M E M O R A N D U M

DATE: September 26, 2002

TO: Presidents

FROM: Richard P. West, Executive Vice Chancellor and Chief Financial Officer

SUBJECT: Business Best Practice Guidelines for CSU Auxiliary Organizations

In response to concerns expressed by the Trustees regarding internal control deficiencies noted at several campuses of the California State University, the Chief Administrators/Business Officers (CABO) were asked to study and recommend guidelines that would articulate sound business practices for auxiliary operations. With the assistance of an external consultant, and conferring with the Auxiliary Organization Association (AOA), the CABO task force identified critical business transaction areas, objectives for each area and finally standards for each category.

In addition to this effort specifically focused on auxiliary operations, CABO also has asked the Financial Officers Association (FOA) to undertake a long-range effort to develop model guidelines/procedures for business operations generally. This work is on-going and mirrors some of the critical areas defined in the auxiliary guidelines.

The attached guidelines are designed to protect and enhance an auxiliary organization's assets; ensure the existence of accurate accounting records; and document authorization and regulatory compliance.

Please distribute these to the appropriate individuals on your campus.

c: Chancellor Charles B. Reed
Chief Administrators/Business Officers

Business Practice Guidelines for CSU Auxiliary Organizations

Background
In response to concerns expressed by the Board of Trustees regarding internal control deficiencies noted at several campuses of the California State University, the Chancellor was asked to determine "best practices" for fiscal controls for the auxiliaries. The Chancellor asked the Chief Administrators/Business Officers (CABO) to study and recommend guidelines that would articulate sound business practices for auxiliary operations. With the assistance of an external consultant, and conferring with the Auxiliary Organization Association (AOA), the CABO task force identified critical business transaction areas, objectives for each area and finally standards for each category.

The guidelines outlined below set sound business practices for auxiliary organizations operating within the California State University system. They are intended to be consistent with generally accepted accounting principles (GAAP), auditing standards (AU and A-133), and reporting requirements applicable to auxiliary organizations, as well as statutory, regulatory and policy requirements. These business practice guidelines should not be viewed as a substitute for, but rather a companion to system and campus-based policies.

These guidelines identify Critical Transaction Areas, a Business Practice Objective within each area, and Action Standards to be established by the auxiliary organization governing board or management. Within GAAP and AU standards, and in a fashion consistent with campus policy, an auxiliary organization may take appropriate and documented mitigation measures that depart from these guidelines. The terms such as "consistent manner," "management," "timely," and "verifiable" or "proper" "documentation" should be construed within industry standards.

1. Cash (including checks and credit cards)
- Balances
- Receipts
- Disbursements
Business Practice Objective: Safeguard and Properly Account for the Receipt, Holding and Disbursement of Cash.
Action Standards -
a) Signature Authority. Adopt and annually review governing board policy that identifies signature authority and provides practices for the receipt and disbursement of cash.
b) Segregation of Duties. Establish a written internal controls system that ensures cash receipt and disbursements are conducted with appropriate segregation of duties.
c) Control over the Receipt of Cash. Receive cash in a consistent manner utilizing systems that ensure integrity of existing internal controls, with annual management review.
d) Control over the Disbursement of Cash. Disburse cash in a consistent manner utilizing systems that ensure integrity of existing internal controls, with annual management review.
e) Reconciliation and Reviews. Reconcile bank accounts on a timely basis with independent management review.

2. Investments
Business Practice Objective: Protect and Properly Account for Investments and Investment Income in accordance with Source Restrictions and Other Requirements.
Action Standards -
a) Investment Policy. Adopt a written governing board investment policy that describes the investment objectives and limitations, and provides for practices to be used to meet its business and fiduciary responsibilities.
b) Segregation of Duties. Establish a written internal controls system that ensures investment and income decisions and record keeping are conducted and reviewed by more than one person.
c) Recording Investment Income. Establish a written record-keeping system that ensures all investment income has been received and recorded in compliance with any source restrictions and other external or internal requirements.
d) Safekeeping Physical Assets. Provide a secure location for securities held by bonded or bonded-authorized persons or institutions.
e) Reconciliation and Reviews. Reconcile investment positions and investment income on a frequent basis with independent management reviews.

3. Donations, Program Service Fees, Other Income
Business Practice Objective: Properly Record and Account for Donations, Program Service Fees and Other Income in Accordance with External and Internal Requirements.
Action Standards -
a) Governing Board Policies. Adopt written governing board policy that describes allowable income-generation activities, including the solicitation and acceptance of gifts, and setting of program service fees or for other services.
b) Budgeting Sources of Income. Establish a written budgeting system that includes reasonable income estimates, the comparison of results, and analyzes significant differences.
c) Recording Donations. Establish a written record-keeping system that enables gifts to be properly received, recorded, and acknowledged in accordance with donor restrictions and other requirements.
d) Invoicing Sponsors. Establish a written system to properly record, invoice, and collect for costs to be reimbursed by third parties.
e) Allocating Reimbursable Costs. Establish written cost allocation processes that ensure reimbursable costs are properly allocated and billed.

4. Receivables (including Pledges)

Business Practice Objective: Properly Record and Promptly Collect Receivables.
Action Standards -
a) Segregation of Duties. Establish a written controls system that ensures billing, cash collection, customer inquiries, and subsidiary ledger reconciliations are conducted separately and with due regard for the receivable duties.
b) Recording Pledges. Record unconditional promises, such as donor pledges, at fair value and have verifiable documentation.
c) Accounting for Receivables. Establish a written system to record receivables in a timely manner with proper documentation as to terms and conditions.
d) Collecting on Receivables. Establish a written system to invoice customers promptly, in a consistent manner, while exercising due diligence in the follow-up and collection of past due accounts.
e) Reconciliation and Review. Reconcile subsidiary receivables ledgers to the general ledger on a timely basis and reviewed independently by management.

5. Procurement
- Purchasing and Contracting
- Receiving
- Accounts Payable
Business Practice Objective: Perform Procurement Activities in a Consistent Manner in accordance with External and Internal Requirements.
Action Standards -
a) Segregation of Duties. Establish a written control system that provides purchase orders and service contracts are prepared separately from receiving and shipping, payables and disbursements, and that identifies unallowable transactions, such as with governing board members.
b) Purchasing within Applicable Policies and Limitations. Establish a written system that provides for purchases and service contracts to be made within governing board policies, source restrictions, funds availability, and other applicable requirements.
c) Purchasing in an Accurate and Consistent Manner. Establish a written system that ensures purchases and service contracts coding, classification, recording, and competitive bidding requirements are applied in a consistent manner.
d) Receiving Materials in an Accurate and Consistent Manner. Establish a written system that ensures materials are received in a consistent manner, and that they are properly inspected, recorded, and reported to the purchasing agent or equivalent.
e) Paying Vendors in an Accurate and Consistent Manner. Establish a written system that ensures accurate and timely payment of vendors after the determination of the receipt of goods or services or under the terms of the transaction.

6. Payroll
- Salaries and Wages
- Benefit Programs
- Related Liabilities
Business Practice Objective: Conduct Payroll Operations Accurately and in Compliance with External and Internal Requirements of an Employer.
Action Standards -
a) Segregation of Duties. Establish a written controls system that ensures payroll preparation is segregated from the general ledger function and other payroll functions such as hiring authorization, timekeeping, and distribution of checks.
b) Maintaining Accurate Payroll Records. Establish a written system that ensures proper authorization, approval, and documentation of new hires, changes in employment, salary and wage rates, and payroll deductions.
c) Payroll Preparation and Record-Keeping. Establish a written system that ensures accurate and timely collection of payroll information such as timecards, effort reporting, attendance records, and funding sources.
d) Distribution of Pay. Establish a written controls system that ensures proper payment of employees, through direct deposit or by check, based upon submitted documentation.
e) Meeting Regulatory Requirements and Other Employer Responsibilities. Establish a written system that enables proper collection and timely remittance of payroll taxes and other withholdings for retirement and insurance programs, as well as all federal and state reporting requirements.

7. Property and Equipment
Business Practice Objective: Properly Account for and Protect Physical Assets.
Action Standards -
a) Segregation of Duties. Establish a written controls system that ensures employees maintaining fixed asset records are independent of those maintaining physical control inventory of property and equipment.
b) Compliance with Sponsor Requirements. Establish a written system that ensures compliance of terms and conditions sponsors may have specified regarding the use of property and equipment.
c) Recording Property and Equipment Acquisitions. Establish a written system that ensures proper recording of property and equipment when received and for labeling of equipment.
d) Conducting Physical Inventories. Establish a written system that ensures physical inspection of property and equipment on a service life schedule.
e) Reconciliation and Review. Reconcile physical inventories to the general ledger on a timely basis with review by management.

8. Debt and Other Liabilities
Business Practice Objective: Properly Record Debt and Other Liabilities in Compliance with Restrictive Covenants and Other Requirements.
Action Standards -
a) Governing Board Policy. Adopt a written governing board policy consistent with the CSU's debt issuance policies describing when debt may be incurred and who is authorized. The policy should be adjusted as needed as the CSU debt policies change.
b) Segregation of Duties. Establish a written controls system that ensures detailed accounting records, physical custodianship of debt instruments, and general ledger records are appropriately segregated.
c) Recording and Maintaining Accurate Records. Establish a written system that properly records all liabilities and their terms and conditions.
d) Complying with Restrictive Covenants. Establish a written compliance verification system that periodically reviews and analyzes restrictive covenants.
e) Reconciliation and Review. Reconcile detailed liability records to the general ledger on a timely basis with review by management.

9. Reserves and Net Assets
Business Practice Objective: Maintain Reserves and Net Assets that will assure the financial viability of the organization, as well as comply with the legal obligations of donors and other third parties.
Action Standards -
a) Governing Board Policies. Adopt written governing board policies that describe appropriate reserve requirements and provide for compliance with donor and other third party legal obligations.
b) Record-Keeping and Reporting. Establish a written system of record keeping and reporting that properly segregates and accounts for the net assets and reserves of donors, and complies with the legal obligations related to other third parties.
c) Maintain Financial Viability. Implement financial standards, which will assure fiscal viability, including proper provision for professional management, adequate working capital, adequate reserve funds for current operations and capital replacements, and adequate provisions for new business requirements.

10. Computer Controls
Business Practice Objective: Create a Safe, Secure, Accurate and Reliable Computer System Environment.
Action Standards --
a) Controlled and Secured Environment. Establish written policies and practices that ensure secure computer system operations, including proper hardware and software redundancies, back-up and recovery mechanisms, system documentation, and disaster recovery programs.
b) Security Controls. Establish written policies and practices creating levels of security linked to job responsibilities, data sensitivity, and physical location of computer network access points.
c) Data Entry Controls. Establish written policies and practices that define controls for data entry, specifically: proper transaction authority, accuracy, completeness, error correction, and audit trails.
d) Processing Controls. Establish written policies and practices that define processing controls, specifically: transaction edit checks, integrity of data files, reconciliation requirements, and error logs,
e) Output Controls. Establish written policies and practices that define output controls, specifically: verification of accuracy, authorized access to data, and proper description of report information and its sources.

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