Sarbanes – Oxley Act of 2002 What does it mean for Higher Ed?
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Sarbanes – Oxley Act of 2002 What does it mean for Higher Ed?






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Sarbanes – Oxley Act of 2002 What does it mean for Higher Ed? Sarbanes – Oxley Act of 2002 What does it mean for Higher Ed? Presentation Transcript

  • Board Member Fiduciary Duty Presented by Galen Howsare Vice President of Administration and Finance [email_address] IASB Convention 2009
  • Iowa School Finance: Five Key Measures
  • Overview
    • What are the financial measures that every board member should know about their district?
  • Overview
    • Equip board members to answer the question “How are we doing financially?”
    • These measures apply to the General Fund – so only part of the equation
    • Not exhaustive but knowing these five will give a fair and accurate representation of the financial health of the General Fund of the school district.
    • Need trend not a single data point.
    • Some are retrospective while others are prospective (and some need to be both).
  • 5. Solvency Ratio
    • What is it?
      • Measures the fund balance (cash) position at the conclusion of the fiscal year.
      • General Fund measure
      • Unreserved/Undesignated General Fund Balance Divided by Total General Fund Revenues
    • What isn’t it?
      • A measure of the limit of spending.
    • Why important?
      • Can impact bond rating
      • Public “understands”
  • 4. Enrollment Trend
    • Finance formula is per pupil – so trend in enrollment is a huge leading indicator of financial health.
    • Look not at just headcount enrollment but also enrollment served.
    • What are the implications of the following two trends?
  • 3. Staff Costs as Percent of Total General Fund
    • Staff costs are the single largest expense in the General Fund.
    • School districts range from 75% to 85% of total General Fund expenditures are on staff.
    • Important because ultimately impacts spending authority.
    • Take out special education staff (ultimately doesn’t impact spending authority).
  • Staff Costs
    • Is this a problem?
  • Staff Costs
    • How about now?
  • 2. Balanced Spending Authority Budget
    • Spending authority measure used during budget preparation.
    • Question: How much can I spend and not cause my Unspent Balance to decline?
    • Annual measure
    • Sets target for expenditure increase.
    • If planning to use Unspent Authority Balance to finance ongoing expenditures you need to figure out how you will sustain.
  • 1. Unspent Balance (Unspent Budget Authority)
    • The single most important measure.
    • Total amount of spending authority remaining at conclusion of fiscal year.
    • Why important? SBRC will not close you down for a negative solvency ratio – but go negative two years and you can be subject to Phase 2 (Russell).
  • 1. Unspent Balance (Unspent Budget Authority)
    • Calculation:
      • Beginning Unspent Balance
      • + Current Year Spending Authority
      • - General Fund expenditures
      • = Ending Unspent Balance
  • Unspent Balance
    • Trend is key
    • Project at least three times during the fiscal year (adopt budget, mid year and then when setting budget for upcoming year).
    • Project into the future – 5 years minimum
    • Tools on IASB website.
    • Use per pupil measures to compare to other school districts
  • Unspent Balance
  • Conclusion
    • 5. Financial Solvency Ratio
    • 4. Enrollment Trend
    • 3. Staff costs as percent of total General Fund Expenditures
    • 2. Balanced Budget for Spending Authority
    • 1. Unspent Balance
  • As directors of a corporate board, what are a school board members’ responsibilities?
    • Decision-making :
        • Policy
        • Required actions
    • Oversight :
        • Monitoring
        • Compliance with legal, policies, reporting
        • Matters suggesting need for inquiry
    • Source: Corporate Director’s Guidebook, 4th Edition
  • Key board member duties
    • Duty of Loyalty
      • “in good faith”
      • “in a manner the director (board member) reasonably believes to be in the best interests of the district”
    • Duty of Care
      • “with the care that a person in a like position would reasonably believe appropriate under similar circumstances?
      • Source: Corporate Director’s Guidebook, 4th Edition
  • Duty of Care - Diligence
    • Attend regularly and participate
    • Review agendas in advance of meetings
    • Become informed from adequate information provided by administration, request more if needed
    • Disclose relevant information to other members
    • Reliance upon counsel, accountants, or others who are acting within their professional or expert competence
    • Monitor compliance with law and policy
    • Evaluation
      • Source: Corporate Director’s Guidebook, 4th Edition
  • Ignorance of the law is not a defense. On January 24, 1996, the Securities and Exchange Commission (SEC) issued a cease and desist order against individual members of the Board of Supervisors of Orange County, California….The Order and Report illustrate the duty and standard of conduct that will be expected of board members when working with the officers, employees, legal counsel, auditors, financial advisors, and other professionals employed by the school board. The Order and Report suggest a duty of care for a prudent school board member when engaging legal counsel and other professionals. Source: Exchange Act Release No. 36,761, Jan. 24, 1996
  • How does Sarbanes - Oxley affect K-12 public school districts? Sarbanes is designed and required for companies registered with the SEC. Purpose: To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. Many believe that the Act is made up of “best practices” related to fiscal and ethical accountability that should be implemented by all organizations. Why? Stakeholder expectations – Board, parents, students, community, fiscal agents
  • Overview (Recommendations - Voluntary)
    • Look to Sarbanes-Oxley for Best Practice
    • Maintain independent auditors-For districts that receive federal funds this is already a requirement through the Government Auditing Standards (Yellow Book).
    • Implement district audit committees
    • Develop written code of ethics policy for administrators
    • Develop and review written internal control processes and procedures
  • Recommendations - Required
    • Both Iowa and Federal law require districts to develop a Whistleblower policy and process
        • Implement a confidential complaint mechanism for employees to communicate concerns about accounting, auditing, or internal control processes .
        • Iowa Code Chapter 70A.29
  • Recommendations - Required
    • Document destruction (18 U.S.C. Section 1519)
        • Makes it a crime knowingly to destroy a document with the intent to obstruct or influence “ the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States…or in relation to or contemplation of any such matter or case .”
  • Board Member Responsibilities
    • Review annual audit and the audit committee’s report and recommendations
      • Ideally should meet with auditor before formally accepting or rejecting the audit
      • Audit-TO and FOR the board
    • Orientation of board members should include financial literacy training
  • Desired State Board Audit Committee Superintendent Business Staff External Auditor
  • Independent Auditors
    • GAO Standards (January 2003) noted that to maintain independence external auditor:
      • Should not perform management functions or management decisions
      • Should not audit their own work or provide services that are significant/material to the audit
    • Federal funding subject to A-133 audits
    • Only audit committee or Board (not Superintendent or Business official) should approve in advance prohibited non-audit services
  • Independent Auditors
    • Prohibited services include: bookkeeping, financial information systems, appraisal services, actuarial services, management or human resource services, investment advice, legal services, and other expert services unrelated to the audit
    • Require a rotation of the lead partner every five to seven years (This DOES NOT require that a district change firms.) Work with the district’s auditor on this issue.
  • District Audit Committee
    • Membership (requirements for a committee status)
      • Recommend 3-5 members (board and public)
        • Must include one board member who is a financial expert-if none exists on the board, then board should appoint a member of the public with the necessary qualifications and/or experience
      • Superintendent, Business Official and other administrators have no voting status
    • Works directly with external auditor
  • Who is a financial expert?
    • A person who has thorough education or experience with knowledge of the following:
    • Understanding of GAAP (Generally Accepted Accounting Practices) and financial statements
    • Experience in the preparation or application of audit statements
    • Experience with internal accounting controls
    • Understanding of audit committee functions
  • Voluntary Recommendations for an Audit Committee
    • Review and recommend the RFP for external auditors
    • Engagement letter should be approved by the Board per Iowa Code since it is a form of contract.
    • Meet with the auditor, review the annual audit and recommend its approval to the full board.
    • Work with the audit firm to accomplish a rotation of the lead partner
    • Recommend the selection of the external audit firm
    • Annually evaluate the performance of the audit services per the RFP (Request for Proposal) specifications
  • Voluntary Recommendations for an Audit Committee
    • Review the code of ethics and conflict of interest policies and determine how compliance will be assured in the district operations
    • Review the confidential complaint mechanism for employees/community members and report summary of findings and recommendations
      • Develop, adopt and disclose a formal process to deal with complaints and prevent retaliation
      • Take employee complaints seriously, investigate the situation, and correct problems or justify why corrections are not necessary
  • Voluntary Recommendations for an Audit Committee
    • Review the adequacy of the internal controls with the Superintendent and Business Official
    • Monitor risk assessment of internal accounting controls, property, board policies, etc.
  • Code of Ethics
    • General statements that describe the intended high standards of ethical conduct
    • Specific topics may include:
      • Conflicts of interest
      • Gifts
      • Travel and expense reporting
      • Use of consultants, agents and lobbyists
      • Use of district-owned equipment
      • Political contributions and activities
      • Public utterances on behalf of the district
  • Superintendent and Business Official
    • Sign-off on code of ethics
    • Set the tone of high standards in the culture
    • Attest to the adequacy of the district’s internal controls
    • Certify that they have reviewed the financial reports
  • Example of Statement Attesting
    • The (name report) of the Happy CSD for the fiscal year ended June 30, 2009, is submitted. Responsibility for the accuracy and completeness of the presentation rests with the officials of the District.
    • We believe that the data is accurately presented in all material respects; that the data is presented to fairly set forth the financial activity of the ____ fund in compliance with the Iowa Code; and that all necessary disclosures have been included in order to enable the board to gain the maximum understanding of the District’s use of these funds in accordance with applicable laws and policies.
    • Respectfully submitted,
    • signed by the Superintendent and SBO (School Business Official)
  • Internal Control -Technical
    • A process, effected by an entity’s governing body, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
      • Effectiveness and efficiency of operating processes
      • Reliability of financial reporting
      • Compliance with applicable laws and regulations
  • Internal Control - Easy
    • Making sure that things work the way they are suppose to work
    • TRUST but VERIFY
  • Components of Internal Control
    • Control environment - sets the tone of an organization, influencing the control consciousness of its people
    • Risk assessment - variety of risks from external and internal sources
    • Control activities - policies and procedures that help ensure management directives are carried out
    • Information and communications - pertinent information must be identified, captured, and communicated in a form and timeframe that enables people to carry our their responsibilities
    • Monitoring - a process that assesses the quality of the system’s performance over time
  • Are things working the way you intend?
    • Examples: Money handling
      • Coaches and teachers taking money for t-shirts (receipts)
      • Double counting with two people
      • Deposit money immediately
      • Parent group finances assistance
      • Athletic/Activity fund activities
      • Credit cards
      • Ticket taking
      • Gifts/Donations
  • Are things working the way you intend?
    • Examples-Accounting
      • Written authorization-budget changes, checks, recording revenues
      • Billings (tuition, open enrollment, other)
      • Properly designed records
      • Security
        • Controlled access
        • Physical security
        • Backup of computer records
        • Disaster recovery
      • Segregation of duties
  • Are things working the way you intend?
    • Examples-Accounting (continued)
      • Periodic reconciliations
        • Cash
        • Accounts payable-totals with individual
      • Periodic verification
      • Analytical review-reasonableness
      • Preparation with GAAP
  • Risk Management
    • Annual report that reviews loss data, insurance coverage and premiums and current risk management activities .
    • Chemical inventory assessment (Rehab the Lab)
    • Claim reporting
    • Risk manager signoff on contract reviews
    • Ergonomics assessment-checking furniture
    • Tracking changes in property values/uses of facilities
    • Fall protection program-policy and training
    • Loss prevention-tracking concerns and corrective action
    • Workers compensation
    • Playground inspection
  • Risk Management
    • Safety committees to review procedures and policies and offer corrective action
    • Safety Training checklist-ensure all new employees received required training
    • Pool chemical monitoring (certified pool operator)
    • Disaster recovery plan for electronic data
    • Record management-fire proof, off site,
    • Cash handling audits
    • Electronic funds transfer-security, passwords
    • Check fraud protection
    • Fine arts-insure to value, check district owned instruments
  • Risk Management
    • Human Resource audit
    • Driving students-check adults for valid drivers license
    • Crisis management procedures-drills and testing
    • Certificates of insurance-reviewing, tracking, additional insured, payment contingent on certificate
    • Standard insurance clauses
    • Volunteers-background checks,
    • Incentive system for people who report safety concerns
    • Source: Public Entity Risk Institute
  • Three Steps to Fiduciary Responsibility
    • Crafting Policy to Guide Fiscal Planning
    • Crafting Policy to Safeguard Fiscal Condition
    • Monitoring Fiscal Management
      • Source: Carver Guide 3
  • Fiscal Planning
    • Budget
      • Certified Budget (April) – legal requirement that sets maximum spending limits and property tax rates
      • Line-item Budget (August-October) – management uses to allocate dollars to individual accounts in line with board expectations/success criteria
      • Board Budget-Typically higher level reporting by function, location or object summaries
      • Source: Carver Guide 3
  • Board Member Responsibility
    • You are NOT a budget manager and should not operate at the level of detail as the management staff.
      • You should not be selecting pens and toner cartridges.
      • Exercise appropriate control so that the right things occur and the wrong things don’t
      • Source: Carver Guide 3
  • Financial Goal Considerations
    • What should be relationship of revenues and expenditures?
    • How are revenues and expenditures projected? (conservative-what does that mean?)
    • What are the right and wrong things for spending?
      • Source: Carver Guide 3
  • Financial Goal Considerations
    • What are the targets for financial solvency ratio, unspent balance, fund balance, and other measures of financial health?
      • Solvency Ratio-5%-10% recommended
      • GFOA recommends 1-3 months of fund balance, i.e. 8.67%-25%
      • No official guidance on unspent
    • How much cash should be available?
    • Inter-fund loans?
    • Use of reserves?
  • June 2002
  • Financial Goal Considerations
    • Projections (recommended 3-5 years)
      • Use informed instinct or (Best/Worse Case)
      • Keep track of assumptions that match projection
        • Enrollment
        • Revenue and expenditures
        • Spending Authority
        • Fund Balance
    • Others
  • Ummm, let’s see! CIETC…no audit committee, no code of ethics, poor Internal controls, poor tone of control set by executives, reasonableness???, no fiduciary monitoring by board…WOW! ENRON, WORLDCOM, Martha, Ramona, … move over!!! Don’t let your name or district be added to this list. Start NOW to begin implementing the best practices from the Sarbanes-Oxley Act of 2002 and other professional organizations.
  • Resources
    • American Bar Association (2004). Corporate director’s guidebook (4th ed.). Chicago, IL: Committee on Corporate Laws.
    • Brasch, W.J. (2004). Sarbanes-oxley and local school districts. School Business Affairs. May 2004.
    • Carver, J. (1996). Three steps to fiduciary responsibility. San Francisco, CA: Jossey-Bass.
    • Gauthier, S.J. (1996). Evaluating internal controls-a local government manager’s guide. Chicago, IL.: Government Finance Officers Association.
  • Resources
    • Iowa Code Chapters 11.6, 274.7, 279.29-279.31, 280.14, 721
    • McCladrey & Pullen. (2004). Audit committee guide for state and local government units. McGladrey and Pullen: Bloomington: Minnesota.
    • Root, S. J. (1998). Beyond COSO: Internal control to enhance corporate governance. John Wiley and Sons, Inc.: New York.
    • Smoley, E.R. (1999). Effective school boards: Strategies for improving board performance. San Francisco, CA: Jossey-Bass.