Monday, August 15, 2016

University of Minnesota Athletic Accounting Part IV

Athletic Accounting Part IV

In December 2015 after the U of M internal auditor released her audit of the administration of the athletic department the president acknowledged that "this university failed to live up to the standards Minnesotans set for us and that we should demand for ourselves." See the December 10, 2015 Pioneer Press report on UMN President Kaler Promises Closer Watch on Gophers Sports Spending. The Star Tribune declared in its December 9, 2015 editorial that the audit revealed "a department whose spending excesses have undermined public trust." See Sense of Privilege at U of M Athletics Department.

Now the internal auditor has quietly released a separate audit on the operations of the athletic department. The primary conclusion is that "Athletics needs to improve their control environment with an emphasis on oversight and procedures to address contract management and business processes." See p. 3 of the June 2016 Report on Athletics Finance & Operations.

This conclusion is a bureaucratic understatement. The report describes a total of 19 "control issues" and makes 23 recommendations with six of those recommendations classified as essential to minimizing operational and compliance risks.

Here is a sample of the issues:

(1) The auditor noted "continued deficiencies" in management over a broad range of contracts, including vendor, employment, equipment, trade, facility rental, and sponsorship contracts. The auditor specifically determined that procedures are not consistently performed to verify that contract terms are being fulfilled or to use competitive bidding for contracts with a value greater than $50,000 as required by university policy. For example, the department did not use competitive bidding to select Verizon for cell phone service that cost $230,00 for a 12 month period or to select an airline for a $270,000 contract. (Athletics could not even find the Verizon contract!)

(2) Athletics alcohol management is not reconciled to Aramark alcohol cost reimbursement. In fiscal year 2015 Athletics purchased $713,000 and in fiscal year 2016 over $1 million was purchased through April 15, 2016. The auditor noted the obvious risks (p. 9):

It is prudent business practice to perform necessary reconciliations to verify University funds and assets are being accounted for. If Athletics is not performing reconciliations it cannot be sure it is recovering its alcohol purchase costs, reimbursements from Aramark are accurate, and that there was no theft. In addition, Athletics' liquor license could be at risk if appropriate due diligence is not performed.

(3) Athletics payroll processes lack regular and effective monitoring. Among other things, the auditor found that Athletics does not determine if the number of overtime hours is reasonable. The cost of this overtime is substantial: $370,000 of overtime and an additional $56,000 of holiday or double overtime in fiscal year 2016 through April.

(4) Disbursement processes are absent necessary controls. For example, in a 12 month period Athletics executed 23 contracts in violation of its own policy by failing to have the sports administrator pre-approve transactions from $2,500 to $9,999 and to have its CFO pre-approve transactions between $10,000 and $50,000.

(5) Distribution of "extras" purchased from Nike is not consistently scrutinized. Athletics purchases non-competition items for its athletes, such as winter clothing. There was an increase in Nike purchases above and beyond the complimentary allotment during fiscal year 2015 by $781,099 and for the first half of fiscal year 2016 by $889,098.

It is clear that there has been a failure to exercise effective oversight of the athletic department from the U of M president on down the line. Substantial sums have been squandered as a consequence of this failure of leadership. The athletic department has now developed a "management action plan" in response to the issues identified by the auditor.

But the plan fails to address the fundamental problem. The major revenue sports programs in our colleges have become part of the sports entertainment industry with $850,000 athletic directors, million dollar coaches, a never-ending athletic arms race, and countless scandals. See Athletic Accounting Part III.

There is a solution that would enable the University to disentangle itself from the big business of the major revenue sports while allowing the games to continue. The football and basketball teams should be organized as separate corporations. The University would grant a license to those corporations to use the University name for the teams. The license fee would be a percentage of the revenues generated from ticket sales, broadcasting rights, advertising, etc. The license fee would be used to support the non-revenue sports the University decides to retain, such as track and swimming and gymnastics.

This is a solution that would enable the sports fans (including the U of M president and most of the Regents) to continue to enjoy the games. Of much greater significance, it would enable the University to focus on education, research, and public service--the reasons for its existence.

Michael W. McNabb

University of Minnesota B.A. 1971; J.D. 1974

University of Minnesota Alumni Association life member

Editors note:

The auditors report noted by the author is apparently not yet available on the Univerity of Minnesota web-site. It has been uploaded to the document server, ScribD, as referenced above. For the convenience of readers it may also be found below. Fascinating reading.