of all institutions w/ biennial reviews
– Additional information on foreign students
– Notification requirements between Department of
State, INS, and institutions to track student entry, enrollment, and changes in status
• Interim notification system by 9/14/02
• New background checks for visa applicants from countries that sponsor terrorism
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Homeland security:
Student and Exchange Visitor
Information System (SEVIS)
• Problems for campuses with large foreign student populations
• Batch interface not yet available for institutions that will not key information directly into system
• Web-based system for preliminary enrollment went live July 1; institutional reporting not mandatory before January 30
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Homeland security:
Public Health Security & Bioterrorism Preparedness Act of 2002
– Select agent list to be reviewed at least biennially
– Regulations will cover possession and use, not just transfers, of select agents
– Tighter controls, including federal background checks on persons allowed access to select agents
– Broad inspection authority for HHS
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Homeland security:
Social security requirements for
INS verification
• New guidance asks INS to issue verification based on review of passports and related documents for foreign applicants for SSNs
• SSA estimates new step will add 3-12 weeks to receipt of SSN
• Campus issuance of “temporary” nine-digit identifiers to address internal payroll unofficially acknowledged by SSA
• Check SSA website for up-to-date guidance
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Department of Homeland Security:
Proposed
 The administration’s five organizational categories proposed for the new department include 24 government entities
 Border and Transportation
 Emergency Preparedness and Response

Chemical, Biological, Radiological and Nuclear Countermeasures
 Information Analysis and Infrastructure Protection
 Secret Service

Sixty-one Congressional committees and subcommittees now have authority over the 24 organizations likely to be merged into the new department
 And, at present, the House Government Reform and Senate Governmental
Affairs committees have general oversight authority
• Source: Congressional Quarterly
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Tax issues and accounting-related
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Tax issues:
Recent IRS actions
• Memo on FICA withholding for medical residents
• Final rules published for:
– Intermediate sanctions
– Corporate Sponsorships
• Re-proposed rules on 1098-T reporting
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Tax issues:
FICA Rules for medical residents
• Memo from IRS chief counsel indicates residents not eligible for student FICA exemption (January 24,
2002)
• Rationale:
– Most services provided by residents are treated as on-the-job training, not part of study program
– Therefore not eligible for student FICA withholding exemption
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Tax issues:
Final rules on corporate sponsorships
• Safe harbor for qualified sponsorship payments
• Exclusive sponsorships allowed
• Exclusive provider arrangements not in safe harbor— but not automatically subject to UBIT
• EO’s web site can link to sponsor’s site, but not endorse it
• Rules published 4/25/02 Federal Register, and are applicable for payments solicited or received after
December 31, 1997
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Tax issues:
IRS Re-proposes 1098-T reporting requirements
• Eases reporting burden
• Repeals requirement to collect name / SSN of individuals claiming student as dependent
• Allows reporting of aggregate amount of qualified tuition / expenses or amounts billed
• Prior year reporting limited to adjustments to amounts previously reported —not all refunds
• Removes requirement to report on individuals ineligible for benefit
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Tax issues:
IRS Re-proposes 1098-T reporting requirements (cont’d)
• Comments due July 29 – see web site for NACUBO response
• Effective date of new regulations will be for tax year
2003 (1098-Ts that will be filed in early 2004)
• Final rules expected by end of 2002
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Accounting-related: GASB Standards
• GASB Statement No. 34
• Basic Financial Statements-And Management’s
Discussion & Analysis-for State and Local
Governments
• GASB Statement No. 35
• Amends GASB34 to include Public Colleges and Universities
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GASB Standards (cont’d)
• GASB Reporting Model Implementation Guides
– Two separate guides developed by GASB staff
(April 2000 and January 2002)
– Special NACUBO guide issued January 2001 for public colleges and universities
• GASB Statement No. 37 - Omnibus Statement
– Addresses problems created by GASB34 and
GASB35
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GASB Standards (cont’d)
• GASB Statement No. 38 - Note Disclosures
• Significantly modifies required disclosures
• Eliminates some, adds others
• Debt, legal issues, payables/receivables
• GASB Statement No. 39 – Affiliated
Organizations
• Applies to foundations and other entities supporting public institutions
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Accounting-related: GASB Projects
• Deposit and investment risk disclosure
• Other post-employment benefits
• Conceptual framework
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Accounting-related: FASB Standards
• FASB Statement No. 141 - Business Combinations
– Excludes not-for-profits
• FASB Statement No. 142 - Goodwill and Intangible
Assets
– Application to NFPs deferred until NFP combination project is complete
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FASB Standards (cont’d
• Not-for-profit business combinations
• Measuring financial instruments at fair value
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Accounting-related: AICPA Project
• Exposure draft revises rules for Property,
Plant & Equipment accounting
• Specifies expenditures which qualify for capitalization
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Accounting-related:
Sarbanes-Oxley Act of 2002
• Creates new, independent regulatory body, the Public Company
Accounting Oversight Board (PCOAB)
• Changes to ensure FASB independence in setting national accounting standards
• Auditor independence requirements mandated for audits of publicly traded companies
• New corporate responsibilities and restrictions for CEOs and
CFOs
• Focus on greater disclosure and transparency in financial reporting, internal controls, ethics, audit committee expertise
• Stricter provisions and for corporate fraud and white-collar crime
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Possible future actions
• Increased disclosure: GASB Statement 39 (issued
2002)
• GASB performance measures “experiment”—coming
(end —2002)
• FASB mandated study of principles-based accounting financial reporting system (due July 2003)
44

Professional & standards-setting groups
• AICPA
• FASB
• GASB
• PCAOB
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Federal regulations
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Federal regulations: ED – Title IV
Program eligibility rules
• Replace the 12-hour rule with a one-day rule
• Clarify provisions for incentive compensation and identifies “safe harbor” activities for student recruiters
• Clarify need to take attendance in order to comply with return of
Title IV funds requirements
• Amend overpayment rules to permit students owning small amounts to retain their program eligibility
• Expand from 90 to 120 days for making late disbursements and require institutions to offer them to students who complete the period of enrollment
• Eliminate the rule for institutions to confirm the receipt of notices sent to borrowers (or parents for PLUS loans) that loan funds have been credited to students’ accounts
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Federal regulations:
OMB Federal Financial Assistance
Management Improvement Act of 1999
• Proposed revisions to Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations
• Proposal for a standard format for federal agency use in announcing discretionary grant and cooperative agreement funding opportunities
• Proposed standard data elements for federal agency use in creating grant funding opportunity announcement summaries under the E-Grants initiative
• Proposed revisions to three OMB cost principles circulars (A-21,
A-87, A-122) to clarify ambiguous language in the interpretation of similar costs
• Proposed revision to Circular A-110, Uniform Administrative
Requirements for Grants and Agreements with Institutions of
Higher Education, et al
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Federal regulations: New opportunity to assess regulatory costs, impacts
• A new administrative policy will allow regulated entities and the public to challenge agency rules and the accuracy of the data behind them.
• A little-known provision included as a rider in the
FY2001 appropriations bill for Treasury and General
Government requires all federal agencies to ensure
“the quality, objectivity, utility, and integrity of information” they produce.
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Issues in 2002:
Status of Congress
• Late July initiatives included approval of new
Homeland Security Agency and passage of
Corporate Accountability Bill
– Corporate Accountability Bill affects only corporations directly, including creation of an independent oversight board loosely attached to the SEC
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Technology
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Technology: 2002 Issues
• Broadband access
• Distance education and federal student aid
• Information technology authorization
• Intellectual property
• Network security
• Privacy
• Workforce development
• FY’03 funding priorities
52

Technology:
Higher Education Information
Technology Alliance (HEIT)
• Five years old; convened by NASULGC and
EDUCAUSE
• Represents higher education’s collective interests in federal information technology policy
• Hosts annual forum to share information and formulate legislative issues agenda
• USA Patriot Act, cyber security legislation, and homeland security activities have far-reaching implications for higher education
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Technology: HEIT Alliance members
AACC
AASCU
ACE
AAU
Association of
Research Libraries
NAICU
EDUCAUSE NASULGC
Internet2 University Continuing
Education
Association
NACUBO
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Internal audit: Today and the future
Two key themes…
• Senior financial/business officers’ perspectives on internal audit
• Adding value as an internal auditor
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Senior business/financial officers’ perspectives
• Budget range: $140 million to $2.4 billion (most over
$1 billion)
• Five publics, five privates
• Staff size (professional)
– 1-12
– One institution fully outsourced except for Director
– One institution had no internal audit function
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Senior business/financial officers’ perspectives (cont’d)
• Reporting relationships
– Nine of ten IA directors report to a senior staff member for administrative purposes
– One reports directly to the Audit Committee
• In-house or outsourced?
– One is fully outsourced but Director is internal staff
– All have considered at one time
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Senior business/financial officers’ perspectives (cont’d)
Yearly plan development
– Internal development and review, Audit Committee approval
– Each has various approaches to risk assessment – many with multi-year planning
– Increasing emphasis on advisory and investigation work
– Proactive follow-up by senior management
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Adding value as an internal auditor
• Be a partner
– Identifying risks
– Identify solutions
– Propose appropriate controls
• Follow best practices
– Be “the” expert on process and good management practices
• Effective communications
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Adding value as an internal auditor
(cont’d)
• Provide management advisory services
– Enterprise wide risk assessment
– Policy interpretation and early procedural guidance
• Educational resource
– Training
– Systems development
• Member of cross functional teams
– Support recommendation implementation
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Adding value as an internal auditor
(cont’d)
From “The Extraordinary Higher Education Leader”
– Think like the President/Chancellor/CFO
– Unlearn what has made you successful
– Develop your total intelligence
– Build and manage key relationships
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Think like the
President/Chancellor/CFO
• Effective resource gathering, allocation, and control
– State and federal grants
– Tuition discounting
– Development
• Compliance
– Tax-related
– Research
– Social legislation
• Technology related
• Homeland security
– Business continuity
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Unlearn what has made you successful
• Ask others for feedback
• Let go of detail – think systemically
• Focus on design, facilitation, and motivation
• From problem-solving to capacity-building
• Build support before issuing a report
64

Develop your total intelligence
• Develop and maintain a balanced lifestyle
• Heart knowledge
– Know yourself emotionally
– Ability to understand others’ intentions and behaviors
– Build on your strengths
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Build and manage key relationships
• Who are they? Find out!
– Audit committee, plus
– President
– CFO and senior staff
– Departmental staff
– External auditors
– State and federal auditors
– Regulators
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Success depends on:
• Regular, systematic innovation and change
• Influencing senior management and the governance process
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NACUBO Website http://www.nacubo.org/presidents_corner
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