Critical External Relationships of the Chief Financial Officer
A plethora of outside pressures requires everything from detailed accountability measures to burgeoning data gathering and financial reporting. Here's a primer that addresses three key compliance areas.
By Mary Jo Maydew and Richard Staisloff
The chief financial officer (CFO) stands at the center of a web of internal and external relationships, all of which converge in the business office. Nowhere else on campus will you find the critical nexus of legal, data, resource allocation, and risk management skills and responsibilities necessary to meet external compliance demands.
Outside entities can affect oversight of instructional programs as well as personnel procedures, record keeping, and financial transactions. The CFO must either provide the documentation necessary to demonstrate compliance or take direct responsibility for activities under the purview of external entities. Failure to comply with the varied demands related to accreditation, federal regulations, and state and local requirements can have serious consequences, including reductions in or elimination of governmental aid and the loss of authority to issue degrees. Following is a summary of the issues in each area, which may be useful not only to the CFO but to other divisions and even board committees. (Read also "Orchestrating Change" in the July/August 2012 issue of Business Officer magazine.)
Accreditation and Increased Accountability
In the United States, accreditation—the process by which institutions of higher education and their various programs receive external review and comment—has two defining characteristics. First, unlike accreditation in most other countries, the process in the United States is private, rather than government controlled. Second, accreditation is accomplished through peer review.
More than 100 years ago, American colleges and universities began organizing voluntary associations to develop and promote agreed-upon quality standards. Today, the United States has six regional accrediting organizations, in addition to 54 recognized accreditors that review faith-based institutions, career-related institutions, or particular programs within institutions.
The core of the process—a periodic, comprehensive review—consists of a self-study completed by the institution, followed by a site visit by a team of higher education faculty and administrators to validate the self-study and assess the institution. The team produces a report for the appropriate accrediting organization's review and action. Comprehensive reviews of institutions, interim reviews, written progress reports, focused visits, annual requests for information, and requests for substantive change provide a system of ongoing external review by accreditors.
From voluntary to mandatory. For many years, accreditation focused on whether the institution was fulfilling its mission and how it could become more effective. In 1965, when the U.S. Congress passed the Higher Education Act, accreditation became a requirement for colleges and universities to receive Title IV federal financial aid funding. Since then, institutional accreditation has increasingly become an eligibility requirement for colleges and universities receiving state grants and loans, federal research funding, and foundation and corporation support.
In short, accrediting agencies have become the gatekeepers for the appropriate distribution of federal funding to higher education. That means accreditors have a responsibility to the U.S. Department of Education (ED) and to the public, in addition to and independent of their responsibility to colleges and universities.
Since the early 2000s, for example, the U.S. government has increasingly compelled accrediting agencies to address public concerns about access and affordability in higher education, in addition to institutional effectiveness. To some degree, the tension among these purposes has changed the nature of accreditation and the relationship between an institution and its accrediting agency.
Accreditation concerns. The work of the Commission on the Future of Higher Education, appointed in 2005 by then Secretary of Education Margaret Spellings, highlighted the tensions between institutional effectiveness and the cost of education. The report issued by the Spellings Commission in September 2006 expressed concern that the accrediting process was not sufficiently transparent, that it focused on process rather than on learning outcomes or the cost of education, and that it impeded innovation. The commission recommended that accrediting agencies pressure institutions to demonstrate that students are learning, make comparisons among institutions possible, make their findings more available to the public, and increase representation from outside higher education in the accreditation process.
While few of the Spellings Commission recommendations have been enacted, the federal government continues to take an active interest in higher education accreditation and to view the process with an increasingly skeptical eye. Every five years, ED reviews the accrediting associations themselves; in recent years, the department has revised its review criteria by adding standards related to student achievement, faculty, student support services, fiscal operations, and administrative capacity.
Adjustments and effects. As accrediting agencies have modified their requirements and processes to meet these regulations—and as transparency and outcomes assessment have become increasingly part of public discourse—colleges and universities have felt the impact in three main ways:
- The imposition of additional requirements within the accreditation process that address student learning outcomes.
- The establishment of direct linkages between institutional reviews and a gatekeeping role for ED. Gatekeeping is manifested in specific requirements regarding student loan default rates and the federal test of financial responsibility for institutions of higher education.
- The promotion of comparative student learning assessment vehicles, including the Collegiate Learning Assessment from the Council for Aid to Education, and the National Survey of Student Engagement administered by the Indiana University Center for Postsecondary Research.
Accountability pressures. Going forward, the traditional focus of accreditation—institutional self-reflection and improvement—and the demands for more accountability to the government and the public will increasingly intertwine. Complying with more and tougher accrediting standards, such as new assessment programs that ED demands of accreditors, will require both time and institutional resources.
Because accreditation is its gateway to federal financial aid, an institution has no choice but to find the resources to comply with new accrediting standards and to conduct the financial tests that assure ED of the college or university's ability to disburse federal financial aid funds.
Federal Regulatory Environment
In recent years, regulation of higher education has expanded exponentially. Nowhere is the evidence of increasing regulatory oversight more apparent than in the passage of the Higher Education Opportunity Act of 2008 (HEOA). This bill of more than 1,150 pages—which was 20 times longer than the Higher Education Act of 1965 it amended—touched on topics ranging from textbook prices to illegal file sharing, and created 64 new programs.
How does an institution respond to this huge expansion of the federal mandates for higher education? The sheer volume of laws, regulations, and interpretations may seem impossible to monitor and absorb, so it helps to divide this regulatory morass into five key areas.
1. Student privacy. The Family Educational Rights and Privacy Act (FERPA) grants to parents and eligible students the right to:
- Inspect, review, and access education records.
- Challenge the content of education records.
- Consent to the disclosure of education records.
In addition, institutions must protect medical data (Health Insurance Portability and Accountability Act of 1996), financial data (Gramm-Leach-Bliley Act), and individual identity (Fair and Accurate Credit Transactions Act/FACTA).
2. Copyright. Colleges and universities have long enjoyed liberal access to copyrighted materials under federal "fair use" regulations. Fair use authorizes the copying of materials without the copyright holder's permission, provided the materials are used for teaching, scholarship and research, and news reporting.
Outside this fair use doctrine, which is often ambiguous, institutions must have appropriate protections in place for copyrighted works. The HEA of 2008 addressed institutional requirements to further protect copyrighted works in the digital age. For example, institutions are now required to develop plans to combat the unauthorized distribution of copyrighted material through illegal downloading.
3. Discrimination. A dozen federal laws provide protections for employees and students against discrimination by institutions. Legislation such as the Civil Rights Act of 1964, the Family Medical Leave Act (FMLA), Title IX, and the Americans with Disabilities Act (ADA) prohibit discrimination on the basis of race, gender, national origin, ethnic status, age, disability, or veteran status.
4. Campus security. In terms of costly recordkeeping and reporting requirements, some of the most burdensome federal regulations occur under the Clery Act, which requires all colleges and universities that participate in federal financial aid programs to keep and disclose information about crime on and near their campuses. The HEA of 2008 not only expanded Clery reporting requirements but also added separate requirements for campus emergency procedures, fire safety, and missing person notification.
5. Financial transactions. At most institutions, federal student financial aid and federal grant funding represent the greatest proportion of federal funds. Federal financial reporting occurs largely through the federal A-133 audit, overseen by the institution's external auditor. The A-133 audit applies to nonprofits spending more than $500,000 per year in federal funding, with reporting made to the Office of Management and Budget (OMB). This audit incorporates the institution's audited financial statements, while adding significant testing on tracking and classification, internal control, and program-specific requirements.
Federal oversight also occurs through annual reporting on Form 990 (Return of Organization Exempt From Income Tax) filed by organizations exempt from federal income taxes under Section 501 of the Internal Revenue Code. In addition, state offices that regulate charitable solicitation often require Form 990.
Form 990 supplies information to governmental agencies for enforcement of laws governing nonprofits. The government is particularly interested in whether funds are being spent by the organization in support of its stated charitable purpose. The form also provides key financial data on the institution's financial condition and performance. Changes to Form 990, adopted in 2008, significantly expanded the reporting on governance and compensation.
Interestingly, federal law and regulations may affect higher education even when the industry is not required to comply. In 2002, Congress passed the Sarbanes-Oxley Act to enhance board oversight of management and auditors. Although Sarbanes-Oxley applies only to publicly traded corporations, many not-for-profit boards of trustees have adopted the act's requirements as best practices.
State and Local Regulatory Environments
Regulation affecting higher education institutions does not stop at the federal level. Typically, state higher education coordinating boards provide oversight. In turn, these coordinating entities have a shared governance relationship through governing boards that have responsibility for one or more public institutions, such as a university system. One state can have numerous governing boards.
Although coordinating boards do not have legal management and direct control responsibilities for campus or university systems, they exercise authority through their regulatory powers, policymaking authority, and budgetary oversight. State boards, for example, may oversee compliance with state aid; make recommendations on operating and capital budgets; and, in some instances, oversee academic program approval.
The price for state support. State aid, ranging from appropriations and grants for operations and capital to restricted funds for student financial aid, brings with it a host of accountability and reporting requirements. Public institutions—and private institutions that accept state funding—are subject to further oversight by the state auditor, whose role is to ensure accountability in the use of public funds.
Institutions also often interact with various state and local financing authorities. These authorities provide conduit financing for capital projects, allowing institutions to access both taxable and tax-exempt markets.
The Value of Vigilance
To ensure compliance with wide-ranging regulatory requirements, institutions typically rely on best practices, such as:
- Investing in regular training for employees. Particularly in the case of discrimination and harassment laws, the courts expect comprehensive efforts at employee education.
- Designating one person to track compliance with federal, state, and local regulations. While the institution does not necessarily need a full-time compliance officer, someone must have the specific responsibility for monitoring compliance activities.
- In each regulatory area, identifying experts on campus who can provide education and oversight.
- Turning to external sources—including insurance carriers, brokers, and legal counsel-for education materials and compliance audits.