The Numbers Game
Alternative investments and financial reporting on intercollegiate athletics piqued attendees’ interest at NACUBO’s Higher Education Accounting Forum.
By Kimberly Dight and Sue Menditto
Lou Mezzina, national industry director for higher education at KPMG, LLP, and Karl Turro, associate controller at Northwestern University, outlined the issues surrounding investment alternatives that accounting professionals must understand. Alternative investments are typically managed as limited partnerships and include venture capital funds, private equity funds, and hedge funds. They are not necessarily riskier; however, because they are not publicly traded securities, attendees had questions regarding due diligence and financial reporting practices. Accounting professionals must pay particular attention to fund valuation and financial reporting and disclosure issues.
Valuation. Determining the value of alternative investment funds is considered an audit risk area. The business office can mitigate the risk level by evaluating the fund’s operations and internal controls. Mezzina and Turro recommended that an institution’s finance committee of the board of directors discuss and review the fund’s business processes. The finance committee can greatly assist both the institution’s audit committee and the independent auditors by handing off the results of their due diligence.
Institutions can benefit from getting comfortable with underlying values. Alternative investment fund managers are supposed to make a good-faith effort to determine value. However, a statement from the underlying manager is not considered sufficient. So how does an institution look at more than just the statement?
Many techniques can increase confidence in the funds management, internal control practices, and valuation methodology:
- Request the audits of these funds annually.
- Perform the upfront due diligence when selecting a fund by checking into the fund’s controls and audit report.
- Understand the fund’s operational practices and details.
- Understand how income is allocated among the various participants in the fund.
- Examine the audit opinions for each fund.
- Become comfortable with the lag period between a fund’s year-end valuation date and the institution’s fiscal year end. Because many funds are connected to private companies, a calendar year end is most common.
To get comfortable with the lag period:
- Look at public information like the S&P Index.
- Compare values against independent third-party estimates.
- Compare values per t he December 31 audit report to unaudited December 31 values. The levels of difference in values can help assess the reliability of values at month end, quarter end, or fiscal year-end periods.
- Read intermittent communication (narratives) about the funds and look for consistency and reliability to the audited values and changes.
- Evaluate the amount of gain compared with the audited market value of the fund. If there is a large gain, it’s fair to say that the valuation was conservative. Consequently it’s not unreasonable to assume appreciation between December 31 and a fiscal year end like June 30.
- Find out who the fund’s auditors are, the type of audit opinions available on each fund, and the process for allocating income among the types of investments.
- Investigate whether major changes in investment managers occurred between calendar year end and the institution’s fiscal year end. If investment management changed, did other processes change? Were there other management changes?
Reporting and disclosures. Generally Accepted Accounting Principles require reporting at fair-market value. Alternative investments must be clearly denoted in an institution’s financial statements. The alternative investment valuation methodology or policy should be evident through disclosure. Institutions need to disclose risks such as credit, concentration, and leverage. If applicable, commitments yet to be recognized must also be disclosed.
In the interest of transparency, institutions need to be aware of the following recommendations:
- Disclose cost, which is not required but is nice to have; there are institutions that currently disclose cost information.
- Show in the valuation policy disclosure that management is accountable and reviews the valuation.
- Categorize investment returns between operating and nonoperating.
As the number of alternative investment funds grows with the demand and expectation of greater returns, so must higher education institutions’ awareness, due diligence, internal control, and financial reporting considerations.
Keeping Score of Sports Programs
A great deal of uncertainty surrounds the new intercollegiate athletics financial reporting requirements. The National Collegiate Athletic Association’s Jim Isch, senior vice president and chief financial officer, Joyce Collins, director of accounting, and Maria DeJulio, research contractor, presented and clarified recent changes in NCAA legislation, the result of several years of effort to improve college and university financial reporting to both the NCAA and the federal government.
In 2003, the NCAA convened a joint task force with NACUBO to improve the quality of financial data collected from members. The NCAA asked NACUBO members to participate in anticipation of increasing business office involvement in the financial reporting of athletics information. The goals of the task force were to:
- collect, in a reliable manner, data that fully describe the financial position of the intercollegiate athletic programs;
- collect key information that will be valuable for presidents of NCAA members to measure trends and develop benchmark s for athletics programs;
- eliminate duplicative reporting requirements to the NCAA and the federal government;
- ensure that the data collected are as comparable among institutions as possible; and
- develop an electronic means of data collection where the campus chief financial officer reviews the submission.
NCAA legislation was amended in August 2004 to change the financial reporting timeline; specify the agreed-upon procedures and related reporting (replacing the financial audit guidelines first enacted in 1985); and revise reporting definitions. NCAA member institutions are required to submit financial data on an annual basis to both the federal government under the Equity in Athletics Disclosure Act (EADA) a nd the NCAA. The NCAA reporting requires 1) an agreed-upon procedures report prepared by an independent auditor, and 2) online reporting of financial data. One goal of the task force was to make these two requirements more compatible with each other as well as with EADA requirements.
Institutions were required to complete the EADA report through the Department of Education Web site by October 30, 2004, and to provide financial data via the new online system to the NCAA by January 15, 2005. Colleges and universities do not have to be in compliance with the new agreed-upon procedures until January 15, 2006. However, institutions were encouraged to implement early, given that the revised revenue and expense definitions in the agreed-upon procedures documentation contain all necessary elements for federal reporting. The agreed-upon procedures, which have been revised as of March 31, can be downloaded from the NCAA Web site (www1.ncaa.org/membership/ed_outreach/eada/forms/procedures.pdf).
Under the old audit guidelines as well as the new agreed-upon procedures, member institutions must submit a statement of revenues and expenses to the CEO. Several revenue and expense definitions were amended and many new categories were created in the revised legislation. In addition to synchronizing definitions with EADA classifications, revisions were made to include capital expenses, third-party expenditures, and other previously unreported categories.
Understanding the Changes
The agreed-upon procedures are intended to provide a road map for the independent auditor’s review of financial data related to intercollegiate athletics. The NCAA anticipates this review to be more focused and cost-effective than a full audit while ensuring the integrity of the report. With the adoption of the legislation, the business office has a more substantial role in athletics reporting. The forum session gave attendees an opportunity to gain a better understanding of the NCAA requirements and at the same time demonstrated that there is still lack of clarity regarding their application. Attendees were confused about the meaning of the new categories for financial reporting and the impact of the new requirements on the relationship (and associated fees) of the institution to its outside auditors.
A new revenue category, Indirect Facilities and Administrative Support, includes the value of facilities and services provided by the institution not charged to athletics. Many institutions do not allocate such costs to athletics and would not allocate it as revenue to the athletics program, and therefore take issue with its inclusion. On the other hand, some institutions do allocate indirect costs to athletics. The new definitions are designed to improve comparability among institutions and reveal hidden costs.
Language regarding the objectives of the report, the role of the independent accountant, and the minimum and supplemental procedures from the old audit guidelines has been modified in the agreed-upon procedures. For example, the minimum agreed-upon procedures program for the revenue section of the document provides more guidance to auditors on specific items to “document and test” rather than instructing them to “gain an understanding” of general categories. For institutions, this raises questions about the scale and reach of the new requirements.
Forum speaker Jim Isch reminded participants that a goal of the changes is to provide campus presidents with a better understanding of the financial data of their athletic departments. At the same time, he encouraged feedback on all aspects of the new reporting. Several issues remain where clarity and guidance would ease institutions’ anxieties. NACUBO and the NCAA will present a webcast to provide such guidance—look for details in E-bulletin and on www.nacubo.org.
Author Bios Kimberly Dight is manager, accounting policy, and Sue Menditto is director, accounting policy, at NACUBO.
- Associations Respond to DACA and DREAM Act Concerns
- Congress Makes Changes to GI Bill Education Benefits
- CFPB Report Criticizes Campus Banking Agreements
- 2017 Intermediate Accounting and Reporting - Winter
January 23-24, 2017
- 2017 Endowment and Debt Management Forum
February 1-3, 2017
- WEBCAST: NACUBO Live! Results of the 2016 NACUBO-Commonfund Study of Endowments
Thursday, February 2, 2017 9:15AM ET
- WEBCAST: Compliance Challenges for the New EPA Hazardous Waste Rule
Tuesday, February 7, 2017 1:00PM ET
- ON-DEMAND: The ROI of Student Success: Practical Considerations for Measuring and Conveying the Financial Value of Student Support Services
- ON-DEMAND: The CBO's Role in Diversity and Inclusion on Campus