NCInnovation, the nonprofit aiming to aid in the commercialization of public university research and financed with $500 million in taxpayer funds, is the subject of an audit investigation by the North Carolina Office of State Auditor (OSA). The OSA investigation and its scope were discussed Monday by NCI board members during a special meeting of the Audit Committee.
According to Linda Hall, executive vice president and chief financial officer of NCI, the state audit is focused on three core areas: private funding commitments and how they were accounted for, whether grant awards are awarded in accordance with state law and NCI policies and procedures, and an evaluation of programs and grants selected for funding.
Earlier this year Carolina Journal reported an NCI board member had formally requested an investigation by OSA. That audit request focused on, among other specific items, the accounting treatment of privately pledged donations. As part of the budget bill appropriating $500 million to NCI, the entity was required to raise $25 million in private capital for operations.
“We’ve been assigned a lead auditor and a manager,” said Hall during the meeting. “NCI and OSA staff have been in communication, to talk about timing and to kickoff the audit there is an entrance conference, which will be an hour meeting that will take place with the OSA.”
Investigators from OSA are due in NCI offices this Friday to begin preliminary meetings with the NCI executives. A final report and audited financial statements would be due to OSA investigators on Oct. 31.
The revelation of a state audit investigation comes less than a month after NCI was determined to be a “component unit of the state” by the Office of the State Controller (OSC). The designation essentially means NCI’s books are of material interest to the State in terms of budget accounting. OSC, which served as the custodian of both $250 million tranches of taxpayer funds appropriated to NCI by the General Assembly, has already distributed the second infusion of taxpayer funds to NCI’s bank accounts as of early August.
According to Hall, NCI, as a state component, would be required to provide the state with comprehensive financial information to incorporate within the OSC’s annual audit.
More audits?
The investigators from OSA won’t be alone, however; NCI is having its own audit conducted via their retained accounting firm, BDO.
“An audit is meant to obtain reasonable assurance that the financial statements are free of material misstatement,” stated the BDO representative for committee members. “Obviously we do not test 100 percent of your transactions so it does not mean, even if we give an unmodified opinion, it does not mean it’s absolute assurance.”
The accountants explained that in the course of the internal audit, they will be looking for deficiencies in internal controls, noting such findings for management and the relevant committees.
“[W]e take that understanding of internal control, not for the purpose of expressing an opinion on the effectiveness of your controls, really to determine how much we’re going to rely on controls as a part of our audit evidence given that you have a small shop and given that controls are still being control processes are still being refined.”
Soon after NCI’s taxpayer-funded windfall was approved by lawmakers, questions arose about the entity’s bookkeeping methods. Concerns were raised by select board members about the classification of lobbying fees, and whether or not the proper filings were selected in reporting to the Internal Revenue Service (IRS).
Differing interpretation by board members of the Internal Revenue Code’s definition of lobbying led to an adjustment of how they report information the IRS. After failing to do so for fiscal year 2023, NCI will now make specific elections to report lobbying fees because it might be at risk of an IRS audit if lobbying is found to have constituted a substantial part of NCInnovation’s activities under a “facts and circumstances” test.
IOUS
Much of Monday’s committee meeting centered around plans to comply with the OSA audit. In that vein, committee members also discussed the accounting treatment of private donation pledges and whether or not relevant records will be classified appropriately for an audit. Specifically, there was question of whether some listed pledge dates in internal reports, representing millions of privately pledged dollars, match material pledge dates as required to be reported in financial statements, or if “in-kind” donations should be counted toward the total of private funds raised.
“Beginning in December, our review of [RTI International] pledge, commitment notes $500,000, and it also notes in cash receivable, $500,000 of their pledge could have been in kind,” said director Art Pope during Monday’s Audit Committee meeting. “And in the discussions we had in Feb. 2024, after [the outside accounting firm] had done reviews, they included all of the RTI pledge as if it were a cash pledge.”
Settling that distinction may prove important for NCI to satisfy auditors and assure full compliance with the enabling legislation that stipulates a specific amount of privately raised capital required to receive taxpayer funds.
BDO accountants acknowledged that amendments may be necessary in order to ensure details like pledge dates and distinctions between cash and in-kind contributions are accounted for properly in submissions to the OSA.
“This report may need to be slightly revised,” admitted the outside accountant. “I mean, if we were presenting a financial statement, and something was an in-kind gift, that certainly would be delineated separately if it were material to the statements, for sure.”
A full NCI board meeting is scheduled for Wednesday, Aug. 14.