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July 13, 2004
CONTACT: Ward Mullens 734.487.4400
ward.mullens@emich.edu

EMU Board of Regents chair addresses University House performance audit findings

YPSILANTI Philip Incarnati, chairman of the Eastern Michigan University Board of Regents, said today that the findings of the Office of State Auditor General’s Performance Audit of University House would help the University improve its business practices.

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The audit, initiated in September 2003 at the request of the Michigan legislature, was released to the public this morning and included four recommendations and findings. The University agreed in principle with all of the recommendations, although it noted several exceptions to the findings in its preliminary responses, Incarnati said.

“It’s not unusual for management and auditors to have differences of opinion regarding processes used in any project. The important thing is, with the exception of not filing a Use and Finance Statement, the audit found no violations of State statutes,” Incarnati said.

Two of the recommendations, that the University obtain approval before using operating revenues to fund capital outlay projects, and that it comply with annual appropriations acts with respect to capital outlay projects, were the direct result of the University not filing a timely and accurate Use and Finance Statement, Incarnati said. A Use and Finance Statement is required when state-supported universities and community colleges build or renovate facilities costing more than $1 million in institutional resources.

“The University’s failure to file a Use and Finance Statement was an oversight. When the University was notified that it had violated the law, it immediately submitted the appropriate forms. Unfortunately, the filing was late and the document was inaccurate. The University has since implemented new procedures to ensure that it is in compliance with the law,” Incarnati said.

Much of the performance audit focused on how funds were accounted for by the University. “First, it’s important to say that having undergone months of scrutiny and two audits, that there were no instances cited where individuals acted outside the scope of their authority, and all funds were accounted for,” Incarnati said. “The discrepancy in published reports regarding the cost for the House really centers on how you define the project.”

The University’s working definition of capital projects was developed many years ago from the Use and Finance Statement regulations that require the estimated cost of “services from five feet outside of the structure.” Similar language is used in the State of Michigan Department of Management and Budget’s Design and Construction Division’s Major Project Design Manual for Professional Service Contractors, State Universities, Community Colleges and State Agencies, John Beaghan, EMU’s interim vice president for business and finance, said. “Using that definition, actual costs were $3.58 million against our projected budget of $3.5 million.”

Beaghan said that the University has never disputed that additional dollars were spent outside of the project to develop the property, but that those funds were properly budgeted and accounted for in accounts designed for those purposes. “We funded landscaping through the Campus Beautification budget, for example,” Beaghan said. “This is consistent with how we have historically funded and reported expenditures. The auditor recommended that these costs be included in the project account. We reported that we spent $3.5 million on the project, plus an additional $1.8 million on land acquisition and site development for a total of $5.3 million. The Auditor says that we spent $6 million; the $5.3 million we recognize as legitimate costs, plus an additional $700,000 in related costs. We don’t agree that this $700,000, which includes costs such as maintaining the Stonebridge residence, fixing the auxiliary property on Forest Avenue and the Deloitte & Touche audit, should be included.”

Since expenditures outside the project definition were within the authority of the administration to spend, those funds were not reported to the Board as part of regular construction updates. This, the auditor pointed out, led to the Board not being totally informed.

“Although the accounting and reporting for this project were the same as for all other construction projects, we learned that we need to do business differently,” Incarnati said. “We’ve already implemented new reporting procedures so that all dollars expended on a project are reported regardless of the funding stream.”

The Auditor’s opinion that the project was not properly managed met with strong objection by Beaghan. “This was a broad statement for the auditors to make, given that they only noted one reportable condition: concerns about the bidding process. We acknowledged that we did not properly file a log of the bid opening and that we accepted an incomplete landscaping proposal. However, all other requirements of the bidding process were met or exceeded,” Beaghan said. “The auditors’ comments about proper oversight also go to the question of how the project was defined. With our long-standing definition, all the costs were properly recorded and we managed the project very well.”

One finding that surprised both Beaghan and Incarnati was that approximately $200,000 of interest income was paid through tuition and fees. “Due to a timing difference in the execution of an option to refinance debt, this sum was not recognized as an addition to our debt service.”

“It was clearly not the Board’s intent to use any tuition or fees on the House (the structure plus the 10-foot perimeter),” Incarnati said. “I’ve instructed administration to utilize unrestricted royalty revenues to reimburse this amount to the University’s general operating revenues account to rectify the use of tuition and fees.” Incarnati added that he was disturbed that the Auditor tried to make a connection between the cost of the House and increasing tuition rates. “Clearly there is no connection whatsoever. At the same time EMU raised tuition, so did every other institution in the state. The tuition increases were tied to the rising cost of delivering instruction and services coupled with a decrease in state appropriations.”

University House, a multipurpose facility that serves as the University’s venue for friend raising and fundraising, as well as the president’s residence, is a valuable asset for the University, Incarnati said. “We need to increase donations and the size of our endowment. University House is helping us to do that. Since its opening, more than 4,000 individuals have visited the facility and in the last fiscal year, our cash donations increased by 35 percent,” Incarnati said.

“It’s not always pleasant to have someone put your operations under a microscope, but it is useful,” Beaghan said, “and although we disagree with some of the findings, the audit will help us improve our operations. In the end, that’s the value.”

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