Professors blame faulty budget system for business school’s $13 million in overspending

The University likely failed to discover the business school’s $13 million in overspending last year because of a financial management method that has long seemed confusing and outdated, several administrators and professors said.

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GW’s chief financial officer Lou Katz defended the high level of autonomy given to schools across GW, which he said is standard among colleges.

The fallout over the business school’s overspending prompted the sudden firing of its dean of three years, Doug Guthrie, last month. Since then, some business professors have blamed GW’s own practices for the mistake.

Associate accounting professor Angela Gore, who specializes in nonprofit accounting, said if GW’s “internal control” system had been working, administrators would have discovered the overspending in a month or less.

“There is no way an overage of this size should have been a surprise,” Gore said.

The budget software used by all of GW’s colleges does not calculate the school’s spending regularly, professors said, forcing some top leaders to rely on their own Excel spreadsheets between quarterly check-ins with the provost.

Executive Vice President and Treasurer Lou Katz defended the system, and said there was not a University-wide problem that prevented administrators from discovering the overspending earlier.

Katz said the University is not planning changes to its budget management system aside from its regular tweaks during the year.

“We have financial controls in place. That said, we continually look to improve our practices,” Katz said.

He added that the provost would review the University’s budget reporting processes this year, part of a new financial model that University spokeswoman Candace Smith said would be more aligned with GW’s 10-year strategic plan. The University’s new vice provost for budget and finance, Rene Stewart O’Neal, will reform the much-maligned system.

Smith declined to provide specifics about the review or any planned institutional-level changes.

She also declined to provide a specific breakdown of that $13 million of overspending, which administrators said mostly stemmed from online and executive education programs.

Sok-Hyon Kang, who was vice dean for faculty and research, said GW should act to prevent that kind of overspending from happening again. He said the administration must first accept the problem for it to be fixed.

“I hope the University uses this unfortunate incident as an opportunity to implement a sound financial reporting system – one that permits timely identification of expenses and informed financial planning and control,” Kang, who is also a professor of accounting, said.

A higher education finance expert and multiple professors said the University’s auditing firm, Baker Tilly, should have recognized the system’s poor oversight.

Bob Shea, a senior fellow of finance and campus management at the National Association of College and University Business Officers, said GW’s chief financial officer should be held accountable for the budget discrepancies.

Shea, who was a budget officer at the Pentagon and a chief financial officer for the Community College of Rhode Island, said schools should be able to gauge expenses and revenues on a monthly basis, which is the standard across higher education institutions.

“The automated budget reporting would be a way to see red flags,” Shea said. “You don’t do budgeting and financial reporting on verbal reports. It’s done through a financial reporting process, so everyone throughout the organization knows.”

Katz said most of Baker Tilly’s audits are on specific policies and the “right balance of controls” rather than looking for answers.

“They don’t necessarily look at the budget process. They look at all aspects of the institution and they do different things throughout each of the years,” Katz said.

Baker Tilly’s managing partner Jere Shawver, who manages GW’s account, did not return request for comment.

A confusing chain of command

Administrators also said it was difficult to balance sometimes conflicting expectations set by the provost and the University’s chief financial officer.

A high-level administrator with knowledge of colleges’ budgeting processes said there are “two different systems” when working with Lerman and Katz.

“We have two different systems. We have a different conversation with Steve [Lerman], and Lou [Katz]’s folks may do something else with the budget,” the administrator, who spoke on the condition of anonymity, said.

“It’s almost a setup. There will be problems here and problems for deans with shortfalls. That’s a basic structural problem within GW,” the official said.

Deans are only required to meet with the provost and the budget office for verbal check-ins quarterly, Lerman said, though he added that some deans meet regularly with financial directors.

In an interview, Guthrie called the budgeting process an “odd dynamic” when talking to officials both in the provost’s office and the budget office, who “changed numbers randomly” and set different expectations.

Philip Wirtz, the business school’s vice dean of programs and education, said Guthrie’s firing follows a year of miscommunication between Guthrie and the University. Wirtz said throughout the year, the University changed how much they expected to take from the business school’s revenue, but that Guthrie did not understand those conversations were concrete.

“The central administration felt that they were renegotiating the deal with Doug, and there was sort of a constant, moving target,” Wirtz said. “To the best of my knowledge, Doug was never aware of the fact that he was going back on this.”

The University had always anticipated the business school overspending by about $9 million, Guthrie said. Officials discovered the extra about $4 million after the fiscal year came to a close.

Guthrie also said he inherited a business school with a flawed financial reporting system. More than half of the school’s departments and programs overspent in fiscal year 2010, with one department exceeding its budget by $175,000, according to a 2010 budget report in Guthrie’s first year.

“Their spending is approved with little oversight or scrutiny, they receive no regular financial reports and transparency is lacking,” the report states.

– Cory Weinberg contributed to this report.

This post was updated on Sept. 23, 2013 at 12:27 p.m. to reflect the following corrections:

The Hatchet incorrectly reported that Sok-Hyon Kang was involved with last year’s budgeting process. While he was familiar with the process, he was not directly involved. The Hatchet also reported that Angela Gore is an assistant professor. She is an associate professor.

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