Module5_Case Study_KU
Fraud in Collegiate Athletics
When Major League Money Meets Little League
Controls
HERBERT W. SNYDER, PH.D., CFE; DAVID O'BRYAN, PH.D., CFE, CPA, CMA
January/Fe
uary 2012
A major, multimillion 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
ibery 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 fingered two individuals, one of whom was exonerated
while the other proved to be central to the case.
Freeman had his sentence reduced from 24 to 18 months, which his attorney said was an
inadequate reward for the information he had provided, according to "Developer source in KU
ticket scandal," by Steve Fry, in The Topeka Capital-Journal, April 22, 2010.
Federal authorities contacted KU officials in late 2009. Under increasing pressure, KU
announced in March 2010 that it had retained the services of the Wichita office 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
okers because the employees
disguised these distributions into categories with limited accountability, such as complimentary
tickets, according to "University of Kansas athletic tickets scam losses may reach $3M," in the
Kansas City Business Journal, May 26, 2010.
The investigation did not examine years prior to 2005 because the athletics department did not
etain 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:
First, 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.
Second, 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
easonably needed.
Third, 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 XXXXXXXXXXbasketball 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 on a weekend and then attribute their absence
to construction at the stadium, according to Foulston Siefkin's final report to the KU's general
counsel.
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. The athletic director was not
involved in the scheme but accepted responsibility for the lax oversight that contributed to its
extent and duration. Athletics office employees solely perpetrated these frauds.
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. 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 difficulty anti-fraud
professionals face is not designing or implementing financial controls; the challenge is
convincing senior administrators and oversight boards to reassert control over their athletic
departments so that existing controls will be effective.
A higher-education institution often uses a top-down, command-and-control structure on the
field or in the gym to build successful sports programs. However, that school 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 su
ounds 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." ("Restoring
the Balance: Dollars, Values and the Future of College Sports")
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
okers, scalpers and casual sales
among ticket holders, facilitates the unauthorized, difficult-to-trace resale of these tickets. This
is exace
ated 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
oad 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
firms but without the same reporting requirements imposed by the U.S. Securities and
Exchange Commission or IRS, according to Lavigne's 2010 ESPN article.
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. According to the Knight Commission's 2009 review of college presidents, a majority
elieves that the influence of outside money has eroded their ability to control coaches and their
programs. ("Quantitative and Qualitative Research with Football Bowl Subdivision University
Presidents on the Costs and Financing of