Sources: Kirk Schulz; Brian Spooner, 785-532-6900; spoon1@k-state.edu
Background materials available online: http://www.k-state.edu/president/reports/
News release prepared by: Cheryl May, 785-532-6415, may@k-state.edu

Thursday, Nov. 19, 2009

K-STATE PRESIDENT KIRK SCHULZ PRESENTS REPORT TO BOARD OF REGENTS

MANHATTAN -- In a presentation today to the Kansas Board of Regents, Kansas State University President Kirk Schulz reported on what his administration has done to ensure that sound business and management practices are in place at K-State now and into the future.

The regents tasked Grant Thornton LLP with conducting an exit analysis upon the retirement of former K-State President Jon Wefald and other retiring presidents of regents schools.

"Over the past several months the K-State family -- including faculty, students, staff, alumni and friends -- have been involved in addressing many of the issues raised in the Grant Thornton transition audit," Schulz said.

In August, Schulz appointed a 12-member committee to assist him in preparing the university's response to Grant Thornton's findings. The committee had representation from faculty, staff, students, alumni and friends of K-State and was chaired by Brian Spooner, university distinguished professor and interim dean of the College of Arts and Sciences.

The committee examined current university practices, provided oversight to additional planned external audits at the National Institute for Strategic Technology Acquisition and Commercialization and K-State Athletics, and ensured that K-State responds in a transparent fashion to all issues raised.

"The committee is comfortable that it has a thorough understanding of the issues raised in the Grant Thornton report, and it believes that its evaluation rests on solid footing," Spooner said in the report presented to the regents. "We are encouraged by the current administration's approach to financial and decisional transparency. This is most apparent in athletics, where the new corporate structure encourages strong oversight by university administrators and the new athletics director has adopted a new code of transparency and fiscal accountability. We hope that the university administration will continue to emphasize this transparency, because we believe that it will lead to appropriate decision-making in the institution's best interests."

Highlights of the report follow. The complete report, along with other documents, is online at http://www.k-state.edu/president/reports/

Conclusion
In addition to the specific recommendations made in this report, we reach the following general conclusions:

First, it is apparent to us that Jon Wefald invested too much power in Bob Krause and provided inadequate oversight and supervision of him. Additionally, Dr. Wefald did not place adequate checks and balances on financial controls, allowing Mr. Krause far too much influence over a variety of university-related funds. Mr. Krause treated these funds as one pool of money, which created a variety of accounting and governance issues. The university needs to ensure that there is appropriate oversight of university funds and that there are reasonable checks and balances in place, so that university administrators act in the university's best interests.

Second, we have concerns regarding the scholarship deficit that accrued over several years. We were unable to assign specific blame for this oversight. But we believe that this deficit resulted from a lack of communication between university administration and the Kansas State University Foundation. Moving forward, better communication between the university and the foundation is critical. For the university to be successful, university administration and the foundation must work in concert. As part of this process, we suggest that the foundation and the university work to reduce the scholarship deficit's burden on the university.

Third, we have general concerns regarding the university's relationship with NISTAC, because NISTAC's overly complex structure clouds its benefits to the university. The benefits from NISTAC need to be better defined and communicated to the university and the public, so that they can evaluate NISTAC's overall utility.

Finally, we are encouraged by the current administration's approach to financial and decisional transparency. This is most apparent in athletics, where the new corporate structure encourages strong oversight by university administrators and the new athletic director has adopted a new code of transparency and fiscal accountability. We hope that the university administration will continue to emphasize this transparency, because we believe that it will lead to appropriate decision-making in the institution's best interests.

Athletics
Before this committee began reviewing the issues in the Grant Thornton report, the department of athletics had engaged the auditing firm of Deloitte & Touche LLP to conduct an internal process control review of its operations. Deloitte reviewed internal processes related to contract administration, expense report and disbursement processing, and Imprest Fund administration review. Deloitte also examined the documentation for 13 transactions referenced in the Grant Thornton report and has confirmed that all of the transactions had documentation, approvals or were corroborated through inspection of related contracts.

Our separate review of the facts indicated that athletics has gone through significant changes in the last 12 months, even before the Grant Thornton report was released. Beginning in January 2009, athletics began looking to improve its structure to bring it into better compliance with new IRS Form 990 requirements. The result was a restructuring of athletics as a business entity, placing more decision-making responsibility in the hands of the board of directors, rather than centering that responsibility in one or two people. The new board of directors includes the athletic director (chair), a president's representative who must be a senior administrator, a similar provost's representative, the university's vice president for administration and finance (secretary/treasurer), the vice president for student life, and the faculty representative to the Big 12 Conference. Each of the board members is a university employee.

This structure requires the board of directors to approve any contracts that exceed $100,000 or that create obligations lasting longer than one year. All compensation for head coaches must be approved by the board of directors.

The new board of directors also adopted a new Imprest Fund policy, limiting expenditures to $5,000 per transaction. The Imprest Fund had been used by athletics to make expedited payments outside of the university controller's office, usually for team and staff travel on an expedited basis. The Imprest Fund has been used on a limited basis since September. The university controller will review monthly reconciliations.

Other new financial controls include:

• Both the athletic director and the vice president for administration and finance must sign off on all expenditures of $50,000 or more;
• Athletic director will personally review and approve all departmental expenses for the foreseeable future;
• Athletic director's personal business expenses will be reviewed and signed off on by the vice president for administration and finance; and
• A compensation committee to make recommendations and decide on employee compensation issues.

The complete Deloitte & Touche LLP althetics report is online at http://www.kstatesports.com/ViewArticle.dbml?DB_OEM_ID=400&ATCLID=204836139

National Institute for Strategic Technology Acquisition and Commercialization -- NISTAC
The board of directors of the National Institute for Strategic Technology Acquisition and Commercialization -- NISTAC -- hired Wildman Harrold, a Chicago law firm, to conduct a follow-up analysis to the Grant Thornton report. The board also asked President Schulz to appoint a committee comprised of five people to be convened as the NISTAC Review Panel.

The Wildman Harrold executive summary concluded, "Overall we did not find support for Grant Thornton's sweeping implications and suggestions of impropriety or conflicting interests at NISTAC. Consistent with Grant Thornton's financial testing, which did not identify any adverse findings, we did not find any reason to suggest that further financial transaction testing or auditing of NISTAC or related entities is necessary outside of the ordinary course of business."

Wildman Harrold made some specific recommendations to improve NISTAC's transparency and conformance to existing best practices.

The committee report notes the "purpose of NISTAC is to facilitate the licensing and commercialization of intellectual property owned by the university and owned by other entities, including NISTAC itself. NISTAC has two for-profit subsidiary companies, Mid-America Technology Management -- MTM -- and Manhattan Holdings -- MH. MTM provides management and consulting services to NISTAC and NISTAC's startup companies. MH provides seed capital for the start-up companies that NISTAC is advising. MH is a partnership between the Kansas Technology Enterprise Corporation, the city of Manhattan, and the Kansas State University  Foundation."

Kansas State University Golf Course Management and Research Foundation
The Golf Course Management and Research Foundation has responded to the Grant Thornton report on its own, and has pledged to use stronger financial controls, including a detailed check request form for all expense payments.

Scholarship deficit
The Grant Thornton report noted that a $2.4 million scholarship deficit became an issue during the 2007-2008 academic year. Because of this debt issue, the Kansas State University Foundation has discontinued the practice of paying scholarship funds to the university and realigning those scholarships during the school year.
Now, the foundation requires that the university align and confirm scholarship funds before making payments. Communication between the university and the foundation has increased to avoid future issues.

The committee interviewed a number of individuals regarding issues discussed in the Grant Thornton report: Bruce Shubert, K-State vice president for administration and finance; Alan Klug, vice president for administration and finance, Kansas State University Foundation; Ron Trewyn, K-State vice president for research; Charles Reagan, chief of staff and deputy to the K-State president; Beth Fancsali and John Luburic, attorneys from Wildman Harrold who were retained by NISTAC to provide an analysis of the Grant Thornton report and to review NISTAC's operating procedures; and Pat Bosco, K-State vice president for student life and dean of students.

The following individuals served on the Transition Audit Advisory Committee:

Chair - Brian Spooner, university distinguished professor of biology and interim dean, College of Arts and Sciences; faculty senate president - Melody L.A. LeHew, associate professor, apparel textiles and interior design, College of Human Ecology; faculty senate - Fred Fairchild, professor, grain science and industry, College of Agriculture; classified senate president - Carolyn Elliott, administrative specialist, office of student life; student body president - Dalton Henry, senior in agricultural communications and journalism and agricultural economics, College of Agriculture; dean - Lori Goetsch, dean of libraries; department head - Eric Higgins, professor and head of finance, College of Business Administration; university distinguished professor (faculty) - M.M. Chengappa, head of diagnostic medicine and pathobiology, College of Veterinary Medicine; Faculty, K-State at Salina - Les Hannah, assistant dean, academics; department of athletics (ex-officio) - Reid Sigmon, senior associate athletics director/administration; legal affairs - Peter Paukstelis, associate general counsel; external (community) - Lee Borck, alumni, Manhattan; external (non-alumnus) - Judd Neal, Overland Park.