High-level administrators at the North Carolina School of the Arts engaged in “willful, deliberate, and intentional” violations of state law in what State Auditor Ralph Campbell described as “similar to the debacle at Enron.” Campbell said the findings at the NCSA were as serious as any his office had uncovered previously.

Among the findings of the State Auditor’s Investigative Audit Division were: state and NCSA-affiliated foundation funds used to make car lease payments and country club dues for NCSA administrators; illegal land sales to divert funds and help put a deposit on a new residency for the chancellor; diversion of funds through property sales; use of three secret bank accounts; illegal payments of over $90,000 to a vice chancellor who attempted to mislead auditors; improper payments to university employees and one sister of a university employee; and paying one employee over $69,000 in undocumented overtime who worked in a position with a maximum annual salary of $49,000.

The findings were so devastating, Campbell said, that he recommends that the University of North Carolina Office of the President should review whether the NCSA ought to continue exercising budget flexibility and furthermore, the UNC system should have all UNC institutions report on the activities, including revenues and expenditures, of all their foundations and related organizations.

“Today Enron is financially and morally bankrupt,” Campbell said. We “cannot allow” the same thing to happen to the UNC system. He called for “shining a bright light” into the foundations and organization affiliated with the university to provide a “powerful incentive” that those organizations act properly.

“We see this as an opportunity to the university system to clean up financial affairs and bring sunlight to the financial affairs at each of these foundations,” Campbell said. The NCSA investigative audit was sparked, Campbell said, by auditors’ observation of unusual payroll entries from a routine audit for the end of fiscal 2003. Those unusual entries included multiple promotions and pay raises along with exorbitant overtime payments with little to no documentation to justify them. Those turned out to be “just the tip of a very large iceberg,” Campbell said.

The findings center on the vice chancellor for finance and administration, Joe Dickson, who resigned during the investigation. Chancellor Wade Hobgood said that he “knew about some of the transactions” but that he didn’t know about the secret accounts or how those transactions were made. Pressed on the issue of Hobgood’s knowledge, Campbell said, “The question is, ‘What did the chancellor know, and other administrators know?’ And another question is, ‘Why didn’t the chancellor know?’”

The investigators learned that Dickson had given Berdette Malloy, an NCSA employee since 1980, several promotions and raises over a 27-month period without following state procedures, ignoring warnings from state officials in the process. During that time, Malloy was also paid more than $69,000 in overtime pay without proper documentation, an amount including nearly $23,000 that was calculated incorrectly.

In addition, the investigation found that more than $53,000 in “special onetime payments” were made to several NCSA administrators and other university employees, most of whom were clearly not eligible for such payments (there were six whose eligibility was questionable). Malloy received $8,500 in two special onetime payments for the same work for which she was also paid overtime. Malloy, under her title as “personnel analyst,” also secured special one-time payments of nearly $4,000 for her sister, working for the associate director of the Kenan Institute for the Arts, and she blocked a $500 deduction in pay from her sister that was requested to be withheld for three days that were not worked.

The investigation also found three accounts in the records of the North Carolina School of the Arts Foundation, Inc., that were not in the budget or disclosed to foundation board members. Those accounts had nearly $220,000 in diverted reimbursements and nearly $180,000 in “inappropriate journal entries.” According to the audit, those accounts funded, to the tune of about $270,000 in expenditures, “lease payments totaling $15,000 for the lease of a Cadillac Escalade for the Vice Chancellor for Finance and Administration [Dickson], who also served as Assistant Secretary and Assistant Treasurer on the Foundation Board, club memberships, cell phone bills, legal fees, consultant fees, gifts for employees and others, travel and meals.”

Investigators also uncovered $90,000 in illegal payments from the NCSA Foundation to Dickson over 13 years that included a monthly stipend for his “Dickson and Associates” consulting firm and an annual expense allowance of $6,000.

Dickson also met with the N.C. Dept. of Transportation to negotiate a deal over a 0.65 acre right-of-way project involving land owned by the NCSA Foundation. Dickson subsequently transferred the land without authorization from the foundation’s board of directors, and the NC DOT paid $108,000 to the NCSA Program Support Corporation. Expenditures based on these diverted funds went to “debt service payments, a $25,000 down payment for the new NCSA chancellor, and various other expenditures.” Dickson also sold five houses donated to the NCSA Foundation to the NCSA Program Support Corp. without authority from the board.

Finally, the investigation revealed that Dickson and the dean of the School of Filmmaking, Dale Pollock, were paid more than $67,000 in “consulting fees” by the NCSA Unity Development Corporation. Dickson received more than $38,000 and Pollock received over $29,000 during a 10-month period. UNC regulations forbid senior officers from receiving payments for “any services rendered to any institution-related foundation, endowment, or other University-related enterprise.”

Saying he “regret[s] these audit findings,” Hobgood, in a statement on the arts school’s web site (www.ncarts.edu), said that every penny of misallocated foundation money would be returned. Hobgood said he would ensure that the arts school implemented the actions identified by the investigative audit.

“Mistakes were made,” Hobgood said. “A primary error was to leave the School of the Arts Foundation in the dark while one of our administrators allocated a great deal of Foundation money without the Foundation’s knowledge or mine.” He apologized on behalf of the school to the foundation board, the executive committee and its officers, and to the donors.

Hobgood was adamant that “No endowment money was affected. Our donors’ money is safe.”

Hobgood made one defense against the findings in the investigative audit, which was of Pollock. Hobgood said that Pollock was “blameless” in receiving money as a consultant on the Unity Place development project. “To ensure separation of Unity work and [Pollock’s] responsibilities as dean, I required that he work outside of School hours and be paid by outside sources,” Hobgood wrote. “He gave a written accounting of his activities to me to ensure that was so. The audit itself quotes me saying that, based on our conversations with UNC General Counsel, I believed Dean Pollock had permission from UNC to work as he did.”

Campbell said the seriousness of the findings warranted reporting them to the State Bureau of Investigation, the attorney general, and Winston-Salem and Forsyth County officials for further investigation.

The report is available online.

Jon Sanders is assistant editor of Carolina Journal.