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A budget trailer bill that gets rid of individual financial audits at the 23 campuses of the California State University system has some observers concerned about losing a layer of financial scrutiny.
Under AB 114, signed by Gov. Jerry Brown on Thursday, the state will save an estimated $1.6 million annually by cutting out campus financial audits. Instead, CSU will include a new breakout of financials for each campus in a system-wide audit each year.
In the past, the law required CSU to hire an outside firm to do annual system-wide audited financial statements, such as this one [PDF]. In addition, auditors were supposed to do at least 10 individual campus audits per year – like this one [PDF] for CSU Long Beach. Each campus was supposed to be audited at least once every two years.
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Supporters of the move, including the CSU chancellor's office and the Department of Finance, say the campus audits were redundant, and the state will get the exact same level of transparency at a lower cost. But critics like the California Faculty Association say the move will mean having fewer checks and balances.
Under the new law, auditors will produce just a single annual system-wide audit, which for the first time will include each campus' statements of net assets, revenues, expenses, changes in net assets and cashflows.
The CSU system has been working to trim costs on its auditing process for some time. Notes [PDF] from an August 2009 meeting of CSU chief administrators and business officers show that George Ashkar, assistant vice chancellor of financial services, was in negotiations with auditor KPMG to "reduce the scope and costs of audits" and that Ashkar's goal was to eliminate "full-scope audits" at campuses in 2010.
CSU spokesman Mike Uhlenkamp said the campus-level audits were duplicative.
"KPMG will still be auditing everything," he said. "It’s just that they’re not doing it twice."
But Steven Filling, professor of accounting at CSU Stanislaus, called the move "ill-advised," saying it's simply not true that campuses will be getting the same level of scrutiny.
For one, he said, the scope of the system-wide audit, even with the breakout of campus financials, will not have the same depth and scope of the previous campus-level reports.
Auditors use a different definition of a "material" error in financial statements depending on the organization's size. For bigger organizations, an error would have to be bigger to be considered material. At smaller organizations, smaller errors could be considered material. A system-wide audit would have a higher threshold than a campus audit, meaning errors that would be important to point out at the campus level would fly under the radar, Filling said.
H.D. Palmer, spokesman for the California Department of Finance, disagreed.
"We don’t believe that you’re going to lose a level of detail by eliminating a duplicative audit," he said.
CSU Chancellor Charles Reed has said the university system has "not had a single issue raised" through the campus-level reports. But Filling said auditors have found problems that never made it into the final reports because the university corrected them in the course of the audit.
For example, he said that several years ago, auditors at CSU Stanislaus found the university's Stockton satellite campus was leaving students' cash tuition payments in a box on a shelf under the counter. Auditors recommended better cash control, and the university complied, but it never ended up in an audit letter, Filling said.
And finally, the new system-wide audits won't include notes to financial statements for each campus, Uhlenkamp said. These notes, which take up 20 or more pages of each campus audit, have some boilerplate language, but they also contain a more detailed breakdown of certain financials.
The notes to the last audit for Cal Poly Pomona [PDF], for example, showed that the university paid nearly $14 million in 2009-10 to auxiliary organizations for services, office space rentals and programs. It also showed the amount of interest used to finance construction projects.
"I know these are lean times, but I just think there are some fundamental safeguards that we ought to have in place to protect the really scarce tax dollars that are available," said California Faculty Association President Lillian Taiz.
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