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July 13, 2004
CONTACT: Ward Mullens 734.487.4400
ward.mullens@emich.edu

Media briefing regarding the Performance Audit of University House by the Office of the Auditor General

Philip A. Incarnati, Chair, EMU Board of Regents

Thank you for being here today to discuss the results of the Performance Audit of the University House project by the Office of the Auditor General.

Related:

The University views this report as a tool that will help us to improve our business processes. We acknowledge the work of the Office of the Auditor General (OAG) and, in principle, agree with the recommendations set forth in the audit. Before I discuss the recommendations and findings in greater detail, let me provide a brief background of the University House project.

In 2000, the EMU Board of Regents commissioned a study as to the feasibility of renovating the former president’s house on Forest Ave. Based on that study, the Board determined that the house did not meet the current and future needs of the University. The Board then made the decision to build a new facility – one that would serve as an appropriate venue for fundraising and friend-raising events, and as a presidential residence. Construction was then approved in June 2001 for a 10,000-square-foot facility costing $3.5 million.

After the facility was nearly completed, it was discovered that EMU inadvertently had not filed a Use and Finance Statement. This form is required when state-supported universities and community colleges build or renovate facilities costing more than $1 million in institutional resources and do not involve a capital appropriation from the state. Projects are reviewed by the Joint Capital Outlay Subcommittee (JCOS), which then either gives the go ahead or denies the project. Once the error was discovered, EMU promptly submitted the statement.

The University’s failure to file a Use and Finance Statement led State Representatives Shirley Johnson and Scott Shackleton to express concerns about University House and request that the Auditor General audit the project.

In response to these concerns and other allegations of wrongdoing, the EMU Board of Regents, September 9, 2003 authorized an independent forensic audit and September 15, 2003 hired the nationally known firm, Deloitte & Touche, to perform the audit. During its comprehensive investigation, the Deloitte & Touche team looked into 17 specific questions and issues.

Thirty-three individuals were interviewed, including all members of the Board, the president and other University officials, a number of University employees, representatives of the EMU Foundation, University House contractors and other contractors who submitted bids or declined to bid on the project. In addition, thousands of documents in 27 categories were examined.

The audit, a copy of which is in your packet, was released in Dec. 2003 and found no wrongdoing except for the failure to submit a Use and Finance Statementrelated to the house project, although it provided recommendations on where EMU could strengthen internal procedures in specific areas. Those recommendations have been implemented.

After the Board had authorized an independent audit, the University was notified that the Office of the Auditor General would be conducting a Performance Audit of the University House project.

 

The Performance Auditexamined five issues. The audit team interviewed several University employees and others associated with the project, and examined applicable statutes, rules, policies, procedures and reference materials. No members of the Board of Regents, or the President of the University, were interviewed for the audit. The audit, released this morning, contains four findings and four recommendations.

The University agrees in principle with all of the recommendations.

Let me summarize the major findings:

  • With the exception of the University’s failure to file a Use and Finance Statement and receive authorization from the Department of Management and Budget and the Joint Capital Outlay Subcommittee before expending any funds, the audit found no violations of state policy or laws. The University has repeatedly acknowledged that we failed to file a timely and accurate Use and Finance Statement (a copy is in your packet) and has already implemented internal procedures to ensure that all future projects are in compliance. In addition, we strongly support the efforts of the JCOS and the OAG in reviewing Use and Finance Statement guidelines.
  • Auditors found no instances to indicate that any individual within the Administration acted outside the authority granted to them.
  • With minor exceptions, noted previously in the Deloitte & Touche audit, the competitive bid process was followed as prescribed. The University acknowledges that it failed to properly file a log of the bids and accepted an incomplete landscape architect proposal. In all other examples, generally accepted and prescribed bidding and contract-awarding practices were complied with and exceeded.
  • There were no anomalies in the general ledger accounts for payments to vendors, contractors and/or persons associated with the University House project and investigators noted no exceptions in conformity with governmental accounting practice standards. However, the auditor did note that costs incurred developing the property outside the defined construction project perimeter were assigned to other University accounts (e.g. parking and paving, property acquisition, fire and security protection, etc.) The auditors recommended that these costs should have been recorded in the construction project account. In addition, as a result of a very complicated bonding strategy, the University did incur additional debt of approximately $200,000 that was paid by operating revenues. These are areas of great concern and considerable controversy.

The University has never disputed that additional costs were incurred outside the $3.5 million project budget. The confusion has always been what costs were recorded where. It is important to note that there is a long-standing University practice that any new building project includes only the building itself and a perimeter of land around the building – usually five feet, but in this case 10 feet.

Any cost items beyond that perimeter—such as site development, landscaping and parking—are not considered part of the capital cost of the project. Instead, they were considered part of general university property development and were covered under other University budgets that have funds allocated for these specific purposes.

The University’s working definition of capital projects was developed many years ago from the Use and Finance Statement which requires the estimated cost of “services from five feet outside of the structure.” This same language is used in the State of Michigan Department of Management and Budget, Office of Facilities, Design and Construction Division’s Major Project Design Manual for Professional Service Contractors, State Universities, Community Colleges and State Agencies. Using this definition, actual costs within the defined perimeter were $3.58 million against a projected $3.5 million budget.Additional costs outside the construction project perimeter totaled approximately $1.8 million. Of the $1.8 million, the University acknowledges that land acquisition costs of $423,809 and commercial kitchen costs of $75,953 should have been included as part of the Use and Finance Statement.

In the absence of a different, state-approved description of capital projects, we affirm that all other costs were properly budgeted and accounted for in accounts designed for these purposes. The cost of maintaining the University’s Stonebridge property, fixing the auxiliary property on Forest Avenue and conducting a forensic audit are not germane to the construction of University House and should not be included in any accounting of the project.

That said; it is clear that the Board was not fully informed of all costs associated with the project and property development regardless of the funding stream. We have already implemented new reporting procedures to address this issue.

Now let me speak to the use of operating funds for this project. In approving the resolution to build University House, the Board was very clear in its intent that no tuition and fees or state appropriated dollars be used although the Board has the authority to do so. Funding for the project was identified from four sources: the transfer of the Forest Avenue property to the Auxiliary Fund; gifts and gifts-in-kind; corporate royalties; and debt refinancing.

On the advice of external experts in the bond field, Piper Jaffray, we executed two refinancing transactions that we were told would result in cash infusion of $2.0 million with no increase in debt service over the lifetime of the bonds. The audit discovered this was not the case. Due to an error on one of the schedules provided, interest payments in the net amount of approximately $200,000were not recognized as additions to the University’s debt service. This sum will be paid using general revenues, which include tuition and fee dollars. We are confident that all other funding streams will meet the financial obligations as budgeted.

I do want to strongly object to the report’s implication that the Board raised tuition and fees to pay for University House. This is absolutely not true. Tuition increases are decided by the Regents to assure the long-term financial viability of the University. These increases were not used to underwrite this project.

I would be remiss if I didn’t comment on the need for and purpose of University House. One of the realities we are dealing with at Eastern Michigan is the University’s low level of endowment and fund raising. To ensure future growth and stability for EMU, we need to enlarge our endowment and increase donations. University House is already helping us do that by providing an impressive venue for entertaining current and prospective donors and telling the EMU story. In the fiscal year just ended, the University hosted more than 4,000 individuals at University House and recorded an increase of more than 35 percent in cash donations compared to the prior year.

In closing, I would like to reiterate that, although we disagree with some of the findings, we found the audit helped us to more carefully examine our business processes. We continue to develop plans to clarify lines and levels of authority, and to strengthen our system of checks and balances. This diligence will help us be consistent with best practices.

John Beaghan, interim vice president for business and finance, Keith Morgan, from Piper Jaffray, and I will be happy to take your questions.

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Eastern Michigan University is a public, comprehensive university that offers programs in the arts, sciences and professions. EMU prepares students with the intellectual skills and practical experiences to succeed in their career and lives, and to be better citizens.

Editor's Note: Looking for an expert source for a story? Check out EMU's Eastern Experts online at www.emich.edu/univcomm/easternexperts.


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