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Article Dean Dorton

Recent economic volatility, reduced government funding, and increased competition in the higher education industry has placed greater emphasis on managing resources and strategic decision making. Colleges and Universities that have active, qualified finance committees will have a competitive advantage in these uncertain times.

In this article we will explore the purpose and responsibilities of a finance committee, composition and structure of the committee and best practices.

Purpose and Responsibilities

The purpose of the finance committee is to ensure that the institution is operating in a financially sustainable manner by balancing short-term and long-term obligations and goals. In order to fulfill this purpose, the board has certain roles and responsibilities:

  • Carry out the governing board’s fiduciary responsibility to ensure the institution’s mission and purpose are fulfilled by:
    • Gaining an understanding of how the institution is financially supported/capitalized
    • Assessing risks, internal and external, that may have a financial impact on the institution
    • Monitoring the institution’s financial efficiency
  • Provide financial guidance to the board of trustees through:
    • Assessing how to protect the institution’s resources
    • Overseeing the budgeting process to ensure that they are based on reasonable assumptions, aligned with institutional goals and that they are properly monitored
  • Determine what is possible given the available resources of the institution
    • Stay involved with other committees regarding new projects and expenditures
  • Assist management in executing the strategic goals of the organization by:
    • Establishing guardrails for management regarding their financial decision making authority
    • Ensuring management has the resources and skills required to facilitate proper internal controls
  • Timely communication of all pertinent issues to the board of directors

Financial reports and budgets are two significant tools at the committee’s disposal to effectively and efficiently perform their vital governance role. Financial statements have a retrospective focus in that financial statements, for the most part, report what has already happened while budgets have more of a forward looking focus, projecting what will happen in the future.

Analytics, such as the Composite Financial Index (CFI), can be used to review the financial statements and analyze past performance and current health of the institution. Budgets should be reviewed by questioning the underlying financial assumptions of the budget and comparing them to historical data for reasonableness. Reconciliation between the financial statements and the budgets can also be an effective tool of the committee.

During this reconciliation, the committee works with management to explain significant variances. This process not only helps to understand past performance, but it is also useful in the development of the next period’s budget.

Composition and Structure

Since the finance committee plays such a vital role in the board’s governance of the institution, it is important to determine who should serve on the committee. The committee should comprise a chair and a vice chair for direction and focus. It should also include members of other key committees such as the student affairs committee, academic affairs committee, and other committees that oversee vital functions of the institutions. This will improve communication and cooperation between the finance committee and other committees.

Members should serve for terms of at least four to five years and the terms should be staggered to promote continuity. Often times, the chief financial officer, budget officer, and chief accounting officer will serve as staff of the committee, and the president of the institution will attend committee meetings. Once again, this serves to aid communication and cooperation between management and the finance committee which is integral to effective governance.

In general, the finance committee should have the skills necessary to fulfill its responsibilities and be structured in a way that fosters communication and cooperation between other committees, the board, and management.

Best Practices

Below are a list of best practices as outlined by the Association of Governing Boards of Universities and Colleges:

  • Chair of finance committee and board chair should define the scope and responsibilities of the finance committee
  • In spring or early summer, the finance committee chair and CFO should meet to coordinate the committee’s annual work and identify/discuss any key issues facing the institution
  • Chair should communicate the work plan to the rest of the committee and the board
  • At each board meeting, the finance committee chair should deliver a status update including information on budget to actual results, emerging trends, and expenditure recommendations

A typical work plan might include the following:

  • Late spring – Committee chair, CFO, and president meet to develop work plan and discuss key issues, internal and external, facing the institution
  • Early summer – Adopt annual budgets, both operational and capital
  • Fall – Review financial results for prior year and use to evaluate the reasonableness of the current budgets; discuss significant changes in key financial metrics
  • Winter – Re-examine revenue projections and discuss and agree on a set of budgetary assumptions for the following year
  • Spring – Study changes in revenue estimates and make recommendations for tuition rates

 

Article written by Tom Smither, Supervisor of Assurance Services

Citations

Stafford, Ingrid. “The Finance Committee”. AGB Effective Committee Series. 2013

Article Dean Dorton

You may have been interested in or may have contributed to funding campaigns on sites such as Kickstarter. There are a number of fundamental issues relating to crowdfunding – is your payment a gift to the fundee, an equity investment, a loan, or a purchase of an item? Funders don’t often think about these issues and the law isn’t always clear. Recently, the Securities and Exchange Commission (SEC) adopted final rules allowing private companies to sell securities (an equity investment) through internet-based crowdfunding. These rules will become effective on May 16, 2016 and will allow all investors (not just accredited investors) to buy private securities – i.e., to invest in crowdfunding ventures. There are limitations – see below:

  • The amount the company can raise through crowdfunding is limited to $1 million in any 12-month period.
  • If an individual investor’s annual income and net worth are both greater than $100,000, he can invest up to 10% of his net worth.
  • If an individual investor’s annual income or net worth is less than $100,000, he can invest the greater of $2,000 or 5% of his annual income or net worth.
  • Crowdfunding investors generally may not sell their securities for one year. Even without that limitation, crowdfunding investors should view their investments as highly illiquid.
  • Funding portals will be required to register with the SEC.
  • Those seeking this type of equity crowdfunding will be required to provide information about the offering and the financial condition of the company. These requirements are much less onerous than those associated with a public offering, but they are significant, and failure to comply may permit an unhappy investor to obtain a refund.

This is a significant improvement to the rules for small companies seeking to raise capital and for funders seeking an equity investment in such companies. We’re not sure if it will bring a sea-change in Kickstarter type fundraising and so the confusion about the nature of such contributions will likely continue – is it a gift, a loan, or a purchase of an item? If it’s an equity investment, it should comply with the new SEC rules.

Contact your Dean Dorton advisor if you have any questions or would like to learn more.

Article Dean Dorton

What controls does your business have in place to manage electronic fund transfers? How easy would it be for your Accounting Department to unknowingly participate in a fraudulent request to complete a wire transfer? Without adequate controls in place, your company could easily become the next victim of a common email phishing scheme. It is easy to think that your employees wouldn’t fall for something like this, but it happens more often than you think.

A local company recently lost over $85,000 because an employee in the Accounting Department received an email that appeared to come from one of the executives. Proper controls were not in place and funds were transferred. By the time anyone realized what had happened and the FBI could be contacted, the funds were gone and could not be recovered.

These types of scams have been around for a long time. However, the thieves are getting more sophisticated and actually put a great deal of effort into the process. It only takes a few vulnerable victims to make their effort pay off. There has been a large upswing in the number of attempts to defraud businesses – yes, even here in Kentucky!

Some attacks use a method called spoofing. Spoofing allows a sender to disguise their address and make it appear as though it came from someone else. For example, I could send an email and make it look like it came from your CEO. With the proper email security and SPAM filtering in place, most of these attempts do not make it through the filters. Properly managed email systems can recognize the spoof and block the message. More recent attempts involve the thieves actually registering a new domain name that is very similar to yours and setting up an email address that comes very close to that of your CEO or management. So close, it is very easy for your employees to not recognize the difference. Generally the email address is only one character off (e.g., jmiller@deanndorton.com instead of jmiller@deandorton.com.

The best defense against these attacks is to ensure there are strong controls around your electronic fund transfer processes that require more than an email request to process the transaction. For example, it is a good idea to require written sign-off. Note that an email does not equal written sign-off. If situations arise where you do need to use email, the recipient should always start a new email message to the requester (never reply to the request email). A text message to the requester would also add an additional layer of confirmation. However, completion of a company request form would be best. A strong control would require dual sign-off for transfers, especially those over a certain dollar amount and for new vendors (or new transfers). The key point here is having a two-step process to help minimize any opportunity for fraud.

Don’t put your business at risk by not having internal controls. For help evaluating and improving your information security and internal controls, please contact your Dean Dorton advisor or Jason Miller, Director of Business Consulting Services, at 859-425-7626 or jmiller@deandorton.com.


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