REPORT DIGEST NORTHERN ILLINOIS UNIVERSITY FINANCIAL AUDIT FOR THE YEAR ENDED JUNE 30, 2018 Release Date: March 7, 2019 FINDINGS THIS AUDIT: 2 CATEGORY: NEW -- REPEAT -- TOTAL Category 1: 0 -- 1 -- 1 Category 2: 0 -- 1 -- 1 Category 3: 0 -- 0 -- 0 TOTAL: 0 -- 2 -- 2 FINDINGS LAST AUDIT: 4 Category 1: Findings that are material weaknesses in internal control and/or a qualification on compliance with State laws and regulations (material noncompliance). Category 2: Findings that are significant deficiencies in internal control and noncompliance with State laws and regulations. Category 3: Findings that have no internal control issues but are in noncompliance with State laws and regulations. State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov INTRODUCTION This digest covers the Northern Illinois University’s Financial Audit as of and for the year ended June 30, 2018. The Northern Illinois University’s Compliance Examination (including the Single Audit) covering the year ended June 30, 2018 will be issued at a later date. SYNOPSIS • (18-1) The University’s internal controls over financial reporting are not sufficient to prevent material misstatements. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS FINANCIAL REPORTING PROCESS The University’s internal controls over financial reporting are not sufficient to prevent material misstatements. During our audit of the significant balances comprising the University’s financial statements, we noted the following: I. Errors and Deficiencies Related to Capital Asset Recognition and Reporting During testing over the University’s balance of construction project expenditures capitalized as construction- in-progress as of June 30, 2018 (totaling $57,908,960 prior to any audit adjustments), we noted six projects, totaling $9,098,946, which were completed and placed in-service, but not appropriately transferred to a depreciable asset. It was determined that each of these projects were completed during the fiscal years ended June 30, 2013, 2014, or 2015. The result of these errors in the University’s financial records as of June 30, 2018 were as follows: • Overstatement of capital assets, construction-in-progress totaling $9,099,000 • Understatement of capital assets, buildings totaling $7,714,000 • Understatement of capital assets, land improvements totaling $1,223,000 • Overstatement of net position, unrestricted totaling $162,000 • Understatement of accumulated depreciation totaling $1,548,000 • Overstatement of net position, net investment in capital assets totaling $1,548,000 The University recorded an audit adjustment to correct this matter in the financial statements as of and for the year ended June 30, 2018. During the fiscal year 2018 audit, University officials made us aware of an asset impairment totaling $1,396,000, recognized in the University’s financial statements for the fiscal year ending June 30, 2018. Although the University appropriately identified a residence hall (Lincoln Hall) in need of an impairment analysis, an impairment trigger occurred during fiscal year 2014, which should have prompted the University to perform an impairment test at that time. An internal memo regarding the future use of Lincoln Hall was issued in August 2013 by University management stating that academic and academic-related services would be relocated to other campus facilities beginning with the 2013-2014 academic year because the Lincoln Hall facilities are dated and demand for housing is significantly less than other residential options. The result of this error is a likely understatement of accumulated depreciation and an overstatement of net position in the University’s fiscal year 2014 financial statements. The result of this error is a likely overstatement of opening net position as of July 1, 2017 totaling $1,396,000. The University did not record an audit adjustment to correct this matter in its fiscal year 2018 financial statements as it was not considered to be material to the users of the financial statements. II. Errors and Deficiencies Related to Inter-Entity Transactions During testing over the University’s implementation of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pension (OPEB), specifically as to whether the Northern Illinois University Foundation (the Foundation), the Northern Illinois University Alumni Association (the Alumni Association), and the Northern Illinois Research Foundation (the Research Foundation) (collectively, the University Related Organizations, or UROs) should be allocated a portion of the University’s share of its net OPEB liability, it was determined that the UROs, discretely presented component units of the University, were not preparing their financial statements under the appropriate financial reporting framework. The UROs, non-profit corporations and separate legal entities from the University, do not meet the definition of a governmental entity under accounting principles generally accepted in the United States of America and should prepare their financial statements in accordance with financial reporting standards issued by the Financial Accounting Standards Board (FASB). Historically, the UROs have prepared their financial statements in accordance with financial reporting standards issued by GASB. The Foundation and the Alumni Association changed their financial reporting framework and prepared financial statements in accordance with financial reporting standards issued by FASB for the year ended June 30, 2018, for inclusion in the University’s financial statements as discretely presented component units. The Research Foundation chose to continue presentation of their financial statements in accordance with financial reporting standards issued by GASB. During the Foundation’s process to convert its financial records to accommodate the change in its financial reporting framework, the Foundation identified 24 gift accounts with gift dates occurring from 1983 through 2018 totaling $3,347,000 previously considered to be resources owned by the Foundation and included in its net assets, which should have been reported as resources owned by the University and included in the University’s net position. The Foundation recorded audit adjustments to recognize a liability for the resources owned by the University in the gift accounts mentioned above. The result of this error in the University’s financial records as of June 30, 2018 were as follows (amounts rounded to 000’s): • Understatement of due from component units totaling $3,347,000 • Understatement of net position (beginning balance) totaling $3,093,000 • Understatement of private gifts, grants, and contracts totaling $248,000 • Understatement of non-operating revenues totaling $115,000 • Understatement of operating expenses totaling $109,000 The University recorded an audit adjustment to correct this matter in the financial statements as of and for the year ended June 30, 2018. III. Errors and Deficiencies Related to Revenue Recognition During testing over the University’s process to estimate its allowance for doubtful student accounts and implementation of corrective actions related to a prior year finding, we noted the University has not fully implemented planned corrective actions over this area. During the prior year audit, we noted the University’s process to estimate its allowance for doubtful student accounts included assumptions over collection rates that had been used and unchanged since fiscal year 2009, and were not considered reasonable given the conditions noted during the prior year audit. An audit adjustment totaling $8.5 million was proposed and recorded for the fiscal year ended June 30, 2017. The University’s corrective action plan related to the prior year condition was to utilize the accounts receivable analysis developed during the prior year audit and to perform collections analysis to determine if an adjustment to its allowance for doubtful student accounts is necessary. We noted that the University did update their overall estimate for its allowance for doubtful student accounts; specifically, the University updated percentages applied to its aging buckets (Current: 1%; 1-180 days past due: 45%; 181-364 days past due: 75%; 365+ days past due: 80%). We also noted the University did contract with a consultant to assist with analyzing collections. The University, however, was unable to complete its analysis over collection trends to support its current allowance estimate for doubtful student accounts for the preparation of its fiscal year 2018 financial statements. No audit adjustments were proposed in relation to the University’s estimate for its allowance for doubtful student accounts reported in its statement of net position as of June 30, 2018. (Finding 1, pages 5-8) This finding has been repeated since 2011. We recommended the University continue to improve its controls over financial reporting to ensure amounts reported within the University’s annual financial statements are accurate and presented in accordance with accounting principles generally accepted in the United State of America. University officials accepted the finding. (For the previous University response, see Digest Footnote #1.) OTHER FINDING The remaining finding pertaining to untimely cash reconciliations is reportedly being given attention by the University. We will review the University’s progress towards implementation of our recommendation in our next engagement. AUDITOR’S OPINION Our auditors stated the financial statements of Northern Illinois University as of June 30, 2018, and for the year then ended, are fairly stated in all material respects. This financial audit was conducted by CliftonLarsonAllen LLP. JANE CLARK Division Director This report is transmitted in accordance with Section 3-14 of the Illinois State Auditing Act. FRANK J. MAUTINO Auditor General FJM:TLK DIGEST FOOTNOTES #1 – Financial Reporting Process – Previous University Response 2017: The University accepts the Auditors’ recommendation. Management has conducted a comprehensive review of each component of this finding and has taken corrective action measures to redesign related business practices and processes, and to finalize critical hires to level the staff workloads that will yield improvements in the work product. In addition, the University will enhance communications during the audit planning stage to ensure appropriate alignment with the external auditors with respect to financial reporting of prior period corrections.