10/09/91

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'Stage Three' of financial reform package unveiled

STANFORD -- It may take at least 65 financial professionals and an additional $10 million this year to satisfy government requirements relating to Stanford's indirect costs, Chief Financial Officer Peter Van Etten told federal officials on Tuesday, Oct. 8.

Van Etten made the rounds in Washington, D.C., to deliver copies of a document describing "stage three" of the university's financial reforms (enclosed). He was accompanied by Reed Brimhall, recently appointed director of Stanford's new Office of Government Cost and Rate Studies, and Larry Horton, associate vice president for public affairs.

In discussions with Navy officials and members of congress, "we tried to demonstrate Stanford's commitment to reform and to discuss the enormous impact this issue is having on the university," Van Etten said from Washington.

Stanford is paying "a very significant price" with changes in personnel and the current budget shortfall, he told officials.

Van Etten said that he also expressed concern that conflict of interest has been created by the qui tam lawsuit filed by Paul Biddle, resident representative of the Office of Naval Research. Biddle could personally recover as much as 30 percent of any damages awarded if Stanford were found to have submitted fraudulent claims to the government.

The Stanford group also told officials that at 55.5 percent, Stanford's indirect cost rate is now "far lower than our costs and has played a large part in our projected annual deficit of $40 million," Van Etten said.

"We're concerned that we return to a fair and equitable relationship with the government," he said.

The discussions were "open and frank," Van Etten said, declining to elaborate.

To date, the university has withdrawn $2.3 million in cost submissions from the past 10 years.

In the next year, Stanford may spend as much as $10 million from reserves trying to satisfy government requirements. Much of that is "legitimately chargeable to the government because it is a government-mandated expense," Van Etten said.

The 65-member team put together by Van Etten and his staff comprises Stanford employees and experts from outside accounting firms, including Arthur Andersen & Co., Coopers & Lybrand, KPMG Peat Marwick, and others.

The largest number of team members are developing new costing procedures to replace those canceled by the government last spring. Among studies to be done are those relating to the libraries, effort reporting, depreciation, utilities and equipment inventory.

Responding to information requests from the Defense Contract Audit Agency is the second most time-consuming effort, Van Etten said. The federal agency is currently conducting 25 audits on campus of the university's records from the last decade, he said.

Other Stanford team members are preparing reports on the actual costs of operating the university for 1989, 1990 and 1991. Provisional indirect cost rates normally are set based on expense estimates, then adjusted up or down when actual costs were known.

Developing proposals for future rates also is consuming significant time. A few team members are dealing with revision of internal controls, Van Etten said.

The stage three document details:

• Reorganization of the Controller's Office to create a new Office of Government Cost and Rate Studies, and shifting of the Internal Audit Department from management and operational auditing to financial and compliance auditing.
• Stanford's commitment to devote additional resources if necessary to complete the tasks set out by the government.
• Progress on implementing 35 recommendations made last summer by the accounting firm of Arthur Andersen & Co., including a training program on cost policy for 2,300 staff and faculty.
• The possible use of $100 million in reserves during the next few years to cover deficits caused by the government decision last April to lower the university's indirect cost rate from 74 percent to 55.5 percent.
• Establishment of an advisory group of 16 senior faculty on indirect cost policy.

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