Fourteen state legislators want the Washington County prosecutor to investigate whether the chief financial administrator at the University of Arkansas at Fayetteville lied to state auditors during a routine audit of the campus’s finances before it was publicly known there was a multimillion-dollar deficit in the fundraising arm.

In a letter sent Wednesday to Prosecuting Attorney John Threet, the legislators note that neither Donald Pederson, vice chancellor for finance and administration, nor Treasurer Jean Schook mentioned to auditors from the Legislative Audit Division during an Oct. 25, 2012, conference that an internal investigation of the deficit was underway.

Pederson also signed a letter during that conference saying he had no knowledge of any allegations of fraud or suspected fraud during the fiscal year that ended June 30, 2012.

UA officials realized there was a problem in the Advancement Division three months earlier, and Chancellor G. David Gearhart asked Schook to look into it.

Schook completed her report and sent a letter to Pederson on Oct. 19, 2012, referring to a “likelihood” of conflict-of-interest violations, misdirection of funds and risk of fraud, according to the legislators. They say Schook’s letter “contained at least seven references to partially fraudulent activity.”

“She made all that information available to [Pederson], and six days later he told our Legislative Audit team he had no knowledge of any allegations of fraud,” said Rep. Nate Bell, R-Mena, who wrote the letter to Threet.“Based on the evidence presented to us in the audit, a crime apparently occurred, and I would like the prosecuting attorney to review it and decide what action they feel is appropriate if any.”

In the letter, Bell wrote that it is Pederson’s written response to auditors, in particular, that he would like reviewed. Bell also noted that Arkansas Code Annotated 10-4-416(b)(f) states that someone found guilty of providing false information to the Legislative Audit Division would face the same punishment as someone who tampers with a public record.

Neither Pederson, Gearhart nor Schook responded to email requests for comment Wednesday.

“MANY FRAUD RISKS”

In Schook’s report to Pederson, she wrote, “Because many fraud risk factors were identified, consideration was given of the need to request an internal audit examination.”

Schook wrote that there was a lack of oversight management, violation of UA policies and “deliberate efforts to disguise poor financial management” but she found “no evidence of intentional acts to misappropriate resources for personal gain.”

Schook’s report cited Brad Choate, vice chancellor of Advancement, for lack of oversight and Joy Sharp, his budget officer, for lack of expertise in budgetary matters. Gearhart has said Sharp was “in over her head.”

Choate and Sharp both lost their jobs as a result of the deficit, but both were allowed to continue working at UA in other capacities until June 30.

The “management representation letter” Pederson signed on Oct. 25, 2012, was addressed to the Legislative Audit Division and the Legislature’s Joint Auditing Committee. It included the sentence, “We have no knowledge of any allegation of fraud or suspected fraud affecting the entity involving management, employees who have significant roles in internal control or others where fraud could have a material effect on the financial statements.”

The letter also included,“We have no knowledge of any allegation of fraud or suspected fraud affecting the entity received in communication from employees, former employees, analysts, regulators or others.”

Bell said Pederson and Schook are apparently using a narrow definition of fraud by saying nothing had been done “for personal gain.” Still, fraud may have occurred, he said.

“The university is basically saying that unless somebody made off with money, no fraud occurred,” said Bell.

Getting clear information about the deficit has been difficult, Bell said, and some legislators feel they can’t trust UA administrators.

“We should be able to get a forthright and honest response,” he said. “There’s no point in doing audits if we’re not going to get honest answers. I think that statute [cited above] is law so that there’s some teeth if people lie to us, and it needs to be enforced.”

$4.2 MILLION DEFICIT

In February, Gearhart asked state and UA System auditors to look into the Advancement Division’s financial situation. State auditors determined that the division had a cumulative deficit of $4.2 million as of June 30, 2012.

UA officials say the cumulative deficit was reduced to $3.2 million by June 30, 2013, but they’re still dealing with annual operating deficits in the Advancement Division.

The deficit was caused primarily because the division hired people for a fundraising campaign when there was no money for those salaries, according to Schook’s report.

As part of the state audit division’s investigation, UA officials provided responses to areas of concern that the auditors had, including the Oct. 25, 2012, meeting and the letter Pederson signed. State auditors said the matters Schook investigated should have been disclosed then.

“We disagree that there were any pertinent matters referenced in the management representation letter that were not disclosed,” the university’s written response began. “No allegations of fraud or suspected fraud was communicated to [Schook or Pederson] at any time. … [Legislative Audit] contends that the university should

make representations that they had knowledge of fraud or suspected fraud, when management did not have such knowledge.”

UA spokesman Mark Rushing sent an official comment on the legislators’ letter by email late Wednesday: “At the time of the exit conference, university officials did not suspect fraud nor had fraud ever been alleged by others, and certainly nothing that would have a material effect on the financial statements.”

Threet said he hadn’t received the letter from Bell and the other legislators as of Wednesday afternoon.

“We have only received a copy of the attached letter through the media,” he said. “When we receive the letter from the authors of the letter, we will review the letter for any further response or action.”

Bell said the letter was sent through the mail so it may take a couple of days to get to Fayetteville.

NO CRIMINAL ACTIVITY

Threet’s office already has investigated matters related to the UA Advancement Division.

Deputy Prosecuting Attorney David Bercaw completed an investigation Dec. 12 of three concerns that auditors referred to the office and found no evidence of criminal activity.

The financial concerns included: the coding of a $1.35million transfer into the wrong type of account; “accounts receivable” entries that partially obscured deficits; and a reimbursement to the former vice chancellor for Advancement that had already been directly paid. Bercaw determined no crimes had occurred.

The deputy prosecutor also considered the conflicting testimony of Gearhart and former university spokesman John Diamond during a Sept. 13 Joint Auditing Committee hearing.

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

Bercaw said he found no evidence that a crime had occurred concerning the documents, but he said a perjury investigation would have to take place in Pulaski County, where the Joint Auditing Committee hearing was held.

In the letter to Threet, Bell said that he has no problem with Bercaw’s findings, but the matter he’s concerned about wasn’t addressed.

Bell said he knows Legislative Auditor Roger Norman didn’t refer to the Pederson matter in his initial letter to Bercaw as a possible criminal matter. But Bell said he had mentioned it at meetings of the Joint Legislative Auditing Committee in September and October and Bell wants it investigated.

“It was totally ignored in the Bercaw report, and I don’t intend to let it get ignored,” said Bell.

The audit committee voted Friday to accept the state audit of the Advancement Division.

Sen. Bill Sample, R-Hot Springs, then objected when committee co-Chairman Rep. Kim Hammer, R-Benton, sought to continue to hear testimony from Choate and Sharp. So Hammer adjoined the meeting.

Rep. Mark Lowery, R-Maumelle, sent a letter Monday to co-chairmen of the Joint Performance Review Committee asking them to take up the issue, and they decided to do so.

On Jan. 7, both Choate and Sharp are scheduled to testify before that committee in Little Rock. Neither has spoken publicly in any detail about the Advancement deficit.

Front Section, Pages 1 on 12/19/2013