The STRAIGHT and NARROW November 2013 The Office of Internal Audit & Compliance's (OIAC) mission is to support the University System of Georgia management in meeting its governance, risk management and compliance and internal control (GRCC) responsibilities while helping to improve organizational and operational effectiveness and efficiency. The OIAC is a core activity that provides management with timely information, advice and guidance that is objective, accurate, balanced and useful. The OIAC promotes an organizational culture that encourages ethical conduct. We have three strategic priorities: 1. Anticipate and help to prevent and to mitigate significant USG GRCC issues. 2. Foster enduring cultural change that results in consistent and quality management of USG operations and GRCC practices. 3. Build and develop the OIAC team. Inside this issue: From the 1 Chief Audit Officer Financial Aid Redux 2-4 Construc on Audits 5-6 Audit Report Follow 7 -up Procedures E-Verifica on 7-8 Process Contact Us 9 Volume 5, Issue 23 Office of Internal Audit & Compliance, BOR -- USG, (404) 962-3020 From the Chief Auditor Officer John M. Fuchko, III Assessing University System of Georgia (USG) Risks --Rolling Audit Plan University System internal auditors have the responsibility to regularly assess risks facing the University System of Georgia. We utilize a vigorous process which includes reviewing internal audit results, monitoring changes in higher education, reviewing external audit results, and consulting with colleagues and USG leadership about emerging issues that may pose a potential risk. This process helps us to identify focus areas for inclusion in our audit plan. The chart below identifies the focus areas for OIAC engagements this fiscal year. The annual audit plan was approved by the Board of Regents on May 14, 2013. The audit plan identifies the actual engagements and focus areas for the coming 18 months. An update of the Rolling Audit Plan will be presented to the Audit Committee during the November Board meeting. What will the OIAC seek to accomplish during this rolling audit plan? We want to ensure the USG institutions are complying with operational and business procedure requirements, that we have strong financial controls in place and that USG institutions are properly administering and managing financial resources. Our plan ensures that we focus audit resources to best address potential risks as follows: Auxiliary Operations & Finances (Athletics) Budget & Financial Management Fiscal Operations: Accounts Receivable, Cash, Inventory Fraud Prevention and Detection Information Technology Security Presidential Transition Audits Public Private Venture Program Student Financial Aid Tuition & Fees Our goal is to implement an annual audit plan that strengthens our infrastructure and safeguards our resources. In the upcoming months, OIAC staff will be deployed to work with institutional audit directors and staff on these nine issues and other risk areas as they arise. I look forward to hearing your thoughts. Please feel free to contact me at john.fuchko@usg.edu. Our Rolling Audit Plan may be found on the OIAC website located at: www.usg.edu/audit/internal_audit. John M. Fuchko, III Chief Audit Officer & Associate Vice Chancellor The STRAIGHT and NARROW Page 2 Audit Programs -- Financial Aid Redux Federal Student Aid Facts The Federal Student Aid (FSA) Handbook is the reference source used by Financial Aid Directors to manage the ins tu on's financial aid program and to report eligibility requirements to the Dept of Educa on. It provides guidance on financial aid eligibility requirements for students and parent borrowers and the ins tu on's responsibili es to ensure that recipients qualify for aid awards under Title IV of the Higher Educa on Act of 1965. The FSA programs provide financial assistance for postsecondary students. The programs are administered by an agency called Federal Student Aid (also FSA), which is part of the U.S. Department of Educa on (ED). In financial aid circles, the term "FSA" is used to refer to both the aid programs and the ED office administering them. Con nued page 4 USG campus auditors have been asked to conduct a financial aid audit this fiscal year. Several institutions may be in the process of conducting these audits while others may not have had the opportunity to assess the audit plan. Before we begin the audits, we wanted to share a few lessons learned when examining Satisfactory Academic Progress (SAP) qualitative and quantitative procedures and pace standards. The realm of financial aid is complex. On first blush, financial aid eligibility appears straight forward. But, have you really read the wonderful 1,000+ page Financial Aid Handbook? The Handbook is not just complex, it is also multifaceted and at times the guidance and interpretation of regulation is vague. Vice Chancellor for Student Affairs Joyce Jones and Chief Audit Officer John Fuchko conducted a financial aid presentation for Board of Regents Academic Affairs Committee members in September 2013. The presentation highlighted the important role FAID plays in funding for the institutions and the complexities involved in administering that aid. Issues discussed included: 1) the complexity of the financial aid process, beginning with understanding the congressional legislation, U.S. Department of Education Regulations and then applying the guidelines to enrollment, calculation of SAP and Pace; 2) the sheer volume of paperwork required to manage the financial aid process from filing the FAFSA form, to compiling and verifying parental financial information, to validating student residency, and finally, to assessing financial aid by institution counselors to culminate in an award; 3) the interdependency between student enrollment and financial aid eligibility; and finally, 4) the impact of increasing higher education costs and how those costs are impacting a student's ability to cover educational expenses in light of dwindling Federal financial aid funding. OIAC staff encountered several nuances of the FAID guidelines critical to accurately conducting institutional financial aid audits. We compiled a summary checklist to assist campus audit staff. The checklist is ever growing and appears at the end of this article. The STRAIGHT and NARROW Financial Aid Redux, Cont'd Page 3 Each institution must develop and publish a Satisfactory Academic Progress [SAP] Financial Aid Policy which minimally outlines: The Qualitative Standards of Progress the policy must numerically specify and outline how the qualitative standard is computed. The policy must indicate if the GPA is the standard used. The policy must indicate which courses are included in the calculation of the GPA and that the computation is cumulative. The Quantitative Standards of Progress the policy must numerically specify and outline how the quantitative standard is computed. The policy must indicate the courses included in the computation of the quantitative standard. The policy must indicate the computation is cumulative. The Completion Ratio - the policy must outline the required satisfactory completion of coursework towards the degree/certificate a student must achieve in order to remain eligible for financial aid. The Appeal Process the policy must outline the process by which a student may appeal a decision that suspends his/her financial aid eligibility. Institutions are not required to have an appeal process. However, if the policy states an institution has an appeal process, the appeal process must describe how the student may reestablish his or her eligibility to receive assistance, [Title 34: Education 668.34 Satisfactory academic progress]. Repayment of Title IV and/or Georgia Hope financial aid funds the policy must clearly specify the students' responsibility for repaying the institution and/or the Federal Department of Education for financial aid funds received through Title IV and /or Georgia Hope if the student does not remain enrolled and academically active in school through at minimum 60% of the semester. [Return of Funds cites HEA, Section 484B, 34 CFR 668.22; Consumer information cite Section 485(a)(1)(F), 34 CFR 668.43] Collection process The refund policy must outline the legal collection process for reclaiming Title IV and/or Georgia Hope funds owed by the student. [Per institution, if applicable] Reference Reading: Federal Student Aid Handbook, h p://ifap.ed.gov/ifap/ USG Financial Aid Facts FY2011-2012 USG System Financial Aid Facts 2011-2012 Pell Grant Awards received by USG undergraduate students: 33.8% students a ending research universi es 41.2% students a ending regional universi es 47.9% students a ending state universi es 54.3% of students a ending state colleges 80.4% of students a ending two-year college Student enrollment totaled 318,027 students; of the 273,494 undergraduate students, approximately 127,147 or 46.50% of the undergraduate students received a PELL Grant award. Undergraduate enrollment included 54,493 first me freshmen (FTF); 27,649 or 50.70% received a PELL grant award $526,951,938 in PELL grant awards was received by students a ending USG ins tu ons Source: BOR Research and Policy Analysis Office, 2011-2012 Ins tu on data reflects classifica on of ins tu ons prior to the August 2013 change in func onal sectors. The STRAIGHT and NARROW Page 4 Financial Aid Redux GUIDELINES FOR COMPUTING QUALITATIVE AND QUANTITATIVE STANDARDS FOR FINANCIAL AID Eligibility for Financial aid is assessed based upon achieving SAP in the previous semester/end of payment period. Current Semester / Aid is Provided Fall 2011 Spring 2012 Summer 2012 Fall 2012 Spring 2013 Previous Semester/ Payment Period Ending Summer 2011 Fall 2011 Spring 2012 Summer 2012 Fall 2012 Transfer students are treated as new enrollees because a transfer student should meet the SAP requirement at me of transfer. Coursework credit and course hours transferred are treated as previous semester in the calcula on of eligibility for Financial Aid. A student must achieve BOTH the Qualita ve and Quan ta ve standards to be eligible for financial aid. Yes Are QUALITATIVE [GPA] calcula ons cumula ve? YES Are QUANTITATIVE [PACE] calcula ons cumula ve? YES Are "W" course hours a empted excluded from the QUALITATIVE calcula on? [GPA]. There are no quality points associated with an official withdrawal. Check impact on R2T4. Are "WF" course hours a empted included in the QUALITATIVE calcula on? [GPA]. WF courses are treated as "F" grades. Check impact on R2T4. Are "W" course hours a empted included in the QUANTITATIVE calcula on? [PACE]. This is the comple on ra o. Are "WF" course hours a empted included in the QUANTITATIVE calcula on? [PACE]. This is the comple on ra o. Are Learning support courses included in the QUALITATIVE [GPA] calcula on for Financial Aid? Learning support courses must be assessed in the QUALITATIVE decision making process for financial aid. However, those classes do not need to be included in the GPA. The ins tu on must demonstrate how the grades for Learning Support courses were assessed. YES YES YES YES Maybe See Policy Are Learning support courses included in the QUANTITATIVE calcula on for Financial Aid purposes? YES When a student changes majors, credits and grades that count toward the new major are included in the calcula on of Yes the Quan ta ve method? [This also varies by ins tu on.] Is the determina on of maximum hours appropriate for the student's academic program? Yes Is the student's eligibility appropriately rese ng when they transi on from a completed undergraduate program to a Yes graduate program? The STRAIGHT and NARROW Page 5 Ins tu onal Effec veness Internal Control Assessment ~ Construc on Audits Guest Contributor: Ma Gardner, CICA This month's ins tu onal effec veness ar cle focuses on construc on audit. This area of expenditure can pose great financial risks and insurance exposure. In an effort to provide our readers with relevant topical informa on, we are sharing this ar cle as a poten al "tool" for ins tu ons to use. The ar cle provides key points to consider when an ins tu on decides to undertake a new construc on project. Construction Audits Construction projects incur risk The job of a construction auditor is to mitigate the risks associated with construction projects and to provide assurance that company money is managed appropriately. Construction projects are often a business's greatest single expense, so they naturally incur a great deal of risk. Billions of dollars are spent each year by organizations on capital expenditures. Investing in capital projects makes an organization vulnerable to construction fraud and unnecessary costs. Lack of resources, lack of sound business processes and lack of oversight by project teams assigned to the project can hinder the organization's ability to properly safeguard project completion (time issues), costs, quality, safety and environmental sustainability. The consequences of unmanaged risks may result in loss capital, loss of management or committee trust for future expenditures, and potential litigation. An auditor's involvement in the beginning and throughout the course of a construction project may set a tone of governing oversight, resulting in fewer cost overruns, overcharges, and billing errors. An Auditor may also be useful in helping to negotiate a favorable contract, which translates into a sound budget figure and increased efficiency with fewer disputes as the project develops. ROI of construction audits Typical construction cost recoveries are one to three percent of the total project cost. According to an article in Internal Auditor magazine, "cost recoveries from contract audits exceed the entire budget for the internal audit department" for some organizations. Construction audits are not an expense, but are necessary for effective cost management that reduces total project costs. General Contractor reputation may be deceiving An organization may hire a well known general contractor to execute and monitor the project but may experience negative outcomes. Unfortunately, hiring well known and seemingly reputable general contractors do not eliminate risk. Even contractors with a good reputation should be held accountable through a construction audit. The landmark case against the well known firm Lend Lease Construction LMB Inc. (formerly Bovis) resulted in restitution of $56M in construction charges due to fraudulently overbilling clients for more than 10 years. The STRAIGHT and NARROW Construc on Audits, cont'd Page 6 Three's a crowd The project owner and auditor must stay involved throughout the entire construction process to ensure only appropriate costs are charged. Collusion between the General Contractor and project owner's representative firm is common. When this relationship is too familiar, the paid representative hired by your company to monitor the project, may not be looking out for your organizations' best interest regarding cost, project quality and/or schedule. On the other hand, priority differences and a strained relationship between the GC and owner's representative could yield the same negative impact. Miscommunications or disagreements over details such as scheduling may take precedence over cost, and could lead to overruns without the owner's consent. Fraud is not the only risk Generally, overcharges or unallowable costs are not due to fraudulent activity. Some mistakes, such as mathematical errors, may be innocent but costly nonetheless. Projects involve a tremendous amount of paperwork, which is often handled outside the organization by project management systems or other forms of project cost tracking software. Unexpected issues arise with any project and must be handled accordingly. A construction auditor helps recognize whether a change order is legitimate or just a hidden profit center for the contractor. The auditor can help create a contract that anticipates and dissolves potential disputes, but is also there when issues arise to provide sound financial analysis of proposed changes. Under budget, overcharged The original budget must be a sound document, which requires sound bidding, budget policies, and budget procedures. Many projects may be under budget while still including erroneous or inappropriate charges. It is easy for a GC to attain a planned expense budget if the original budget amount exceeds the actual project cost. Contractors may neglect details outlined in the scope of work or use materials of lesser quality without issuing the proper credit for reduction in cost. Additionally, establishing aggressive general contractor savings within a contract provides an incentive to come in under budget and share in cost savings with an owner, especially if the savings is not capped by a maximum amount. Value in vigilance Auditors should not be shy about questioning construction changes or probing for details despite not having all the knowledge to construct a building themselves. If an auditor suspects materials or a scope of work has been altered or eliminated, the Auditor should travel to the jobsite and verify the change. Construction auditors prevent contractors from cutting corners and sweeping details under the rug by staying involved in every phase of the project lifecycle. Expensive pitfalls and hidden costs can be rampant in capital expenditures. Construction audits are essential to maximizing the value of an organization's project. While industry experience helps, it is certainly not a requirement. Attention to detail, ability to dissect contracts and willingness to ask questions are some of the most important qualities an internal auditor should possess to effectively manage risks when undertaking a capital expenditure. Matt Gardner, CCA, CICA Honkamp Krueger & Co. The STRAIGHT and NARROW Page 7 E-Verifica on of Contractor Employees--SB160 By Michael J. Foxman, OIAC ? DID YOU KNOW? A - P Board of Regents Business Procedures Manual 16.3.7 discusses Audit Report review and follow- up procedures for all significant or material audit issues. Each material issue reported as closed and/or resolved by ins tu on management shall be reviewed by the Ins tu onal Chief Auditor (ICA) or the Office of Internal Audit and Compliance (OIAC) within sixty (60) days of the issue being reported as closed. Significant issues may be reviewed a er being reported as closed but this review is not required. The ac ons taken to resolve the issues are reviewed and may be tested to ensure that the desired results were achieved. In some cases, managers may choose not to implement an audit recommenda on and to accept the risks associated with the audit issue. The follow-up review will note this as an unresolved excep on. The USG Chief Audit Officer shall periodically report the status of audit issues to the BOR Commi ee on Internal Audit, Risk, and Compliance to include the status of issues not closed in a mely manner. Open or par ally resolved State, OIAC and ins tu on audit findings are maintained in the USG Internal Audit func on enterprise system. Auditee management, such as the Chief Business Officer (CBO) or the ICA, should update the status of each issue in the USG Internal Audit func on enterprise system (TeamMate) on at least a quarterly basis. During the 2013 Session of the General Assembly, the Legislature passed Senate Bill 160 (SB 160) which made several changes to the previous EVerify legal and reporting requirements. Title 13 Report Report of Contractors Hired for the Physical Performance of Services has been required since House Bill 87 was signed into law in 2011. However, SB 160 revised the definition of "physical performance of services," which increases the number and types of contractors to be included in the report. Effective July 1, 2013, the definition was revised to mean "any performance of labor or services for a public employer using a bidding process or by contract wherein the labor or services exceeds $2,499.99... (the term excludes contractors who are licensed under Title 26 or 43 or by the State Bar of Georgia). Previously, only public contractors performing construction type services for the state of Georgia were required to use EVerify. As of July 1, 2013, any public contractor, including every tier of subcontractor, performing any kind of service for the state of Georgia, not just construction type services, must use E-Verify to do business with the state. What does this mean for your institution? An affidavit must be obtained from contractors (meeting the definition as defined in SB 160) documenting that the contractor is authorized to use and uses E-Verify when hiring employees. A copy of the affidavit is available on the Department of Audits and Accounts (DOAA) website at www.audits.ga.gov//NALGAD/ IllegalImmigrationReformandEnforcementAct.html. If you hire a contractor with no employees, a copy of the contractor's driver's license or state issued ID card must be obtained as well as verification that the license was issued in a state that verifies lawful immigration. There is no affidavit required. However, these contractors still have to be included in the Title 13 report and listed as "exempt". The STRAIGHT and NARROW E-Verifica on of Contractor Employees--SB160, Cont'd Page 8 Please note that since SB 160 did not go into effect until July 1, 2013, the report submitted in December 2013 should include a listing of: All contractors hired for public works related projects (renovations, maintenance, improvements, etc. based on HB 87 definition of "physical performance of service") for all contracts executed from December 1, 2012 June 30, 2013. All contractors hired for the "physical performance of services" (as defined in SB 160) from July 1, 2013 November 30, 2013. Summary of Title 13 Reporting Key Points Effective July 1, 2013, the definition was revised Institutions will need to obtain affidavits from a significantly larger number of vendors than in previous years, based on the new definition. Affidavits are obtained from any employer with one or more employees. The affidavit is available on the DOAA website. If you hire a contractor that is self-employed and has no employees, you must obtain a copy of their driver's license or state-issued ID card. For the Title 13 report, the institution must list all contracts that meet the definition of "physical performance of services." Finally, please keep in mind that all reports are due to the Department of Audits and Accounts by December 31. Reporting is an annual event. DOAA will not accept submissions by mail, fax, or email. All institutions are required to upload a comma delimited field or text file into the system or enter the date directly into the system on the DOAA web site. DOAA is creating a video to summarize the various reporting requirements and provide a demonstration of the collection system. The video will be available by November 15, 2013 and can be accessed at www.audits.ga.gov. Questions may be submitted at ImmHelp@audits.ga.gov. Michael Foxman Michael.foxman@usg.edu Trivia Ques on? Who were: Victor Z. Brink and Lawrence B. Sawyer? Victor Z. Brink and Lawrence B. Sawyer were 20th century pioneer figures in the internal audi ng profession. Victor Z. Brink served as The IIA's first research director. He was instrumental in ge ng The IIA's Statement of Responsibili es of the Internal Auditor issued in 1947. Lawrence Sawyer was chairman of the Research Commi ee who subsequently revised the Statement of Responsibili es in 1971. The Statement of Responsibili es of the Internal Auditor clarified that while internal audi ng primarily dealt with accoun ng and financial ma ers, opera ng issues were also within audi ng scope of ac vi es. Reference Reading Writing Aids Writing High-Impact Reports: Proven Practices for Auditors and Accountants [Spiral-bound] by Angela J. Maniak, 2005 Blue Book of Grammar and Punctuation, by Jane Strause, 2013 Www. GrammerBook.com, Jane Strause [On-line & Blog] Professional Aids Thriving in Uncertainty, Creating the Risk Intelligent Enterprise, By Frederick Funston & Stephen Wagner, 2010 Board of Regents of the University System of Georgia Office of Internal Audit & Compliance (OIAC) 270 Washington Street, SW Suite 7093 Atlanta, GA 30334-1450 Phone: (404) 962-3020 Fax: (404) 962-3033 Website: www.usg.edu/audit/ ? Ask the Auditor ? If you have a governance, risk management, compliance or control ques on that has been challenging you, let us help you find the answer. Your ques on can help us to become be er auditors. Want to Contribute to the Straight and Narrow? We invite you to send your ques ons and ideas for future ar cles to us for feature in upcoming Straight and Narrow newsle ers. Contact Us: USG-OIACNewsle er@usg.edu "Crea ng A More Educated Georgia" www.usg.edu