THE UNIVERSITY OF TEXAS AT SAN ANTONIO

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2015 Annual Financial Report Audit

Office of Auditing and Consulting Services

Internal Audit Report# 2016-01

February 22, 2016

Reviewed by: .c:==?� Ricardo Romo

President

2015 Annual Financial Report Internal Audit Report #2016-01

 

 

EXECUTIVE SUMMARY

Objectives & Scope UTSA’s Office of Auditing and Consulting Services work was limited to procedures necessary for Deloitte to provide an opinion on the FY15 UT System Consolidated Annual Financial Report (AFR). The extent of our work was not sufficient to provide an opinion on UTSA’s AFR and was limited to determining whether any material adjustments need to be recorded in the UTSA AFR.

Conclusion & Observation No material adjustments were identified that needed to be recorded in the UTSA AFR or included in the UT System Consolidated AFR. Deloitte issued an unqualified opinion on the UT System Consolidated AFR (See Appendix A). Deloitte presented its opinion on the UT System Consolidated AFR to the UT System Board of Regents at the February 11, 2016 meeting. However, there were unreconciled variances between the general ledger and bank balances. As of August 31, 2015, cash on the general ledger was $13.8 million greater than cash on the bank balance reconciliations. These variances were due to issues when the cash balances were converted from the previous accounting system to PeopleSoft. Financial Affairs is in the process of hiring an outside accounting firm to reconcile the general ledger to the bank balance. In Deloitte’s FY15 Independent Auditors’ report on internal control over financial reporting (See Appendix B), Deloitte included a systemwide significant deficiency on the monthly bank reconciliation process for all institutions that participated in the UTShare/PeopleSoft implementation including UTSA. This finding was also reported in FY14.

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Background

In accordance with accounting and financial reporting requirements promulgated by UT System policy and the Texas Comptroller of Public Accounts, Annual Financial Reports (AFRs) and related footnote information are prepared by the financial reporting officers at each UT institution and UT System Administration. The Office of the Controller at UT System Administration consolidates the AFRs and prepares footnotes and other related disclosures to comply with generally accepted accounting principles. The University of Texas at San Antonio (UTSA) AFR and related footnote information is the responsibility of UTSA management. At the February 2014 meeting, the Board of Regents approved the renewal of Deloitte to conduct an independent audit of the Consolidated AFR of the UT System for FY 2014 and FY 2015. Deloitte has audited the Consolidated AFR, which includes the statement of net position as of August 31, 2015, and the related statement of revenues, expenses, and changes in net position and cash flows for the year then ended, which are summarized in the Appendix C.

Audit Scope

and Objectives

Deloitte is required to perform the audit of the Consolidated Annual Financial Report of the UT System in conformity with auditing standards generally accepted in the United States of America to determine whether the Consolidated AFR of the UT System presents fairly, in all material respects, the financial position of the UT System as of August 31, 2015, and its changes in net position and its cash flows for the year then ended. The UT System Audit Office agreed to assist Deloitte in conducting the independent financial audit. The scope of the audit procedures developed by Deloitte and executed across the UT System varied based on size of the institution and financial statement line item. Our work was limited to procedures necessary for Deloitte to provide an opinion on the FY15 UT System Consolidated AFR. The extent of UTSA’s Office of Auditing and Consulting Services procedures is not sufficient to provide an opinion on the AFR of UTSA and was limited to determine whether any material adjustments need to be recorded in the UTSA AFR.

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Audit Results

Overview of Procedures Performed

Control Testing

Substantive Testing –

Internal Audit

As directed by Deloitte, we performed financial audit procedures on the following financial statement line items: Cash & Cash Equivalents $85,868,590Plant Property, and Equipment $1,197,021,989Deferred Revenue $118,278,326Tuition Revenue $268,752,256Tuition Discount and Allowance $76,162,239Operating Expenses $485,394,422Gift Contributions for Operations $10,355,261Auxiliary Enterprise Revenue $42,642,987

At the request of Deloitte, we updated control documentation and performed limited control testing on controls selected by Deloitte. The following financial statement line times were subject to control testing: Cash Property Plant and Equipment Deferred Revenue Tuition Revenue Operating Expenses Gifts and Contributions Auxiliary Enterprise Revenue

Based on the control testing performed, no exceptions were noted. At the request of Deloitte, we performed analytical procedures, recalculations, and substantive testing of a sample of transactions. The following financial statement line items were subject to substantive review: Cash Deferred Revenue Tuition Tuition Discounts and Allowances Operating Expenses Payroll

Based on the test work performed, exceptions were noted in cash procedures. No other exceptions were noted.

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Observation #1 There were unreconciled variances between the general ledger and bank balances. As of August 31, 2015, cash on the general ledger was $13.8 million greater than cash on the bank balance reconciliations. These variances were due to issues when the cash balances were converted from the previous accounting system to PeopleSoft. Deloitte reviewed this misstatement and it was determined by management and the System to be immaterial to the UT System Consolidated AFR taken as a whole. In Deloitte’s FY15 Independent Auditors’ report on internal control over financial reporting, Deloitte included a systemwide significant deficiency on the monthly bank reconciliation process for all institutions that participated in the UT Share PeopleSoft implementation. This finding was also reported in FY14.

Risk: Cash balances are overstated in the financial statements and the general ledger.

Risk Level: This is considered a high risk due to key internal and some external financial/operating data being incorrect and due to the designed controls being inconsistent in their effectiveness.

Management Response/ Action Plan:

Management agrees with the recommendation and considers the reconciliation of the variance deserving of the highest priority resources. After significant time spent by the accounting function, UT System personnel and an outside consultant during FY2015 without success, management will engage an outside accounting firm to reconcile the account.

Responsible Party:

Assistant Vice President for Financial Affairs & Controller

Implementation Date:

August 31, 2016

Substantive

Testing – Deloitte

Deloitte completed analytical procedures and substantive testing for the following line items: Property Plant and Equipment Operating Expenses Gifts and Contributions Auxiliary Enterprise Revenue

No exceptions were identified.

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Conclusion No material adjustments were identified that needed to be recorded in the UTSA AFR or included in the UT System Consolidated AFR. Deloitte issued an unqualified opinion on the UT System Consolidated AFR. However, there were unreconciled variances between the general ledger and bank balances due to issues when the cash balances were converted from the previous accounting system to PeopleSoft. UTSA is in the process of hiring an outside accounting firm to reconcile the general ledger to the bank balances.

J. Richard Dawson Institution Chief Audit Executive

� �� Laura Buchhorn Audit Manager

=)�j� Auditor

Paul Tyler Director, Auditing & Consulting

Services

Aaron Sanders Auditor

This engagement was conducted in accordance with The Institute of Internal

Auditors' International Standards for the Professional Practice of Internal Auditing.

Member of Deloitte Touche Tohmatsu Limited

INDEPENDENT AUDITORS’ REPORT

To the Members of the Audit, Compliance and

Management Review Committee of the

University of Texas System Board of Regents

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of the University of Texas System (the System),

which comprise the consolidated statements of net position as of and for the years ended August 31, 2015 and 2014,

and the related consolidated statements of revenues, expenses and changes in net position and of cash flows for the

years then ended, and the related notes to the consolidated financial statements, as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in

accordance with accounting principles generally accepted in the United States of America; this includes the design,

implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated

financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express opinions on these consolidated financial statements based on our audits. We

conducted our audits in accordance with auditing standards generally accepted in the United States of America and the

standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller

General of the United States. Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment

of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making

those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation

of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances,

but not for the purpose of expressing an opinion on the effectiveness of the System’s internal control. Accordingly, we

express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation

of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit

opinions.

Opinions

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the

financial position of the System, as of August 31, 2015 and 2014, and the changes in net position and cash flows for

the years then ended in accordance with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP Suite 1700 400 West 15th Street Austin, TX 78701 USA

Tel: 512 691 2300 Fax: 512 708 1035 www.deloitte.com

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Emphasis of Matter

As discussed in Note 4 to the consolidated financial statements, the System restated its beginning net position as of

September 1, 2014, to reflect the impact of implementation of Governmental Accounting Standards Board Statements

No. 68, Accounting and Financial Reporting for Pensions – An Amendment of GASB Statement No. 27 and No. 71,

Pension Transition for Contributions Made Subsequent to the Measurement Date –An Amendment of GASB Statement

No. 68. Our opinion is not modified with respect to this change.

Other Matters

As discussed in Note 6, the consolidated financial statements include investments valued at approximately $29 billion

and $30 billion as of August 31, 2015 and 2014, respectively, whose fair values have been estimated by management

in the absence of readily determinable fair values.

Accounting principles generally accepted in the United States of America require that the Management’s Discussion

and Analysis, the Other Post-Employment Benefits Schedule of Funding Progress, the Schedule of the System’s

Proportionate Share of the Net Pension Liability, and the Schedule of the System’s Contributions be presented to

supplement the consolidated financial statements. Such information, although not a part of the consolidated financial

statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of

financial reporting for placing the consolidated financial statements in an appropriate operational, economic, or

historical context. We have applied certain limited procedures to the required supplementary information in

accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of

management about the methods of preparing the information and comparing the information for consistency with

management’s responses to our inquiries, the consolidated financial statements, and other knowledge we obtained

during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on

the information because the limited procedures do not provide us with sufficient evidence to express an opinion or

provide any assurance.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated December 11, 2015 on our

consideration of the System's internal control over financial reporting and on our tests of its compliance with certain

provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to

describe the scope of our testing of internal control over financial reporting and compliance and the results of that

testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an

integral part of an audit performed in accordance with Government Auditing Standards in considering the System’s

internal control over financial reporting and compliance.

December 11, 2015

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INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Members of the Audit, Compliance and

Management Review Committee of the

University of Texas System Board of Regents

We have audited, in accordance with the auditing standards generally accepted in the United States of

America and the standards applicable to financial audits contained in Government Auditing Standards

issued by the Comptroller General of the United States, the consolidated financial statements of the

University of Texas System (the “System”) as of and for the year ended August 31, 2015, and the related

notes to the consolidated financial statements, and have issued our report thereon dated December 11,

2015, which includes an emphasis of a matter/other matters paragraphs related to investments without

readily determinable fair values and the adoption of new accounting standards.

Internal Control over Financial Reporting

In planning and performing our audit of the consolidated financial statements, we considered the

System’s internal control over financial reporting (internal control) to determine the audit procedures that

are appropriate in the circumstances for the purpose of expressing our opinions on the consolidated

financial statements, but not for the purpose of expressing an opinion on the effectiveness of the System’s

internal control. Accordingly, we do not express an opinion on the effectiveness of the System’s internal

control.

A deficiency in internal control 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. A material weakness is a deficiency, or a combination

of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement

of the System’s consolidated financial statements will not be prevented, or detected and corrected on a

timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control

that is less severe than a material weakness, yet important enough to merit attention by those charged with

governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this

section and was not designed to identify all deficiencies in internal control that might be material

weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may

exist that were not identified. Given these limitations, during our audit we did not identify any

deficiencies in internal control that we consider to be material weaknesses. We did identify certain

deficiencies in internal control, described in the accompanying Schedule of Findings and Responses, that

we consider to be significant deficiencies.

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Compliance and Other Matters

As part of obtaining reasonable assurance about whether the System’s consolidated financial statements

are free from material misstatement, we performed tests of its compliance with certain provisions of laws,

regulations, contracts, and grant agreements, noncompliance with which could have a direct and material

effect on the determination of consolidated financial statement amounts. However, providing an opinion

on compliance with those provisions was not an objective of our audit, and accordingly, we do not

express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters

that are required to be reported under Government Auditing Standards.

The System’s Response to Findings

The System’s response to the findings identified in our audit are described in the accompanying schedule

of findings and responses. The System’s response was not subjected to the auditing procedures applied in

the audit of the consolidated financial statements and, accordingly, we express no opinion on it.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and compliance

and the result of that testing, and not to provide an opinion on the effectiveness of the System’s internal

control or on compliance. This report is an integral part of an audit performed in accordance with

Government Auditing Standards in considering the System’s internal control and compliance.

Accordingly, this communication is not suitable for any other purpose.

December 11, 2015

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SCHEDULE OF FINDINGS AND RESPONSES

Finding 2015-01: Bank Reconciliation and Journal Entry Review Process—Post-PeopleSoft Implementation—Significant Deficiency in Controls

Criteria—Bank reconciliations should be performed timely and reconciling items should be resolved

within a reasonably short period of time. In addition, the general ledger accounting system should be

configured to prevent a user from being able to create and approve their own journal entry.

Condition and Cause—This finding was reported in the prior year as item 2014-01. In the prior year,

multiple UT academic institutions had control deficiencies as a result of the implementation of the new

PeopleSoft system. After the go-live date of May 1, 2014, through the end of the fiscal year, August 31,

2014 (FY14) and 2015 (FY15), we noted the following:

Monthly Bank Reconciliations—Multiple academic institutions did not perform or review bank

reconciliations on their various cash accounts in a timely manner. Further, we noted significant

unreconciled items on bank reconciliations as of August 31, 2014 and 2015. While some progress was

made on these unreconciled items in FY15, the matters were not fully resolved.

Journal Entry Approvals—We noted that configurations within PeopleSoft allow certain people the

ability to create and approve their own journal entry. Management at these institutions appear to have

established manual controls to mitigate this risk. During our testing of journal entry review controls,

we did not note any exceptions to the manual journal entry review controls; however, we believe

there should be proper segregation of duties within PeopleSoft to prevent users from creating and

approving their own journal entries.

Effect—Cash reconciliations and journal entry reviews and approvals are key control activities. The lack

of timely performance of monthly reconciliations of cash accounts and a lack of review of journal entries

could potentially lead to significant misstatements on the UT System Annual Financial Report.

Recommendation—Continue to investigate the unreconciled differences related to cash reconciliations.

Perform reconciliations on a timely basis between the bank balance and the general ledger on a monthly

basis, which will decrease the risk of a material misstatement within the cash balance at each institution.

Also, at the institutions without appropriate segregation of duties around journal entry creation and

approval configured within PeopleSoft, implement a workflow within PeopleSoft to prevent someone

from approving their own journal entry.

Views of Responsible Officials—

Monthly Bank Reconciliations— Institutions are continuing to identify bank reconciliation issues that

occurred during the cutover from DEFINE to PeopleSoft. Progress continues to be made in resolving

these differences, resources have been provided by System Administration, and if necessary consultants

will be engaged.

Journal Entry Approval— Journal workflow was moved to production for smaller campuses as of May

2015. While this is being reviewed and tested, UT Share campuses who have not implemented workflow

will continue to document their approval manually on the paper journals.

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Appendix C Summarized below are UTSA’s AFR Statement of Net Position, Statement of Revenues, Expenses and Changes in Net Position, and Statement of Cash Flow information.

Statement of Net Position As of 8/31/15 As of 8/31/14 Total Assets $1,288,258,108 $1,304,582,495Total Liabilities 166,556,261 171,202,137Total Net Position 1,121,701,847 1,133,380,359

 

Statement of Revenues Expenses & Changes in Net Position

FYE 8/31/15 FYE 8/31/14Operating Revenue $318,523,350 $305,871,729Operating Expenses (485,394,422) (463,884,935)Non-Operating Revenue 177,433,461 220,699,301Gains, Losses & Transfers (22,240,901) (16,507,998)Change in Net Position (11,678,512) 46,178,097

 

Statement of Cash Flows FYE 8/31/15 FYE 8/31/14Net Cash (Used) by Operating Activities

(133,647,297) $(133,658,730)Net Cash Provided by Noncapital Financing Activities 200,841,834 178,500,712Net Cash (Used) by Capital and Related Financing Activities (51,154,066) (67,216,011)Net Cash Provided by Investing Activities 10,386,770 25,305,319Net Increase in Cash 26,427,241 2,931,290Cash & Cash Equivalents – Beginning of the Year 59,441,349 56,510,059Cash & Cash Equivalents – End of the Year 85,868,590 59,441,349

 

 

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