LITTLE ROCK — University of Arkansas at Fayetteville Chancellor G. David Gearhart threatened to call in auditors as early as Aug. 6 last year if he couldn’t get answers regarding a surprise $3 million-plus budget deficit in the Division of University Advancement, university records show.
By late September, top officials suspected enough bad accounting and financial practices in the troubled fundraising division to warrant an audit, an e-mail from the school’s finance chief, Don Pederson, shows.
Yet Gearhart didn’t call for state auditors to examine the fiscal problems until Feb. 5, when he said he felt prodded by critical editorials in the Arkansas Democrat-Gazette.
Gearhart noted in two memorandums last summer that an audit would attract attention from the university’s board of trustees. The board approves major policies for the University of Arkansas System, which includes UAFayetteville.
“It is not in our best interests to involve the auditors, as that information goes to the [board of trustees],” Gearhart wrote in an Aug.6 e-mail, “but I feel I have a fiduciary responsibility to get answers and that may be the only way.”
He sent the message to the two employees later reassigned because of the deficit, Vice Chancellor for University Advancement Brad Choate and his budget officer, Joy Sharp.
Audits are typically performed to assure users of financial statements that the information is correct and presented in accordance with accounting standards, experts say. In the case of government agencies such as universities, those users include lenders, benefactors and taxpayers.
E-mails and other documents talking about a possible audit were among 88 pages released by UA-Fayetteville on Feb. 15 in response to a lawsuit filed by the Arkansas Democrat-Gazette.
The newspaper argued that the records, which included treasurer Jean Schook’s report on the Advancement Division deficit, were public under the state Freedom of Information Act.
The university continues to say that the documents are personnel records exempt from the public information law, but UA obtained written permission from Choate and Sharp to release them.
Legislative and University of Arkansas System auditors are to meet late this week to plan how they’ll examine the Advancement Division’s overspending of its roughly $10 million budget in fiscal 2012.
Officials expect another, smaller deficit in the department in fiscal 2013, which ends June 30. Documents that the university released suggest that the Advancement Division also recorded smaller deficits for years before 2012.
Gearhart reassigned Choate in November but continued Choate’s $348,175 salary. Sharp was demoted and reassigned, her $91,086 pay was cut to $68,314. Gearhart has said their job appointments will end June 30.
E-MAILS ON AUDIT
The fiscal 2012 deficit was discovered July 6. That’s when the University of Arkansas Foundation delayed a $225,000 funding transfer request from Sharp “due to a lack of availability of funds.” The money was meant to pay deferred compensation for Gearhart.
The Division of University Advancement handles efforts such as fundraising, communications, alumni affairs and special events. Gearhart ran the division for 10 years and promoted Sharp to the budget officer position. In 2008, Gearhart became chancellor and hired Choate to replace him.
As the spending deficit unfolded last year, Gearhart referred to it in one e-mail as “a colossal fiscal crisis.”
According to documents and interviews, here’s what university officials said about whether to call in auditors.
In the Aug. 6 e-mail Gearhart wrote to Choate and Sharp, with a copy to Pederson, the vice chancellor for finance and administration: “I know you are working on answers to what happened and [Pederson’s] folks are assisting you, but I feel that we must come to closure on the reasons for this budget short fall sooner rather than later.
“If you don’t have an answer to me by end of week I feel an obligation to involve our auditors. I don’t want to simplify things, but someone should be able to add up allincome from last year and compare it to all expenditures and answer what happened.”
Gearhart went on to write how the audit “is not in our best interests” because the information goes to trustees.
In an Aug. 8 e-mail from Gearhart marked “CONFIDENTIAL” to Choate, he listed 10 directives, including making drastic spending cuts and providing more hands-on budget management:
“Failure to determine, in a timely manner, why you accumulated such a large deficit will require me to ask the system auditors to do a complete audit of your division. When the auditors become involved, they are required to report it to the Board of Trustees. [Pederson] and I are willing to hold on this request to give you and [Sharp] time to determine what happened. I have discussed this with [UA System] President [DonaldR.] Bobbitt.”
In notes to Gearhart on Sept. 29, Pederson said: “Though I still want to gather a bit more information before we make the decision on audit, let me outline some of the information I have.”
Sharp “had the opportunity (with her sister) to initiate, approve, receive funds, and hide or obfuscate the record, which violates basic sound practice and policy to reduce the risk of fraud.”
“This alone warrants an audit, but I want to check the items I know only indirectly to be sure.”
Sharp’s sister, Betty Sharp, is an assistant director for planned giving in the Advancement Division.
NONE RECOMMENDED
The university’s own report into the deficit did not recommend an audit.
In the Oct. 19 financial review, treasurer Schook wrote:
“Because many fraud risk factors were identified, consideration was given of the need to request an internal audit examination. After careful consideration, the decision ... should be left ultimately to [Pederson] and the chancellor. The following notes are relevant to that decision:
“There is an overwhelming amount of evidence that points to lack of management oversight, non-compliance with university policies and procedures and deliberate efforts to disguise poor financial management ... however no evidence of intentional acts to misappropriate resources for personal gain have been discovered. It should be noted that a review of accounting records specifically to identify misappropriated resources has not been performed and will likely be some time before staff resources are available to conduct such a review.
“The historical data suggests that the primary driver of accumulated deficit balances was the addition of staff with no permanent funding.”
The report also says an audit would be limited to university accounts and couldn’t report on accounts held by the nonprofit University of Arkansas Foundation. The results “would highlight the violations of university policy and lack of management oversight that have already been identified,” Schook said.
The report also listed the public funds deficit at $2,451,360 and the private foundation deficit at $1,889,559, totaling $4,340,919. In January, university officials said when all expenditures and revenue were totaled, the deficit was $3.37 million.
On Nov. 2, Gearhart met with university trustees and Bobbitt in a closed session to talk about the Advancement Division’s financial problems. In an interview later, the chancellor said they talked “about asking our university system auditors to come in. In discussing it with Dr. Bobbitt and members of the board, they didn’t feel it was necessary to do it.
“I was prepared to call for the audit if they thought it was necessary. I think they believed they had sufficient information.”
In a Feb. 5 statement, Gearhart called for auditors from “both the Arkansas General Assembly and the University of Arkansas System to perform independent audits of spending within the university’s advancement division.”
“Frankly,” Gearhart said later, “I woke up one morning after one of Mr. [Paul] Greenberg’s editorials” in the Democrat-Gazette that was critical of the university regarding the Advancement Division’s financial issues. “And I thought ‘What the heck, let them come in and look at everything. ... Let’s let the auditors come in.’”
Front Section, Pages 1 on 02/24/2013