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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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.

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

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

The UA’s Athletic Budget

Head scratching about the financial reporting of the UA Athletics Department

How much does the University of Arkansas spend on its athletics department? The total number for fiscal year 2013 was an astonishing 88 million dollars, up from 81 million the previous year and 68 million in 2010, an increase of almost 30% in 3 years. According to the University, these expenses are more than covered by the revenues so that no taxpayer or tuition money is spent on athletics.

It is interesting however to note that the actual revenues and expenditures reported each year are twelve million more than was budgeted (according to certified budget documents filed with the state). Every year. Why are budget makers so wide off the mark? AthleticRevenuesTable
For example, about 3 million are spent every year for game guarantees ($3.6 million in 2013). Yet these amounts never appear in the budget. Could this be related to the UA’s attitude that game guarantees constitute a trade secret? Somewhat bizarrely, the line item for ‘Facilities’ is under-budgeted every year – by seven million in 2013 and a whopping 12 million in 2012. Can you picture the financial officer preparing the budget: “Let’s see, last year we budgeted 3 million but spent 15 million on facilities, so this year we are going to budget 4 million, that should fix it”. On the revenue side, most of the unbudgeted revenue appears in the “Other Income” category (12 million in 2013, up from 9 million in 2010). The same line item, which is said to include “investment, rental, endowment income”, is budgeted as zero ($0) every year. Is this related to the UA’s habit of keeping Razorback Foundation finances in the dark? Or is it another result of the sloppiness built into the UA’s accounting practices, as recently revealed and criticized by the Legislative Audit report?

In an additional twist to the story, google turned up an Economic Impact study from 2012 which quantifies athletic department expenditures for 2010-11 as $84.7 million and revenues as $90.0 million, compared to the official figures of $74.9 million expenditures and $75.2 million revenues. Further, the study (p. 14) lists almost $20 million in private donations, a figure nowhere to be found in the official financial report (which lists $7.7 million in “private gifts”). What kind of creative accounting is going on here???

UPDATE: As a reader points out, athletic revenues and expenses also have to be reported to a federal database known as EADA. Look up an institution and click on “Revenues and Expenses” to see the most current data. They are dramatically different from the figures reported to the state (and also not the same as the economic impact study figures). AthleticFinancesTable The total revenue reported to EADA was almost $100 million in 2012 and 2013. Over the last four years, the Athletic Departent reported $55 million more in revenues and $40 million more in surplus to EADA than was reported to ADHE!

The explanation seems to be that ADHE requires to budget and report only expenditures “paid by an institutionally held fund”, and to report only “monies from foundations, clubs, and other private gifts which are received by institutionally held accounts”, which in effect allows the UA to keep multiple sets of books and thereby defeat state oversight and transparency.

The budget documents and where to find them

State law requires all Universities every year to file a Certification of Budgeted Athletic Revenues and Expenditures with the Arkansas Department of Higher Education (ADHE), and to report the actual revenues and expenditures (AR Code 6-62-106) at the end of each fiscal year (fiscal year 2014 runs from July 2013 to June 2014). The forms to be used are known as ADHE Form 21-2 (budgeted) and ADHE Form 21-1 (actual). Note that each form uses somewhat different line items. Some of the recent reports (both budgeted and actual) can be found on the UA’s Financial Affairs web site. State law requires all state entities, including state-supported universities, to publish on their web site each and every report they file with another state entity (AR Code 25-1-118). Compliance with this law is uneven, as we shall examine in a later post.

University of Arkansas Athletic department financial statements
Budgeted2010, 2011, 2012, 2013, 2014;   Actual2010, 2011, 2012, 2013
Summary 2010-2014

A more detailed breakdown of the 2014 athletic budget can be viewed at Arkansas Business. The ADHE is also required to publish the athletic finance reports, but they are not easy to find. A Summary of Intercollegiate Athletic Revenues and Expenditures, 2012-13 is contained on the last page of the Arkansas Higher Education Coordinating Board quarterly meeting agenda, October 25, 2013. The last agenda item of the board meeting taking place today is approval of the athletic financial survey.

Chancellor Gearhart alleged to have directed destruction of documents

If this is true it would be a bombshell.

Benji Hardy at Arkansas Times reports (full report) from today’s Legislative Auditing Committee meeting about the University of Arkansas Advancement Division:

Diamond praised the report released this week by Legislative Audit, which delivered a less-than-glowing review of both the university’s lack of transparency surrounding this episode and accounting practices at the Division. Still, said Diamond, the Legislative Audit team “could not do its work as well as it needed to” because key documents were unavailable. (…) But Diamond says that at least some documentation may have been destroyed under verbal directives from Chancellor David Gearhart and another university officials. Diamond says that there are multiple witnesses who can corroborate this accusation and who will testify under oath if asked by the committee. When asked by Rep. Kim Hammer why those individuals weren’t here today, Diamond said that most still have jobs at the university and feared reprisal from administration. Diamond also faulted university officials for maintaining a “culture of secrecy” around the issue and for not consulting himself and other senior staff when compiling a previous internal investigation into the fiscal trouble at Advancement (long before the external legislative audit work began).

As a result of this testimony, the Committee voted to reopen the report and to refer Diamond’s testimony to the prosecutor. In consequence, the audit team now has to continue its work and investigate the matter further. One question will certainly be whether Diamond’s testimony will be corroborated by other witnesses – in which case Chancellor Gearhart will be in trouble. The reopening of the audit also has the unfortunate consequence that the records gathered by the audit will remain closed to the public. Arkansas Code 10-4-422 specifies:

“All working papers, including communications, notes, memoranda, preliminary drafts of audit reports, and other data gathered in the preparation of audit reports by the division are exempt from all provisions of the Freedom of Information Act (…) After any audit report has been presented to members of the Legislative Joint Auditing Committee, the audit report and copies of any documents contained in the working papers of the division shall be open to public inspection

Although the report was presented to the Auditing Committee, the Committee voted to “accept this report as not presented”.

Update: The Arkansas Democrat-Gazette reports in more detail on Diamond’s allegations:

Diamond said: “Members of the Advancement Division leadership team and staff received directives from key individuals that resulted in the destruction of documents relevant to the audits and to Freedom of Information Act requests.
“This occurred both before and after [Gearhart’s Feb. 5] request” that the Legislative Audit Division and the UA System Internal Audit staff review the Advancement Division’s spending, Diamond said.
“These two reasons are in part why auditors could not find documents they sought, and that’s why so few responsive documents were given to the media during the past several months,” Diamond said.
Diamond said Reynolds also directed employees to carry out a “housecleaning” of financial records early this year. Employees were asked to shred boxes of financial records days after Gearhart called in state auditors on Feb. 5, Diamond said.
Reynolds said Friday in an email that the allegations “are false. I did not order a ‘house cleaning’ of documents, and no one ordered me to do so.”

Diamond’s prepared statement (pdf)

Update:
UA-unit auditors: Review 3 items
Prosecutors to look into UA record-purge claim
Prosecutor looks into claims files destroyed at UA
‘Delete after reading,’ UA budget officer emailed