A School’s Financial Management Systems

The accounting procedures and financial management systems used by a school to record and report on the transactions in the Title IV programs play a major role in the school’s management of those programs. In this appendix, we will discuss the minimum criteria for those procedures and systems, identify areas where problems might arise, and point out potential system weaknesses.

A school’s financial management system (including the school’s accounting system) must provide effective control over and accountability for all funds received from the U.S. Department of Education’s (ED’s) Grant Management System (G5). A Title IV fiscal management system includes procedures for:

At a minimum, a school’s financial management system, including its accounting system, must provide:

Schools organize and manage their financial operations differently depending on such factors as the size of the school, administrative structure, staffing, automation, and federal program participation. Although fiscal operations can vary from school to school, successfully managing Title IV programs at any school depends on coordinated efforts across institutional offices.

Coordination has become increasingly important as automated systems have replaced paper-based ones. Automated systems bring many benefits, such as enhanced data integrity and speedy data exchange, but they also present challenges. Perhaps the most critical challenge is that automation can blur responsibility for functions that, by law, must be kept separate, such as awarding and disbursing federal funds.

A school’s accounting system includes those procedures that deal with the organization and controls necessary to identify and record transactions in a school’s journals and ledgers, while systematically providing for the supporting documentation for all journal entries. The accounting system is a subset of the school’s larger system of financial management.

Managing Title IV assistance is a school-wide responsibility. Title IV program funds are provided to the school, and all offices at a school must work together to ensure successful program management. A school’s Title IV program management generally takes place in three functional areas:

Schools differ in how they divide these functions among administrative offices. However, the office of the chief executive, the financial aid office, and the business office always play key roles.

Ultimate responsibility for a school’s Title IV programs resides with the school’s CEO or president. Although authority and responsibility are delegated to other offices, the leadership and support of the CEO are crucial to successfully administering Title IV programs. By recognizing the importance of Title IV programs, making Title IV program administration a high priority, and holding key officials accountable, CEO leadership can foster an environment that promotes an effective and responsive financial aid program that meets institutional goals, students’ needs, and federal requirements.

The next page lists the administrative responsibilities of a school’s CEO.

While the financial aid office usually has most of the responsibility for administering the Title IV programs, its role in the school’s fiscal operation is typically limited.

Most Title IV-related fiscal operations are handled by a school’s business office. This office may also be known as the fiscal office, finance office, comptroller’s office, bursar’s office, treasurer’s office, or student accounts office. For the duration of this text, this office will be referred to simply as the business office.

The business office provides critical services to the school in managing both federal and nonfederal financial aid programs. Administering the accounting, record keeping, and reporting functions related to the school’s use of federal and other funds requires many detailed, complex systems. Strong internal controls and sound business and financial management practices are key to the success of these operations and properly delivering funds to students.

The next page lists some of the common responsibilities of the business office.

Typically, several offices at your school will share responsibility for managing any one Title IV program. To illustrate this network of responsibilities, consider the relatively routine activity of managing FWS Program time sheets for student employees. The financial aid office typically authorizes FWS awards and monitors student earnings to ensure students have not exceeded their authorized awards. On the other hand, the business office usually processes payroll and monitors the school’s nonfederal share of FWS to ensure the school is adequately matching the federal share. Your school’s processes should demonstrate similar interdependence in your management of its Title IV programs. To further explore this principle, if your school participates in the FWS programs, please complete the FWS questionnaire on the next page as it applies to your school.

In addition to having a well-organized financial aid office staffed by qualified personnel, a school must ensure that its administrative procedures for the Title IV programs include an adequate system of internal controls or checks and balances.

Internal control is an integral component of an organization’s management. An effective internal control structure includes a school’s plan of organization and all the policies, procedures, and actions taken by the school to provide reasonable assurance that the school will achieve its objectives in the following areas:

The first category addresses a school’s administrative objectives, including performance and financial goals and safeguarding of resources. The second relates to the need to ensure that the decisions made by a school in its day-to-day operations are based on accurate information. The third relates to the preparation of financial statements, audits, and other fiscal and operational reports a school is required to make to the Department. The fourth refers to a school’s fiduciary responsibility to safeguard Title IV funds and ensure they are used for the purposes and by the recipients intended. The fifth addresses the requirement that a school comply with all applicable federal and state laws and regulations, as well as the regulations of its accrediting agency.

Internal control consists of five interrelated components derived from the way a school is managed. The components are:

Of course, no matter how well designed and operated, internal control cannot provide absolute assurance that all objectives will be met. Factors outside the control or influence of management can affect the entity’s ability to achieve all of its goals. In addition, modern data management systems create special problems because often, paper and audit trails may be problematic. Good systems of internal control should provide for paper documentation at key points in the electronic system.

One key feature of any internal control system should be built in independent checks on performance. In large organizations, the internal audit function should report directly to the CEO or board of directors. This helps avoid the difficulties and conflicts of interests that result when the internal audit staff reports to the accounting manager, Vice President for Finance, or Chief Financial Officer. In small organizations where total separation of duties is not an economically viable alternative, owners and presidents must be involved in the control system through independent performance checks. In addition, they must assume key duties such as check signing and monthly bank account reconciliations.

To participate in the Title IV programs, a school must be able to demonstrate that adequate checks and balances are in place. A school’s internal control system should, at a minimum, include:

A school should use its internal audits and/or external audits to verify that the systems of checks and balances in place at the school have been properly designed and are being followed routinely.

To accomplish separation of functions, duties are divided among different individuals to reduce the risk of error or inappropriate action (for example, when the employee or office responsible for safeguarding an asset is someone other than the employee or office that maintains accounting records for that asset). In general, responsibility for related transactions should be divided among employees so that one employee’s work serves as a check on the work of other employees. When duties are properly separated, collusion (or multiple person involvement) to commit fraud is more easily identified.

Federal regulations require a school to separate the functions of authorizing payments and disbursing or delivering funds so that no single office or individual exercises both functions for any student or parent receiving Title IV funds. Even very small institutions with limited staff are not exempt from this requirement. These two functions must be performed by individuals who are not members of the same family¹, who do not together exercise substantial control over the school, and who are organizationally independent.

Individuals responsible for authorizing or disbursing Title IV funds may not do both, but they may perform other functions. If these functions are done by computer, no one person may have the ability to change data that affect both the authorization and disbursement of Title IV funds.

Typically, the financial aid office is responsible for authorizing disbursements by awarding aid through the need analysis and packaging processes. Awards are then turned over to a business office that typically requests funds from ED’s Grant Administration and Payment System (G5), and disburses the funds by crediting student accounts, delivering checks to students, authorizing an EFT, or delivering cash to students. The person (or office) that awards Title IV funds may not sign checks or deliver them to students, nor be permitted to disburse cash to students, or to credit student accounts with Title IV funds to cover allowable costs (such as tuition, fees, books, supplies, or other authorized charges).

There should also be a separation of functions within the business office. This separation should provide that the individual within the school who reconciles federal cash does not also receive federal cash or disburse it. This will ensure that several individuals at the school evaluate federal funds and, at each step of the process, the applicable regulations are being followed.

The person performing reconciliations should receive bank statements and Direct Loan reconciliation reports directly from the respective, appropriate sources. Supervisory approval of the completed reconciliations should also be obtained and documented on the forms.

While electronic processes enhance accuracy and efficiency, they also can blur separation of functions so the awarding and disbursement occur virtually simultaneously. Schools must set up controls that prevent an individual or an office from having the authority (or the ability) to perform both functions. In addition, your system also should have controls that prevent cross-functional tampering. For example, financial aid office employees should not be able to change data elements that are entered by the registrar’s office. Finally, your system should only allow individuals with special security classifications to make changes to the programs that determine student need and awards, and it should be able to identify the individuals who make such changes.

For further guidance on the separation of functions, contact the Department’s School Participation Division that serves your school’s state.

Since no one person may have the ability to change data that affect both authorization and disbursement, if award entries made by the financial aid office automatically roll over and populate award fields in the business office, then the separation of functions must take place elsewhere.

For example, if your system automatically awards funds based on a student’s budget and/or need, then your system must ensure that only employees with a special security standing can change those budgets or otherwise modify a student’s award. In addition, your system must be able to identify any employee who makes a change to a data element or program that can affect the level of a student’s award (anyone who initiates a budget or award override).

A trial balance is the confirmation that debit and credit balances are equal. A trial balance for Title IV programs is a confirmation that accounts receivable, program expenditures, and the cash balance equal the amount of aid that has been authorized by the financial aid office.

To be effective, taking a trial balance should be performed at least monthly and reconciling cash should be performed when bank statements are received or at least monthly if statements are received more frequently.

Since cash is more susceptible to manipulation than other assets, multiple checks and balances are necessary for effective internal control of cash.

Reconciling cash is one confirmation that the cash balance shown in the school’s accounting records is in agreement with the balance reflected in the school’s bank statement. Differences between the school’s accounting records and the school’s bank statement balance can be caused by timing variances, errors, or unrecorded entries. The bank reconciliation process can lead to adjusting entries for:

The individual performing bank reconciliation should be trained to recognize and report sources of errors such as:

The prompt and thorough performance of bank reconciliation duties enhances the internal control system.

Note that if a school maintains separate bank accounts for each program, a separate bank reconciliation process should be performed for each account/program.

Reconciliation of Title IV funds is a key component of internal control in the Title IV programs. It is one of the tools a school uses to evaluate its system for accounting for the receipt and expenditure of Title IV funds in accordance with generally accepted accounting principles. A school reconciles data when, for example, on the FISAP it reports cumulative FWS data for the relevant year. A school also performs reconciliation on an annual basis when it reports annual FSEOG data on the FISAP and when it closes out its general ledger. However, to help fulfill its responsibility to safeguard federal funds and ensure they are expended as intended, a school should perform reconciliation in each Title IV program monthly. That is, to provide adequate internal controls, a school must have a system for comparing separately, for each Title IV program, the total draws recorded in G5 in a 30-day period to the amount disbursed to students or returned to the Department and explaining all discrepancies.

Reconciliation in the Title IV programs is an internal control procedure that helps ensure that a school has met its fiduciary responsibility to use its Title IV funds in the manner and for the purposes prescribed by regulations. The process of reconciliation as required in the regulations applies primarily to a school’s accounting records. Other internal control procedures ensure that a school’s other fiscal records and its program records are being maintained properly and that they accurately reflect the school’s Title IV operations.

During reconciliation, a school compares its G5 records to its banking records, and the accounting entries in its Title IV cash accounts to the accounting entries in its Title IV disbursement accounts. The reconciliation process will seek to explain the differences between the funds the school received and the funds the school disbursed or returned.

Regulations require that all federal funds drawn down be accounted for. Moreover, a school must identify expenditures of Title IV funds on a student-by-student basis. So, if the trial balances run for one or more of the Title IV programs fail to show that all federal funds received by the school were disbursed or returned in the time frames allowed by regulations, the school will have to examine its accounting detail (student-by-student records) to identify the discrepancies keeping the accounts out of balance. All discrepancies must be explained for the accounts to be considered reconciled.

A key element in the reconciliation process is the clear audit trail a school’s accounting records should provide. That audit trail should track Title IV funds from G5 to individual students.

Part of the monthly reconciliation a school should perform requires examining fiscal and program records to ensure they agree with and substantiate the reconciled accounting records.

Questions you can ask about your program and fiscal records include the following:

As part of your school’s internal control procedures, you should have a system that examines your fiscal and program records to ensure they are in agreement and support your accounting records.

The FSA Assessments can help you in reconciling and other fiscal management activities: FSA Assessments. Some of the assessments that might interest the business office are those on Default Prevention & Management, Direct Loans, Fiscal Management, Return of Title IV Funds, FSEOG, and FWS.

The FSA Assessments can also help schools create a policy and procedure manual through the subtopic - A Guide to Creating a Policies and Procedures Manual.

The Department continues to encourage and support schools’ use of electronic recordkeeping and communications. Of course, any time a school electronically transfers funds, records or transmits confidential information, or obtains a student’s confirmation, acknowledgment, or approval, the school must adopt reasonable safeguards against possible fraud and abuse. Such safeguards include:

Before the start of an award year, you should test your school’s automated packaging program to ensure that the calculations used to determine the amount of students’ grant, loan, or FWS awards yield consistent results, and that the awards that result are within the amounts allowed by regulation. In addition, you should compare the records of awards made to students by the financial aid office to the records of those awards in the business office.

When the responsibility for a particular work function is assigned to one employee or to a small group of employees, that employee (or that group) is accountable for specific tasks. Then, if a problem occurs, the employee responsible can be easily identified.

Some schools cross train their employees and rotate job assignments each fiscal year. This policy discourages employees from engaging in long-term schemes to defraud the school and ED. Rotating assignments also makes it more likely that theft or misuse will be discovered quickly because an employee in a new assignment will quickly identify behavior or records that are out of compliance with school policy or ED regulations.

Requiring the use of simple mechanical devices can often reduce temptation and prevent theft. For example, schools that distribute Title IV credit balances by check should adopt procedures that ensure that checks that cannot be delivered are returned to a lockbox type device, not to the school’s mail room. Returned checks should be recorded and provided the same safeguards as cash.

Control activities usually involve two elements—policies establishing what should be done, and procedures to affect the policies. For example, in evaluating satisfactory academic progress (SAP), a school might have a policy that, to be considered to be making satisfactory academic progress, a student must have a 2.0 GPA once that student has attempted 60 credits. The procedures associated with that policy are the action steps the school takes to measure a student’s progress in increments and intervene with students who appear to be in danger of failing to achieve the required GPA.

Many factors support the creation of a written policies and procedures manual for a school’s participation in the Title IV programs. The first factor is compliance with Department regulations. In some cases, e.g., verification deadlines, withdrawal procedures, approved leaves of absence, and SAP, schools are required by ED regulations to have written procedures and to make them available. Second, for policies and procedures to be created with input from all appropriate offices within an organization, the draft versions must be in writing so everyone works from the same starting point. Third, thoughtful, conscientious, and consistent implementation of any organization-wide activity requires a mutually agreed upon and understood framework for the activity. Finally, a comprehensive, well-written policies and procedures manual can:

Improving the way schools manage the Title IV programs is a priority for the Department, and should be one for school business and financial aid officers. Strengthening your school’s administration of Title IV aid begins with an annual analysis of existing procedures, practices, and polices, is followed by an honest evaluation of where you have been successful and where improvements are needed, and concludes with planning for the upcoming year. An annual program of analysis, evaluation, and planning can help your school ensure its compliance with statutory and regulatory requirements and promote constant improvement in your procedures, practices, and polices.

The primary methods for evaluating a school’s management of the Title IV programs are self-evaluation and peer evaluation.

Compliance is a requirement, but quality is a choice. If your school is serious about this choice, the Department provides a way for you to conduct a practical self-evaluation of your Title IV programs. The Department has developed an FSA Assessment Tool that is intended to help schools examine and improve their management of the Title IV programs.

The FSA Assessment Tool can be used to evaluate and analyze a school’s existing policies, procedures, and practices to determine where improvements are needed. The Department encourages schools to use the assessment activities on an ongoing basis to ensure compliance and establish the foundation for continuous improvement.

The FSA Assessment Tool consists of a comprehensive set of activities and questions designed to help your school assess its current Title IV operations. Each assessment contains the major functional requirements, as well as suggested assessment steps.

The assessments can help you:

Title IV Assessment topics currently available include the following:

To enhance their effectiveness, the Assessment Tools include activities to test compliance and procedures. The FSA Assessments also are linked to the latest regulations, Dear Colleague Letters, Federal Registers, and other related documents. Downloadable Microsoft Word documents include the hyperlinks as well.

Since financial aid is an institutional responsibility, some assessments may need to involve several offices on campus (financial aid, business office, admissions) to complete the assessment.

See the November 13, 2013 Electronic Announcement for information about the DL quality assurance requirement. See also Activity 2 in the Direct Loan FSA Assessment.

Peer evaluation is another technique your school can employ to obtain an independent, objective review of your administration of Title IV programs. A peer evaluator can be a financial aid administrator or fiscal officer from another school or a financial aid consultant.

During a peer evaluation, a school obtains an objective assessment of its operation from someone at a similar school. The person performing the evaluation also benefits by getting a firsthand look at how another school manages financial aid programs. Comparing notes and exchanging ideas are methods by which colleagues in financial aid offices and business offices can share their expertise for improved Title IV administration.