Audit Division
Audit Summary

University and Community College
System of Nevada
Report LA96-33

Results in Brief

Budgetary and expenditure controls within the University System contain significant weaknesses. Therefore, little assurance can be given that funds are spent on priorities set by the Legislature and the Board of Regents. The Nevada Constitution requires the Board of Regents to control and manage the financial affairs of the University and Community College System of Nevada. However, this responsibility is not carried out through a strong centralized system of control. Instead, key functions such as establishing, revising, and monitoring budgets and controlling expenditures have been left to the institutions.

Principal Findings

1. The current organizational control structure results in an inefficient process that fails to effectively control budgets and expenditures. Because management control responsibility has been delegated to the institutions, each has developed its own methods to manage and control the expenditure of funds, many of which are ineffective. (page 14)

2. Only four of the seven institutions have developed policies and procedures for budget and expenditure activities. As a result, we noted a number of different accounting practices at the various institutions. For instance, inefficient and ineffective bank reconciliation procedures at UNLV led to a $7.6 million unreconciled cash account as of November 1995. (page 18)

3. Much of the information needed to properly oversee the financial operations of the University System is unreliable or not readily available. In many cases, basic financial and budgetary information provided to us during the audit was incomplete and inaccurate. In other cases, information was not provided or was not provided timely. (page 21)

4. About 40% of the University System financial activity is accounted for in non-state accounts. Budgets for these accounts are either not critically evaluated prior to approval or not prepared at all. We identified more than 6,800 accounts systemwide that were not budgeted. During fiscal years 1995 and 1996, we estimate expenditures totaling $235 million were charged to non-budgeted accounts. (page 23)

5. Because of weak controls, we noted several areas where funds were spent on activities or purposes other than for which they were budgeted. Based on testing of fiscal year 1995 transactions, we identified $883,000 in state funds budgeted for instruction purposes that was used to fund 37 non-instruction positions. We also found 25 transactions totaling $785,000 that were spent on items not approved by the Board. Furthermore, we estimate that nearly $3.2 million in professional faculty salaries over the past two years were shifted to other areas by the institutions. (page 29)

6. Based on a plan prepared by UNLV, the Board approved the use of $3.85 million in student fees to address budget shortfalls. However, because of inadequate monitoring, UNLV spent $917,000 of these funds in fiscal year 1995 to overcome budget deficits that were not identified in its plan. (page 33)

7. System Administration relies on an ineffective process to monitor budgets. The fiscal exception reporting process was established by the Board to improve financial accountability. However, because of weaknesses and inherent limitations of this process, it does not provide an effective control over institution budgets. (page 35)

8. Overrides of the University's automated accounting system occur on a routine basis. The system is designed to reject a transaction that would exceed budgeted expenditure levels or available funding. However, this control can be overridden by various staff at the institutions to circumvent budgetary controls. (page 36)

9. More than $500,000 in income from a Board of Regents' asset has been shifted to the UNR Foundation. This action violated Board policy which requires Board assets be maintained separately from foundation assets. (page 40)

University and Community College
System of Nevada

Auditor's Comments on System's Response

The University and Community College System of Nevada, in its response, does not agree with certain of our findings, conclusions, and recommendations. The following identifies those sections of the report where the University System has taken exception to our position. We have provided our comments on the issues raised in the University System's response to assure the reader that we believe our findings, conclusions, and recommendations as stated in the report, are appropriate.

1. The University System strongly disagrees with our finding on page 20 that UNLV has devoted significant resources to resolving bank reconciliation problems, yet they remain uncorrected. System officials state the problem was identified nearly 15 months ago and has been largely resolved. (see page 56)

Legislative Auditor's Comments

UCCSN's independent auditors first reported problems with the System's bank reconciliation procedures to the Board of Regents in December 1993. These problems were again reported to the Board in October 1994 and October 1995. In February 1996, UNLV indicated it had dedicated two accounting staff to work full time on the reconciliation process. In addition, UNLV indicated six accounting staff, an external consultant, the internal auditor, and a UNR consultant were all working to correct the problems with bank reconciliations. On August 14, 1996, UNLV's Controller's Office reported that its last fully balanced bank reconciliation was for the month of March 1996. Then, on August 23, 1996, UNLV indicated it had completed the reconciliation for the month of April 1996. Despite devoting significant resources, as of August 1996 UNLV still took nearly four months to reconcile its bank accounts.

2. University officials do not agree with our conclusion on page 29 that expenditure activities are not adequately monitored. Consequently, they rejected our recommendation that System Administration approve accounting transfers. System officials indicated the newly created Accountability Report requires transfers of funds be identified and justified. (see page 58)

Legislative Auditor's Comments

Although the Accountability Report is intended to identify transfers of budgetary authority, it will not detect or prevent inappropriate transfers of expenditures. As discussed on page 30, expenditure transfers are transactions that inappropriately move expenses from one account to another. These transactions can be used to bypass controls over budgets. Our recommendation addresses the review and approval of these transactions to ensure their propriety. Furthermore, the Accountability Report is an after-the-fact reporting of activity, not a budgetary control designed to detect and prevent improper recording of transactions. Finally, the Accountability Report is used only for state operating budgets; therefore, about $200 million annually will not be addressed in this report.

3. University officials dispute our finding on page 33 that UNLV used students fees to fund Athletic Department deficits without specific Board approval. According to System officials, in 1994 UNLV identified a number of funding sources to offset athletic and performing arts deficits, and the Board granted approval for UNLV to solve the problems. (see page 59)

Legislative Auditor's Comments

As discussed on page 33, UNLV approached the Board of Regents in June 1994 with a plan to address budget deficits. University staff proposed using student fees to address deficits in UNLV's operating budgets and in the Performing Arts Center. However, no mention was made of UNLV's Athletic Department deficit in the plan presented to the Board or in the minutes of the Board Meeting.

4. University System officials do not agree with our conclusion on page 34 that budgetary revisions should be properly reviewed and approved. Consequently, they rejected our recommendation that the Board establish a policy requiring System Administration approval for budget revisions and Board approval for those exceeding a certain level. System officials indicate this would create a bureaucratic review that would focus on micro-management of institution decision making. Further, they maintain the fiscal exception process provides a good check on institution budget activities. (see page 59)

Legislative Auditor's Comments

As discussed on page 34, effective budgetary monitoring requires budget revisions be properly reviewed and approved. The process of establishing and approving budgets is rendered meaningless when revisions are made by the institutions without oversight by System Administration or the Board. Our recommendation gives the Board flexibility in setting levels for required review and approval while allowing it to meet its constitutional responsibilities to control the System's finances. Furthermore, the fiscal exception process is not designed to provide control or accountability of revisions to approved budgets.

5. University System officials do not agree with our conclusion on page 35 that the fiscal exception reporting process is not an effective budget monitoring tool. Consequently, they have rejected our recommendation that the process be replaced with regular monitoring of budgets at the System Administration level. System officials feel the current process is sufficient as long as all encumbrances and expenditures are uniformly reported by each institution. However, they do acknowledge the reports serve little use following the close of the fiscal year; therefore, they are not used in every quarter. (see page 59)

Legislative Auditor's Comments

As discussed on page 35, the fiscal exception reporting process contains many weaknesses that diminish its potential as an effective budgetary control. In addition, this process is an inefficient use of resources. Therefore, we recommended replacing this process with a stronger system of budgetary control. Independent monitoring of institution budgets would provide more reliable information than is currently obtained through the self-reporting method. Furthermore, institutions would not be required to provide financial information that is already available to System Administration in the University's accounting system. Finally, regular budgetary monitoring would encompass all accounts, not just those experiencing financial difficulties.