The chief financial officer at the University of Arkansas at Fayetteville committed no crime when he withheld information from state auditors in the fall of 2012 regarding a multimillion-dollar deficit in UA’s fundraising division, a prosecutor who investigated the case said Wednesday.
David Bercaw, deputy prosecutor for the state’s 4th Judicial Circuit, said his investigation centered on a “management representation letter” used by the Arkansas Legislative Audit Division at the end of routine audits. The standardized letters are used by auditors across the country.
Donald Pederson, UA vice chancellor of finance and administration, signed a management representation letter for the Legislative Audit Division on Oct. 25, 2012, saying he didn’t know of any fraud, suspected fraud or allegations of fraud on the Fayetteville campus during the fiscal year that ended the previous June 30.
Six days earlier, Pederson had received a report from UA Treasurer Jean Schook saying there were “many fraud risk factors” in the mismanagement of money that led to a deficit in the UA Advancement Division during fiscal 2011 and 2012.
“Risk of fraud” and “accusations of fraud” are different things, said Bercaw.
Based on the wording of the management representation letter, Pederson did nothing that would warrant a criminal charge, Bercaw said Wednesday.
“All that was at issue was the wording between the Schook report and what was in the management representation letter,” Bercaw said.
Pederson didn’t respond to a request for an interview Wednesday.
If Pederson had “knowingly provided false documents, records, or other data,” he could have been found guilty of a felony under Arkansas Code Annotated 10-4-416(f). But that statute doesn’t address withholding information from the Legislative Audit Division.
5 PROBES OF DEFICIT
The statute could be interpreted different ways, said Robert Steinbuch, a professor at the University of Arkansas at Little Rock W.H. Bowen School of Law. One interpretation would be that not providing important information was the same as providing false data, said Steinbuch. But generally, criminal statutes are “construed narrowly” so that people don’t commit crimes unknowingly, he said.
There have been five investigations of the Advancement Division deficit - Schook’s, two by Bercaw and two by auditors. None of the investigations found evidence of criminal activity, but they all criticized the management and accounting practices that resulted in the deficit. In addition, auditors have said the information should have been disclosed.
Bercaw completed a four month investigation of the case Monday. It took so long, he said, because he’s normally working about 60 cases at a time.
In December, Bercaw finished his initial investigation of the Advancement Division, looking specifically at three issues of possible criminal activity referred to the prosecutor’s office by auditors.
Chancellor G. David Gearhart requested investigations by the Legislative Audit Division and UA internal auditors in February 2013. State auditors determined that the division had a cumulative deficit of $4.2 million as of June 30, 2012.
The deficit was caused primarily because the division hired people for a fundraising campaign when there was no money for those salaries, according to a finding from Schook’s report that was confirmed by auditors.
Schook’s report cited Brad Choate, then-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 deficit has since been covered with money from UA reserves, and the Advancement Division plans to pay back the reserves, said LauraJacobs, a UA spokesman.
On Dec. 18, state Rep. Nate Bell, R-Mena, and 13 other legislators sent a letter to the prosecutor saying Pederson’s actions should be explored in more depth.
Bercaw said he interviewed Pederson in October as part of the initial investigation, but he didn’t talk to Pederson again as part of the follow-up investigation. Bercaw said the only additional interview he did in the second investigation was with Schook.
“After going back through everything, I felt we were making the correct call on it,” said Bercaw.
LEGISLATORS RESPOND
Rep. Kim Hammer, R-Benton, said he accepts the finding by Bercaw. Hammer was co-chairman of the Joint Legislative Auditing Committee, which heard testimony regarding the deficit.
“If the prosecutor is satisfied that no fraud occurred, then we would have to conclude that it was the case of gross mismanagement, and that may not be something that the prosecutor can file charges on,” said Hammer, who signed the letter asking for the investigation.
Hammer said he would like to strengthen the state’s whistle-blower law to ensure that people are able to step forward with information - outside their organizations’ management structure - without the fear of losing their jobs.
“I think there were people that were knowledgeable of what was going on at the time that, for whatever reason, did not notify other individuals sooner,” Hammer said.
Other lawmakers who also signed the letter disagreed with Bercaw’s finding.
Rep. Mark Lowery, R-Maumelle, wrote in an email that “the very fact that there was a ‘risk of fraud’” should have been reported by Pederson to legislative auditors.
If Pederson’s “unwillingness” to share information hindered the audit from proceeding further, then “a material misrepresentation occurred,” wrote Lowery.
“It’s not just an oh-by-the way. It is a significant misrepresentation,” said Lowery, who is not a member of the audit committee.
Another auditing committee member, Rep. Andy Mayberry, R-East End, said he disagreed with Bercaw, but “it all goes down to kind of what your definition of what the suspected fraud might be.”
He added: “In my personal opinion, Dr. Pederson violated at least the intent of the communication of the management representation letter.”
Rep. Charlotte Douglas, R-Alma, a member of the audit committee, said she trusted that Bercaw did “due diligence” in reviewing Pederson’s actions.
She said that when she heard Pederson speak to legislators after the Advancement Division’s deficit became public, “it appeared to me from Mr. Pederson’s testimony that there was some conflict between what he was saying and what had been reported to us in documents.”
Asking for a prosecutor to review Pederson’s actions was “a natural extension” of the committee’s oversight role, she said.
Asked if she thought the lack of findings against Pederson could influence what others disclose when appearing before the audit committee, Douglas said it could.
“I would always hope that people would, when they make that decision, look at their consciences and say, ‘This is the people’s money. This is not my money,’” Douglas said. “And if something is not being done ethically, or if they feel that fraud is a possibility, that they would make the right decision.”
Front Section, Pages 1 on 05/01/2014