How Career Schools Can Prepare for a Financial Statement Audit

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David Luc, MSA

Senior Auditor, Schools and Nonprofits

Every year, career schools that take part in Title IV programs must also go through an annual financial statement audit (FSA). Getting ready for an FSA audit does not have to be stressful if you know what to focus on.

Your financial statements tell a story about how well your school handles federal aid. Auditors and the Department of Education look closely at whether your records match your student systems and if your financial statements follow generally accepted accounting principles.

Here are some of the most common financial reporting problem areas and how to prepare for them:

1. Record Title IV Funds Properly
Many schools record federal funds as revenue as soon as they receive them. In the accounting world, that is called cash basis accounting which is not allowed in audits. These funds should only be recognized when the school earns them, often based on the students’ attendance. This is called accrual basis accounting, which is what schools must report in their audits. Review your revenue recognition policy and make sure it follows accounting standards.

2. Record Accounts Receivable and Deferred Tuition Correctly
If students pay for a future term, do not count that money as current revenue. It belongs in deferred revenue (a liability account) until instruction is delivered. Likewise, if a student has not yet paid for the current term, the school should still recognize the tuition as a receivable.  These mistakes often lead to misstated revenue.

3. Reconcile Your Records Often
Your accounting system, student information system and the Department of Education’s G5 or COD system should all match. Make monthly reconciliations part of your routine. Small mismatches can lead to bigger problems during the audit.

4. Pay Attention to Heightened Cash Monitoring
Schools on Heightened Cash Monitoring (HCM) face extra scrutiny from the Department of Education. This means the school must provide additional documentation before disbursing funds to owners among other restrictions. Preparing for an audit includes keeping detailed records of all owner distributions and supporting documentation. Schools should regularly review their cash management practices to ensure compliance and reduce the risk of audit findings related to HCM requirements.

5. Review the 90/10 Calculation Carefully
For proprietary schools, the 90/10 calculation is essential. Double check that you include only eligible revenue and do not accidentally leave out or overstate amounts that affect your compliance standing. Any misstatement in the school’s calculation of 90/10 is required to be reported as a finding by the auditor, regardless of materiality.

6. Respond to Auditor Requests Carefully and Timely
Auditors typically send a detailed list of documents and supporting schedules they need before and during the audit. Many issues arise when schools provide the wrong documents, send materials at the last minute, or fail to send required items at all. This can cause unnecessary audit findings and make the process more stressful. The best preparation is to review requests carefully, provide complete and accurate documentation on time and organize records throughout the year so nothing is missing when auditors ask for it. Most items on these document request lists are the same every year, so if your auditor asked for something last year there is a good chance they will want it again this year.

Preparing for an FSA audit is about maintaining strong financial discipline all year long. When your school’s records are accurate, consistent, and well supported, the audit becomes a chance to confirm that your school is operating responsibly and ready for continued participation in federal aid programs.