Review of Community College Audit Reports. Fiscal Year Ending June 30, 2001

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1 Review of Community College Audit Reports Fiscal Year Ending June 30, 2001

2 This report and any related follow-up correspondence are available to the public. Alternate formats may also be requested by contacting the Office of Legislative Audits as indicated at the bottom of the next page or through the Maryland Relay Service at Please address specific inquiries regarding this report to the Assistant Director listed on the inside back cover by telephone at (410) Electronic copies of our audit reports can be viewed or downloaded from the Internet via The Department of Legislative Services Office of the Executive Director, 90 State Circle, Annapolis, Maryland can also assist you in obtaining copies of our reports and related correspondence. The Department may be contacted by telephone at (410) or (301)

3 August 20, 2002 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Samuel I. Rosenberg, Co-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Mr. John J. Oliver, Jr., Chairman Maryland Higher Education Commission Mr. Karl S. Aro, Executive Director Department of Legislative Services Ladies and Gentlemen: In accordance with the provisions of the Education Article, Section (h) of the Annotated Code of Maryland, we have reviewed the audit reports that must be filed by 15 of the State s community colleges with the Maryland Higher Education Commission for the fiscal year ended June 30, 2001 and are herein summarizing the results of such audits. Our review disclosed that all opinions expressed by the colleges independent auditors stated that the applicable financial statements were fairly presented in conformity with generally accepted accounting principles. However, the financial statements of one community college disclosed an unrestricted current fund deficit and two community colleges had uninsured/uncollateralized bank deposits. A draft copy of this report was provided to the Maryland Higher Education Commission for review and comment. Since there are no recommendations in this report, a written response was not necessary. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor

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5 Background Information and Purpose of Review For the fiscal year ended June 30, 2001, State aid totaling approximately $163 million was granted to 15 of Maryland s 16 community colleges. This aid primarily consisted of funding based on cost and student enrollment data. In addition, it included certain retirement benefits and various other grants. The remaining college (Baltimore City Community College) is a budgetary unit of the State and receives an annual State appropriation. Baltimore City Community College is not subject to the Education Article, Section (h) of the Annotated Code of Maryland; however, it obtains annual financial audits that are conducted by a certified public accounting firm. The College is also subject to fiscal/compliance audits by the Office of Legislative Audits. We issue separate reports on the College, which contain information regarding the results of these audits. The Education Article, Section (a) of the Annotated Code of Maryland requires the Maryland Higher Education Commission to adopt guidelines for the preparation of annual audit reports on the colleges. The guidelines promulgated by the Commission require independent auditors to express opinions as to the fairness of presentation of the colleges financial statements as well as to the cost and student enrollment data used for calculating the State aid to the colleges. The guidelines also require the auditors to issue management letters containing all material weaknesses in the colleges systems of internal controls. While not required, many of the auditors issue management letters that contain non-material weaknesses. We reviewed the audit reports of the State s community colleges for the fiscal year ended June 30, 2001 to determine compliance with the applicable statutes and the guidelines promulgated by the Commission. This report contains the results of that review. 3

6 Results of Review Audit Reports Thirteen of the 15 audit reports were filed timely and all of the opinions expressed by the auditors were unqualified. Our review disclosed that 13 of the 15 community college audit reports were filed timely with the Commission for the fiscal year ended June 30, 2001, and all of the audit reports contained unqualified opinions from their auditors. The two community college audit reports submitted after the required filing date were for Allegany College of Maryland and Montgomery College. The State s community colleges are required by law to file annual audit reports within 90 days of the fiscal year end (June 30) unless an extension is granted. In addition, the Commission s audit guidelines require the auditors to express opinions as to the fairness of the presentation of the colleges financial statements. An unqualified opinion is issued when the auditor states that the applicable financial statements are presented fairly, in all material respects, in conformity with generally accepted accounting principles. Financial Statements An unreserved, unrestricted current fund deficit was noted for one college. Our review disclosed one college with a deficit balance in the unreserved portion of its unrestricted current fund as of June 30, Specifically, the Community College of Baltimore County had an unreserved, unrestricted current fund deficit of $3,329,873. Since the College s unrestricted current fund also had a positive reserved fund balance of $2,538,004, the total unrestricted current fund deficit was $791,869 at June 30, The unrestricted current fund is the fund used to account for those financial transactions relative to a college s performance of its primary objectives (that is, education, research, public service, general administration). Consequently, a deficit in this fund may indicate a potential financial problem. We did not perform a detailed analysis to determine the cause of this deficit; nevertheless, the College s financial statements and accompanying notes contained certain pertinent information relative to the deficit. Specifically, the College s financial statements disclosed that recorded liabilities for compensated absences equaled the amount of the College s unreserved deficit. 4

7 Generally accepted accounting principles specify that liabilities for employees rights to receive compensation for future absences for which employees will be paid (for example, vacation) be recorded in the financial statements. The liabilities are liquidated during future periods as employees use such benefits (that is, employees are absent from work), or upon termination of employment, at which time the employees receive additional cash compensation for cumulative unused benefits. The financial statements of two community colleges disclosed uninsured/ uncollateralized bank deposits. The financial statements of Frederick and Garrett Community Colleges disclosed uninsured/uncollateralized bank deposits. Specifically, the financial statements of Frederick Community College disclosed that cash deposits exceeded collateralization and insurance by $84,835 at June 30, In addition, the financial statements of Garrett Community College disclosed that during fiscal year 2001 cash deposits exceeded collateralization and insurance by as much as $550,000. This condition was also noted for Garrett Community College during our preceding year s review. As a result of our follow-up efforts, the colleges notified us that additional collateral would be pledged by their banks to cover all deposits. Article 95, Section 22 of the Annotated Code of Maryland requires that deposits with financial institutions by local government units (including community colleges) be fully collateralized. Full collateralization is necessary to minimize the risk of loss of a deposit in the event of the default of a financial institution. Management Letters Management letters included 26 recommendations for improvement. We reviewed the management letters applicable to the audits of the community colleges that were filed with the Commission for the fiscal year ended June 30, Ten of the community colleges did not receive any recommendations, while the remaining five community colleges received a total of 26 recommendations. None of these recommendations were considered to be material weaknesses in the colleges systems of internal controls. 5

8 The Commission did not formally evaluate the adequacy of the colleges responses to the 26 non-material recommendations since, in accordance with the Commission s guidelines, comments and suggestions related to non-material weaknesses are not required. When auditors include such items in the letters, the colleges follow-up actions are subject to the auditors review during subsequent audits. The following schedule provides a summary of the fiscal year 2001 recommendations by fiscal area. Two of the 26 recommendations were repeated from the preceding year. Fiscal Area of Recommendation Number of Recommendations Electronic data processing systems 5 Accounting and financial reporting 5 Cash receipts and disbursements 4 Plant assets, inventory 4 Accounts receivable 2 Grants / contracts 2 Other (including financial aid, student enrollment) 4 Total 26 6

9 AUDIT TEAM Robert A. Garman, CPA Assistant Director Angela M. Phillips, CPA Senior Auditor