State University of New York 2011 Audit Committee Presentation October 28, 2011 kpmg.com

State University of New York

2011 Audit Committee Presentation

October 28, 2011

kpmg.com

KPMG LLP is a Delaware limited liability partnership,the U.S. member firm of KPMG International Cooperative(“KPMG International”), a Swiss entity.

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KPMG LLP515 BroadwayAlbany, NY 12207-2974

October 25, 2011

The Members of the Audit Committeeof the State University of New York:

This presentation has been prepared for our meeting with the State University of New York’s (SUNY) Audit Committee on October 28, 2011. Included are required communications of the scope and the preliminary results of our audit of SUNY’s financial statements as of and for the year ended June 30, 2011. In addition, we have provided control enhancement observations, status of other deliverables and an update on new accounting matters SUNY will face in future years.

We are pleased to have the opportunity to meet with the members of the Audit Committee to review this information and any other matters of interest.

Very truly yours,

KPMG LLP

Jane H. LettsPartner

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 71814NYO

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Table of Contents

Executive Summary

Deliverables

KPMG Responsibilities Under GAAS

Consideration of Fraud

Summary of SUNY’s Components

Results of Substantive Testing to Date

Open Areas

Required Communications

Preliminary Management Letter Comments

Preliminary Audit Differences

Other Matters


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Executive Summary

Financial Statements

Plan to issue an unqualified opinion for the year ended June 30, 2011, subject to completion of final audit procedures.

Significant disclosures for 2011:

– Acquisition of the Long Island College Hospital, footnote 1.

– As outlined in footnote 13 to the financial statements, several events subsequent to the financial statement date have been disclosed.

Management Cooperation

We received full cooperation from management and had no disagreements on accounting, reporting or disclosure matters.

Internal Controls

We did not identify any material weaknesses or significant deficiencies in internal control over financial reporting.

We did identify certain control deficiencies and other observations that will be reported in a management letter.

Independence

To the best of our knowledge, there are no circumstances or relationships between KPMG and SUNY which would impair our independence in reporting on SUNY’s financial statements.


Our responsibility for communicating with the Audit Committee, as required by our professional standards, is outlined in our Required Communications, other than as contained in this report, we have no matters of significance to address with the Audit Committee at this time.


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Deliverables

Audit Plan, delivered in May, 2011

Auditors’ report on the basic financial statements

Auditors’ report on internal control and compliance

Management Letter

Letter to the Audit Committee fulfilling our requirements under SAS No. 114, Communications With Those Charged With Governance


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KPMG Responsibilities Under GAAS

Our Responsibilities under GAAS:

We have a responsibility to conduct our audit in accordance with generally accepted auditing standards. In carrying out this responsibility, we planned and performed the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, we are to obtain reasonable, not absolute, assurance that material misstatements are detected. We have no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by error or fraud, that are not material to the financial statements are detected.

In addition, in planning and performing our audit, we considered internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements. An audit does not include examining the effectiveness of internal control and does not provide assurance on internal control. However, our internal control testwork to date did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses.


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Consideration of Fraud

“The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud”

We addressed on our professional responsibility by executing the following procedures:

Management interviews and discussions including existing management fraud controls

Interviews with staff level and management employees

Review of journal entries, including large, unusual and non-recurring journal entries

Assess potential illegal acts or fraud allegations

Consideration of the following risks in the performance of our substantive procedures:

– Internal pressures

– Third party pressures

– Related party transactions

– Manual journal entries

– Management bias

Based upon our inquiries and testing to date, no financial statement fraud came to our attention for the period ending June 30, 2011.


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Summary of SUNY’s Components

Component Auditor Audit Scope

SUNY Campuses and Health Science Centers

KPMG All SUNY Campuses and Health Science Centers are in scope. We have visited the campuses listed in our audit plan and designed substantive audit procedures to obtain sufficient and appropriate audit evidence covering transactions and amounts reported by campuses and the health science centers.

The Research Foundation of State University of New York (RF)

KPMG We have placed reliance on the KPMG audit report issued over the RF's June 30, 2011 financial statements.

Alfred Ceramics (Statutory) Bonadio We have received audited financial statements, confirmed independence/objectivity with auditor, reviewed other auditor's peer review report.

Cornell (Statutory) PWC We have received audited financial statements, confirmed independence/objectivity with auditor, reviewed other auditor's peer review report.

State University Construction Fund (Fund)

KPMG We have placed reliance on the KPMG audit report issued over the Fund's March 31, 2011 financial statements. We have audited the adjusting entries posted by SUNY to record capital assets based on the Fund's spending activity.

Auxiliary Service Corporations Various We have received audited financial statements, confirmed independence/objectivity with auditor, reviewed other auditor's peer review report.

Campus Foundations – Discrete Component Units

Various We have received audited financial statements, confirmed independence/objectivity with auditor, reviewed other auditor's peer review report.

Community Colleges N/A Excluded from SUNY's financial reporting entity and therefore no procedures were performed by KPMG.

We considered our audit to be a “group audit” because of the inclusion of separate legal entities in SUNY’s financial reporting entity. Below is a summary of our evaluation of SUNY’s components:


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Results of Substantive Testing to Date

Key Risks Significant Accounts Audit Results to Date

Complex financial reporting process reliant on other organizations

Investments, Capital Assets, Payroll, Expenditures

We have documented and tested source documentation used in financial statement preparation. We have confirmed the independence of other auditors.

We noted that the Controllers office has not received certain audited financial statements used in their reporting process. See management letter comment.

Revenue recognition Tuition and fees, grants, hospitals and clinics

We selected samples of revenue transactions and obtained source documentation. We examined revenue transactions for compliance with SUNY and GAAP based revenue recognition standards.

No exceptions noted.

Tuition and patient revenues that are uncollectible

Accounts receivable We reviewed collection history and receivable aging, and tested subsequent cash receipts. We substantively tested key underlying data used to determine the adequacy of allowances.

We believe account receivable balances are reasonably valued.

Assumptions and data underlying actuarial calculations are invalid or inaccurate

Actuarially determined liabilities (including self-insurance and OPEB liabilities)

We utilized a KPMG actuary to assist us in assessing key assumptions and methodology. We substantively tested key underlying data used to determine the liabilities and valuation.

We believe the OPEB valuation was reasonably stated.

Decentralized control environment

All accounts and disclosures Interview key operational personnel and evaluate competency. Test controls for reliance over management review controls.

We believe controls at the campus level would be enhanced through the review and consideration of service organization SAS 70 reports. See management letter comment.

Unsubstantiated disbursements Operating expenses We selected cash disbursements and traced transactions through to the appropriate general ledger caption. We obtain underlying source documentation, including contract, PO and invoice.

No exceptions noted.

Fraud that could impact financial reporting and presentation of financial information

All accounts and disclosures We reviewed journal entries and topside adjustments, we interviewed personnel at SUNY central and campuses.

We did not identify any fraud that impacted financial reporting.


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Open Areas

SUNY’s acquisition of the Long Island College Hospital:

1. Examination of LICH’s final audited financial statements.

2. Review SUNY’s determination for inclusion of newly created separate legal corporations (LICH Holding Corporation and Staffco) in SUNY’s reporting entity.

3. Determine the adequacy of footnote disclosures.

4. Review of legal documentation to determine:

– Assets to be received by SUNY.

– Assets to be received by LICH Holding Corporation.

– Liabilities to be assumed by SUNY.

– Assets and liabilities to be placed in legal trusts.

– Future commitments and contingencies.

Completion Procedures:

1. Down to date inquiries

2. Final analytical procedures

3. Review of final financial statements, including KPMG’s national office.

4. Formalize conclusions on non-gaap accounting policies, passed audit differences and control deficiencies/observations.

5. Management representation letter


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Requirements Under SAS No. 114 Application to SUNY

Our Responsibility Under Professional Standards

The auditor should communicate to those charged with governance the level of responsibility assumed under auditing standards generally accepted in the United States of America (GAAS) for matters such as internal control and whether the financial statements are free of material misstatement.

Our primary responsibilities are:

‒ To conduct an independent audit of the financial statements in accordance with GAAS and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

‒ To provide independent assurance to the Board of Trustees that the financial statements prepared by management are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles (GAAP).

In carrying out our responsibilities under GAAS, we obtained reasonable (but not absolute) assurance that SUNY’s financial statements are free of material misstatement and we intend issue an unqualified opinion thereon.

In addition, in planning and performing our financial statement audit, we considered the SUNYs internal controls in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements. However, an audit does not include examining the effectiveness of internal controls throughout SUNY and does not provide assurance on internal controls for SUNY.

We also have a responsibility to communicate significant matters, if any, related to the financial statement audit that are, in our professional judgment, relevant to the responsibilities of the Board of Trustees in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to the Board of Trustees.

These communications are based on our audit testing to date and will be updated, as necessary, upon the completion of our audit.


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Required Communications (continued)


Significant Accounting Policies

The auditor should determine that the Board of Trustees is informed about:

The initial application of significant accounting policies or changes in their application.

The methods used to account for significant and unusual transactions, and the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus.

SUNY’s significant accounting policies are summarized in Note 1 to the financial statements and represent policies prevalent to the financial position and operations of SUNY.

During 2011, there were no transactions recorded for which there is a lack of authoritative accounting guidance or consensus.

Management Judgments and Accounting Estimates

Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s current judgments. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting the estimates may differ from management’s current judgments.

The auditor should determine that the Board is informed about:

The process used by management in formulating accounting estimates.

The basis for the auditor’s conclusions regarding the reasonableness of those estimates.

Significant accounting estimates affecting SUNY’s financial statements include the following:

‒ Fair value of investments

‒ Post-retirement benefit obligations

‒ Accounts receivable realization

‒ Medical malpractice claims

We evaluated management’s significant judgments and estimates noted above as part of our audit, and found them to be reasonable in the context of the financial statements taken as a whole.


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Audit Adjustments and Unadjusted Audit Differences

The auditor should inform the Board of Trustees about:

Adjustments arising from the audit that could, in the auditor’s judgment, either individually or in the aggregate, have a significant effect on the entity’s financial reporting process.

Passed audit adjustments aggregated by the auditor during the current audit engagement (and pertaining to the latest period presented) that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

We identified no adjustments during the 2011 audit that could, in our judgment, either individually or in the aggregate, have a significant effect on SUNY’s financial statements.

Unadjusted audit differences identified do not have a significant impact on SUNY’s net assets for the year ended June 30, 2011.

We will obtain written representation that management believes the effect of the unadjusted audit differences are immaterial to the 2011 financial statements.

Other Information in Documents Containing Audited Financial Statements

The auditor should discuss with the Board of Trustees our responsibility for other information in documents containing financial statements, any procedures performed, and the results thereof.

Our responsibility for other information in documents containing SUNY’s financial statements and our report thereon does not extend beyond the financial information identified in our report, and we have no obligation to perform any procedures to corroborate other information contained in these documents.

Disagreements with Management

The auditor should discuss with the Board of Trustees any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity’s financial statements or the auditor’s report.

We had no such disagreements with SUNY’s management during our 2011 audit.


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Management’s Consultation with Other Accountants

When the auditor is aware that management has consulted with other accountants about auditing and accounting matters, the auditor should discuss with the Board of Trustees his or her views about such matters.

To the best of our knowledge, management has not consulted with or obtained opinions (written or oral) from other independent accountants during the past year concerning matters that were subject to the requirements of SAS No. 50, Reports on the Application of Accounting Principles.

Major Issues Discussed with Management Prior to Retention

The auditor should discuss with the Board of Trustees any major issues that were discussed with management in connection with the initial or recurring retention of the auditor, including, among other matters, any discussions regarding the application of accounting principles and auditing standards.

We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year. However, these discussions occurred in the normal course of our professional relationship, and our responses were not a condition to our retention as SUNY’s auditors.

Significant Difficulties Encountered During the Audit

The auditor should inform the Board of Trustees of any serious difficulties encountered in dealing with management during the audit, such as unreasonable delays and timetables, unavailability of personnel, and failure to provide information on a timely basis.

We encountered no difficulties in dealing with management during the performance of our 2011 audit.

Material Written Communications

The auditor should ensure the Board is aware of all material written communications between the auditor and management.

Material written communication between management and KPMG include:

‒ Engagement Letter; and

‒ Management Representation Letter


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Independence

The auditor should communicate in writing, at least annually, all independence-related relationships between the firm and the client and provide confirmation that the firm is an independent accountant with respect to the client.

We confirm we are independent accountants with respect to SUNY under all relevant professional and regulatory standards.


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Preliminary Management Letter Comments

Material Weakness A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

Significant Deficiency A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Control Deficiency A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis.

Observation Improvements to internal control or SUNY’s operations.

Internal Control Definitions:


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Preliminary Management Letter Comments (continued)

Control Deficiencies

Campus Cash Reconciliations – cash reconciliations were prepared for each account, however, we noted the existence of stale reconciling items.

Review of SAS 70s – SUNY’s campuses utilize third party service organizations to perform student loan account administration functions. We noted that certain SUNY campus personnel did not obtain and review service organization SAS 70s.

User Access Rights Reviews – periodic user access reviews are currently not being performed.

System Backups – regular backups are performed, however, we were unable to determine the operating effectiveness of this control as documentation is not retained beyond 3 months.

Testing of Disaster Recovery Plan – no disaster recovery tests were performed during the current year that could be used to prove the recoverability of CAS Mainframe application.

Observations

Password Configurations – password settings are configured to enforce passwords of minimum 5 characters length. We believe that at a minimum 8 characters should be present for a strong password.

Emergency Changes – follow the same process as normal program changes; however the policy and procedure document for program changes does not specifically define emergency changes and the policies related to those changes.

Timeliness of Component Reporting – SUNY’s financial reporting process is dependent upon information supplied by other organizations. In order to prepare SUNY’s June 30 th year-end financial statements, they require final audited financial statements from the Long Island College Hospital. To date these audited statements have not been supplied to SUNY. Additionally, The University Hospital of Brooklyn Foundation has not completed their financial audit for the period ending July 31, 2010. These financial statements are required to be included in the Foundation financial statements of SUNY.


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Preliminary Audit Differences

We have identified the following audit differences which we are currently in the process of quantifying:

Accrued Interest

SUNY records debt information supplied by DASNY at March 31, 2011. Accordingly, accrued interest expense is understated for the 3-month period April 1st to June 30th. This error is expected to have an inconsequential impact to net assets as a corresponding understatement in State appropriation revenue/receivable exists. There were no debt issuances or repayments made during the April 1st to June 30th timeframe.

Capital Assets/Deposits with Trustees

SUNY records capital asset information for educational facilities and residence hall facilities as of March 31st. As a result, capital spending from April 1st to June 30th is excluded from the financial statements. The offset to the understatement of capital assets is an almost equal offset in deposits held with trustees. We expect this to have an inconsequential impact to net assets.

Summer Tuition

SUNY defers all summer tuition. Accordingly, summer tuition related to the periods on or before June 30th has been recognized in the subsequent reporting period. As this accounting policy is consistently applied year over year, the rollover impact is expected to be inconsequential to net assets.


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Other Matters

Consideration Items for the 2012 Audit:

– Upstate Medical Center’s acquisition of Community General Hospital

– The State-wide implementation of SFS.

– New accounting standards:

GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements

GASB Statement No. 61, The Financial Reporting Entity: Omnibus, an amendment of GASB Statement No. 14 and No. 34

GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements

GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position


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