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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
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Higher education in transition
Rapid change: Industry
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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
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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
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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)
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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
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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
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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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