In the October of 2023, The U.S. Department of Education (DOE) issued a final regulation, Financial Responsibility, Administrative Capability, Certification Procedures, Ability To Benefit (ATB), that requires all institutions of higher education that participate in federal programs under Title IV of the Higher Education Act (Student Financial Assistance) to disclose all related parties in their audited financial statements. The effective date of the regulation was July 1, 2024. The requirement extends beyond current GAAP requirements in that it requires institutions to disclose related-party transactions at a level of detail that would allow the DOE to readily identify the related party – “such information must include, but is not limited to, the name, location and a description of the related entity, including the nature and amount of any transactions between the related party and the institution, financial or otherwise, regardless of when they occurred.” Furthermore, if there are no related-party transactions during the fiscal year or no related-party balances outstanding reported in the financial statements, it adds a requirement to add a note to the financial statements to disclose that fact. The DOE has published a document, Financial Responsibilities—Questions and Answers, that provides clarifying guidance about the related-party disclosure requirements.

The AICPA has also published guidance under Q&A Section 6960 Colleges and Universities, specifically 6960.13, Related Party Disclosure Requirements Issued by the U.S. Department of Education for Institutions of Higher Education, that addresses concerns that were raised regarding the inclusion of the additional related-party transaction information in audited financial statements and the implications on the auditor’s responsibility under professional standards.

Under the guidance provided by Q&A 6960.13, there are two options afforded for the presentation of this information. The first is to present the related-parties footnote, addressing both GAAP requirements and the additional DOE requirements. In this case, both would be covered under the audit opinion, and consequently Q&A 6960.13 reminds auditors that the procedures in AU-C 550.15 (Related Parties) may be adapted as appropriate for the additional disclosures, whereby the auditor should make inquiries of management and others and perform other risk assessment procedures to obtain an understanding of controls. Q&A 6960.13 further reminds auditors of the applicability of other auditing standards, such as considering the establishment of a lower materiality for the additional disclosures (AU-C 320 Materiality) and obtaining written representations from management specific to the additional disclosures (AU-C 580). In situations when the auditor is unable to obtain sufficient appropriate audit evidence about the related-party disclosures, modification to the auditor’s opinion may be necessary (AU-C 705).

The second option, as allowed for under AU-C section 700, Forming an Opinion and Reporting on Financial Statements, would be to distinguish the additional related-party information required by the DOE by labeling it as “unaudited” and presenting it separately from the related-party disclosures required by GAAP. Under this option, the additional information is not covered by the auditor’s opinion, and therefore the procedures in the preceding paragraph would not be necessary. Q&A 6960.13 provides two examples of how the required DOE disclosures may be differentiated.

The full text of the final DOE regulation, Financial Responsibility, Administrative Capability, Certification Procedures, Ability To Benefit (ATB) can be accessed at www.govinfo.gov/content/pkg/FR-2023-10-31/pdf/2023-22785.pdf

The DOE Financial Responsibilities—Questions and Answers is available at www2.ed.gov/policy/highered/reg/hearulemaking/2024/financial-responsibility.html