Audit or Review with SACS Accreditation?

The Southern Association of Colleges and Schools Commission on Colleges (SACS COC) is one of seven regional accreditation agencies recognized by the United States Department of Education (USED) and is charged with accreditation of universities in southern states, including Texas. SACS undergoes a Continued Recognition Review by the USED every 5 years. SACS COC requires universities to be reaccredited every 10 years. Under SACS COC’s The Principals of Accreditation and its Resource Manual for Principals of Accreditation, Core Requirements, Section 2.11 specifies audited or reviewed financial statements. The Texas State Auditors’ Office performs the Audit for the State of Texas Comprehensive Annual Financial Report (CAFR), which includes all state universities. SACS does not accept the State’s CAFR and the State Auditors’ Office (SAO) has not issued separate audits or reviews for universities in the past. The SAO has delegated responsibility for conducting audits and reviews associated with SACS accreditation to Belt Harris Pechacek. A university can request that its audit or review be delegated to Belt Harris Pechacek by following the process at https://www.sao.texas.gov/apps/ear.

SACS allows either reviewed or audited financial statements. A university should determine two to three years prior to the accreditation if an audit or review is preferable based on its specific situation. A review is considerably less in scope than an audit and, consequently, is less expensive, requires less staff time, is faster from start to finish, and is less likely to result in audit/review findings reported in the management letter. An audit is far more likely to reveal systemic problems resulting in a management letter, takes longer to complete and will be much more expensive. However, a person knowledgeable about the audit and review processes will likely weight the credibility of an audit versus a review by a factor of 10 to 1 or more. The pros and cons associated with a review and audit are significant and should be carefully considered. Belt Harris Pechacek can assist with identifying the key factors to aid in the service level selection process.

The risk of adverse findings with an audit and the impact to the accreditation process can be mitigated by having an audit conducted one year prior to the accreditation process. Whereas most governments are audited annually each year since there creation, must universities in Texas have never been audited in the life of the institution, which maybe approaching 100 years. The likelihood of problems is high, so identifying the problem in sufficient time to identify, correct, and re-report resolution of the matter through the audit process is key. The start-early approach should mitigate the “finding” risk to the accreditation process, and, perhaps more importantly, demonstrate a much more in-depth governance and accountability process by conducting an audit and correcting findings. For example, Texas Southern University’s (TSU) theft by its former president and other financial difficulties cast a shadow on the TSU and management correctly elected to have an audit rather than a review. While the initial audit performed by Belt Harris Pechacek noted numerous management letter findings, TSU’s management worked to resolve the issues noted that were cleared in subsequent audits, which in part led to the SACS probationary status being lifted.

Excerpts from SACS COC’s Principles of Accreditation and Resource Manual for Accreditation are below:

http://www.sacscoc.org/pdf/2012PrinciplesOfAcreditation.pdf
http://www.sacscoc.org/pdf/Resource%20Manual.pdf

SACS COC The Principals of Accreditation

2.11

2.11.1 The institution has a sound financial base and demonstrated financial stability to support the mission of the institution and the scope of its programs and services. The member institution provides the following financial statements: (1) an institutional audit (or Standard Review Report issued in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA for those institutions audited as part of a systemwide or statewide audit) and written institutional management letter for the most recent fiscal year prepared by an independent certified public accountant and/or an appropriate governmental auditing agency employing the appropriate audit (or Standard Review Report) guide; (2) a statement of financial position of unrestricted net assets, exclusive of plant assets and plant-related debt, which represents the change in unrestricted net assets attributable to operations for the most recent year; and (3) an annual budget that is preceded by sound planning, is subject to sound fiscal procedures, and is approved by the governing board.

SACS COS 2012 Edition Resource Manual for Principals of Accreditation

2.11.1 The institution has a sound financial base and demonstrated financial stability to support the mission of the institution and the scope of its programs and services.

The member institution provides the following financial statements: (1) an institutional audit (or Standard Review Report issued in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA for those institutions audited as part of a systemwide or statewide audit) and written institutional management letter for the most recent fiscal year prepared by an independent certified public accountant and/or an appropriate governmental auditing agency employing the appropriate audit (or Standard Review Report) guide; (2) a statement of financial position of unrestricted net assets, exclusive of plant assets and plant-related debt, which represents the change in unrestricted net assets attributable to operations for the most recent year; and, (3) an annual budget that is preceded by sound planning, is subject to sound fiscal procedures, and is approved by the governing board. Audit requirements for applicant institutions may be found in the Commission policy “Accreditation Procedures for Applicant Institutions. (Financial resources)

Rationale and Notes

Although missions may vary among institutions, a sound financial base and a pattern of financial stability, provide the foundation for accomplishing an institution’s mission, regardless of changing economic conditions. Adequate resources allow for deliberate consideration of the effective use of resources to fulfill that mission. It is reasonable that the general public, governmental entities, and current and prospective students expect sufficient financial and physical resources necessary to fulfill the institution’s mission.

Note: The financial statements required in Core Requirement 2.11 are necessary, as a minimum, to provide documentation of financial resources and stability.

Item (2) above requires a statement of financial position of unrestricted net assets, exclusive of plant assets and plant-related debt, which represents the change in unrestricted net assets attributable to operations for the most recent year. Unrestricted net assets (UNA) are assets not restricted to specific use by donors, to be used as the institution deems appropriate. UNA include assets of varying liquidity (availability). Some assets, such as cash, might be very liquid. Plant assets, such as buildings and equipment, might be difficult to sell to meet obligations. The purpose of calculating UNA exclusive of plant and plant-related debt (UNAEP) is to determine the level of assets available to meet day-to-day obligations of the institution. There is no prescribed format for this schedule. It must be multi-year and the content is defined by the standard: unrestricted net assets less plant, net of depreciation and plant-related debt. The definition of plant can be problematic. Institutions should work with their auditors to properly classify assets as either plant or investment. If an asset can be easily sold, and is not intended to be held indefinitely, it may be reasonable to exclude it from plant. However, if an asset is not easily sold and if the institution does not intend to sell it in the foreseeable future, it may be appropriate to include it in plant for this calculation. Institutions should be guided by the question, “Is the asset in question reasonably available to meet general operational obligations?” In general, board designated unrestricted net assets would be included as unrestricted net assets for the purpose of this schedule. Plant-related debt is generally debt used to expand or refinance buildings, improvements, equipment, or other plant assets. Debt obtained to fund operational deficits, even if secured by plant, should not be included in plant-related debt. For purposes of this calculation, plant-related debt may not exceed plant, net of depreciation.

Relevant Questions for Consideration

  • How does the institution demonstrate financial stability?
  • How does the institution demonstrate a sound financial base?
  • What evidence shows that the institution is living within its financial means?
  • What evidence is there that financial behaviors are sustainable?
  • If financial behaviors have eroded the overall financial base or stability of the institution, what are they and why has this happened?
  • Is the institution borrowing to support day-to-day operations?
  • Are audited financial statements, or standard review reports, prepared in accordance with generally accepted accounting principles and all FASB or GASB standards?
  • How is the institution’s budget approved?
  • What is the balance of UNAEP? How has it changed over time? If it is falling, why?
  • If there is a deficit, what has created the deficit? An overinvestment in plant? Operational deficits? Purchases of property and equipment?

Documentation
Required Documentation, if applicable

  • Audited financial statements, including footnotes, for the most recently ended fiscal year prior to the due date of an institution’s compliance certification, or, a Standard Review Report, with individual institutional financial information, for the most recently ended fiscal year end prior to the due date of an institution’s compliance certification
  • A written management letter specific to the institution for the most recently ended fiscal year prior to the due date of an institution’s compliance
  • Statement of Unrestricted Net Assets exclusive of plant and plant-related debt, which represents the change in unrestricted net assets attributable to operations for the most recent year
  • The current annual budget (summary) and evidence of sound budget planning
  • Documentation of board approval of the budget
  • A multi-year statement of unrestricted net assets that matches audited financial statements showing the exclusion of plant assets, net of depreciation and plant-related debt, resulting in UNAEP; the change in UNAEP over at least a two-year period

Examples of other Types of Documentation

  • Rating agency reviews with special attention to any upgrades or downgrades in bond ratings (if applicable)
  • Approved, amended and actual budget summary totals for the past three years
  • Copies of contribution agreements that affect the financial stability of the institution
  • Evidence of a sound financial base and of financial stability, which may include ratio analysis based on audited financial statements (e.g., standard ratios such as the CFI (composite financial index), current ratio, or other standard ratios (If benchmarked, please include source of benchmark.)
  • Trend reports that represent a sound financial base and stability such as enrollment, endowment return, state appropriations, etc.

Robert Belt, CPA, Managing Partner

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