The Audit That Might Have Been at the University of Louisville.

Last September, following a string of multimillion dollar embezzlements at the University of Louisville, and in the midst of ongoing concerns about the health and even the integrity of the its financial operations, the University retained Strothman and Company of Louisville for an independent outside audit. Strothman has relevant experience auditing large public institutions and has a member of the UofL Board of Trustees as a client. It is more than competent to perform an in-depth financial or management audit. The cover sheet for the Request for Proposal required that the auditors would, by March 31, 2014, perform:

• A special examination of the processes and procedures of internal audit,
• survey banking to identify UofL accounts,
• evaluate internal controls related to signature authority and vendor legitimacy,
• and examine the financial controls for faculty professional practice.

While this certainly was a reasonable business decision given the obvious system breakdowns and criticism from the community, I suspect the University felt compelled to offer at least some measure of accountability much as it did when it agreed to an audit of its handling of the QCCT fund for indigent care in early 2012. There is always some risk that an external review will turn up shortcomings, or worse. The QCCT review was not at all flattering and for whatever reason, that funding mechanism seems to be being phased out. A subsequent audit of the University’s involvement in Passport, the Medicaid managed care plan, revealed financial manipulations that were frankly illegal. High-ranking officers lost their jobs. A source of unrestricted money for the school dried up. In outside reviews of its academic affairs as evidenced by rejection of yet another application for a Phi Beta Kappa chapter, and placement of its entire Medical School and its Continuing Medical Education program on probation, UofL has not been faring very well either. Little wonder the University spends most of its promotional effort on its sports programs– Beer and Circus instead of Books and Brains. I suggest that identifying problems is not something to be afraid of. It is how the institution deals with unflattering appraisals or criticism that defines both its credibility and its strength. In my opinion, UofL’s reflexive posture of stonewalling the public is hurting it much more than revelation of its failings. This has to stop if the community is to gain the confidence needed for it to provide needed support.

What was released? What was not?
Disappointingly, but still true to form, several requests by reporters to see the audit document were rebuffed. An appeal was made to Kentucky’s Attorney General to order compliance. In the middle of this multi-month stalling, a document claimed to be the final report of the auditors was released. Even on the face of it, the document so reluctantly produced cannot possibly represent the contracted work-product of Strothman. For one thing, there is no discussion of whether or not unauthorized University bank accounts within a 50 mile radius were found, nor is there any mention whatsoever of evaluation of the private professional practices at the medical school. Although the auditor’s report states that it incorporates recommendations regarding the “Health Science Campus,” there is absolutely nothing in the report that relates to faculty professional practice. References are made to Health Science Center “unit business managers” but these are individuals within the academic structure of the University and not its clinical practices which lie outside of University structure.

Frankly, it is not only unauthorized bank accounts with the name University of Lousiville on them that I would be concerned about. In my former experience, the myriad private companies set up by UofL Departments, research laboratories, or by individual faculty, and which are used to circumvent University policy and procedures should be of at least equal concern. The private professional practices of University have been among these.

Does UofL’s Board even know?
Concern has even been expressed that the University is restricting access to a more detailed report to its own its Board of Trustees, perhaps to avoid public accountability. Board members are beginning to go on the record expressing concern about lack of full and timely conveyance of information, or inadequate discussion of significant issues. Reluctantly therefore, I cannot dismiss the possibility that there is more going on than meets the eye and that the full results of the contract with Strothman are being withheld. In my opinion, UofL’s Board of Trustees has an obligation now to convince us that our trust in this public institution is warranted.

Why did they all go?
The public has another reason to be concerned about what is going on behind closed doors. Since the audit was called for, four senior University officials retired receiving unusually large severance bonuses at a time of supposed fiscal austerity. These were long-serving individuals who certainly deserved recognition, but in the current climate of secrecy, it was unavoidable that speculation would arise over whether the payments and accompanying signed agreements of confidentiality were intended to suppress disclosure of University practices. None of those individuals have spoken publicly to dispel such concerns. Presumably they would be free to do so.

Clinical Departments under water.
The desire to see the audit report was sharpened by increasing evidence that the financial health of the University is worsening. The partnership with KentuckyOne health has not gotten off to a good start and the mega-millions that were expected by the University have not appeared. Indeed, it may be that little or none has been transferred other than the $33 million loan used to pay off University Hospital’s existing debt. The clinical departments at the medical school are financially in bad shape. The Chairman of the Department of Pediatrics said as much to his faculty. I am informed by two former colleagues that many, if not the majority of clinical departments are going into debt to the University. Things are apparently so bad that University of Louisville Physicians, Inc., the new private practice arm of the University and under financial distress itself, was forced to reduce the salaries of many of its clinicians. (More about that later.)

How useful is the audit as released?
The initial responses to what is being called the final audit report reflect considerable skepticism that that is all there is to it, or if so, whether the University received good value for its money. To my reading, the report is virtually generic. With relatively little change, it might be used for any large complex organization. The recommendations seem so obvious that my first thought is why was the University not doing these things already? I do not believe that the short report that has been released by the University encompasses the findings of the audit or the work contracted for. I have no doubt that the University was given additional material by Strohman in fulfillment of its contract with the Commonwealth.

Our hopes were too high.
In truth, none of us should have been disappointed. This was not a financial audit and was never intended to be. As presented, it was at the most a management audit. The audit firm merely reviewed the University’s own internal audits. I would have expected an “independent” audit to do a little more digging than that. A number of employees were interviewed and no doubt provided useful information, but in the secretive environment they work in, some or many may have been reluctant to say what they really thought or knew for fear of retaliation.

How much confidence should we have in the findings?
Noteworthy, and perhaps disturbingly, the firm–  “did not audit, review, or otherwise verify the accuracy or completeness of your financial statements or accounting records in accordance with generally accepted accounting principles.” We relied on the accuracy and completeness of the documents and information you and the University employees provided or made available to us. Our engagement cannot be relied upon to disclose errors fraud or other illegal acts that may exist. We have no responsibility to identify and communicate significant deficiencies or material weaknesses in your internal controls as part of this engagement, and our engagement cannot therefore be relied upon to make disclosure of such matters.’   Why then, a part of me has to ask, bother doing such an audit at all that can promise so little?

Additional comments.
It used to be that even the Dean of the Medical School had no knowledge about what was going on within its clinical practices. The University was desperate to know– it wanted and still wants access to clinical revenue to support other University functions. With the formation of University of Louisville Physicians (ULP), I would have guessed that some of the mysteries might have fallen away but I no longer have inside information in that area. In my opinion, allowing a second audit firm to conduct the review of the clinical practices reflects a strategy designed to continue to keep those operations outside of public or even University review. More troubling is my belief that bleeding off so much clinical revenue from the Medical Center for so long has contributed in a substantial way to weakening of its operations.

The Foundations.
It appears that the various affiliated University foundations were not included in this audit. They should have been. Money from University activities flows back and forth through the major foundations which are involved in all major aspects of University function. For example, we are told that UofL has raised One Billion dollars for its endowment. Where did that money come from? How much of it was unrestricted? What strings were attached? Is it true as I was told by one person, that much of the total amount is structured more in the way of contracts than gifts? In my opinion, these foundations are used by the University to operate outside state or public view and accountability. Given their central role in the University’s financial structure and University programs, they should be included in any financial or management audit.

Enough for now.
Some heavy-hitters in the community are also seeking more information. Perhaps the tipping-point of the limit of University obfuscation (or desperation?) has been reached. In my opinion that happened some time ago. Large segments of the University appear to be faltering if not failing. In my opinion we are past the point when responsible government or community leadership needs to step in for an “intervention.” Seems to me that UofL’s Board of Trustees has the first obligation to do so, but from the outside I am seeing division and distress. With its recent positive review of President Ramsey’s performance and the award of a raise, perhaps the Board has already signaled its course. If so, in my opinion, other actors need now to be more assertive, if only to convince the rest of us that the train has not jumped the tracks. Release of this audit in its entirety along with other information that should properly be in the public domain would be a good first step.

As always, if I have made an error in fact, please help me to correct it.  What additional insights can you lend?

Peter Hasselbacher, MD
President, KHPI
Emeritus Professor of Medicine, UofL
July 20, 2014

Cover sheet for RFP and Response, but without the detailed work requirements.
Purported Final Report from Strothman and Company.