10 questions every board should ask of its athletics department
DOJ to NCAA on basketball corruption: “We have your playbook”
INSIGHT ARTICLE |
It is no secret that NCAA athletics can be a big-ticket revenue generator for colleges and universities. Programs with sustained success build strong brand awareness and generate long-term benefits, such as attracting prospective students and a thriving alumni network. A successful program also drives ticket sales and concessions as well as other much needed revenue streams, such as sports apparel sponsorship, licensing and television deals. To give a sense of the dollar amounts involved, consider these recent examples:
- A Pacific-12 Conference (Pac-12) university recently signed a 12-year contract with Under Armour worth $280 million, bringing in an annual value of approximately $18.7 million per year to the university.1
- The Southeastern Conference (the SEC) reported revenues of $639 million for its fiscal year 2016. The 14-member schools each received distributions between $39 and $42 million.2
- The head coach for an SEC football program recently signed a contract worth over $11 million per year,3 nearly 40 percent more than the highest-paid NFL coach. 4
With so much money, reputations and rivalries at stake, many were disheartened to learn that a pattern of corruption and bribery had been uncovered in the world of college basketball. Specifically, at a September 26, 2017 press conference, acting U.S. Attorney Joon Kim announced that 10 individuals linked to various NCAA basketball programs had been indicted in an ongoing FBI investigation. During the press conference, Kim stated:
The picture painted by the charges brought today is not a pretty one: coaches at some of the nation’s top programs soliciting and accepting cash bribes, managers and financial advisers circling blue-chip prospects like coyotes, and employees of one of the world’s largest sportswear companies secretly funneling cash to the families of high-school recruits.
Although no institutions have been directly implicated at this time, fallout from an announcement like this can be devastating for impacted institutions and cause great reputational harm. Consequences could potentially include NCAA sanctions, loss of athletic-related revenues, lower alumni giving and reduced government subsidies. For example, an NCAA penalty such as a postseason ban can potentially cost a university millions of dollars. Vanderbilt University sports economist John Vrooman estimates the cost of a postseason ban on a school projected to make it to basketball’s Sweet 16 round in the NCAA Tournament to be between $5.1 and $8.6 million.5
A more severe penalty such as an NCAA “death penalty,” or the NCAA’s ability to ban a school from competing in a sport for at least one year, could have far more severe and enduring consequences. This is notoriously exemplified by the Southern Methodist University (SMU) football team, which received the NCAA “death penalty” in 1987 that contributed to the collapse of the Southwest Conference and caused irreparable harm to SMU’s reputation.
What can a college or university do to mitigate the risks and potential reputational harm from a corruption scandal? Asking the following questions can be a good start to evaluating the strength of an institution’s anti-corruption program, including the existence of internal controls and identifying areas for improvement.
Evaluate policies, procedures and governance
1. Has a risk assessment been conducted during the past year to understand potential internal control weaknesses and new fraud risk exposure areas within your athletics program?
2. What policies and procedures are in place to prevent and detect fraud and corruption (are potential fraud risk and corruption schemes and associated internal controls documented)?
3. Do employees in the athletics department have sufficient code-of-ethics training to navigate gray areas (including recruiting and retention efforts) and is attendance monitored and audited?
4. What types of financial and nonfinancial controls have been established to reduce risks associated with interactions with athletic sponsors and vendors (e.g., apparel and media organizations)?
Manage third-party risk
5. What procedures are performed to assess and mitigate risks associated with doing business with new third parties (who is responsible for gathering third-party business intelligence)?
6. What procedures are performed to monitor third-party activities? Do contracts contain detailed descriptions of goods and services provided as well as necessary safeguards, including “right to audit” provisions?
7. Do third parties periodically affirm compliance with the organization’s code of ethics and anti-corruption policy?
Monitor and respond
8. What is your organization doing to identify and investigate unusual transactional activity within its books and records?
9. Are you properly monitoring and publicizing your anonymous hotline?
10. Have you had an independent third party assess the adequacy of your internal controls and overall compliance program?
RSM has developed specialized solutions to combat the emerging issues our higher education clients face, such as financial and risk advisory, operations to board training, tax compliance, alternative investments and endowment valuation. Our professionals work with hundreds of colleges and universities nationally, building a deep understanding of how to help you overcome challenges and accomplish your mission and goals.