Question

Based on "Fraud in Collegiate Athletics"Case

When Major League Money Meets Little League Controls

( Adapted from an article in Fraud Magazine, January/February 2012) By Herbert W. Snyder

1. Identify some of the weaknesses in KU's internal controls that allowed fraud to occur in the athletic department. Explain your answer.

2. Do you think that the sentences given to the perpetrators were appropriate? or too harsh? or too lenient? Explain your answer.

Fraud in Collegiate Athletics

When Major League Money Meets Little League Controls

(Adapted from an article in Fraud Magazine, January/February 2012)

By Herbert W. Snyder, Ph.D., CFE; David O'Bryan, Ph.D., CFE, CPA, CMA

A major, multi-million sports ticket fraud at the University of Kansas highlights how CFEs can help convince administrators and boards to reassert control over their athletics departments. The answer could be independent oversight.



On June 30, 2009, David Freeman pleaded guilty to conspiracy to commit bank fraud as part of a federal bribery case. Anxious to please the judge prior to his sentencing, he provided investigators with information about theft and resale of football and basketball tickets at the University of Kansas (KU).

Freeman identified two individuals, one of whom was exonerated while the other proved to be central to the case. 

As a result, Freeman had his sentence reduced from 24 to 18 months. Federal authorities contacted KU officials in late 2009. Under increasing pressure, KU announced in March 2010 that it had retained the services of Foulston Siefkin LLP to conduct an internal investigation. Assisted by a forensic accounting firm, Foulston Siefkin found that six employees had conspired to improperly sell or use approximately 20,000 KU athletic tickets — mostly to basketball games, including the Final Four tournament — from 2005 through 2010. The sales amounted to more than $1 million at face value and could range as high as $3 million at market value. Even worse, the investigators were unable to determine how many of the tickets were sold directly to brokers because the employees disguised these distributions into categories with limited accountability, such as complimentary tickets, according to a May 26, 2010 article in the Kansas City Business Journal, "University of Kansas athletic tickets scam losses may reach $3M." 

The investigators could not examine records prior to 2005 because the

athletics department did not retain those records.

The investigation of KU's ticket sales and fundraising operations by federal authorities continued throughout 2010 and 2011.

KU's internal investigation, which was released May 26, 2010, implicated the associate athletic director for development, the associate athletic director for the ticket office, the assistant athletic director for development, the assistant athletic director for sales and marketing, the assistant athletic director for ticket operations and the husband of the associate athletic director for the ticket office who had been working for KU as a paid consultant.



WHAT ACTUALLY HAPPENED? 



The accused allegedly abused the complimentary ticket policies of the university in three ways:

1- Official policy allowed for certain athletic office employees to receive two complimentary tickets for each athletic event, provided they would not resell them. Instead, the athletic department routinely gave each of these employees more than two tickets for each event and tacitly permitted, if not overtly encouraged, reselling.

2- The development/fundraising arm of the athletic office was permitted to use complimentary tickets to cultivate relationships with prospective donors. However, these officials helped themselves to many more complimentary tickets than they could have reasonably needed for the stated purpose.



3- Athletic department members improperly used or resold complimentary tickets reserved only for charitable organizations. 

The culprits concealed these thefts by simply charging tickets to such fictitious accounts as RJDD - "Rodney Jones Donor Discretionary" - and not recording the ultimate recipients. (Jones was the assistant athletic director for development and one of the two persons the informant identified.)



By 2009, a cover-up compounded the original schemes. When the 2008-2009 basketball ticket sale records could not be reconciled, Charlotte Blubaugh told Brandon Simmons and Jason Jeffries to move documents from the athletic office to the football stadium where she, Ben Kirtland and Tom Blubaugh would destroy them over the weekend, and then attribute their absence to construction at the stadium.



In a separate scheme, the husband of the associate athletic director for the ticket office, who was supposedly employed as a consultant to the athletic department, received payments totaling $116,500, all approved by the associate athletic director for development. Apparently, the husband did not provide any services in exchange for these payments. 

Importantly, no allegations or evidence suggested that any players, coaches or university administrators outside athletics were involved in these crimes. Athletics office employees solely perpetrated these frauds. The athletic director was not involved in the scheme but accepted responsibility for the lax oversight that contributed to its extent and duration.


So how did the frauds go undetected for at least five years? And what can anti-fraud professionals do to prevent situations like this?



WHY COLLEGE ATHLETIC PROGRAMS ARE VULNERABLE TO FRAUD



The KU ticket scandal is not unique. It is merely the most recent and largest among financial scandals in college athletic departments that have included the University of Louisville, the University of Colorado and the University of Miami, to mention a few. What happened at KU is a combination of separate, but related, problems that have become increasingly common in college athletic programs:

• Major athletic programs generate and spend huge sums of money. • These programs frequently lack transparency in their finances.

• Athletic programs often operate independently of university

oversight.

As we have seen, the frauds at KU were not particularly sophisticated. (For example, the associate athletic director for the ticket office used multiple dummy accounts for ticket purchasers with business locations that matched her home address.) The problems that anti-fraud professionals face is the lack of internal controls within victim organizations; the challenge is convincing senior administrators and oversight boards to reassert control over their athletic departments so that existing controls will be effective.



Higher education institutions often use a top-down, command-and- control structure on the field and in the gym to build successful sports programs. However, universities might inappropriately use that same approach to administer the business side of athletic programs. Fraud examiners, who deal with intercollegiate athletics, should be aware of the following factors, which may predispose athletic programs to fraud:



College sports are a lucrative target for frauds. 
Part of the difficulty in dealing with ticket sale frauds in college athletics is that the sheer volume of money invites theft. According to most recent figures available from the National Collegiate Athletic Association (NCAA) and compiled by ESPN ("The money that moves college sports," March 3, 2010, by Paula Lavigne), the 120 schools that comprise the Division I Football Bowl Subdivision generate more than $1.1 billion from ticket sales each year. Of these, the top five schools raise between $30.6 million and $44.7 million. (By comparison, KU is large but not exceptional. During the same period, the KU athletic programs spent more than $65 million and generated more than $17 million in ticket sales.) 



College sports increasingly value winning over good financial stewardship. 
The inherent risk that surrounds such large sums of money is compounded by the intense pressure athletic programs face to win games and increase their television exposure. As the Knight Commission observed in its 2009 report on college athletics: 

"The

growing emphasis on winning games and increasing television market share feeds the spending escalation because of the unfounded yet persistent belief that devoting more dollars to sports programs leads to greater athletic success and thus to greater revenues." This situation, albeit in different contexts, is common to many businesses that experience fraud. High revenues combined with a focus on growth at all costs often lead to situations in which organizations outstrip their own control structures and invites unscrupulous employees to siphon funds.



Sports tickets are inherently valuable and easily convertible to cash. 
Athletic departments maintain an inventory of valuable, readily exchangeable assets in the form of tickets. An active secondary market, including ticket brokers, scalpers and casual sales among ticket holders, facilitates the unauthorized, difficult-to-trace resale of these tickets. This is exacerbated when the market value of the tickets frequently exceeds their considerable face value by a wide margin.

 Also, custodians of complimentary tickets can wield great power and influence over those who want these coveted assets. Otherwise good people may turn a blind eye to wrongdoing if tempted, for example, by free tickets to the Final Four or a BCS Bowl game.



College athletic departments frequently lack transparency in their operations. 
Lack of access to information is a classic condition for facilitating fraud. The financial reporting that university athletic departments require varies widely in the amount and quality of information that they make publicly available. The U.S. Equity in Athletics Disclosure Act, for example, requires colleges to file annual reports with the U.S. Department of Education. However, compliance requires only six areas of expense—an overly broad set of categories that allows wide variation among institutions. The situation is a bit ironic when we consider that many Division I schools—such as the University of Texas with yearly athletic revenues of $44 million, or Alabama with an annual athletic budget of $126 million—rival or exceed for-profit companies but without the same reporting

requirements imposed by the U.S. Securities and Exchange Commission or the IRS. 



Frequently, a single individual controls the daily financial management of an athletic department and is not subject to financial controls and oversight normally found in profit-making entities.

This trend to place all the power in one person often begins at schools with highly successful coaches. Winning athletic events does not necessarily translate into managerial or financial competence. Winning may actually contribute to financial mismanagement because it promotes an aura of invincibility, which could lead to lax oversight. Who wants to kill the proverbial goose that is laying the golden eggs? KU's athletic director, according to Gasaway, lost millions of dollars in potential revenue for the university. 



A second problem is that private sources often pay the large salaries. A number of college presidents noted in the Knight Commission study that they are losing control over athletics, as schools are accepting more outside sources of income, such as television contracts or private fundraising, to pay athletic salaries. 



Ticket audits may require specialized testing. 
Most colleges provide free or reduced-price tickets to major or prospective donors. That group changes from game to game. So, athletic departments need to test internal controls and reconcile actual game attendance with revenues to ensure that the ticket office is not overly generous with its donor tickets.



As the KU scandal illustrates, it is absolutely critical that someone independent from the athletic department perform timely reconciliations after each event to ensure adequate segregation of duties. 

Schools that provide free tickets to employees need additional controls and tests. In most cases, complimentary tickets should be reported as part of employees' taxable income. Similarly, controls need to be in place to make sure that employees do not receive more

tickets than they are allowed by their employment contracts. (Regardless, it seems to be more than a lack of specialized training that caused Kansas' auditors to overlook the scandal during their periodic reviews of the ticket sales as shown by the multiple front organizations using the ticket director's home address.)



REASSERTING CONTROL OVER COLLEGE ATHLETICS. 

Large revenue streams are likely to remain an integral part of intercollegiate athletics. The obvious course for universities, barring reducing sports, is to become better stewards of their athletic resources. More specifically, the same aspects of college sports that spawned the scandal at KU and other universities should be the focus of improvements, including better transparency and oversight.



Transparency
 Public disclosure of an organization's finances is a powerful deterrent to numerous types of fraud. Although the U. S. Department of Education requires universities to report some data for athletic programs, it is difficult to compare these disclosures among institutions because the law requires reporting only in very broad categories. The NCAA requires reporting with greater detail. However, the public rarely sees such data. Moreover, the NCAA allows much leeway on the ways universities can categorize such data. 

A uniform system of accounts and reporting would promote comparability and consistency among programs. To increase accuracy and reliability, information provided to external parties should come from universities' central financial administrations, not directly from their athletic programs. A university’s internal audit function should be actively involved to enhance the quality of reported information. The external agencies receiving these reports should post them on the Internet to promote openness and transparency, and so independent watchdogs can scrutinize them for evidence of wrongdoing. 



Oversight
 As with any other organization, simply installing better anti- fraud controls is not sufficient to deter fraud. A standard of fraud prevention is that controls are only as effective as the people who use

them. A lesson from the KU case is that athletic departments require independent oversight. 

If it is true, as the Knight Report suggests, that university presidents feel they are unable to do this directly, then universities must seek other bodies to provide the oversight. Potential candidates include private university accrediting bodies, state boards of higher education or a university's board of trustees. Together with improved reporting standards, the move to independent review would remove the process from the more political atmosphere of university presidents and their competing needs to run their schools, raise funds and have winning athletic programs.



KU EPILOGUE

 After the scandal broke at KU, federal and state authorities continued their investigation, which resulted in seven indictments and seven guilty pleas:


• Jason Jeffries, assistant athletic director for ticket operations, pled guilty to one count of misprision and was sentenced to two years of probation and $56,000 restitution.



• Brandon Simmons, assistant athletic director for sales and marketing, pled guilty to one count of misprision and was sentenced to two years of probation and $157,840 restitution.

 Both Jeffries and Simmons cooperated in the investigation from an early stage and received relatively light sentences.



• Kassie Liebsch, athletic department systems analyst, pleaded guilty to one count of conspiracy to commit wire fraud and was sentenced to 37 months and $1.2 million restitution. Liebsch was not identified as a co-conspirator in the spring 2010 investigation. She continued to work at KU until the day of her indictment, Nov. 18, 2010.



• Rodney Jones, assistant athletic director for development, pleaded guilty to one count of conspiracy to commit wire fraud and was sentenced to 46 months and $1.2 million restitution.



• Charlette Blubaugh, associate athletic director for the ticket office, pleaded guilty to one count of conspiracy to commit bank fraud and was sentenced to 57 months and $2.2 million restitution.



• Tom Blubaugh, consultant to KU and husband of Charlette Blubaugh, pled guilty to one count of conspiracy to commit wire fraud and was sentenced to 46 months and nearly $1 million restitution. 



• Ben Kirtland, associate athletic director for development, pleaded guilty to one count of conspiracy to commit wire fraud. He was sentenced to 57 months and nearly $1.3 million restitution, including about $85,000 to the U.S. Internal Revenue Service and the balance to Kansas athletics.



After the story broke, Athletic Director Perkins announced he would retire in September 2011, and then abruptly retired on Sept. 7, 2010. KU has since replaced him with a new athletic director who makes roughly 10 percent of his predecessor.


An Aug. 10, 2011, court filing indicates that the U.S. attorney's office had collected only $81,025 from the five individuals convicted of conspiracy. 

As Ben Franklin was quoted as saying, "It takes many good deeds to build a good reputation, and only one bad one to lose it." It may be easier to recover the money than the damaged reputation.

Supporters of college athletics have asserted that the KU ticket fraud represents a crime by employees and not a failure of college athletics. However, any enterprise that generates millions and has so little internal control is inviting fraud.



Answer 1

Weaknesses in KU's internal controls with explanation:

1. Hiring people who are relatives: It is always a bad practise to hire employees who are relatives in the same department. In the given case if we closely observe the team involved in the fraud is formed by the relatives ( ie. people related to each other) . It is the work of the HR department to keep a close eye on these factors and to frquently monitor the same. Absense of a proper control over human resource management is one of the cause for this fraud.

2. No control over accounting data : If we analyse the given data it is evident that there is no control over accounting information. The accounting data prior to 2005 is not at all available for verification. They do not have any control over the expenses and income which again led to an inneficient fund management. This also hindered the investigation to a large extent.

3. No control over complimentary tickets distribution : Complimentary tickets are distributed only when the requirement meets the given set of policies. In the given case policies are just formed but not followed. There is no control over complimentary tickets that are distributed. They do not have proper record of the donations given. The group involved in the fraud purposefuly destroyed the information which means there is no segreegation of duties.

4. No internal audit team : It is important to have a check on all the internal aspects of the company regularly which was absolutely absent in the given case.

Sentence given to perpetrators were appropriate since the whole fraud scheme was by a set of employees. But KU is also responsible for not having a proper internal control system in place. It is the responsibility of KU to set proper policies and to put a proper internal control system in place to keep a check on all the internal aspects.