Business Office Basics: Know Your Audit, Part 2

Tips on explaining to the board how the Statement of Activities relates to the operating statement, and on improving the audit note about the flow of Temporary Restricted Net Assets.

May 4, 2023  |  By Jim Pugh

stock image of audit button

A founding business officer of NBOA with 51 years of experience, Jim Pugh shares wisdom he has collected in his decades of service to independent schools. This is the ninth article in the Business Office Basics series. The series thus far includes:  entry interviews when you start at a new school trustee orientation in terms of school finance financial reporting strategies department budget request forms preparing the operating budget for the board achieving financial equilibrium; the  annual capital budget; the  investment committee report.

As mentioned in the previous article of this series, the annual audit confirms a school’s internal accounting and reporting. It is also an important repository of financial information which is part of the historical record. The CFO should understand and reflect on its contents.

Reconciliation of the Audit to the Operating Statement

One of the questions your school’s audit or finance committee will eventually ask is:

“How does the Statement of Activities relate to the operating statement (P&L) we receive from the business office?”

This is a legitimate question. Most school budgets hew closer to a “cash budget” than to a purely GAAP budget. Few trustees understand or can remember the differences between the two statements. This question is a pitch across the middle of the plate.

The prepared CFO is in a position to reply: “Good question. Here is a schedule which shows the differences between the two statements, and which reconciles their bottom lines.”

Sharing this reconciliation schedule helps everyone. The trustees see that the CFO really understands this stuff. The CFO has the opportunity to educate the trustees why certain revenues and expenses are included in one financial statement and not the other.

The Reconcile P&L to audit v.1 Excel file is a typical reconciliation between the P&L and the unrestricted column of the Statement of Activities. This example includes eight accounts which are included in the Statement of Activities and not in the school’s budget. It includes six accounts which are included in the budget and not in the Statement of Activities.

The reconciliation schedule may lead to a discussion about why certain items are included in the operating budget. This is a good thing. The trustees should be thinking about the usefulness of the internal financial statements.

Missing in Action – Reporting on Temporarily Restricted Net Assets

Over the last 15 years I have read approximately 500 independent school audits. This is in conjunction with my work on the Financial Position Survey (FPS), a report which draws on the Moody’s method of credit analysis to assess trends in independent school’s financial health. In 2017, the FPS became part of Business Intelligence for Independent Schools (BIIS), NBOA’s data analysis platform.

By far the biggest deficiency I see in most audit reports is the sparse amount of information about the receipt and expenditure of Temporarily Restricted Net Assets (TRNA). It puzzles me that the reporting requirement in GAAP is so minimal.

TRNA often constitutes 10% or more a school’s revenue and expense. Why is there not better reporting of the flows and uses of these funds?

The Audit Note TRNA Excel file shows the type of TRNA schedule which would improve the usefulness of the audit notes. This example is a composite of several of the best schedules I have seen in school audits.

As much as schools prefer unrestricted gifts to restricted gifts, many schools are seeing an increase in gifts with restrictions from donors. Improved reporting on TRNA helps to show the school is carrying through on its obligation to these donors.

There is no rule that a school’s audit cannot include supplements beyond the required standards. In the short term, an expanded schedule of TRNA activity sheds light on an important part of the school’s operation. In the long term, it contributes to the historical record which may be used to research the school’s operations and understand it longitudinally.


Jim Pugh

Jim Pugh taught history in three independent schools and then served as full-time or interim CFO in ten independent schools. For the 2022-23 school year, he is wrapping up the surveys he conducts for several school associations.


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