The Board of Regents Audit: It Could Have Been Worse

It took me a while, but I have finished reading and digesting the Board of Regents Audit.  Unless you are really interested in reading audit-speak, I don't recommend wading through it yourself.  My thoughts follow beyond the jump, and several media outlets have already posted good summaries of the findings.

Before getting to my thoughts, we should address some comments made in response to the audit by outgoing University President Jon Wefald.  My first thought on seeing that Wefald had commented on this was that it would probably be a good time for Wefald to stay away from the media for a while.  You know, the whole "put down the shovel and walk away" thing.  Other than stating the incredibly obvious -- he admits he gave Bob Krause too much authority -- Wefald didn't say much of note.  Well, other than this little gem:

"I really chewed him out for that Ron Prince deal. That was so ridiculous. Ridiculous and absurd," Wefald said.

Good, I'm really glad to hear that Krause didn't skate on that whole Ron Prince super-double-secret deal thingy.

Anyway, the audit is out, and to return to the title of this post, my overriding thoughts regarding this whole situation are easily summed up: I expected it to be worse.

You may find that hard to believe.  We are being roundly criticized by outside commentators -- much more on that one later -- and even those who cover K-State with a favorable slant are looking at this with disapproval, as they should.  Even Dr. Saturday, probably the preeminent college football blog, led with this story today.  That is almost certainly the first time in that blog's history that we have been the lead story.

Before I start looking at why this isn't as bad as I expected, I should make it clear for those who are less capable than others of understanding subtle distinctions that none of this is good.  Our alma mater has clearly been managed incompetently for at least the last five-to-seven years, and the athletic department has been a mess of an old boys' club during that time.  Krause and Wefald deserve all the criticism they have received, and then some.  Some of the "business decisions" made defy any and all explanation.  My point, however, is that this is not nearly as bad as I thought it might be, and is really a case study in incompetent leadership rather than an exhibition of a renegade athletic department cheating to win.

Roughly the first two-thirds of the audit discusses findings of improprieties involving various separate legal entities that are closely associated with K-State, including the alumni association, KSUGCMRF and Colbert Hills Golf Course, the KSU Foundation, and the NISTAC Cluster (I would add another word to that).  Many of the findings in these areas dealt with shoddy management and corner-cutting that needs to be improved, but really lends itself more to the appearance of impropriety than actual impropriety.  For example, the audit details two instances where shoddy reimbursement systems led to double payments (p. 14).  This is stupid and a waste of money, but it's nothing criminal and can be dealt with by appropriate oversight.

A lengthy portion of the audit is devoted to the NISTAC business incubator, detailing a dizzying set of transactions that may have involved self-dealing and inappropriate voting measures.  Without doubt this business arrangement needs to be reviewed.  However, again this goes back to Krause and Wefald and their apparently Nixonian belief that they were above reproach in their actions.  New, competent leadership can ensure problems such as these do not arise.

On page 24, the report gets down to what we are most concerned about, specifically the audit's findings regarding the Intercollegiate Athletics Association.  Here, most of the findings are concerned with circumvention of appropriate controls and possible tax issues relating to the payment of coaches and athletics directors.

First, one thing I keep seeing brought up is the 13 undocumented transactions totalling $845,000.  For sure, this could be a big issue, as that's a lot of money to be spent without documentation.  But a careful reading of the audit supplies me with at least reasonable doubt as to whether these undocumented transactions are as significant as some may have you believe.  First, the audit covered fiscal years 2001 through 2008, meaning that $845,000 was spread over seven years.  Second, the audit indicates those amounts were disbursed to Tim Weiser, Bill Snyder and Bob Krause, among others.  How many others are we talking about here?  Two?  Ten?  If we're talking about 15+ individuals sharing $845,000 over seven years in a school that has to pay as much for transportation as K-State does because of it's isolated location, suddenly we're not necessarily talking about a huge waste of money.  I don't know that is how it happened, but those looking at it from the other side don't have any better proof that that is not how it happened.

In today's business climate, the terms "supporting documentation no longer available due to normal record retention practices" necessarily evokes memories of Enron, Arthur Anderson and improper document shredding.  But there's no evidence here that our athletic department was shredding documents to hide improper payments.  One of the unavailable documents was Weiser's original 2001 contract.  Given that new contracts had replaced that agreement at least twice and that Weiser left the school last summer, it's not particularly surprising to me that it wasn't available.  Remember, the athletic department is not a state entity.  It's a private, non-profit corporation, and it's entitled to decide how long it wants to keep old records around, subject to whatever restrictions the SEC and Sarbanes-Oxley places on document retention.

Now the part for which you've all been waiting: the payments to limited liability companies.  The report found that coaches and athletic directors were being compensated via payments to their personal LLCs, such as Snyder's SSM, Inc., Weisers "The Weiser Way," and Krause's "Horizon Ranch," which is curiously no longer available on the Kansas Business Center Web site.  This is big news, of course, because we recently found out about a secret arrangement between Krause and Ron Prince, or more accurately Prince's personal LLC, "In Pursuit of Perfection," which is currently registered to 111 Anderson Hall, Manhattan, Kan. 66502.  Also, IPP, LLC in Kansas is registered to a law firm in Topeka.

Anyway, the audit found that a majority of the compensation paid to Snyder and others was paid to their LLCs, ostensibly for "consulting," "appearances," and "endorsements."  As the audit notes, many universities do this, and it's not per se improper.  If K-State had a reasonable basis for classifying the individuals at issue as independent contractors in these situations, then the payments are not improper.  The issue is who withholds taxes.  For payments to the LLCs, the athletic department would not withhold taxes, leaving that up to the LLCs.  Again, if the distinction is proper, this isn't a problem and there's absolutely no evidence that Weiser, Snyder, or anyone else have been improperly paying their taxes through their LLCs.

The question that kept popping into my mind while I read this information was how this evidence would play into the lawsuit between K-State and Ron Prince.  At first, I thought the University was screwed, because these repeated agreements with individual LLCs would indicate a pattern of behavior that would strongly indicate Jon Wefald knew what was going on.  However, the audit points out that this practice was discontinued in 2005, due to concerns about taxation issues.  If the practice was discontinued in 2005, and Krause truly did hide the secret agreement from President Wefald, then an argument can be made that Krause did not have the authority to enter into such an agreement and that Wefald did not know of it and did not approve of it. 

In the interest of full disclosure here, I should point out that it appears Frank Martin has his own LLC.  Make of that what you will, but given that it was formed in 2007, which is within the scope of this audit, the audit uncovered nothing untoward regarding payments to Martin's LLC.  It's entirely possible that Martin maintains his own LLC for services that are legitimately outside the scope of his employment.  Further, please note that it appears Mark Mangino, Bill Self, and Bo Pelini also have personal LLCs.

My biggest "WTF?" moment in reading the audit came when the athletic department's loan to Tim Weiser was discussed.  For whatever reason, Krause decided it was a good idea to loan Weiser $500,000 -- yep, half a million dollars -- with Weiser not required "to justify or explain the purpose" of the loan.  As the audit states, terms such as these "are not standard clauses even in the most informal of lending agreements."  I know I wouldn't loan even $50 to anyone without some direction on how it was to be used.  The audit notes that the loan was repaid within one month of Weiser's departure for the Big 12 office in Arlington, Texas, and Wefald claims in the article linked earlier that Weiser paid interest on the loan.  All's well that ends well, I guess, but I'd rather our athletic department leave the lending to the professionals.

In conclusion, in addition to my overriding thought that "it could have been worse," I want to echo something I recently posted over at Corn Nation.  Everyone is pointing out what a train wreck our athletic department is right now, and there's no denying that the last several years have been an unmitigated disaster.  However, I take great comfort in the fact that Kirk Schulz now occupies 100 Wilson Court, and that John Currie is now in charge over at Bramlage Coliseum.  If Jon Wefald were still president and Bob Krause were still athletic director, I would be terrified of what the future may hold.  Further, the department wouldn't even be receiving the probably cautious donations it's receiving now. 

Point is, it's not the institution that's inherently incompetent, but rather the people in charge of it who make poor decisions.  It's often said in America that we are a government of men (PC term: people), but that saying really applies to all institutions.  An institution is not some living being with a will of its own; rather, it's taken in whatever direction by those with authority.  Wefald and Krause got far too comfortable with their positions and took K-State and its various related entities in a poor direction.  With Schulz and Currie in office now, both outsiders with no prior connection to K-State, we can look ahead and hope that the dark days are behind us.  By releasing this information, I am already confident the new administration will be more open and honest with the fans, donors, alumni and friends of K-State than the previous regime.

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