On October 31, 2023, the Department of Education updated regulations on Financial Responsibility, Administrative Capability, Certification Procedures and Ability to Benefit (ATB). The broad changes will be effective July 1, 2024 – below, we provide an analysis on the changes regarding annual audits and Financial Responsibility, so you understand what’s new and what to focus on.
Audit Submission Deadline
The deadline for the submission of all annual audit reports was updated. It is now the earlier of 30 days after completing the report or six months after the end of your institutions’ fiscal year. Keep in mind that the 30-day deadline means the later of the report date of the financial or compliance audit. If an accrediting or state agency has an early deadline for your financial audit, it is still a best practice to coordinate both the financial and compliance audits at the same time. They are still required to be submitted together to the Department.
Fiscal Year-End
Starting with fiscal years beginning after July 1, 2024, audited financial statements submitted to the Department of Education must match the fiscal year-end of your entity’s tax returns filed with the IRS. This will lead most institutions with non-calendar year-ends that are taxed as flow through entities (sole proprietorships or S corporations) to explore changing either its tax or audit year-end. However, institutions taxed as partnerships will be required to change its audit year-end to December 31, as a non-calendar year-end is not an option.
Institutions taxed as S corporations will have limited options in changing its tax year-ends. If your institution is a flow through entity with a June 30 or later year-end, expect to change the audit year-end in 2024 to December 31. You should also plan for multiple audits for both your 2024 fiscal year and 2024 calendar year during the transition. Institutions with January through May 31 year-ends will make the transition with its 2025 audits.
Submission of Additional Information
In order to determine whether your institution is financially responsible, the Department may require the:
“Submission of audited consolidated financial statements, audited full consolidating financial statements, audited combined financial statements, or the audited financial statements of one or more related parties that have the ability, either individually or collectively, to significantly influence or control the institution, as determined by the Department.”
Keep in mind that the Department already requires disclosure of all related party activity in the annual audit report and that the discretion can extend far.
Updated Mandatory and Discretionary Triggers
The Department of Education updated its general standards of financial responsibility. An institution is considered financially responsible if it can meet all its financial obligations and provide the administrative resources necessary to comply with Title IV. The Department states an institution is not financially responsible if it:
- Fails to make its refunds or pay credit balances
- Fails to make repayments to the Department for any debt or liability resulting from the institution’s participation in Title IV
- Fails to make a payment in accordance with an existing undisputed financial obligation for more than 90 days
- Fails to meet payroll obligations
- Borrows funds from retirement plans or restricted funds without authorization
- Is subject to a mandatory or discretionary triggering event
Manual triggering events can either create an automatic failure of financial responsibility or result in a recalculated composite score. A recalculated composite score below 1.0 also constitutes as failure of financial responsibility. Both scenarios will require your institution to provide financial protections to continue participating in Title IV programs. The most usual form of financial protection is a letter of credit. Institutions with more than one manual or discretionary trigger are required to provide separate financial protections with a minimum of 10% of the total Title IV drawn in the prior fiscal year.
Please pay attention to the following key mandatory triggers under the changes:
Withdrawal of Equity: Any proprietary (for-profit) institutions with a composite score under 1.5 in a fiscal year that has a subsequent withdrawal of equity that drops the composite score below 1.0 will not be deemed financially responsible. This rule also applies to an institution for its annual financial statement submission or change in ownership submission through the end of the first fiscal year after a change in ownership with a subsequent withdrawal of owner’s equity.
Contributions and Distributions: If your institution has a capital contribution in the last quarter of its fiscal year and there is a distribution in the subsequent first two quarters of the next year, those distributions will offset against the contribution. Additionally, if the recomputed composite score falls below 1.0, an institution will not be deemed financially responsible. This effectively requires any year-end capital contribution to be a permanent infusion for its inclusion in the composite score.
With the new rules, an institution must report most mandatory and discretionary triggers to the Department within 21 days of occurrence.
Key Takeaways
This was not a quiet year, as we saw several changes beyond annual audits and Financial Responsibility under the new regulations. Make sure to discuss any concerns or questions on the regulations with one of Sikich’s Title IV audit experts by contacting us below:
