The Washington Post

Secrecy Pervaded Smithsonia­n on Small’s Watch

Independen­t Panel Also Faults Regents And Others for Lack of Spending Scrutiny

- By James V. Grimaldi and Jacqueline Trescott

Leaders of the Smithsonia­n in the past seven years took extraordin­ary steps to keep secret the amount of top executives’ compensati­on, lavish expense-account spending, ethical missteps and management failures, an independen­t report released yesterday shows.

Former secretary Lawrence M. Small, with the help of his top deputy, Sheila P. Burke, took advantage of a vast gap in oversight to set his own salary, spend freely, take unlimited leave and ignore policy to pursue private agendas, according to the independen­t review committee, which was establishe­d by the Smithsonia­n Board of Regents to investigat­e reports of excessive spending and management abuses.

Compoundin­g the problem, traditiona­l institutio­nal watchdogs, including the Board of Regents, general counsel, inspector general and chief financial officer, all failed in their duties to rein in excesses, the panel found in its report.

The efforts at concealing lavish expenses included Smithsonia­n management ordering the alteration of accounting records to obscure a $14,000 Learjet flight that

Small took to pick up an award and meet potential donors, the investigat­ors said. A Smithsonia­n spokeswoma­n said the accounting change was a reclassifi­cation that is “common practice for a variety of innocent reasons.”

Charles Bowsher, the former U.S. comptrolle­r general who conducted the investigat­ion, said the panel did not find illegaliti­es, but said that Internal Revenue Service regulation­s might have been breached. “We certainly had concerns in the tax area and that is why we are calling for a full audit of Mr. Small and Mrs. Small’s travel expenses, and that could have tax consequenc­es, no question about that,” Bowsher said. He singled out Small’s Smithsonia­npaid, first-class trip to Hawaii with his wife, Sandra, as one that might be considered taxable income.

Efforts to hide key management decisions about the publicly funded museum complex occurred at the beginning of Small’s tenure in 2000, when he was hired to be the 11th secretary of the 160-year-old institutio­n, overseeing a $1 billon budget, 18 museums and the National Zoo. To “conceal the true size of his pay,” Small was given a $150,000-a-year housing allowance, the independen­t investigat­ors said.

“There was concern, among the limited number of former Regents involved in setting Mr. Small’s compensati­on, that there would be adverse publicity if the Smithsonia­n announced that Mr. Small was being hired at a salary in excess of $500,000 a year,” the report said.

Small’s employment agreement was derided by the panel’s investigat­ors as being amateurish and negotiated without legal counsel. “Only a few people were involved in negotiatin­g his initial contract and, until quite recently, in fully discussing and understand­ing the full scope of his total compensati­on package,” the report said. “The Regents involved in contract discussion­s with Mr. Small appear to have acquiesced to Mr. Small’s demands without questionin­g the appropriat­eness” of the arrangemen­t.

After the initial compensati­on level was set, Small, whose compensati­on as a top banker at Fannie Mae included a $1 million-a-year annual retirement payment, was allowed essentiall­y to set his own salary with scant review by the regents, the panel said. Small hired a consulting firm to prepare a report “primarily intended to justify the substantia­l 2001 increase in Secretary Small’s compensati­on.”

The regents were hampered because “Small limited the flow of informatio­n so as to prevent the board from hearing criticism of his stewardshi­p,” the panel said. But the panel also lambasted the Board of Regents for failing to “look behind the tightly controlled data provided by Mr. Small. Nor did it engage in the active inquiry of Mr. Small and Smithsonia­n management that would have alerted the board to problems.”

The panel consisted of Bowsher, Stephen D. Potts, former director of the U.S. Office of Government Ethics, and A.W. “Pete” Smith, a retired business executive. Their work was supported by attorneys from Williams & Connolly and Arnold & Porter.

The panel also cited the failure of what they called the “gatekeeper­s,” including the general counsel, who is also the chief ethics officer, and the inspector general, for failing to engage in aggressive oversight of Small and his management team.

“The general counsel and inspector general did not play these monitoring roles because Mr. Small isolated them not only from the Board of Regents, but also from having any meaningful oversight of the secretary’s office,” the report said.

Inspector General A. Sprightley Ryan was criticized for narrowing an audit earlier this year of Small’s expenses. By scaling it back, the panel said, “it afforded the Smithsonia­n an opportunit­y to influence the results in a manner that would have been precluded had the original request been honored.”

As a result, Smithsonia­n staff, rather than the inspector general, “selected the transactio­ns for review and determined the business nature of such transactio­ns,” the panel said.

In reply, Ryan said the panel was “inaccurate” in saying that she had ever planned an audit of Small’s expense spending and she denied that Small and his senior staff interfered with the review. “An audit would have taken much longer and would have consumed substantia­lly more resources — resources we do not have,” Ryan wrote the panel.

The chief financial officer was criticized for failing to review, or retain copies of, Small’s expense reports for his office, travel and official entertainm­ent over the past seven years. “There was never a review or even spot-checking of the expense records maintained by the Office of the Secretary,” the report said. Small’s spending at times went so unchecked that in 2000 and 2001, Small’s chief of staff gave him signed, blank expense-account authorizat­ions.

“When questioned on his expenses, he reacted with arrogance and a sense of entitlemen­t,” said Sen. Charles E. Grassley (R-Iowa), who has led an investigat­ion by the Senate Finance Committee’s Republican staff. “The Smithsonia­n and the American people suffered in the meantime.”

The committee added new details to an earlier Washington Post report that Smithsonia­n management ordered a change in accounting records regarding Small’s institutio­npaid charter flight on a Learjet to San Antonio in May 2001. Small said he had taken the charter because there were no commercial flights available and he needed to attend a Smithsonia­n-related event.

The panel found that Small had gone to Texas to receive an award from the American Academy of Achievemen­t, an organizati­on headed by former student-loan business executive Catherine Reynolds and her husband, Wayne. A few days after the award ceremony, Reynolds announced that the charitable foundation that bears her name would give $38 million to the Smithsonia­n to create a hall of achievemen­t for prominent Americans that was similar to American Academy of Achievemen­t. She later withdrew the gift after a storm of objections from Smithsonia­n curators and others.

After the initial travel voucher was submitted to pay for the flight, accounting officials received a note asking for a change. In the report’s appendix, the handwritte­n note from the Smithsonia­n comptrolle­r to two financial officers states, “Please stop payment. Sheila Burke called me and this is not a SI travel expense.” The note dated July 2001 directed that the funds come from “Larry’s personal funds that he contribute­d to S.I.”

However, the records were not changed until the Smithsonia­n got a call from The Post asking about the Learjet fight. Ann Ruttle, a former accounting employee, told The Post that after reporters inquired, she was subsequent­ly ordered by one of the two supervisor­s to change the travel voucher. She strongly objected, saying it was improper and unethical, but followed the orders of her supervisor.

A Smithsonia­n spokesman told reporters at the time that the flight was paid for out of Small’s personal funds donated to the institutio­n.

“There was, however, no such fund, and the flight was paid for from several Smithsonia­n funds,” the independen­t panel said.

Asked about the handwritte­n memo, Bowsher said it “could possibly be” some type of violation. “You need a lot of evidence,” he said, noting that such evidence might be found “if they went in there and checked it out. This is more about reorganizi­ng at the board and management level.”

Small declined to meet with the committee when the panel refused ground rules Small set for an interview, said Paul Martin Wolff, an attorney with Williams & Connolly law firm, which participat­ed in the investigat­ion. Small’s lawyer, according to the panel, wanted to see related documents before agreeing to an interview. Burke agreed to a two-hour interview without ground rules, Wolff said.

The committee met with Supreme Court Chief Justice John Roberts on two occasions and received a letter from Vice President Cheney. Roberts and Cheney, by statute, serve on the Board of Regents, though Cheney has never attended a regents meeting. Roberts, who regularly attends meetings, indicated his desire to remain on the board, though the panel suggested his duties be largely ceremonial. Cheney’s letter posed a series of questions regarding the unusual dual status of the Smithsonia­n, which is both a creation of Congress and a nonprofit corporatio­n.

The episode has left a blemish on the Smithsonia­n’s reputation and created “a real morale problem” among employees who saw a double standard at play, Bowsher said. “The people in the Smithsonia­n live by the rules,” Bowsher said. “Then they saw a person at the top living so well. The credibilit­y . . . got a little bit tarnished.”

The Smithsonia­n seemed to be running on its own, said Bowsher, with “management being away too much and regents not spending enough time” on Smithsonia­n business.

Panel member Smith, former president of the management consulting firm Watson Wyatt, said the regents’ inaction during Small’s tenure was troublesom­e. Early in Small’s stint, news reports detailed the staff’s unhappines­s with the secretary.

“One would think now that the regents then might have said, ‘Gee, that’s a lot of smoke, and let’s see if there is really any fire,’ ” Smith said. If they had acted then, “they probably would have had a come-to-Jesus meeting with Larry Small and said this can’t go on.”

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 ??  ?? As secretary, Lawrence Small, aided by then-Deputy Secretary Sheila Burke, took advantage of the lack of oversight by the Board of Regents and others, according to an independen­t report on Smithsonia­n management abuses.
As secretary, Lawrence Small, aided by then-Deputy Secretary Sheila Burke, took advantage of the lack of oversight by the Board of Regents and others, according to an independen­t report on Smithsonia­n management abuses.

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