Budget changes due, UA agrees
Legislators: It’s wrong to list overspending as debt owed
Top University of Arkansas officials agreed under intense questioning by legislators Friday to adopt financial accounting changes recommended by state auditors for the Fayetteville campus.
During the two hours they questioned UA Chancellor G. David Gearhart and his top finance staff members, Legislative Joint Auditing Committee members focused on how well the university accounts for income and spending in its deficit-ridden fundraising division, which overspent its budget by $4.19 million in 2012.
“From accountants I’ve talked to, it sounds like [UA officials] were defending an accounting method that was indefensible,” state Sen. Bryan King, co-chairman of the committee, said Saturday. “It would be shocking if they went back to the old accounting method that was part of the problem.”
Friday’s wide-ranging hearing included allegations from former UA spokesman John Diamond, who said under oath that Gearhart ordered Advancement Division leaders at a Jan. 14 meeting to get rid of records and stop creating them. The meeting took place just a few weeks before Gearhart asked state auditors to review the deficit spending, Diamond said.
Gearhart, under oath, de-
nied Diamond’s allegations.
Legislators also voiced concerns about competency, transparency and accountability at the UA-Fayetteville campus, “which all go to an overall trust issue” involving the state’s largest university and its supporters and taxpayers, Rep. Andy Mayberry, R-Hensley, said at the meeting.
By hearing’s end, legislators were still considering what to do next regarding Diamond’s allegations and other issues raised by the audit, which was released Tuesday. They voted to continue work on the audit but didn’t say what the next step would be.
Before the meeting’s end, however, legislators insisted that UA officials make all of the auditors’ recommended changes to their accounting procedures.
Gearhart, Vice Chancellor for Finance and Administration Don Pederson and Treasurer Jean Schook argued that some accounting issues singled out by state auditors and legislators amount to a difference of opinion over acceptable record-keeping methods for universities like the Fayetteville campus.
“I hear you saying you reluctantly agreed with legislative audit’s recommendations and will from this day forward conduct business as recommended?” asked Rep. Kim Hammer, R-Benton, the legislative joint auditing committee’s other co-chairman.
“We have recognized there is a professional difference of opinion,” said Schook. “We have deferred to auditors’ recommendations.”
Legislators questioned three main areas of accounting for the University Advancement Division, which includes fundraising, alumni affairs and other outreach efforts. The division also overspent its fiscal 2011 budget by $2.14 million, according to a report released Tuesday by the Legislative Audit Division and University of Arkansas System internal auditors.
Most accounting questions centered on whether Advancement Division budgets gave a true picture of what was happening.
OFF-BUDGET HIRING
Legislators questioned how the fundraising division hired employees and paid them over several years without having permanent funding in the budget to do so and without top finance officers noticing the chronic overspending.
The university’s own report on the deficit, issued last October and signed by Schook, said the Advancement Division hired 20 employees between 2008 and 2012, “without determining if sufficient budget or other resources were available for permanent funding.”
Schook’s report went on to suggest that “the primary driver of accumulated deficit balances was the addition of staff with no permanent funding.”
“The deficits were $2 million. Where did that money come from to allow them to spend into a hole?” asked Rep. David Meeks, R-Conway.
Gearhart, Pederson and Schook explained that they used money from reserve accounts to fill in the holes. But because of budgeting practices, annual budgets didn’t show that the Advancement Division was spending in the red.
University officials didn’t learn of the problem for fiscal 2012, which ended June 30 of that year, until a few days later on July 6, 2012. That’s when the University of Arkansas Foundation refused to transfer $225,000 to the division because of a lack of available funds.
“We clearly had the reserves [to pay for new hires], the problem was, we weren’t clearly identifying that we were doing so,” Pederson said.
“When you look at your budget and explore hiring people within that budget … what controls are in place?” Meeks asked.
Pederson said, “We don’t have sufficient controls in place to check that. We’re working on that.”
The issue of hiring employees without permanent funding apparently traces back more than a dozen years, according to state audit records and Arkansas Democrat-Gazette articles.
The UA’s Fulbright College of Arts and Sciences overspent its budget for 2000 by $640,583, according to news accounts. An audit by the University of Arkansas System’s internal auditors found that the college was paying $1.07 million in “total unfunded salaries” for fiscal 2001.
Pederson told auditors at the time that the college had historically hired people for “unfunded positions” because there is a basis for believing money will come through during the year, according to a Democrat-Gazette article.
Internal audit chief Jacob Flournoy said at the time: “I think that’s risky. … It’s been working that way, yes, but it’s gotten to the point where we can’t monitor it effectively.”
SPEND NOW, AND HOPE
Another accounting topic that generated debate was how UA finance officials balanced overspent budgets by writing in an “accounts receivable” for that amount.
The accounts receivable entry, auditors said, records a debt owed. But finance officers wrote in the deficit amount to balance the budget at the end of the year based on what had been overspent. And the university didn’t know whether that revenue would flow in to cover the amount.
“Deficit spending has been converted to an asset,” King, R-Green Forest, told Gearhart and his staff. “Do you see how it almost sets up the system to fail, as it did here?”
“It doesn’t make sense,” said Sen. Jonathan Dismang, R-Beebe, who works as a chief financial officer for an investment company. “You’re spending money you’re planning to get in the future.”
Legislative Auditor Roger Norman explained it this way at the hearing. The purpose of an accounts receivable entry is to record the amount of revenue that’s due from another organization or source, Norman said. “The university did it based on expenses. It had nothing to do with revenues.”
Dismang asked the UA officials: “Do you still plan on booking receivables for expenditures?”
Schook replied that the university would not.
ENTRY’S SIGNIFICANCE
Gearhart told legislators in an opening statement Friday that he acknowledges responsibility for the overspending.
“It was on my watch and happened under my leadership,” he said. “The proverbial buck stops here and I do not shy away from that responsibility.”
At the same time, he and his finance officers said the overspending that caught administrators by surprise involved just one division. Auditors had found deficits in two other divisions, but university officials were aware of and were monitoring those divisions.
Overall, Gearhart said, “your university is in the best position financially it has been in years.” And he reminded them: “There has never been a deficit in the university as a whole.”
Schook also told legislators that recording the Advancement Division’s deficit as an “accounts receivable” did not misstate the financial picture.
“Whether it is included or excluded in our financial statements does not materially misstate the financial statements,” she said. “And that is the standard.”
But Dismang disagreed with Schook about the significance of “accounts receivables” and the deficits they represented, saying they were “material” to the division’s audit.
The accounts receivable “clouded the amount of money available. I would contest the comment they were not material. They were material for [the Advancement Division], but not for the institution as a whole,” Dismang said.
“For the University of Arkansas, they may not be material,” Norman said. “But this audit was for the Advancement Division.”