Spring 2013 issue of Horizons

COLLEGES & UNIVERSITIES

Regulatory Assessment of Private Institution’s Financial Responsibility by Brent Stevens, CPA & Pat Miller, CPA

I n 1995, the Department of Education contracted with a third party to develop a set of financial responsibility and viability ratios that could be used on an annual basis to gauge the financial health of non-public colleges and universities that participate in the Title IV programs. The department wanted to utilize a formula for testing that would both minimize the risk of financially unhealthy institutions passing the test and financially healthy institutions failing the test.

After the review of financial statements for more than 400 institutions, the department and the third party contractor proposed the original version of its ratio analysis methodology in September 1996, and the final version was incorporated into Department of Education regulations in November 1997. The methodology used by the Department of Education focuses on three ratios to judge an institution’s financial health: 1. Primary Reserve Ratio: This ratio, defined as expendable net assets divided by total expenses, takes into account an

page 32 | horizons Spring 2013