The Department of Education (ED) released two FAQ documents supporting the Financial Responsibility, Administrative Capability, and Certification Procedures regulation implementation that takes effect July 1, 2024.
These documents, released on May 20, 2024, provide sub-regulatory guidance for financial responsibility and certification procedure regulations, serving as a reference for ED when assessing specific institutional cases.
As the effective date approaches, use the following audit highlights and related-party financial statement requirements to prepare your organization for the new rules.
Background
In October 2023, the Biden-Harris Administration announced final regulations to significantly enhance oversight and accountability for higher education institutions and strengthen consumer protections for student borrowers.
The new rules will:
- Strengthen ED’s ability to protect students and taxpayers from the negative effects of sudden college closures
- Restrict colleges from withholding course credits paid for with Federal money from students’ transcripts
- Require colleges to clearly communicate to students how much financial aid they will receive—a common source of confusion and error
New Regulations on Financial Responsibility
Below are highlights from the ED’s FAQ sheets to help you determine how to properly prepare for these new regulations.
Effective Date
ED clarified that the July 1, 2024, effective date applies to financial statements submitted to the ED on or after July 1, 2024, regardless of when an institution’s fiscal year begins or ends.
Filing Due Date
The submission deadline for an institution to submit its compliance audit and audited financial statements is the earlier of six months after the end of the institution's fiscal year or 30 days after the date of the most recent auditor's report.
This new deadline doesn’t affect submission deadlines set by the Single Audit Act.
Related Party Disclosures
The final regulations include new disclosure requirements for related-party transactions within the institution’s audited financial statements. The new disclosure requirements extend beyond the requirements of Accounting Standards Codification® (ASC) 850, Related Party Disclosures.
These broader disclosure requirements include the identification of all related parties – based on the definition of a related entity set forth in ASC 850 – and a level of detail that would enable the education secretary to readily identify the related party. If there are no related party transactions for the year, this must be disclosed.
The note disclosure requirements are:
- Name of the related party
- Location of the related party
- Description of the related party
- Nature and amount of any transactions between the related party and the institution, financial or otherwise, regardless of when they occurred and regardless of amount
If there are no related-party transactions during the audited fiscal year or any related-party outstanding balances reported in the financial statements, management must include a note in the financial statements to disclose this information.
Personal Information of Related Parties
Institutions typically follow OMB Memorandum M-17-12, which discourages making personally identifiable information publicly available. For this reason, institutions should consider preparing a separate audited financial statement for attachment to the eZ-Audit submission.
The audited financial statements would be in addition to the general purpose audited financial statements and Uniform Guidance audited financial statements that institutions prepare.
Reporting Considerations
How an institution reports the related party disclosures required by ED – included with the disclosures required by generally accepted accounting principles (GAAP) or presented separately – can affect how the auditor reports on them.
Considerations for related party disclosure addressing both GAAP and the ED’s requirements covered by auditor’s opinion, include:
- The auditor must consider auditing standards, including paragraph .61 of AU-C section 700, Forming an Opinion and Reporting on Financial Statements, states that if additional information is presented in financial statements but isn’t required by the financial reporting framework, it should be covered by the auditor's opinion if it can’t be clearly differentiated.
- Therefore, if an institution includes related party disclosures required by ED and doesn’t clearly differentiate them from those required by GAAP, the disclosures are covered by the auditor's opinion.
- If the auditor is unable to obtain sufficient appropriate audit evidence about the related party disclosures included in this combined presentation, modification to the auditor's opinion may be necessary.
Considerations for related party disclosure addressing the ED’s requirements not covered by auditor’s opinion, include:
- Paragraph. A80 of AU-C section 700 states that if information included in financial statements isn’t required by the financial reporting framework and isn’t necessary for fair presentation, but is clearly differentiated, it may be identified as unaudited or not covered by the auditor's report.
- Thus, an institution can choose to include required ED information as unaudited and distinguish it separately from what’s required to comply with GAAP. This can be done by including a heading or explanation that the information is required by ED.
New Mandatory Triggering Events and Discretionary Triggers
The final rules give ED the ability to act quickly when institutions show warning signs of being financially challenged and at risk of failing or closing. The rules aim to deter institutions from conducting certain activities by outlining mandatory triggering events. Poor behavior may result in requests for a letter of credit or other forms of financial protection from institutions by ED.
The final regulations make the following changes:
- Financial responsibility. The final rules create warning signs from colleges that allow the ED to obtain letters of credit or other upfront financial protection more easily. These signs include financial risk due to debt payment, lawsuits by Federal or State actors, or the risk of losing Federal student aid due to high default rates.
- Administrative capability. The final rules introduce additional requirements for colleges, such as providing clearer financial aid information, prohibiting the withholding of transcripts for federally funded courses, requiring sufficient career services, and restricting the employment of individuals with a history of poor management of Federal student aid programs.
- Certification procedures. The final rules establish additional conditions for institutions showing warning signs, such as requiring a teach-out plan and limiting new programs. They also ensure student aid is only for career-training programs meeting state certification duration requirements and mandate distance education institutions to comply with state laws on postsecondary institution closure.
- Ability to benefit. The final Ability to Benefit rules create more transparent procedures for students without a high school diploma or its equivalent to access federal aid.
There are also several discretionary triggers that may result in a requirement to provide financial protection based upon a case-by-case determination.
These include:
- Subject to adverse accreditor actions, such as a show cause order or probation
- Experiencing significant fluctuations in federal student aid volume
- Closing programs or locations that enroll significant shares of students
- Subject to adverse actions by states and other federal agencies
Institutions will have 21 days to report triggering events. As part of this reporting, institutions could also show that a mandatory triggering event has been resolved.
NACUBO Advisory Guidance 24-01
The National Association of College and University Business Officers (NACUBO) recently developed Advisory Guidance 24-01 to explain the new and updated financial responsibility requirements for private nonprofit institutions, triggering events that affect both public and nonprofit institutions, and other new requirements related to the certification procedures that enable institutions to participate in Title IV programs.
We’re Here to Help
To learn more about these final rules and accountability efforts and how they impact higher education institutions, contact your Moss Adams professional.
Additional Resources