Update: Audit Shows Poor Management, No Fraud in UA Advancement

The former head of the University of Arkansas' Advancement Division failed at budget oversight, increasing the division's expenses from less than $8 million a year to more than $13 million despite revenue that remained steady at about $10 million, the Division of Legislative Audit said in a report released Tuesday.

The investigative report was requested in February by UA Chancellor G. David Gearhart, who stripped former Vice Chancellor Brad Choate of budget authority last fall and then let his contract expire on June 30.

In a press briefing Tuesday afternoon, Gearhart said the audit supported the UA's position that the shortfall was the result of financial incompetence by Choate and his budget officer, Joy Sharp, who also lost her job on June 30. Gearhart stressed repeatedly that lawmakers and the public should be reassured that the audit found no fraud or malfeasance or misspending of tax dollars, and all money has been accounted for.

Choate, Gearhart said, was a "pretty darn good fundraiser, and we appreciate what he did as a fundraiser, [but] terrible as a budget manager."

Although a shortfall of more than $3 million in Choate's books was discovered in July 2012, the University of Arkansas didn't make the problem public until Arkansas Business uncovered the story in December. Just as UA officials indicated when first questioned, the Legislative Audit report found that much of the overspending came from Choate's hiring of additional staff for a capital campaign — salaries adding almost $2 million a year.

More: Click here (PDF) to download the full audit document.

But other accounting problems contributed to the growing problem and to the delay in detecting it. For instance, Sharp, the Advancement Division's budget officer, deposited $1.35 million from funds for a specific, restricted purpose into an unrestricted account — a mistake she said was inadvertent.

The office of UA Treasurer Jean Schook also received criticism for posting receivables in the Advancement accounts of more than $2 million on the last day of fiscal 2011 and fiscal 2012 that "partially obscured the deficits in the financial statements."

The Legislative Audit report said the treasurer "indicated… that this is the University's typical practice to eliminate deficits on the financial statements on June 30." But the UA, in its response, denied having such a practice.

"The University did not establish a receivable as an effort to obscure a deficit balance, and we disagree that it is our typical practice to eliminate deficits in this way."

In the press briefing, Schook said the same accounting method used in Advancement was used elsewhere in the UA's budget and had passed muster with outside auditors. Don Pedersen, vice chancellor for finance, said the disagreement over the accounting procedure would not likely cause problems elsewhere in the budget because only one other division -- the Walton College of Business -- has a budget complicated by multiple funding sources like the Advancement Division.

The audit report says that it has been forwarded to prosecuting attorney in the 4th Judicial District, but the report does not suggest any obvious crimes. Choate did apparently claim a $2,052 reimbursement for an expense that had actually been paid directly to the vendor. That duplicate expense was discovered in June 2012 and Choate repaid it in October. (Meanwhile, Gearhart said, Choate failed to claim reimbursement for $7,200 in legitimate expenses, which the UA paid him before he left.)

Other than that single case, the Legislative Audit staff "noted no other duplicate payments or improper expenditures."

Update: The UA has also released this statement in response to the report findings:

Statement from University of Arkansas System President Donald R. Bobbitt 

“The audit report released today by the Division of Legislative Audit regarding the advancement division of the University of Arkansas confirms the issues that contributed to the overspending in the division. While the expenditures were for legitimate needs leading up to a major fundraising campaign and the auditors found no theft or fraud, it’s clear that there was a lack of budget oversight within the advancement division. As Chancellor Gearhart has said, this was a case of overspending the budget of a division within the university.

“As leaders of a vital public institution, we must ensure that we are closely monitoring and appropriately accounting for all of the university’s resources. We will address all of the issues raised in the report and move forward in a positive way. Since becoming aware of the problem last fall, Dr. Gearhart and his team have worked steadily to identify the causes of the overspending and have taken steps to ensure this does not happen again. I want to reiterate and confirm my full support for Chancellor Gearhart in this effort. In calling for these audits, Dr. Gearhart invited a transparent review of the advancement division finances with the goal of determining steps needed to correct the problem. I am grateful to the auditors for their diligent work and for their recommendations, which we will begin to implement immediately. 

 “While the unanticipated deficit in the advancement division was and is unacceptable, the university itself remains in very good shape financially. With growing enrollment and strong reserves, the university is in the best financial shape in its history.”