University of Louisville Releases Financial Auditor’s Review Following Court Settlement

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The University of Louisville on Monday released a financial auditor’s review that had been kept out of the public’s eye for more than a year, the result of a court settlement with the Kentucky Center for Investigative Reporting.

The February 2014 assessment, prompted by a series of high-profile thefts and embezzlement, found a system that had been susceptible to fraud and inappropriate disbursements, among other shortcomings.

“Because the circumstances that allowed the frauds to occur have not substantially changed, we believe the University is still at risk for future fraudulent activity,” the report notes.

The analysis from Louisville-based auditing firm Strothman and Co. offers a detailed, qualitative look at financial oversight issues and includes a series of recommendations, nearly all of which the school later says it adopted.

After public records requests were rebuffed, the Kentucky Center for Investigative Reporting in December filed a civil suit in Jefferson Circuit Court seeking the release of Strothman’s 17-page analysis.

The news organization sought a declaration that the university willfully withheld records related to the consultant’s examination of the school’s financial management. U of L claimed the documents were a preliminary draft and not a final report.

As part of a settlement of the lawsuit, the university agreed to release the initial report provided to the school by the auditing firm. The case was dismissed Monday by Judge Olu Stevens. Read the report.

U of L spokesman Mark Hebert released the following statement:

“Settling the lawsuit at this juncture is the prudent course of action for the University. The litigation was becoming costly, protracted and a burden on university personnel. While we believe the attorney general’s opinion (14-ORD-181) supports our position that the document in question is a draft and not subject to public disclosure, we respect the media’s right to differ. While we believe settling this issue is in the best interests of all involved, it should not be construed as precedent for the University’s obligations under the Kentucky Open Records Act.”

“We are committed to improving our financial controls and accountability. We are following an aggressive timetable for implementing the recommendations from Strothman. Many of their recommendations are already in place and we plan to have all others implemented by the end of the year,” the statement read.

The Strothman assessment became the basis for a more broad university “consulting report” released in July that highlighted changes the university was undertaking or planning to take. That document provided an overview but did not cite details on particular findings.

Among its many recommendations, Strothman said U of L should hire a chief financial officer, add a layer of review in the Finance Office, standardize security across its computer system, and improve controls over the payroll system.

The school has paid Strothman more than $160,000 for its work and has previously authorized an additional $100,000 for the firm to help implement the recommendations.

As part of its examination, Strothman tried to determine how many bank accounts existed in the name of University of Louisville, University of Louisville Physicians or any derivative. The firm requested information from all banks in a 50-mile radius. The university provided a list of 11 authorized accounts at PNC Bank, as well as one account in the name of the University of Louisville Athletic Association.

The firm ultimately found more than 20 additional bank accounts linked in some manner to U of L. They include accounts for the German Club, the U of L Sports Administration Club, U of L Parking, and more.

Strothman also learned of several accounts linked to University Medical Associates, the previous incarnation of University of Louisville Physicians. However, Fifth Third Bank told Strothman that they were unaware of any accounts in the name of the university.

The auditing firm later found additional accounts linked to previous entities tied to University of Louisville Physicians, according to the report.

Strothman determined the banking account matter needed follow-up.

For all the bank accounts, “management should ensure that follow-up procedures be performed to determine that these accounts are not being used for fraudulent or inappropriate purposes,” the report noted.

The consultants wrote: “As an example, someone who wished to steal receipts from University of Louisville Athletics could set up a bank account in the name of ULA, LLC and make deposits into that account if they were able to physically divert the check.”

The firm repeatedly called for increased oversight and accountability.

In making a case for creating a CFO position, the auditing company noted that U of L doesn’t always “compel corrective action” when deficiencies are identified.” And improvements “recommended by the University’s internal auditors and others often do not get implemented on a timely basis. University controls and policies are often applied inconsistently or not at all. It was unclear to us who had primary responsibility for this area.”

U of L later hired Harlan Sands, who earlier this year stepped into the combined role of chief financial officer and chief operations officer.

A handful of other findings stand out. Strothman found that a manager requesting a disbursement in at least one department is the same person to approve the disbursement.

The consultants also sought more oversight in the hiring of temporary and student employees. There’s potential a manager “would be in a position to add a fictitious employee to the payroll system.”

The February 2014 Strothman analysis was presented to U of L trustees in the board’s April 2014 meeting. Trustees were given 30 to 40 minutes to review the draft report, but couldn’t keep copies, according to board member Steve Wilson. At the time, school spokesman Mark Hebert said the company was still working on the document.

The university released its own broad “consulting report” in July. Officials had agreed with nearly all of the firm’s recommendations, though details on the firm’s findings were sparse. School leaders noted that many of the changes were already underway. Read that report.

Disclosure: In October 2014, the University of Louisville, which for years has donated to Louisville Public Media, earmarked $10,000 to KyCIR as part of a larger LPM donation. Trustee Stephen Campbell has donated to KyCIR. See our About page for more information.

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