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Program to improve accounting controls nearly complete

STANFORD -- Stanford has nearly completed a 35-point program begun in 1991 to improve the university's accounting controls, the accounting firm Arthur Andersen & Co. said in a final report ending their two-year evaluation of Stanford's financial controls.

The program, recommended at the height of the indirect- cost dispute, was part of an effort to reestablish "Stanford's reputation for integrity and sound management," then-President Donald Kennedy said at the time.

Stanford officials retained Arthur Andersen & Co. in early 1991 in response to allegations that the university had charged the government for inappropriate expenses.

Andersen's package of 35 recommendations also was reviewed and endorsed in 1991 by a special advisory panel of national leaders in government, education and business. The university has implemented 31 of the recommendations, is still working on three others and has deferred one, Arthur Andersen said in its final report, dated May 31, 1993.

The package of recommendations, according to Chief Financial Officer Peter Van Etten, focused on the development of clear policies and procedures related to research administration, and then assurance that all faculty and staff understand and follow them.

The recommended improvements, Van Etten said, would replace "previous administrative practices, involving extensive exceptions, with a more formalized approach based on clearly communicated policies and training."

"In the short term, this may mean more work for staff," Van Etten said. "But I believe that in most cases the clarification of policies, together with necessary training, will result in less confusion and uncertainty for faculty and staff, as well as improved compliance with the requirements of government sponsors."

Contrary to some opinions, Van Etten said, Arthur Andersen did not recommend modifications that would have made Stanford's internal controls look like those of a defense contractor.

"That would have required detailed faculty time and effort reporting, which most people agree is incompatible with the academic mission of a research university," he said.

In its original 1991 report, Arthur Andersen said the most urgent need at Stanford was to separate unallowable and inappropriate indirect costs at the time they are incurred. New screening procedures were established, special accounts were set up to capture those costs, and a new training module on cost policy was delivered to everyone at Stanford with signature authority.

The firm also recommended formalizing a code of business conduct, establishing the position of compliance support officer and reorganizing the university's Internal Audit department. Formal procedures for the handling of indirect costs were recommended, as were several improvements in the areas of property administration and sponsored project administration.

In an interim report published in May 1992, Arthur Andersen reported that steps to implement the recommendations "had been severely impeded by the current need to direct substantial university personnel and financial resources to innumerable projects related to pressing government audit and administrative activities."

In their final report, one year later, Andersen noted that "Stanford's progress on these recommendations demonstrates a significant and ongoing commitment to improved internal controls."

"Stanford is building the necessary infrastructure to provide reasonable assurance of effective internal controls over the handling of sponsored funds," the report said.

Van Etten said he is "extremely pleased with the accomplishment of many individuals who contributed to completing the tasks recommended by Arthur Andersen."

The package of 35 recommendations fell into five areas:

  • Control environment - This included the single deferred recommendation - that the university revise its mission statement. University officials decided to delay action because of changes in presidential and provostial leadership. The matter may be taken up in the near future, Van Etten said.

The university implemented the remaining suggestions in this area, including publishing a Code of Conduct for Business Activities, hiring a compliance support officer who is strengthening compliance training programs, and restructuring Stanford's internal audit function.

  • Written policies and control procedures - Several new or updated documents have been published in the past year, including a Lab Timecard User's Manual (distributed to system users in January) and a Grant and Contract Accounting Procedures Manual (used in the Controller's Office). A newly revised Sponsored Projects Proposal Preparation Manual was distributed throughout the university in June, and will be followed next month by a new document, An Overview of Sponsored Project Administration. The one remaining recommendation concerns documentation of policies and procedures for the handling of indirect costs. This manual, which will include procedures for service-center administration, is in final preparation for publication later this year.
  • Accounting system - The university eliminated departmental special codes in the accounting system and established new accounts to capture unallowable costs. Reviews of indirect- cost accounts were incorporated into the university's annual studies of indirect costs. The university also adopted a new system requiring higher level management review and approval of online journal transfers.
  • Cost allowability and allocability -- This area involved strengthening internal controls. The 11 recommendations have been implemented; five of them still must be documented in the new indirect-cost accounting manual now being developed.

The recommendations included implementing selective time-and-effort reporting, screening costs at the front end (before they go into the accounting system), adding reviews for high-risk accounts, performing special studies in a timely manner, testing space inventory surveys, reviewing cost-accounting policy decisions, and performing service center reviews.

  • Contract and grant administration - Six of the eight recommendations in this category have been implemented, and significant progress made toward the remaining two, Arthur Andersen said.

In the area of property administration, the university hired a new property administration manager to strengthen property controls and integrate the equipment inventory system with the accounting system.

Arthur Andersen said that "Stanford has achieved a major milestone" by linking the two systems for most new property acquisitions, but must still reconcile the equipment inventory system with the general ledger. Finance officials are laying plans to replace Stanford's core financial systems, a major undertaking that will affect every department and every accounting transaction.

Property administration has also hired three professionals to support continuing inventories. Eventually, property inventories will be done every other year.

In other actions, the Board of Trustees has reviewed procedures for granting of indirect-cost waivers. The Sponsored Projects Office has added a staff member to ensure that technical reports are filed in a timely manner and is improving database systems and monitoring of report submissions.

The university is establishing monitoring mechanisms to assure that principal investigators' certifications of costs are current, Arthur Andersen said. Wording of the certification statement was changed in May.



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