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Higher Education - The Impact of COVID-19 on NYS Colleges and Universities Year-End Audits

COVID-19 has caused major disruption to colleges and universities in New York State and across the country. Business officers are stretched thin with the varied operational and financial issues that they are facing. With fiscal year-ends fast approaching, here are a few practical items to keep in mind as you prepare for your year-end audits.

Department of Education (DOE) Developments – First, the DOE has established a COVID-19 web page that has the latest information from the DOE. Other DOE highlights are included below:

  • Most colleges and universities have moved courses online. Normally, this would require review and accreditation approval, but those required approvals have been waived through the end of the semester. Any courses not previously provided in the same format, however, are not permitted to continue after June 30 without proper authorization.
  • Many schools are now permitting their students to attend other local schools, by entering into a temporary consortium agreement. In situations where schools are less technologically savvy, students may be able to enroll in similar courses at another institution and still receive the credit at their own school. This allows students to continue with their studies without taking a leave of absence.
  • College may continue to pay federal work-study to those students who were previously employed by the College. If the student is working, the College must continue to pay them
  • Many colleges are crediting students with the remainder of the room and board for the semester. Typically, this would require an adjustment to the student’s Cost of Attendance (COA), however, this has been waived. Colleges may credit the student but must determine whether the credit for room and board creates an overall credit balance in the student’s account, specifically from federal student financial aid (SFA). If there is such a credit, it must be paid out within 14 days.
  • The DOE will award $13.95 billion to colleges and universities, 90 percent of which will be distributed directly to schools via the Title IV distribution system. Each institution’s allotted amount will be determined by a formula, which the DOE will finalize based on full-time equivalent enrollment of Pell Grant recipients (75 percent of the calculation) and using full-time equivalent enrollment of non-Pell students (25 percent of the calculation). Institutions must use 50 percent of their award for direct emergency aid to students. religious facilities, or enrollment recruitment contractors.

Some higher education institutions may qualify for emergency federal loan programs. Not-for-profit organizations with the lesser of 500 employees or the applicable size standard in number established by the SBA can apply for CARES Act Paycheck Protection Program (PPP) Loans. These loans may cover two and a half months of payroll costs up to a maximum of $10 million. Keep in mind that a portion of these CARES Act Loans may qualify for forgiveness of debt. These PPA loans are being distributed through certain banks and credit unions. In addition, 501(c) 3 institutions may qualify for up to $2 million in Small Business Administration (SBA) Economic Injury Disaster (EIDL) loans which are being administered directly by the SBA.

OMB Deadlines -A Single Audit deadline deferral has been granted for recipients and sub-recipients with fiscal year-ends through June 30, 2020. The extension is for a period of six months to allow institutions to extend the completion and submission of the Single Audit reporting package. Institutions should maintain documentation of the reason for the delayed filing if elected.

Treatment of Tuition Refunds and Credits – As institutions have moved to remote learning, management must determine how to handle room and board charges. Management will need to determine how best to handle previously recognized revenue. If the decision is made to issue credits for the amounts already collected, institutions may need to recognize a contract liability under the new revenue recognition standard. Refunds will likely be recognized as revenue reductions.

Impact on Investments/Endowments –The impact on investment and endowment portfolios, as a result of the downturn in the markets caused by COVID-19 is staggering. Significant swings in value are becoming the new normal and make managing day to day operations difficult. The timing of these market swings could have a significant impact on your spending policy for years to come. Many endowments may have underwater endowments, for the first time in several years and these are required to be disclosed in the financial statements. This is a good time to reassess your spending policy for underwater endowments.

International Students and Study Abroad Programs - Study abroad programs will likely be affected by the pandemic. We cannot quantify what the impact will be, but it is likely that students, frightened by the prospect of being stranded overseas, will approach such programs with more caution. Additionally, institutions that recruit overseas may find that foreign students may be reluctant, or even unable, to attend as a result of various travel restrictions.

Growing Concern – For many institutions that were previously struggling with declining enrollment, the COVID-19 crisis could not have come at a worse time. While it is too soon to quantify the impact that the pandemic will have on enrollment, it is safe to say that the impact will be negative. Coupled with room and board refunds and exacerbated by the investment market declines, liquidity may become a significant issue. Your auditor may ask you to perform cash flow projections, complete with stress tests to prove financial viability.

Lease Considerations – For many institutions, this is the first year for the adoption of the new leasing standard. (Although it is possible that FASB and/or GASB will defer implementation deadlines.) Institutions that have debt covenants should begin to assess the potential impact on their financial statements, as a result of the new leasing standard. Debt covenants may already be strained as a result of the pandemic. Additionally, an inventory of the institution’s leases should be taken prior to the preparation of the financial statements.

Long-Lived Assets and Potential Impairment – Does your institution have buildings or other equipment that are not currently in use or held for sale? As a result of the economic downturn related to COVID-19, institutions may need to perform an asset impairment test. Depending on the facts and circumstances, the decline may be considered a triggering event, and thus require an impairment analysis.

Borrowing Rates – This may be viewed as both a positive and a negative. First the good news. Some institutions may find that funds are relatively affordable as interest rates decline. The bad news relates to defined benefit pension and other post-retirement plans that an institution may have. With the decline in the overall rates, the benefit obligation will increase, thus resulting in additional liabilities within the financial statements.

IT Considerations – We have seen many institutions move immediately to the online classes to continue the semester. The overall costs of this move are still being tabulated. While it is too early to predict if this will be a recurring event, institutions should determine whether an adequate investment in technology has occurred. This consideration is not only for the near-term but for potential future on-line expansion. Also, the move to online learning creates an additional set of IT security concerns that need to be considered by institutions.

These are just a few of the challenges that institutions may encounter in their year-end audit process, as a result of COVID-19. Institutions are encouraged to work with their auditors early in the audit process to ensure that potential issues are identified early. If you have any questions, do not hesitate to reach out to our higher education experts at The Bonadio Group.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.