Kentucky State University failed to accurately record millions of dollars, audit finds

A special examination of Kentucky State University’s finances revealed widespread overspending, a lack of financial control, and misuse of credit cards and university funds, according to a report released by the Office of the Auditor of Public Accounts Wednesday.

The 117-page report found numerous issues related to finances and the university’s finance office, including poor internal controls and communication, failure to ensure an effective budgeting process, and widespread overspending and credit card usage. The report identified more than $1.3 million in credit card transactions with little to no documentation, and in one instance, the use of a fund that was meant for faculty, staff and student recognition was used to pay for the rental of Kentucky Castle for a board retreat.

The special examination looked at KSU’s financial activity between July 1, 2018, and June 30, 2021, when KSU was under the leadership of former president M. Christopher Brown II. The report identified 20 issues related to finances at the university and noted “inadequate or non-existent record keeping and continuously high rate of employee turnover,” making the audit more difficult to conduct, according to the report.

Improper documentation of funds “put over $3 million in federal funds at risk,” and KSU “failed to implement the most basic level of internal control necessary to prevent overspending,” according to the report. The report also raised concerns about the former executive vice president for finance, who was seemingly employed by two universities at the same time for two months in 2021.

“The many problems found in our examination did not happen overnight, and frankly they will not be solved overnight. What is clear is that past practices at KSU detailed in our exam report must come to an end,” said Kentucky State Auditor Mike Harmon, who is also campaigning to be the Republican candidate for governor.

The examination is being referred to the U.S. Attorney’s Office for the Eastern District of Kentucky and the Kentucky Office of the Attorney General, and portions of the report related to federal grant spending will be sent to the U.S. Department of Treasury and the U.S. Department of Education, Harmon said.

Interim KSU President Ronald Johnson said he and the board of regents have been working to address financial issues within the university, but the issues facing the university are extreme.

“I draw on experience of 40-plus years in industry, in government, and of course in the context of HBCUs, and I can be honest, I’ve just not seen this level of failure in terms of checks and balances,” Johnson said.

Johnson said the university and its leadership are working to make the necessary changes and move forward.

“I assure you that we are working, and with great haste, to ensure that the public trust in Kentucky State University is maintained, or essentially returned,” Johnson said. “The release of today’s report presents a moment of tremendous difficulty and great potential.”

Lack of financial control and misuse of federal funds among issues

“KSU failed to fully implement and maintain an effective system of internal controls over its financial and administrative operations,” the report said. “KSU’s administration for the period examined, July 1, 2018, through June 30, 2021, permitted and enabled poor fiscal management practices to persist, including: excess spending above budgets, consistent reliance on credit cards and charge accounts allowing for funds to be spent without encumbrance, growing outstanding accounts payable, incomplete accounting records, and an inadequate accounting system.”

The report also found the former president and board were given inaccurate information about the university’s finances, and in 2021, the board was told the university was “on track to end the fiscal year in the black.” However, later that year, over $15 million of prior year expenditures were carried over into the next fiscal year.

Additionally, “no written policies and procedures for the budget process exist and a consistent procedure was not followed in developing the budget,” and internal audits were only performed intermittently, and at times, actively delayed from being performed.

Spending of federal grant funds was also a concern outlined in the report. When a university receives those funds, there are strict requirements for how they are spent. KSU’s inadequate record keeping meant that many federal grant expenditures could not be verified.

“KSU did not maintain a strong internal control system over federal grant expenditures to ensure compliance,” according to the report. “In addition, some internal controls were deliberately circumvented by KSU executive staff.”

Among the funds reportedly misused were the Higher Education Emergency Relief Fund, as well as other COVID-19 funds and grants for historically Black universities.

“If federal awarding agencies find the funds were spent inappropriately, KSU could be required to repay those funds,” which total more than $3.3 million, according to the report.

The report also raised concerns about the former president’s and administration’s spending.

Records show nearly $100,000 was spent on supplemental medical insurance for select members of the former administration, including Brown and former executive vice president for finance, Douglas Allen.

Over $84,000 was given to Brown in December 2018 as retroactive payment for housing, “to cover the cost of private housing in which the President did not live,” according to the report. The university also paid nearly $4,000 to cover utilities for Brown, and a one-time payment of $12,500 to Brown without explanation.

“Not only were these payments unjustified, but the spending was also irresponsible given the financial condition of the University at the time,” according to the report.

The examination also found more than $138,000 in bonuses paid to top university administrators over two years. Use of public dollars to pay bonuses violates the state constitution, Harmon said.

The report outlines a long list of recommendations for the university, including:

• Stronger communication about the university’s budget and spending

• Tighter controls on credit card spending

• Establishing an organized system for financial and operational records, including written policies and procedures

• Training for staff on how to use and retain documents

• Improvement of how federal grant funds are administrated.

Concerns raised about former finance officer’s employment

The report also found that Allen, who is now the vice president of business and finance at Tennessee State University, was employed by both universities at the same time from May to June 2021, violating KSU’s conflict of commitment policy.

“The lack of prior approval notwithstanding, considering the role and full-time work responsibilities held simultaneously at KSU and TSU, it is questionable whether the former EVP for Finance was able to fulfill his full-time job responsibilities at KSU over the two-month period,” according to the report.

Allen was found to be sending emails from his KSU account to his TSU email account in late May 2021, including a presentation on KSU’s internal endowed funds, according to records found during the investigation.

From the two universities, he was making over $37,000 per month. The former KSU payroll director also told state auditors Allen “demanded she pay out his full vacation balance of approximately $34,000,” though that went against university policy.

The report recommends the university seek legal counsel “to determine options that may be available to recoup any payment for services not rendered by the employee.”

KSU’s budget shortfall, leadership changes

The university has been under scrutiny for leadership and financial challenges in the last several years, with the special examination from the auditor announced last May. In 2022, KSU received $23 million from the state to address its budget shortfall. The university has been without a permanent president since Brown resigned in 2021, although the search for a new president resumed earlier this month.

As part of the $23 million, the university also had to create a management improvement plan, outlining guidelines for improving the operations of the school. The plan includes a complete review of KSU policies and procedures, academic programs and the accounting and fiscal reporting systems.

The university’s board of regents was overhauled via a Senate bill last year, and the new board has spent much of its time attempting to get the university on sound financial footing.

After Brown’s resignation, he and the university sued each other. In his lawsuit against the university, the former president said he was fired without cause and is owed $270,000 in severance pay. In its lawsuit against Brown, the university said the former president failed to fulfill his duties, and left the university in a poor financial state and with a damaged reputation.

KSU is the only public historically Black university in the state, and is also a land-grant university. A special examination of KSU was conducted by the auditor’s office in 2000, which detailed 16 findings related to KSU’s financial controls.