UA division’s deficit found free of crime

A prosecutor has found no evidence of criminal activity in connection with a multimillion-dollar deficit in the fundraising division at the University of Arkansas at Fayetteville.

A 14-page summary of the investigation reads like an indictment of the university’s budgetary process and internal control, failures in which led to overspending in the Advancement Division.

“The initial reaction to this breakdown … was one of alarm because most, if not all, of the red flags for the commission of fraud were present due to the breakdown of internal control,” wrote David Bercaw, deputy prosecutor for Washington County, in the summary issued Thursday.

But no fraud or theft occurred, Bercaw said Thursday afternoon.

Chancellor G. David Gearhart indicated he was pleased with the finding.

“I am grateful to the office of the prosecutor for conducting a thorough investigation into the matters referred by the Legislative Joint Auditing Committee,” Gearhart said. “We accept the conclusions of the report, are reviewing the recommendations … and are actively implementing the recommendations of Legislative Audit.”

The most serious allegation Bercaw investigated was that Gearhart ordered the destruction of records to keep them from auditors and public view.

But Bercaw said Thursday that he found no evidence that relevant documents were destroyed. UA employees did shred documents while cleaning out multiple storage buildings, Bercaw wrote, but he found no evidence that any of those documents were pertinent to the investigation, were related audits or were subject to requests under the Arkansas Freedom of Information Act.

Gearhart, who headed the Advancement Division from 1998 to 2008, was surprised to learn of the deficit, according to emails among UA administrators after the problem came to light in July 2012. Gearhart said he had monitored the division’s financial situation carefully, but said his replacement,Brad Choate, apparently didn’t.

In February, months after the deficit was discovered and Choate had been relieved of duties, Gearhart requested audits by the state Legislative Audit Division and UA System auditors. Those audits were released Sept. 10 and some of the recommendations have already been implemented, UA officials have said.

The Arkansas Legislative Joint Auditing Committee is to meet today in Little Rock to discuss the Advancement Division deficit. The committee heard testimony on the subject Sept. 13 but put any decisions on hold until Bercaw could complete his investigation.

Gearhart and Choate, the former vice chancellor for advancement, are expected to testify at the meeting today .

FOUNDATION’S ROLE

Throughout the report, Bercaw cited failures of the UA’s internal accounting system, which allowed the Advancement Division’s cumulative deficit to grow over two years to $4.2 million by June 30, 2012, while being obscured by “accounts receivable” entries, which an audit criticized.

The Advancement Division would spend money during a fiscal quarter and be reimbursed afterward with private money from the University of Arkansas Foundation.

The amounts that are transferred from the foundation fluctuate on the basis of income from capital gains, dividends and interest. During the period under investigation, 2009-2012, the Advancement Division was receiving an average of about $4.5 million a year from the foundation. That accounted for a little less than half of the divisions’s available cash for the year.

The remainder of the division’s funding comes from state appropriations and school tuition and fees.

The division would list the amount expected from the foundation as a “receivable” at the end of each quarter. A day or so later, money was transferred from the foundation, and the deficit from the previous quarter would be “reversed.”

But sometimes, the amounts transferred from the foundation were for less money than the division had already spent.

“The vice chancellors in the Advancement Division were not receiving the budget information that they needed to be receiving and had no option but to track the expenditures and budget for their unit as best they could,” wrote Bercaw. “The auditors indicated that most of the deficit came from unfunded hiring.”

The theory, according to Bercaw’s report, was that no “cost center” at the university could show a deficit balance at the end of the fiscal year, so attempts were made to zero-out the year-end balances. But that was “counterproductive,” Bercaw wrote.

“This is one of the things you want your accounting system to tell you,” he wrote. “Since the accounting system was being defeated by the use of the accounts receivable transactions at year end, the issue was never brought to light until the Advancement account was frozen by the university foundation.”

The UA Foundation would allow the Advancement Division to spend the amount of money it was expected to receive one quarter beyond the current quarter, according to Bercaw’s report. But when the division spent beyond its anticipated revenues for two quarter in its foundation account in 2012, the funds were frozen, he wrote.

UA administrators have defended the use of accounts-receivable entries.

UA Treasurer Jean Schook told Bercaw the accounts-receivable entries were made “solely for reporting purposes” and if not reversed in the next quarter, there would be no method with the university’s accounting system to identify in what period the revenue was received.

“We kept asking about the understatement of revenues and we are not sure anyone grasped exactly what we were asking,” Bercaw wrote in the report. “The only reply which was responsive came from Ms. Schook, who stated that the accounts receivable entry at the end of the following year offset the negative revenue and was proper because there was always an expectation of the receipt of the revenue. Our understanding of this practice is that it was system-wide and was for the purpose of bringing any cost center defects to a zero balance.” CURRENT REMEDIES

UA has already changed the timetable concerning quarterly transfers from the UA Foundation. The transfers made at the beginning of each quarter are now for spending in that same quarter.

To make that work, however, the Advancement Division needed to pay off a $1.9 million negative cash balance owed to the foundation. In January, $1.9 million of a $4 million transfer from university reserves went to the division to offset money that would have come from the foundation.

The remainder of the $4 million transfer was used to offset overspending in fiscal 2013, which ended June 30. Some leftover money at the end of the year was applied to the cumulative deficit, reducing it to $3.2 million as of June 30, 2013, UA officials have said.

Since the overspending problem became apparent, the Advancement Division’s budget has been increased from about $10 million to $14 million annually. Chris Wyrick, vice chancellor for advancement, said he’s cut costs, but the division still needs money from reserves to make the budget work.

Wyrick took over as the division’s head in April. Choate was relieved of his administrative duties in November 2012, and his contract wasn’t renewed in July.

An additional transfer of $2.2 million will be necessary to offset overspending in the division for the current fiscal year, fiscal 2014, according to a budget summary.

DISPOSAL OF RECORDS

The Legislative Audit Division report noted a dearth of available records, which hindered its investigation.

A former UA administrator alleged that was because Gearhart ordered the documents to be shredded.

John Diamond, a former UA spokesman, testified at the Legislative Joint Auditing Committee meeting Sept. 13 that Gearhart ordered records to be destroyed, during a Jan. 14 meeting of UA department heads. Among those records, he said, was a December 2012 budget activity report.

Bercaw determined that the document didn’t fall under a Jan. 10 request by the Arkansas Democrat-Gazette, under the Arkansas Freedom of Information Act, for all such reports created from Jan. 1, 2012, to June 30, 2012. The newspaper’s request was broader than that, also asking for Advancement Division budgets for fiscal 2011, 2012 and 2013.

“However, the document was clearly a monthly update of the Advancement Division’s budget and should be characterized as a budget activity report,” wrote Bercaw. “The report handed out at the meeting was for December 2012, outside the time frame of the request.”

While investigations were underway, UA officials have said, they continued to clean out storage buildings of old and duplicate records. The university reduced the number of its storage building units from six to two, wrote Bercaw.

“With the possible exception of foundation payment authorization forms … there is no evidence that any records relevant to our examination, needed for the audit or subject to an [Freedom of Information Act] request were disposed of,” wrote Bercaw.

Original payment-authorization forms dating back to 2009 were stored electronically at the UA Foundation, Bercaw said.

There was conflicting testimony by Gearhart and Diamond at the Sept. 13 committee hearing. If anyone committed perjury that day, it would be up to a Pulaski County prosecutor to investigate, since it occurred there, according to Bercaw’s report.

Diamond told legislators on Sept. 13 that Gearhart ordered Advancement Division officials at a Jan. 14 meeting to “get rid” of records. Gearhart responded that he had never ordered anyone to destroy documents and described Diamond, who was fired Aug. 23, as a “disgruntled” employee.

Diamond said he hopes the committee will pursue the matter today.

“I’m hopeful that the Legislative Audit Committee will refer that question of whether the chancellor perjured himself to the Pulaski County prosecutor,” Diamond said.

OTHER MISCUES

Another issue Bercaw dealt with in his report concerned a reimbursement to Choate in 2011. Bercaw said he determined that Choate was unaware his reimbursement of $2,052 for a “year-end fundraising celebration” had already been directly paid to the Fayetteville Country Club. Choate later repaid the university.

Bercaw also determined that Joy Sharp, a former budget officer in the Advancement Division, had mistakenly coded a $1.35 million donation to the wrong type of account in 2012. The non-endowed gift from the Tyson family was for the Jean Tyson Child Development Study Center.

In an internal report last year, Schook, the UA treasurer, flagged the deposit as “what appeared to be an intentional effort to disguise a prior year accounts receivable balance that had not been cleared.”

“The misdirection of the funds occurred in spite of the purpose of the funds being clearly described on the face of the check,” Schook wrote.

But Bercaw found that no fraud occurred.

“When we asked Ms. Sharp why she put the incorrect code on the transmittal form, she stated that it was a mistake,” wrote Bercaw. “We are not persuaded that this transaction was an intentional effort to cover the deficit in the Advancement Division or any type of fraud.”

The amount of the deposit wouldn’t have been enough to cover the division’s deficit, wrote Bercaw. Sharp didn’t benefit personally from the transaction, and it went through the treasurer’s office with no questions, he noted.

Gearhart has said Sharp was “in over her head,” and Bercaw’s report seemed to agree. Sharp has bachelor’s and master’s degrees in education.

“Ms. Sharp had no training in finance or budgeting and had only received in-house training on the use of the [UA’s] accounting system,” wrote Bercaw.

Gearhart described Sharp as someone authorized to pay bills when he was head of the Advancement Division. After Gearhart became chancellor in 2008 and Choate was hired to head the Advancement Division, Sharp was delegated with authority to make spending and budget decisions, according to the report.

Summary of findings The Washington County prosecutor’s office was sharply critical of the University of Arkansas at Fayetteville’s accounting system and controls, but did not find criminal wrongdoing in its examination of auditors’ findings regarding a multimillion-dollar deficit in UA’s Advancement Division.

A summary of the findings: Regarding a $2,051.87 reimbursement to former Advancement Division chief Brad Choate that UA had already paid directly to the vendor: “It does not appear that the duplicate payment was anything more than an error given that one payment went to the vendor, one payment went to Mr.

Choate, Mr. Choate reimbursed the University, and that it was found that the University owed Mr.

Choate substantially more in unreimbursed expenses.” Regarding a $1,355,055.64 deposit meant for construction of the Jean Tyson Child Development Study Center that former Advancement Division budget officer Joy Sharp instead deposited into an unrestricted spending account: “We are not persuaded that this transaction was an intentional effort to cover the deficit in Advancement or any type of fraud,” prosecutors said, because the amount wasn’t enough to hide the deficit, because Sharp got no personal benefit from the transaction, and because the treasurer’s office didn’t question the transaction.The deposit didn’t result in the restricted funds being spent in error, the report concluded

Regarding the UA treasurer’s office posting “accounts receivables” that partially obscured Advancement Division deficits in financial statements: “We do not believe that there was any criminal intent to commit fraud by any one person or group of persons.” Because of a breakdown of internal controls, “We conclude Ms. Sharp had the opportunity to commit fraud but did not do so. In addition there is no evidence that funds were expended for inappropriate or fraudulent purposes. All expenditures were valid and there were no missing funds.” Regarding conflicting statements by former UA chief spokesman John Diamond and UA Chancellor G. David Gearhart that Gearhart ordered the destruction of documents during a meeting Jan. 14, and possible perjury related to the conflicting statements: “If anyone did perjure themselves at the [Sept. 13 Legislative Audit Committee] hearing, jurisdiction would properly lie in Pulaski County as the hearings took place in Little Rock.

However this appears to be the product of a rather acrimonious dispute within the University community over the meaning and the reach of the Freedom of Information Act.” “The statements of those present at the meeting conflicted as to what exactly transpired, but it appears that at the meeting there was a disagreement between Chancellor Gearhart and Mr. Diamond,” about UA’s required actions under the act.

“With the possible exception of Foundation Payment Authorization Forms … there is no evidence that any records relevant to our examination, needed for the audit or subject to an FOIA request were disposed of.” “There were conflicting statements given by witnesses as to the disposition of Foundation Payment Authorization Forms held within the Advancement Division,” with Sharp saying she boxed them for storage and new budget officer Denise Reynolds saying they were not in Sharp’s office.

However, “We did not find evidence that the Foundation Payment Authorization Forms were disposed of with the intent to frustrate the audit or to frustrate FOIA requests.”