No charges will be filed against the chief financial officer at the University of Arkansas at Fayetteville in connection to allegations that he lied to state auditors in 2012.

There’s no evidence that Donald Pederson, vice chancellor for finance and administration, knew about any “allegations of fraud or suspected fraud” regarding a multimillion-dollar deficit in UA’s fundraising arm at the time of a routine audit in 2012, according to a letter that David Bercaw, deputy prosecuting attorney for Washington County, sent Monday to state Rep. Nate Bell, R-Mena.

Pederson told auditors as much, in regard to what he knew, and signed a letter to that effect on Oct. 25, 2012. But that was three months after an internal investigation began into the Advancement Division deficit and six days after UA Treasurer Jean Schook finished a report saying there was risk of fraud in the mismanagement of Advancement Division funds.

At the time of that interview with auditors, Pederson was aware of problems, but “no evidence of any intentional acts to misappropriate resources for personal gain, in other words, fraud or theft, had been found,” Bercaw wrote.

Ultimately, there was no fraud discovered through subsequent investigations in-to the deficit in the Advancement Division, the prosecutor wrote.

“It’s what I expected,” said Bell, who requested the investigation in a Dec. 18 letter cosigned by 13 other legislators.

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

“At this point, I’ve still got additional research being done on it,” Bell said Tuesday. “I don’t want to get way deep in the weeds with it, but I don’t agree with their assessment of it. We make the laws. They enforce them. I am looking at all possible options, but it’s probably over with. I’m close to out of options. I’ll say at this point I’m a little frustrated, but we’ll see how it shakes out.”

Pederson said in a statement released by the university that he was pleased with the result of the investigation.

“I appreciate the careful attention to this matter made by the prosecuting attorney’s office and agree completely with the findings of this review,” Pederson said Tuesday through a UA news release. “The report speaks for itself.”

UA Chancellor G. David Gearhart said in the statement that it was the “appropriate conclusion.”

LAWMAKERS REACT

Several other legislators contacted late Tuesday said they couldn’t comment because they hadn’t read the report.

“I would not want to make a comment until I saw the letter,” said Rep. Mark Lowery, R-Maumelle.

State Sen. Bryan King, R-Green Forest, said he hasn’t seen the letter either. King, who was chairman of the Joint Legislative Auditing Committee, said he has been frustrated with UA officials throughout investigations into the Advancement Division deficit.

“During this whole process, I never felt like Pederson and Schook and Gearhart took the responsibility they deserved,” said King.

In February 2013, Gearhart requested audits from the Arkansas Division of Legislative Audit and UA system auditors, saying he felt pressured by editorials in the Arkansas Democrat-Gazette.

The audits were completed in September, finding numerous issues of mismanagement.

State auditors determined that the division had a cumulative deficit of $4.2 million as of June 30, 2012. The deficit has since been covered with money from UA reserves, and the Advancement Division plans to pay back the reserves, said Laura Jacobs, a UA spokesman.

Auditors referred potential criminal allegations to Bercaw, who investigated them for three months before determining no criminal activity occurred.

Bell’s request to investigate Pederson’s actions came after Bercaw completed his initial investigation on Dec. 12. Bell noted that Bercaw’s report didn’t address the issue he was concerned about.

In the Dec. 18 letter, Bell wrote that neither Pederson nor Schook mentioned to auditors from the Legislative Audit Division during the Oct. 25, 2012, conference that an internal investigation of the deficit was underway.

Legislative auditors also noted the omission in their audit report regarding the deficit.

Pederson signed a “management representation 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 in July 2012, and 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 said Schook’s letter “contained at least seven references to potentially fraudulent activity.”

In Schook’s report to Pederson, she wrote, “Because many fraud risk factors were identified, consideration wasgiven 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.”

Bercaw wrote that, “Our reading of the Schook report is that Ms. Schook had identified eight factors within the Advancement Division that indicated a risk of fraudulent activity due to a profound breakdown of internal control,” but with no intentional efforts 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.”

Bercaw’s report notes that Choate sent an email to Pederson and Gearhart on Oct. 20, 2012, “strongly objecting” to Schook’s conclusions. So at the time of the interview with auditors, Pederson had an email from Choate in which he denied Schook’s claims and said he didn’t believe Sharp “intended harm.”

“In other words, at the time of the exit conference no one had reported to him that they believed fraudulent activity had taken place, only that a risk of fraud existed and needed to be corrected,” wrote Bercaw.

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 said,“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.”

‘BEYOND REASONABLE DOUBT’

In Monday’s letter, Bercaw notes that the letter Pederson signed was referring to the entire campus, not just the Advancement Division.

“Any criminal case must be proven beyond a reasonable doubt,” wrote Bercaw. “Within the plain meaning of the words set out in the management representation letter, we do not believe that Dr. Pederson made false representations to Legislative Audit in his execution of the management representation letter.”

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.

During the 2013 investigation in connection with the deficit, Bercaw looked at these financial concerns: the coding of a $1.35 million 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.

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, 2013, 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 a perjury investigation would have to take place in Pulaski County, where the Joint Auditing Committee hearing was held Sept. 13.

That matter is still under review, said Larry Jegley, the Pulaski County prosecuting attorney.

“We’ve got that and we have not reached any conclusions about anything,” Jegley said, adding that he has no timeline for when the review may be concluded.

In a telephone interview late Tuesday, Bercaw emphasized the difference between a “risk” of fraud and knowledge of fraudulent activity.

“Basically, the conclusion I came to on that is in Ms. Schook’s report, she’s talking about the risk of fraudulent activity,” said Bercaw. “That’s quite a bit different from saying fraudulent activity was taking place. I didn’t feel there was any foundation for a charge.”

Bercaw said that’s the same conclusion he reached in December.

“After going back through everything, I felt we were making the correct call on it,” he said.

Information for this report was contributed by Jaime Adame of the Arkansas Democrat-Gazette.

Front Section, Pages 1 on 04/30/2014