The U.S. Department of Education’s (ED) Dear Colleague Letter issued May 16, 2024 (Implementation of Regulations Related to Financial Responsibility, Administrative Capability, Certification Procedures, and Ability to Benefit (ATB) | Knowledge Center), reinforces the proposed requirement by ED to align postsecondary institutions’ fiscal year end (FYE) with the institution’s tax year end (TYE) as outlined in the Code of Federal Regulations (CFR). Specifically, institutions must comply with the Financial Responsibility detailed in CFR §668.23.
Why is ED Requiring the Change?
In the ‘Discussion’ section of the Final Rule, ED indicated they are requiring institutions to match its fiscal year to the tax year to:
- Conduct consistent oversight
- Prevent institutions from manipulating required timelines (example given is when submitting two years of audited financial statements in a change-in-ownership)
- Relieve Department from burden of having to determination on a case-by-case basis if the use of different fiscal years for Departmental and IRS purposes is done for manipulative purposes
Why Do Some Institutions Have Different Fiscal and Tax Year Ends?
The flexibility currently afforded to institutions in selecting their fiscal year end is crucial for effective financial management. Many schools align their FYE with their academic year, facilitating smoother budgeting and planning processes. Changing the FYE to December 31 would disrupt these well-established financial cycles, necessitating significant adjustments in accounting practices and financial planning. In many cases, based on the type of entity, institutions are required to have December 31 as their TYE.
Why the Change is Unnecessary to Improve Consistent Oversight
Institutions are required to submit audited annual financial statements to ED. The periods under audit are consecutive and consistent, regardless of an institution’s TYE. Any potential manipulation of the information being provided to ED for oversight only comes into play when an institution changes its year end.
Why Create Administrative and Capacity Burdens for Institutions and ED Caused by Stub Audits?
The reality is that most institutions that have different year ends will be changing their FYE to agree with their TYE. All of these transitions will either require stub period audits or overlapping audit periods as part of that transition. This creates additional burdens on institutions in terms of workload and audit fees. Institutions will have the additional burden of overhauling accounting systems and retraining staff. Institutions who have debt could be required to negotiate the change in their fiscal year end with the lenders. The requirement also creates additional work for an already overwhelmed ED via the stub period audits that must be reviewed.
Increase to Regulatory Bottlenecks
In many instances, institutions have elected June 30 as their FYE to follow the financial aid award year, while still using December 31 as their TYE. Tax law requires several types of entities to use December 31 as their TYE unless certain conditions are met. ED’s requirements will most likely lead to nearly all institutions who have different FYE and TYE to convert their FYE to December 31. There is already a shortage of qualified auditors with the knowledge and experience to audit institutions in accordance with ED’s requirements. Requiring many more institutions to transition to a December 31 FYE will magnify this issue and overwhelm the industry in 2026. Audits for institutions who already have December 31 FYE and any institutions converting to a December 31 FYE will all need to be submitted by June 30, 2026. In addition, turnaround time for ED to review audit submissions and issue Final Audit Determination Letters is extended each year. The volume of audits being submitted in the second quarter of each year will exacerbate this trend.
Conclusion
While the intent behind the proposal is to streamline regulatory oversight and enhance financial transparency, the current system already ensures sufficient oversight through rigorous reporting standards. The potential benefits of aligning the FYE with the tax year end are more than negated by the significant disruptions and costs. Maintaining the flexibility in choosing fiscal year ends supports effective financial management and minimizes administrative burdens, allowing institutions to focus on their primary mission of providing high-quality education.
For further details, you can refer to the Federal Student Aid Handbook and 34 CFR 668.171.
