March 20, 2003
TO:
Members of the Facilities and Finance and Management Committees
FROM:
Stephen McAllister, Associate Commissioner
SUBJECT:
OHE Internal Audit Department Activity Report for the Quarter Ended
12/31/02
Reviews Completed
URI
o Follow-up Review of Internal Controls Over Revenue at the University of
Rhode Island Health Services- Report issued. No material findings.
Proprietary School Financial Reviews
o Lincoln Technical (formerly Computer Ed)- Quarterly Review 3/31/02.
o RI Beauty Academy- Financial reviews in connection with a change of
ownership.
Reviews In Progress
URI
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Review of Payroll Systems at URI – Draft report is being discussed with
University management.
Review of Fraternity, Sorority, and Graduate Student Housing Fire SafetyAwaiting management response to draft report.
Convocation Center/Skating Rink Project Management Review- The draft
report is being reviewed by OHE Legal.
Review of CPRC Business Relationship With Pro-Change- The draft report is
being reviewed by OHE Legal.
Upcoming Reviews- FY03 Q2
OHE
o Bond Disbursement Review- To evaluate internal controls over revenue bond
expenditures throughout the system.
Members of the Facilities/Finance Committees
March 20, 2003
Page 2
URI
o Review of Cash and Petty Cash Funds – To evaluate internal controls over and
the necessity for cash and petty cash funds maintained by the University.
RIC
o Review of Payroll Operations- To assess internal controls over the three payroll
systems at the College.
CCRI
o Review of Construction Change Orders- To assess the adequacy of internal
controls over the issuance and management of change orders to construction
projects at the College.
Other Developments and Projects
Statement on Auditing Standards (SAS) 99- Consideration of Fraud in a Financial
Statement Audit
SAS 99 is effective for our FY03 financial audit and will result in a number of new
and/or expanded test procedures. Of primary concern to the Board and to senior
management is the requirement for the external auditors to ask the Board and
management about the risks of fraud within the organization. The responses to these
enquiries will be used to determine the nature and extent of testing the external auditors
will perform.
Those who may be questioned include the Finance Committee Chair (de facto Audit
Committee Chair), the Commissioner, Associate Commissioner Finance and
Management, institution presidents and business vice-presidents, in-house legal counsel,
and internal audit. Key topics to be covered include management’s:
o Knowledge or suspicion about possible fraud or awareness of any allegations of
fraud
o Understanding about the risks of fraud in the entity and the programs in effect to
mitigate or deter fraud
o Communications to employees on its views on business practices and ethical
behavior
o Reports to the Finance Committee on the effectiveness of internal controls in
preventing and detecting fraud
Internal Audit will provide updates on these issues in the upcoming months.
Members of the Facilities/Finance Committees
March 20, 2003
Page 3
Sarbanes-Oxley Act
Congress enacted the Sarbanes-Oxley Act on July 30, 2002 to improve corporate
governance and internal controls. While the act only applies to publicly-traded companies
listed with the SEC, many of its provisions are regarded as “best practices” and are being
adopted by governmental and non-profit organizations. A brief summary of those
provisions of the act most applicable to public higher education is attached for your
information.
GASB 34/35 Implementation and Annual Financial Audits
GASB Statements Number 34 and 35 were implemented on schedule. Annual financial
audits were completed on schedule. The three institutions received unqualified (clean)
opinions for the first time. No financially material management letter comments were
received. At all three institutions, KPMG commented on the need to align the State
budgetary system with the accrual accounting methodology now required for financial
reporting.
GASB 39 Implementation
GASB Statement Number 39 requires that public institutions with fund raising or other
affiliated organizations will have to include them as component units in the institutions’
financial statements if they meet certain criteria. The foundations at the three institutions
are likely to meet these criteria. Adding the resources of these organizations to the
institutions’ financial statements may confuse readers about the real financial status of the
institutions. A project team has been formed to identify what affiliated organizations
qualify for the new GASB standard and to coordinate this implementation.
System Insurance Analysis
The project team from the three institutions and OHE will perform an overall risk
analysis on the system to determine the adequacy and efficiency of current insurance
policy coverage.
URI Indirect Rate Assist
IAD, at the University’s request, is reviewing the documentation supporting URI’s
indirect rate request to the US government.
Fifth Annual State Accountants and Auditors Institute- 10/2/02
IAD, in conjunction with the State Police Financial Crimes Unit, presented a session on
fraud indicators.
Members of the Facilities/Finance Committees
March 20, 2003
Page 4
Stewardship Reports
The 12/31/02 reports were discussed with the URI, RIC, and CCRI controllers and the
status of outstanding audit issues was updated. Copies of the Stewardship Reports for
RIC, URI, and CCRI are attached.
Audit Services
A request for proposal for auditing services for FY03-05 was forwarded to State
Purchasing for processing. Twelve accounting firms were directly notified of the RFP.
Personnel
Within the OHE’s Finance and Management Division, Ms. Robin Beaupre’s CPA duties
were reassigned to concentrate primarily on budget issues.