Endowment Compliance Audits

Institutions which raise funds for endowments need to be mindful of complying with the donor’s intentions long after the gift was made, and often after the fundraiser who closed the gift is gone from the institution. Although agreeing to a donor’s intentions seems to be a straightforward proposition when dealing with one donor and one gift, years later, it may prove to be more challenging, particularly as the number of distinct funds multiplies, each with unique requirements.

Eventually, the organization may find itself in need of conducting an endowment compliance audit.

Reasons for this are many. The most common motivator results from donor or staff complaints.

Typical issues include: an excessive unspent balance in the spending account, funds not used for the purpose they were intended, or the fund is so old that documentation is inadequate or missing entirely. 

There are several steps that need to be taken before conducting a compliance audit.

First, there needs to be a specific policy defining standards for compliance. Although using funds for a purpose other than for what they were intended is clearly a problem, accumulation of dollars in the spending account is muddier.

Policy standards should cover the following:

  1. Template for documentation covering pertinent issues
  2. Signed documentation indicating donor intent
  3. Correct use of funds
  4. Reporting to donor
  5. Spending account balance (neither excessive nor negative)

For one institution, an excessive balance in the spending account was defined as three times the average annual award. More than occasionally, the balance was intentionally retained, such as when a department was recruiting a faculty member and wanted to accumulate sufficient funding in the chair to cover relocation expenses. However, when this is known, a time-limited exception to the policy can be granted.

Secondly, there needs to be a communication process to educate and involve the many stakeholders in the process. Some universities establish a cross-campus committee to explain the reasons behind the audit, and what they hope to accomplish through such an effort.

Thirdly, it is important to establish an action plan once the findings are known, and ensure accountability. In other words, this needs to be a part of someone’s performance appraisal. This person has the responsibility for ensuring that all standards are met, and that any indicated remediation is completed.

At one institution, we discovered that there was more than $2 million in un-awarded scholarship funds. Knowing this, it made it difficult to understand why there was a continued push to raise scholarship dollars when there were many funds that were not used.

The compliance audit revealed a number of issues. In some cases, scholarship awarding was delegated by the deans to chairs, then to committees, who delegated to administrative assistants, who did they thought was best. There was no oversight to confirm that funds were awarded, if the student who was named to receive the scholarship ever came to the university, etc.

In other cases, it was discovered that specific criteria was too restrictive or burdensome, i.e., requiring student recipients to double major in Japanese and Business, as well as spend each summer in Japan without providing funding for travel and living expenses.

The ultimate lesson from conducting regular compliance audits of endowed funds is that it is as important to spend the funds, and spend them correctly, as it is to raise them.