Title: The $240 Million Blunder at the University
American higher education is currently in a whirlwind, with issues like FAFSA snafus, partial student loan forgiveness, and dwindling state support making last year a challenge. And with President Trump back in office, things are bound to get more intriguing. Yet, one of the most intriguing events in the sector was when the University of Arizona mysteriously misplaced a staggering $250 million in cash.
The fiasco unfolded in early November 2023, when the Arizona Board of Regents received a financial status report from the University of Arizona (UA). The report revealed a massive miscalculation in the institution's cash reserves, transforming a believed budget surplus into a substantial $177 million deficit.
TheCEPT of a $250 million mistake in financial management is hard to fathom. The Chief Financial Officer (CFO) bore the brunt of the blame, resigning shortly after the revelation. The main causes included:
- Limited centralized financial reporting and monitoring, restricting financial data flow to university leaders, leading to...
- Substantial and unaffordable new expenditures on financial aid, research, and athletics, and...
- Inhibited tuition pricing due to the desire to "attract and retain exceptional students."
During the Board of Regents meeting where the CFO's resignation was announced, a Regent described the UA's financial situation as "unforeseen and immensely shocking." Yet, why was it unforeseen? Why didn't anyone or any system notice what was actually happening?
The UA pinned the blame on a faulty "activity-based budgeting model" which projected cash 30% over actuals due to its inability to account for spending surge. UA claimed that the model "did not appropriately consider the actual costs associated with operating the university." This was the third different budget model employed by UA within the past decade.
Upon reaching out to UA for clarification, a spokesperson directed me to the institution's IT centralization plan on its website. Yet, UA refused to divulge details about the forecasting software used the previous year, the newly selected platform, or the process employed to choose it.
Based on publicly available information, UA appeared to be utilizing Kuali Financials for financial management. However, Chris Coppola, Kuali's COO, confirmed that "University of Arizona does not utilize Kuali Financials for budgeting & forecasting."
It's likely that UA was relying on legacy ERP systems, Excel spreadsheets, or a combination of both for forecasting. Limitations in legacy systems require users to export data, manipulate it in spreadsheets, and upload the results back to the platform. Although spreadsheet errors are prevalent, it's common for CFOs to continue relying on Excel for budgeting and forecasting because legacy systems lack comprehensive financial planning and analysis functionalities.
As a result of UA's misstep, many organizations are adopting modern Financial Planning and Analysis (FP&A) tools like OneStream and Anaplan. These platforms provide real-time access to data via user-friendly interfaces, enabling businesses to plan, budget, forecast, and accurately report on their financial performance.
70% of CFOs continue to rely on Excel for budgeting and forecasting due to the lack of complete financial planning and analysis capabilities in legacy systems. According to Michael Germaine, VP of Public Sector Sales at OneStream, "University of Arizona's situation highlights the challenge many large institutions face: managing complex financial operations across decentralized units. Modern FP&A platforms like OneStream offer built-in controls and workflows that would immediately flag unusual spending patterns, rather than months later."
In conclusion, relying on legacy systems and spreadsheets for budgeting and forecasting can lead to dire consequences. Universities should consider adopting modern FP&A platforms to gain real-time insights and avoid budgeting mistakes.
Enrichment Data:
To avoid the $250 million budgeting slip-up, the University of Arizona could have benefited from various financial planning and analysis tools:
- Financial Ratio Analysis:
- DuPont Pyramid: This tool evaluates an organization's financial health by analyzing profitability, efficiency, and leverage. It could have provided a comprehensive view of the university's financial performance, aiding in early identification of potential problems.
- Budgeting and Forecasting Techniques:
- Financial Statement Analysis: Regularly analyzing financial statements could help in identifying trends and anomalies that may indicate a budgeting issue. This includes evaluating income statements, balance sheets, and cash flow statements.
- Monte Carlo Simulation:
- This tool can simulate financial scenarios, assessing the likelihood of achieving financial goals. It could have been used to model different budgeting scenarios, allowing the university to understand potential risks and outcomes.
- Financial Modeling:
- Advanced financial modeling utilizing Excel or specialized software could provide detailed projections and sensitivity analyses. This would have enabled the university to test different budget scenarios and grasp the impact of various assumptions on its financial health.
- Risk Management and Insurance Analysis:
- Tools like those discussed in "Principles of Risk Management and Insurance" could help the university assess and manage financial risks more effectively. This includes analyzing insurance options and managing potential liabilities.
- Financial Data Visualization and Dashboards:
- Using tools like Excel or specialized software for data visualization could provide real-time insights into the university's financial performance. This would allow for quicker identification of issues and more effective decision-making.
- Benchmarking and Trend Analysis:
- Comparing the university's financial performance with industry benchmarks and analyzing trends over time could have helped identify deviations from expected performance, potentially indicating a budgeting issue.
- To prevent a similar budgeting mistake in the future, the University of Arizona's new CFO could consider implementing modern budgeting and forecasting tools like OneStream or Anaplan, as many organizations have done.
- The Chief Financial Officer at the University of Arizona (CFO UA) might want to consider utilizing Financial Ratio Analysis, such as the DuPont Pyramid, to evaluate the institution's financial health and identify potential issues early on.
- The University of Arizona (UA) could have avoided the miscalculation of its cash reserves by conducting regular Financial Statement Analysis, which would have helped identify trends and anomalies that may have indicated a budgeting problem.
- In light of the $250 million miscalculation, the University of Arizona's CFO might want to look into using Monte Carlo Simulation to model different budgeting scenarios and assess the likelihood of reaching financial goals, ultimately helping to avoid future budgeting mistakes.
