Private higher education institutions are required to comply with evolving financial reporting standards, including related party disclosures. Understanding these requirements is essential for ensuring compliance, maintaining transparency, and mitigating financial risks. This article explores the key aspects of related party disclosures, their implications, and best practices for accurate and efficient reporting.
1. Background on Related Party Disclosures
The U.S. Department of Education (ED) has reinforced disclosure requirements under 34 C.F.R. 668.23(d), expanding reporting requirements that go beyond Generally Accepted Accounting Principles (GAAP). Institutions must identify and report all related party transactions, regardless of materiality, in the audited financial statements.
Key Requirements:
- Disclosure must include name, location, description, and value of transactions with related parties.
- Even in the absence of related party transactions, a footnote stating this must be included in financial statements.
- Related parties include affiliates and key members of management/governance and their immediate family members.
2. Compliance Challenges and Advocacy Efforts
Higher education institutions face challenges in complying with ED’s requirements, particularly due to increased reporting burdens and privacy concerns. Organizations such as NACUBO and AICPA have advocated for regulatory changes, arguing that:
- The requirements exceed GAAP standards, creating an undue burden on institutions.
- Disclosure of non-material transactions is unnecessary and complicates financial reporting.
- Alternative reporting mechanisms, such as IRS Form 990, already capture related party transactions.
3. Best Practices for Compliance
To meet ED’s regulatory expectations while protecting institutional interests, experts recommend:
- Issuing two sets of financial statements: One for general publication (GAAP-compliant) and one with additional disclosures for ED.
- Defining “management” carefully to avoid unnecessary inclusions in disclosure reports.
- Reviewing financial records and governance structures to ensure completeness and accuracy in reporting.
By implementing these strategies, institutions can balance compliance with operational efficiency while maintaining financial transparency.
If you need further guidance or have any questions on this topic, please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
