2nd panel to look at UA unit

Monday, January 6, 2014

A second joint legislative committee will take a shot Tuesday at identifying mistakes that led to millions in overspending by the University of Arkansas at Fayetteville’s fundraising division.

One question state Sen. Jane English wants answered is: “How did we get here?”

How did the state’s largest university allow its donation-seeking arm, called the Division of Advancement, to overspend by more than $4 million over at least two fiscal years without attracting anyone’s attention?

“Taxpayers are saying, ‘How did you get yourself into this situation?’ And ‘What are you doing to make sure this doesn’t happen again?’” said English, a North Little Rock Republican who is co-chairman of the Legislative Joint Performance Review Committee.

The committee is to hear testimony from and ask questions of six current and former school officials.

Among them are Chancellor G. David Gearhart, top finance officer Don Pederson and Treasurer Jean Schook.

Also scheduled to speak are former fundraising division head Brad Choate and division budget officer Joy Sharp, who lost their jobs in connection with the deficit issues; and former university spokesman and public information officer John Diamond, who has said he was fired because he objected to withholding public documents related to the deficit.

Tuesday’s meeting will be the first time Choate and Sharp have spoken publicly about the deficit. The Legislature’s Joint Auditing Committee invited both to testify Dec. 13, but legislators unexpectedly decided to accept - with little discussion - the auditors’ report, and then adjourned. The Joint Performance Review Committee is picking up the issue in part to give Choate and Sharp a chance to tell their sides of what happened, legislators say.

Tuesday’s hearing is scheduled for 1 p.m. in Room A of the Multi-Agency Complex at 1 Capitol Mall in Little Rock.

An auditors’ report released Sept. 10 and the first hearing by the Joint Auditing Committee on Sept. 13 raised accounting and management issues that legislators say are troubling. Among them:

Improper and incorrect accounting by Sharp and lack of fiscal oversight by Choate. Sharp acknowledged in a letter to university officials that she had made mistakes due to overwork. Choate has said in written statements that he did monitor finances, but was given incorrect information by Sharp and was never notified of any problem by the university finance division.

Inaccurate accounting by the university treasurer’s office, headed by Schook and Pederson. Schook’s office recorded accounts receivables for the fundraising division - $2.1 million in fiscal 2011 and $2.5 million in fiscal 2012 - that “partially obscured the deficit,” state auditors said in their report.

Auditors also criticized the treasurer for not disclosing two of three outstanding loans from the UA Foundation to the fundraising division. Schook and other university officials initially defended the accounting entries, but have since agreed to change those practices.

Other accounting issues, such as the fundraising division’s failure to budget all of its revenue from public and private sources and to document payments to vendors made through the UA Foundation. The division also hired new personnel without budgeted funds to pay them.

Failure by Pederson and Schook to disclose to state auditors at an Oct. 25, 2012, audit exit interview that the fundraising division had overspent by millions. They also did not reveal a report on the deficit by Schook, dated six days earlier, that identified “many fraud risk factors.”

Schook’s Oct. 19, 2012, report also found no evidence that anyone intentionally took funds for personal gain.

Auditors additionally were critical of Pederson for signing a management representation letter at that exit conference that said: “We have no knowledge of any allegation of fraud or suspected fraud,” according to the Division of Legislative Audit report.

Contradictory statements under oath on Sept. 13, 2013, before the Legislative Joint Auditing Committee by Gearhart and Diamond.

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. Gearhart went on to say that he never told anyone to destroy documents that were previously requested under the state’s Freedom of Information Act.

Two fundraising leaders who were present at the Jan. 14 meeting have supported Diamond’s account in interviews with prosecutors. One has supported Gearhart.

University officials have said Diamond was fired for insubordination; Diamond has said he voiced his belief that state law required the university to release more documents than Gearhart and others wished to release.

“I think everyone agrees errors were made,” Sen. Uvalde Lindsey, D-Fayetteville and vice chairman of the Performance Review Committee, said last week. “I’m dismayed by the apparent lack of internal [financial] controls.”

“What do we do in going forward to ensure our internal controls are impeccable to catch major stuff as this is, and minor stuff as well?” he said.

A three-month investigation by the Washington County prosecutor’s office, released Dec. 12, found no evidence of criminal activity in connection with four particular findings by legislative auditors. Those included an improper deposit of a $1.35 million check by Sharp, a double payment for one expense filing of $2,052 by Choate, the accounts receivable entries by Schook, and the conflicting statements under oath by Gearhart and Diamond.

Though university officials were initially resistant to some auditors’ accounting recommendations, Gearhart, Pederson and university trustees say they are now adopting all of them.

Two potential criminal issues remain unresolved.

The Washington County prosecutor’s office says it will look into whether Pederson lied to state auditors when he signed the October 2012 management-representation letter without disclosing fundraising division deficit information.

Fourteen legislators signed a letter in December saying they believed that issue had been overlooked during the prosecutor’s initial investigation. State law prohibits providing false information to the state’s Legislative Audit Division.

The contradictory testimony by Gearhart and Diamond regarding document destruction also will get another round of scrutiny. Although Washington County prosecutors said they found no evidence of perjury, that office also said it had no jurisdiction in the matter since the testimony took place in Little Rock.

Legislative auditors forwarded the matter to Pulaski County prosecutor Larry Jegley, who said last week that he and his staff will decide what to do next.

The overspending saga has dogged Gearhart for more than a year, ever since the deficit was discovered in July of 2012. Five university trustees turned out for the truncated Dec. 13 legislative hearing to show their support for the Fayetteville native.

Trustee John Goodson talked about the Fayetteville campus’s progress under Gearhart, who headed the university’s fundraising division for 10 years before he was named chancellor in 2008.

“You may like Dave Gearhart, you may not like Dave Gearhart, but these items are moving under his progressive watch,” Goodson said.

Through a school spokesman late Friday, Gearhart said university staff members look forward to Tuesday’s hearing to answer “any questions that legislators may have while also addressing the improvements we’ve made to our financial system of checks and balances, particularly in the Advancement Division, that reinforce the recommendations made by the Division of Legislative Audit.”

Lindsey said he hopes Tuesday’s session is constructive.

“It’s not a witch hunt,” Lindsey said. “We’re not trying to send somebody to the prosecutor. We want to hear about the errors, the corrections, the policy.”

Front Section, Pages 1 on 01/06/2014