STATEMENT OF AUDITING STANDARDS 112 (SAS112)
Communicating Internal Control Matters Identified in an Audit
UC Riverside June 2007
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" 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
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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?
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- 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)
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- SAS 112
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
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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
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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
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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
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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
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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.
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Who is responsible for
implementing internal controls?
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PARTNERSHIP
Principal
Investigator
&
Project
Personnel
Control Units
(Deans/VC
& CFAO)
Central
Offices
(Accounting, Audit &
Departments
(Chair/
Director,
MSO, Staff)
Advisory Services,
AP&B, OR,
etc.)
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Growth in Direct Contract and Grant Expenditures
Fiscal Year 2003/04 to Fiscal Year 2005/06
$80,000,000
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0
State Agencies
Private
Local Government
Federal Government
FY03/04
Source
Federal
Government
Local Government
Private
State Agencies
Total
FY03/04
FY04/05
FY05/06
FY04/05
FY05/06
1 Year %
Increase/D
ecrease
2 Year %
Increase/Decrea
se
$36,970,256
$47,197,544
$53,447,911
13%
45%
$1,553,189
$1,936,147
$2,217,444
15%
43%
$14,358,686
$14,711,554
$13,544,906
-8%
-6%
$5,788,019
$5,985,849
$4,950,031
-17%
(a)
-14%
$58,670,150
$69,831,094
$74,160,292
6%
26%
Source: 2005-06 Annual Report on Contract & Grant Expenditures
(a) 26% increase from FY03/04 13
UCR’s Challenge
Increasing extramural support while
managing risk
Our Goal
Facilitating Faculty Success!
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award close-out
sub-recipient
monitoring
cost sharing
effort
reporting
cost
transfers
POTENTIAL
RISKS
IN C&G
AREA
review of
monthly
statements
physical
inventory
overdraft
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FALL 2006
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C&G Risk: Effort Reports

Symptoms of deficiencies




Major area of concern for Federal
Government
Current Efforts


Incomplete or missing reports
Late reporting
New on-line system coming
Resolution of deficiency

Remove unsubstantiated costs
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C&G Risk: Cost Transfers

Symptom of Deficiency





Major area of concern for Feds
Current Efforts


High volume
Late transfers (may require revised effort reports)
Improper documentation and/or allocation
methodology
Enhancing Business Rules
Resolution of deficiency

Reversal of charges
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C&G Risk: Award Closeout

Symptom of Deficiency




Area of concern for Feds
Current Efforts


Delinquent Financial Reports
Delinquent Technical Reports
Improving notification process
Resolution


Future funding withheld for specific
awards
Funding to institution withheld
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Minimizing Risks in Sponsored Project
Administration

Training



Tools



C&G Workshops (to be expanded)
Ethics Awareness
Enterprise Reporting System
Ledger Recon/Review System
(coming soon)
Policies


C&G Manual
UCR Research Administration Roles
& Responsibilities (in development)
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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
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Minimizing Risks in Sponsored Project
Administration

Timely return of certifications:




Monitor Sub-recipient’s progress on
project compared to billing
statements


Effort Reports
Cost sharing Reports
Impacts Financial Reports and Award
Close-Out
Potential impact on award close-out
Timely submission of Technical
Reports
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SAS112-Campus Departments
General Internal Controls to Minimize Risk
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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
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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
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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
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What to do:
•Control Assessment
•Training
When issues are identified:
1- Self-report
2-Assistance
3-Escalate/Remediate
4-Proactive Approach
Everyone is responsible
When control issues
or policy non-compliance
are recurring and systemic:
It will be transparent
and there will be consequences
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Contacts






Gretchen Bolar, Vice Chancellor-Academic Planning &
Budget gretchen.bolar@ucr.edu
Bobbi McCracken, Asst. Vice Chancellor-Financial
Services bobbi.mccracken@ucr.edu
Mike Jenson, Director-Audit & Advisory Services
michael.jenson@ucr.edu
Bruce Morgan, Asst. Vice Chancellor-Office of
Research bruce.morgan@ucr.edu
Toffee Jeturian, Asst. Director-Audit & Advisory
Services rodolfo.jeturian@ucr.edu
Marc Guerra, Director-Financial Control &
Accountability marc.guerra@ucr.edu
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