Prosecutor: No Criminal Activity, But Breakdown of Controls in UA's Advancement Division

An investigation by a northwest Arkansas prosecutor found no evidence of criminal activity in the University of Arkansas Advancement of Division, but cited "a breakdown of internal controls" in the division and recommended the university make changes suggested by the Arkansas General Assembly's Legislative Audit Division.

In a 14-page letter submitted to Fourth Judicial District Prosecutor John Threet, Deputy Prosecuting Attorney David Bercaw detailed findings in his investigation into matters surrounding a multimillion-dollar budget deficit in the advancement division.

The Arkansas Times posted a PDF of the complete letter here.

In several instances, Bercaw and his team found evidence of errors, breakdowns of internal controls, breakdowns of the budgeting process, inadequate bookkeeping systems and incomplete document retention policies.

The letter specifically questioned the UA's policy of zeroing out account deficits on the last day of the fiscal year by inserting an equivalent amount as an account receivable, only to then remove that the next day to start a new fiscal year. That practice allowed the Advancement Division's deficit to grow unnoticed for two fiscal years.

But even that was not considered criminally suspicious.

"We did not find evidence of criminal activity in this matter," Bercaw said. "This is very unfortunate situation of a breakdown of internal control with the Advancement Division. We strongly recommend that the University implement all of the recommendations of Legislative Audit."

Prosecutors and legislators have been working to get to the bottom of exactly how the division overspent its budget by $4.2 million in the 2012 fiscal year and had deficits dating back at least until 2008. The audits, conducted by the Legislative Audit and the University of Arkansas System's internal audit section, show that the division hired new employees without yet having the revenue in place to cover their salaries.

The division was $2.1 million over its budget in 2011. Some of that deficit carried into the 2012 budget year. University officials didn't know about the overspending until the June 30, 2012, close of the fiscal year. The school is covering the shortfall from its reserves.

Legislative Audit presented its report on the matter to legislators on Sept. 13. During the hearing, two top university officials hurled conflicting charges under oath regarding purported destruction of budget-related documents. The university's former top spokesman, John Diamond, who was fired, said school officials ordered the destruction of documents relevant to the audits. Chancellor David Gearhart has denied Diamond's claims.

Matters contained in the audit, along with Diamond's claims that documents were destroyed, were referred to Threet's office for investigation. In the letter released Thursday, Bercaw detailed his findings:

* Looking into a duplicate payment involving a $2,051.87 reimbursement to Brad Choate, the former vice chancellor for advancement, and an identical payment to a university vendor, the prosecutors concluded that the payment was simply an error that "does seem to indicate some internal confusion in using their accounting system."

* Choate's former budget director, Joy Sharp, moved $1.35 million that was supposed to be spent specifically on the Jean Tyson Child Development Study Center into a general account, but prosecutors concluded that the transaction was an error and discounted suggestions that she did it to disguise the deficit. They also found that Sharp was inexperienced and insufficiently trained in some of the budgeting and spending matters with which she was intrusted.

"We are not persuaded that this transaction was an intentional effort to cover the deficit in the Advancement Division or any type of fraud," Bercaw said.

In another part of the findings, Bercaw said investigators don't believe "there was any criminal intent to commit fraud by any one person or group of persons." He said there is no evidence that funds "were expended for inappropriate or fraudulent purposes," and that "all expenditures were valid and there were no missing funds."

* Finally, prosecutors said they found no evidence that any records under Freedom of Information Act requests, relevant for prosecutors' investigation or needed for the audit were destroyed, as alleged by Diamond in the September hearing.

Prosecutors did find that for one type of document, Foundation Payment Authorization Forms, the university had no records retention policy and likely should have retained those forms for a certain period. Still, prosecutors allowed that those forms might be owned by the private, nonprofit University of Arkansas Foundation, and possibly not subject to the FOIA.

New Procedures

And during a meeting of its board of trustees last month in Little Rock, school officials said they are implementing new procedures for hiring and accounting. At the recommendation of auditors, officials now have to have written documentation and a revenue source to cover any new hires. The division's computer system is to be set up to prevent anyone from being hired without an identified revenue source to cover the costs.

The school also has stopped letting employees share computer login credentials.

The document notes the university set up a system so that it now records expenditures in the appropriate accounts and ensures that contributions are deposited into the accounts where they belong.

(The Associated Press contributed to this report.)