By Eric Berman
January 08, 2018
In October 2017, we introduced pending changes to fiduciary activities in our article “Is Your Government a Fiduciary? – Just Scratching the Surface…”
Since the article’s publication, a high-profile case brought to light some of the potential issues involving student activity funds (SAFs). In a case involving the City of Boston School District, the Internal Revenue Service issued seven findings, with four of the findings citing mismanagement of student activity funds in city schools. Findings included poor or destroyed documentation for payments, payroll expenditures channeled through the funds and other improprieties. According to published reports in the Boston Globe, the city will have to reissue 1,200 corrected W-2 forms for the last three calendar years. The oldest public school in the nation, Boston Latin, spent tens of thousands of dollars from such accounts for an advance placement program coordinator in violation of state and federal rules, which require student activity fund spending on extracurricular activities that enrich a student’s education outside the classroom.
An internet search can easily show that the Boston School District is hardly the only case of student activity fund misuse in recent years. Common themes include:
The AICPA 2017 Audit and Accounting Guide – State and Local Governments in paragraph 12.18 discusses how SAFs should be reported in a district’s financial statements as special revenue (if specific criteria are met) or agency funds, depending on the nature of the requirements concerning the use of the funds. The funds are at risk despite their relatively small balances (in most cases) because of the opportunity for misappropriations. Receipts may be in cash and may be handled outside of the normal treasury procedures at a district. State laws may also govern the ultimate accountability of the funds.
Best Practices in SAF Management
Due to these issues, districts (and institutions of higher education,) that have SAFs should utilize the same internal controls for other cash and investment accounts for SAFs. Systematic policies and procedures including, but not limited to:
These items, and others may alleviate many of the common internal control issues experienced in SAF misuse.
In many cases, SAF reporting is in accordance with state laws. The laws may require special reports as a result of agreed-upon-procedures (or other forms of assurance or attestation engagements) to be filed with a state oversight entity, typically a state department of education. As discussed in the AICPA Audit and Accounting Guide, current reporting in accordance with Generally Accepted Accounting Principles may result in either a special revenue fund or an agency fund.
Upon implementation of GASB Statement No. 84, Fiduciary Activities (GASB-84), in periods beginning after Dec. 15, 2018, school districts will focus on whether the SAF encompasses holding resources for the benefit of students. If the resources are ultimately used for the benefit of students and not for activities that are part of the government’s provision of goods and services, then the SAF may be a fiduciary activity and probably result in a newly created custodial fund, replacing an agency fund. If the SAF is used for the goods or services that the government provides, then a special revenue fund or some other governmental fund may exist.
As an example, if an SAF is used to collect funds from parents for student field trips, the SAF would likely be a fiduciary activity, even if the school district appropriated matching funds for the trips. The students are the primary beneficiaries of the funds.
However, if the resources did indeed arise from the provision of goods or services to the student, such as providing band instruments or paying for coaching staff, then the activity may be a governmental activity and potentially a special revenue fund. As part of the deliberations for what became GASB-84, the GASB did not want to provide a specific requirement for the type of fund to be used due to the variations in activities in SAFs.
As a result, governments with SAFs should consider their policies, procedures and activities of the SAF coupled with compliance requirements to decide how to systematically report SAF activity. Even if a custodial bank or trustee is used for an SAF, the government may still have control of the funds for reporting purposes in accordance with GASB-84 if the government holds the assets, or has the ability to direct the use, exchange or employment of assets in a manner that provides benefits to the specified or intended recipients.
GASB-84 describes when a government has ‘use’ of an asset. When a government expends or consumes that asset for the benefit of individuals, organizations, or other governments outside of the government’s provision of services to them, it has use. For example, if a teacher writes checks from an SAF for the benefit of students, chances are the teacher is acting in a fiduciary capacity.
A government does not give up employment of assets by appointing a trustee or a designee, such as a bank. After all, the contract was signed by the government with specific instructions on the use, exchange or employment of the assets. The contract may have termination clauses. In all likelihood, even if such a contract is in use for an SAF, the district is likely still acting in a fiduciary capacity.
Even if there is a purpose restriction on the SAF, the government may still control the assets in accordance with GASB-84. If control is present, an SAF should be reported by the government either as a fiduciary activity or as a governmental fund.
We are anticipating many “what-if” questions on SAFs. Should you have any questions on SAF controls or reporting in accordance with GASB-84 please ask your Eide Bailly partner.
 James Vaznis, “Boston pays nearly $1m after audit”, Boston Globe, Nov. 29, 2017, page 1.