Adjusting Journal Entry Investigation Audit No. 14-023 UNT Michelle Finley, CIA Chief Internal Auditor

April 16, 2014

WHY THE INVESTIGATION WAS PERFORMED An investigation was performed as a result of complaints received from the Texas State Auditor’s Office (“SAO”) and UNT Compliance hotline in September 2012. The complaints were similar and expressed concerns related to journal entry #0000213745. The adjusting journal entry was recorded to UNT’s general ledger on August 1, 2012, and the associated reversing entries were recorded for the UNT fiscal years ended August 31, 2012 and August 31, 2013. Internal Audit co-sourced with Deloitte and Touche LLP (“Deloitte”) to investigate the allegations. A report to UNT System Internal Audit, from Deloitte, outlining the work completed can be referenced in Exhibit A. The following is an excerpt from the complaint received from the SAO: The Financial Reporting Office (FRO) at the University of North Texas booked a $23,260,343.22 receivable effective 8/1/12 that is not collectible. I believe the reason the journal was created was to hide thousands of unreconciled transactions (as UNT’s annual financial report is being prepared) that occurred on several Balance sheet accounts from fiscal years 2004 through 2009, that were never resolved or writtenoff. The Director of FRO, who also approved the journal, referred to it simply as a “set-aside.” However, due to the age, amount and quantity of journals, GAAP [Generally Accepted Accounting Principles] clearly requires that the uncollectible portion of the receivable be immediately written down to its collectible amount. The staff in FRO who are directly responsible for reconciling the balance sheet accounts in question on a monthly basis have spent countless hours trying to resolve the unreconciled differences year after year, but to no avail. But instead of booking an allowance to reflect the risk, the Director simply swept all unlocated differences from the various accounts into a single receivable account totaling $23 million that continues to age without resolution and misstates UNT’s financial position. In coordination with Deloitte, the following work was performed to investigate the allegations:    

Performed interviews with key individuals associated with the preparation, approval, and execution of the adjusting journal entry transaction and subsequent correcting or reversing transactions; Reviewed documentation for the entry to assess whether the entry was properly supported, reported in accordance with Generally Accepted Accounting Principles (“GAAP”), and reviewed and/or approved by an appropriate level of management; Reviewed account reconciliations for the significant accounts impacted by the journal entry; and Measured the impact of the adjusting journal entry and subsequent reversing or correcting journal entries on the financial statements for UNT and UNTS.

OBSERVATIONS & RECOMMENDATIONS Based on the work performed, it was determined that the journal entry was not made in accordance with Generally Accepted Accounting Principles (“GAAP”) and appears to be a potential overstatement of net position in the FY2012 and FY2013 UNT financial statements, as well as the UNTS consolidated financial statements. The following summarizes the observations and associated recommendations:

Best Practice / Operational

Internal Policy Compliance

Regulatory / Statutory Compliance

Adjusting Journal Entry Investigation Audit No. 14-023 UNT

Key observations are ranked based on risk. Red indicates a High Risk observation, Yellow indicates a Moderate Risk, and Green indicates a Low Risk.

The Net Position in the FY2012 and FY2013 Financial Statements could be Overstated by as much $23 Million. – The former UNT Associate Vice President for Finance and Controller and the former Director of Financial Reporting and Operations were aware of the unreconciled differences and potentially uncollectible receivables prior to the issuance of the FY2012 and FY2013 UNT and UNTS financial statements. They directed and recorded this adjustment rather than evaluating the validity of these differences as to whether they were true assets of the UNTS. An allowance for doubtful accounts that encompassed all of the outstanding receivables was not recorded to mitigate the risk that the assets were not collectible and supporting documentation for the underlying transactions could not be provided by UNT Financial Reporting & Operations. As a result, the accounts receivable balance as of August 31, 2012 may be overstated by up to $23 million. The UNT and the consolidated UNTS net position could be overstated by as much as $23 million, as well. UNT does not have a written policy in place outlining the methodology to estimate an allowance for doubtful accounts. The establishment of an allowance for doubtful accounts ensures receivables are not overstated for financial reporting purposes. Recommendations for the Acting UNT Vice President for Finance and Administration: 1. Develop and document a UNT Allowance for Doubtful Accounts Policy, based on historical receivable information, to establish guidelines for accurately estimating uncollectible amounts. 2. Ensure that all necessary corrective action is taken related to the UNT adjusting journal entry and all reversing and correcting entries, as well as the allowance calculation. 3. Evaluate the allowance for doubtful accounts calculated for the remaining accounts receivable in FY2013 to determine if any additional financial statements adjustments are necessary. 4. Periodically evaluate receivables to determine their collectability. Recommendation for the UNT System Interim Chief Financial Officer and UNT Acting Vice President for Finance and Administration: 5. Restate prior period UNT and the consolidated UNTS financial statements as required. Management Response: UNT/UNTS concur and will review the current UNT Allowance for Doubtful Accounts Policy in comparison to historical receivable collectability to ensure the Policy and related process results in an accurate estimate. Any required revisions to the current Policy will be completed before August 31, 2014. UNT/UNTS will periodically evaluate all receivables in light of this Policy to determine receivable collectivity and appropriate asset value. UNT/UNTS will also ensure all necessary action is taken relative to the referenced UNT adjusting journal entry and will recalculate the Allowance for Doubtful Accounts estimate presented in the FY 2013 UNT and UNTS consolidated financial statements to ensure the net accounts receivable balance was presented accurately. Any necessary adjustments to prior period UNT and UNTS consolidated financial statements will be completed by August 31, 2014. Journal Entry was not Consistent with GAAP – GAAP requires the preparer of the financial statements to record assets that are valid and properly valued. Recording reconciling differences as miscellaneous receivables is not consistent with GAAP and therefore potentially misstates the financial position of UNT and the UNTS. Additionally, detailed supporting documentation was not attached to the journal entry support or maintained by UNT Financial Reporting & Operations. 2

Adjusting Journal Entry Investigation Audit No. 14-023 UNT

Recommendations for the UNT System Interim Chief Financial Officer: 6. Ensure procedures are developed in the financial reporting offices across the System that ensures that journal entries are processed in accordance with GAAP and reflect the nature of the underlying transaction. 7. Develop and document a System-wide policy that specifies that supporting documentation accompany all journal entries to support the validity of the transaction. Recommendation for the UNT Acting Vice President for Finance and Administration: 8. Ensure procedures are developed immediately that require sufficient supporting documentation to evidence the purpose and validity of all journal entries. Management Response: UNT/UNTS will develop an appropriate improved Journal Entry Policy, including documentation requirements, segregation of duties, and an escalation approval process for transactions based on a pre-determined threshold. Implementation of new policy controls and any corrective actions will be completed by August 31, 2014. While a comprehensive policy is under development, directives from the UNTS CFO will be provided to the UNTS components outlining requirements that all journal entries be properly evidenced with supporting documentation, approved by an individual with appropriate institutional authority, reviewed by the Financial Reporting & Operation Offices, and approved by an executive level for a specified monetary threshold. Further, UNT will perform an assessment of resources needed to address the recommendation that all journal entries be reviewed by the Financial Reporting & Operations Office and any need for additional personnel resources will be evaluated. In support of these procedure and policy improvements, UNT will begin an assessment in collaboration with UNT System Information Technology Shared Services to Implement PeopleSoft Journal Entry (JE) review and approval functionality. To strengthen the control environment, journal entry training sessions will be held for the UNT Financial Reporting & Operations Department to address the new directives and outline compliance with GAAP. These steps to improve the journal entry process will be in place by August 31, 2014. Circumvention of Internal Controls – While the journal entry preparer and approver are different employees in the system, the former Senior Director of Financial Reporting & Operations prepared the journal entry detail, provided this detail to an Accountant IV within the department to enter into EIS, and subsequently approved the journal entry. This resulted in an inadequate segregation of duties. Recommendation for the UNT System Interim Chief Financial Officer: 9. Develop and document a System-wide policy for processing journal entries that includes adequate segregation of duties. Management Response: UNT/UNTS will develop an appropriate improved Journal Entry Policy, including documentation requirements, segregation of duties, and an escalation approval process for transactions based on a pre-determined threshold. Implementation of new policy controls and any corrective actions will be completed by August 31, 2014. While a comprehensive policy is under development, directives from the UNTS CFO will be provided to the UNTS components outlining requirements that all journal entries be properly evidenced with supporting documentation, approved by an individual with appropriate institutional authority, reviewed by the Financial Reporting & Operation Offices, and approved by an executive level for a specified monetary threshold. Further, UNT will perform an assessment of resources needed to address the recommendation that all journal entries be reviewed by the Financial Reporting & Operations Office and any need for additional personnel resources will be evaluated. 3

Adjusting Journal Entry Investigation Audit No. 14-023 UNT

In support of these procedure and policy improvements, UNT will begin an assessment in collaboration with UNT System Information Technology Shared Services to Implement PeopleSoft Journal Entry (JE) review and approval functionality. To strengthen the control environment, journal entry training sessions will be held for the UNT Financial Reporting & Operations Department to address the new directives and outline compliance with GAAP. These steps to improve the journal entry process will be in place by August 31, 2014. Inappropriate Management Review – The UNT Financial Reporting & Operations Department does not require an escalation of review and approval based on a monetary threshold or for unusual or non-recurrent transactions. Failure to require an appropriate level of management to review all journal entries that are unusual, over a specified monetary threshold or non-recurrent increases the risk of error and/or fraud. Recommendation for the UNT System Interim Chief Financial Officer: 10. Develop and document a System-wide policy for processing journal entries that includes an escalated approval process for transactions above a pre-determined monetary threshold. Transactions over a specified monetary threshold should require executive level review and approval. Management Response: UNT/UNTS will develop an appropriate improved Journal Entry Policy, including documentation requirements, segregation of duties, and an escalation approval process for transactions based on a pre-determined threshold. Implementation of new policy controls and any corrective actions will be completed by August 31, 2014. While a comprehensive policy is under development, directives from the UNTS CFO will be provided to the UNTS components outlining requirements that all journal entries be properly evidenced with supporting documentation, approved by an individual with appropriate institutional authority, reviewed by the Financial Reporting & Operation Offices, and approved by an executive level for a specified monetary threshold. Further, UNT will perform an assessment of resources needed to address the recommendation that all journal entries be reviewed by the Financial Reporting & Operations Office and any need for additional personnel resources will be evaluated. In support of these procedure and policy improvements, UNT will begin an assessment in collaboration with UNT System Information Technology Shared Services to Implement PeopleSoft Journal Entry (JE) review and approval functionality. To strengthen the control environment, journal entry training sessions will be held for the UNT Financial Reporting & Operations Department to address the new directives and outline compliance with GAAP. These steps to improve the journal entry process will be in place by August 31, 2014. Ineffective Reconciliation Processes – The UNT Financial Reporting & Operations Department does not maintain adequate account reconciliation definition schedules, reconciliation processes, or policies regarding reconciliation preparation, review, and approval. Key to an effective reconciliation process is timely review and resolution of reconciling items. The majority of the line items on the adjusting journal entry related to unresolved reconciling differences dated prior to September 1, 2010 that remained unresolved at the time of the issuance of this report. Bank and account reconciliations are detective controls and are crucial elements of the internal control structure. Failure to resolve differences identified in the reconciliation process in a timely manner increases the risk of error and fraud. Recommendations for the UNT System Interim Chief Financial Officer: 11. Create System-wide Policies and develop procedures related to account reconciliations and write-off timelines for unresolved reconciling items. 12. Establish account reconciliation training for all individuals performing reconciliations to ensure consistency. 13. Institute an effective review process of all differences identified in the reconciliation process. This process should require the reviewer to immediately research and follow up on the nature of the difference and 4

Adjusting Journal Entry Investigation Audit No. 14-023 UNT elevate the issue to the appropriate level of upper management. In addition, differences identified to-date should be immediately evaluated as to the reason and amount to determine if potential write-off of those items is appropriate. Management Response: To ensure reconciliations are comprehensive and fully address unresolved transactions, UNT/UNTS will put in place a standardized reconciliation procedure and template. UNT/UNTS will also develop a formal Account Reconciliation Policy and initiate the necessary training of all affected employees. This new Policy will be in place by August 31, 2014, and a training program will be created and put on place by November 2014, to ensure that future reconciliations will occur timely and in accordance with accepted standards. UNT/UNTS will immediately begin corrective actions necessary to resolve any identified reconciliation discrepancies from past years that have not been addressed. It is anticipated that all reconciliations will be brought current and fully addressed by November 2014. OVERALL MANAGEMENT RESPONSE The University of North Texas (UNT) and the University of North Texas System (UNTS) administration acknowledge and thank UNT System Internal Audit and Deloitte LLP for their work on this investigation and for this audit report. Management concurs with the recommendation to review and ensure prompt compliance of policies for allowance for doubtful accounts, journal entry preparation and documentation, and account reconciliation following Generally Accepted Accounting Principles (GAAP) and meeting best business practice standards. Management is conducting a thorough assessment of all aspects of the preparation, approval, and posting of the referenced adjusting journal entry. We will quickly evaluate the history and documentation regarding this journal entry and make all necessary adjustments. These efforts will be given our immediate priority attention with appropriate allocation of resources to ensure an accountable and auditable resolution. Investigation performed by: Carissa Spinks, MBA, CIA, CFE, Senior Internal Auditor Investigation reviewed by: Susan Edwards, CIA, CICA, CFE, Director of Internal Audit

For more information, contact us by email at [email protected] or by phone at 940.565.2153. UNT System Board of Regents L. Jackson, Chancellor N. Footer, Vice Chancellor and General Counsel A. Clemson, Interim Chief Financial Officer L. Diamond, Interim System Controller N. Smatresk, President, UNT T. McCoy, Acting Vice President for Finance and Administration L. Miara, Associate Vice President for Finance & Controller S. Hill, Director of Institutional Compliance Texas State Auditor’s Office Governor’s Office Legislative Budget Board Sunset Advisory Commission

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Exhibit A UNT System Adjusting Journal Entry Analysis Prepared by Deloitte & Touche LLP

Exhibit A

University of North Texas System Adjusting Journal Entry Analysis

Deloitte & Touche LLP | March 31, 2014

Exhibit A

March 31, 2014

Deloitte & Touche LLP 2200 Ross Avenue Suite 1600 Dallas, TX 75201 USA Tel: +1 214 840 7376 Fax: +1 214 880 5376 www.deloitte.com

Ms. Michelle Finley Chief Internal Auditor University of North Texas System 1155 Union Circle, #311579 Denton, TX 76203-5017 Dear Ms. Finley: Deloitte & Touche LLP (“Deloitte & Touche”) has performed an analysis of certain adjusting journal entry transactions that were reported to the Office of the Chief Internal Auditor of the University of North Texas System (“UNTS”). The adjusting journal entry in question was recorded to the University of North Texas (“UNT”) general ledger during fiscal year ended August 31, 2012 and the associated reversing entries were recorded for the UNT fiscal years ended August 31, 2012 and August 31, 2013. The purpose of this report is to summarize the procedures that were performed and related observations that were identified through our analysis and testing of these adjusting journal entries to assess the appropriateness of these entries and their effect on the financial position of UNTS and UNT. Our services were performed in accordance with the Statement on Standards for Consulting Services issued by the American Institute of Certified Public Accountants (AICPA). However, our services did not constitute an engagement to provide audit, compilation, review, or attestation services as described in the pronouncements on professional standards issued by the AICPA, and, therefore, we will not express an opinion or other form of assurance with respect to our services. In addition, our services did not constitute an examination or compilation of prospective financial information in accordance with standards established by the AICPA. We did not provide any assurance regarding the outcome of any future audit or regulatory examination or other regulatory action, nor did we provide any legal advice regarding our services; the responsibility for all regulatory and legal issues with respect to these matters resides with UNTS. It is further understood that UNTS management is responsible for, among other things, identifying and ensuring compliance with laws and regulations applicable to the financial statement activities of UNTS and UNT. This report is intended solely for the information and use of UNTS and UNT and is not intended to be, and should not be, used by any other party, with the exception of oversight agencies for the performance of their oversight responsibilities. We appreciate the cooperation received from management and staff of UNTS and UNT during the performance of this review. Yours truly,

Partner Deloitte & Touche LLP

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Exhibit A

Table of Contents

Section Name

Page Number

Project Overview

3

Observations & Recommendations

5

Appendix A – Texas State Auditor Request

7

Appendix B – Texas State Auditor Hotline Complaint

8

Appendix C – University of North Texas Hotline Complaint

9

University of North Texas System – Adjusting Journal Entry Analysis | 2

Exhibit A

Project Overview Background The UNTS Internal Audit Department received notification of anonymous complaints filed with the Texas State Auditor’s Office Special Investigation Unit (“SAO”) on September 25, 2012 and the UNT ethics hotlines on September 19, 2012. Please reference Appendices B & C, respectively, to review the complaints that were filed through those portals. Further investigation was requested by the Texas State Auditor’s office, as outlined in Appendix A. The complaints claimed that an adjusting journal entry dated August 1, 2012 (the “Adjusting Journal Entry”) performed by the UNT Financial Reporting & Operations Department (“FRO”) on the UNT general ledger was created “to hide thousands of unreconciled transactions that occurred on several balance sheet accounts from fiscal years 2004 to 2009 that were never resolved or written off.” The allegations also indicate that the account balances that were recorded may be uncollectible and that the former senior director of the financial reporting office “swept all the unreconciled differences from the various accounts into a single account receivable account totaling $23 million that continues to age without resolution and misstates UNT’s financial position.” The Adjusting Journal Entry was recorded on August 1, 2012 in the net amount of $23,260,343.22 to record a miscellaneous account receivable for that amount and affect fifty-two asset and liability general ledger accounts in the areas of cash, state appropriations, accounts receivable, and accounts payable. The following is a summary of the journal entry by financial statement line item: Account Classification Cash & Cash Equivalents Accounts Receivable Accounts Payable Other Liabilities Total

Entry Sum by Account Classification $5,855,428.08 $16,719,122.31 $594,984.30 $90,808.53 $23,260,343.22

Effect on Trial Balance Reduction of assets Reduction of assets Increase of liability Increase of liability

Scope and Objective Our analysis consisted of reviewing the journal entry in question and obtaining the supporting documentation to assess whether the journal entry was properly approved, supported and recorded in accordance with generally accepted accounting principles (“GAAP”); gathering an understanding of the UNT personnel responsible for the preparation, review, and approval of the entry; and quantifying the effect of the journal entry on the FY2012 financial position of UNT. The scope of this analysis did not include investigating the unresolved reconciling items or account balances of the accounts affected by the entry. As part of our procedures, we obtained copies of the reversing or correcting journal entries posted in the general ledger subsequent to August 1, 2012 in FY2012 and FY2013 to assist with the quantification of the potential misstatements to the financial statements.

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Exhibit A Approach Our approach for this analysis consisted of the following steps: · Step 1: Performed interviews with individuals associated with the preparation, approval, and execution of the Adjusting Journal Entry transaction and subsequent correcting or reversing transactions, · Step 2: Requested supporting documentation of the entry to assess whether the entry was properly supported and to assess the appropriateness of the adjustment amounts for a risk-based sample of line item accounts, · Step 3: Requested documentation to indicate the review and approval of the entry by an appropriate level of management, · Step 4: Requested account reconciliations as of July 31, 2012 for the significant accounts that were impacted by the journal entry, and, · Step 5: Measured the impact of the adjusting journal entry and subsequent reversing or correcting journal entries on the financial statements A risk-based approach was developed to assess the materiality for each account affected by the Adjusting Journal Entry. Our analysis consisted of 17 of the 52 line items totaling a net amount of $23,064,717.26 within the journal entry, providing coverage of 96% of the transaction.

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Exhibit A

Observations and Recommendations The table below provides a summary of the observations and associated recommendations as identified through our analysis: Observation Number

Observation Name

1

Insufficient supporting documentation maintained

2

Observation

Recommendation

Detailed supporting documentation for the Adjusting Journal Entry was not attached to the journal entry support maintained in ImageNow or separately filed by the FRO Department.

Journal entries should be accompanied by supporting documentation to evidence the purpose and validity of the entry, as well as support for how amounts were calculated.

Recording unreconciled differences as other receivables is not in accordance with GAAP

GAAP requires the preparer of the financial statements to record assets that are valid and properly valued. Recording reconciling differences as miscellaneous receivables is not in accordance with GAAP and therefore misstates the financial position of UNT and the UNTS.

The FRO Department should implement controls requiring timely and periodic evaluation of assets for validity to ensure the financial statements are properly stated in accordance with GAAP.

3

Untimely resolution of reconciling items

The majority of the line items on the Adjusting Journal Entry related to unresolved reconciling differences dated prior to September 1, 2010 that remained unresolved at the time of the issuance of this report. Account reconciliations are detective controls and are crucial elements of the internal control structure. Failure to resolve differences identified in the reconciliation process in a timely manner increases the risk of errors or irregularities.

The FRO Department should institute an effective review process of all differences identified in the reconciliation process. This process should require the reviewer to research and follow up on the nature of the difference and elevate the issue to the appropriate level of upper management for timely review. In addition, unresolved reconciling differences identified to-date should be immediately evaluated as to the reason and amount to determine if potential write-off of those items is appropriate.

4

Ineffective reconciliation processes

The FRO Department does not maintain adequate account reconciliation definition schedules, reconciliation processes, or policies regarding reconciliation preparation, review, and approval.

The FRO Department should create policies and procedures related to account reconciliations and write-off timelines for unresolved reconciling items.

5

Insufficient review & approval of transaction

While the journal entry preparer and approver were different employees in the system, the former Senior Director of the FRO Department prepared the journal entry detail and provided it to an Accountant IV within the FRO Department to enter into the system. The former Senior Director subsequently approved the journal entry for posting in the system. Failure to require appropriate level of management to review all journal entries that are unusual or nonrecurring increases the risk of error or irregularities.

The FRO Department should maintain a segregation of duties policy. Approvals above a predetermined monetary threshold should require approval of, at a minimum, the Associate Vice President for Finance & Controller.

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Exhibit A Observation Number 6

Observation Name Financial statements were potentially misstated as a result of the accounting treatment

Observation

Recommendation

The former Associate Vice President for Finance & Controller and former Senior Director of the FRO Department were aware of the unreconciled differences and potentially uncollectible receivables prior to the issuance of the FY2012 and FY2013 UNT and UNTS financial statements and directed and recorded this adjustment rather than evaluating the validity of these differences as to whether they are true assets of UNT and UNTS. A valuation allowance was not recorded to offset this receivable to mitigate the risk that the asset is not collectible. As a result, the account receivable balance as of August 31, 2012 was potentially overstated by $23 million resulting in a potential overstatement of the UNT and UNTS net position by the same amount.

Management with technical accounting knowledge within the FRO Department should review journal entries prior to posting to assess their appropriateness and alignment with GAAP. Management should also evaluate the impact of such transactions on the financial position of UNT and UNTS prior to recording this transaction. Consideration should be made as to whether the parties who rely on the financial statements should be notified of any errors or irregularities.

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Exhibit A

Appendix A — St a t e   Audi t or ’ s   Of f i c e   Request

University of North Texas System – Adjusting Journal Entry Analysis | 7

Exhibit A

Appendix B — St a t e   Audi t or ’ s   Of f i c e   Hotline Complaint

University of North Texas System – Adjusting Journal Entry Analysis | 8

Exhibit A

Appendix C — University of North Texas Hotline Complaint

University of North Texas System – Adjusting Journal Entry Analysis | 9