Gearhart, Choate, Diamond to testify before Legislature

UPDATE II:
Arkansas Blog relates this tidbit from the hearing:

There was a five-minute break during which Gearhart, Schook, and Pederson huddled up with fellow well-dressed persons and seemed in good spirits. Much of what Choate and (especially) Diamond said painted top UA officials in an ugly light, but little if any of it can be substantiated as unethical or illegal.
One man in the group of UA officials said to Gearhart and Schook, “after they finish asking all these questions, what are they going to do? I mean, what can they do?”

“Nothing,” someone else replied, “they have no authority.”

That’s the attitude.

UPDATE:
Full audio from the committee meeting
Brad Choate: Says UA ‘snookered’ legislative auditors. John Diamond describes Gearhart anger and freeze-out of newspaper
6 tell their sides of UA unit woes

All the main players in the saga of the University of Arkansas Advancement Division budget trouble are scheduled to appear and testify before the Legislature’s Joint Performance Review Committee today at 1 pm (agenda, meeting documents, press coverage here, here, and here). The meeting will give Brad Choate, who says he was scapegoated by Chancellor Gearhart, the chance to finally present his side of the story. This is significant because Choate signed an agreement with the University barring him from discussing these matters in public, except to assist an official investigation. The Legislative Audit Committee, at its December meeting, declined to hear Choate’s testimony. Choate’s prepared statement (actually, two versions of it) still found its way to the press (for a full list of related documents, see previous post). He says that he was “thrown under the bus” by Gearhart, contending that he merely continued practices that he inherited from his predecessor (Gearhart). His statement might be dismissed as self-serving but does make some plausible points. It is hard to understand why the Legislative Audit (DLA) never interviewed him, or several other officials with intimate knowledge of the Division, during their investigation. DLA also failed to interview Chancellor Gearhart and the time period under investigation was restricted to the years 2009-2012, excluding Gearhart’s own tenure as head of Advancement. DLA adopted many of the conclusions blaming Choate from treasurer Schook’s report despite her own (and finance chief Pederson’s) implication in questionable practices.

Former budget director Joy Sharp will for the first time testify in public to her role in the fiasco. She was the only UA employee punished with a pay cut. Both Sharp and Choate ultimately lost their jobs but Choate kept his $350k salary.

Former PR chief John Diamond will also testify, for the second time. His allegations that financial documents were destroyed were confirmed by investigations and other witnesses. Nevertheless, assistant prosecuting attorney Dave Bercaw chose to find that no laws were broken. The statement by Gearhart, confirmed by several witnesses, to “get rid” of Advancement Division budget documents was redacted out of the prosecutor’s final report. The prosecutor states that the document in question did not fall under a Freedom of Information request of the Arkansas Democrat-Gazette (failure to comply with FOIA is actually a criminal violation). Diamond and the newspaper dispute that. Diamond’s frustration about this “significant error” is palpable – he blew the whistle on outrageous behavior (albeit only after he had been fired), only to find that investigators are going out of their way to not see anything.

Legislators have also been unhappy with omissions in the prosecutor’s report and have demanded further investigation of CFO Pederson. And the Pulaski County prosecutor is reviewing whether Gearhart committed perjury when he denied, at the September meeting, ever having ordered the destruction of documents.

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Documents of the Advancement Division crisis

The volume of documentation in the various investigations of financial irregularities in the University of Arkansas Advancement Division is getting out of hand. This post simply lists some (!) of the key documents that will help readers understand what is at issue. We’ll try to update this page when new material emerges.

Trouble for Chancellor Gearhart Continues

The saga of the University of Arkansas Advancement Division, the multi-million budget deficit, the legislative audit with its damning findings and the ensuing investigation by the prosecutor’s office isn’t over. The legislative audit committee on December 13 closed the audit case and shamefully voted to prevent further, potentially crucial testimony from being heard. And the prosecutor reported finding no evidence for criminal activity. But 14 state legislators are not satisfied with the report and demand a closer look at how the UA’s chief financial administrator Don Pederson handled the affair.

Additional bad news for Chancellor Gearhart: The Arkansas Democrat Gazette’s Lisa Hammersly pored over thousands of pages of notes from the prosecutor’s investigation and found that in fact, several UA officials questioned by the prosecutor confirmed troubling allegations against Gearhart:

“Chancellor G. David Gearhart told fundraising staff members at a Jan. 14 meeting to “get rid of” budget documents, two people at that meeting told Washington County prosecutors. The descriptions of that meeting from a current UA official and a recently retired one echo a statement made to legislators in September by former university spokesman John Diamond.”

The prosecutor’s job was to determine whether Gearhart broke the law. His answer was no. Readers may be surprised to hear that according to the prosecutor, it is perfectly legal for a University administrator to order the suppression of potentially embarrassing budget documents. The very serious question is also raised whether Gearhart committed perjury when he denied, under oath before the audit committee, having ordered documents destroyed. The prosecutor evaded that question by claiming lack of jurisdiction. In any case, testimony from several independent sources confirms Gearhart’s strong aversion to public scrutiny and accountability. In the eyes of many critics, such an attitude is incompatible with the spirit of the law and with Gearhart’s role as a public servant. In any case, the trouble for top UA admnistrators isn’t over. Stay tuned.

Links (with documents):

UA division’s deficit found free of crime
UA’s Pederson in glare of 14

2 quote Gearhart: ‘Get rid’ of papers

University harmed by resistance to accountability, transparency

The long awaited Investigative Report (pdf) by the Arkansas Division of Legislative Audit (DLA) was published Tuesday. Along with it, an Internal Audit Report (pdf) by University System auditors was also published. Both analyze the events and failures that led to the accumulated $4.2 million budget deficit in the University of Arkansas’ Advancement Division under then Vice Chancellor for Advancement Division (VCAD) Brad Choate. Academic Daylight has published an initial analysis. More analyses and background info can be found at Arkansas Blog, mostly written by Max Brantley (also here, here and here) and in the reporting of Arkansas Democrat Gazette journalists Tracie Dungan and Lisa Hammersly.

Self-inflicted PR desasters

The report constitutes the latest in a sequence of self-inflicted PR disasters for the University: first, a budget shortfall over several millions, accumulated due to sloppy accounting practices, was not detected for more than a year; then the University attempted to keep the details from the public, which prompted a FOIA (Freedom of Information Act) lawsuit by the state’s most powerful newspaper, the Arkansas Democrat-Gazette. The University’s position was legally untenable if not outright deceptive and officials soon had to disclose the records in question, as well as initiate audits both by the University System’s own internal audit division and the Legislative Audit, a step that had been contemplated earlier but wasn’t deemed necessary until public outcry made it inevitable. The newly appointed Division head Chris Wyrick went to work restructuring the unit with much fanfare but when the media wanted to know details, University officials again opted to stonewall, a tactic which was protested by the Media Relations director John Diamond and allegedly led to his firing. Diamond’s revelations about a hostile work environment and an institutional culture averse to transparency and accountability to the public inflicted further damage on the University’s reputation. Have officials, first and foremost Chancellor David Gearhart (who Diamond alleges issued a “no-talk-directive”) learned any lessons? Time will tell.

So, the audit report – initially expected around May – is finally here. The University’s reaction has been the claim that it just confirms what their own internal investigation (conducted by Treasurer Jean Schook and reproduced as appendix C in the DLA report) already revealed. But while the DLA confirmed the misconduct of VCAD Brad Choate and his budget manager Joy Sharp (both were terminated as of June 30, 2013 but interestingly, only Sharp suffered a salary cut from $91k to $68k while Choate’s $350k pay was continued), Treasurer Schook and Vice Chancellor for Finance and Administration (VCFA) Don Pederson are also held responsible for their lack of oversight and perhaps collusion (reported in the Democrat-Gazette after this blog). In this light the Chancellor’s decision to rely exclusively on an internal report prepared by Schook herself under Pederson’s supervision, rather than calling in external auditors right away, seems inexcusable. Ultimately the question remains unanswered how a deficit amounting to almost $2 million by June 2011 was only “discovered” by the VCFA a full year later.

Flawed budget procedures

The UA System audit has received less attention than the DLA report but its findings concerning shortcomings in the UA’s general budget process are highly relevant. This audit observes a general lack of financial documentation: “financial documentation was not sufficiently available to audit the decentralized budgeting controls within the Advancement Division in accordance with generally accepted auditing standards. (…) we never received any budget files for the Advancement Division.” (p. 4). Schook “stated there were very few accounting records and no organized historical records for the Advancement Division” since 2008 (p. 5). DLA auditors also “experienced difficulty obtaining Advancement financial records” and point out that the content of Sharp’s computer’s hard drive was not backed-up when she was reassigned.

UA System auditors found that “there were no written procedures governing the budget process for the University and that the University does not budget all available funds campus-wide. (…) “We noted Finance and Administration has not provided written instructions on how to effectively monitor the budgetary process to the colleges and divisions.” Further:

“We were informed by the Controller that Finance and Administration did not monitor college and division accounts in a deficit position until May of each year (eleven months into the fiscal year). (…) The Vice Chancellor for Finance and Administration also informed us that unappropriated reserves are not budgeted. Requests for funding from the reserves are made by the college or division’s management to the Vice Chancellor for Finance and Administration. The Vice Chancellor for Finance and Administration makes final decisions on fund transfers from unrestricted reserves. However, requests are approved in consultation with the Chancellor for any questionable items. We observed that there was no consistent documentation when requests were not approved.

The University’s current centralized budget process creates an audit risk environment (related to impact and likelihood) that adverse transactions may occur and not be detected on a timely basis.”

Will lessons be learned?

The University has promised to revise its budget procedures (and, true to form, created a new highly paid administrative position for the task). But it resists some of the recommendations of both audits. And clearly, these reforms, if they materialize, would not have been considered without the audit reports and the public pressure that made them necessary.

Again: will University officials learn the lessons? Do Gearhart, Pederson and Wyrick understand that their resistance to transparency and accountability has damaged the institution far more than the budget deficit? Do they understand that the ability and willingness to honestly assess and correct mistakes made – one’s own mistakes, not just those of one’s underlings – is a strength, not a weakness?

Highlights of the UA Legislative Audit Report

The long awaited investigative report (pdf) by the Arkansas Division of Legislative Audit (DLA) was published today. ReportHighlightsA 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. AdvancementBudget 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.