MASSACHUSETTS INSTITUTE OF TECHNOLOGY REPORTS ON THE AUDIT OF FEDERAL FINANCIAL ASSISTANCE PROGRAMS IN ACCORDANCE WITH OMB CIRCULAR A-133 FOR THE YEAR ENDED JUNE 30, 2014 MASSACHUSETTS INSTITUTE OF TECHNOLOGY Reports on the Audit of Federal Financial Assistance Programs in Accordance with OMB Circular A-133 For the Year Ended June 30, 2014 Table of Contents I. Financial Reports Independent Auditor's Report ...…………………..…………………..……………… 2 Basic Financial Statements of the Institute for the Year Ended June 30, 2014………. 4 II. Schedule of Expenditures of Federal Awards Schedule of Expenditures of Federal Awards for the Year Ended June 30, 2014 …... 38 Notes to the Schedule of Expenditures of Federal Awards………………………….. 40 Appendices to the Schedule of Expenditures of Federal Awards.………………….. 42 III. Reports on Internal Control and Compliance and Summary of Auditor's Results Independent Auditor's Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards …………………… 200 Independent Auditor's Report on Compliance with Requirements that could have a Direct and Material Effect on each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133..........… 202 Schedule of Findings and Questioned Costs …………………………………………. 204 Summary Schedule of Prior Audit Findings................................................................... 208 Management Response to Schedule of Findings and Questioned Costs……………… 209 SECTION I FINANCIAL REPORTS Independent Auditor’s Report To the Risk and Audit Committee of the Massachusetts Institute of Technology Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of the Massachusetts Institute of Technology (the “Institute”) and its subsidiaries, which comprise the consolidated statement of financial position as of June 30, 2014, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Massachusetts Institute of Technology and its subsidiaries as of June 30, 2014, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us 2 Other Matters We have previously audited the Massachusetts Institute of Technology’s 2013 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated September 13, 2013. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30,2013 is consistent, in all material respects, with the audited financial statements from which it has been derived. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards for the year ended June 30, 2014 is presented for purposes of additional analysis as required by Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 12, 2014 on our consideration of the Massachusetts Institute of Technology’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Massachusetts Institute of Technology’s internal control over financial reporting and compliance. September 12, 2014 3 Massachusetts Institute of Technology Statements of Financial Position at June 30, 2014 and 2013 (in thousands of dollars) 2014 2013 Assets Cash ................................................................... $ 297,759 $ 299,913 Accounts receivable, net .................................................... 195,544 168,932 Pledges receivable, net, at fair value ............................................ 490,336 404,594 Contracts in progress, principally US Government ................................ 65,326 67,999 Deferred charges, inventories, and other assets ................................... 120,811 107,891 Student notes receivable, net ................................................. 48,169 49,484 Investments, at fair value .................................................... 16,228,756 13,830,100 Noncontrolling interests .................................................... 287,825 274,663 Land, buildings, and equipment (at cost of $3,881,205 for June 2014; $3,650,856 for June 2013), net of accumulated depreciation ................................... 2,624,271 2,516,264 Total assets . $ 20,358,797 $ 17,719,840 Liabilities and Net Assets Liabilities: Accounts payable, accruals, and other liabilities ................................ 411,959 384,437 Liabilities due under life income fund agreements, at fair value .................... 103,076 95,259 Deferred revenue and other credits.......................................... 133,288 138,017 Advance payments ...................................................... 392,214 396,831 Borrowings............................................................ 2,918,901 2,428,215 Government advances for student loans ...................................... 35,037 34,563 Accrued benefit liabilities ................................................. 48,830 109,644 Total liabilities . 4,043,305 3,586,966 Net Assets: Unrestricted net assets controlled by the Institute............................... 6,467,131 5,500,955 Unrestricted net assets attributable to noncontrolling interests ..................... 287,825 274,663 Total unrestricted net assets ............................................... 6,754,956 5,775,618 Temporarily restricted net assets ...........................................