FRANKFORT — A less flattering report than the audit released last week on Kentucky State University would be hard to imagine.

        In dry, accountant's tones, it describes an institution that wasted money and invited larceny because it did not know exactly how much money or property it had, how its money flowed in and out or even who was spending it.

        Records were incoherent or nonexistent. University management “is unable to ascertain the financial condition of the university,” the report from state Auditor Ed Hatchett's office said.

        For all its sting, the audit conceivably could help KSU President George Reid, who has battled faculty and regents since his arrival in June 1998 and who effectively is on probation with his current Board of Regents.

        One factor in Mr. Reid's favor is that the audit was for his first year — the fiscal year that ended June 30, 1999. The audit should have been issued by January of last year, which says something about the state of KSU's internal accounting and seems to support Mr. Reid's defense that problems were inherited, not created, by him.

        Moreover, KSU now has brought on board an internal auditor, Wanda Long, and a comptroller, Arthur Moncrief. Ms. Long is well-regarded and gave up a good job at the University of Louisville. Mr. Moncrief has a reputation as a turnaround artist, having previously helped solve financial problems at Alabama State University.

        The audit of KSU for fiscal 2000, which was being performed separately, is due next month. Mr. Reid should benefit if it shows significant improvement, which everyone seems to expect, because there was nowhere to go but up.

        The audit — actually three audits in one — was taken over by Mr. Hatchett's office after KSU's accounting firm, PricewaterhouseCoopers, or PWC, quit. A massive embezzlement had been discovered on top of already-terrible record keeping, and PWC faced the unsettling prospect of having to render a “disclaimer” — a statement that no reliable opinion of the university's finances was possible.
       

Comedy of errors
               Accounting firms avoid a disclaimer at all cost because, perhaps perversely, it reflects badly on them. The torch was passed to Mr. Hatchett's office, which dutifully issued disclaimers for all three parts of the audit — financial statement, internal controls and administration of federal funds.

        In a sense, the audit laid out an expensive comedy of errors and omissions.

        The university claimed to have fixed assets — land, buildings, furniture and equipment — worth $116 million. But there was no documentation for that figure because there was no inventory. Or rather, there was no longer an inventory.

        An inventory had at one time been stored on a stand-alone computer. There was no backup, so the record was lost when the computer crashed in 1997.

        Proper record keeping is essential for safeguarding property against loss or theft, the auditors pointed out. KSU could not protect what it did not know it had.

        The internal accounting staff was neither adequate nor knowledgeable, a condition made worse by the fact that no one seemed to be in charge, much less minding the store.
       

“Reasonable care”
               The most obvious evidence of that was the case of Janice Phillips, who was hired as a secretary in the accounting office in 1997. In a 10-month period, she managed to steal $845,000 — money that was supposed to be paid to various KSU vendors.

        Her single most ambitious pilfer was $196,000 that was owed to the university's food service contractor, a branch of Marriott. Big companies tend to notice when such bills don't get paid. The contractor came looking for its money, and Ms. Phillips was caught.

        The auditors concluded she was able to steal simply because the university had left itself wide open to fraud and was not particularly choosy about whom it hired.

        In other words, Ms. Phillips may have been a criminal, but she was no criminal mastermind. She didn't have to be.

        As part of its “corrective action plan,” the university pledged to the auditor's office that “reasonable care will be taken that key personnel have high standards of integrity,” as well as competence.
       

Audits not enough
               KSU's response also noted that employees have been trained to perform bank account reconciliations, which now are being done promptly each month instead of being allowed to pile up, as before.

        In the absence of an adequate, knowledgeable accounting staff, KSU relied on audits to detect errors in its financial statement — somewhat akin to using a smoke detector as a kitchen timer. “Management erroneously considers independent auditors to be part of its financial statement preparation process,” the audit said.

        In its response, KSU pointed to the hiring of Ms. Long, Mr. Moncrief and a chief financial officer, William Pennell.

        Charles Wolfe is a statehouse reporter for The Associated Press.
       ­

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