Mid-Year Checkup for Year End Planning

By Michael T. Wherry, CPA | December 8, 2016

By Michael T. Wherry, CPA

With summer vacations on the horizon and with the 6/30 audit deadline now in the “rearview mirror”, it is a good time for schools to perform a mid-year check-up of financial and regulatory items as a form of preventive maintenance. Planning in advance of year end is a prudent step and should be an on-going practice for management. If your institution is not a December 31st year end, you can perform this “check-up” when most appropriate. M&A believes the following items are critical to review to prevent issues during your financial and financial aid audits.

Financial Statements

90/10 Calculation:
If your rate is above 80%, you should be reviewing on a quarterly basis and potentially monthly if the rate is above 85%. Ensure the information in the 90/10 calculation is complete, reconciles to your general ledger and G5 reports, is being computed on a student-by-student basis, any non-Title IV information is being tracked, and the fund sources are being treated consistent with the presumptive rule. The documentation should be supportive of the calculation for your auditor and ED may request as well if the rate is close to 90%.

Composite Score Ratio(CSR):
The CSR should be computed, using the current balance sheet, actual year-to-date revenue and expenses along with projected revenue and expenses for the remainder of the fiscal year. Projecting the CSR now will provide management with time to make, as needed, financial improvements in advance of year end such as new debt or capital leases, equity infusion, cost cutting measures, etc.

Accounts Receivable Allowance:
With continued economic pressure on students, the allowance for doubtful accounts is a key estimate which management should be closely reviewing. Management should be reviewing the actual collections on accounts receivable balances especially for students who are out-of-school (graduates, withdrawn, suspended, terminated). Management should consider performing a look-back calculation for the past two to three years to determine what percentage of out-of-school accounts receivable is being collected and using this percentage as a basis for the current year allowance for doubtful accounts. If management has made recent changes to the collection process, then the look-back percentage may not be the only factor to consider, but it still should be a key factor to consider. An allowance for doubtful accounts which is not properly and fully reviewed in advance of year end could have a composite score ratio ramification upon the auditor’s review and testing.

Goodwill Impairment:
With the continued underperformance in the sector, every school which has goodwill recorded on its books should critically review whether goodwill has been impaired. Goodwill is normally evaluated initially based upon qualitative factors. If these qualitative factors result in a determination that goodwill is more likely than not to be impaired, then a quantitative analysis is required. An external or an internal quantitative valuation can be performed, and in either case, management should be expecting to support if goodwill is deemed not to have been impaired. In addition, if an impairment is likely, this needs to be included in the projected composite score ratios.

Monthly Financial Statements:
Management should ensure that monthly financial statements are being prepared timely by the business office. As part of these monthly financial statements, key reconciliations need to be performed or the monthly financial statements may be unreliable. The key accounts for which reconciliations should be performed every month are cash (all accounts), accounts receivable, accounts payable and deferred tuition. Also, it is important to update the allowance for doubtful accounts at least quarterly. As part of a strong internal control environment, a second person should be reviewing and approving these reconciliations on a monthly basis. Management should be concerned when key accounts are not being reconciled on a monthly basis as this could be a sign of materially incorrect financial statements or a misappropriation of assets (i.e. theft).

Financial Aid

Completion & Graduation Rates:
As a reminder, the completion and graduate rate right-to- know disclosures were required to be made available/distributed on July 1, 2016. Schools should ensure this rate is consistent with the information submitted to the Integrated Postsecondary Education Data System (IPEDS) and the supporting documentation is maintained for review during the audit.

Campus Crime:
The campus crime security report and crime statistics need to be distributed to students/employees and submitted to ED by October 1, 2016. Crime statistics and policies are a continued “hot item” for ED, and even small errors are resulting in schools being referred to the ED’s Administrative Actions and Appeals Service Group (AAASG) for its consideration of possible adverse actions. While we have not specifically seen schools receive adverse action from AAASG as a result of minor crime statistic violations, this risk could increase especially if repeat findings exist.

Federal Direct Loan Reconciliations:
ED continues to review schools to determine if institutions are not performing the Federal Direct Loan (FDL) reconciliations on a monthly basis. Schools are required to reconcile the financial aid department’s records to the business office department’s records (internal reconciliation), and then these records need to be reconciled to the Common and Origination Disbursement (COD) system (external reconciliation) on a monthly basis. ED sent Electronic Announcements in November and December 2015, and the Federal Student Aid Handbook, Volume 4, Chapter 6 has detailed information and best practices on performing these reconciliations. ED also offers interactive training at: http://www2.ed.gov/offices/OSFAP/training/specific.html.

Cash Management Regulations:
New regulations became effective on July 1, 2016, which affected schools who are on Heightened Cash Monitoring 1 (HCM1). As a reminder, if a school is on HCM1, Title IV (T4) credit balances are no longer allowed to be maintained and must be paid prior to requesting a T4 drawdown. Schools should review their procedures to ensure they are in compliance. In addition, there are new regulations which outline the situations under which a school may treat books and supplies as a part of tuition and fees. If a school is including books and supplies as part of tuition and fees, we recommend that you confirm this with your regulatory counsel.

Volume 3, Issue 3
Summer 2016

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