On Thursday, October 31st, The U.S. Department of Education (DOE) issued a reminder for institutions on the longstanding requirement to disclose all related party transactions in audited financial statements. This electronic announcement highlights recent AICPA guidance aimed at ensuring institutions meet both GAAP and DOE standards. Financial aid administrators and compliance officers should closely review these updates, which are effective for financial statements submitted to the DOE on or after July 1, 2024.
Regulatory Requirements for Disclosure of Related Party Transactions
Institutions have been required to report related party transactions in audited financial statements since 1997, as per DOE regulations aligned with GAAP standards. The DOE’s recent update clarifies the expectation that institutions not only disclose these relationships but also affirmatively disclose the absence of related party transactions if applicable.
The DOE has emphasized its role as a primary user of institutions’ audited financial statements, given the significant level of federal funding provided to these institutions. Therefore, institutions are expected to treat DOE’s disclosure requirements with the same diligence as GAAP standards, ensuring the DOE’s access to clear, accurate information on related party relationships that could impact institutional financial stability.
Updated AICPA Guidance for Auditors
The AICPA has provided guidance for auditors on how to approach these disclosures to satisfy DOE requirements. The guidance clarifies that materiality thresholds for related party disclosures may need to be lower than for other items in the financial statements, reflecting the DOE’s specific expectations. To comply, institutions must present related party disclosures that are fully audited and covered by the auditor’s opinion. If any part of these disclosures is identified as “unaudited” or “not covered,” the DOE will reject the financial statement submission.
The only disclosure alternative acceptable to the DOE is one that includes all related party transactions covered within the auditor’s report. If institutions do not clearly differentiate DOE-specific disclosures from standard GAAP disclosures, they must ensure that all related party information remains fully within the auditor’s purview.
Ensuring Institutional Compliance
Institutions must maintain internal controls that ensure thorough identification and documentation of all related party transactions. These controls, required under DOE’s administrative capability standards, are critical for achieving compliance with both DOE and GAAP standards. The DOE expects institutions to take reasonable measures to ensure that related party disclosures are accurate and complete, preventing omissions that could jeopardize institutional funding.
The DOE also underscores that it will consider administrative actions against institutions that fail to comply, particularly if disclosures are found unaudited. To avoid administrative repercussions, financial aid administrators should work closely with their auditing teams to verify that all DOE-required information is appropriately audited and reported.
Next Steps
Financial aid administrators and audit staff should take immediate steps to familiarize themselves with the new compliance expectations, while confirming that internal controls meet these standards. If your office needs help meeting or implementing the DOE’s rigorous disclosure requirements, reach out to info@heag.us for support. Our experts can assist you in aligning your disclosure requirements with the DOE and AICPA guidance, to confidently meet the updated related party disclosure requirements and uphold their compliance standards.