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Kansas Board of Regents
Confidential Exit Analysis Related to the Retirement of Dr. Jon
Wefald
President of Kansas State University
Prepared by Grant Thornton LLP
April 27, 2009
SECTION 1: ENGAGEMENT SUMMARY
Engagement Overview, Scope and Approach
On October 21, 2008, Grant Thornton LLP (“Grant Thornton”) was engaged by the
Kansas Board of
Regents (the “Regents”) to assist the Regents in the performance of an exit
analysis of certain non-State
funded accounts administered and/or controlled by President Jon Wefald of Kansas
State University (“KSU”
or the “University”) or his direct subordinates.
The key objective of this engagement was to evaluate whether financial
transactions involving these
employees within the specified accounts for the period 2003 to the present were
for legitimate business
purposes and were appropriately documented and approved.
An analysis of specific accounts and entities identified by the Regents and the
Kansas State University
Foundation (“Foundation”) for the period 2003 to the present was conducted. The
identified accounts and
entities included:
· Kansas State University Alumni Association (“Alumni Association”);
· Foundation account funds provided for the benefit of the University,
specifically funds provided to
the National Institute for Strategic Technology Acquisition and
Commercialization (“NISTAC”) and
its affiliated entities and the Kansas State University Golf Course Management
and Research
Foundation (“KSUGCMRF”), and the Discretionary Funds provided for President
Wefald and
former Vice President for Institutional Advancement Bob Krause; and
· Intercollegiate Athletics Association (the “Athletics Department”) non-State
funded accounts.
In conducting our analysis, Grant Thornton:
· Interviewed President Wefald and other key personnel of the University, the
Alumni Association,
KSUGCMRF, the Foundation, the Athletics Department and NISTAC;
· Analyzed general ledgers of the KSUGCMRF, the Foundation, NISTAC and its
affiliated entities,
and the Athletics Department and performed testing of certain account
transactions;
· Analyzed Statement of Substantial Interest forms, Conflict of Interest and
Time Commitment forms
and employment contracts and related documents for various individuals; and
· Analyzed minutes of meetings of Boards of Directors and various Committees for
the entities
reviewed.
Our services were provided in accordance with the Statement of Standards for
Consulting Services
promulgated by the American Institute of Certified Public Accountants and,
accordingly, do not constitute a
rendering by Grant Thornton or its partners or staff of any legal advice, nor do
they include the compilation,
review or audit of financial statements. Because our services were limited in
nature and scope, they cannot be
relied upon to discover all documents and other information or provide all
analyses that may be of
importance in this matter. For instance, any procedures we performed cannot be
relied upon to give
assurance that any defalcations or fraudulent transfers that might have taken
place were discovered.
Scope Limitations
Not all information requested by Grant Thornton was available for our
inspection. Specifically, supporting
documentation for 13 selected cash disbursements by the Athletics Department,
the original July 2, 2001
employment contract information and the 2005 BMA Annuity information for former
Athletics Director Tim
Weiser and the NutriJoy, Inc. Stockholders’ Agreement among The Coca-Cola
Company (“Coca-Cola”),
NISTAC and NutriJoy, Inc. (“NutriJoy”) related to Coca-Cola’s purchase of a
controlling interest in NutriJoy
were not available.
Mr. Bob Cavello, Associate Director of Athletics, indicated that the supporting
documentation for the 13
selected disbursements, representing $845,000, could not be located or was no
longer available due to normal
record retention practices. The payees in question included former Athletics
Director Tim Weiser, former
Head Football Coach Bill Snyder, and former Vice President for Institutional
Advancement and Athletics
Director Bob Krause, among others. Therefore, we were unable to determine
whether these transactions
were for a legitimate business purpose and were appropriately documented and
approved.
Mr. Cavello originally indicated that the Athletics Department had neither a
copy of Mr. Weiser’s original
2001 contract nor the documentation supporting the Athletics Department’s 2005
purchase of the BMA
Annuity to fund the matching of Mr. Weiser’s deferred compensation account. Mr.
Cavello indicated that he
requested these documents from Mr. Weiser’s advisors, but they did not become
available during our
engagement. Subsequently, we were told that Mr. Krause indicated that there was
no July 2, 2001 contract
for Mr. Weiser, although one was specifically noted by date in the “Third
Amendment to Contract for Tim
Weiser.” We have identified possible tax issues related to Mr. Weiser’s
employment contracts and various
payments made to him there under. Please refer to the “Intercollegiate Athletics
Association” section of this
report for further detail on this issue.
Mr. Kent Glasscock, President of NISTAC, indicated that the NutriJoy
Stockholders’ Agreement related to
Coca-Cola’s purchase of a controlling interest in NutriJoy could not be shared
with Grant Thornton due to
confidentiality concerns. Therefore, our analyses rely solely on verbal
representations regarding the rights
that accrue to the various classes of common stock. Our interest in this
document was to determine if the
University and the Foundation, through their investments in and financial
support of NISTAC, are being
treated fairly in comparison to other classes of investors. Please refer to the
“NISTAC Cluster” section of
this report for further detail on this issue.
Primary Findings
Significant progress and growth has occurred at the University during the tenure
of President Wefald with the
significant assistance of former Vice President for Institutional Advancement
Bob Krause. Notable
accomplishments under President Wefald’s leadership include:
· University enrollment has increased 52%;
· Academic excellence has grown as evidenced by the 125 Rhodes, Marshall,
Truman, Goldwater and
Udall Scholarships awarded to KSU students since 1986;
· Significant funds have been raised contributing to the rebuilding of the
Athletics Program and 2.2
million square feet of new buildings and renovations throughout the campus;
· The University has developed a prominent Food Safety and Security Program; and
· KSU has drawn national attention through its selection as the site for the new
National Bio and
Agro-Defense Facility.
President Wefald shared with us that his management style is to hire good people
and to delegate to them the
authority and responsibility they need to accomplish the goals he has set for
them. Therefore, rather than
having a straight line of reporting to President Wefald, we found that many of
the entities, for which we were
instructed to analyze accounts, report to President Wefald through the Office of
Vice President for
Institutional Advancement, concentrating a great deal of responsibility and
oversight in that office. Mr.
Krause held the position of Vice President for Institutional Advancement from
its initiation in August 1986
through October 1, 2008.
Over the years, as President Wefald delegated responsibilities to Mr. Krause,
Mr. Krause’s sphere of influence
grew from student recruitment and retention, University relations and alumni
affairs to include extensive
responsibility for coordinating the activities of the Alumni Association, the
Foundation and the Athletics
Department with those of the University. In addition, Mr. Krause was given
responsibility for economic
development on behalf of the University. Therefore, Mr. Krause’s involvement in
most of the entities and or
accounts we were asked to analyze was notable as detailed below.
· Mr. Krause’s involvement in the Athletics Department was more than cursory.
During the period
under review, Mr. Krause participated in contract and compensation negotiations
for head coaches
and Athletics Director Tim Weiser, often being the only signatory to the
contract on behalf of the
Athletics Department or University as the Vice President for Institutional
Advancement and/or the
sole member of the Athletics Director Compensation Committee. Mr. Krause was
also very
involved in the financial affairs, fundraising efforts and strategic direction
of the Athletics
Department. Prior to his current position as Athletics Director, Mr. Krause
served as the Interim
Athletics Director on four occasions. Due to the level of Mr. Krause’s
involvement in the Athletics
Department, President Wefald approved an “Overload Contract” for Mr. Krause
under which the
Athletics Department compensated him in an amount approximating 25% of his base
salary as Vice
President for Institutional Advancement from 2003 through 2008. A payment was
also approved in
2001 for Mr. Krause’s responsibilities as Interim Athletics Director during that
year.
· Mr. Krause was one of the initial visionaries of and has been instrumental in
the development and
funding of the Colbert Hills Golf Course. He personally guaranteed a portion of
the construction
debt and is currently making payments on a personal promissory note related to
that guarantee. He
also serves as the Assistant Treasurer of KSUGCMRF.
· Mr. Krause was also responsible for and very involved in economic development
efforts on the
University’s behalf. Mr. Krause served as the University’s representative to
NISTAC, the Executive
Chair of NISTAC, as a director of a wholly-owned subsidiary of NISTAC and
currently serves as
Chairman of NutriJoy, one of the most commercially successful private businesses
incubated by
NISTAC. Reportedly, the 2008 sale of a majority interest in NutriJoy to
Coca-Cola would not have
occurred without Mr. Krause’s involvement and leadership.
However, we found that the concentration of influence by President Wefald
through his aggregation of
reporting and oversight duties in Mr. Krause has led to a blurring of the lines
between some of the entities we
reviewed. The Foundation, the Alumni Association, KSUGCMRF, NISTAC and the
Athletics Department
view themselves, and are viewed by others, as part of or associated with the
institution of KSU. However,
they are all separate legal entities apart from the University. They all have as
a common goal the advancement
of KSU and have at times entered into transactions with one another in support
of that goal. However, as
separate legal entities, any transactions among them should be appropriately
disclosed, approved and
documented allowing for transparency of intent and substance. The failure to do
so raises the question of the
legitimacy of the transaction. Our report details numerous instances where
transactions between the various
entities did not meet this standard.
We found that conflicts of interest are inherent in the structure of NISTAC as
the bylaws allow
directors/officers of the NISTAC Cluster to personally own stock in and serve on
the boards of directors of
incubated companies. This duality of interest, to the University through its
involvement in NISTAC and to
the incubated companies as directors and/or stockholders, should be closely
monitored by the University and
the Foundation.
We found that KSUGCMRF and the Athletics Department have entered into
transactions with employees of
the University or its various affiliate entities which may result in favorable
tax treatment to that employee in
situations where it may not be warranted and/or may result in tax liability and
possible penalties to the
involved entity. In these particular instances, Grant Thornton is not offering a
tax opinion on the
transactions, but rather bringing the transaction forward so that appropriate
tax opinions may be sought.
The overall findings of our work revealed that reporting responsibility for and,
in some cases, apparent
authority over KSUGCMRF, the Foundation, NISTAC and the Athletics Department is
effectively centered
under Mr. Krause. This situation has led to a laxity in some transactions among
those entities and with the
University. There is a need for more formalization, structure, accountability
and transparency in the manner
in which the University and its related entities interact and transact with one
another. Conflicts of interest
can and do exist which should be carefully considered and managed to ensure that
the legitimacy of
transactions and to avoid perceptions of possible self-dealing or mismanagement.
SECTION 2: ENGAGEMENT SCOPE AND APPROACH
Objective and Scope
The key objective of this engagement was to evaluate whether financial
transactions within the specified
accounts that fell under the control of President Wefald or one of his direct
subordinates for the period 2003
to the present were for legitimate business purposes and were appropriately
documented and approved.
Approach
In conducting our analysis, Grant Thornton:
· Interviewed key personnel of the University, the Alumni Association, KSUGCMRF,
the Foundation,
the Athletics Department and the NISTAC Cluster;
· Reviewed general ledgers of the KSUGCMRF, the Foundation, the NISTAC Cluster,
and the
Athletics Department and performed testing of certain account transactions;
· Reviewed Statement of Substantial Interest forms, Conflict of Interest and
Time Commitment forms
and employment contracts and related documents for various individuals; and
· Reviewed minutes of meetings of Boards of Directors and various Committees of
certain entities.
Interviews
We interviewed the following key personnel:
· Dr. Jon Wefald, President of the University;
· Mr. Bob Krause, Athletics Director, former Vice President for Institutional
Advancement of the
University and former Executive Chair of NISTAC;
· Mr. Bruce Shubert, Vice President of Finance and Administration of the
University;
· Ms. Fran Willbrant, Controller of the University;
· Ms. Cindy Bontranger, Budget Director of the University;
· Ms. Amy Button Renz, President of the Alumni Association;
· Mr. Brad Sidener, Senior Vice President and Chief Financial Officer of the
Alumni Association;
· Mr. Bernie Haney, Executive Director of KSUGCMRF and Assistant
Director/Development-Golf
Programs of the Athletics Department;
· Mr. Gary Hellebust, President and Chief Executive Officer of the Foundation;
· Mr. Bruce Kent, Counsel for Gift Planning of the Foundation;
· Mr. Alan Klug, Vice President for Administration and Finance and Chief
Financial Officer of the
Foundation;
· Ms. Christy Scott, Compliance Officer of the Foundation;
· Ms. Lois Cox, Director of Investments of the Foundation;
· Ms. Deborah Depew, Assistant Director of Accounting Services of the
Foundation;
· Mr. Kent Glasscock, President and Executive Committee member of NISTAC;
· Ms. Victoria Appelhans, Vice President of Finance for NISTAC;
· Mr. Bob Cavello, Associate Director of Athletics;
· Mr. Kim Linck, Assistant Business Manager of Athletics; and
· Ms. Tami Breymeyer, Director of Licensing.
Document Reviews
We reviewed the following documentation:
· The financial statements for the University, the Alumni Association, KSUGCMRF,
the Colbert Hills
Golf Course, the Foundation, the NISTAC Cluster, and the Athletics Department
for the fiscal yearend
periods of June 30, 2003 through 2008;
· Reviewed the Discretionary Funds at the Foundation and the general ledgers of
KSUGCMRF, the
NISTAC Cluster and the Athletics Department and performed testing of certain
account
transactions;
· Reviewed Statement of Substantial Interest forms, Declaration for Conflict of
Interest and Time
Commitment forms and employment contracts and associated documents for various
individuals.
SECTION 3: FINDINGS AND RECOMMENDATIONS
Kansas State University Alumni Association
Scope
Our work at the Alumni Association involved interviewing President Amy Button
Renz and Senior Vice
President and Chief Financial Officer Brad Sidener. We reviewed the Alumni
Association fiscal year-end
financial statements for 2003 through 2008. However, no cash disbursement
testing was performed at the
Alumni Association at the request of the Foundation. Mr. Sidener indicated that
neither President Wefald
nor any of his direct reports received any compensation or reimbursement from
the Alumni Association
during the period under review.
Overview
The KSU Alumni Association is a 501(c)(3) educational non-profit organization.
The Alumni Association
reports to the President through the Office of the Vice President for
Institutional Advancement. It receives
State funding to maintain a database of KSU alumni. Maintenance of the database
is currently shared with
the Foundation for fund raising purposes. In the past, the Alumni Association
and the Foundation charged
each other for services with respect to the alumni database but that has been
discontinued as it was proving
to be a wash. The database contains approximately 260,000 names including
geographic and biographic data,
and donation receipts history.
Revenues come from membership dues, annual gifting, affinity partnerships,
Alumni Center use, catering
commissions, sponsorship money and advertising. There is a tiered rate for
Alumni Center use depending on
affiliation (KSU Departments, the Foundation and Alumni Association members
receive discounts). Usage
fees up to $1,250 annually for President Wefald’s wife are waived so she may use
the Alumni Center for
public relations. Both the Foundation and the Athletics Department receive a
$2,000 annual allotment.
Usage above that amount (which is the norm) is billed at the appropriate rate.
The Alumni Association may
waive usage fees for specific events at its discretion. The Foundation hosts 10
to 15 events each year. The
Athletics Department hosts six to eight events each year.
Expenses are primarily staff payroll and benefits, general administration,
programs, magazines and
recruitment events. The Alumni Association owns the building but the University
owns the surrounding
land, including parking lots. Programs include 30 Athletics events and “watch
parties.” The Alumni
Association also uses the University jet on a per mile basis, although sometimes
the charge is shared with the
Athletics Department (e.g. a coach speaks at an Alumni Association sponsored
event).
The Alumni Association maintains its own bank account and also has an Imprest
Account at the University
Controller’s Office to pay KSU-related “vendors” such as student payroll,
University jet, grounds keeping and
miscellaneous minor University charges.
Findings and Recommendations
Based on the information available to us for our review, we had no material
findings or recommendations.
Kansas State University Golf Course Management and Research
Foundation
Scope
Our work at KSUGCMRF and the Colbert Hills Golf Course (the “Golf Course”)
involved interviewing
KSUGCMRF Executive Director Bernie Haney regarding KSUGCMRF’s general structure,
history and the
2005 debt restructuring; Foundation Assistant Director of Accounting Services
Deborah Depew with regard
to KSUGCMRF’s books and records maintained by the Foundation; and Director of
Licensing Tami
Breymeyer regarding the interface between KSUGCMRF, the Golf Course and the
Athletics Department.
Mr. Haney, KSUGCMRF’s sole employee, is a “fractional employee” in that 10% of
his time is dedicated to
KSUGCMRF and 90% is dedicated to the Athletics Department for his position as
Assistant
Director/Development – Golf Programs. Mr. Haney’s responsibilities for KSUGCMRF
include fundraising,
budget development and oversight, maintaining/developing relationships with
benefactors and corporate
partners, and serving as the liaison among KSUGCMRF, the Golf Course, the
Athletics Department, the
Men’s and Women’s Golf Coaches, Grand Mere Development1 and the University.
We reviewed KSUGCMRF’s and the Golf Course’s fiscal year-end financial
statements for the years 2003
through 2008 as well as KSUGCMRF’s general ledger for the same period. We tested
cash disbursement
transactions equal to or greater than $500 for selected individuals
(representing 80.6% of the category) and all
other cash disbursements, including payroll, equal to or greater than $2,500
(representing 74.1% of the
category). Neither President Wefald nor any of his direct reports received any
compensation or
reimbursement from KSUGCMRF or the Golf Course during the period under review.
Overview
KSUGCMRF is a 501(c)(3) educational non-profit organization and a wholly-owned
subsidiary of the
Foundation. It is a separate legal entity from the University and the Athletics
Department. KSUGCMRF is
supported primarily through specified private donations, overseen by the
Foundation. KSUGCMRF receives
private donations in support of its on-going operations; dedicated for the
construction of a new 13,500
square foot clubhouse to be completed in January 2010; and for “The First Tee.”
“The First Tee” is a
national not-for-profit organization designed to give disadvantaged and minority
youths an opportunity to be
involved in golf.
The Golf Course is owned by KSUGCMRF and is leased (at no cost) to Golf
Generations, Inc. Golf
Generations is a for-profit corporation responsible for all daily operations and
maintenance of the Golf
Course, for which it charges KSUGCMRF an annual fee of $24,000. Golf Generations
employs seven fulltime
and 50-60 part-time employees which are paid through the operations of the Golf
Course. Net income
from operations of the Golf Course rolls up into KSUGCMRF’s financials which in
turn roll up into the
financials of the Foundation.
1 Grand Mere Development is the luxury residential/commercial development
surrounding the Golf Course. Grand
Mere Development is owned by members of the Vanier family. The Vanier family are
significant supporters of the
University and the Athletics Department and are the in-laws of Mr. Krause. Mr.
Krause stated that he and his wife do
not have any financial ownership or interest in Grand Mere Development.
KSUGCMRF has ties to the Athletics Department through support for KSU’s Men’s
and Women’s Golf
Teams. The Golf Course serves as the home course for the Men’s and Women’s Golf
Teams for which it
receives $20,000 a year from the Athletics Department. The January 1, 2006
Operating Lease between
KSUGCMRF and Golf Generations, Inc. indicates that “…the Kansas State men and
women’s golf teams
shall have free use of the Golf Course, except that such members shall be
responsible for the food and
beverages charges and merchandise purchased at the Golf Course. In addition, the
teams shall have free use
of the driving range and the practice facilities at the Golf Course…” However, a
July 26, 2005 letter from
former Athletics Director Tim Weiser to the President of KSUGCMRF indicates that
the Athletics
Department agreed to the annual $20,000 per year payment on behalf of the golf
teams as the operating
budgets of the golf teams could not absorb this cost. The letter further
indicates that an “alternative source
of funding” was secured to pay this expense and indicates that if that source
becomes unavailable, then the
Athletics Department’s support of the annual $20,000 payment would end. Mr.
Krause indicated that the
$20,000 per year paid by the Athletics Department was to reimburse the Golf
Course for the golf teams’ use
of the locker area and indoor practice facilities. However, the practice
facilities appear to be available to the
golf teams without charge per the Operating Lease and $20,000 a year for the use
of the locker area could be
seen by some as questionable. The Athletics Department, as a “founding member”
of the Golf Course,
receives four permanent play passes for its general use. Mr. Krause, the current
Athletics Director, serves as
the Assistant Treasurer of KSUGCMRF and has check approval and signatory
authority.
KSUGCMRF also has ties to the University through the College of Agriculture’s
Turf Management
curriculum. The College of Agriculture pays $40,000 annually for access to the
Golf Course for turf
management experiments, but receives no playing rights. In addition, the Kansas
State Student Union
donates $5,000 annually to support discounted greens fees for KSU students.
Cash Disbursements
Of the cash disbursements selected for testing, only 60% had a payment request
in the form of a formal
memo or informal notation, and only 7% had any notation that could be considered
an “approval.” Copies
of checks were attached to only 9% of the cash disbursement packets tested. We
noted disbursements paid
to Mr. Haney for reimbursement of expenses were not approved. We also noted
disbursements for “Cash”
totaling $4,000, but most did not have evidence of approval.
Bridge Loan Guarantees
The Golf Course was built in 2000 on 315 acres of grazing land purchased by
KSUGCMRF from the Vanier
family, long-time KSU supporters/donors and in-laws of Mr. Krause. The family
retained approximately
700 acres surrounding the golf course site for the Grand Mere Development
consisting of luxury residences
and commercial properties.
Initial funding for the construction of the Golf Course included $12 million in
specific donations, $8 million
in bonds payable and a $4.1 million line of credit (the construction “Bridge
Loan”). The Bridge Loan was
personally guaranteed by six individuals, including Mr. Krause. Within a few
years of opening, the Golf
Course was financially distressed. In early 2005, KSUGCMRF defaulted on its
bonds, resulting in a financial
restructuring in June 2005. Negotiations with the indenture trustee and bond
guarantor resulted in a $2
million settlement in payment of the bonds. KSUGCMRF then bought back the Golf
Course for $2 million
borrowed from Kansas State Bank. The original Bridge Loan had been paid down to
$1.8 million and was
then owned by Columbian Bank & Trust. Effective June 30, 2005, the six personal
guarantors executed notes
payable to Columbian Bank & Trust individually for one-sixth of the outstanding
Bridge Loan and
KSUGCMRF’s debt to Columbian Bank & Trust was retired. Three of the guarantors
chose to pay off their
loans to Columbian Bank & Trust during 2005. The other three guarantors,
including Mr. Krause,
renegotiated or refinanced their promissory notes to extend the maturity date as
much as five years.
Although KSUGCMRF’s debt was retired in full when the guarantors took on their
personal obligations, the
debt remains on KSUGCMRF’s balance sheet in a line item entitled “Non Recourse
Line of Credit.” Five of
the guarantors made a lump sum contribution or are making periodic contributions
to the KSUGCMRF in
the amount of their principal and interest payments due, which KSUGCMRF pays to
Kansas State Bank with
instructions to forward to the appropriate financial institution to pay down the
guarantors’ personal debt. It
appears that the transactions are structured in this manner so that the loan
payments can be counted by the
guarantors as “designated contributions” and therefore be considered tax
deductible donations to
KSUGCMRF. This is confirmed by an October 18, 2005 email from Mr. Krause to the
other guarantors with
a copy to Mr. Bernie Haney, Mr. Alan Klug, an individual at Kansas State Bank
and a member of the
Foundation’s external audit team.
The IRS could potentially view this as an improper transaction as the debt being
repaid is the debt of the
individual guarantors and not that of KSUGCMRF, yet KSUGCMRF is receipting the
payments as tax
deductible donations. We spoke with the member of KSUGCMRF’s external audit team
copied on the
previously referenced email. The auditor indicated that he was aware of the
structure of the transaction. He
indicated that he had not sought an opinion from any taxing authority regarding
the structure, but believed
that the payments would be viewed as being made in support of the KSUGCMRF and
therefore would be
deductible by the guarantors.
Given that Mr. Krause has held various positions within the University and its
affiliates during the period in
which he has been making payments on his personal guarantee, we analyzed the
compensation paid to him or
on his behalf by the Foundation, the Athletics Department and the NISTAC Cluster
to determine if any of
those organizations could be making directly or funding the guarantee payments
on his behalf out of accounts
under our review. It does not appear that the Foundation, the Athletics
Department or the NISTAC Cluster
made payments for Mr. Krause’s personal guarantee or on his behalf based on both
the timing and the
amount of payments made.
Findings and Recommendations
With regard to cash disbursements, formal payment request forms detailing the
business purpose of the
request for payment should be completed. In addition, cash disbursements should
not be made without the
necessary approvals.
The Foundation, as the parent of KSUGCMRF, should consider the manner in which
the Bridge Loan and
its related guarantees are being reported by KSUGCMRF and paid to and receipted
by KSUGCMRF for debt
no longer in the entity’s name and determine if the situation warrants further
review. KSUGCMRF’s
financial statements are currently inaccurate as they list as a liability a debt
not legally owed by KSUGCMRF.
The appearance of a conflict of interest or preferential treatment for the
guarantors should be factored into
the Foundation’s decision.
The relationship between KSUGCMRF, the Golf Course and the Athletics Department
should be reviewed
and appropriately formalized and documented. Currently, the $20,000 annual
payments by the Athletics
Department for the golf teams’ use of the locker area and indoor practice
facilities do not appear to be
required by the Operating Lease with Golf Generations (which post-dates the 2005
letter from former
Athletics Director Tim Weiser). The Operating Lease specifically speaks to the
free use of the Golf Course,
the driving range and the practice facilities at the Golf Course. All
transactions between KSUGCMRF, the
Golf Course and the Athletics Department should be appropriately formalized and
documented.
Kansas State University Foundation
Scope
Our work at the Foundation involved interviewing President and Chief Executive
Officer Gary Hellebust,
Counsel for Gift Planning Bruce Kent and Vice President for Finance and
Administration and Chief
Financial Officer Alan Klug. We also spoke with Director of Investments Lois Cox
and Compliance Officer
Christy Scott about specific transactions. We reviewed the Discretionary Funds
ledger for the period fiscal
year 2003 through the present and selected 517 items for testing. We tested cash
disbursement transactions
greater than or equal to $750 if paid to individuals (representing 47.2% of
President Wefald’s Discretionary
Funds and 54.2% of Mr. Krause’s Discretionary Funds) and all other cash
disbursements in excess or equal to
$1,500 (representing 20.0% of President Wefald’s Discretionary Funds and 28.3%
of Mr. Krause’s
Discretionary Funds).
Overview of Discretionary Funds
An annual Discretionary Fund with an average amount of approximately $380,000
was made available to
President Wefald by the Foundation through an account entitled “University
Welfare and Development.” An
annual Discretionary Fund with an average amount of $265,000 was made available
to the Vice President for
Institutional Advancement (formerly Mr. Krause) by the Foundation through an
account entitled “University
Recruitment and Public Relations.” The source of funding for these accounts was
unrestricted funds at the
Foundation. President Wefald has traditionally used the funds for official
hospitality, to pay the non-State
funded portion of travel expenses, to support University departments that have
smaller budgets and for
miscellaneous expenses related to his office. Mr. Krause has used his funds for
official hospitality, to pay the
non-State funded portion of travel expenses and for miscellaneous expenses
related to his office. In addition,
vehicles for President Wefald, his wife and a member of his staff as well as for
Mr. Krause are paid for out of
the Discretionary Funds.
Our review of the cash disbursements from the Discretionary Funds found that, in
general, appropriate
supporting documentation and approvals were present. However, a few transactions
were noted in which the
purpose of transaction did not appear to be an appropriate use of the
Discretionary Funds or was missing.
For instance, in September 2003, Discretionary Funds in the amount of $1,191.00
were used to reimburse
Mrs. Wefald for the air fare for Ms. Kerry Wefald to accompany her on a trip to
New York for the Friends of
the Arts through the Marianna Kistler Beach Museum of Art. The purpose of the
trip was not noted in the
supporting documentation. Furthermore, no reason for Ms. Kerry Wefald’s
attendance was proffered other
than that Kerry was an alumna and “very good at meeting people and making them
feel welcome.”
Assumedly, Kerry Wefald is a relative of President and Mrs. Wefald. The
Foundation questioned the
appropriateness of the reimbursement as a handwritten note to the Chief
Financial Officer approving
payment indicated that “The Wefalds have agreed they will make only “support
gifts” from the fund in the
future, therefore avoiding any misperception that the funds were not utilized
correctly.”
Furthermore, the supporting documentation for some transactions, such as various
monthly payments made
in 2005 and 2006 in the $700 to $800 range to RB Enterprises, Inc, carries no
explanation at all. The
payments appear to be installment payments of some kind, but there is no
indication of what is being paid or
its business purpose.
Additionally, a few instances of duplicate reimbursement of an expense were
noted. It is our understanding
that the Foundation requires the submission of the original receipt to assist in
protecting against duplicate
reimbursements. However, we noted a few instances where a receipt was submitted
for an expense and then
a short time later, a charge or other account statement with the same expense
would be submitted and both
would be paid.
An example is the dinner tab at the Manhattan Country Club on October 27, 2006
for the BRI Dedication.
On November 2, 2006, Charles Reagan submitted a check request against President
Wefald’s Discretionary
Fund payable to the Manhattan Country Club in the amount of $4,005.51. The
support was the actual
itemized dinner tab from the Country Club. The Foundation issued check #101540
on November 9, 2006 to
the Manhattan Country Club in the amount of $4,005.51. On November 6, 2006,
Charles Reagan submitted
a check request against President Wefald’s Discretionary Fund payable to the
Manhattan Country Club in the
amount of $4,237.79. The support was a Manhattan Country Club account statement
in the name of Susan
Peterson-Thomas, a member of President Wefald’s staff. The statement included a
line item dated October
27, 2006 for “Banquets/Parties” in the amount of $4,005.51. An electronic copy
of the dinner tab from the
October 27, 2006 event was attached and matched the previously submitted
documentation exactly. The
Foundation issued check #101645 on November 13, 2006 to the Manhattan Country
Club in the amount of
$4,237.79. Therefore, the Foundation double paid the Manhattan Country Club in
this instance. If it has not
done so, the Foundation should research these cash disbursement to determine if
they were appropriately
reimbursed by the Manhattan Country Club or Ms. Peterson-Thomas.
In another instance, on June 25, 2007, Marilyn Land submitted a check request
against Mr. Krause’s
Discretionary Fund payable to Wal-Mart in the amount of $107.51. The support was
the actual June 20, 2007
itemized receipt from Wal-Mart. The receipt indicated that the items were
charged against an account. The
Foundation issued check #112564 on June 28, 2007 payable to Wal-Mart in the
amount of $107.51. On July
18, 2007, Marilyn Land submitted a check request against Mr. Krause’s
Discretionary Fund payable to Wal-
Mart in the amount of $107.51. The support was the Wal-Mart account statement in
the name of “Vice
President for Inst AD.” The statement included a line item dated June 20, 2007
in the amount of $107.51.
The Foundation issued check #113660 on August 2, 2007 to Wal-Mart in the amount
of $107.51. Therefore,
it appears that Foundation double paid Wal-Mart in this instance. If it has not
done so, the Foundation
should research these cash disbursements to determine if they were appropriately
reimbursed by Wal-Mart.
A final issue relates to the different hats that Mr. Krause wore in support of
the University and its related
entities and the appropriate payment of his expenses by the various University
and University-related entities.
On three occasions in 2006 and 2007, Mr. Krause requested reimbursement from his
Discretionary Fund
totaling $889.76 for dinners related to NutriJoy, an incubated company of NISTAC
in which NISTAC and
Mr. Krause personally hold stock. In addition, during this period of time, Mr.
Krause was both the Executive
Chair of NISTAC and Chairman of the Board of NutriJoy. In fact, Mr. Krause had
become a 15% fractional
employee of the NISTAC Cluster due to the amount of time he was spending on
NISTAC business unrelated
to the University. Two of the three dinners directly related to NutriJoy’s
potential partnership with Coca-
Cola. The Foundation should consider a methodology to share expenses with other
entities when an
individual is representing, in part, interests outside the University.
A related concern is the possibility that requests for reimbursement could be
made to more than one entity
utilizing copies of the same documentation allowing for the duplicate
reimbursement of expenses. All
University-related entities should have a policy of only accepting original
receipts. Only when original
receipts are not available should a charge account statement be accepted, and
then only with appropriate
consideration and approval.
Scholarship Deficit
Scholarships are routinely offered to students through the University’s Office
of Student Financial Aid. We
were told that the Office of Student Financial Aid typically offers more in
scholarships than it intends to
fund, as not all scholarships extended are accepted. The primary sources of the
scholarship funds are
donations and endowments overseen by the Foundation. Other sources of monies to
fund scholarships
historically came from the Kansas State University Student Assistance Foundation
from the resale of Sallie
Mae loans typically in the range of $600,000 to $800,000. Supplemental
scholarship funds were available to
the Vice President for Institutional Advancement’s office in the form of Alumni
License Plate fees, logo
royalties and funds from a Pepsi contract, typically in the range of $440,000.
It is our understanding that the
Office of Student Financial Aid and the Kansas State University Student
Assistance Foundation were under
the direction of the Office of the Vice President for Institutional Advancement,
formerly Mr. Krause.
Mr. Krause indicated that the Foundation gives the Office of Student Financial
Aid a line of credit with
which to fund the individual scholarships. After it has been determined which
scholarships will be funded by
which endowments or donations, due to various eligibility requirements of some
scholarships, the line of
credit is reconciled against the various monies available for scholarship use at
the Foundation.
Mr. Krause indicated that in 2007 the Scholarship Fund at the Foundation became
overdrawn by
approximately $2.4 million. He indicated that the cause was twofold. A much
higher than normal
scholarship acceptance rate that year, and a recent change in federal
regulations which had caused the
activities of the Kansas State University Student Assistance Foundation to go
dormant, effectively truncating
that traditional source of scholarship funding. Per Mr. Krause, this period of
time also coincided with a
period in which his office ceased to receive the normal “accounting” or
“reconciliation” of funds available for
scholarships from the Foundation. The Foundation disagrees with Mr. Krause and
indicated to us that Mr.
Krause had been given the same “accounting” or “reconciliation” of funds
available for scholarships that had
been provided in the past and that it appeared that scholarships in excess of
the amount of available funds
were offered with the expectation that the Foundation would somehow fund any
shortfall. The Foundation
also disagrees that the acceptance rate for scholarships was abnormally high for
2007.
In March 2008, the Foundation informed Mr. Krause of the approximate $2.4
million shortfall and requested
a proposal for repayment. However, Mr. Krause indicated that his office and its
reporting departments did
not have sufficient funds to cover the deficit in full. The initial proposal
submitted by the Office of the Vice
President for Institutional Advancement was to repay the funds over a five to
eight year period from the only
remaining sources available to it with which to fund scholarships: the Alumni
License Plate fees, logo
royalties and funds from a Pepsi contract. This proposal was reportedly
unacceptable to the Foundation due
to the length of time for repayment. A second proposal was to have the Athletics
Department pay an
additional $400,000 a year directly to the Foundation. This proposal shortened
the repayment period, but was
also rejected by the Foundation.
As of June 30, 2008, a negotiated repayment plan was reached. The Office of the
Vice President for
Institutional Advancement would contribute Alumni License Plate fees, logo
royalties and funds from a Pepsi
contract in the amount of $447,000 for fiscal year 2008, $440,000 for fiscal
year 2009, and $312,000 for fiscal
year 2010. Of the $625,000 in Discretionary Funds annually made available to the
Office of the President
and the Office of the Vice President for Institutional Advancement from the
Foundation, $400,000 would be
applied against the scholarship account deficit in fiscal years 2008, 2009 and
2010. The resulting $400,000
shortfall in the Discretionary Funds in those years would be funded by the
Athletics Department. The
Athletics Department would reduce or cease its payment of the Institutional
Support Fee to the University’s
Controller’s Office, expected to approximate $180,000 per year. In addition, the
University would transfer
$220,000 per year to the Athletics Department which would then be transferred to
the Foundation.
Reportedly, the transaction was structured in this manner as the University is
prohibited from transferring
funds directly to the Foundation. We questioned the Athletics Department’s
responsibility for involvement
in this transaction and were told that as the Athletics Department fell under
the purview of Mr. Krause, Mr.
Krause elected to solve the issue in this manner and that the Athletics
Department clearly did not have any
responsibility for the payments. Per President Wefald, this arrangement was
negotiated with his knowledge
and approval.
Findings and Recommendations
Disbursements from the Discretionary Funds should strictly adhere to the
Foundation’s Accounting Policy
Manual which requires that every disbursement request provide documentation
justifying the business
purpose of the expense and how it benefits KSU. The Accounting Policy Manual
also states that credit card
statements detailing monthly charges are not adequate receipts for documentation
purposes. Any
disbursement requests not complying with the Accounting Policy Manual should be
denied until
appropriately amended and supported.
If it has not already done so, the Foundation should research the detailed
instances of duplicate
reimbursement and ensure that they are appropriately resolved.
In the event an individual requests reimbursement for an event or trip where he
or she was clearly
representing the University and a party or entity unrelated to the University,
the reimbursement should be
divided fairly between the University and the other entities deriving benefit
from the event or trip.
The amount of funds available for scholarships should be determined and formally
communicated to all
concerned parties prior to the awarding of scholarships. The entities awarding
scholarships should ensure
that they do not offer scholarships in excess of the available funding.
Appropriate controls may require the
submission of scholarship letters to the Foundation prior to their presentation
to students.
Given that the Discretionary Funds generally go to activities that benefit the
entire University and its related
entities, it is unclear why it is appropriate for the Athletics Department to
fund any shortfalls caused by the
deficit in the scholarship accounts or for any other reason. It would seem that
the traditional source of
funding, being unrestricted funds at the Foundation, is the most appropriate
source of funding. Any amounts
transferred by the Athletics Department to the Discretionary Funds at the
University should be formally
documented to include approval by the appropriate board or committee of the
Athletics Department.
Furthermore, formal acknowledgement by the University Controller’s office
regarding the reduction in the
Institutional Support Fee to be paid by the Athletics Department should also be
documented.
NISTAC Cluster
Scope
Our work at the NISTAC Cluster involved interviewing former NISTAC Executive
Chair Bob Krause,
NISTAC President Kent Glasscock, and NISTAC Vice President of Finance and Chief
Financial Officer
Vicki Appelhans. We reviewed financial statements and general ledgers for NISTAC,
Mid-America
Technology Management, Inc., (“MTM”) and Manhattan Holdings, LLC (“Holdings”)
for fiscal years 2003
through 2008. In addition, we reviewed the minutes of the Boards of Directors
for each entity for calendar
years 2001 through 2008 and the employment contracts and compensation agreements
for Messrs. Glasscock
and Krause. We tested 22 cash disbursement transactions greater than or equal to
$500 if paid to selected
individuals (non-payroll) or for select investments. This represented 99.6%,
42.6% and 100% of the category
for NISTAC, MTM and Holdings, respectively. We also tested 105 other cash
disbursements (excluding
payroll) greater than or equal to $15,000. This represented 55.1%, 73.9% and
100% of the category for
NISTAC, MTM and Holdings, respectively.
Overview
The NISTAC Cluster consists of the following related entities:
· NISTAC is a 501(c)(3) Educational non-profit organization whose mission is to
create and sustain a
formal network that will support technology advancement, technology transfer,
education and
scientific research nationwide. NISTAC’s objective is economic development
through facilitating the
commercialization of new technologies and the promotion of related research and
education.
Development and commercialization focuses on two distinct portfolios of patents:
patents donated
by corporations (Technology Acquisition, Development and Commercialization or “TADAC”),
and
patents originating at KSU and provided by the Kansas State University Research
Foundation
(“KSURF”). NISTAC commercializes both TADAC and KSURF patents and provides
administrative services to startup companies licensing TADAC and KSURF patents,
as well as
laboratory and office space as needed.
· MTM is a for-profit entity and a wholly-owned subsidiary of NISTAC. MTM
provides management,
human resources and financial services to companies incubated by NISTAC. NISTAC
positions
(President, CFO etc.) are held by employees leased from MTM.
· Holdings is an investment vehicle that provides seed capital funds for
startups being incubated by
NISTAC. Holdings is jointly owned by the City of Manhattan, the Foundation and
the Kansas
Technology Enterprise Corporation (“KTEC”)2 in equal portions.
The University’s relationship to NISTAC is through financial support and the
donation or transfer of
intellectual property to be commercialized through incubated companies. During
the period under review,
the University and its affiliated entities have paid NISTAC between $200,000 and
$830,000 per year for
NISTAC’s role in acquiring, administering and protecting licensed technologies
and intellectual property on
the University’s behalf for research and economic development. In addition, as
previously mentioned, the
Foundation is a one-third owner in Holdings.
NISTAC is currently assisting several startup companies, some of which are
barely more than a shell with an
annual Secretary of State filing. Two companies (NanoScale Materials, Inc. and
NutriJoy, Inc.) have grown to
the point of being self-managed. Two other companies are repositories for groups
of related patents rather
than multiple startups with single patents.
In addition to investments made by the NISTAC Cluster, companies incubated by
NISTAC have access to a
network of “Angel Investors” who are regularly given the opportunity to invest
in startup companies under
NISTAC’s management. In particular, it was noted that President Wefald, Mr.
Krause and Mr. Krause’s wife
are investors in companies incubated by NISTAC.
2 KTEC is a private/public partnership established by the state of Kansas to
promote technology based economic
development. KTEC supports strategic research and development at NISTAC and
eight other Business Assistance
Incubators throughout the state. KTEC also provides support through two
state-wide networks. Each site has a
specific focus and provides a set of services including everything from shared
lab space to access to investment capital
for early-stage companies. KTEC supports NISTAC through grants and is also an
owner/investor in Holdings. Our
work did not involve any analysis of KTEC information or data.
Until his resignation on September 3, 2008, Mr. Krause held various positions
within the NISTAC Cluster.
Mr. Krause was the University’s representative to NISTAC, the Chairman of NISTAC,
a board member of
MTM , and a member of Holdings’ Advisory Board during the period under review.
Due to the amount of
time he was spending on non-University related NISTAC business, he was appointed
Executive Chair of
NISTAC and given a 15% fractional employment contract in 2006.3 His compensation
as NISTAC
Executive Chair was all placed into a deferred compensation plan and was paid
out in January of 2009,
subsequent to his resignation from NISTAC, MTM and Holdings. Mr. Krause was
eligible for bonuses, both
cash and equity in startup companies invested in by NISTAC. However, upon his
resignation, Mr. Krause
declined to take receipt of any equity awards due him.
Conflict of Interest
A conflict of interest occurs when an individual or organization has an interest
that might compromise their
objectivity and reliability. A conflict of interest exists even if no improper
acts result from it, and can create an
appearance of impropriety that can undermine confidence in the conflicted
individual or organization. Such a
conflict exists relative to the NISTAC Cluster as directors of NISTAC and its
affiliated entities are permitted
to hold stock in and serve as directors/officers of investee companies. This can
call into question their
decision-making in situations such as that involving NutriJoy as described
below.
NutriJoy, Inc.
NutriJoy was jointly founded by NISTAC and KSURF in 2000 to develop and
commercialize nutritional
technologies donated to NISTAC by The Procter & Gamble Company and technologies
derived separately
from research within KSU. NutriJoy’s two main brands, Calc-C® and Goodbites™,
are based upon the
donated technologies. NISTAC and its affiliate companies hold significant
ownership in NutriJoy largely via
NISTAC’s licensing of intellectual property to NutriJoy and the conversion of
loans into equity. Under the
original terms of the License Agreements between NISTAC and NutriJoy, NISTAC
received an annual
license maintenance fee and royalties on licensed product sales by either
NutriJoy or its sublicensees.
Since 2000, NutriJoy has been supported in part through a network of loans
and/or equity investments by
NISTAC, MTM, Holdings and KSURF. In addition, NutriJoy has been invested in by
Angel Investors,
including President Wefald, Mr. Krause, and Mr. Glasscock.4 Reportedly, Mr.
Krause and President Wefald
invested in NutriJoy in 2002 purchasing 37,500 and 35,000 shares, respectively,
with cash at the $1 per share
stated par value.
3 In fiscal year 2007, Mr. Krause was a 15% employee of NISTAC/MTM per his
contract with those entities and a 90%
employee with the University as Vice President for Institutional Advancement.
His total contracted time totaled 105%.
4 NISTAC declined to identify other “Angel Investors” due to confidentiality
concerns. However, it was verbally
indicated that only Dr. Wefald and Mr. Krause were the only “Angel Investors”
that were employed by the University or
any of its affiliates.
Per the License Agreements between NISTAC and NutriJoy, in the event NutriJoy
becomes insolvent or
otherwise ceases business operations, all technology rights revert back to
NISTAC. Given that the value of
NutriJoy is largely vested in the intellectual property it controls, such a
reversion of the patents could strip
NutriJoy of its revenue generating assets, preventing a recovery of cash
investments by NutriJoy’s
stockholders. This became of concern to some of NutriJoy’s stockholders in the
Spring of 2005. NutriJoy
was experiencing cash flow difficulties that threatened its existence while it
was pursuing a strategic
partnership with a large food or beverage company. One of the transactions being
considered at that time
was the acquisition of NutriJoy’s underlying intellectual property by the
strategic partner. Under that
scenario, NISTAC alone could agree to sell and assign the underlying patent
rights away from NutriJoy,
effectively rendering NutriJoy’s stock worthless.
Given its cash flow difficulties in 2005, NutriJoy sought to raise additional
equity funds to enable it to
continue operating and to attempt to complete the transaction with the proposed
strategic partner. The
Boards of NISTAC and MTM agreed to convert their collective $200,000 in
outstanding loans to NutriJoy to
equity investments subject to the contingency of an additional $200,000 being
raised from existing
stockholders. Other key stockholders, who had the financial wherewithal to match
the investment, made
their additional investments contingent upon the receipt of assurances from
NISTAC that cash investors in
NutriJoy would not be disadvantaged relative to NISTAC in any future realization
of capital returns from the
technologies licensed to NutriJoy. Therefore, in a Resolution in Lieu of Meeting
dated April 21, 2005, the
Executive Committee of NISTAC (chaired by Mr. Krause who was also a cash
investor in NutriJoy)
recommended that “Any future capital, non-royalty financial returns arising from
the sale and assignments of
intellectual properties, now licensed from NISTAC to NutriJoy, are allocated
first to repay cash investments
by stockholders if a normal proportional allocation of such returns, according
to stockholdings held by each,
are insufficient to do so.” The Resolution would specifically apply to any
transaction within three years of the
date of the Resolution.
The recommended allocation of proceeds would postpone any financial returns to
NISTAC on its non-cash
(received in lieu of licensing fees or royalties) investments in NutriJoy until
all cash-based investors had a
return of their $1 per share par value. Allowing the cash investors to receive a
return of capital first would
allay investors’ fears and contribute to NISTAC’s stated purpose of promoting
investment in the startup
companies. The Resolution was presented to and approved by the full NISTAC Board
of Directors at their
May 17, 2005 meeting. The Executive Committee Resolution does not address
whether or not members
holding a cash investment in NutriJoy, such as Mr. Krause and Mr. Glasscock,
recused themselves from this
action. However, the NISTAC Board minutes note that directors who personally
supported NutriJoy in
executive or financial capacities abstained from voting on the Board’s approval
of the Resolution.
Further, at the same May 17, 2005 meeting of NISTAC’s Board of Directors, the
Executive Committee
sought approval to make “quick and binding decisions involving a possible sale
of intellectual properties and
rights held by NISTAC and licensed to NutriJoy.” The reasoning behind this
request was that NutriJoy was
currently engaged in highly confidential and sensitive discussions that could
possibly lead to an “urgent need”
for NISTAC to make such decisions without sufficient time for Board approval.
Reportedly, the then
Chairman of NISTAC and NutriJoy, Dr. Ron Sampson, was at odds with the remainder
of the NutriJoy
Board regarding the possible strategic partnerships. This led to the NISTAC
Board creating an “Augmented
Executive Committee” apart from the existing Executive Committee, for the
purpose of making decisions in
the NutriJoy situation only. The members of the “Augmented Executive Committee”
were specifically
chosen because they had no personal interest or involvement with NutriJoy. Three
of the five Executive
Committee members, Messrs. Sampson, Krause and Glasscock, had personal interest
in NutriJoy through
their board position at NutriJoy and/or personal ownership of NutriJoy stock. It
appears that the Board was
attempting to address the conflict of interest on the Executive Committee by the
creation of the “Augmented
Executive Committee.” However, NutriJoy was not successful in obtaining a
significant strategic partnership
at that time, and the Augmented Executive Committee was disbanded.
Due to NutriJoy’s continued need for cash infusions to support operations,
NISTAC’s Executive Committee
approved an additional investment in NutriJoy in January 2006. In conjunction
with that investment and the
planned phased retirement of Dr. Sampson from the NISTAC and NutriJoy Boards,
NISTAC’s Executive
Committee “strongly encouraged the NutriJoy Board to invite the Chair of the
NISTAC Board, Mr. Krause,
to join their Board.” Mr. Krause was subsequently appointed Chairman of
NutriJoy’s Board.
Under Mr. Krause’s leadership and with his significant personal involvement,
NutriJoy successfully pursued a
significant strategic partnership with Coca-Cola. In August 2007, NISTAC’s
Executive Committee discussed
and reaffirmed the April 2005 Resolution that would result in NISTAC not
receiving a financial return on its
843,750 NutriJoy shares acquired via licensing or other services in advance of
capital recovery of other
stockholders. Additionally, the Executive Committee stated NISTAC’s willingness
to negotiate to eliminate
its ongoing royalty requirement in order to facilitate a sale of stock. Messrs.
Krause and Glasscock were
authorized by the Executive Committee to negotiate with NutriJoy, on behalf of
NISTAC, a capitalized
future return for eliminating its royalty requirement. It appears from the
NISTAC Board minutes that the
binding decision with regard to the Coca-Cola transaction was made by the five
member Executive
Committee, inclusive of Messrs. Krause and Glasscock.
In late January 2008, Coca-Cola acquired a majority interest in NutriJoy. As a
result NutriJoy Class A (cash)
stockholders received a cash distribution of approximately 68¢ per share
accounted for as a return of capital.
We were told that under the terms of the NutriJoy Stockholders’ Agreement, Class
A stockholders must
receive $1.00 for their shares before any distributions are paid to other
classes of stockholders. Class A
stockholders receiving cash distributions include, but are not limited to NISTAC,
Holdings, KSURF, MTM,
the Robert Steven Krause Revocable Trust dated 5/16/03, Kenton L. Glasscock
Trust dated 6/1/01, and
Jon and Ruth Ann Wefald. NISTAC received a cash distribution of $375,725.26 on
the 550,315 NutriJoy
Class A shares, but not on the 843,750 Class B shares it had acquired in
relation to the donation of the
intellectual property.
In addition to giving up the cash distribution on its Class B shares, NISTAC
also gave up on-going
compensation due from NutriJoy and its sublicensees under the 2000 License
Agreement related to the
annual license maintenance fees; all royalty payments due from NutriJoy, its
affiliates and sublicensees; and all
non-royalty sublicensee payments. Compensation to NISTAC is now addressed in the
January 2, 2008
Second Amendment to License Agreement which reads “The parties agree that NISTAC
is entitled to certain
contingent payments in exchange for the rights granted by it in this Agreement.
The contingent payment
amounts, if any, are as described in Section 2.4 of the Stockholders Agreement
for NutriJoy, Inc. dated of
even date herewith and the circumstances under which such payments are due to
Licensor from Licenses.”
It should be noted that we requested and were denied access to the NutriJoy
Stockholders’ Agreement
referred to above. Mr. Glasscock indicated that the referred to payments will be
a modest distribution to
NISTAC after all Class A stockholders have received a return of $1 per share,
but prior to any distribution to
Class B (NISTAC) or Class C (Coca-Cola) stockholders.
The NutriJoy Stockholders’ Agreement may provide further relevant information
regarding the Coca-Cola
transaction and further description of the rights of the various classes of
NutriJoy stock as well as stock
awards to officers and directors. Had we been allowed to review this document,
it is possible that findings of
an adverse nature may have been identified.
Wildman Harrold Report
The NISTAC Cluster was originally established in the 1990s using a model
developed by KTEC. In
discussions with similarly-structured entities, NISTAC management became
concerned that their corporate
structure might be incompatible with recent changes to governing regulations and
tax laws. In 2005,
NISTAC engaged the services of Wildman, Harrold, Allen & Dixon, LLP (“Wildman
Harrold”) to make an
assessment of the structure of the NISTAC Cluster and its operations and
employee compensation policies.
On March 6, 2006, Wildman Harrold prepared a report which found that the Boards
of Directors and
Committees of NISTAC, MTM and Holdings were “too intertwined.” At NISTAC’s
August 22, 2006 Board
of Directors meeting, several personnel changes were made to the Boards of
NISTAC and MTM as well as
changes to the NISTAC Executive Committee and Compensation Sub-Committee to
address this
recommendation. In addition, various findings addressed the manner in which
equity compensation was
awarded, specifically:
· Grants of equity to employees (by way of the MTM Deferred Compensation Trust,
the “MTM
Trust”) may violate reasonable compensation rules promulgated by the IRS
relating to not-for-profit
entities.
· Incentive compensation to employees should be properly allocated. Employees of
NISTAC and
MTM should only be rewarded for the work they have performed for each entity.
· Up to one-third of all equity compensation of NISTAC and MTM is funded into
the MTM Trust but
MTM Trust documents list MTM as the sole entity funding the MTM Trust.
· NISTAC royalty/licensing income and incentive equity grants to employees are
inversely related.
Should NISTAC receive equity for royalty and licensing fees instead of cash,
employees may be
unjustifiably rewarded at the expense of NISTAC’s profitability.
NISTAC’s Compensation Sub-Committee established a cap of “three times salary”
with respect to incentive
compensation relating to licensing revenues. With respect to equity
compensation, NISTAC is currently
working with the law firm of Husch Blackwell Sanders LLP to develop equity
compensation rules that are
compatible with the recommendations of Wildman Harrold.
Findings and Recommendations
NISTAC has an established protocol for disclosing conflicts of interest through
its bylaws which requires that
directors declare their interest and/or engagement with another party or entity
in advance to the other
directors and abstain from voting on any agreement with the entity in which they
have a personal interest. In
relation to the Coca-Cola transaction, the April 17, 2007 NISTAC Board minutes
indicate that the Board
empowered the Executive Committee to take necessary and binding actions in
between Board meetings with
the understanding that the Executive Committee would give due consideration to
maximizing potential long
term value for NISTAC while meeting other objectives within its mission. The
motion passed unanimously.
Mr. Glasscock was a member of the NISTSAC Board, President of NISTAC and a
shareholder in NutriJoy,
yet it was not noted that he abstained from voting. Furthermore, Mr. Krause was
Executive Chair of the
Board of NISTAC, Chairman of NutriJoy and a shareholder in NutriJoy, yet it was
not noted that he
abstained from voting. On August 15, 2007 the Executive Committee of the Board
met to review the terms
of the proposal by Coca-Cola to acquire a controlling interest in NutriJoy. The
Executive Committee
consisted of Messrs. Krause and Glasscock, both stockholders in NutriJoy, and
three other members who
reportedly did not own NutriJoy stock. A motion passed unanimously to recommend
the Coca-Cola
proposal to NutriJoy and affirming that NISTAC was 1) waiving the distribution
of any financial return on its
shares acquired in lieu of cash until all existing shareholders have recovered
their capital investment; and 2)
eliminating its royalty requirements in order to facilitate a sale of stock.
Furthermore, the Executive
Committee authorized Mr. Krause and Mr. Glasscock to negotiate with NutriJoy on
behalf of NISTAC a
capitalized future return for the elimination of its royalty requirement. Again,
Mr. Glasscock was a member
of the NISTAC Board, President of NISTAC and a shareholder in NutriJoy, yet it
was not noted that he
abstained from voting. Mr. Krause was Executive Chair of the Board of NISTAC,
Chairman of NutriJoy and
a shareholder in NutriJoy, yet it was not noted that he abstained from voting.
While NISTAC has established a written protocol to address conflicts of
interest, it does not appear that the
protocol is followed. The possibility for future conflicts of interest such as
that arising from the Coca-Cola
transaction and the actions of Mr. Krause and other NutriJoy shareholders who
were also in a position of
influence at NISTAC should be carefully considered by the University and the
Foundation. The Foundation
may want to consider increasing their oversight through Board and Executive
Committee participation to
ensure that they are fully informed with regard to NISTAC and its incubated
companies’ operations.
With regard to the Wildman Harrold report, NISTAC should obtain positive
confirmation from Wildman
Harrold or Husch Blackwell Sanders LLP that the current composition of its
various Boards of Directors,
Committees and Sub-Committees and Advisory Boards conforms to the
recommendations of the Wildman
Harrold report and any subsequent changes in regulation and tax law.
NISTAC should continue working with Husch Blackwell Sanders LLP to revise its
compensation policies to
ensure compliance with all regulations and tax laws. The resulting
recommendations and implementation of
those recommendations by the NISTAC Cluster should be reviewed by the University
and the Foundation.
Intercollegiate Athletics Association
Scope
Our work at the Athletics Department involved interviewing Athletics Director
Bob Krause, Associate
Director of Athletics for Business Operations Bob Cavello, and Assistant
Business Manager Kim Linck. We
reviewed the minutes of the Intercollegiate Athletics Council for fiscal years
2001 through 2008 and reviewed
employment contracts, and related documents for various coaches and Athletics
Directors. We also reviewed
the general ledgers for fiscal years 2003 through 2009 year-to-date and selected
500 items for cash
disbursements testing. We tested cash disbursement transactions greater than or
equal to $5,000 if paid to
individuals, not including payroll (representing 90.4% of the category),
payments to KSU Aviation greater
than or equal to $3,500 (representing 60.3% of the category), payments to
KSUGCMRF greater than or equal
to $10,000 (representing 68.4% of the category) and miscellaneous payments equal
to or in excess of $50,000
(representing 32.4% of the category).
Not all information requested by Grant Thornton was available for our
inspection. Specifically, we did not
receive supporting documentation for 13 selected disbursements by the Athletics
Department as well as the
original July 2, 2001 employment contract and 2005 BMA Annuity documentation for
former Athletics
Director Tim Weiser. Mr. Bob Cavello, Associate Director of Athletics, indicated
that the supporting
documentation for the 13 selected disbursements, representing $845,000, could
not be located or was no
longer available due to normal record retention practices. The payees in
question included former Athletics
Director Tim Weiser, former Head Football Coach Bill Snyder, and former Vice
President for Institutional
Advancement and Athletics Director Bob Krause, among others. Therefore, we were
unable to determine if
these transactions were for a legitimate business purpose and were appropriately
documented and approved.
Mr. Cavello originally indicated that the Athletics Department did not have a
copy of Mr. Weiser’s original
2001 contract nor the documentation supporting the Athletics Department’s 2005
purchase of an annuity to
fund the matching of Mr. Weiser’s deferred compensation account. Mr. Cavello
indicated that he requested
these documents from Mr. Weiser’s advisors, but they did not become available
during our engagement.
Subsequently, we were told that Mr. Krause indicated that there was no original
July 2, 2001 contract for Mr.
Weiser although one is specifically referred to by date in the “Third Addendum
to Contract for Tim Weiser.”
We have identified possible tax issues related to Mr. Weiser’s employment
contracts and various payments
made to him there under which are discussed later in this report.
Overview
The Athletics Department is organized as a 501(c)(3) educational non-profit
organization and is a separate
legal entity from the University. Its day-to-day operations fall under the
responsibility of the Athletics
Director.
The Intercollegiate Athletics Council (“Advisory Council”) serves in an advisory
capacity to the Athletics
Director. Voting members of the Advisory Council are comprised of two alumni
members, two student
members, two faculty-at-large members, one faculty representative to the NCAA,
the Big 12 Conference and
any other conferences in which the University may affiliate, one alternate
faculty representative and the
Chairperson. The Athletics Director and the Alumni Board and Foundation Board
liaisons are non-voting
members. The Advisory Council is largely limited to the discussion of budgetary
matters, use of facilities,
promotional activities, equal opportunity for all athletics, academic progress
of athletes and personal conduct
of athletes and employees of the Athletics Department. The Advisory Council does
not function as a
standard board of directors and in reality appears to provide little in the way
of “checks and balances” with
regard to the operations of the Athletics Department.
The Athletics Directors have historically reported to President Wefald through
Mr. Krause as Mr. Krause was
given responsibility for implementing the Memorandum of Understanding between
the Athletics Department
and the University by coordinating the daily activities and interests of the
University with those of the
Athletics Department. Therefore, Mr. Krause, with President Wefald’s approval,
has always been
significantly involved in negotiating coaches’ and Athletics Directors’
contracts, and was very involved in the
financial affairs, fundraising efforts and strategic direction of the Athletics
Department.
However, under Mr. Krause some processes within the Athletics Department have
not always been
appropriately structured and formalized. Furthermore, transactions involving
other University-related entities
have not always been appropriately structured and transparent given that the
Athletics Department is a
separate legal entity. Examples of such instances are detailed below.
Imprest Account
Most of the operating funds for the Athletics Department are kept in a bank
account (“Bank 14”) maintained
by the University Controller’s office. The Business Office of the Athletics
Department submits check
requests to be processed by the University Controller’s office and, except for
disbursements from state funds
or greater than $75,000, the University Controller’s office does not review the
requests or any supporting
documentation.
In addition to the Bank 14 account, the Athletics Department maintains and
controls an Imprest Account at a
local bank from which it can make disbursements without having to go through the
Controller’s office.
Funding for the Imprest Account comes from disbursements out of the Bank 14
account. While the
University Controller’s office can monitor the amount of money flowing through
the Imprest Account, they
do not have the opportunity to review or monitor any payments being made from
that account.
Per Mr. Cavello, the purpose of the Imprest Account was to provide funds in
cases where payment was
needed sooner than the 10 day processing period for payments going through the
Bank 14 account. He
indicated that payments through the Imprest Account (also known as the
“Contingency Fund”) were for staff
and team travel. Our analysis has shown that approximately $1,400,000 in annual
disbursements flowed
through the Imprest Account during Fiscal Years 2003 through 2005 and
approximately $2,000,000 in annual
disbursements during Fiscal Years 2006 through 2008.
While approximately 95% of these disbursements were for travel-related payments
and reimbursements, we
found a number of contract payments to the personal corporations of Mr. Weiser,
Mr. Snyder and Mr.
Krause for compensation in excess of their base salary. The majority of such
payments were made through
the Bank 14 account maintained by the University Controller’s office. It is not
clear why contract payments
would be made through the Imprest Account as they do not relate to travel. As
with other payments to
employees’ personal corporations, the supporting documentation was minimal,
usually consisting of an email
from Mr. Cavello to Ms. Christy Scott directing that a payment be made. We
obtained a file memo dated July
28, 2005 from Ms. Christy Scott which memorialized one such payment to Mr.
Weiser’s personal corporation
and stated “For confidentiality reasons, the check will be written from the
Imprest account…” Our analysis
of Mr. Weiser’s compensation showed that the amount paid represented payments
due him under his 2005
contract and it is unclear why this particular payment required confidentiality,
or from whom.
With the exception of one payment, all the payments were under the $75,000
review benchmark for the
Controller’s office. However, a payment of $121,726.25 was made to Mr. Weiser’s
personal corporation from
the Imprest Account. On December 14, 2006, Mr. Weiser emailed Mr. Cavello and Ms
Scott and asked for a
check payable to Weiser Way on January 1, 2007 consisting of the remainder of
his “additional
compensation” (compensation in excess of base salary as described below). Mr.
Weiser indicated in the email
that he had some taxes to pay by December 31, 2006 that he needed to cover with
the remaining additional
compensation, but that he did not want that income to be considered as received
in 2006. A handwritten
note on the email indicates that the Controller’s office could not prepare a
check dated January 1, 2007, so
the fund were transferred from the Bank 14 account to the Imprest Account on
December 14, 2006 and a
manual check dated January 1, 2007 was issued out of the Imprest Account in the
amount of $121,726.25.
It is recommended that the use of the Imprest Account be limited to its stated
intent of travel-related
expenses and reimbursements. We have been told that all future related to
compensation will be made
through the University’s payroll system.
Institutional Support Fee
Although the Athletics Department is a separate legal entity, it utilizes
various back-office functions of the
University’s Controller’s Office such as bookkeeping and check writing services.
The Athletics Department
has historically paid the Controller’s Office a fee for these services through
an Institutional Support Fee,
which approximates 2.25% of gross receipts excluding student fees and University
interdepartmental sales.
The fee owed the Controller’s Office is traditionally paid by the Athletics
Department to the University in
June of every year. During the period under analysis, fees paid to the
Controller’s Office averaged $195,000
per year.
However, on June 6, 2008, the Athletics Department transferred $80,000 to the
Foundation to augment the
Discretionary Funds of President Wefald ($54,400) and Mr. Krause ($25,600). The
source of these funds was
$80,000 of the $180,000 Institutional Support Fee due the University Controller.
Per discussions with
Foundation personnel, we were told that disbursements from the Discretionary
Funds had not been subject
to any formal budget, but generally averaged $650,000 for the two accounts. It
is our understanding that the
$80,000 transfer was predicated by the perceived need for additional
Discretionary Funds by President
Wefald and Mr. Krause above and beyond the amount provided by the Foundation for
fiscal year 2008, and
not because of any obligation on the part of the Athletics Department. We were
told that Mr. Krause
requested the transfer of funds from the Athletics Department as those funds
were under his area of
responsibility. We were not provided documentation indicating that this transfer
was approved by any board
or committee of the Athletics Department nor by the University Controller’s
Office. However, we were
told that Mr. Bruce Shubert, the Vice President of Administration and Finance of
the University, to whom
the Controller reports, verbally approved the transaction. Mr. Shubert indicated
that “from time to time, the
Institutional Support Fee is adjusted for selected departments based on either
University or departmental
circumstances – those adjustments are not always reduced to writing.”
Furthermore, the Athletics Department participation in resolving the scholarship
deficit at the Foundation by
transferring the Institutional Support Fee due the University for the next three
years to the Discretionary
Funds at the Foundation has already been detailed in this report.
Potential Tax Issues
In reviewing various contract documentation and payments made by the Athletics
Department to coaches
and other individuals, we encountered a variety of possible tax issues. The
potential issues are detailed below.
Employee or Independent Contractor
Our analysis of compensation paid through the Athletics Department revealed that
over the period analyzed,
Mr. Krause, Mr. Weiser, Mr. Wooldridge and Mr. Snyder all received salaries,
which were recorded on W-2
forms. However, those individuals also received additional compensation in the
form of “consulting fees,”
“contract pay,” “professional fees” or “overload contracts.” In many instances,
this additional compensation
was not paid to the individual through the University payroll system, but rather
to a private corporation or
limited liability company set up by the individual. For instance, Mr. Weiser
received his additional
compensation through an entity named “The Weiser Way.” Mr. Wooldridge received
his additional
compensation through an entity named “Pershing.” Mr. Snyder received his
additional compensation
through an entity named “SSM, Inc.” and Mr. Krause, at times, received his
through an entity named
“Horizon Ranch.” The additional compensation for Messrs. Weiser, Wooldridge,
Snyder and Krause was not
run through the University’s payroll system. It was instead expensed through the
Athletics Department’s
“Contract Pay” or "Miscellaneous Expense” accounts. We were told that this was
the long standing practice
of the Athletics Department and was done in part because the additional
compensation may not have been
funded by State funds and in part to provide confidentiality for the individuals
receiving the additional
compensation. With the exception of Mr. Krause, as described below, it appears
that all described
compensation would be directly related to the individual’s performance of their
duties as coaches of a
University athletics team. It does not appear that any of the compensation would
be due the coaches for
“consulting services” unrelated to their roles as coach.
The Athletics Department acquires payroll services for its employees through the
University Controller.
Therefore, all Athletics Department payroll is run through the University’s
payroll system. According to the
University Controller, University employees’ taxable income is now reported to
the IRS though the W-2
form. However, historically, there have been individuals that received
consulting fees or other forms of
compensation that did not run through the University’s payroll system. If the
payment did not run through
the University’s payroll system, no withholdings were deducted from the
compensation.
If consulting fees were paid to an individual, who was not an employee, the
University filed an IRS Form
1099. However, if the consulting fees were paid to a corporation, such as SSM,
Inc., The Weiser Way, or
Horizon Ranch, LLC the University did not have an IRS reporting requirement, and
the reporting of that
income to the taxing authorities was the responsibility of the recipient.
In reviewing Coach Bill Snyder’s contract dated June 18, 2001, it was noted that
compensation was outlined
in a variety of ways including: annual salary (base salary), other duties (e.g.,
television shows, appearances,
endorsements) and performance bonuses. Coach Snyder’s base salary was paid
through the University payroll
system and was subject to appropriate payroll deductions. The remainder, a
majority of total compensation,
was paid outside of the payroll system primarily to Coach Snyder’s corporation,
SSM, Inc., and was not
subject to payroll deductions. The following fringe benefits were also noted:
country club membership,
founder privilege at Colbert Hills, the use of football facilities for football
camps, football suite as long as he
lives in the Manhattan, Kansas area, home football game tickets, home basketball
game tickets, two courtesy
vehicles, undergraduate education expenses for his daughters, and a guaranteed
5-year contract extension as
Associate Athletics Director for his son after Coach Snyder’s departure.
In addition to the June 18, 2001 contract with Mr. Snyder, the Athletics
Department located a November 13,
1996 contract between Mr. Snyder’s personal corporation, SSM, Inc., and the
Athletics Department. That
contract appears to address many of the same issues addressed in the June 18,
2001 contract and may be
considered to have been usurped or amended by the June 18, 2001 contract. It is
difficult to see how Mr.
Snyder could be defined to be an employee of the Athletics Department under the
2001 contract and an
employee of SSM, Inc. under the 1996 contract simultaneously for appearing to
provide the same services
under both contracts.
In reviewing former Athletics Director Tim Weiser’s contract documents and
addendums, it was noted that
compensation was outlined in a variety of ways including: base salary and annual
longevity award/bonus. Mr.
Weiser’s base salary was paid through the University’s payroll system and was
subject to payroll deductions.
The remainder, a majority of total compensation, was paid outside of the payroll
system primarily to Mr.
Weiser’s corporation, The Weiser Way, and was not subject to payroll deductions.
The following fringe
benefits were also noted: country club membership, founder privilege at Colbert
Hills, two courtesy vehicles,
clothing allowance and vacation expenses.
Generally, the employer must withhold income taxes, withhold and pay Social
Security and Medicare taxes,
and pay unemployment tax on wages paid to an employee. The employer generally
does not have to withhold
or pay any taxes on payments to independent contractors. Further, any fringe
benefits provided are taxable
and must be included in the recipient’s pay unless tax law specifically excludes
it.
Considering the terms of the contracts above, it is possible the IRS would not
view Coach Snyder or Mr.
Weiser as independent contractors in part, rather than employees in whole, for
tax purposes. Many
universities do pay their coaches for appearances and endorsements through a
contract with the coach’s
personal corporation. However, it is our understanding that the taxing
authorities do not look favorably on
those situations if it is the Athletics Department or the University who is
arranging for/negotiating the
appearances and the endorsements on behalf of the coach, such as is the
situation at KSU. If the Athletics
Department classifies an employee as an independent contractor and does not have
a reasonable basis for
doing so, it may be held liable for employment taxes for that employee. Further,
at the time of this analysis,
documentation had not been provided to determine how fringe benefits received by
Coach Snyder or Mr.
Weiser were being reported for tax purposes.
This issue of employee or independent contractor was reportedly raised by the
Athletics Department’s
external auditors in 2005 and resulted in a change going forward for contracts
for newly hired coaches.
However, it does not appear that changes were made to the manner in which
already established
compensation arrangements, such as for Coach Snyder and Mr. Weiser, were
accounted for. Moving forward
it is understood that all employees have total compensation accounted for
through the payroll system subject
to the proper payroll deductions. However, it is recommended that the Athletics
Department and University
conduct a thorough review to identify all possible independent subcontractor and
fringe benefit
arrangements. To the extent such arrangements exist, they should be reviewed by
an independent, qualified
third-party to ensure that they comply with the applicable tax laws.
Overload Contract
According to President Wefald, Mr. Krause has long been involved in the
University’s Athletics Department,
in effect serving as President Wefald’s liaison to the department. Since 1986,
Mr. Krause has served as the
Interim Athletics Director on four occasions prior to his full-time appointment.
On average, Mr. Krause has
devoted in excess of 20 hours of his often 80 hour work week to Athletics
Department activities. In
recognition of the amount of time Mr. Krause was devoting to the Athletics
Department, in excess of his
normal responsibilities as Vice President for Institutional Advancement,
President Wefald approved an
“Overload Contract” for Mr. Krause beginning in 2003. The Overload Contract was
documented in the
form of an addendum to Mr. Krause’s contract as Vice President for Institutional
Advancement.
Mr. Krause was eligible for and received compensation equal to 25% of his salary
as Vice President for
Institutional Advancement from the Athletics Department. However, as discussed
previously, the payments
for the “Overload Contract” were not run through the University’s payroll
system, but rather through the
Athletics Department’s Miscellaneous Expense account. Some of the payments were
made in the name of
“Horizon Ranch” and did not appear to be subject to any withholdings. Although
Mr. Krause was not an
employee of the Athletics Department at the time these payments were made, they
should still be reviewed
from a tax perspective to ensure that they were handled appropriately. As the
Athletics Department reported
to the University through Mr. Krause, the payments could be viewed by the taxing
authorities as payments
due to Mr. Krause as an employee of the University.
Informal Deferred Compensation Arrangement
Through testing, it was observed that Coach Snyder may have had an informal
deferred compensation
arrangement as a matter of course from at least fiscal year 2002 and continuing
beyond Coach Snyder’s
departure from the KSU football program in November 2005. The June 18, 2001
contract between Coach
Snyder and the Athletics Department stated that the described “annual
compensation will be distributed
periodically to the employee or SSM, Inc. as mutually determined by the
University and the employee.” At
some point in time, the aforementioned section of the contract was amended by
the striking of the phrase “to
the employee or” so that the annual compensation for Mr. Snyder is directed to
be paid to SSM, Inc. This
amendment is not dated and bears the hand written initials RSK, assumedly Robert
S. Krause. Coach
Snyder’s base salary was paid through the University’s payroll system and was
subject to payroll deductions.
However, as previously discussed, the remainder, a majority of total
compensation, was paid outside of the
payroll system primarily to Coach Snyder’s corporation, SSM, Inc.
The amount and timing of the payments to SSM, Inc. appear to have been
determined by Coach Snyder.
Rather than paying all compensation owed Coach Snyder in the year it was earned,
or formally deferring that
compensation, the Athletics Department kept track of the additional compensation
owed to Coach Snyder in
an Excel spreadsheet and paid it to Coach Snyder upon his request. This often
resulted in compensation
earned in a particular year not being paid out for several years. Mr. Cavello
confirmed that as of December
31, 2008 Coach Snyder was still owed nearly $900,000 in outstanding compensation
by the Athletics
Department which was earned in fiscal years 2005 and 2006.
New regulations governing nonqualified deferred compensation plans went into
effect on January 1, 2009.
The regulation provides that all amounts deferred under a deferred compensation
arrangement must be
included in gross income if the arrangement is not in compliance with the rules
under Internal Revenue Code
(“IRC”) § 409A. Failure to comply could subject the Athletics Department to
penalties and interest.
It is recommended the Athletics Department and University conduct a thorough
review to identify all
possible deferral arrangements, qualified and unqualified. To the extent such
arrangements exist, an
independent, qualified third-party should be hired to analyze the agreements and
their accounting to ensure
compliance with IRC § 409A both in operation and form, and all other applicable
laws.
BMA Annuity for TimWeiser
Pursuant to the :Fourth Addendum to Contract for Tim Weiser,” dated March 31,
2005, the Athletics
Department agreed to take on “additional responsibilities” with regard to the
2002 Deferred Compensation
Agreement with Mr. Weiser. The Athletics Department agreed to match all previous
and future deferred
compensation and interest thereon under the Deferred Compensation Agreement up
to a maximum amount
of $1 million. To fund this future obligation, the Athletics Department
purchased a BMA Annuity with an
initial funding of $400,000.
Supporting documentation attached to a cash transaction we tested indicated that
the amounts due Mr.
Weiser under the BMA Annuity contract would only be paid to Mr. Weiser upon his
termination of
employment and would be subject to all applicable employment taxes at that time.
Mr. Weiser left the
Athletics Department on June 14, 2008 and received his settlement payout on July
14, 2008. The supporting
documentation for the amounts paid to Mr. Weiser upon his leaving the Athletics
Department does not
indicate that applicable employment taxes were withheld. Furthermore, the
payment was made to The Weiser
Way and not through the University’s payroll system. As discussed previously, it
was not the Athletics
Department practice to withhold taxes unless payments were made through the
University’s payroll system.
Payments made to Mr. Weiser upon his leaving the Athletics Department should be
reviewed from a tax
perspective to ensure that it adheres to all applicable tax laws and
regulations.
Loan to TimWeiser
On January 3, 2008, Mr. Krause, as the Vice President for Institutional
Advancement and the sole member of
the Athletic Director Compensation Committee, approved a loan agreement and
promissory note between
the Athletics Department and Mr. Weiser resulting in a loan of $500,000 to Mr.
Weiser funded January 6,
2008. The loan agreement indicated that “The Borrower shall not be required to
justify or explain the
purpose of any Loan. The Loan(s) shall automatically be approved by the Lender
upon Borrower’s written
request to the Lender.” These are not standard clauses in even the most informal
of lending agreements.
The loan plus interest was due at the earliest date that Mr. Weiser was no
longer the KSU Athletics Director.
The loan was repaid on July 14, 2008 from funds the Athletics Department owed
Mr. Weiser from the
Borrower’s Matching Dollar Account (funded by the BMA Annuity) under Mr.
Weiser’s Separation
Agreement.
This is reportedly the sole instance of the Athletics Department making a loan
to an employee. We found no
evidence that this transaction was discussed with or approved by anyone other
than Mr. Krause.
Documentation reviewed indicates that Mr. Krause was aware of Mr. Weiser’s
impending resignation when
he approved the loan. Therefore, risk of repayment did not appear to be a
consideration. However, we
question the appropriateness of the Athletics Department serving as a lending
entity to any individual. One
would expect that the lending of monies in this magnitude would be strictly
formalized by the Athletics
Department, if it was allowed at all.
Bill Snyder’s Founder’s Membership at Colbert Hills
Although not noted in the 2001 and more recent contract documents we reviewed
for Mr. Snyder, a review of
the Athletics Department general ledger revealed that the Athletics Department
was paying for a $100,000
Founder’s membership at Colbert Hills on behalf of Mr. Snyder. Payments of
$12,500 were paid to
KSUGCMRF periodically and posted against accrued payroll for Mr. Snyder. The
last such payment was
dated February 25, 2004.
On March 30, 2005, a $12,500 payment was made to SSM, Inc., for “SVC
PROVIDED-COLBERT.”
Reportedly, in late 2007 or early 2008, KSUGCMRF notified Mr. Snyder that his
last payment due of $12,500
had never been received. Mr. Snyder indicated that he had made all payments due.
Therefore, Mr. Krause
authorized the payment of $12,500 from the Athletics Department on behalf of Mr.
Snyder and had the
payment charged to “Miscellaneous Expense” rather than run through “Accrued
Payroll expense.”
It appears that the 2008 payment may represent a double payment by the Athletics
Department of the last
payment due KSUGCMRF on behalf of Mr. Snyder. The accounting documentation
indicates that the
March 30, 2005 payment of $12,500 that went to SSM, Inc., may have been due
KSUGCMRF. The Athletics
Department should research this transaction to determine the appropriateness of
the 2008 payment to
KSUGCMRF.
Bill Snyder’s Current Contract
We requested Mr. Snyder’s contract documents related to his current position as
Head Football Coach.
Initially we were given an “Initial Appointment Term” document which noted only
his base salary. When we
requested the contracting documents related to his entire compensation package,
we were told they were still
being negotiated, some three months after he accepted the position, and were not
available for review. We
then received a “Revised Initial Term Appointment” document which noted his
salary at the $1.85 million
widely reported in the press.
As noted above, previously Mr. Snyder’s compensation was split with his base
salary running through the
University’s payroll system and the remainder being paid to his personal
corporation without any
withholdings. We strongly urge the Athletics Department to have the current
contract and compensation
documents put through a financial as well as legal review to make sure that the
Athletics Department is in
compliance with all appropriate accounting and tax laws with regard to the
payment of Mr. Snyder’s
compensation.
Findings and Recommendations
Contract negotiations and compensation matters within the Athletics Department
should be subjected to
legal and financial reviews. We were told that historically not all compensation
matters were subjected to a
legal or financial review which should have addressed the areas of concern noted
above. Reportedly, all final
contracts are now reviewed by the University’s General Counsel’s Office.
However, financial reviews are
more apt to occur during the external audit process. We would recommend that all
contract and
compensation matters be subject to an initial financial review which should
specifically address any tax
concerns. In addition, contracts should be reviewed on a periodic basis to
ensure that changes in accounting
standards or tax laws are appropriately applied.
All transactions between the Athletics Department and the University or any
University related entity should
be formalized with regard to structure, accountability and transparency. Formal,
documented approval
processes should be instituted to ensure that all transactions are appropriately
vetted prior to being recorded.
CONCLUSION
The University has benefitted greatly from the leadership of President Wefald
and the efforts of Mr. Krause.
Both gentlemen exhibit an obvious passion for KSU. However, the concentration of
influence under Mr.
Krause has resulted in an informality with regard to how the University and some
of its related entities
interact and transact. This has raised suspicions among the interested parties
with regard to the intent behind
various transactions that we researched and which are detailed in our report.
In general, the Office of the President should be mindful that although Kansas
State University is affiliated
with several entities with a common goal, the support and advancement of the
University, many of these
affiliated entities are separate legal entities unto themselves. As such, each
entity should conduct its activities
and pursue its mission cognizant of the need for clear lines of delineation
which require a degree of structure,
formality and transparency.
Furthermore, the reporting structure supporting the Office of the President
should be robust and diverse
enough to allow for the identification and disclosure of potential conflicts of
interest so that they can be
appropriately managed.
