Report 2016-130 Recommendation 9 Responses

Report 2016-130: The University of California Office of the President: It Failed to Disclose Tens of Millions in Surplus Funds, and Its Budget Practices Are Misleading (Release Date: April 2017)

Recommendation #9 To: University of California Board of Regents

To ensure that the Office of the President's financial safeguards are adequate, the regents should require the Office of the President to engage in a financial audit of only the Office of the President's operations.

Annual Follow-Up Agency Response From April 2019

The remaining action to fully implement this recommendation, a third party review of UCOP's reserve and budgeting internal controls, has now been completed. Deloitte was engaged to perform this review and issued its report in December 2018. The report concluded that the controls tested appeared to be operating effectively based upon the associated evidence reviewed and the samples tested. The following observation was identified: formal processes and controls for timely approval by the Regents for material forecast adjustments have yet to be fully designed and implemented. UCOP developed an action plan to address this observation which was presented to the UC Regents as part of the Mid-Year Budget to Actuals item in March 2019.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

We are rating this recommendation as fully implemented because a third party firm completed its review of the Office of the President's reserves and budgeting internal controls. After we released our report, we had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determine the most efficient way for the university to address our concerns within a reasonable cost. We determined three steps—described in detail in prior assessments below—that would allow the Regents to efficiently complete this recommendation. We had previously rated steps 1 and 2 as complete. The independent review by Deloitte completes the final step of our agreement.

Deloitte completed its independent assessment of the Office of the President's budget and reserve internal controls. It found that the internal controls tested appeared to be operating effectively. For other internal controls that Deloitte determined were too new to test, it determined that the Office of the President designed the safeguards appropriately. We look forward to assessing any additional reviews performed by the Office of the President related to our recommendation due in April 2020, which requires the Office of the President to evaluate its budget process to ensure it has efficient and adequate safeguards.

Annual Follow-Up Agency Response From October 2018

The following is the current status of the agreed-upon additional actions to fully address this recommendation:

1. Present to the Regents a schedule of UCOP funds, fund balances, and fund restrictions, including reserve balances.

Status: Complete as of May 2018. A schedule of UCOP funds, fund balances and fund restrictions was presented in March 2018: http://regents.universityofcalifornia.edu/regmeet/mar18/f10.pdf. UCOP reserve balances were presented to the Regents as part of the Fiscal Year 2018-19 UCOP budget presentation in May 2018: http://regents.universityofcalifornia.edu/regmeet/may18/b1.pdf.

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns.

Status: Complete as of June 2018. On June 28, 2018, a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns was sent to the Chair of the Regents and the Chair of the Compliance and Audit Committee.

3. Engage a third party firm to conduct a review of UCOP's reserve and budgeting internal controls after the fiscal year 2018-19 budgeting process is complete, to allow time for new controls over reserves and budgeting to be implemented (by September 2018)

Status: Deloitte has been engaged to complete this internal controls review. Fieldwork is now complete and the final report is expected to be issued by end of October 2018.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Since we released our report, we have had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determine the most efficient way for the university to address our concerns within a reasonable cost. We came to an agreement that the Regents could meet this recommendation by completing the following steps:

1. Present to the Regents a schedule of Office of the President funds, fund balances, and fund restrictions, including reserve balances.

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for the Office of the President showing significant departments within the Office of the President in separate columns.

3. Engage a third party firm to conduct a review of the Office of the President's reserve and budgeting internal controls after the fiscal year 2018-19 budgeting process is complete, to allow time for new controls over reserves and budgeting to be implemented.

We have determined that items 1 and 2 above are complete. The Office of the President presented a schedule of Office of the President funds, fund balances, and fund restrictions, including reserve balances to the Regents as part of its fiscal year 2018-19 budget presentation. In June 2018, the Office of the President presented a schedule of fiscal year 2016-17 revenue and expenses for UCOP showing Agriculture and Natural Resources, University of California Press, Department of Energy Laboratories, University of California Education Abroad Program, University of California Washington Center, and California Digital Library in separate columns to the Chair of the Regents and the Chair of the Compliance and Audit Committee. However, as of October 2018, the third party review of the Office of the President's reserve and budgeting internal controls has not been issued. Therefore, this recommendation is partially implemented.

1-Year Agency Response

At the November 2017 Regents meeting, PricewaterhouseCoopers (PwC) presented the results of its audit of the statement of revenues and expenses for the Office of the President. PwC issued a clean opinion on the report.

In response to concerns raised by State Auditor regarding the scope of this audit, and to provide additional information to the Regents for its oversight of UCOP finances, UCOP will take the following additional actions:

1. Present to the Regents a schedule of UCOP funds, fund balances, and fund restrictions, including reserve balances (complete as of March 2018)

2. Present to the Chair of the Regents and the Chair of the Compliance and Audit Committee a schedule of revenue and expenses for UCOP showing significant departments within UCOP in separate columns (by June 2018)

3. Engage a third party firm to conduct a review of UCOP's reserve and budgeting internal controls after the fiscal year 2018-19 budgeting process is complete, to allow time for new controls over reserves and budgeting to be implemented (by September 2018)

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Since our 6-month assessment, we had multiple meetings with the Regents and Office of the President executives to discuss this recommendation and determined the most efficient way for the university to address our concerns within a reasonable cost. The items the Office of the President outlines above reflect an agreement we came to during a meeting in February that included the chair of the compliance and audit committee, the systemwide controller, and the chief compliance and audit officer. As we stated as part of recommendation 3, we reviewed the information the Office of President provided to the Regents regarding fund restrictions and did not identify any issues. However, we were unable to review the Office of the President's reserve balances because it did not provide us with that data as discussed in recommendation 5. Additionally, this recommendation is pending the Regents and the Office of the President completing items 2 and 3. Therefore this recommendation is partially implemented.

6-Month Agency Response

The financial audit of the Office of the President is in process. The audit is being conducted by the University's external auditor, PricewaterhouseCoopers (PwC) with support from Internal Audit. PwC will issue an opinion on a report showing Office of the President expenditures and the sources of funds used to pay those expenditures, including the campus assessment. PwC will present this additional report at the November 2017 Regents meeting along with the other external audit reports.

California State Auditor's Assessment of 6-Month Status: Pending

Although the Office of the President presented the regents with a financial audit in November 2017 titled "Financial Statement, June 30, 2017" (audit), this audit does not implement our recommendation. Specifically, the audit was limited to only the Office of the President's revenues and expenditures for fiscal year 2015-16. Because of the audit's limited scope, it omits the Office of the President's reserve balances. We expected the audit to include an assessment of reserve balances because in our report we found that the Office of the President had failed to disclose the amount and nature of these reserves to the regents and to the public. In addition, the audit did not evaluate the Office of the President's internal controls. We expected an assessment of the Office of the President's reserve and budgeting internal controls because in our report we determined there were significant deficiencies in these areas. While a financial audit of the Office of the President that was similar in nature to university's systemwide audit would have addressed these areas, this November 2017 audit is too limited in nature to satisfy our recommendation.

Finally, another shortcoming of the November 2017 audit is that it includes several large entities under the Office of the President's control, such as the Division of Agriculture and Natural Resources and the Education Abroad Program. Although it is acceptable to include these entities in the audit, the Office of the President should place their financial activities in separate columns to allow for full transparency of the Office of the President's financial activities. Because the report does not show these entities' operations separately from the Office of the President, it does not fully address this recommendation.

We shared our concerns with the Office of the President and Regent Zettel and committed to future coordination to ensure this recommendation is fully implemented.

60-Day Agency Response

The audit scope for 2016-17 for the University's external auditor, PricewaterhouseCoopers, has expanded to include a separate report on the results of operations for the Office of the President. UCOP's Internal Audit department will support this audit by conducting its own review of Office of the President expenditures. PwC will issue an opinion on a report showing Office of the President expenditures and the sources of funds used to pay those expenditures, including the campus assessment. PwC will present this additional report at the November 2017 Regents meeting along with the other external audit reports. In the future, when the Office of the President presents its budget for approval, the Regents will have confidence that the actual expenditures presented are correct since those amounts and underlying transactions will have been audited by Internal Audit and PwC.

California State Auditor's Assessment of 60-Day Status: Pending

The regents' response implies that it has already expanded the scope of these audits. However, according to the systemwide deputy audit officer, the Office of the President is still in the process of developing these documents and therefore it did not provide any additional information.The status of this recommendation is pending completion of the financial audit and the Office of the President's planned internal audit.

All Recommendations in 2016-130

Agency responses received are posted verbatim.