David Bercaw, deputy prosecutor for the Fourth Judicial District, has released of his investigation into whether anyone at the University of Arkansas violated the law in relation to the budget shortfall at the university’s advancement division and the subsequent fallout. Legislative Audit referred the inquiry to the prosecutor’s office.
I haven’t made it all the way through, but here’s the conclusion:
“We did not find evidence of criminal activity in this matter. This is a very unfortunate situation of a breakdown of internal control within the Advancement Division. We strongly recommend that the University implement all of the recommendations of Legislative Audit.”
UPDATE: Benji Hardy offers a fuller reading of the prosecutor’s findings on the jump.
Bercaw’s report highlights four possible areas of criminal wrongdoing concluding that there is no evidence crimes were committed by UA officials. But in several places, the document is sharply critical of the university’s lax internal practices in handling funds. Here are the four issues that were under investigation:
1) The Division of Advancement mistakenly cut a check for $2,000 to division head Brad Choate in fall 2011, when this money was intended to reimburse a vendor. (The vendor itself was also paid.) Choate later gave the money back to the division. This seems like a legitimate mistake, the report concludes. It’s not improbable that a busy official would accept a personal reimbursement without checking the accounting carefully — nor forget an unpaid reimbursement; Choate had about $7,700 coming to him from the University in unreimbursed expenses by the time of his dismissal. Also, considering Choate’s executive-grade salary ($350,000/year) it’s unlikely he was seeking to commit fraud over two grand.
2) Budget Director Joy Sharp, who was demoted when Choate was dismissed, misdirected a payment of $1.3 million in restricted funds from the UA Foundation in April 2012. The money in question was for “the construction of the Jean Tyson Child Development Center,” and that’s also the purpose the foundation’s check indicated with its numeric code. But when Sharp deposited the $1.3 million, she indicated a different code on the deposit — one that directed the money into the Division of Advancement’s unrestricted funds.
Sharp says this was a mistake; a 2012 internal report from UA Treasurer Jean Schook says it appears to have been “an intentional effort to disguise” a deficit. (The UA official line is that Sharp and Choate are the ones wholly responsible for the advancement budget screw up.) The prosecutor’s report concludes the code switch likely was a mistake, in part because the deficits advancement was racking up were so large that $1.3 million was insufficient to hide them. Also, the report here notes that “Ms. Sharp told us that normally, the Treasurer’s office would call them if they saw something wrong on the deposit form. Ms. Sharp’s formal training was a bachelors degree and a masters degree in Education…[she] had no training in finance or budgeting.” Which again raises the question: In an entity responsible for handling tens of millions of dollars of public funds annually, why wouldn’t the budget director have such training?
3) The most significant issue at stake in the entire prosecutors report is the shell game that the university seems to be playing with its foundation money. The reason the multi-million dollar deficits in advancement went unnoticed for years is that the school used accounting mechanisms to shift the shortfall forward from one fiscal year to the next. UA officials have said this is a routine part of the school’s accounting practices and that it was misused by Choate and Sharp. At the end of a fiscal year, on June 30, advancement would simply make its deficits disappear by posting an accounts receivable from the foundation, therefore artificially balancing its books. The next day — the beginning of the new fiscal year — the accounts receivable would be eliminated and the deficit would reappear. Part of the reason this happened, evidently, was a iniversity policy: “staff were instructed that cost centers could not close the fiscal year with a deficit balance. Apparently, this was formal advice for the entire campus.”
The report says there’s no evidence fraud was committed. Instead, it condemns the university’s lack of accountability. The conclusion seems to be that Sharp was not to blame as much as the flawed system that UA has created.
From Bercaw’s report:
“The initial reaction to this breakdown by…[the auditors], Agent Cessario, and myself 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. However, neither…[the auditors], Agent Cessario, and myself found any evidence that Ms. Sharp committed fraud. Instead, everyone we spoke to about Ms. Sharp believes here to be an honest person who was overwhelmed by her job duties. We conclude that Ms. Sharp had the opportunity to commit fraud but did not do so.”
The university is now (reluctantly) changing its accounting rules, but only after the Legislative Audit told it to do so in September. The prosecutor’s report is similarly damning about the practice of using accounts receivables to conceal deficits within the UA:
“The directive that no cost center can show a deficit balance at year end is counterproductive. We can think of no reason that a cost center could not show a deficit balance at year end, if in fact that cost center was running a deficit. This is one of the things that you want your accounting system to tell you.”
4) Destruction of documents and noncompliance with FOIA requests. At the last legislative audit meeting — after which auditors requested that the Washington County prosecutor begin this investigation — UA Chancellor David Gearhart and former advancement official John Diamond delivered contradictory testimonies under oath. Diamond says he believes UA officials destroyed documents germane to the audit; Gearhart says Diamond is lying.
The prosecutor’s report says there’s no evidence UA intentionally destroyed anything relevant, although its record keeping practices are questionable. Documents were cleared out of several storage units while the audit was ongoing, but these appear to have all been much older documents. Still, the school has no policy regarding the retention of Foundation Payment Authorization Forms. It also doesn’t number those forms, so it’s not clear whether or not any are missing.
The report again editorializes that the university needs to get its act together.
“We believe that is poor practice not to retain the forms for a period of time since they are in support of reimbursement requests…we further recommend that the forms be pre-numbered as a control.” But, it continues, “we did not find evidence that the Foundation Payment Authorization Forms were disposed of with the intent to frustrate the audit or to frustrate any FOIA requests.”