UA finance chief cleared in criminal investigation

The Washington County District Attorney has cleared University of Arkansas finance chief Don Pederson of criminal wrongdoing in connection with financial irregularities in the Advancement Division (find all related documents here). An attempted cover-up was not illegal. Was it ethical?

At issue in this particular investigation was the fact that the UA leadership had not disclosed the budget trouble to state auditors when it was discovered in 2012. The state audit conducted in 2013 states (p. 12):

“On October 25, 2012, during the exit conference for the University’s financial audit report for the fiscal year ended June 30, 2012, neither the Treasurer [Jean Schook] nor the Vice Chancellor for Finance and Administration [Don Pederson] disclosed to DLA staff information about the Treasurer’s report on Advancement issued six days earlier.”

The auditors concluded that the information about financial irregularities and the potential of fraud should have been disclosed to auditors, as (one would think) common sense would also dictate. But, it turns out, it wasn’t required by law, and the statement that Pederson did make to auditors in what is known as a Management Representation Letter – in which no mention of financial irregularities was made – was not technically false. Pederson’s base salary is currently $295,000, up from $250k in 2010. Treasurer Schook’s salary is $164,450, up from $118k in 2010.

Report by Arkansas Democrat-Gazette, April 30, 2014
University of Arkansas news release, April 30, 2014
Comment by Arkansas Blog, May 1, 2014

The new (and presumably final) investigation of the Washington County DA was prompted by of a group of state representatives, led by Nate Bell (best known for his far-right politics), who were surprised to see that the DA’s initial investigation had not addressed this particular matter. The result was predictable. The attempted cover-up was certainly unethical as well as poor judgment but apparently not technically illegal. As Arkansas Times’ Max Brantley put it:

“The University of Arkansas shaded, obscured and hid the truth about a huge deficit  in its advancement division. It got caught. Underlings took the fall. Dishonest behavior is not necessarily a  crime and sometimes it has no consequences, outside of public shaming.”

Update: Pederson will retire June 30, 2014 (announcement).

Speaking of dishonest behavior, it is interesting to note that the University of Arkansas Board of Trustees recently enacted a Code of Ethical Conduct (along with new policies on accounting, budgeting, and transparency). The new code states:

“Employees shall conduct themselves in a manner that strengthens the public’s trust and confidence by adhering to the following principles:

  • conduct that is beyond reproach and integrity of the highest caliber;
  • honesty and fairness; and
  • accountability, transparency and commitment to compliance”

Revolutionary stuff! In addition to admonishing everybody to follow all applicable laws (seriously!), the code states:

“Employees involved in the preparation of reports and documents (and information included therein) filed with or submitted to federal, state, and local authorities by the University are required to make disclosures that are full, fair, accurate, timely, and understandable. They may not knowingly conceal or falsify information, misrepresent material facts, or omit material facts. These same obligations also apply to other public communications made by the University.”

The code requires all employees to report suspected violations but there is no specific requirement to actually follow up and investigate such reports. The Academic Daylight blog has reported a number of dubious practices, including the under-reporting of the compensation of certain top administrators, dubious accounting practices in the UA Athletic Department, and violations of internal procedures in the approval of extra compensation to UA faculty. We also found that required workforce audits had not been conducted and that certain reports required by law to be posted online were not.

In none of these issues have corrections been made.

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Doing well: Gearhart’s inner circle

Amid budget trouble, money was found for hefty pay raises to some UA top administrators

Arkansas Blog has published information compiled by John Diamond concerning some remarkable pay raises recently awarded to administrators connected to the University of Arkansas’ troubled Advancement Division. Recall that the Advancement Division is still running a deficit attributed to uncontrolled payroll increases. Some of the raises are due to promotions which Diamond contends were granted without following proper procedures. A University spokesman has denied that allegation, claiming that these positions had been posted and their pay reviewed. We haven’t seen the records proving or disproving this but point out that workforce analyses, salary and raise audits required under UA policy apparently have not been conducted in recent years. We have also reported on some remarkable extra compensation awards that were not pre-approved as required by policy.

Room for raises at the top

Associate Vice Chancellor for Development Mark Power received a whopping 32% raise, to $194,000. He took over in July 2013 for Bruce Pontious, who left in September. Power’s salary has gone up 57% in four years (he already was listed as Associate Vice Chancellor back in 2010). The salary comparison is based on the Administrator’s Compensation Survey (see last post for details). Chris Wyrick, who was promoted head of Advancement in 2013, now makes twice what he made in 2010. To be fair, he still makes less than his predecessor Brad Choate. It is noteworthy however that he already got a raise after only three months on the job, to $287,000. Shortly thereafter, Wyrick had to publicly explain offensive remarks he was reported having made.

Judy Schwab, another Associate Vice Chancellor in Chancellor Gearhart’s inner circle, got a 10% raise to $165,000, an increase of 26% over four years. Even more remarkable is a 15% raise for treasurer Jean Schook. Schook pleased Gearhart by assigning all blame for the Advancement Division trouble to Brad Choate and Joy Sharp, but found her own financial maneuvers severely criticized by the Legislative Audit.

Scott Varady, working as General Counsel for the System Office, was even awarded two raises in just a few months. He now makes $200,000, 32% more than in 2013. General Counsel has played a significant if somewhat covert role in the whole crisis. For example, they provided the fake justification for withholding records from journalists’ FOIA requests. When the prosecutor’s office investigated possible FOIA violations by UA administrators, the UA attorneys interviewed critical witnesses in presence of Gearhart’s private attorney. The conduct of these interviews on September 24, 2013 was initially revealed by John Diamond in legislative testimony. The UA has confirmed that the interviews have taken place but contends that no related records, notes, transcripts, or emails exist, and no comment has been made as to the purpose. Why did Varady’s taxpayer-funded salary make a sudden jump last December?

Denise Reynolds, named head of budget and HR for Advancement in 2013, received a 3% raise in July 2013 and then an additional 20% in October, retroactive to July. She now makes $92,500, 46% more than only two years ago. She was a witness in the Washington County prosecutor’s investigation of possible FOIA violations. The Democrat-Gazette reported on December 19, 2013 that top administrators Bruce Pontious (now retired) and Graham Stewart (leaving end of January for Vanderbilt) testified that Gearhart told them at a meeting on January 14, 2013 to “get rid” of budget documents, confirming the account given earlier by John Diamond (fired). “Soon after that September meeting with legislators, Reynolds supported Gearhart’s version of what happened. She told the Arkansas Democrat-Gazette that the Chancellor never told her to destroy documents or stop creating them.” The “get rid” quote was included in a draft version of the prosecutor’s report but was edited out of the final version. The Pulaski County prosecutor is currently investigating whether Gearhart lied under oath about what happened at this meeting.

Pay raises for selected University of Arkansas top administrators, 2010-2014 (table was revised to better reflect benefits)

Pay raises for selected University of Arkansas top administrators, 2010-2014 (table was revised to better reflect benefits)

A more comprehensive compilation of pay raises for top administrators (xls format) shows that a number of Vice Chancellors and Vice Provosts have done very well recently, with rates of increase better, and sometimes much better, than 20% over four years being the norm. Most faculty members and other UA employees were lucky to get any raises at all.

Diamond’s Damning Testimony

John Diamond’s testimony at yesterday’s legislative hearing (find all related documents here) was even more damning than what he revealed back in September. He offered a number of clear-cut violations of the state Freedom of Information Act, and shared emails documenting the condescending attitude of top University officials toward the press. Under Arkansas law, failure to comply with the Freedom of Information Act is a criminal violation. Among the cases cited by Diamond:

  • “There was a large budget notebook for FY14 that was kept in Denise Reynolds/ office. (…) That notebook was clearly responsive to the FOIa but he [Chris Wyrick] did not provide it.”
  • “Chris [Wyrick] himself maintained a large notebook of materials related to his reorganization plan. (…) That information was responsive to the FOIA but was not provided.”
  • There were four copies of a video of the June 20 staff meeting Chris had had us make when he announced the reorganization plans. Under the law, videos are lectronic documents – the kind sought in the July 22 FOIA. Those videos were not provided in response to the FOIA.”
  • “There were countless email exchanges dealing with these topics between and among individuals, including the Chancellor, Chris, and Don Pederson, that were specifically asked for by name or title. But none of these was provided as responsive to the July 22 FOIA. I gave the Washington County prosecutor’s office over one hundred pages of potentially responsive documents related just to the July 22 FOIA alone. In Arkansas, knowingly and negligently violating a FOIA request is a criminal offense.”

The emails provided by Diamond give insight into the attitude and mindset of officials like Gearhart and Pederson with respect to dealing with inquiries and demands for transparency and accountability from the public. Below is a January 23, 2013 email by CFO Pederson announcing that he would not respond to inquiries and FOIA requests from the Arkansas Democrat-Gazette any more. Nowhere has it been expressed so clearly that University officials regard compliance with Freedom of Information as a matter of their own discretion rather than an obligation of the law. Pederson implies that this had been cleared with Chancellor Gearhart, Provost Gaber, President Bobbitt, and unnamed legal counsel. Diamond further reports that the next day, Gearhart told him “he had been getting a lot of pressure from President Bobbitt and trustees to stop me from answering reporters’ questions on the Advancement situation.” Gearhart then allegedly yelled: “Don Bobbitt and the board told me to shut John Diamond up!”

Pederson email January 23, 2013

Pederson email January 23, 2013

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.

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

Legislative Audit Committee to discuss UA file shredding

Another chapter in the saga of the University of Arkansas Advancement Division troubles will be written next Friday, December 13. It will be the main topic at the next Legislative Audit Committee meeting. At the September meeting, the committee voted to reopen the audit and prosecutors were asked to look into allegations of intentional destruction of relevant files, as well as into some financial irregularities.

Meanwhile, an extensive investigative report by Lisa Hammersly in the Arkansas Democrat Gazette raised additional serious issues about file shredding and will be sure to be considered by auditors and legislators. Here’s a flavor of what UA officials seem to regard as standard record-keeping practice:

“The chief financial officer for the University of Arkansas at Fayetteville’s fundraising division, Denise Reynolds, directed staff members to destroy hundreds of pounds of documents this year, according to emails and interviews obtained by the Arkansas Democrat-Gazette. The document-disposal project at three storage sites took place as state auditors investigated millions of dollars in overspending by the fundraising division, officially called the Division of University Advancement. (…) University emails obtained by the Democrat-Gazette and interviews with Advancement Division officials show at least one instance in which Reynolds approved the destruction of “payment authorization” records dated as recently as fiscal 2011. (…) The email and phone call took place within a week after Gearhart called in auditors from the Legislative Audit Division and the University of Arkansas System to investigate the division’s overspending. Reynolds’ response would have allowed for the destruction of payment authorization forms for fiscal 2011 and earlier. Since auditors released their report in September, university officials have said they aren’t responsible for retaining copies of payment authorization forms, which they say are available to auditors through the UA Foundation.”

This is consistent with allegations made by former communications director John Diamond:

“Testifying under oath, Diamond told the committee that Gearhart became angry during a Jan. 14 meeting of Advancement Division leaders and ordered Reynolds, Diamond and others in the room to “get rid of” budget-related records. Then in February, Diamond said, a directive was given to certain division employees to “destroy boxes of records as part of a housekeeping matter.” Diamond said he believed that’s one reason auditors couldn’t find all of the budget records they wanted.” (…)
Auditors’ Sept. 10 report cited two instances of difficulty obtaining records related to transactions with the UA Foundation:
Payment authorization forms. The report found 765 “payment authorization” forms for fiscal 2012. But when auditors looked back to fiscal 2011 and 2010, they located “only 20.”
“Worksheets and files detailing all foundation reimbursement requests” and budget reports prepared by former advancement budget officer Sharp. (…) The UA Foundation “payment authorization form” shows which university employee requested money from the foundation, how much, its purpose and who approved the transaction, as well as other information. After former UA spokesman Diamond told legislators at their Sept. 13 hearing that Advancement Division staff members were told to get rid of boxes of records, he said employees specifically asked about “payment authorizations.” They were told to discard those from fiscal 2011 and earlier, he said. “So they went to the shredder,” Diamond said. In response to Diamond’s allegations, university treasurer Schook told the joint auditing committee: “The [payment authorization] document is owned by the foundation.””

Notice what is going on here. The University leadership stubbornly claims that any financial transactions involving the UA Foundation are not of public record. The financial statements that the public gets to see are grotesquely incomplete (see also “The UA’s Athletic Budget”). Foundation records are shielded from the public eye, a practice decried by Freedom of Information experts. In the above case (of which many questions remain open), it appears that foundation records kept by the University were deliberately shredded to prevent them from becoming public (records stored by the UA are subject to FOIA – Schook’s claim that they are “owned by the foundation” is absurd). It is hard to believe that the people responsible weren’t aware how suspicious this shredding action during an ongoing audit investigation must look, and that it might even be illegal. That they went ahead anyway shows to what extraordinary length the UA leadership is willing to go to keep public scrutiny away from foundation finances. And that may be the real scandal behind the scandal.

Worth noting also is a new report showing that the Advancement Division is still in the red:

“The University of Arkansas at Fayetteville will transfer $2 million from its publicly funded reserves to offset overspending in its Advancement Division this fiscal year, said Mark Rushing, a UA spokesman.
A total of $6 million from reserves has been committed to the Advancement Division since a multimillion-dollar deficit was discovered in the division in July 2012. A $4 million transfer was made from reserves in January.”

Chancellor Gearhart has said that had he known about the division’s additional funding needs, he would have provided the funding. If it was so easy, one wonders, why hasn’t he? Why does the division keep drawing on UA reserves?

Other relevant links:
When the University of Arkansas speaks, people listen — carefully
UA evasive on emails with a columnist
University of Arkansas gang can’t shoot straight

Questions about Extra Compensation at UofA

UPDATE: Some readers have confused extra compensation with outside employment. This is not related to outside employment. It’s the University paying some faculty extra salaries, entirely from public money.

A handful of UofA faculty members receive substantial extra compensation awards for extra service or teaching duties. Forty-three individuals received extra compensation totaling $10,000 or more in calendar year 2012, according to data (pdf) provided by the University of Arkansas under the Freedom of Information Act. In total, about $1.6 million were awarded in extra compensation to some 350 individuals, $640,700 of which went to just 43 individuals.

Largest cumulative extra compensation awards at University of Arkansas, 2012

Largest cumulative extra compensation awards at University of Arkansas, 2012

Matthew Waller, Supply Chain Management Department Chair in the Walton College of Business, received a total $38,875.00 in extra compensation for service duties. Steve Boss, Geosciences professor, received the largest single extra compensation award of $23,302.50, also for service.

The little known practice of awarding extra compensation to some faculty members raises a number of concerns. According to University policy (pdf), “Approval should be obtained prior to the start of the activity”. A review of approval forms (pdf) for large extra comp awards shows that this was not the case. Dr. Boss was awarded three months’ worth of his regular pay for a service activity started 7/1/11 and ended 6/30/12 and the approval form was signed on 5/30/12. Dr. Waller was awarded $16,556.60 for “curriculum development” from 7/1/12 to 8/31/12, equivalent to one full monthly salary (according to http://openua.uark.edu), and the approval form was signed 7/23/12. He was awarded $12,375 for an activity from 4/1/12 to 5/26/12 and the approval form was signed 6/5/12. Marcia Shobe, Associate Director of the School of Social Work, was awarded $11,808 (1.4 regular monthly salaries) for editing the Journal Inquiry from 3/1/12 to 5/11/12 (2.5 months). The approval is dated 4/18/12. Eleven extra compensation forms with amounts of $10,000 or more were reviewed and all but two of them were approved after the start of the activity, in most cases even after the end of the activity. The recently released Legislative Audit report has, of course, faulted University officials for not following policies and procedures related to the approval of expenditures.

Policy also requires that extra compensation duties “are performed outside the normal work schedule”. Dr. Waller and Dr. Shobe were effectively paid 150% of their regular salary during certain periods. Are we to imagine that they worked an extra “shift” after their regular work day (of course, faculty members, as exempt employees, do not have fixed work schedules)? Service duties are part of the regular duties of all faculty members. It is unclear why some service activities are compensated while most are not (aren’t most faculty members engaged in curriculum development, for example?), why a handful of individuals receive unusually large awards, and whether these activities are really performed in addition to a full workload. Faculty members with onerous service duties usually receive reductions in their teaching load and research expectations. In that case, extra compensation seems like double-dipping.

The issue of transparency is also raised. The nominal salaries of faculty members are published in the University annual budget (now available online) and reported to the National Center for Education Statistics. Extra compensation is not included in these figures. A policy that allows the award of large amounts of money to a small number of individuals out of public view looks like an invitation to favoritism and good ol’ boyism.

University officials, when asked about the issue, defended the practice. Barbara Abercrombie, Human Resources Director, wrote on behalf of Don Pederson, Vice Chancellor for Finance and Administration: “The policy does not prohibit later review and approval of payments made for bona fide activities that fall within the scope of the policy. The activities indicated on the forms were appropriate to pay under the extra compensation policy.” “‘Should’ is not the same as an absolute requirement”, wrote Pederson in an internal email (pdf). True, but it’s not the same as “whatever” either. The policy may be intended to allow for limited exceptions to the pre-approval rule, but University officials have made the exception become the rule. If that’s acceptable, why have a policy at all?

Let’s be clear that this is not an “academic” debate about semantics. This is a policy put in place to safeguard the financial and ethical integrity of the University. When large monetary awards are approved ex post, oversight becomes dubious, as evidenced by an internal email (pdf) by Provost Sharon Gaber recounting that she was asked to approve extra compensation forms for classes already taught. “Why are we just now approving these? There is no way that I can say no? They have already taught the classes.” She suggested that “we should require up-front approval”, apparently unaware that it was already required under the policy.

The University of Arkansas is currently under heightened public scrutiny (to understate a bit) due to financial irregularities and sloppy budgeting. The academic community and the public have the right to expect extraordinary financial diligence and scrupulous compliance with all rules and policies from the administrators of the state’s public University. The cavalier way in which disbursements of large amounts of public money as “extra compensation” were handled and then justified by questionable reinterpretation of the applicable policy is everything but reassuring.