Highlights of the UA Legislative Audit Report

The long awaited investigative report (pdf) by the Arkansas Division of Legislative Audit (DLA) was published today. A detailed analysis is to follow. Some highlights from the report (verbatim taken from page 1):

• “Review of Advancement financial records revealed deficit cash balances of $2.14 million and $4.10 million at June 30, 2011 and 2012, respectively.
• The Treasurer’s Office posted Advancement accounts receivables of $2.1 million and $2.5 million at June 30, 2011 and 2012, respectively, which partially obscured the deficits in the financial statements.
• The Vice Chancellor for Advancement Division [Brad Choate] did not exercise proper fiscal oversight and did not comply with University policies and procedures.
• Advancement revenues remained relatively constant over the four-year period reviewed, while expenditures increased significantly from $7.94 million to $13.23 million, resulting in an overall decline in the combined Advancement and Foundation cash balance.”

“Incorrect journal entries”

The excerpts make clear that the audit confirmed sloppiness and lack of oversight by former Vice Chancellor (VCAD) Brad Choate and his budget director Joy Sharp, but also shed light on the responsibility of the Treasurer (Jean Schook) and the Vice Chancellor for Finance and Administration (VCFA), Don Pederson. The report lists “incorrect journal entries”, “noncompliance with generally accepted accounting principles and University policies and procedures”, “deficiencies in internal controls”, and “lack of oversight by the VCAD” (p. 4) attributable to the former. But the auditors also fault Pederson for not disclosing a troubling internal report to DLA auditors in 2012 (p. 4). There were also yearly discretionary fund “subsidies” authorized by VCFA (p. 6). The Treasurer’s Office approved a “proxy arrangement” between Joy Sharp and her sister, “which conflicts with sound accounting practices” (p. 9). Most disturbingly, the auditors identify “Inaccuracies in Advancement financial statements prepared by the Treasurer’s Office relating to accounts receivable” (p. 7, 10). By June 2011, the division had a cash deficit of close to $2 million, which the Treasurer evened out by posting $2.1 million “accounts receivable”, which was subsequently reversed. “The Treasurer indicated to DLA that this is the University’s typical practice to eliminate deficits on the financial statements at June 30.” (p. 11) University officials dispute that this is a “typical practice” (their response is included as appendix A in the report) but clearly, somebody in Finance must have been aware of the deficit at this point – they were trying to make it disappear. Yet allegedly it only came to light a full year later.

Unanswered questions

The report raises other questions which remain unanswered. As quoted above, the DLA says that “revenues remained relatively constant” while “expenditures increased significantly” by 67%. That is actually not consistent with the budget numbers presented in Exhibit I.

A significant portion of the Division’s revenues come from the University Foundation, “based on a percentage of a three-year rolling average of investment earnings on unrestricted endowment donations” (Exhibit I, note 3), and the figures given fluctuate between $2.1 and $6.3 million (“relatively constant”?) The report doesn’t address these fluctuations. Generally speaking, Foundation finances are off-limits even for the Legislative Audit and remain a grey area in the report. Crucially, a significant portion of Advancement operations, on average $2.6 million per year, representing more than 20% of total expenditures, was financed by “Advancement Foundation direct payments to vendors”. Not the remotest hint can be found about the identity of these “vendors” and the services in question! These direct payments were approved by the VCFA or his assistant and were “neither budgeted nor accounted for by Advancement”. The authorization forms and supporting documentation “were not maintained by the University”. As a result of this practice of excluding Foundation funding from budgeting, “Advancement’s financial position is not complete and transparent” (p. 9). This seems to go to the heart of the issue, namely the systematic secrecy surrounding Foundation funding.

Missing data at the heart of the affair

The DLA has tried its best to provide a complete budget overview for the fiscal years 2009-2012 (it is unfortunate that 2013 was not included in the audit) but as revealed in footnote 3 to Exhibit I, data are still missing. For 2009, the amount for direct payments (which, as mentioned above, were not accounted for) was unavailable, resulting in both revenues and expenditures being understated for that year – possibly by millions. Given the assertion that these payments were “neither budgeted nor accounted for”, the question arises (but isn’t answered) to what extent we can rely on these figures – if at all. Clearly, the 2009 budget is understated. It is a mystery why then the auditors chose 2009 as baseline for their budget trend (Exhibit II), which they misleadingly say increased 67% over three years. When taking fiscal 2010 as baseline, the first year with complete data (but are they complete? How can we ever know?) and also the last with a balanced budget, the increase was only 22%. It seems that the authors of the report decided to settle on a story that was easy to tell (look at that – 67% increase!) but hides some of the complexities of what really happened. The report observes that personnel costs increased by almost $2 million, or 29%, over three years (p. 10), which was a significant driver for the deficits in fiscal 2011 and 2012. Still, personnel costs account for only 66% of total expenditures. Little if anything can be learned from the report about the remaining $4.5 million, and least of all about the $2.7 million in “direct payments”. Why shouldn’t the public know how the Advancement Division “advances” the University, what they are spending 20% of their budget on? Is there anything improper to hide? No? Then why is it being hidden? Go to the University’s BudgetUA web site, which is supposed to promote financial transparency, and you’ll find only salary information – nothing about operating budgets and other stuff. Why?

This lack of financial transparency is not acceptable for a public University. But it is how the University leadership likes it.