A REPORT
TO THE

ARIZONA LEGISLATURE

Financial Audit Division
Report on Internal Control and Compliance

Arizona State
University
Year Ended June 30, 2007

Debra K. Davenport
Auditor General

The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.

Copies of the Auditor General’s reports are free.
You may request them by contacting us at:

Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:

www.azauditor.gov

Arizona State University
Report on Internal Control and Compliance
Year Ended June 30, 2007
Table of Contents

Page

Annual Financial Report
Issued Separately
Report on Internal Control over Financial Reporting and on Compliance and
Other Matters Based on an Audit of Financial Statements Performed in
Accordance with Government Auditing Standards

1

Schedule of Findings and Recommendations

3

DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL

STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL

WILLIAM THOMSON
DEPUTY AUDITOR GENERAL

Independent Auditors’ Report on Internal Control over Financial Reporting
and on Compliance and Other Matters Based on an Audit of Financial
Statements Performed in Accordance with Government Auditing Standards

Members of the Arizona State Legislature
The Arizona Board of Regents
We have audited the financial statements of the business-type activities and aggregate discretely
presented component units of the Arizona State University as of and for the year ended June 30, 2007,
which collectively comprise the University’s financial statements, and have issued our report thereon dated
November 15, 2007. Our report was modified to include a reference to our reliance on other auditors. We
conducted our audit in accordance with U.S. generally accepted auditing standards and the standards
applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller
General of the United States. Other auditors audited the financial statements of the aggregate discretely
presented component units, the Arizona State University Foundation, the Arizona Capital Facilities Finance
Corporation (ACFFC), the Arizona State University Alumni Association, the Collegiate Golf Foundation, the
Mesa Student Housing, LLC, the Arizona State University Research Park, Inc., the Sun Angel Foundation,
and the Sun Angel Endowment, as described in our report on the University’s financial statements. The
financial statements of the aggregate discretely presented component units were not audited by the other
auditors in accordance with Government Auditing Standards. This report includes our consideration of the
results of the other auditors’ testing of internal control over financial reporting that are reported separately
by those other auditors. However, this report, insofar as it relates to the results of the other auditors, is
based solely on the reports of the other auditors.
Internal Control over Financial Reporting
In planning and performing our audit, we considered the University’s internal control over financial
reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on
the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the
University’s internal control over financial reporting. Accordingly, we do not express an opinion on the
effectiveness of the University’s internal control over financial reporting.
Our consideration of internal control over financial reporting was for the limited purpose described in the
preceding paragraph and would not necessarily identify all deficiencies in internal control over financial
reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we
and the other auditors identified certain deficiencies in internal control over financial reporting that we
consider to be significant deficiencies.

2910 NORTH 44

th

STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051

A control deficiency exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the University’s ability to initiate, authorize, record, process, or report
financial data reliably in accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the University’s financial statements that is more than
inconsequential will not be prevented or detected by the University’s internal control. We consider items
07-01 through 07-06 described in the accompanying Schedule of Findings and Recommendations to be
significant deficiencies in internal control over financial reporting.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the financial statements will not be
prevented or detected by the University’s internal control.
Our consideration of internal control over financial reporting was for the limited purpose described in the
first paragraph of this section and would not necessarily identify all deficiencies in internal control that
might be significant deficiencies and, accordingly, would not necessarily disclose all significant
deficiencies that are also considered to be material weaknesses. However, of the significant deficiencies
described above, we consider items 07-01, 07-03 and 07-04 to be material weaknesses.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the University’s financial statements are free of
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. However, providing an opinion on compliance with those
provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The
results of our tests disclosed no instances of noncompliance or other matters that are required to be
reported under Government Auditing Standards.
Managements’ responses to the findings identified in our audit have been included herein. We did not
audit managements’ responses and, accordingly, we express no opinion on them.
This report is intended solely for the information and use of the members of the Arizona State Legislature,
the Arizona Board of Regents, and the University and is not intended to be and should not be used by
anyone other than these specified parties. However, this report is a matter of public record, and its
distribution is not limited.

Debbie Davenport
Auditor General
November 15, 2007

2

Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
Arizona State University Findings
None reported.

Component Unit Findings
The other auditors that audited the Arizona State University Foundation, and the Arizona Capital Facilities
Finance Corporation, including several subsidiaries [Energy Management Services (Main) LLC, McAllister
Academic Village LLC, Nanotechnology Research LLC, and Sun Devil Energy Center LLC], reported the
following significant deficiencies and material weaknesses for those component units:
07-01
Arizona State University Foundation
Restatement due to prior year errors in the classification of net assets
As identified and corrected by Foundation management, the Foundation’s 2006 financial statements
required restatement due to errors in the classification of net assets. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 117, Financial Statements of Not-for-Profit Organizations, a
statement of activities shall report gains and losses recognized on investment and other assets (or
liabilities) as increases or decreases in unrestricted net assets unless their use is temporarily or
permanently restricted by explicit donor stipulations or law. In the years prior to June 30, 2007, investment
gains and losses in excess of the amounts made available for temporarily restricted spending were
improperly classified as permanently restricted net assets. These amounts should have been classified as
temporarily restricted net assets in accordance with the donor intentions. The effect of the restatement
was to increase temporarily restricted net assets and decrease permanently restricted net assets by
approximately $35,200,000. This restatement had no effect on the change in net assets for the year ended
June 30, 2006.
We recommend that the Foundation review and revise, as necessary, its policies for classifying market
gains and losses recognized on investments in order to prevent future misclassifications.
Management response: The material weakness mentioned above describes a prior period adjustment
proposed by Foundation management to correct an error in the classification of net assets. Foundation
management disagrees with the auditor’s conclusion that this adjustment evidences a material weakness
as of June 30, 2007.
The issue involves the decision of management during fiscal year 2007 to reclassify earnings on
permanently restricted funds as temporarily restricted, rather than as permanently restricted. Prior to fiscal
year 2007, the Foundation’s endowment agreements described how to manage the payout from the fund
to spending accounts and were silent about restrictions on the earnings. During the current fiscal year,
new management revised this classification and determined that, since the agreements were silent on the
subject, the earnings should be treated according to current statutory regulations and generally accepted
accounting principles. During the current fiscal year, Foundation management revised the endowment
agreements to specifically address the restriction class of the donations and earnings. Management
prepared and proposed a prior period adjustment to rectify this situation, which was agreed to by the
external auditors.
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Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
The Statement of Auditing Standards No. 112, Communicating Internal Control Related Matters Identified in
an Audit, that was issued in May 2006 states that a control deficiency exists when the design or operation
of a control does not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect misstatements on a timely basis. It further states that a strong indicator of
material weakness in internal control is a restatement of previously issued financial statements to reflect
the correction of a material misstatement. Our external audit firm’s policy interprets this to mean that all
prior period adjustments are material weaknesses in internal control.
It is management’s observation that, during 2007, new management reviewed and reinterpreted the
language in the endowment agreements. Based on this review, management identified the situation that
led to the adjustment, prepared a prior period adjustment, and proposed this adjustment to the external
auditors. Based on these facts, management believes that sufficient controls existed during 2007, and that
these controls allowed current management to detect this situation in a timely manner. Management also
revised the language in the endowment agreements during 2007 to clarify the accounting treatment and
prevent this situation in the future.
Management believes that, if material weakness exists, management must have some way to remediate
this deficiency. Given that, during 2007, current management detected the situation and revised the
language in the endowment agreements to prevent this situation from occurring in the future, any control
deficiency that existed in prior years was effectively remediated during 2007. Therefore, management
respectfully disagrees with the assertion that a material weakness existed as of June 30, 2007.
07-02
Arizona State University Foundation
Year-end audit adjustments
Based on the nature of the year-end adjustments, the Foundation’s interim combined financial statements
did not include all of the necessary adjustments to provide combined financial statements comparable to
the audited combined financial statements distributed to outside users. Specifically, the interim combined
financial statements did not recognize certain contributions in accordance with Statement of Financial
Accounting Standards (SFAS) No. 116, Accounting for Contributions Received and Contributions Made.
Additionally, the discount rate used by management to calculate the present value on long-term pledges
receivable should be determined at the time the unconditional promise to give is initially recognized and
should not be revised subsequently. The effect of these year-end audit adjustments was to increase
contribution revenue by $3,100,000, increase pledges receivable by $10,200,000, increase the present
value discount on long-term pledges receivables by $7,700,000 and decrease accounts payable by
$600,000. In order for decision makers and other users of the combined financial statements to make
informed decisions regarding the Foundation, its financial position and its changes in net assets, the
Foundation’s interim combined financial statements should be prepared on a consistent basis with the
year end audited combined financial statements.
We recommend that the Foundation review the content of the audit adjustments made to the year-end
combined financial statements and develop appropriate policies and procedures to ensure that these
items are appropriately considered in the monthly closing process.
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Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
Management response: The significant deficiency described by the auditors above relates to the recording
of gifts and the calculation of the discount on future pledge payments. In a prior year, the Foundation
received two pledges: a conditional pledge from a private foundation of $20 million, due when the
condition was met, and a pledge of $10 million, due after the condition was met and at the death of the
donor. During 2007, the private foundation removed the condition on the $20 million pledge and provided
a new payment schedule for the payment of these funds. While the $20 million pledge was accurately
recorded on the Foundation’s books, the second pledge of $10 million was not recorded properly at
June 30, 2007. The $10 million dollar pledge also became recordable when the condition was removed
and has an expected payment date according to actuarial tables of more than 10 years from now.
Recording this second pledge significantly altered the pledge discount value.
In addition to the above pledge recording, another item impacted the calculation of the pledge discount.
The rates used in prior years to calculate the present value of the expected cash flow streams for pledges
were estimated using rates that management at that time determined to be reasonable estimates of the
risk-free rate at the time of the gift. During this year, management determined that the applicable federal
rate (AFR) was a more easily documented estimate of the risk-free rate and management applied the AFR
to pledges received in prior years as well as to new pledges received in the current year. The accounting
standards state that the discount rate determined at the time of the initial pledge should not be revised in
subsequent years. Although both rates are reasonable estimates of the risk-free rate, management
concurs that the application of the AFR to prior years’ calculations is not supported by generally accepted
accounting principles. The revision of these rates and recalculation resulted in an additional adjustment to
the discount value.
07-03
Arizona Capital Facilities Finance Corporation’s subsidiaries:
Energy Management Services (Main) LLC
McAllister Academic Village LLC
Nanotechnology Research LLC
Sun Devil Energy Center LLC
Financial statement preparation – operating effectiveness
The COSO framework for effective internal control over financial reporting states that control activities
should be selected and developed to mitigate risks to the achievement of financial reporting objectives,
which would include appropriate disclosures required by generally accepted accounting principles
(GAAP). Management, including the accounting staff, does not have sufficient knowledge of current GAAP
in order to determine the completeness of financial statement information and disclosures. As a result of
this operating deficiency, material disclosure and classification misstatements could not be prevented or
detected prior to our audit.
Management response: The response of ACFFC to the auditors’ findings and recommendations in
conjunction with the audit of Arizona State University for the year ended June 30, 2007 is as follows: This
response was prepared subsequent to the ACFFC audit and has been shared with the ACFFC auditors.
This response is for the Auditor General’s findings 07-03 through 07-06.
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Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
The Arizona Capital Facilities Finance Corporation (ACFFC) uses a contract accountant to perform certain
accounting duties including monthly bookkeeping, preparation of year-end entries and preparation of the
annual financial statements for certain ACFFC subsidiaries. At the ACFFC’s September, 2007 Board
meeting, prior to the issuance of the Auditors’ findings, a decision was made to consider options to
improve the accounting for ACFFC.
At the ACFFC’s December, 2007 Board meeting, a decision was made to appoint a new contract
accountant who is a licensed Arizona CPA to take over the duties of the former contract accountant.
Further, the current ACFFC Board President, who is an Arizona licensed CPA and experienced in financial
statement reporting, will assume increased oversight responsibilities for the ongoing accounting and
financial reporting of ACFFC and will work closely with the new contract accountant.
07-04
Arizona Capital Facilities Finance Corporation’s subsidiary:
McAllister Academic Village LLC
Inadequate design and operation of accounting process
Inadequate design and operation of internal controls over the entire accounting/bookkeeping process was
identified. This inadequacy occurs not only when there is only one individual responsible for the entire
accounting process of the entity, but when the necessary accounting for the entity is beyond the overall
capabilities of the employee. This deficiency is also a result of lack of internal communication between the
employee, internal management and third party management. The overall result is a failure to provide
complete, accurate and timely accounting information for the entity.
Management response: The response of ACFFC to the auditors’ findings and recommendations in
conjunction with the audit of Arizona State University for the year ended June 30, 2007 is as follows: This
response was prepared subsequent to the ACFFC audit and has been shared with the ACFFC auditors.
This response is for the Auditor General’s findings 07-03 through 07-06.
The Arizona Capital Facilities Finance Corporation (ACFFC) uses a contract accountant to perform certain
accounting duties including monthly bookkeeping, preparation of year-end entries and preparation of the
annual financial statements for certain ACFFC subsidiaries. At the ACFFC’s September, 2007 Board
meeting, prior to the issuance of the Auditors’ findings, a decision was made to consider options to
improve the accounting for ACFFC.
At the ACFFC’s December, 2007 Board meeting, a decision was made to appoint a new contract
accountant who is a licensed Arizona CPA to take over the duties of the former contract accountant.
Further, the current ACFFC Board President, who is an Arizona licensed CPA and experienced in financial
statement reporting, will assume increased oversight responsibilities for the ongoing accounting and
financial reporting of ACFFC and will work closely with the new contract accountant.

6

Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
07-05
Arizona Capital Facilities Finance Corporation’s subsidiary:
Nanotechnology Research LLC
Financial statement misstatement
The following adjustment was not prevented or detected by internal controls:
Lease receivable and unearned revenue should have been adjusted to their actual amounts at June 30,
2007. The net investment in direct financing lease is stated at the sum of the minimum lease payments
less unearned revenues. The minimum lease payments are based on a variable interest rate determined
on a weekly basis. The lease receivable and unearned revenue should have been reevaluated at year end
based on the current rates of 3.73% for tax exempt bonds and 5.35% for the taxable bonds.
Management response: The response of ACFFC to the auditors’ findings and recommendations in
conjunction with the audit of Arizona State University for the year ended June 30, 2007 is as follows: This
response was prepared subsequent to the ACFFC audit and has been shared with the ACFFC auditors.
This response is for the Auditor General’s findings 07-03 through 07-06.
The Arizona Capital Facilities Finance Corporation (ACFFC) uses a contract accountant to perform certain
accounting duties including monthly bookkeeping, preparation of year-end entries and preparation of the
annual financial statements for certain ACFFC subsidiaries. At the ACFFC’s September, 2007 Board
meeting, prior to the issuance of the Auditors’ findings, a decision was made to consider options to
improve the accounting for ACFFC.
At the ACFFC’s December, 2007 Board meeting, a decision was made to appoint a new contract
accountant who is a licensed Arizona CPA to take over the duties of the former contract accountant.
Further, the current ACFFC Board President, who is an Arizona licensed CPA and experienced in financial
statement reporting, will assume increased oversight responsibilities for the ongoing accounting and
financial reporting of ACFFC and will work closely with the new contract accountant.
07-06
Arizona Capital Facilities Finance Corporation’s subsidiary:
Sun Devil Energy Center LLC
Financial statement misstatement
The following adjustment was not prevented or detected by internal controls:
Derivative instruments are valued at fair value. The entity posted an adjusting entry at year end to reflect
the swap instrument at fair value. The entity used a specialist, the PFM Group in Philadelphia, PA, to
perform the year-end valuations of the swap agreements. The report provided by the specialist included a
valuation for an ASU swap unrelated to the entity. The adjustment posted by the entity at year end
included the fair value of the ASU swap. The controls over financial reporting did not detect a
misstatement caused by this error.
7

Arizona State University
Schedule of Findings and Recommendations
Year Ended June 30, 2007
Management response: The response of ACFFC to the auditors’ findings and recommendations in
conjunction with the audit of Arizona State University for the year ended June 30, 2007 is as follows: This
response was prepared subsequent to the ACFFC audit and has been shared with the ACFFC auditors.
This response is for the Auditor General’s findings 07-03 through 07-06.
The Arizona Capital Facilities Finance Corporation (ACFFC) uses a contract accountant to perform certain
accounting duties including monthly bookkeeping, preparation of year-end entries and preparation of the
annual financial statements for certain ACFFC subsidiaries. At the ACFFC’s September, 2007 Board
meeting, prior to the issuance of the Auditors’ findings, a decision was made to consider options to
improve the accounting for ACFFC.
At the ACFFC’s December, 2007 Board meeting, a decision was made to appoint a new contract
accountant who is a licensed Arizona CPA to take over the duties of the former contract accountant.
Further, the current ACFFC Board President, who is an Arizona licensed CPA and experienced in financial
statement reporting, will assume increased oversight responsibilities for the ongoing accounting and
financial reporting of ACFFC and will work closely with the new contract accountant.

8