REPORT OF

THE

STATE AUDITOR

 

 

University of Colorado Foundation

 

PERFORMANCE AUDIT

October 2005

 

 

 

LEGISLATIVE AUDIT COMMITTEE

 

 

2005 MEMBERS

 

Representative Val Vigil

 

Chair

 

Senator Norma Anderson

 

Vice-Chair

 

Representative Fran Coleman

Senator Deanna Hanna

Representative David Schultheis

Senator Stephanie Takis

Senator Jack Taylor

Representative Al White

 

 

Office of the State Auditor Staff

 

Joanne Hill

 

State Auditor

 

Sally Symanski

 

Deputy State Auditor

 

Monica Bowers

Tanya Beer

Jennifer Hopkins

Julie Kennedy

Jenny Page

 

 

Legislative Auditors

 

BKD, LLP

KPMG, LLP

Contract Auditors

 

 

 

STATE OF COLORADO

JOANNE HILL, CPA

State Auditor

OFFICE OF THE STATE AUDITOR

303.869.2800

Legislative Services Building200 East 14th Avenue

FAX 303.869.3060 Denver, Colorado 80203-2211

 

 

October 18, 2005

 

Members of the Legislative Audit Committee:

 

This report contains the results of a performance audit of the University of

Colorado Foundation. The audit was conducted in conjunction with an audit of the

University of Colorado under Section 2-3-103, C.R.S., which authorizes the State Auditor

to conduct audits of all departments, institutions, and agencies of state government. The

report presents our findings, conclusions, and recommendations, and the responses of the

University of Colorado Foundation and the University of Colorado.

 

 

TABLE OF CONTENTS

 

 

PAGE

REPORT SUMMARY .............................................1

Recommendation Locator ..........................................7

OVERVIEW..................................................... 11

CHAPTER 1. MANAGEMENT OF DONOR GIFTS.................17

Cash Contributions ............................................. 19

Distribution of Gift Monies ........................................ 24

Expenditure of Gift Monies ........................................ 31

Gifts In Kind .................................................. 35

Recording Nonmonetary Gifts ...................................... 40

CHAPTER 2. ADMINISTRATION ...............................43

Operating Expenses ............................................. 44

Administrative Cost Savings ....................................... 51

CHAPTER 3. TRANSPARENCY AND ACCOUNTABILITY ......... 55

System Advancement Funds ....................................... 57

Contracts for Foundation Services ................................... 61

Special Events ................................................. 65

Accountability for Loan Program .................................... 71

Flow of Funds ................................................. 74

CHAPTER 4. THE RELATIONSHIP BETWEEN THE UNIVERSITY

AND THE FOUNDATION ..........................77

 

 

 

STATE OF COLORADO

OFFICE OF THE STATE AUDITOR REPORT SUMMARY

 

JOANNE HILL, CPA

State Auditor

 

 

University of Colorado Foundation

Performance Audit

October 2005

 

 

Authority, Purpose, and Scope

 

This performance audit of the University of Colorado Foundation (Foundation) was conducted in

conjunction with an audit of the University of Colorado (University) pursuant to Section 2-3-103,

C.R.S., which authorizes the Office of the State Auditor to conduct audits of all departments,

institutions, and agencies of state government. The audit work, performed from March through

September 2005, was conducted in accordance with generally accepted government auditing

standards. The purpose of the audit was to evaluate the effectiveness and efficiency of the

Foundation’s operations. As part of our audit, we reviewed the Foundation’s management and

disbursement of donor contributions; acceptance and valuation of non-monetary gifts; management

of loans; administrative policies, procedures, and expenses; and the services provided to the

University. The Office of the State Auditor retained BKD, LLP and KPMG, LLP to assist with the

audit work.

 

We acknowledge the assistance and cooperation extended by management and staff at the University

of Colorado Foundation and the University of Colorado.

 

Overview

 

The University of Colorado Foundation was established in 1967 to support the University of

Colorado. The Board of Regents of the University has authorized the Foundation to receive gifts

and bequests of money or property on behalf of the University. The Foundation is a privately

governed, nonprofit corporation under Section 501(c)(3) of the Internal Revenue Code and provides

a number of services to the University including gift management, fund-raising, donor cultivation,

coordination of special events, investment management, and guaranteeing of loans.

 

The Foundation is governed by a Board of Directors which is part of a larger Board of Trustees.

Foundation operations are managed on a day to day basis by 138 staff, who are located at

Foundation offices in Boulder, Denver, and Colorado Springs. The Foundation is funded by fees

from the University, investment earnings, alumni membership dues, special events, and

contributions. In Fiscal Year 2005 the Foundation received $7 million from the University for

development services and donor cultivation.

 

For further information on this report, contact the Office of the State Auditor at 303.869.2800.

 

-1

 

 

 

SUMMARY

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Key Findings

 

Management of Donor Gifts

 

Both the Foundation and the University are responsible for having controls that ensure donated

monies are expended in a manner consistent with donor restrictions. We reviewed the Foundation’s

procedures for handling cash contributions and transferring gift monies to the University and the

University’s expenditure of gift monies. In addition, we reviewed the Foundation’s procedures for

handling non-monetary gifts, or gifts in kind. We found:

 

• The Foundation should improve procedures to ensure monies are deposited in funds

that reflect donor intent. The Foundation is responsible for recording each contribution

in a gift fund that accurately reflects the donor’s purpose. Out of a sample of 67 cash

contributions totaling about $292,300, we found problems with 16 items, or almost a quarter

of those tested, including inadequate documentation to determine the donors’ intent, gifts

recorded in funds that did not correspond to the donors’ intent, and checks made payable to

the University that were erroneously deposited into Foundation accounts. The Foundation

has no policy or procedure for handling donations that are not accompanied by clear written

instructions from the donor or a formalized policy with the University addressing how the

Foundation should handle gift checks made payable to the University, which is a separate

legal entity.

• The Foundation and the University lack a clear, coordinated system for transferring

gift monies that ensures donor intent is met. Out of a sample of 134 transfers of gift

monies totaling about $6.9 million from the Foundation to the University, in 54 instances (40

percent) we were unable to determine if the gifts were transferred for a purpose consistent

with the donors’ intentions because of inadequate documentation and poor coordination

between the Foundation and the University.

• The University should improve procedures to ensure expenditures are consistent with

donor intent. Out of a sample of 51 University expenditures of gift monies totaling about

$139,000, in 7 instances (14 percent) we found problems including commingled gift monies

with differing purposes within a single account, inadequate documentation to determine if

the expenditure was appropriate, and an instance in which the expenditure did not appear to

comply with donor restrictions. We found that University staff charged with expending gift

monies do not always receive sufficient guidance regarding the appropriate use of the gifts,

and that neither the University nor the Foundation regularly audits the use of gift monies to

ensure compliance with donor restrictions.

• The Foundation has not exercised adequate oversight over acceptance of non-monetary

gifts. Foundation policy requires that a Board committee give prior approval for accepting

certain high-risk non-monetary gifts such as property, art work, or equipment. Out of a

 

SUMMARY

 

 

Report of The Colorado State Auditor

 

sample of 53 gifts in kind worth about $21.1 million, half did not comply with Foundation

policies and procedures for accepting gifts. Problems included lack of evidence of approval

to accept the gift, lack of adequate documentation to support the valuation of the gift, and

no evidence that costs of maintaining the donated item had been assessed. The Foundation

and the University have agreed to transfer responsibility for accepting non-monetary gifts

to the University; however, the University does not currently have a policy for accepting and

valuing these gifts.

 

• The Foundation should correct errors made in recording gifts. We identified errors in

how the Foundation recorded two large gifts worth a total of about $6.58 million. Most

significantly, as a result of one error the Foundation’s assets have been overstated by about

$5.75 million since Fiscal Year 2000.

Administration

 

We reviewed the Foundation’s administrative policies, procedures, and expenses, and found:

 

• The Foundation has inadequate controls over employee reimbursements and use of

credit cards to ensure its policies are meaningful and effective. Out of a sample of 1,087

purchases totaling about $163,100, in 490 instances (45 percent ) we found policy violations,

errors, and/or a lack of supporting documentation. The Foundation’s review and approval

processes are not sufficient to ensure all purchases are consistent with its stated policies and

related to the Foundation’s core mission. For example, the Foundation does not consistently

enforce its policies requiring receipts to support purchases or documentation of a business

purpose for meals, and it does not require staff to submit itemized receipts that would enable

it to determine if staff had purchased prohibited items such as alcohol and personal goods.

We identified 278 purchases totaling about $52,600 that did not have an itemized receipt

needed to verify compliance with policies.

• The Foundation should establish policies and procedures designed to limit

administrative costs. Foundation policy does not contain limits or guidelines on

appropriate costs for hotels and meals, which appears to have resulted in instances of

excessive costs. We found lodging costs up to $435 per night and staff-only meal expenses

as high as $110 per person. In addition, in Fiscal Year 2004, the Foundation spent an

average of $940 per week on meals for employees and associates; these meals were not

related to Board meetings, out-of-town travel, or meetings with donors. We identified

several purchases of meals and lodging for staff spouses, transportation by limousine, and

first-class airfare.

 

SUMMARY

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Transparency and Accountability

 

We reviewed the financial relationship between the University and the Foundation and identified

several concerns about the lack of transparency and accountability for how the University uses some

funds, including:

 

• University expenses were paid through the Foundation, circumventing University

purchasing policies and State Fiscal Rules. Each year, the University has transferred more

than $600,000 to the Foundation to pay for certain University expenses. This process

bypassed University controls and policies and State Fiscal Rules and prevented a full public

accounting of the University’s use of funds. In our sample of 64 purchases totaling about

$46,700 that were made by University staff but paid by the Foundation, many violated State

Fiscal Rules and/or University policy. Violations included about $1,600 for limousine

services and $760 for meals in excess of State Fiscal Rule limits. We also found that the

University used gift funds at the Foundation to pay expenses that violated the Board of

Regent policies against doing business with discriminatory organizations. Overall, for Fiscal

Years 2004 and 2005, we noted about $94,000 for flowers and gifts, about $15,200 for

alcohol, and about $606,600 for food and catering, among other expenses, all of which are

considered “donor cultivation” expenses. However, there was no evidence that the expenses

were evaluated to determine if they actually increased the donor base or led to increased

donations. The University reports that it eliminated the practice of transferring monies to

the Foundation to pay University expenses as of Fiscal Year 2006.

• The University lacks adequate contracts with the Foundation, limiting its capacity to

monitor performance and ensure accountability. The University pays the Foundation

approximately $11.3 million each year for a variety of services. From Fiscal Year 2002

through 2005, payments from the University to the Foundation totaling about $5.9 million

were made without any contracts, which is a violation of State Fiscal Rules. Many of the

contracts that were in place lacked signatures, performance measures, and effective dates,

and were not consistently monitored by the University. Overall we found insufficient

contracts or problems with contracts for most services the Foundation provides to the

University.

• Unclear definition of responsibilities between the University and the Foundation for

planning and control of special events, creating inefficiencies and lack of

accountability. The University and the Foundation jointly manage about 35 to 40 fund-

raising special events each year. The Foundation collects an administrative fee from event

revenues for handling special event accounting and administration. In a sample of eight

events, we found that, based on the information available, some events were not profitable

and some had not been approved as required by Foundation policy. In addition, the

Foundation did not consistently apply the administrative fee, and formal cash controls were

lacking.

 

SUMMARY

 

 

Report of The Colorado State Auditor

 

• The Foundation lacks formal polices governing the loans it issues. The Foundation

makes loans to various parties on a case-by-case basis and with the approval of the

Foundation’s Investment Committee; however, the Foundation does not have any formal

policies or procedures governing these loans. Further, it is unclear whether the Foundation

issuance of such loans is consistent with its mission. Between July 1, 2001 and March 31,

2005, the Foundation issued or had outstanding 12 loans, with a total loan receivable balance

ranging from about $2.7 million in Fiscal Year 2002 to about $740,800 in March 2005. We

noted concerns with all seven of the Foundation-issued loans reviewed, which had original

combined loan issuance amounts of about $2.9 million.

• The complex financial arrangements between the Foundation and the University

prevent a full and clear accounting for University monies. Each year the Foundation

transfers about $57 million of gift monies to the University and receives about $11.3 million

from the University through direct payments, transfers, and fees. Some of the money the

University uses to pay the Foundation is gift money originally received from the Foundation.

The complexity of the flow of money, combined with inadequate contracts governing the

relationship between the two entities, reduces accountability for and transparency of

expenditures and highlights the need for the University and Foundation to assess their

financial arrangements.

The Relationship Between the University and the Foundation

 

• The University should evaluate the structure, role, and function of the Foundation. Our

review of the Foundation and its relationship with the University raises questions about the

Foundation’s effectiveness and efficiency in supporting the University. We noted concerns

with the Foundation’s handling of gifts and fulfillment of its fiduciary responsibility to

donors and found inefficiencies in the Foundation’s daily operations. Our findings also

illustrate a lack of transparency regarding University and Foundation activities and the flow

of funds between the two organizations, and a lack of accountability for both donor and

public monies. The University needs to evaluate the structure and role of the Foundation and

consider options to ensure the organizations interrelate in a manner that best serves the

University.

Our recommendations and the Foundation’s and University’s responses can be found in the

Recommendation Locator on pages 7 through 10 of this report.

 

 

RECOMMENDATION LOCATOR

 

 

Rec.

No.

Page

No.

Recommendation

Summary

Agency

Addressed

Agency

Response

Implementation

Date

1 22 Formalize additional written policies and procedures for managing cash

contributions, including (a) obtaining documentation from donors when

donations are over a specified amount; (b) establishing a document

retention policy; (c) implementing a standard format for documenting

donors’ verbal instructions; (d) contacting donors for clarification

before recording any gift whose purpose is not clear.

University of Colorado

Foundation

Agree January 2006

2 23 Work together to finalize, approve, and implement policies and

procedures for handling checks received by the Foundation that are

made payable to the University.

University of Colorado

Foundation

University of Colorado

Agree

Agree

November 2005

November 2005

3 28 Maintain all transfer requests from the University to provide supporting

documentation for monies sent to the University.

University of Colorado

Foundation

Agree January 2006

4 28 Strengthen controls over transfers of gift funds from the Foundation to

the University by establishing a direct relationship between all

Foundation gift funds and all University gift accounts and their

respective purposes.

University of Colorado

Foundation

University of Colorado

Agree

Agree

February 2006

February 2006

5 29 Make immediate improvements in the process of transferring gift

monies from the Foundation to the University by providing instructions

to University departments on completing transfer request forms,

reaching an agreement on the review of the purpose codes during the

transfer process, and ensuring exceptions are resolved timely and prior

to the University’s use of monies.

University of Colorado

Foundation

University of Colorado

Agree

Agree

November 2005

November 2005

6 30 Make permanent improvements in the process of transferring gift

monies from the Foundation to the University by providing periodic

training to staff and ensuring that purpose codes are consistent between

the University and the Foundation.

University of Colorado

Foundation

University of Colorado

Agree

Agree

February 2006

February 2006

 

-7

 

 

 

RECOMMENDATION LOCATOR

 

 

Rec.

No.

Page

No.

Recommendation

Summary

Agency

Addressed

Agency

Response

Implementation

Date

7 33 Work together to implement and strengthen controls to ensure that gift

monies are spent according to donor restrictions, including providing

fund managers with adequate documentation of donor restrictions; and

establishing plans for Foundation and University internal auditors to

audit gift expenditures.

University of Colorado

Foundation

University of Colorado

Agree

Agree

February 2006

February 2006

8 34 Strengthen controls over the gift monies received by discontinuing the

practice of commingling gift monies with various purpose restrictions

within a single gift account, and developing written policies and

procedures related to managing the gift monies the University receives.

University of Colorado Agree February 2006

9 39 Work together to develop written policies for accepting gifts in kind. University of Colorado

Foundation

Agree October 2005

University of Colorado Agree November 2005

10 39 Strengthen the Gift Acceptance Policy and procedures by clarifying the

tenure and operations of the Gift Acceptance Committee, and requiring

that staff maintain documentation of the gift valuation, usefulness,

ongoing costs the University or Foundation may incur, and any

consideration given to the donor.

University of Colorado

Foundation

Agree October 2005

11 41 Adjust the financial records by removing the $5.75 million pledge

receivable recorded in 1999 related to the leased property, reclassifying

the property into land and building portions, and reflecting amortization

only on the building. In addition, follow the policy with respect to

recording gifts of privately held securities as gifts in kind.

University of Colorado

Foundation

Agree October 2005

 

-8

 

 

 

RECOMMENDATION LOCATOR

 

 

Rec.

No.

Page

No.

Recommendation

Summary

Agency

Addressed

Agency

Response

Implementation

Date

12 50 Strengthen and enforce policies governing employee expense

reimbursements and credit card purchases by (a) requiring itemized

receipts for all purchases over a specified amount, a written explanation

of the business purpose, and a list of meal participants and

entertainment expenses; (b) requiring documented supervisory approval

for expenses for all staff; (c) establishing policies to hold staff

accountable for policy violations; (d) requiring the President’s approval

and written justification for employees to purchase airline tickets

directly, and considering prohibiting first-class and nonemployee

travel.

University of Colorado

Foundation

Agree October 2005

13 53 Improve controls over administrative expenses by (a) establishing

maximum daily limits for travel costs; (b) clarifying the types of

expenses that may be charged to the Foundation for Board members

and non-staff; and (c) requiring preapproval for high-dollar credit card

University of Colorado

Foundation

Agree October 2005

expenses.

14 60 Increase transparency and accountability for all University and gift

funds by continuing the prohibition on transferring monies to the

Foundation to pay University staff expenses and eliminating the

practice of allowing the Foundation to reimburse University employees

or using gift monies to directly pay University expenses.

University of Colorado Agree November 2005

15 64 Improve accountability for services contracted through the University

of Colorado Foundation by (a) establishing formal contracts for

Foundation services; (b) including remedies in the contracts to address

any failure to meet requirements; (c) establishing a system for

monitoring contract services; and (d) annually assessing the fees paid

to the Foundation.

University of Colorado Agree January 2006

 

-9

 

 

 

RECOMMENDATION LOCATOR

 

 

Rec.

No.

Page

No.

Recommendation

Summary

Agency

Addressed

Agency

Response

Implementation

Date

16 65 Develop performance standards in service contracts and use the

standards to evaluate the Foundation's performance. The Foundation

should continue to explore methods for comparing its performance with

peer foundations.

University of Colorado

Foundation

University of Colorado

Agree

Agree

January 2006

January 2006

17 69 Evaluate who should be responsible for special event administration

and accounting and develop a written agreement if appropriate.

University of Colorado

Foundation

Agree December 2005

University of Colorado Agree December 2005

18 69 Strengthen management for special events by (a) implementing written

policies and controls over revenues and expenses; (b) developing

criteria for approving special events in written policies; (c) establishing

procedures to assess the cost-benefit of special events; and (d)

establishing cash control policies and procedures for all situations in

which staff handle cash.

University of Colorado

Foundation

University of Colorado

Agree

Agree

December 2005

December 2005

19 73 Reassess the Foundation’s loan program and determine if it is a service

the Foundation should continue to provide.

University of Colorado

Foundation

Agree October 2005

University of Colorado Agree January 2006

20 75 Conduct a comprehensive assessment of the financial arrangements

between the two organizations and consider ways to improve

accountability and transparency as they simultaneously evaluate the

restructuring options discussed in Recommendation No. 21.

University of Colorado

Foundation

University of Colorado

Agree

Agree

January 2006

January 2006

21 82 Conduct a comprehensive evaluation of the structure, role, and

functions of the Foundation and consider options such as (a) limiting

the Foundation’s functions to development services; (b) limiting the

Foundation’s functions to investment management; or (c) continuing

the current arrangement, which includes both functions.

University of Colorado Agree January 2006

 

-10

 

 

 

Overview

 

 

Background

 

The University of Colorado Foundation (Foundation) was established in 1967 to

support the University of Colorado (University). Section 23-5-112, C.R.S., entitles

nonprofit foundations organized for the sole benefit of higher education institutions

to receive gifts and bequests of money or property, which may be tendered by will

or gift. The Foundation is a privately governed, Colorado nonprofit corporation and

a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code.

The Foundation provides a number of services to the University including gift

management, fund-raising, donor cultivation, investment management, and securing

of loans.

 

The Foundation operates on the same fiscal year as the State, with a June 30 yearend. According to its unaudited financial statements, in Fiscal Year 2005 the

Foundation received about $50 million in donor contributions for the University,

earned about $52 million on investments, and transferred about $48 million in gift

funds to the University. As of the end of Fiscal Year 2005, the Foundation held

about $568 million in net assets. Donors may donate cash; nonmonetary gifts such

as securities and real estate; and property (gifts in kind) such as computer hardware

and software, art work, and equipment. Donors may also establish endowments or

deferred (planned) giving arrangements, such as bequests and trusts, or make pledges

to give over time.

 

In Fiscal Year 2005 nearly all of the donor contributions received were restricted,

meaning they were earmarked by donors for specific programs or projects such as

scholarships or athletics. In Fiscal Year 2005 gifts from alumni and individual

donors represented 45 percent of total donations while gifts from corporations,

foundations, and other organizations accounted for the remaining 55 percent.

 

Foundation Organization and Services

 

The Foundation has its headquarters in Boulder with offices in downtown Denver

and on the University campuses in Boulder, Denver, and Colorado Springs.

 

The Foundation is governed by a Board of Directors comprising 15 members who

meet at least four times per year. The University President and a member of the

University’s Board of Regents serve as nonvoting, ex-officio members of the Board

 

 

University of Colorado Foundation Performance Audit - October 2005

 

of Directors. The Directors’ duties include providing policy, business, and fiduciary

oversight of Foundation operations. The Board of Directors also has several

committees that focus on specific issues within the Foundation, including Audit,

Governance, Compensation, Investment Policy, and Finance and Operations

Committees. In addition to the Board of Directors, the Foundation has a Board of

Trustees that provides leadership and support in fund-raising, and elects the Board

of Directors. The Board of Trustees is made up of about 60 members, including the

members of the Board of Directors, the Foundation President, the University

President, one University Regent, and the University campus Chancellors; the

University officials serve as nonvoting, ex-officio members.

 

At Fiscal Year-End 2005, the Foundation employed 138 staff assigned to several

departments including development, stewardship and donor relations, finance and

accounting, legal, human resources, data and technology management, and the

Boulder Alumni Association. Foundation and University staff jointly conduct

record-keeping, communication, donor education, budgeting, special event

coordination, and accounting functions related to donor cultivation, fund-raising, and

special events. The Foundation currently tracks gifts and donor information

internally using the SunGard Business Systems Resources’ (BSR) Advance software

program.

 

The Foundation provides a variety of services to the University, including:

 

• Gift Acceptance and Cultivation – The Foundation’s primary responsibility

is to serve as the fund-raising partner of the University. The Foundation

provides development and cultivation services by soliciting and managing

contributions from individuals and other donors. These services include

donor outreach, gift acceptance and processing, stewardship, research,

maintaining a database of University alumni and donors, and overseeing the

Annual Giving Program. These services are discussed in Chapter 1.

• Investment Management – According to its unaudited financial statements,

as of June 30, 2005, the Foundation had about $665 million in investments

and cash. This includes $517 million in endowments (including $85 million

in University endowments held by the Foundation at the University’s

request); $81 million in callable funds (cash, current gifts and endowment

earnings held by the Foundation prior to their use or “call” by the

University); $50 million in life income arrangements; and $17 million in

other invested funds such as securities and real estate. Investment

Management services are discussed in Chapter 4.

 

Report of The Colorado State Auditor

 

• Securing Loans – The Foundation guarantees loans under the Faculty

Housing Assistance Program (FHAP) up to a maximum of $50,000 for

individual loans. This program is a faculty recruiting and retention tool for

the University. During the period of July 1, 2001, through March 31, 2005,

approximately 50 FHAP loans were issued or outstanding to University

faculty members. In addition, the Foundation offers other loans on a case-

by-case basis to support its own activities and University initiatives and

programs. From July 1, 2001, through March 31, 2005, the Foundation

issued 12 of these other loans, and the total amount issued or outstanding on

the loans ranged from about $740,800 to about $2.7 million over the period.

Loans are discussed in Chapter 3.

• Special Events – The Foundation assists the University in administering

fund-raising and donor events. Typical special events include golf

tournaments, galas, receptions, dinners, and auctions. The Foundation

primarily serves an accounting and record-keeping function and at times

assists in planning and working at events. These services are discussed in

Chapter 3.

• System Advancement Funds – The Foundation manages a System

Advancement account, which is specifically earmarked for general use by

University officials within the University of Colorado System Offices.

University officials use the funds primarily to support fund-raising activities

and related travel expenses incurred by the University President’s office.

The University reports that these services were discontinued as of July 1,

2005. They are discussed in Chapter 3.

• Alumni Services – The University of Colorado at Boulder Alumni

Association (Boulder Alumni Association) is a division of the Foundation

with 21 staff. The Boulder Alumni Association’s Controller is also the

Assistant Controller of the Foundation. The Boulder Alumni Association’s

financial information is reported as part of the Foundation’s consolidated

financial statements, and it is subject to Foundation administrative policies.

The Alumni Association has a separate Board of Directors comprising 51

members including three Foundation officers. The Alumni Association’s

expenses, totaling about $3.1 million in Fiscal Year 2005, are funded through

membership dues, event fees, and support from the University. These

services are discussed in Chapter 3.

• Student Housing – In June 2002 the Foundation established Bear Creek I,

LLC, a Colorado limited liability company, to finance and develop a student

housing facility on University land in Boulder. The Foundation established

a contract with a real estate development and management company to

 

University of Colorado Foundation Performance Audit - October 2005

 

oversee construction and management of the facility. In Fiscal Year 2005 the

Foundation’s student housing-related expenses were about $9.5 million and

revenues were $4.7 million. That year the University paid the Foundation

$3.6 million to supplement student housing revenues due to low occupancy

in the Bear Creek I facility.

 

Foundation Revenues and Expenses

 

The following table shows the Foundation’s revenues and expenses for Fiscal Years

2001 through 2005.

 

 

Report of The Colorado State Auditor

 

15

 

University of Colorado Foundation

Revenues and Expenses

Fiscal Years 2001 Through 2005 (In Thousands)

2001 2002 2003 2004 2005

Net Assets, Beginning of Year $478,988 $531,659 $509,193 $499,0891 $559,034

Revenue & Fee Receipts

Gifts & Contributions for the University $81,415 $76,128 $70,676 54,928 50,054

Gifts & Contributions for the University

Hospital Authority2 49,8633 5,164 4,631 12,452 1,844

Net Investment Gain (Loss) (1,743) (22,838) 16,115 72,995 51,954

University - Development Fees 7,363 7,778 7,295 7,282 6,971

University - Other Fees 892 1,108 1,013 865 1,276

Boulder Alumni Association 3,281 3,255 3,541 3,092 3,458

Student Housing 4 -0-0-03,414 8,268

Other Revenue5 2,512 (3,948) (969) 5,180 2,622

Total Revenue & Fees $143,583 $66,647 $102,302 $160,208 $126,447

Expenses & Distributions

Gifts & Income Distributed to the University $58,511 $55,088 $63,305 $60,537 $48,496

Gifts, Income, & Pledges Distributed to the

University Hospital Authority2 10,897 12,108 13,058 13,947 37,368

Development 13,196 12,938 13,451 10,183 10,608

Supporting Services6 5,261 5,822 6,799 7,758 8,291

Boulder Alumni Association 3,047 3,157 3,203 2,957 3,132

Student Housing4 -0-0163 4,881 9,488

Other Program Services7 -0-0756 -0-0Total Expenses & Distributions $90,912 $89,113 $100,735 $100,263 $117,383

Total Change in Net Assets 52,671 (22,466) 1,567 59,945 9,064

Net Assets, End of Year $531,659 $509,193 $510,760 $559,034 $568,098

Source: University of Colorado Foundation’s audited financial statements and data for Fiscal Years 2001 through 2003.

Foundation unaudited restated financial statements for Fiscal Year 2004 and unaudited financial statements

for Fiscal Year 2005.

1 In Fiscal Year 2005 the Foundation restated its Fiscal Year 2004 financial statements. The adjustment is reflected

in the Fiscal Year 2004 beginning net assets.

2 The University of Colorado Hospital Authority is a separate organization from the University.

3 According to Foundation staff, gifts and contributions were higher in Fiscal Year 2001 because it was an exceptional

year for the Foundation’s seven-year fund-raising campaign, which ended in June 2003.

4 The Foundation began incurring student housing expenses related to Bear Creek I, LLC, in Fiscal Year 2003, and

began generating revenues in Fiscal Year 2004.5 Includes change in value of split-interest agreements (trusts) and net assets released from restrictions.

6 Includes restructuring costs, administrative, and operational costs not directly related to development activities.

7 Pledges distributed to the University of Colorado Real Estate Foundation when it separated from the Foundation in

Fiscal Year 2003.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

In Fiscal Year 2005 the Foundation’s primary source of revenue was investment

earnings totaling about $52 million, followed by gifts and donor contributions of

about $51.9 million. From Fiscal Year 2001 to 2005, contributions for the University

declined by 39 percent. The Foundation also receives approximately $11.3 million

annually, either directly or indirectly, from the University for development, fund-

raising, donor cultivation, and other services. Annually the Foundation’s largest

distribution is the transfer of gift funds to the University in accordance with

agreements with various donors; during Fiscal Year 2005 the transfer to the

University was about $48.5 million. The Foundation’s expenses for development

(gift acceptance, donor development and cultivation services) ranged from about

$13.2 million in Fiscal Year 2001 to about $10.6 million in Fiscal Year 2005. Over

the same period the Foundation’s net assets increased from about $532 million at June

30, 2001, to about $568 million at June 30, 2005, or approximately 7 percent.

 

University Payments and Transfers to the

Foundation

 

As mentioned above, each year the University pays the Foundation to provide fund-

raising and other services. In Fiscal Year 2005 the University provided about

$7 million to the Foundation for development services and donor cultivation. In

Fiscal Year 2005 the ratio of contributions collected to University development

payments to the Foundation was seven to one.

 

Audit Scope and Methodology

 

The Office of the State Auditor undertook this audit at the request of the President of

the University of Colorado and with the agreement of the University of Colorado

Foundation Board of Directors and management. The audit reviewed the expenditure

of gift funds and compliance with donor intent, the Foundation’s overall role and

mission and its relationship with the University, and several administrative areas

within the Foundation. We interviewed representatives from University and

Foundation management and staff, the Foundation Board of Directors, and the

University Board of Regents. We conducted a survey of other universities and

foundations to gain an understanding of the policies and practices of other entities

similar to the University and Foundation.

 

 

Management of Donor Gifts

Chapter 1

 

Background

 

One of the primary functions of the University of Colorado Foundation (Foundation)

is to raise funds to support the University of Colorado (University). The Foundation

accepts donations in the form of pledges, cash, nonmonetary gifts such as securities

and real estate, and gifts in kind such as computer equipment, art work, and other

property. Donors may also make deferred or planned giving arrangements in the

form of bequests, annuities, and trusts. According to the Foundation’s unaudited

financial statements, in Fiscal Year 2005 the Foundation received about $50 million

in contributions for the benefit of the University, of which about $522,800 was gifts

in kind. Typically, the Foundation processes the gifts and passes them through to the

University. For example, for cash contributions, the Foundation establishes “funds,”

or accounts, to maintain and invest donated monies until they are requested by the

University. For each cash contribution, the Foundation issues a gift receipt to the

donor that indicates the amount of the donation and the fund to which it was

deposited. For gifts in kind, the Foundation has historically accepted and recorded

the donated items and forwarded them to the appropriate University program or

college. In addition, the Foundation provides annual endowment status reports to

donors.

 

As of the end of Fiscal Year 2005, the Foundation had approximately $568 million

in net assets within the following categories:

 

• Permanently Restricted. These funds are permanently maintained by the

Foundation with all or part of the earnings used for donor-specified purposes.

Pure endowments (gifts that have been given to the Foundation with

instructions from the donor that the value of the original gift be invested and

held in perpetuity) are permanently restricted. The purpose of a pure

endowment is to provide a permanent stream of income over time while

holding the principal intact. As of June 30, 2005, the Foundation held about

$190 million in permanently restricted net assets.

• Temporarily Restricted. These funds are subject to donor restrictions that

will be met through Foundation or University actions or the passage of time.

Quasi-endowments, which are funds that must be held and invested by the

Foundation for a period specified by the donor, but not in perpetuity, are one

type of temporarily restricted funds. Investment earnings on both pure and

 

University of Colorado Foundation Performance Audit - October 2005

 

quasi-endowments are recorded in separate endowment earnings funds that

are temporarily restricted and are available on call to the University. Other

types of gifts that are not required to be held in perpetuity by the Foundation,

such as gifts of cash, are also considered temporarily restricted until the

donor’s intended use of the funds has been fulfilled. As of June 30, 2005, the

Foundation held about $348 million in temporarily restricted net assets.

 

• Unrestricted. These funds are not subject to donor restrictions. According

to the Foundation, unrestricted monies are typically generated from earnings

on investments and are available for Foundation operations, to be used

according to Board of Director guidelines or approvals. As of June 30, 2005,

the Foundation had about $30.2 million in unrestricted net assets.

Unless a cash donation is given with instructions that it is intended to support an

existing fund, the Foundation creates a new gift fund with a unique fund number for

each gift. Within the categories of permanently and temporarily restricted net assets,

the Foundation maintains over 5,000 distinct gift funds. Each gift fund is assigned

a fund manager, generally a University employee, who is responsible for monitoring

and approving transactions within the fund. Gift monies are transferred from the

Foundation to the University upon request from the University.

 

Donor Intent

 

University of Colorado President Elizabeth Hoffman requested that the State Auditor

conduct an audit of the Foundation and the University with a particular focus on the

“chain of custody” of monies donated to the Foundation and subsequently transferred

to and expended by the University. A primary purpose of the audit was to determine

whether the final expenditure of gift monies is in compliance with donor restrictions

on the gifts. The first three sections of this chapter discuss the process used by the

Foundation and University to ensure monies are spent in compliance with donor

intent. The remainder of the chapter addresses gifts in kind and related issues.

 

According to the Foundation, nearly all gifts are designated, or restricted, by donors

for specific purposes at the time of the donation. To sustain fund-raising and attract

and maintain donors over the long term, it is critical for the Foundation and the

University to ensure that donor restrictions are honored. To evaluate whether gift

funds received by the Foundation and expended by the University are being handled

in accordance with donor intent, we reviewed the three major components of the

process for receiving and expending gift monies. These components and the results

of our review are covered in the following three sections:

 

• Cash Contributions, which discusses the Foundation’s processes for

receiving and recording gift monies.

 

Report of The Colorado State Auditor

 

• Distribution of Gift Monies, which discusses the University’s process for

requesting gift monies, the Foundation’s process for transferring gift monies

to the University, and the University’s receipt of those monies.

• Expenditure of Gift Monies, which discusses the University’s management

and expenditure of gift monies.

For the University and the Foundation to ensure compliance with donor intent,

controls must be in place and operating as intended for each component of the

process. Our review identified issues in each component of the process and an

overall need for better coordination between the University and the Foundation.

These issues must be addressed to help ensure that donor intent is met from the point

of initial receipt of the gift to the final expenditure of gift monies.

 

We contracted with the accounting firms BKD, LLP and KPMG, LLP to conduct a

portion of the testing in these areas.

 

Cash Contributions

 

The first step in ensuring that donor restrictions on contributions are fulfilled is to

record the donated monies in gift funds that reflect the donor’s intent. We reviewed

the Foundation’s written policies for accepting gifts and managing gift funds. The

Foundation’s Endowment and Current Fund Policy requires that documentation

about the use of a fund (correspondence, account request form, or Donor Fund

Agreement) be obtained to establish gift funds. In addition to the formal policy, the

Foundation has written procedures that outline the process for establishing new gift

funds.

 

To determine if the Foundation records cash contributions in the correct gift funds

(i.e., funds that reflect restrictions imposed by the donors), we reviewed a sample of

67 cash contributions totaling about $292,300 for the period July 1, 2001, through

March 31, 2005. For 51 of the contributions we tested (76 percent) totaling about

$206,600, the monies appeared to have been deposited into the correct fund.

However, for the other 16 contributions (24 percent) totaling about $85,700, either

we could not determine whether the donation was recorded in the appropriate fund

or we identified other problems, as described below.

 

Lack of documentation on donor intent. For nine of the contributions we tested

(13 percent) totaling about $82,900, the Foundation did not have adequate

documentation to determine the gift fund to which the monies should have been

recorded. Specifically:

 

• For four of the contributions we tested totaling $170, the Foundation had no

documentation of any kind of the purpose of the donations.

 

University of Colorado Foundation Performance Audit - October 2005

 

• For three of the contributions we tested totaling about $6,300, the Foundation

had notes regarding the purpose of the gifts that were written by staff based

on phone conversations with the donors. While two of these donations were

for nominal amounts, the third was a single donation of over $6,200.

• For two of the contributions we tested totaling about $76,400, the Foundation

had some documentation, such as internal correspondence regarding the

contribution, but no documentation directly from the donor indicating the

purpose of the donations.

Foundation policy requires documentation in the form of correspondence, an account

request form, or a fund agreement to establish a fund. However, the Foundation has

no written policy or procedure for documenting donor intent when donations are

made to existing funds. According to the Foundation, when the intent is not apparent

from the check or documentation accompanying a donation, staff review the donor’s

giving history and record the contribution in the fund to which the donor made

previous donations. However, without written instructions from the donor, the

Foundation cannot be sure this approach fulfills the donor’s intent for that specific

contribution. In addition, donors sometimes provide information on restrictions of

their gifts verbally. For example, if there is no giving history for the donor,

Foundation staff contact the donor by phone. Similarly, when the Foundation holds

fund-raising drives, staff often contact current or potential donors by phone to solicit

donations.

 

According to the Foundation, a primary control to ensure gifts are processed

correctly is the receipt it mails to donors. The gift receipt shows the fund to which

the gift was recorded. To help ensure that donor restrictions are being honored, the

Foundation should also require staff to obtain written confirmation of intent from the

donor for donations over a specified amount. For example, if Foundation staff

receive verbal instructions from a donor with respect to the purpose of a gift, staff

should send a follow-up letter to the donor outlining the intent of the gift that can be

signed and returned by the donor. For contributions below this specified amount, the

Foundation should establish and follow a consistent format for staff to use in

documenting verbal instructions from donors.

 

Recording of donations to incorrect gift funds. For three of the contributions we

tested (4 percent) totaling $1,700, the Foundation recorded the monies in incorrect

funds, as follows:

 

• One check contribution for $1,000 included a notation that it was intended for the

“CU football camps,” which at that time were operated by a private entity, not

the University or the Foundation. The Foundation originally deposited the check

into the Coaches’ Incentive Fund to be used by University coaches. A month

after the check was received, Foundation staff realized they had erred in

 

Report of The Colorado State Auditor

 

accepting the donation and sent the football camp a check for the donated

amount.

 

• One contribution for $500 was intended for theater productions, but the

Foundation deposited it into the Theater and Dance fund. According to

Foundation staff, there was no theater productions fund at the time the gift was

received. Although a theater productions fund was created later the same month

the gift was received, this $500 contribution was not transferred into that fund.

To ensure donor intent was met, the Foundation should have established the

separate fund for theater productions at the time the $500 gift was first received.

• One check contribution was made payable to the “Golden Buffalo Scholarship

Fund”; however, the memo line on the check stated “Buffalo Beef Club.”

According to the Foundation, the Buffalo Beef Club is a project operated by the

football coaches, and as a result, staff recorded the gift in the head football

coach’s discretionary fund. In this case, the Foundation should have contacted

the donor to clarify intent because of the inconsistencies between the payee and

the information on the memo line of the check.

To ensure the donor’s wishes are respected, the Foundation should apply strict

standards on recording contributions by following up with donors on any gifts for

which the donor’s intent is not clearly documented.

 

Deposit of checks made payable to the University. For four of the contributions

we tested (6 percent) totaling about $1,100, the Foundation deposited checks that

were made out to the University or a University program, not to the Foundation.

Checks were made to the University, the School of Journalism and Mass

Communication, the University of Colorado Cancer Center, and the Barbara Davis

Center for Childhood Diabetes. Although we did not identify problems regarding

donor intent with the funds into which the Foundation placed these gifts, it is not

appropriate for the Foundation to deposit checks that are made out to the University

or its programs.

 

Foundation deposit of checks made out to the University was raised as an issue in the

University’s Fiscal Year 2002 financial audit. That report noted that in some cases,

the checks may have either represented contract and grant monies that belong to the

University or gifts that donors intended to go directly to the University. In June 2003

the University drafted a policy for processing donations made payable to the

University. The draft policy requires that “when the designated payee on a gift

instrument . . . is the University of Colorado . . . or a [University] program, and there

is no accompanying information to indicate that the donor is responding to a specific

solicitation [such as a fund-raising drive by the Foundation], the gift is . . . deposited

into a designated . . . University of Colorado bank account.” The Foundation also

developed a process such that when the Foundation receives a gift check payable to

 

 

University of Colorado Foundation Performance Audit - October 2005

 

the University or a department thereof, Foundation staff contact the donor to clarify

which entity should deposit the check. To date, neither the University nor the

Foundation has formally adopted policies in this area. Since our audit also identified

exceptions in this area, it is important that the University and Foundation move

forward to formalize policies addressing this concern.

 

Recommendation No. 1:

 

The University of Colorado Foundation should formalize additional written policies

and procedures for managing cash contributions, including:

 

a. Requiring that written documentation from the donor be obtained for all

donations over a specified amount.

b. Establishing a document retention policy to ensure that documentation from

donors is maintained until the donated monies have been fully used or are no

longer restricted.

c. Implementing a standard format for documenting verbal instructions from

donors for contributions below the specified amount.

d. Contacting donors for clarification before recording any gift whose purpose

is not clearly evident from information accompanying the gift and

appropriately documenting the donors’ instructions.

University of Colorado Foundation Response:

 

Agree.

 

a. Implementation Date: January 2006. The Foundation has adopted a new

Gift Acceptance Policy that requires written documentation for all gifts,

regardless of amount. In addition, the Foundation is developing

standardized gift acknowledgment and receipt letters that will clearly

restate the significant terms of gifts of $1,000 and above, including (1)

the form of the gift (pledge, check, credit card, cash, other), (2) the

amount of the gift (if cash or cash equivalent), (3) a detailed description

of the gift (if non-cash), (4) the intended purpose of the gift, and (5)

restrictions (if any). Donors will be requested to note any corrections,

sign and return the letters by fax or mail.

b. Implementation Date: January 2006. The Foundation will develop a

document retention and destruction policy.

 

Report of The Colorado State Auditor

 

c. Implementation Date: December 2005. The Foundation will develop a

standard form for documenting verbal instructions from donors for

contributions when written documentation was not provided or the

documentation was not clear as to the donor’s intent.

d. Implementation Date: October 2005. The Foundation’s new Gift

Acceptance Policy requires contacting donors for clarification of the gift

purpose if it is not clearly evident from information accompanying the

gift.

Recommendation No. 2:

 

The University of Colorado Foundation and the University of Colorado should work

together to finalize, approve, and implement policies and procedures for handling

checks received by the Foundation that are made payable to the University.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: November 2005. In October 2005, the

Foundation Board approved a policy and implemented standard procedures

governing checks received by the Foundation but made payable to the

University. This policy was developed with coordinated efforts and

agreement from the University.

 

University of Colorado Response:

 

Agree. Implementation Date: November 2005. The University and

Foundation have been working through the issues to draft a policy governing

the deposit of gift instruments since 2003. After careful consideration of the

complex issues, the University policy is expected to be adopted effective no

later than November 1, 2005.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Distribution of Gift Monies

 

The second step in ensuring donor intent is met is to transfer gift monies from the

Foundation and deposit them into University gift accounts that correctly reflect their

restrictions. When a University department determines a need for gift monies from

the Foundation, the department submits a “Request for Transfer of Funds,” or a

transfer request, to the Foundation. The University includes the following

information on the request form:

 

• The number and name of the Foundation fund from which the University is

requesting the transfer.

• The number of the University gift account into which the funds will be

deposited.

• The amount requested.

• A brief description of the purpose of the request.

When the Foundation receives the transfer request, accounting staff review the

information on the form to determine if it is complete, if gift monies are available,

and if the intended use of the monies indicated on the form by the University is

consistent with the purpose for which the gift fund at the Foundation was established.

 

To determine whether the Foundation disburses gift monies to the University in

accordance with donor restrictions, we reviewed a sample of 134 transfers the

Foundation made to University gift accounts between July 1, 2001, and March 31,

2005, totaling about $6.9 million. For 54 of the transfers we reviewed (40 percent)

totaling about $2 million, we were unable to conclude whether the gift monies were

transferred for a purpose consistent with the donors’ intentions due to issues in the

two areas described below. For some of the transfers, we noted more than one issue.

 

Lack of Documentation

 

First, the Foundation could not provide sufficient documentation for us to assess

compliance with donor restrictions for 13 of the transfers we reviewed (10 percent)

totaling about $501,000. Specifically:

 

• For three of the transfers in our sample totaling about $126,500, the

Foundation could not provide the transfer request forms from the University;

as a result, we were unable to determine the purpose for which the University

requested the monies.

• For 10 of the transfers in our sample totaling about $374,500, the Foundation

could not provide any original documentation regarding the restrictions

 

Report of The Colorado State Auditor

 

placed on the fund; it could only provide information that had been entered

into its automated donor system. The Foundation should have had either

internally generated “new account request” forms or fund agreements signed

by the donors documenting the donors’ restrictions on the funds. For these

10 transfers, the issues identified are similar to those noted in the previous

section under Cash Contributions.

 

Lack of Coordination for Transfers

 

The second main area in which we identified issues was during the actual transfer of

monies from the Foundation and subsequent receipt by the University. Both the

Foundation and the University reported that they rely on the knowledge of the

University department staff to request monies in accordance with donor restrictions.

However, the use of transfer forms that describe the purpose for requesting monies

and the assignment of purpose codes to Foundation gift funds and University gift

accounts are intended to serve as controls to help ensure donor intent is met.

Overall, we found a lack of adequate coordination of efforts and information

between the University and Foundation and a lack of sufficiently defined procedures

to ensure compliance with donor intent.

 

Purpose descriptions on the transfer request forms are vague. Foundation

accounting staff report that the University’s description of the purpose of the

requested monies is one of the primary pieces of information on the transfer form

used to determine if the request is appropriate. For 19 transfers totaling about

$769,900 in our sample of 134 transfers, the written description on the request form

was insufficient to allow us to determine if the purpose was consistent with donor

restrictions. For example, some of the descriptions of the stated purpose on transfer

request forms included “for expenditures,” “for program activities’ food and

beverage costs,” and “for support of the various programs that have received funding

through gifts or grants to the Foundation.” The Foundation has written procedures

for its staff to follow in reviewing the request forms submitted by the University.

However, the procedures do not provide specific direction on the level of detail staff

should expect on a transfer request form in order to properly evaluate the purpose.

On the other hand, the University does not have written procedures directing

department staff to provide complete and detailed information on the purpose for

which the monies are being requested and how the purpose meets donor intent. In

addition, neither the University nor the Foundation provides routine training to

personnel responsible for handling transfers of gift monies to assist them in carrying

out their fiscal duties. Joint training sessions could be particularly beneficial to clear

up inconsistencies and address communication issues.

 

Purpose codes assigned by the Foundation and University do not provide an

effective control over the use of donor monies. The Foundation assigns an

 

 

University of Colorado Foundation Performance Audit - October 2005

 

alphabetic purpose code to each of its gift funds to help identify the primary

restriction or purpose of the fund. Similarly, the University assigns a four-digit

expense purpose code to each of its gift accounts. The University and Foundation

have developed a “cross-over” table that correlates both entities’ purpose codes.

Foundation staff enter information for each transfer request into a spreadsheet that

is sent to the University Treasurer’s Office at the time the requested monies are

wired to the University each week. When the University receives the wire transfer

and spreadsheet, it uploads the spreadsheet into its accounting system and runs an

automated query that compares the Foundation and University purpose codes,

identifies transfers where codes do not “cross-over” or align, and generates an

exception report. This is forwarded to the appropriate campus controllers and

University departments for resolution.

 

This process could function as a control to help ensure that gift monies are deposited

to the proper University gift account. However, we noted the following issues:

 

• Each Foundation purpose code reflects a relatively narrow purpose for which

the monies can be used, but donations can be made to serve multiple

purposes. For example, when the Foundation receives a contribution that the

donor has designated for both scholarships and purchases of academic

materials, the Foundation may assign an “A” purpose code, designating it

only as a scholarship fund. If a University department requested monies

from the fund to purchase academic or instructional materials (which would

be allowed), it would transfer the monies into a gift account with a University

purpose code of “instruction” (1100). However, the Foundation’s

(A/scholarship) code does not correlate to the University’s (1100/instruction)

code on the “cross-over” table, resulting in a discrepancy.

For our sample, we compared the purpose codes assigned by both the

University and the Foundation to their respective gift funds and accounts.

For 36 of the transfers in our sample (27 percent) totaling about $1.5 million,

the purpose code on the Foundation gift fund from which the monies were

requested did not correlate to the purpose code of the University gift account

into which the monies were being deposited. For example, the exceptions

included 23 transfers that the University requested for deposit into gift

accounts with the purpose code of 1100/instruction; however, the Foundation

gift funds from which the monies were requested had purpose codes that

were for a variety of noninstructional purposes, such as to provide financial

aid and scholarships and to support nonacademic units.

 

• The Foundation reports that it uses other information on the transfer form,

not the purpose codes, to evaluate whether transfers to the University are

intended for the appropriate purposes. The Foundation uses the purpose

codes for general reporting on use of gift monies.

 

Report of The Colorado State Auditor

 

• As mentioned previously, the University has assigned responsibility to the

campus controllers for addressing exceptions identified during the automated

query. However, the University has no centralized control to monitor and

document that exceptions are properly resolved in a timely manner and prior

to the deposit of monies into a University gift account.

The University reports that it is currently working to address the lack of alignment

of the purpose codes by adopting the Foundation’s coding system for gift transfers

by the end of Calendar Year 2005. While this would make a comparison of the

purpose codes more useful, the University should also reach an agreement with the

Foundation on the importance of the codes in the transfer process and the need for

the Foundation to consider these codes during its review of transfer requests.

Further, the University should develop procedures to resolve all exceptions from the

automated query in a timely manner before the monies are made available for

University expenditure.

 

In terms of the overall process of transferring gift monies, the University’s long-

range goal is to establish a one-to-one relationship between Foundation gift funds

and University gift accounts and their respective purposes. Establishing a direct link

between each Foundation gift fund and an associated University gift account should

be an effective way to ensure that gift monies are transferred to appropriate

University accounts, as long as such information is kept current in both the

Foundation and University systems. However, until this goal is accomplished, there

is a risk that gift monies are transferred to the University for purposes that are not

consistent with donor restrictions on the gifts.

 

Until the relationship between Foundation gift funds and University gift accounts is

resolved, there are other steps the University and Foundation should take to improve

controls over transfers. First, the Foundation should ensure that all transfer requests

from the University are maintained to provide support for monies sent to the

University. Second, the University and the Foundation should reach an agreement

on what constitutes sufficient description for Foundation staff to determine whether

the University’s purpose correlates to the purpose of the Foundation fund from which

the monies will be transferred. University staff should be instructed to include the

necessary level of detail in the description of the purpose on each transfer request.

Both the Foundation and the University should conduct periodic staff training,

including joint sessions, on the coding and transfer process for handling gift monies.

Third, the Foundation and University should work together to resolve problems with

the purpose codes and use these codes to help ensure compliance with donor intent.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Recommendation No. 3:

 

The University of Colorado Foundation should maintain all transfer requests from

the University to provide supporting documentation for monies sent to the

University.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: January 2006. As a matter of practice, the

Foundation does maintain transfer requests from the University. Three of the

134 transfers requested for review over a four-year time frame could not be

located. The Foundation will develop a record retention and destruction

policy as noted in the response to Recommendation No. 1. The long-term

plan is to implement a document management system that will electronically

capture and store these requests.

 

Recommendation No. 4:

 

The University of Colorado Foundation and the University of Colorado should

strengthen controls over transfers of gift funds from the Foundation to the University

by establishing a direct relationship between all Foundation gift funds and all

University gift accounts and their respective purposes. This information should be

updated periodically in both entities’ systems to ensure consistency as new funds and

accounts are created.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: February 2006. The Foundation and the

University are currently working on program modifications to establish a

direct relationship between all Foundation gift funds and all University gift

accounts to include the respective donor purpose. A process will be

established to update this information on a weekly basis.

 

University of Colorado Response:

 

Agree. Implementation Date: February 2006. The University, in

collaboration with the Foundation, has begun work to design a process that

provides a direct relationship between the University and Foundation gift

accounts. The process is expected to include a routine schedule to update the

information in both entities’ systems.

 

 

Report of The Colorado State Auditor

 

Recommendation No. 5:

 

The University of Colorado Foundation and the University of Colorado should make

immediate improvements in the process of transferring gift monies from the

Foundation to the University until the direct relationship recommended above is

established by:

 

a. Providing instructions to University departments on completing transfer

request forms to describe how the purpose of the request is consistent with

the restrictions on the Foundation gift fund from which monies are requested.

b. Reaching an agreement on the review of the purpose codes during the

transfer process and ensuring exceptions identified during the transfer

process are resolved timely and prior to the University’s use of monies.

University of Colorado Foundation Response:

 

Agree. Implementation Date: November 2005.

 

a. Working closely with the University, the Foundation will develop written

instructions for University staff describing how to complete the gift

transfer request form, emphasizing that the purpose of the request must

be clearly documented and consistent with the donor intent or restrictions

specified in the gift fund.

b. The Foundation will work closely with the University to reach an

agreement on the review process of purpose codes and to resolve in a

timely manner purpose code exceptions identified in the transfer process.

University of Colorado Response:

 

Agree. Implementation Date: November 2005. The University, in

collaboration with the Foundation, will make immediate improvements to the

gift transfer process by adopting university written procedures that specify

how:

 

a. Departmental gift managers are expected to complete the fund transfer

request form to demonstrate compliance with donor restrictions; and

b. Campus controllers are expected to timely review and resolve purpose

code exceptions identified in the transfer process.

 

University of Colorado Foundation Performance Audit - October 2005

 

Recommendation No. 6:

 

The University of Colorado Foundation and the University of Colorado should make

permanent improvements in the process of transferring gift monies from the

Foundation to the University by:

 

a. Providing periodic training to staff on the processing of gift fund transfers,

including joint sessions.

b. Improving the use of purpose codes as a control over donor monies by

ensuring the codes are consistent between the University and the Foundation.

University of Colorado Foundation Response:

 

Agree. Implementation Date: February 2006.

 

a. The Foundation and the University will collaboratively develop a training

program for University staff on requesting and processing gift transfers.

b. The Foundation will work closely with the University to establish an

enhanced coding system (see Recommendation No. 4) to ensure there is

consistency and clarity of donor purpose between the Foundation and the

University.

University of Colorado Response

 

Agree. Implementation Date: February 2006. The University, in

collaboration with the Foundation, will make permanent improvements to the

gift management process by establishing (as part of Recommendation No. 4):

 

a. A training program for University staff responsible for gift transfers and

spending which highlights the control processes and departmental roles

and responsibilities; and

b. An enhanced coding system to provide consistency between the

University and Foundation, and adequate and understandable definitions

related to donor restrictions.

 

Report of The Colorado State Auditor

 

Expenditure of Gift Monies

 

After the Foundation records a cash contribution into the proper gift fund and

distributes monies to the University in a manner consistent with the purpose of the

contribution, the final step is to ensure the monies are actually spent in accordance

with the donor’s restrictions.

 

The University has policies that assign fiscal responsibility to departmental staff at

all levels, including departmental administrators, department chairs, deans, and vice

chancellors. These individuals are responsible for ensuring that only allowable costs

are incurred, including those that are allowed under the restrictions placed by a donor

on gift monies.

 

Generally, University departments do not request transfers from the Foundation for

each expenditure they make using gift monies. In other words, there is not a one-toone relationship between a request for gift monies and an expenditure of gift monies.

Therefore, to assess whether gifts are spent in accordance with donor intent once

they are transferred to the University, we reviewed a sample of 51 University

expenditures of gift monies in Fiscal Year 2004 totaling about $139,000, traced them

to the University gift accounts from which they were expended, and then traced

transfers into those University gift accounts to the Foundation gift funds where the

monies originated. We found problems with seven of the 51 expenditures we tested

(14 percent), including:

 

• For four expenditures we reviewed totaling about $2,800, we could not

determine whether the monies were used according to donor restrictions,

because the University commingles monies from various sources and with

various purposes within its gift accounts. The first expenditure was for meals

for residents in the orthodontics program paid using monies from an account

that contained donations made (1) to support the dental school, (2) to support

building and equipment costs for the dental school, and (3) to establish an

orthodontics residency program. The second expenditure was for a dinner

for graduate students paid using monies from an account that contained

donations made (1) for undergraduate scholarships, (2) to support

undergraduate students participating in research in the Psychology

Department, and (3) for general discretionary use by faculty. The third

expenditure was for a scholarship or award paid for using monies from an

account that contained (1) donations made to establish a chair in

environmental and community development policy and (2) proceeds from a

special event to generally raise money for a University campus. The fourth

expenditure was for a departmental Holiday party paid using monies from a

gift account that contained donations (1) for discretionary use by the

department, and (2) to support departmental professorships and research.

 

University of Colorado Foundation Performance Audit - October 2005

 

• For two expenditures we reviewed totaling about $240, we could not

determine whether the monies were used according to donor restrictions

because of poor documentation of the use of the monies. The first

expenditure was for office supplies paid using monies donated for research.

We could not determine if the supplies were specifically for research or for

general program use. The second expenditure was for alcohol paid using

monies donated for operating expenses of a University program. The

University had no documentation describing the event for which the alcohol

was purchased and showing that it related to program operations.

• For one expenditure we reviewed totaling about $90, the expenditure did not

appear to be consistent with donor restrictions on the monies used. The

expenditure was to purchase wine for faculty recruitment receptions using

monies donated to pay for expenses and supplies for biological research.

We identified three conditions that create a risk that University gift expenditures will

not meet donor intent. First, as noted above, the University commingles monies

from various sources in its gift accounts, such as donations from different sources

and with different purposes. As a result, the University cannot always ensure that

a given purchase meets all the restrictions on the monies used. If the University

established an individual account associated with each Foundation gift fund, as

discussed in the previous section, the University could eliminate the commingling

of gift monies.

 

Second, the University and the Foundation do not provide the gift fund managers

clear guidance regarding their responsibilities for complying with donor intent. Each

Foundation gift fund is assigned a fund manager (often a chair, dean, or chancellor

from the University) who is authorized to approve both transfer requests to obtain

gift monies and expenditures of those monies. In other words, the University has

delegated responsibility for proper spending of gift monies to the individual

departments and programs, which approve expenditures of gift monies. Personnel

at the department and program level are expected to ensure expenditures comply

with donor restrictions. Although the University has various written policies and

procedures regarding fiscal management and control, the policies and procedures are

not specific regarding how gift fund managers should document the use of gift

monies according to donor restrictions. In addition, fund managers do not always

have adequate documentation that explains the donor restrictions on gift monies for

which they are responsible.

 

Third, neither the University nor the Foundation has processes in place to regularly

monitor the use of gift monies after they are expended. In Fiscal Year 2005 the

Foundation established an internal audit function that was intended to be responsible

for, among other things, auditing gift expenditures at the University to evaluate

 

 

Report of The Colorado State Auditor

 

compliance with donor intent. To date, no such audits have been scheduled or

completed. The University’s Internal Audit department may review some gift

expenditures as part of its risk-based departmental audits, but it does not conduct

audits for the specific purpose of evaluating whether gift monies have been spent

according to donor intent.

 

Overall, we found weaknesses in the University’s and Foundation’s processes for

ensuring donor intent, creating a risk that gift monies are spent for purposes other

than those intended by the donors. Both the University and the Foundation have a

fiduciary duty to honor donor wishes and are responsible for establishing clear,

comprehensive policies, processes, and training to ensure that gift monies are

handled appropriately. As the recipient of the gifts, the Foundation has a

responsibility to donors to record the gifts in the correct funds and transfer monies

to the appropriate University accounts. Once the Foundation transfers gift monies

to the University, they become the property of the University Board of Regents. As

such, the University has a responsibility to ensure the monies are spent in accordance

with the intent of the donors. The University and the Foundation need to have

adequate controls in place to give donors assurance that their gifts are being used as

intended. To protect their donor base, the University and the Foundation should

work together to improve policies and processes to ensure donor intent is met

whenever gift monies are expended.

 

Recommendation No. 7:

 

The University of Colorado Foundation and the University of Colorado should work

together to implement and strengthen controls to ensure that gift monies are spent in

accordance with donor restrictions. This should include:

 

a. Providing each fund manager with adequate documentation specifying the

restrictions on the accounts for which they are responsible including, where

appropriate, written fund agreements.

b. Establishing plans for both Foundation and University internal auditors to

conduct specific audits of gift expenditures for compliance with donor intent

and addressing concerns noted during the audits in a timely manner.

University of Colorado Foundation Response:

 

Agree.

 

a. Implementation Date: February 2006. Working together with the

University, the Foundation will enhance the donor restriction

 

University of Colorado Foundation Performance Audit - October 2005

 

documentation provided to each fund manager by establishing a direct

relationship between all Foundation gift funds and all University gift

accounts as noted in Recommendation No. 4. Imaging of gift agreements

can also enhance the timeliness and adequacy of documentation that fund

mangers need to understand donor intent.

 

b. Implementation Date: November 2005. In September 2004 the

Foundation created an Internal Audit position to evaluate risk, review

compliance with established policies and procedures, and provide

recommendations to enhance internal controls within the Foundation.

The Foundation will establish written plans for this function to conduct

periodic audits (at least annually) of gift expenditures for compliance

with donor intent. Additional audit plans will be developed to follow-up

on the effectiveness of responses from this performance audit (within six

months of implementation dates). All findings will be reported to the

Foundation’s Audit Committee.

University of Colorado Response:

 

Agree. The University, in collaboration with the Foundation, has begun

work to strengthen its controls.

 

a. Implementation Date: February 2006. The University will provide

enhanced information to departmental gift managers related to donor

restrictions through the direct relationship process (discussed in

Recommendation No. 4), and, where appropriate, imaged documentation

such as gift agreement excerpts.

b. Implementation Date: November 2005. The University will modify its

internal audit plan and programs in the following ways: (i) adding an

audit of the effectiveness of the implementation of the solutions to the

recommendations in this audit report within six months of their

implementation dates, (ii) ensuring that its current audit programs, such

as departmental audits and procurement card audits, test donor restriction

compliance when gift monies are identified as the funding source, and

(iii) adding a separate audit on gift compliance to its annual audit plan

risk evaluation.

Recommendation No. 8:

 

The University of Colorado should strengthen controls to ensure the gift monies that

it receives are spent in accordance with donor restrictions by:

 

 

Report of The Colorado State Auditor

 

a. Discontinuing the practice of commingling gift monies with various purpose

restrictions within a single gift account.

b. Developing written policies and procedures for University fund managers

related to managing the gift monies the University receives.

University of Colorado Response:

 

Agree. Implementation Date: February 2006. The University of Colorado

will strengthen controls over gift monies by:

 

a. Implementing the direct relationship process and enhanced coding system

(discussed in Recommendation Nos. 4 and 6) which is intended to

prevent the commingling gift monies with various purpose restrictions

within a single gift account; and

b. Developing written procedures setting forth the control processes and

departmental roles and responsibilities for gift management.

Gifts In Kind

 

As noted earlier, the Foundation receives gifts of property on behalf of the

University. We reviewed the Foundation’s policies and procedures governing the

treatment of these non-cash gifts, or gifts in kind. The Foundation’s Gift Acceptance

Policy states that “the Foundation Board of Directors is responsible for accepting or

declining all gifts to the Foundation.” The Board has delegated the authority to

accept gifts, including gifts in kind, to either a Gift Acceptance Committee or

Foundation staff, depending on the type of gift. According to the Gift Acceptance

Policy:

 

• All gifts considered to be of significant or moderate risk must be approved

by the Gift Acceptance Committee. Such gifts include non-publicly traded

securities, personal property with a fair market value of $100,000 or more

(such as works of art, vehicles, and computer hardware and software), and

gifts that have the potential to adversely reflect on the Foundation or the

University or would require undue expenditures, such as maintenance costs.

• All other gifts are to be considered low risk and may be accepted by

Foundation staff on behalf of the Board. For example, cash donations not

accompanied by unusual restrictions would be considered low risk.

 

University of Colorado Foundation Performance Audit - October 2005

 

In addition to the formal policy, the Foundation has written gift acceptance

procedures with stipulations to guide staff in receiving and recording gifts, including

the following:

 

• Generally, nonmonetary gifts with a fair market value exceeding $5,000 will

be recorded at the values placed on them by qualified independent appraisers.

• For gifts of equipment donated by the manufacturer, the Foundation will

record the gift at the fair market value documented by the manufacturer’s

financial office at the time of the donation or at “blue book” value.

• Prior to the acceptance of a gift in kind, the appropriate Foundation unit or

University program must submit to the Foundation a written recommendation

as to the usefulness of the gift to the University or Foundation.

According to Foundation staff, the Gift Acceptance Policy and the associated

procedures were officially approved by the Board of Directors in January 2004.

However, staff also stated that the policy requirements and procedures had been

followed for several years prior to their formal adoption in 2004.

 

We reviewed a sample of 53 gifts in kind received by the Foundation from July 1,

2001 through March 31, 2005. The gifts we tested totaled about $21.1 million. We

found that half the gifts in kind in our sample did not comply with the Foundation’s

policies and procedures for accepting gifts, as follows (some gifts had several

compliance problems and are reflected in more than one section below).

 

Lack of evidence of approval to accept gifts. For all 25 of the gifts in kind we

tested that were individually valued at $100,000 or more (47 percent of the total

sample), with a combined value of about $20.6 million, there was no evidence that

either the Board (prior to January 2004) or the Gift Acceptance Committee (since

January 2004) had approved acceptance of the gifts. Our sample included the largest

gifts in kind the Foundation received in each fiscal year reviewed, representing over

86 percent of the total gifts in kind accepted during the period. Our sample included

gifts of computer equipment, scientific equipment, and an aircraft.

 

Lack of support for valuation of gifts. For 15 of the 53 gifts in kind tested

(28 percent) totaling about $8.9 million, the Foundation did not have documentation

to adequately support the valuation of the donation. Specifically:

 

• For nine of the gifts we reviewed totaling about $5.8 million, the valuation

was not supported by documentation from the donor or other verifiable

source, such as an independent appraiser.

 

Report of The Colorado State Auditor

 

• For four of the gifts we reviewed totaling about $1.3 million, the Foundation

overstated the value of the gifts by about $176,400 in total when recording

them. For two of the gifts, the Foundation could not explain why they were

recorded at higher values than indicated on the documentation provided by

the donors. For the other two gifts, there were mathematical errors in

calculating the values.

• For one of the gifts we reviewed with a value of just over $1 million, there

was no documentation explaining the valuation method for the donated item,

and the valuation was not reduced to account for an agreement allowing the

donor use of the gift for 14 days each year. Since the donor agreement was

silent regarding who was required to cover the cost of the donor’s use, the

University must cover the costs. We estimate the value of the donor use of

the gift to be about $39,200 per year, or about $52,300 from the date of the

donation in March 2004 through June 2005.

• For one of the gifts we reviewed with a value of $830,000, the Foundation

received three separate appraisals valuing the donated item, but none of the

appraisals described their valuation methods. The Foundation determined the

value of the gift by averaging two appraisals, which were completed in

November 1999 and February 2002, or more than two years apart.

Lack of evaluation of the costs to maintain gifts. For 2 of the 53 gifts in kind we

tested (4 percent) totaling about $1.8 million, there was no documentation indicating

that the Foundation had considered the costs of maintaining the donated items.

 

• One item was a Learjet originally recorded by the Foundation in 2002 at

$830,000 and written down to $100,000 in 2004, about two years after the

original donation. About five months after the write-down, the Foundation

sold the aircraft for the written-down value. In meetings of the Foundation’s

Board of Directors, Executive Committee, and Audit Committee subsequent

to receiving the gift, one Board member requested a summary of the

aircraft’s operating expenses. We found no evidence that a summary was

provided.

• One item was a piece of scientific equipment recorded by the Foundation in

2004 at just over $1 million. The signed memorandum of agreement

between the donor and the Foundation for the gift specified that the item was

donated in “as-is” condition and that the University was responsible for all

costs related to acquisition, operation, and maintenance of the equipment.

The Foundation had no documentation indicating that these costs had been

evaluated.

 

University of Colorado Foundation Performance Audit - October 2005

 

Lack of documentation supporting the usefulness of gifts. For 13 of the 53 gifts

in kind tested (25 percent) totaling about $16.5 million, the Foundation did not have

documentation from the University regarding the usefulness of the donated item.

According to Foundation staff, the majority of gifts in kind are sent to the University

for use by a particular college or program. Documenting the need for the gift before

it is accepted is important to ensure the Foundation only accepts gifts that are useful

to the University. We selected five of the largest gifts in kind for the period

reviewed and confirmed with the University that it had received and was currently

using the items.

 

Gift Acceptance Policy

 

One reason for the issues we found is that the Foundation’s Gift Acceptance Policy

and procedures do not clearly stipulate the documentation that staff should generate,

obtain, and/or maintain when accepting a gift in kind. For example, the policy and

procedures do not require staff to document that costs of maintaining donated

equipment were estimated and considered or that the University had confirmed a

need for the gift before it was accepted. The policy and procedures also do not

describe how the Gift Acceptance Committee should document its decisions to

accept or deny gifts.

 

Additionally, we found no evidence that the Gift Acceptance Policy had been

approved by the Foundation’s Board of Directors, and in fact, the March and May

2004 meeting minutes of the Board’s Audit Committee indicate that the Gift

Acceptance Policy was not formally adopted as of those dates. In addition,

Foundation staff and Board members confirmed that as of July 2005, no Board

members had been assigned to the Gift Acceptance Committee and the Committee

had not been operating as intended under Foundation policy.

 

The Foundation and the University are in the process of transferring the

responsibility for accepting certain gifts in kind to the University. The two

organizations have an unwritten agreement that the University will take a much

larger role in accepting gifts in kind beginning in Fiscal Year 2006. The University

has not yet finalized a policy or procedures for accepting gifts in kind. The

University and the Foundation both need to formally adopt gift in kind acceptance

policies that address the concerns expressed here. Once adopted, both the University

and the Foundation should train personnel to help ensure they carry out the policies

properly.

 

 

Report of The Colorado State Auditor

 

Recommendation No. 9:

 

The University of Colorado Foundation and the University of Colorado should work

together to develop written policies for accepting gifts in kind. The policies should

address authority to approve gifts in kind, acceptable valuation procedures,

evaluation of maintenance costs, and documentation of the need for each gift.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: October 2005. On October 3, 2005 the

Foundation Board of Directors reviewed and approved updates to its Gift

Acceptance Policy. This revised policy clarifies that gifts in kind proffered

for use and benefit of the University shall be handled directly by the

University according to its Administrative Policy Statement “Gift In Kind

Transactions.” The revised Foundation Gift Acceptance Policy also clarifies

procedures necessary to accept gifts in kind proffered to the Foundation for

its own benefit. These procedures address authority to approve and accept

gifts in kind, acceptable valuation procedures, consideration and evaluation

of maintenance costs, and documentation of the need for each gift.

 

University of Colorado Response:

 

Agree. Implementation Date: November 2005. The University will assume

responsibility for gifts in kind intended for use by the University. The

University will have approving policies and procedures which will govern

the process. The policies will identify acceptance authority, valuation

procedures, cost evaluation, and business use evaluation.

 

Recommendation No. 10:

 

The University of Colorado Foundation should strengthen its Gift Acceptance Policy

and procedures by:

 

a. Clarifying the tenure and operations of the Gift Acceptance Committee.

Specifically, the policy should state the process by which the Committee will

document its decisions about accepting or denying gifts and report its

decisions to the Board of Directors on a periodic basis.

b. Requiring that staff collect and maintain documentation of the technique used

to value each gift, the usefulness of the gift to the University, the analysis of

 

University of Colorado Foundation Performance Audit - October 2005

 

any ongoing costs the University or Foundation may incur by accepting the

gift, and the calculation of any consideration to be given to the donor.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: October 2005.

 

a. The Gift Acceptance Committee has adopted administrative procedures

governing its actions, including: voting, minutes of meetings, retention

of committee documents, and reporting to the Board of Directors. In

addition, the Board of Directors has approved a revised “Gift Acceptance

Policy” which clarifies the membership of the Committee to include the

Vice-Chair of the Board and the Chair of the Board’s Development

Committee. Additional Board members may be appointed to the

Committee at the discretion of the Board Chair. Staff members on the

Committee shall include the chief development officer, chief financial

officer/treasurer, chief development services officer, general counsel, and

chief planned giving officer, who shall serve as Secretary to the

Committee.

b. Documentation regarding specific gifts proffered for acceptance,

including analysis of usefulness and/or anticipated costs associated with

the gift, will become part of the Committee’s minutes. It should be noted

that the University’s new role and responsibility with respect to the direct

acceptance of gifts in kind (as noted in the Foundation’s response to

Recommendation No. 9 above) will virtually eliminate the Committee’s

involvement in the review/acceptance of such gifts, except in special

circumstances where a particular gift in kind is being proffered to the

Foundation for its own benefit.

Recording Nonmonetary Gifts

 

In addition to the concerns noted above, we identified issues with the Foundation’s

recording of two large gifts totaling about $6.58 million. The first gift was a large

pledge made to the Foundation in October 1999 when a property owner promised to

give the Foundation the land and building in which the Foundation currently

conducts its main operations. At the same time, the Foundation entered into a 15year lease with the property owner for the same land and building, ending one month

before the date the pledge is to be fulfilled. We identified two errors in the

Foundation’s recording of these transactions, as follows:

 

 

Report of The Colorado State Auditor

 

• The Foundation recorded a contribution receivable and contribution revenue

for $5.75 million related to this pledge, which reflects the fair value of the

land and building. However, over the 15-year term of the lease, the

Foundation will pay about $9.9 million, or about $4.1 million more than the

fair value of the property (including implied interest). There is no real gift

component to the agreement.

• The Foundation recorded both the land and building portions of the lease

together and is amortizing both over the useful life of the lease. Since the

donor pledged to give the Foundation title after the end of the lease term,

FASB Statement No. 13 indicates the Foundation should have recorded the

land and the building separately and only amortized the building, not the

land.

As a result of the first error in recording the lease transaction, in Fiscal Year 2000

the Foundation overstated its assets and revenues by about $5.75 million (by

recording a contribution and related revenue for $5.75 million). As a result of the

second error, related to amortization costs, the Foundation is charging excess

amortization against the property and overstating these expenses. We did not

calculate the impact of this error.

 

The second gift was the Learjet aircraft discussed earlier in the chapter, which was

received and recorded by the Foundation in Fiscal Years 2002 and 2003 as a result

of three separate contributions of stock in the company that owned the plane. The

first two gifts of stock were originally recorded as gifts in kind but later reversed and

recorded as regular cash contributions; the third gift of stock was originally recorded

as a cash contribution. According to Foundation staff, donations of publicly traded

stock are recorded as regular cash contributions rather than gifts in kind because they

are immediately liquidated. However, since the donated stock for the Learjet

company was a privately held security and was not liquidated, all three gifts should

have been recorded as gifts in kind. Although there is no impact on the Foundation’s

Fiscal Year 2005 financial statements as a result of this error, the supplemental

disclosure of gifts in kind on the Statements of Cash Flows were understated in

Fiscal Years 2002 and 2003.

 

Recommendation No. 11:

 

The University of Colorado Foundation should adjust its financial records to correct

the recording of gifts by removing the $5.75 million pledge receivable recorded in

1999 related to the leased property. In addition, the Foundation should reclassify the

related property into land and building portions and adjust its financial records to

reflect amortization only on the building portion, in accordance with FASB

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Statement No. 13. The Foundation should also ensure that it follows its policy with

respect to recording gifts of privately held securities as gifts in kind.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: October 2005. The Foundation has restated

its 2004 financial statements to properly account for the capital lease and the

conditional promise to give. This restatement is reflected in the Foundation’s

audited consolidated financial statements of June 30, 2005 and 2004.

 

 

Administration

Chapter 2

 

 

Background

 

The University of Colorado Foundation (Foundation) is organized into several

departments including development, stewardship and donor relations, finance and

accounting, legal, human resources, and data and technology management. As

discussed in the Overview, the Boulder Alumni Association (Alumni Association)

is a division of the Foundation and is included in the Foundation’s annual financial

statements. At Fiscal Year-End 2005 the Foundation employed 138 full- and part-

time staff carrying out a variety of development and administrative duties such as:

 

• Soliciting donations through donor visits, mail and phone campaigns, and

special events.

• Accepting and processing gifts.

• Accounting and administration.

• Maintaining a database of University of Colorado alumni and donors.

• Managing endowments and other investments.

• Working with the University to coordinate special events on behalf of

University departments and alumni.

• Supporting the University with special projects such as the Faculty Housing

program and the Bear Creek I student housing facility.

The Foundation’s operating costs averaged about $22.1 million annually from Fiscal

Year 2003 through 2005. The table below shows a breakdown of the Foundation’s

operating expenses for this period.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

University of Colorado Foundation

Operating Expenses1

Fiscal Years 2003 Through 2005

Expense Category 2003 2004 2005

Salaries & Other Personnel Expenses2 $14,204,300 $11,194,800 $11,056,100

Professional Services3 1,556,600 2,684,800 $3,209,500

Facilities & Equipment4 2,357,900 2,418,100 $2,410,400

Office Supplies & Administration5 2,144,800 1,712,300 $2,067,300

Donor Cultivation Meals, Tickets, & Events6 1,519,000 1,313,700 $1,524,000

Other Expenses7 1,011,600 1,122,900 $1,225,300

Employee Travel8 658,900 451,500 $539,000

TOTAL $23,453,100 $20,898,100 $22,031,600

Source: University of Colorado Foundation General Ledger.

1 Includes Boulder Alumni Association. Expenses related to the Foundation Boards of Directors and

Trustees are included within the categories listed.

2 Includes salaries, incentives, temporary labor costs, payroll taxes, and life/health insurance costs.

3 Includes consulting, auditing, and legal expenses.

4 Includes rent, utilities, insurance, maintenance, office equipment, furniture, and depreciation.

5 Includes office supplies, staff training, memberships, licenses, subscriptions, telecommunication

services, advertising, and meals and meeting costs that involve only Foundation employees.

6 Includes donor-related food, beverages, entertainment, tickets, facilities rentals, awards, and gifts.

7 Includes bank, credit card, and trust management fees; interest expenses; transfers between funds and

net asset classes; prior year corrections; and other miscellaneous expenses.

8 Includes airfare, lodging, meals, car rental, mileage reimbursements, other transportation, parking, tips,

and toll fees.

 

Our audit reviewed the Foundation’s policies and procedures and related internal

controls over expenses such as travel and related costs, donor cultivation, meetings,

meals, and club and membership dues. The Foundation incurs other expenses that

were not included in the scope of our audit such as for staff compensation, building

and equipment rental and utilities, information technology services, and professional

services. In the areas we reviewed, our audit identified a significant lack of controls

as well as deficiencies in Foundation policies and procedures that have led to

unallowable and questionable expenses.

 

Operating Expenses

 

The Foundation pays operating costs through direct payments to vendors, credit card

charges, and reimbursements to employees. The Foundation is liable for 20 general-

use credit cards with a total combined credit limit of $340,000 and maximum

individual card limits ranging from $1,000 to $50,000. With respect to

 

 

Report of The Colorado State Auditor

 

reimbursements, the Foundation’s policies allow employees to be reimbursed for

business-related expenses and are consistent with Internal Revenue Service

guidelines in terms of requirements for supporting documentation. Foundation

policies prohibit reimbursement for certain types of purchases, as discussed later in

this section, but do not prohibit any type of credit card purchases.

 

In Fiscal Year 2005 the Foundation reimbursed its staff a total of about $390,100 and

used Foundation credit cards to pay about $603,200 in expenses. We reviewed

policies and procedures and examined samples of actual expenses to determine

whether the Foundation reimbursements and credit card charges were appropriate

and limited to business-related expenses. We found problems with controls over

both employee reimbursements and credit card purchases, as discussed in this

section. Overall, the Foundation’s written policies and internal controls are not

sufficient to ensure that reimbursements or credit card purchases are consistent with

Foundation policies.

 

An organization’s upper management is responsible for establishing a commitment

to standards of professional conduct, including compliance with policies and

procedures. To test employee reimbursements, we selected a sample of five

Foundation staff from those with the highest amount of reimbursements from July

1, 2003, through March 31, 2005 (21 months). The five staff selected were all upper-

level managers. We reviewed a total of 40 reimbursement vouchers paid to these

employees, which included 669 separate purchases totaling about $50,900, or about

51 percent of the total dollar amount reimbursed to the five staff during the period

of review. To test credit card purchases, we selected a sample of 13 credit card bills

from July 1, 2001, through March 31, 2005, with total charges of more than

$112,200 and containing 418 transactions. In total, our sample of reimbursements

and credit cards included 1,087 purchases with a value of about $163,100.

 

Our review of employee reimbursements and credit card charges revealed

unacceptable levels of policy violations. Overall, in 490 of the 1,087 reimbursed

purchases and credit card transactions (45 percent), we found policy violations,

errors, and/or lack of supporting documentation. We found that Foundation

management commonly received reimbursements for purchases that were not

supported by documentation sufficient to determine whether the expense was

legitimate. Similarly, we found the Foundation paid for credit card charges for

which there was inadequate documentation to ensure the expenses were appropriate

and business-related. The errors we detected indicate a disregard for ensuring that

limited funds are used appropriately and in accordance with the Foundation’s

mission to support the University. We found significant weaknesses in the policies

themselves and in the Foundation’s enforcement of policies, as described below.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Ineffective Review Process. The Foundation has a written policy for approving

employee reimbursements and credit card purchases. The reimbursement policy

requires supervisory and accounting approval for expenses incurred by all staff. The

Foundation’s practice is for employees to obtain a supervisor’s approval when

submitting a payment voucher for credit card purchases as well. By policy, a

Foundation officer and the employee’s supervisor must sign payment vouchers for

both reimbursements and credit cards bills totaling $2,500 or more before the

payment is made.

 

We found a large number of reimbursements and credit card payment requests that

were not properly approved. Specifically:

 

• 7 of the 13 credit card payment vouchers we reviewed containing

transactions totaling about $60,800 were approved by the employee who

originated the voucher. This is a lack of segregation of duties and creates a

risk that inappropriate expenses could go undetected.

• 31 of the 40 reimbursement vouchers we examined totaling about $37,500

were reviewed and approved by peers or other non-supervisors of the payee

(e.g., other Senior Vice Presidents), rather than by the President. The

Foundation President is required by policy to approve the reimbursements of

the staff in our sample.

• 8 of the 40 reimbursement vouchers we examined totaling about $13,100

were approved by a subordinate, rather than by a supervisor of the employee

requesting the reimbursement.

• 1 of the 40 reimbursement vouchers we examined for about $170 lacked any

type of approval, and 3 credit card payment vouchers we examined that

exceeded $2,500 each and totaling about $23,700 also lacked approval.

In December 2003 the Foundation implemented a computer-based reimbursement

system that requires an electronic signature from an employee’s supervisor before

a reimbursement can be paid. While this system is intended to increase controls over

reimbursements, we identified a number of weaknesses that impair its effectiveness.

First, the system is not used for reimbursements to Alumni Association staff, who

received a total of about $50,700 in reimbursements in Fiscal Year 2005,

representing 13 percent of the $390,100 reimbursed to all staff. Second, the system

does not require the President to approve senior managers’ expenses. Finally,

approving supervisors do not receive the receipts supporting the reimbursement

requests, so they cannot evaluate whether purchases are allowable under Foundation

policies. Instead, an accounts payable clerk is responsible for reviewing receipts for

policy compliance, such as the prohibition against alcohol purchases. In effect, this

 

 

Report of The Colorado State Auditor

 

means that a subordinate is responsible for identifying and enforcing policy

violations of higher-level staff, which is not an effective control mechanism.

 

Lack of Enforcement of Documentation Requirements. The Foundation’s

policies are intended to be consistent with Internal Revenue Service (IRS) guidelines

that require documentary evidence confirming the amount, date, place, and essential

character of a business expense and the number of people served at meals.

Specifically, until October 2004, Foundation policy required staff to submit receipts

for all purchases included on a reimbursement or credit card payment voucher except

those that do not typically generate a receipt, such as tolls and tips. Since October

2004, the Foundation has only required receipts for purchases over $25. The policy

also requires staff to provide a written explanation of the business purpose of each

expense and a list of all participants for meal and entertainment expenses. We found

that the Foundation does not enforce these requirements, as illustrated by the

following violations:

 

• No receipts of any kind. Out of our sample of 1,087 reimbursements and

credit card purchases totaling $163,100, we found that there were 822

purchases totaling about $160,200 that should have been supported by

receipts under the Foundation’s policy (the remaining expenses were for

items that would not generate a receipt or for which receipts were not

required). Of these 822 purchases, we found that 159 purchases with a value

of more than $28,000 did not have a receipt as required. This included

reimbursement to one employee of about $1,200 for expenses related to a

donor cultivation trip without receipts or other proof of payment, such as a

cancelled check or credit card bill.

• No written explanation of business purpose. For 145 reimbursed

purchases and credit card transactions in our sample totaling about $29,400,

the Foundation’s documentation did not contain any written explanation of

the business purpose. These purchases included questionable items such as

meals, lodging, and airfare for employee spouses.

• No lists of participants for meals and meetings. Our sample contained

305 reimbursed expenses and credit card charges for more than $53,300 that

related to meals and entertainment. For 172 of these, totaling about $39,600,

documentation did not include lists of the participants as required by

Foundation policy.

Lack of Itemized Receipts. We found that staff did not submit itemized receipts for

expenses, although such receipts were needed to determine compliance with

Foundation policies. Prior to October 2004, Foundation policy prohibited

reimbursement of personal expenses such as casual meals, birthday gifts, and non

 

 

University of Colorado Foundation Performance Audit - October 2005

 

business travel, and limited the amount of alcohol staff could purchase with meals

to 50 percent of the total bill. In October 2004 the Foundation expanded the list of

nonreimbursable expenses to include hotel laundry charges if traveling fewer than

five days, luxury and premium rental cars, personal entertainment expenses, and all

alcohol purchases. We reviewed the supporting documentation for all

reimbursements to the five staff in our sample to evaluate whether staff were

complying with these policies. We found that staff had not provided itemized

receipts for about one-third of the purchases we reviewed, representing almost one-

quarter of the dollar amount of reimbursed expenses we examined. In particular, 57

percent of all meal purchases were not supported by an itemized receipt. As a result,

we could not identify whether employees complied with the Foundation’s policy

limiting the purchase of alcohol. For the 219 credit card purchases in our sample that

required an itemized receipt, we found 139 transactions (39 percent), totaling about

$42,400, that were not supported by an itemized receipt. Without itemized receipts,

it is not possible to determine if staff have purchased prohibited items.

 

In October 2004 the Foundation changed its policy to require itemized receipts to

support reimbursements for purchases over $25 that employees make on their

personal credit cards but not for purchases made with cash or checks. The

Foundation should require itemized receipts for purchases over $25 regardless of the

payment method, and review receipts to enforce compliance with its policies.

 

Lack of Evidence of Prior Approvals. According to its policies, the Foundation

will only pay for first class airfare, nonemployee travel-related costs, and premium

car rentals (vehicles above the compact or mid-size categories but below the luxury

category) if prior approval is obtained from the employee’s supervisor. In our

sample, we identified several violations of the preapproval requirement, as follows:

 

• A $2,500 credit card charge for an overseas trip made by a Foundation

employee’s spouse and 25 meal and hotel reimbursements totaling about

$1,700 that contained evidence of nonemployees traveling with employees.

We found no evidence of prior approval or a business purpose for the non-

employees’ travel. The reimbursements included two instances when the

Foundation reimbursed about $1,200 in restaurant, room service, and other

in-room service charges for two room occupants.

• Four rentals of premium cars at an average cost of more than $100 per day

with no evidence of prior approval from the Foundation President.

• Six upgrades to first-class airline tickets for which there was no evidence of

prior approval. We could not determine the additional cost incurred for these

higher-cost tickets.

 

Report of The Colorado State Auditor

 

The Foundation should enforce its policy requiring prior approval by the Foundation

President for all first-class airfare and nonemployee travel expenses to ensure costs

are appropriate. Further, as a steward of public funds, the Foundation should

consider prohibiting first-class and nonemployee travel.

 

In January 2004 the Foundation began requiring all staff to arrange flights through

a travel coordinator in order to control high-dollar airline ticket purchases. An

employee’s supervisor is required to preapprove the purchase, which is then charged

on one of the Foundation’s credit cards. Our sample of five Foundation credit card

bills after January 2004 contained 33 airfare purchases made by the travel

coordinator, but the Foundation could provide documentation of supervisor pre-

approval for only 21 of these purchases (64 percent). In addition, seven airline

tickets in our sample totaling about $4,500 were not purchased through the travel

coordinator.

 

As noted on page 45, we found at least one policy violation (e.g., lack of required

documentation, lack of proper approvals) for about 45 percent of the transactions we

reviewed. Due to the lack of itemized receipts, particularly in the area of meals, we

were not able to determine the total number or amount of unallowed reimbursements

or credit card charges in our sample. Without itemized receipts, there is a risk that

the Foundation is paying for unallowed expenses. This risk is elevated because the

Foundation has not established any consequences for staff who violate policies, such

as holding an employee personally liable for unallowed expenses or recording

repeated violations in personnel records. This is a concern particularly for credit

card charges because the Foundation is liable for all expenses charged to the cards

in our sample, and Alumni Association staff, who have card limits ranging from

$1,000 to $40,000, can charge significant amounts without prior approval. Of the

418 credit card purchases we reviewed totaling $112,200, there were 61 individual

purchases costing $500 or more, for a total of $66,300 in high-dollar purchases with

no prior approval.

 

Overall, the Foundation needs to expand its policies to require appropriate

supervisory approvals and itemized receipts for all reimbursable expenses and credit

card charges over a specified amount, such as $25. The Foundation should ensure

all policies are enforced, such as those requiring complete documentation of

business purpose and meal participants, documented supervisory preapprovals when

required, and supervisory approvals for all expenses. In addition, the Foundation

should hold employees personally liable for expenses that do not comply with

policies or preapproval requirements and reflect repeated violations in personnel

records and evaluations.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Recommendation No. 12:

 

The University of Colorado Foundation should strengthen and enforce its policies

governing employee expense reimbursements and credit card purchases by:

 

a. Requiring that staff provide itemized receipts for all purchases over a

specified amount, such as $25, as well as a written explanation of the

business purpose of the expense and a list of participants for all meal and

entertainment expenses.

b. Requiring documented supervisory approval for expenses for all staff,

including top management.

c. Holding staff accountable for policy violations by requiring employees to pay

for any unallowed expenses.

d. Requiring the President’s approval and a written justification for employees

to purchase airline tickets directly rather than through the travel coordinator,

and considering a prohibition on first-class and nonemployee travel.

University of Colorado Foundation Response:

 

Agree. Implementation Date: October 2005.

 

a. The Foundation’s Board of Directors approved a revised update to the

Travel and Expense Reimbursement Policy in October 2005. The policy

is much clearer in its wording to require itemized receipts for all

purchases over $25 as well as written explanations of the purpose of the

expense and a list of participants for all meal and entertainment expenses.

b. Documented supervisory approval is a requirement in the policy

mentioned above. Expense reimbursements for the Chief Executive

Officer will be reviewed a least annually by the Audit Committee of the

Board. The Foundation controller will provide the CEO a written

expense report summary and review of all Foundation officers and

executives at the senior vice president level and above on a quarterly

basis.

c. In the revised Travel and Expense Reimbursement Policy noted above,

staff are clearly accountable for policy violations.

 

Report of The Colorado State Auditor

 

d. The Revised Travel and Expense Reimbursement Policy does not allow

staff to purchase airline tickets directly. First class travel is not permitted

by the Foundation per this policy. Non-employee travel, when such

travel is conducted on behalf of and for the benefit of the Foundation,

must be approved in advance by the CEO.

Administrative Cost Savings

 

In addition to the concerns relating to expense reimbursements and credit card

expenses, we identified areas where the Foundation could realize cost savings by

improving its spending policies. Currently the Foundation’s policies state: “When

travel, entertainment, or other business expenses are necessary, it is the goal that all

employees incur those expenses at the most reasonable cost . . . .” The policy does

not give any further guidance as to “reasonable cost” or set specific limits.

 

This broad policy language and lack of spending guidelines increases the risk of

misuse of funds and the appearance of impropriety in spending. While reviewing

expenses incurred by the Foundation between July 1, 2001, and March 31, 2005, we

identified several types of expenses that could be reduced by establishing spending

limits or developing clearer definitions of allowable costs in the Foundation’s policy.

 

Employee Travel and Entertainment

 

Foundation staff travel domestically and abroad for a variety of reasons, such as to

attend conferences, training seminars, and investment meetings and to cultivate

donors. As a nonprofit organization, the Foundation is not subject to State Fiscal

Rule limits for travel expenses. Because Foundation policy places no limits on these

expenses, employees have little incentive to choose more affordable hotels and

restaurants. The Foundation spent about $539,000 on travel in Fiscal Year 2005.

 

The Foundation could realize cost savings by implementing “not to exceed” limits

for lodging and travel-related meal expenses where no donors are present. We found

a range on staff-only meals from about $4 to more than $110 per person , and hotels

up to $435 per night. The federal government has established a maximum daily

allowance for its employees’ travel that varies depending on the cost of living in the

destination city. These limits were established after extensive review of average

hotel and restaurant prices by city, and employee and employer surveys. If the

Foundation implemented a limit that fell within the federal allowances, travel costs

could be reduced.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

We identified a number of specific purchases during our review of Foundation

expenses that appeared excessive and could have been reduced if the Foundation had

established spending limits, as follows:

 

• Payment of nearly $1,300 for five Foundation employees for one night’s

lodging in hotels where Board meetings were held within 35 miles of the

employees’ homes.

• Payment of about $120 for a limousine to transport a Foundation employee

and a Board member between the airport and their hotel, when a taxi service

would have charged about $30 for the trip.

• Payment of about $680 for a charter flight from Englewood, Colorado, to

Broomfield, Colorado, (25 miles by road) for a University coach. The

Foundation had no information regarding the purpose of this trip.

• Payment of $200 to a Foundation employee who submitted ATM withdrawal

slips for reimbursement with no receipts or log of expenses. According to

the Foundation, the withdrawals were reimbursed to provide the employee

with cash for incidental costs for an upcoming trip. However, the employee

also itemized incidental expenses on the request for reimbursement submitted

at the conclusion of the trip, receiving an additional reimbursement without

repaying the $200 in cash.

• Payment for six last-minute airfare purchases, resulting in considerably

higher costs than tickets purchased in advance. We were not able to estimate

the incremental costs of these tickets.

• Payment of $260 for theater tickets for the spouses of a Foundation employee

and a Board member who were traveling on official Foundation business.

The Foundation reported that the spouse of the Board member is also a

substantial donor. However, according to documentation from the

Foundation, the Board member was traveling in his official capacity and the

trip was not for purposes of donor cultivation. The Foundation has no

policies guiding appropriate expenses for Board members traveling on

Foundation business.

The Foundation should strengthen its written policies to prohibit payments for (1)

lodging for employees within a specified distance from their homes, (2) luxury travel

such as limousine expenses (in addition to the current prohibition on renting luxury

cars), and (3) cash withdrawals. In addition, the Foundation should implement a

policy requiring two- to three-week advance purchase of airline tickets unless the

employee receives prior approval from his or her supervisor. The Foundation should

 

 

Report of The Colorado State Auditor

 

also stipulate in its policies the circumstances under which it will pay nonemployee

transportation costs. Finally, the Foundation should develop guidelines for

appropriate expenses for Board members traveling in their official capacity for

Foundation business.

 

Foundation Meetings and Meals

 

Foundation policy allows staff to charge meals with fellow employees and other non-

donors as long as the business purpose is fully documented. The policy requires that

“business lunches with fellow employees must be limited and the business purpose

fully explained . . . all employees should exercise reasonable judgement in the

incurrence of these expenses.” However, similar to the travel expense policy

discussed above, there is no definition of “limited” or “reasonable judgement.”

 

In Fiscal Year 2004 the Foundation spent about $48,800, or about $940 per week, on

meetings and meals for employees and business associates that were not related to

Board meetings, travel, or donor cultivation. Because Foundation staff work in close

proximity to one another, we question the appropriateness of holding frequent

meetings outside the office and charging the Foundation for these meals. The

Foundation could realize cost savings by limiting the frequency and/or dollar amount

it will pay for staff-only meals.

 

Overall, the Foundation has not established spending limits or clear guidance on

what is reasonable for travel, employee meals, lodging, and entertainment expenses.

More explicit spending limits, such as maximum daily limits for travel expenses,

clarification of appropriate expenses for Board members and other non-staff, and

restrictions on staff-only meals would help eliminate ambiguities and improve use

of operating funds. Further, the Foundation should consider instituting a pre-

approval process on its corporate liability credit cards for high-dollar charges such

as meals and entertainment for groups over a certain size, and lodging .

 

Recommendation No. 13:

 

The University of Colorado Foundation should improve controls over administrative

expenses by:

 

a. Establishing maximum daily limits for travel costs such as meals and

lodging, restricting the use of limousine travel, paying expenses only for

travel that has a business purpose, paying lodging expenses only for

accommodations beyond a specified distance from the employee’s home, and

restricting the frequency and cost of staff-only meals.

 

54 University of Colorado Foundation Performance Audit - October 2005

b. Clarifying the types of expenses that are allowable and may be charged to the

Foundation for Board members and non-staff.

c. Requiring preapproval for high-dollar credit card expenses such as lodging

in excess of established limits, last-minute air fares, and group meals and

entertainment.

University of Colorado Foundation Response:

Agree. Implementation Date: October 2005.

a. Maximum daily limits for travel costs, including meals and lodging have

been established. Exceptions can only be made, if done so in advance

and in writing, by the CEO or, in the event of CEO travel, by the Chair

of the Board.

b. Expenses that are allowable and may be charged to the Foundation for

Board members and non-staff are now covered in the Travel and Expense

Policy.

c. As addressed in item a. above, any exceptions for reimbursement under

the Travel and Expense Policy require pre-approval.

 

 

Transparency and Accountability

Chapter 3

 

Background

 

In this chapter we discuss our evaluation of the financial relationship between the

University and the Foundation. Specifically, this chapter addresses concerns with

University expenses paid through the Foundation; the quality and completeness of

written contracts between the University and the Foundation; undefined

responsibilities and controls for special events; and a lack of policies and controls for

loans issued by the Foundation. Overall, the issues in this chapter pose questions

regarding accountability and transparency on the part of both the University and the

Foundation that need to be immediately addressed.

 

As explained in the Overview, the Foundation performs a variety of services for the

University, such as processing gifts, managing the University’s consolidated

endowments, and developing donor support. The University pays fees to the

Foundation for these services. At the same time, the Foundation provides gift

monies to the University. These financial arrangements are described below.

 

The University compensates the Foundation for its services in a variety of ways.

First, under an Agreement for Development Services, the University makes outright

payments to the Foundation for some services such as major fund-raising, donor

cultivation, and securing faculty housing assistance loans. Second, the University

allows the Foundation to charge fees against certain revenues to pay for some fund-

raising activities and for management and investment of the University’s custodial

endowments. These amounts are effectively fees paid by the University because they

reduce the amount of monies available to the University for other uses. In addition,

the University pays a portion of the salaries and provides office space at no charge

for some Foundation staff.

 

As detailed in the table below, over the past four fiscal years the University has

provided an average of about $11.3 million annually to the Foundation, either

directly or indirectly, for various services.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

University of Colorado Fees, Transfers, and Reimbursements to the Foundation1

Fiscal Years 2002 Through 2005

(In Thousands)

2002 2003 2004 2005

% Change

2002-2005

Development Services Agreement1

System Offices $2,948 $3,000 $3,000 $2,942 0%

Boulder Campus $1,765 $1,302 $1,559 $1,609 -9%

Boulder Athletic Department $1,146 $1,134 $1,239 $1,172 2%

Health Sciences Center $1,122 $1,189 $754 $766 -32%

Denver Campus $297 $311 $300 $315 6%

Colorado Springs Campus $500 $359 $323 $167 -67%

Subtotal Development Services $7,778 $7,295 $7,175 $6,971 -10%

Program Fees and Transfers

Boulder Alumni Association $969 $956 $879 $879 -9%

System Advancement $831 $752 $600 $700 -16%

Coleman Institute $177 $160 $165 $158 -11%

College & Program Fees2 $0 $0 $106 $124 N/A

Faculty Housing Assistance Program $100 $100 $100 $100 0%

Parents Fund $97 $71 $55 $54 -44%

Subtotal Program Fees $2,174 $2,039 $1,905 $2,015 -7%

Donor Cultivation Fees and Reimbursements3

Annual Giving Program4 $0 $0 $1,084 $1,202 N/A

Special Events $55 $47 $6 $27 -51%

Gift Administration5 $1,002 $788 $0 $0 N/A

Subtotal Donor Cultivation Fees & Reimb. $1,057 $835 $1,090 $1,229 16%

Custodial Investment & Management Fees6 $579 $1,021 $1,427 $749 29%

TOTAL $11,588 $11,190 $11,597 $10,964 -5%

Source: General Ledger data provided by the University of Colorado Foundation and the University of Colorado.

1 Excludes the value of office facilities the University provides to Foundation staff that is not tracked.

2 The Foundation established separate service agreements with three colleges/programs for which it receives a

separate fee–the Leeds School of Business, the College of Arts & Sciences, and the ATLAS Institute.

3 Fees charged by the Foundation against gift revenues.

4 In Fiscal Year 2004 the Foundation began contracting with a firm to conduct the Annual Giving Program and

collecting a fee from gift revenues to cover Foundation contract costs.

5 The Foundation eliminated the Gift Administration fee beginning in Fiscal Year 2004.

6 The Foundation charges fees on the endowments it holds for the University. The fees have ranged from a high of

2.2 percent of the value of the endowments in Fiscal Years 2003 and 2004 down to 1 percent in Fiscal Year 2005.

 

The remainder of this chapter covers the financial and service arrangements between

the Foundation and University.

 

 

Report of The Colorado State Auditor

 

System Advancement Funds

 

As discussed above, the University provides the Foundation an average of about

$11.3 million annually, either directly or indirectly, for various services. A portion

of the monies transferred is used to establish a System Advancement account

specifically earmarked for use by University officials, primarily for fund-raising and

travel expenses incurred by the University President’s office. The University has

transferred between $600,000 and $831,100 to the Foundation each year between

Fiscal Year 2002 and 2005 for this account. During the course of our audit, the

University reports that it eliminated the System Advancement account at the

Foundation, effective in Fiscal Year 2006.

 

System Advancement monies were budgeted by the University, transferred to the

Foundation, paid out by the Foundation for expenses incurred by the University, then

reflected in the Foundation’s financial records as revenues and expenses. However,

the Foundation believed that it was not accountable for the expenses because they

were University-directed expenses. Moving University funds to the Foundation to

pay University expenses reduces transparency and accountability.

 

Lack of Controls Over System Advancement

Funds

 

As the following table shows, the University’s System Advancement expenses

totaled roughly $2.7 million over the four-year period of Fiscal Year 2002 through

2005.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

University of Colorado

System Advancement Expenses Paid by the Foundation

Fiscal Years 2002 Through 2005

2002 2003 2004 2005 Total

Donor Cultivation1 $554,000 $434,300 $443,300 $513,000 $1,944,600

Travel2 $46,600 $102,800 $14,700 $15,300 $179,400

Salaries & Personnel Costs3 $142,100 $57,100 $0 $0 $199,200

Office Supplies & Administration4 $29,800 $19,900 $16,900 $20,900 $87,500

Printing, Copying, & Advertising $38,500 $21,500 $39,800 $11,700 $111,500

Dues, Fees, & Memberships5 $14,300 $6,300 $9,800 $6,700 $37,100

Other6 $7,500 $58,100 $17,300 $22,100 $105,000

TOTAL $832,800 $700,000 $541,800 $589,700 $2,664,300

Source: University of Colorado Foundation General Ledger.

1 Includes donor-related food, beverages, entertainment, facilities/equipment rentals, awards, and gifts.

2 Includes airfare, meals, lodging, car rental, mileage reimbursement, parking, tips, taxis, tolls, trains, and

miscellaneous expenses during travel.

3 Includes salaries and wages, employment tax, and benefits. In Fiscal Year 2004, the University ceased using

System Advancement funds for personnel costs.

4 Includes office supplies, professional development, licenses, subscriptions, telecommunication services,

photography, postage, parking permits, and meeting costs.

5 Includes dues, professional association fees and memberships, and social club dues.

6 Includes contracted services, consulting fees, rent, maintenance, storage, transfers between funds and net asset

classes, and miscellaneous expenses.

 

University policy states: “For all expenditures [paid with University funds], if

more than one policy applies, the more restrictive policy is to be followed.”

[Emphasis added.] University funds are all monies received by the University

regardless of their source. However, we found that the University followed neither

its own policies nor State Fiscal Rules for System Advancement expenses. In

addition, Foundation policies were not followed for these expenses. We found many

System Advancement expenses that violated University policies and State Fiscal

Rules. The general lack of controls over these funds contributed to the lack of

accountability for their use.

 

In addition, although the Foundation’s financial records for Fiscal Years 2004 and

2005 indicate that the University spent close to half a million dollars a year of System

Advancement monies for “donor cultivation,” there was no review of the purpose,

impact, or outcomes of the spending. For the two year period we noted $3,600 spent

for limousines, about $94,000 for flowers and gifts, about $15,200 for alcohol, and

about $606,600 for food and catering, among other expenses. There was no evidence

that the expenses were evaluated to determine if they actually increased the donor

base or led to increased donations.

 

 

Report of The Colorado State Auditor

 

We reviewed a sample of 25 System Advancement payments, totaling about $49,200,

made between July 1, 2001, and March 31, 2005. These payments included 68

individual purchases made by University staff. We identified only four of these

purchases, totaling $2,500, that were originally processed through the University, as

should have been the case for all of the purchases. The remaining 64 purchases,

totaling about $46,700, were made outside of University policies and procedures,

State Fiscal Rules, and Foundation policies. Examples of these purchases that raise

concerns include:

 

• Seven purchases for alcohol totaling $4,200 had no University Official

Function approval as required by University policies. Official Function forms

document the purpose of the event and the number and type of expected

participants, and must be reviewed and approved by a senior University

official.

• Thirteen meals totaling about $500 for traveling University staff and/or

spouses exceeded State Fiscal Rules limits. No donors were present at these

meals.

• Seven purchases totaling about $500 for meal costs were split between the

University and the Foundation. The portion charged to the University, about

$240, complied with State Fiscal Rules. The University charged the

remaining $260 that exceeded State Fiscal Rules to the Foundation.

• Five purchases totaling about $1,600 were for limousine services for

University officials. In one case, $534 was paid for a limousine to transport

a University official from an airport to a hotel, then to a donor’s home where

the limousine waited for several hours, then back to the hotel. University

policies require staff to select the most economical means of travel.

Because these expenses are paid using monies from the University, are incurred by

the University, and are intended to be for University business, they should be spent

in accordance with University policies and State Fiscal Rules.

 

Other Questionable Expenses

 

In addition to using System Advancement funds to pay certain University expenses,

the University sometimes requests that the Foundation use gift funds to make

purchases or pay expenses for University staff. We identified one example in which

gift funds were spent in a manner that violates Regent policy. Specifically, in Fiscal

Years 2002 and 2003, the University asked the Foundation to use gift monies to pay

about $5,000 per year for membership dues at a male-only golf club for a University

coach. We reviewed correspondence regarding these payments in which University

 

 

University of Colorado Foundation Performance Audit - October 2005

 

officials clearly stated that the University was asking the Foundation to pay for the

dues because a Board of Regents policy prohibits the University from doing business

with discriminatory organizations. On an ongoing basis, the University should

require its expenses to be subject to its own controls.

 

Recommendation No. 14:

 

The University of Colorado should increase transparency and accountability for all

University and gift funds by:

 

a. Continuing the prohibition on transferring monies to the Foundation to pay

expenses incurred by University staff.

b. Eliminating the practice of allowing the Foundation to reimburse University

employees or using gift monies to directly pay expenses incurred by or on

behalf of the University.

University of Colorado Response:

 

Agree.

 

a. Implementation Date: July 2005. On July 1, 2005, the University

suspended its practice of establishing System Advancement accounts at

the Foundation.

b. Implementation Date: November 2005. On July 1, 2005, the University

adopted a policy prohibiting direct spending of university gift monies at

the Foundation. In addition, the University will adopt a policy to prohibit

payments to University employees by the Foundation.

 

Report of The Colorado State Auditor

 

Contracts for Foundation Services

 

Strong, binding contracts promote accountability for services being purchased. State

Fiscal Rules require state agencies and institutions of higher education to establish

contracts for personal services over a specified amount (over $50,000 prior to August

2005; over $100,000 after that date). In addition, the chief executive officer or

delegate of the agency or institution must sign all contracts. The State also provides

direction on drafting and monitoring contracts in its Contract Management Guide,

which states: “The most important provisions for monitoring are actual specific

performance standards, and the measures of efficiency and effectiveness that are to

be applied to evaluate the contractor’s performance.” The Guide notes that contract

monitoring is intended to ensure that legal obligations are fulfilled and acceptable

levels of services are provided.

 

We found deficiencies in the contracts between the University and the Foundation that

indicate a substantial lack of accountability for the approximately $11.3 million the

University pays the Foundation each year, as described below.

 

Lack of Contracts. We found the University had no written contracts for some of

the services the Foundation provided during the period we reviewed. In other words,

there was no written documentation of the specific services to be provided, the

expected outcomes, or the fees to be paid for the following services:

 

• Boulder Alumni services, which include organizing activities such as game-

day events for Boulder campus alumni and soliciting alumni donations. In

1996 the University developed an addendum to the Development Services

agreement to cover the Boulder Alumni services the Foundation provides.

However, the addendum has never been updated to reflect changes in

Foundation services and/or fees. During Fiscal Years 2002 through 2005, the

University paid the Foundation a total of about $3.7 million for these services.

The alumni associations for the other University campuses in Denver,

Colorado Springs, and the Health Sciences Center are managed by each

respective campus, not the Foundation.

• Parents Fund services, which include activities specifically directed toward

parents of students, such as coordinating fund-raising projects, conducting

donor research, and maintaining donor records. The University did not

establish contracts with the Foundation for these services for Fiscal Years

2002, 2003, or 2004, over which time it paid about $222,900. The University

did draft a contract for Fiscal Year 2005.

 

University of Colorado Foundation Performance Audit - October 2005

 

• The Annual Giving Program, which is a fund-raising drive that involves

contacting potential donors by phone and mail to solicit donations and

maintaining donor records. This program is also meant to maintain and

enhance the donor base of each campus. In Fiscal Year 2004 the University

began paying the Foundation for the costs of these services but did not

establish contracts for the over $1 million paid in each of Fiscal Years 2004

and 2005. Individual schools and colleges pay for Annual Giving Program

services through a charge against the donations collected. These fees are

based on the number of donors contacted during the fund-raising drive.

Overall, the University spent an average of 42 cents for every dollar raised

through the Annual Giving Program in Fiscal Year 2004, but the fees paid and

donations received varied widely from campus to campus. These fees and

services are not established in a formal contract, nor is the fee structure

formally approved by the University.

Incomplete Contracts. In addition to not having contracts in place for some

services, we found issues with the contracts that had been established, as follows:

 

• Unsigned contracts. Since Fiscal Year 2001, the University has updated its

Development Services contract with the Foundation through annual

amendments. However, neither the University nor the Foundation signed the

amendments for Fiscal Years 2003 and 2004, and did not sign the Fiscal Year

2005 amendment until April 2005, almost 10 months after it became effective.

Additionally, the University and the Foundation did not sign the Parents Fund

contract established for Fiscal Year 2005.

• Lack of contract effective dates. State Fiscal Rules require state contracts

to include effective dates for the services covered. The University’s contract

with the Foundation for management of its custodial endowments (described

later in the chapter) became effective in May 2004 and states that it is subject

to an annual review by both parties. The contract also states that in the

absence of an express renewal, it will continue unless it is terminated. Under

State Fiscal Rules this contract should include a date by which the University

and Foundation will review the terms of the agreement. In Fiscal Year 2005

the University paid the Foundation about $750,000 for management and

investment of the custodial endowments.

Lack of Contract Oversight. We identified weaknesses in the University’s contracts

with the Foundation related to performance measures, monitoring, and enforcement,

as follows:

 

• Lack of quantifiable performance measures. The Development Services

agreement and individual school and program service agreements between

 

Report of The Colorado State Auditor

 

the University and the Foundation contain only one quantifiable performance

measure, and instead contain general requirements and performance

expectations. For example, the Development Services agreement requires the

Foundation to provide development and fund-raising services but does not

identify performance measures. The Foundation has recently developed

performance standards and goals for its development staff and has begun

monitoring whether staff accomplish productivity goals, such as the number

of face-to-face contacts with donors. The University could use these goals

and measures to assess development and fund-raising services for the

Foundation as a whole. The one performance measure in the Development

Services agreement is: To limit the costs to raise and manage private gift

dollars to reasonable amounts that compare favorably with those of peer

foundations. To measure this, the agreement requires the Foundation to

calculate an annual cost-to-gift ratio and evaluate the ratio against peer

institutional programs. The Foundation has only provided this calculation to

the Boulder campus on one occasion. This measure can be useful for

evaluating the Foundation’s performance over time and identifying areas

where improvements could be made. According to the University and the

Foundation, providing development services is a collaborative effort, which

makes it difficult to isolate the development outcomes achieved specifically

by the Foundation. However, it is important that the University develop

measurable outcome-based standards in its contracts to evaluate performance

over time and to reconsider or adjust fund-raising responsibilities and goals.

 

• Lack of comprehensive and consistent monitoring. The University’s

monitoring of Foundation services is informal, decentralized, and

undocumented. Various chancellors, deans, and faculty oversee the

Foundation’s fund-raising services pertaining to their particular campuses but

do not follow an established standard for monitoring or documenting

oversight. The Foundation presents reports to the University’s Board of

Regents on a semi-annual basis, however, without formal and consistent

System-wide monitoring, the University cannot assess the quality and

necessity of services provided by the Foundation.

The University’s failure to establish contracts in compliance with State Fiscal Rules

for services provided by the Foundation and to develop and monitor performance

measures for the services limits its ability to ensure it obtains the appropriate level of

services for the fees paid. Further, under Fiscal Rules, by having unsigned contracts,

the contracts’ payment liability shifts from the University to University employees

involved in incurring the obligation. The University and the Foundation need to

ensure that current, signed contracts are in place for all Foundation services and that

the contracts include appropriate performance measures. In addition, the University

should ensure that it has a comprehensive oversight function for its contracts.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Recommendation No. 15:

 

The University of Colorado should improve accountability for services contracted

through the University of Colorado Foundation by:

 

a. Establishing formal contracts for services provided by the Foundation in

accordance with State Fiscal Rules.

b. Including remedies in the contracts to address any failure to meet

requirements or performance measures.

c. Establishing a system for monitoring contract services, such as assigning an

office or individual to work with University schools and colleges to ensure

performance requirements are met.

d. Assessing annually whether the mechanism for determining fees for

Foundation services is appropriate and whether the fees paid are in line with

the services provided.

University of Colorado Response:

 

Agree. Implementation Date: January 2006. The University, in collaboration

with the Foundation, is negotiating a new service contract, which is expected

to:

 

a. Be in accordance with State Fiscal Rules;

b. Include remedies in the contracts to address any failure to meet

requirements or performance measures;

c. Be monitored by the Office of Vice President for Administration; and

d. Assess annually whether the fees paid to the Foundation are in line with

the services provided.

 

Report of The Colorado State Auditor

 

Recommendation No. 16:

 

The University of Colorado Foundation and University of Colorado should develop

performance standards in service contracts, and the Foundation should report on the

standards on an annual basis. The University and the Foundation should use the

established objective criteria to evaluate the Foundation’s performance over time and

identify and address areas for improvement. The Foundation should also continue to

explore methods for comparing its performance with peer foundations.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: January 2006. The Foundation and the

University are currently finalizing the Development Services agreement. This

agreement will establish and define objective performance criteria to evaluate

the Foundation’s performance and require reporting from the Foundation on

an annual basis. The Foundation and University will seek approval of this

new agreement from their respective boards.

 

The Foundation is currently exploring methods for comparing its performance

with peer foundations. This is a suggested topic of discussion for the

University Foundation Financial Officers meeting in Ames, Iowa at the end

of October.

 

University of Colorado Response:

 

Agree. Implementation Date: January 2006. The University is negotiating

with the Foundation a new service contract (discussed in Recommendation

No. 15) which will include specific performance standards and objective

criteria to evaluate the Foundation’s performance with reporting annually.

 

Special Events

 

Another area where the financial and programmatic responsibilities of the University

and Foundation need to be evaluated and clarified is special events. Special events

are fund-raising activities, such as golf tournaments, gala dinners, silent auctions, and

international travel tours, held to benefit a particular University department or

program. Events are intended to be self-funding and are typically developed,

requested, and administered by University staff with Foundation assistance. Donors

pay special event fees, which include a donation component in the form of cash,

checks, and credit cards. University and Foundation staff, students and, at times,

 

 

University of Colorado Foundation Performance Audit - October 2005

 

volunteers collect the event funds, and then either deposit them, send them to a

Foundation office, or mail the funds to the Foundation’s lockbox. Once the

Foundation receives the event funds, it sends the donor an official receipt. The

Foundation maintains individual funds or accounts for each special event to record

expenses for the event, gifts in kind, and special event fees, which have gift and

nongift components.

 

The Foundation charges the University a fee for administering special events. Until

June 30, 2003, the Foundation charged a 5 percent fee on all gift revenue received for

special events. Beginning in late March 2004, the Foundation modified the fee to be

the greater of $500 or 5 percent of nongift revenue, up to a maximum of $2,500.

 

Between Fiscal Years 2002 and 2005, the University and Foundation jointly held

about 35 to 40 special events each year. The table below shows the revenues and

expenses recorded by the Foundation and the fees charged to the University for these

years. As discussed later in the chapter, accounting for special events is incomplete,

so the figures in the following table may underreport the total expenses and revenues.

 

University of Colorado and University of Colorado Foundation

Special Event Revenues and Expenses

Fiscal Years 2002 Through 2005

2002 2003 2004 2005

Revenues $2,018,500 $1,769,100 $2,188,000 $1,627,500

Expenses $584,500 $682,600 $916,200 $719,500

Fees Charged to the University $55,100 $47,100 $6,4001 $26,500

Estimated Net Proceeds2 $1,378,900 $1,039,400 $1,265,400 $881,500

Source: University of Colorado Foundation and University of Colorado special events data.

1 In Fiscal Year 2004 the Foundation only assessed fees for four events and collected additional fees for

10 events held in Fiscal Year 2003 due to accounting errors.

2 Some special event revenues and expenses are recorded by the University, not the Foundation. Net

proceed figures are based on Foundation records and may not represent all revenues and expenses.

 

We reviewed eight special events held between July 1, 2002 and March 31, 2005.

Using information from the Foundation, we estimated expenses as a percent of

revenues for the special events in our sample, as shown in the table below.

 

 

Report of The Colorado State Auditor

 

67

 

Revenues, Expenses, and Net Proceeds

for a Sample of Special Events

July 1, 2002 Through March 31, 2005

Fiscal

Year Type of Event Revenues Expenses

Net

Proceeds

Expenses

as a % of

Revenues

2003 Dinner, Raffle, & Auction $51,700 $25,500 $26,200 49%

2003 Dinner $86,300 $39,900 $46,400 46%

2004 Bicycle Race $120,200 $60,800 $59,400 51%

2004 Golf Tournament $16,500 $16,500 $0 100%

2004 International Travel Tour $52,200 $71,200 ($19,000) 136%

2005 Golf Tournament, Barbeque, Auction $24,700 $12,200 $12,500 49%

2005 Golf Tournament, Dinner, Auction $154,600 $95,600 $59,000 62%

2005 International Travel Tour $201,100 $189,700 $11,400 94%

TOTAL $707,300 $511,400 $195,900 72%

Source: University of Colorado and University of Colorado Foundation financial information and

special event documentation.

 

As the table shows, some events in our sample generated net proceeds, one lost

money, and two cost nearly as much as they earned. We identified a number of issues

with management of and accountability for special events that may limit their cost

effectiveness.

 

Unclear division of responsibility. There is no written agreement between the

University and the Foundation regarding special events. As a result, the roles and

responsibilities of each organization are not clearly defined, and accountability for the

success of the events has not been assigned. In particular, there is incomplete

accounting for the events. For three of the eight events we reviewed, some revenues

and expenses were either accounted for in University accounts or in an incorrect

Foundation fund. For example, a fund established for a golf tournament included

transactions for a separate dinner banquet not related to the tournament, and for one

event, expenses were paid out of four different funds—a University gift account, the

Foundation special event fund, and two other Foundation funds. Neither the

Foundation nor the University compiles the revenue and expense data from both

entities to calculate overall net proceeds or losses for every event.

 

Without complete, centralized accounting for special events, neither the University

nor the Foundation can adequately monitor the success of individual events or the

overall benefit of special event fund-raising. Special event expenses recorded by the

Foundation increased about 44 percent between Fiscal Years 2002 and 2004—much

 

 

University of Colorado Foundation Performance Audit - October 2005

 

more rapidly than special event revenues, which rose about 8 percent. The lack of

complete financial information for special events prevents the University and

Foundation from identifying these changes and determining the cause.

 

Lack of approvals. Foundation policy requires management approval of special

events before they are held, although the policy does not establish any criteria for

granting the approval. We found that five of the eight special events sampled had no

evidence of approval by Foundation management, and three did not have a budget

form on file at the Foundation, which shows the estimated expenses, revenues, and

net proceeds for the event. In addition, if an event is held annually, it is typically only

approved at the time the initial event is planned—not in subsequent years.

 

Inconsistencies in administrative fees. We evaluated the administration fees the

Foundation charged the University for 66 special event funds that received gift

revenue in Fiscal Years 2002 through 2005. We determined that the Foundation did

not collect some fees owed by the University for 12 events, for a total of about

$14,000, primarily due to the waiver of certain fees. In particular, events that

benefitted the University’s Boulder Athletic Department were exempt from all event

administration fees. However, the Foundation has no written policy for waiving

special event fees. In addition, the Foundation’s current fee structure was established

based on an estimate that Foundation staff would spend about 100 hours

administering a special event at an average rate of $25 per hour. However, it is

unclear how this estimate relates to the 5 percent fee, and Foundation staff do not

track the time they actually spend on a given event.

 

Lack of cash controls. The Foundation does not have written cash control policies,

either for special events or for other circumstances when cash is collected. We

identified weaknesses in the cash controls for special events. For example, the

Foundation does not track the locations from which all funds are received or require

event staff to log the funds they collect. We learned of an instance of alleged theft

when a student worker was asked to hand deliver a bank bag containing special event

funds to the Foundation. The Foundation was not aware that the funds were missing

until notified by a University staff member. A number of Foundation and University

staff, as well as students and volunteers, may handle cash donations, so it is important

to ensure that minimum cash handling standards and procedures are established. The

Foundation and University should also train staff on cash handling, internal controls,

and fraud prevention, and should periodically evaluate cash controls as part of the

internal audit function.

 

Given the concerns we noted, which relate primarily to the coordinated arrangement

for special events, the University should reassess whether the Foundation’s role in

special events is consistent with the Foundation’s overall mission. If the University

decides to continue the Foundation’s involvement in special events, it should establish

 

 

Report of The Colorado State Auditor

 

a written agreement for the services the Foundation will provide and the associated

fees. The University and the Foundation should also strengthen policies and controls

to ensure that all revenues and expenses are recorded in the appropriate special event

accounts; implement cash handling controls; define the criteria for approving special

events; and evaluate the cost-benefit of each special event on an ongoing basis.

 

Recommendation No. 17:

 

The University of Colorado Foundation and the University of Colorado should

evaluate who should be responsible for special event administration and accounting.

If the decision is to continue special events as a combined effort, the University and

the Foundation should strengthen accountability for special events by developing a

written agreement that specifies the services the Foundation will provide, the fees the

University will pay, and the specific responsibilities of all parties involved in special

events.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: December 2005. The Foundation and the

University have agreed that effective December 1, 2005 the University will

be responsible for special event administration and accounting.

 

University of Colorado Response:

 

Agree. Implementation Date: December 2005. The University will assume

responsibility for university-sponsored special events.

 

Recommendation No. 18:

 

The University of Colorado Foundation and the University of Colorado should

strengthen management for special events, regardless of who is responsible for

overseeing and processing the events, by:

 

a. Implementing written policies and controls to ensure that all revenues and

expenses are recorded in the appropriate special event accounts.

b. Developing criteria for approving special events in written policies.

c. Establishing procedures to assess the cost-benefit of each special event.

 

University of Colorado Foundation Performance Audit - October 2005

 

d. Establishing cash control policies and procedures for all situations in which

staff handle cash, including special events; training staff on the controls; and

having an internal auditor review cash controls on a periodic basis.

University of Colorado Foundation Response:

 

Agree. Administration of University sponsored special events will be the

responsibility of the University effective December 1, 2005. The Foundation

will work with the University to strengthen management in this area and

develop transition plans for those special events currently administered and

accounted for at the Foundation. There may be some special events initiated

and sponsored by the Foundation. The responses for items a. through d.,

below, relate to any such Foundation-sponsored events.

 

a. Implementation Date: Implemented. The Foundation has implemented

written policies and controls to ensure all revenues and expenses are

recorded in appropriate special event accounts for any Foundation

sponsored special event.

b. Implementation Date: Implemented. Criteria to approve special events

are included in the policy noted in item a. above.

c. Implementation Date: December 2005. A written cost-benefit analysis

will be submitted by the event coordinator within 20 business days of

event conclusion to the Foundation senior management team and CEO.

d. Implementation Date: December 2005. For all situations in which

Foundation staff handles cash, policies will be established. Staff training

will be conducted and the Foundation Internal Auditor will review cash

controls and staff training on a periodic basis to ensure adequacy and

accountability.

University of Colorado Response:

 

Agree. Implementation Date: December 2005. The University has begun

developing and will implement policies and procedures to govern the special

event process (as discussed in Recommendation No.17), which will specify:

 

a. Procedures and controls over financial accounting;

b. Approval criteria and roles;

c. Cost-benefit assessment; and

d. Cash controls.

 

Report of The Colorado State Auditor

 

Accountability for Loan Program

 

The Foundation is involved in supporting two types of loans. First, it guarantees up

to $50,000 for each loan under the Faculty Housing Assistance Program (FHAP).

FHAP loans are available to University full-time tenured and tenure-track faculty

members to assist them in buying a primary residence in Colorado. These loans are

used as an incentive to attract tenure-track staff. The Foundation has a contract with

the University of Colorado Federal Credit Union (Credit Union) outlining its

responsibilities for the FHAP. The University pays the Foundation to guarantee the

loans and the Foundation pays the Credit Union to administer the program. During

the period July 1, 2001, through March 31, 2005, approximately 50 FHAP loans were

issued or outstanding under this program. As of March 31, 2005, the Foundation had

38 outstanding FHAP loans worth about $1.8 million.

 

Second, the Foundation makes other loans to various parties on a case-by-case basis

and with the approval of the Foundation’s Investment Policy Committee. According

to the Foundation, these loans are made to support University initiatives and programs

and facilitate Foundation goals. Some are made at the request of the University. For

example, the Foundation has made loans to the Coleman Institute and Sharp Point

Properties, LLC, on behalf of the University’s Real Estate Center. The only

Foundation policy relating to loans is in the Foundation Bylaws, which state that the

Foundation shall not make any loans to Foundation Directors or Officers. Between

July 1, 2001, and March 31, 2005, the Foundation issued or had outstanding 12 of

these other loans. The total loans receivable balance for the Foundation-issued loans

ranged from about $2.7 million in Fiscal Year 2002 to about $740,800 in March 2005.

As of March 31, 2005 five Foundation-issued loans were outstanding.

 

We reviewed a sample of nine loans that were outstanding at some time in Fiscal

Years 2002 through 2005; two were FHAP loans guaranteed by the Foundation and

seven were Foundation-issued loans. The Foundation issued four of the seven

Foundation loans at the University’s request. The nine loans sampled had a combined

beginning balance of about $3 million and a combined ending balance of $664,100

at March 31, 2005. We reviewed the supporting documentation for each loan as well

as the Foundation’s loan procedures. We identified several issues related to the seven

Foundation-issued loans, as follows:

 

• For all seven Foundation-issued loans, the Foundation could not provide

evidence documenting the creditworthiness of the borrowers. The total

combined amount of the original seven loans was about $2.9 million. A

receivable of about $621,600 for one of these sampled loans remained

outstanding as of March 31, 2005.

 

72 University of Colorado Foundation Performance Audit - October 2005

• For one loan, the Foundation extended a revolving line of credit for $75,000

to Colorado Golf for Charities in October 1999. According to the Foundation,

Colorado Golf for Charities was originally a special event to benefit the

University Health Sciences Center. Beginning in 1999, the Foundation

decided to discontinue sponsoring the event. At that time, a former

Foundation employee set up a not-for-profit entity called Colorado Golf for

Charities to provide administrative services for golf tournaments organized as

fund-raising events. Because Colorado Golf for Charities provided benefits

to the Health Sciences Center, the Foundation set up a revolving line of credit

to help with initial start-up costs. As of July 31, 2001, the outstanding loan

balance was about $79,800 (principal plus interest). This amount remained

outstanding throughout Fiscal Year 2003 and most of Fiscal Year 2004. After

attempting collection procedures, the Foundation wrote off the loan in July

2004. The Foundation does not have any written policies or collection

procedures for past due loans.

• For one loan totaling $875,000 that the Foundation made to a University

employee in August 1997 at the University’s request, we noted several

concerns. First, the loan amount was $10,000 higher than the initial purchase

price of the property for which the loan was made. Second, the University

employee received about $27,600 in cash at the time of closing on the

purchase of the property. Internal Foundation documentation suggested this

cash should be returned to the Foundation, but we found no evidence that the

funds were returned until the loan was paid off in Fiscal Year 2003. Third, the

borrower made 13 monthly payments that were each $100 below the required

monthly amounts in 1997 and 1998 and missed two monthly payments, one

in November 2000 and one in June 2002. The borrower paid the 13 months

of short payments in October 1998 and paid the two missed payments when

the loan was paid off in September 2003, more than a year after they occurred.

The Foundation did not exercise its option of assessing a 5 percent late charge

penalty on the delinquent payments, nor did it exercise its acceleration option

under the loan agreement. The low payments were identified by Foundation

financial auditors in Fiscal Year 1998.

• For one loan, the Foundation recorded a loss at the time of the loan

transaction. In January 2001 the Foundation received and recorded a gift of

property at $1.25 million, although it had separate valuations of the gift for

between $855,000 and $1.25 million. In September 2001 the Foundation sold

the property to a limited liability company for $1.2 million ($300,000 in cash

plus a $900,000 Foundation-financed loan). At the time of the sale, the

Foundation recorded a $50,000 realized loss. This transaction raises concerns

because the property sold had been given to the Foundation nine months prior

 

 

Report of The Colorado State Auditor

 

to the sale by a donor who was also a member of the company that purchased

the property.

 

• For three loans with original balances totaling about $688,100, the Foundation

did not have copies of the deeds of trust securing the loans. All three loans

had been paid in full as of March 31, 2005.

The University and the Foundation should work together to determine whether

securing and issuing loans is within the Foundation’s core mission. The Foundation

is not a bank and does not have loan issuance systems and controls. In the interim,

for the five Foundation-issued loans that remain outstanding, the Foundation should

ensure it has systems in place to ensure accountability, including:

 

• Closely monitoring payment status.

• Clearly defining and implementing collection procedures for past due loans.

• Establishing and adhering to criteria for exercising late payment penalties or

loan acceleration clauses.

• Gaining the Audit Committee’s approval of any write-offs of debt.

Recommendation No. 19:

 

The University of Colorado Foundation and the University of Colorado should

reassess the Foundation’s loan program and determine if it is a service the Foundation

should continue to provide.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: October 2005. On October 3, 2005 the

Foundation’s Board of Directors approved a policy governing loans. This

policy provides due diligence criteria that must be addressed prior to approval

of any loan including creditworthiness of the borrower, status of security, and

the ability of the borrower to repay the loan.

 

University of Colorado Response:

 

Agree. Implementation Date: January 2006. The University’s proposed

contracts with the Foundation do not request any loan services other than the

Faculty Housing Assistance Program which the University intends to

continue. The University’s proposed operating agreement with the

Foundation (see Recommendation No. 21) provides that the Foundation will

not provide loans to University employees. Further, the University’s proposed

 

 

University of Colorado Foundation Performance Audit - October 2005

 

operating agreement requires any loan program be provided pursuant to a

University approved program or specifically approved by the President and

reported to the Board of Regents.

 

Flow of Funds

 

The importance of transparency and accountability in the government arena cannot

be overstated. Taxpayers and decision makers need to know that agencies are

 

(1) properly accounting for and openly reporting expenditures, (2) using scarce

resources in the interests of the public good, and (3) maximizing revenues while

reducing administrative costs. Therefore, access to complete and comprehensive

financial information at all levels of management is essential to sound

decisionmaking. Similarly, such access is important to ensure the public trust

essential to a large organization like the University.

We found that the financial arrangement between the University and the Foundation

includes various fees, reimbursements, and transfers of funds. In addition, in some

cases, the University makes payments to the Foundation using the University’s

unrestricted gift funds originally transferred from the Foundation. For example, in

Fiscal Year 2004 the University used about $2.5 million in gift monies received from

the Foundation to then pay fees to the Foundation. We are concerned that donors are

unaware that the University returns a portion of donations to the Foundation to

support Foundation operations.

 

As mentioned earlier in the chapter, the University pays the Foundation fees or

reimbursements for the services it provides. From Fiscal Year 2002 through 2005,

the University provided an average of about $11.3 million annually to the Foundation,

either directly or indirectly, for various services. Over the same period, the

Foundation distributed an average of $56.9 million annually to the University.

 

The flow of payments to and from the Foundation and the University illustrates an

overly complex relationship that reduces transparency and accountability and raises

concerns. First, it is unclear whether the University’s annual payments to the

Foundation, which was created to raise funds for the University, is the best method

of supporting the Foundation at a time when the University’s budget is constrained

by decreasing state support. Second, when University contracts are not always in

place or fully executed prior to services being rendered, the University loses control

over services received from the Foundation. This is a concern in light of issues

discussed in this chapter regarding the informal nature of the various financial

arrangements between the University and the Foundation.

 

 

Report of The Colorado State Auditor

 

The University and the Foundation should undertake a comprehensive analysis of the

flow of financial support between the two entities and the necessity and legitimacy

thereof. This analysis should consider ways to simplify the financial arrangement

between the University and the Foundation to clarify responsibilities and make the

relationship more transparent. The University should conduct this analysis as part of

the restructuring options discussed in Chapter 4.

 

Recommendation No. 20:

 

The University of Colorado Foundation and the University of Colorado should

conduct a comprehensive assessment of the financial arrangements between the

two organizations and consider ways to improve accountability and transparency as

they simultaneously evaluate the restructuring options discussed in Recommendation

No. 21.

 

University of Colorado Foundation Response:

 

Agree. Implementation Date: January 2006. The Foundation, in collaboration

with the University, is conducting a comprehensive assessment of the

financial arrangements between the two organizations with a development

services contract. To improve accountability and transparency, an operating

agreement between the two organizations is also being developed.

 

University of Colorado Response:

 

Agree. Implementation Date: January 2006. The University, in collaboration

with the Foundation, has begun the assessment of its financial arrangements

with the Foundation and is modifying them as indicated in the other

recommendations of this report, most notably Recommendation Nos. 14, 15,

16, and 21.

 

 

The Relationship Between the

University and the Foundation

Chapter 4

 

Background

 

The relationship between the University of Colorado (University) and the University

of Colorado Foundation (Foundation) is complex and has evolved over the years

since the Foundation was first established in 1967. The University Board of Regents

authorized the Foundation to solicit, receive, hold, and invest funds for the

University’s benefit. The Foundation is a nonprofit corporation whose stated

mission is to support the University of Colorado. Over the period we reviewed, the

Foundation’s responsibilities have included raising funds, cultivating donors,

managing investments, administering special events, administering and guaranteeing

various types of loans, and making payments for certain University expenses. The

Foundation and the University often work together on activities such as running

special events, attracting and maintaining large donors, making housing loans

available to University faculty, and accepting gifts. Fund-raising and investment

management are important functions that allow the University to sustain and expand

the number, types, and quality of its programs.

 

Our audit of the Foundation and its relationship with the University raises questions

about how the Foundation can best fulfill its core mission as well as its effectiveness

and efficiency in supporting the University. Our report identifies concerns with the

Foundation’s handling of gifts and fulfillment of its fiduciary responsibility to ensure

contributions are used in accordance with donor intent. It also reveals inefficiencies

in the Foundation’s daily operations and expenses that are unnecessary in furthering

support of the University. Finally, the financial relationship between the Foundation

and the University is overly complex, reducing transparency and accountability. We

believe the University needs to evaluate the structure and mission of the Foundation

and how the organizations should interrelate to best serve the University.

 

Evaluating the Relationship

 

We collected information on other higher education foundations around the U.S. and

found that foundations have varying structures and relationships with their partner

 

 

University of Colorado Foundation Performance Audit - October 2005

 

universities. Specifically, we surveyed foundations at 11 public universities: the

University of Florida, the University of Indiana, the University of Iowa, Kansas

University, Ohio State University, Oklahoma University, Oklahoma State University,

the University of Texas, Texas A&M University, the University of Washington, and

the University of Wisconsin. On the basis of our research, we identified three

general structures for foundations, as follows:

 

• Those whose sole or primary purpose is to manage fund-raising efforts.

• Those whose sole or primary purpose is to manage investments.

• Those that serve as both fund-raising and investment managers.

We found that over half of the foundations on which we collected information (7 of

the 11) are independent organizations with separate staff and funding and no direct

oversight by their partner institutions. One foundation is part of the university it

supports, operating with university staff and funding and following state and

university rules. The last three foundations are hybrids; while they are separate

nonprofit organizations with offices physically located off the university campus,

they operate with university staff or have a university employee as the chief

executive officer or president.

 

This is an opportune time for the University of Colorado to evaluate its relationship

with the Foundation and the functions it expects the Foundation to carry out. The

following sections discuss some of the options the University should consider in

evaluating its relationship with the Foundation.

 

The Foundation as Development Services Provider

 

One option available to the University and the Foundation is to evaluate changing

the Foundation’s role to focus only on development services. The following issues,

discussed earlier in the report, would need to be addressed:

 

• Transparency of financial support. The University should establish a

mechanism for paying for Foundation services in a way that clearly identifies

the full amount of support the University provides and the sources of monies

used for such payments. The University should ensure that bona fide

contracts for payment of services exist and that performance measures are

well defined.

• Controls to ensure reasonableness of Foundation expenses. The

University needs assurance that expenses incurred by the Foundation for

fund-raising and donor cultivation purposes are reasonable and necessary.

 

Report of The Colorado State Auditor

 

The Foundation needs to implement controls as recommended earlier in the

report.

 

• Transparency and accountability for expenses. To eliminate confusion

and improve controls and accountability, University expenses should be paid

through University-controlled systems.

• Effective management of special events and acceptance of gifts in kind.

These functions are currently being transferred from the Foundation to the

University. The University and the Foundation need to determine if this is

the best long-term arrangement for these functions. Both areas need stronger

policies and oversight.

• Accountability for ensuring donor intent. As long as both organizations

have some involvement in accepting and managing donor monies, the

University and the Foundation need to establish clear oversight and

accountability and develop effective controls for ensuring donor intent is

fulfilled.

• Development of large and small donors. Currently both the University and

the Foundation have some responsibility for smaller-scale donor cultivation

and fund-raising, such as through special events and fund drives, as well as

for cultivating large donors. If the Foundation’s services are limited to fund-

raising, the University and the Foundation need to consider options such as

having major donor cultivation handled by the Foundation and special events

and alumni relations handled by the University, or alternatively, having the

University take responsibility for cultivating large donors and the Foundation

deal primarily with smaller fund-raising activities.

In addition, if the University discontinues its use of the Foundation as an investment

manager and transfers its custodial endowments back from the Foundation, the

University should consider the need to evaluate the University Treasurer’s Office

functions. Although we did not include an assessment of the University Treasury in

our audit, this approach could require the University to reevaluate the long- and

short-term goals of its operating pool and investments.

 

The Foundation as Investment Manager

 

A second option would be to focus the Foundation’s mission only on investment

management. The following issues would be critical to a restructuring that focused

on investment management:

 

• Full consideration of the investment portfolios. According to the

Foundation, it had about $553.4 million in its Long-Term Investment Pool

 

University of Colorado Foundation Performance Audit - October 2005

 

as of June 30, 2005. About $87.5 million of this amount is University

custodial endowments that the Foundation manages for the University in

accordance with a written agreement. As of June 30, 2005, the University

had about $672.5 million invested in its own Treasury Pool. We did not

audit investments of either the Foundation or the University as part of this

audit, however, financial statements indicate that the University and the

Foundation have very different risk tolerances and time horizons for their

investments, resulting in very different asset allocations, as shown in the

following table.

 

University of Colorado Foundation Long-Term Investment Pool

and University of Colorado Treasury Pool1

Investments by Category as of June 30, 2005

(In Millions)

Foundation University

Investment Category

Market

Value

% of

Total

Market

Value

% of

Total

Domestic Equity $204.8 37% $170.4 32%

Alternatives $188.1 34% $0 0%

International Equity $94.1 17% $69.1 13%

Fixed Income $55.3 10% $295.9 55%

Real Estate $11.1 2% $0 0%

TOTAL $553.4 100% $535.41 100%

Source: Financial information and investment data provided by the University of Colorado

Foundation and the University of Colorado.

1 The University’s Treasury Pool is intended to maintain sufficient liquidity for day-to-day

operations of the University. Therefore, to reflect only longer-term investments, $137.1 million

in short-term fixed-income investments are excluded from the table.

 

The differences in the asset allocations reflect differences in the investment

policies of the Foundation and the University. The Foundation’s objective

for its Long-Term Investment Pool is to seek the highest possible total return

consistent with appropriate risk levels, and the investment time horizon is

perpetuity. Conversely, the University has a lower risk tolerance with

emphasis on preservation of principal.

 

The University Treasurer is a member of the Foundation’s Investment Policy

Committee and is responsible for overseeing the custodial endowments

managed by the Foundation. The Treasurer reviews quarterly reports on the

 

 

Report of The Colorado State Auditor

 

Foundation’s investments and informs the University Board of Regents of the

investment performance and investment policies of the Foundation.

 

The Foundation charges the University a fee to cover the costs it incurs for

administrative and managerial duties related to the custodial endowments.

The fees cover the Foundation’s custodial, investment consultant, and

investment management costs as well as costs for various Foundation duties

such as overseeing the investment managers, working with donors to

establish new endowments, and communicating with donors about their

endowments. In Fiscal Year 2005 the University paid the Foundation a fee

of 1 percent of the value of the custodial endowments.

 

If the Foundation were to serve solely as an investment manager, the

University and the Foundation would need to consider how best to manage

the investment allocations and ensure that the University’s goals and risk

tolerance are adequately accounted for.

 

• Full involvement of the Board of Regents. It is critical that the Regents

have access to complete, accurate, and independent information on

investment risks and performance for all University monies managed by the

Foundation. Therefore, the Regents need to ensure that mechanisms for their

active and ongoing involvement in investments continue to operate

effectively.

• Investment in Loans. The University and the Foundation need to consider

whether the Foundation should continue to offer and guarantee loans.

The Foundation as Both Development Services

Provider and Investment Manager

 

A third option would be to maintain the status quo, in which the Foundation’s role

includes both development services such as fund-raising and gift management, and

investment management. In this case, all issues cited in the previous two sections

would need to be addressed.

 

Our report points out a variety of concerns that highlight the importance of adequate

oversight, clear communication, and defined duties between the two organizations.

Given the issues we raise, we believe the University should conduct a comprehensive

assessment of the Foundation’s role and structure and the related financial

arrangement, and consider the options and issues discussed above.

 

 

University of Colorado Foundation Performance Audit - October 2005

 

Recommendation No. 21:

 

The University of Colorado should conduct a comprehensive evaluation of the

structure, role, and functions of the Foundation along with the assessment of the

financial arrangement with the Foundation as suggested in Recommendation No. 20.

The evaluation should consider options such as (a) limiting the Foundation’s

functions to development services, (b) limiting the Foundation’s functions to

investment management, or (c) continuing the current arrangement, which includes

both functions. In addition, the evaluation should address the issues discussed

throughout the report in accordance with the role determined for the Foundation.

 

University of Colorado Response:

 

Agree. Implementation Date: January 2006. The University has determined

that it should continue its current arrangement with the Foundation as a

legally separate entity that provides development and investment

management services as defined in separate agreements. To ensure this

continued relationship has the appropriate level of transparency and

accountability, the University is negotiating an operating agreement to

govern its relationship with the Foundation as well as a new service contract,

as described in Recommendation No. 15. The University intends the

proposed contracts to be effective January 1, 2006.

 

 

The electronic version of this report is available on the Web site of the

Office of the State Auditor

 

 

www.state.co.us/auditor

 

A bound report may be obtained by calling the

Office of the State Auditor

 

 

 303.869.2800

 

Please refer to the Report Control Number below when requesting this report.

 

Report Control Number 1691