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“Plus ça change, plus c’est la même chose.” With the electronic revolution bringing dramatic changes to every area of life, one wonders if even that old adage will itself change. In less than five years offices at MIT have become electronic workplaces. This is as true for faculty who propose, conduct, and report on research projects as it is for the administrative and support staff who monitor, reconcile, and report on faculty research project spending. Where there has been a paper trail, increasingly there is an electronic trail. In MIT’s rapidly changing environment how does the responsible administrator comply with audit requirements and standards for faculty projects, especially where there may be strict rules relative to spending?
Recognizing the changing realities, MIT Controller Jim Morgan and Chuck Shaw from the Audit Division convened a team in spring 1999 to review existing procedures for reconciling cost objects (accounts), and to recommend new guidelines for financial review and control (FRC). The recent move to the electronic general ledger system SAP, with the resulting significant changes in MIT’s financial systems, improved electronic controls, and the Institute’s increasing reliance on electronic documentation made this project necessary.
The team included representatives from central offices, departments, laboratories and centers (DLCs), as well as participants from the Institute’s Audit Division. Research on this issue clarified the fact that while government regulations specify that there must be a process to review activity on a federal grant or contract, there is no specific guidance as to how this must be done. A survey of how other colleges and universities perform reconciliation of accounts revealed that only 3 of the 25 major research institutions surveyed require the line-item by line-item reconciliation that MIT requires. Within MIT there is also inconsistency among departments, labs, and centers as to how they reconcile their cost objects.
“It is my belief that MIT can improve its control process and reduce the effort by using the tools resulting from the Financial Review Team’s work,” commented Morgan.
The New Procedures
The new financial review and control procedures allow for less paper retention. One physical reality in the office will be a reduced need for file storage space.
The new policies and procedures for performing the monthly financial review are being tested among pilot groups around the Institute. The new guidelines relate primarily to the month-end review process, and do not dramatically change the basic system of financial controls in place at the Institute.
“The last financial review policy was issued in 1990,” said School Coordinator Bob Davine, who has conducted training sessions for the pilot groups. “In 10 years technology has enabled us to do a simplified and streamlined financial review and control.”
The overall approach is to provide options allowing a paperless review for those who want to perform the review electronically, while accommodating those who choose to continue to use the existing paper-based system. There is now a choice of methods for performing the month-end financial review: on paper, online within SAP, through a set of queries developed for the Data Warehouse, or by a combination of these three methods. The electronic review allows the local administrator to review costs by accounts, by transaction type across several accounts, or for more than one month.
If a faculty member wants to review cryogenic costs on all research projects, for example, this can be done online using either SAP or a Data Warehouse report. Pilot users have agreed that they like this ability to get an overview of spending by category.
Financial review and control guidelines have been documented in an online manual available on the Web http://web.mit.edu/cao/www/FRC/. “MIT’s Guidelines for Financial Review and Control” outline the new policies and procedures for performing the monthly financial review, and have been used as a reference manual during the pilot period. A quick guide, which describes suggested ongoing and statement related review procedures by transaction type, is also available through the same Website.
Risk-Based Financial Review
The requirement for checking off detailed transactions line-item by line-item on printed detail transaction reports or accounting statements has been eliminated. The suggested approach is risk based. Transaction types where the risk of error or abuse is intrinsically high should be reviewed in detail, while transaction types where internal controls are extensive require less detailed review.
Robin Elices (ASO) and Gill Emmons (CAO), two members of the Financial Review and
Control Team, stated that although the proposed procedures may not save time while the reviewing staff are still on a learning curve, the new process is designed to encourage a more comprehensive review. The new Financial Review should be faster and of a better quality because it focuses on the risk areas by size and type of transaction. "Under the old method, the procedures called for all of the detailed charges to be reviewed for an account, but did not address whether the account was overrun or underspent. We want our new procedures to focus the staff on an overall review and understanding of the account and why they are performing these activities and not simply check off charges in a routine manner."
“Reviewers had been required to apply the same level of effort to every type of transaction, regardless of the potential for a real problem to be observed,” said Institute Auditor Deborah Fisher. “In the audit profession we have found the concept of risk-based testing to be useful in reducing effort while improving controls. That is, we want to encourage reviewers to use risk analysis for controls, which will most likely result in the '80/20 rule,' freeing up the rest of their time to concentrate on real problems in addition to their other duties. It will be a goal of management to help reviewers understand how to employ these procedures.”
Ron Hasseltine, assistant director of the Center for Materials Science and Engineering, comments that he likes “not having to save documents for those transactions where strong internal controls are built into the system.”
While staff may choose to retain a wide variety of documentation for their own purposes, a DLC must retain documents only for those transactions where no copy is held within a central unit such as Accounts Payable, or for which no copy exists electronically. The only documents that must be retained within the DLC are packing slips (or other evidence of receipt), credit card receipts, time cards, and signed consolidated salary expense analysis sheets (DACCAs). The requirement for the “four way match” (invoices, packing slips, requisitions, and POs) has been eliminated. Most financial information is now available on-line and most audit trails can now be followed electronically.
Training
A training program is being developed for Administrative Officers, Financial Administrators, and Administrative Assistants who will use these new procedures. It is being designed to convey the new concepts and recommended procedures and to demonstrate the electronic tools now available. As they learn to use these new tools staff will better understand how the system works and how to use the tools best to serve the faculty and their projects.
Pilots
New policies and procedures for performing monthly financial review were tested during the summer through a series of pilots. Feedback from pilot groups, which were selected within each School and from an interdisciplinary laboratory as well as within the central units, will be incorporated into the procedures. A formal announcement of the new procedures will be made by Deborah Fisher and Jim Morgan for Institute-wide implementation.
Because the pilot efforts help assure that the new program meets the needs of the MIT community, the team is giving particular attention to whether or not the guidelines and the new methods behind the new, online procedures are clearly understood.
This is an evolving process, and new procedures will continue to be developed as needed in order to respond to the needs of the MIT community. If you would like to communicate your thoughts on these issues, or would like additional information or clarification, please contact Assistant Controller Gill Emmons at gemmons@mit.edu.
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