Wednesday, September 17, 2003
Copyright © Las Vegas Review-Journal

HOLIDAY BASKETBALL: Classic's finances probed

Audit finds irregularities in annual tournament's records

LARRY MCKAY RESUME Bachelor's degree in secondary education and mathematics and master's degree in educational administration from the University of Idaho. 1973 - Math teacher at Bridger Middle School 1975 - Dean of students at Rancho High School 1976 - Assistant principal at Rancho 1990 - Assistant principal at Valley High School 1993 - Assistant principal at Durango High School 1997 - Appointed district director of student activities and athletics 2003 - Retired on June 27 SOURCE: Clark County School District

A Clark County School District audit of the Holiday Prep Classic basketball tournament has uncovered tens of thousands of dollars in lost public money, incomplete and inaccurate bookkeeping, and multiple violations of district financial policies.

The central figure in the report is former district Athletic Director Larry McKay, who has organized the tournament since its inception 26 years ago. A Christmastime fixture in the valley, the Holiday Prep Classic draws high school basketball teams from across the country to compete against local teams.

Tournament finances were so muddled, auditors were unable to determine exactly how much money might be unaccounted for.

According to the audit, McKay put school district funds in a nondistrict bank account that he controlled and used the money to reimburse himself for tournament expenses he put on personal credit cards. McKay reimbursed himself with amounts that exceeded the credit card charges, the audit says.

Because of the numerous irregularities uncovered by the audit, the Clark County School District is seeking help from the district attorney and the Nevada Division of Criminal Investigations to help unravel the financial disarray. The audit and the results of an unfinished school police inquiry will be turned over to those authorities.

"We don't like that this has happened," Clark County Superintendent Carlos Garcia said of the audit findings. "We think it's terrible that it happened. We're taking this very seriously. We're going to look into this as far as we can and clean it up."

District officials don't know whether McKay could face criminal charges in connection with his management of the tournament. Garcia said he has involved the law enforcement agencies to answer that question.

McKay retired in June while auditors were examining the tournament's financial records from the past three years. McKay said his retirement was not related to the audit of his department.

McKay said he has cooperated with the inquiry. He admitted making mistakes, but said he never willfully broke rules or procedures. Running the tournament was a personal passion, he said, that led him to invest a great deal of personal resources to benefit youth sports. He also said he has refunded money to the district for some of the discrepancies cited in the audit.

"I never profited personally from the tournament," McKay said. "My only intent was to provide good opportunities for high school basketball to flourish in Las Vegas."

The major problems outlined in the audit include:

• Multiple conflicts of interest with McKay's employment outside the district. McKay managed a summer basketball tournament, The Big Time, a registered nonprofit organization that is not affiliated with the school district but played its games at district campuses. McKay also was treasurer of the Southern Nevada Officials Association, of which the district is a major customer.

• District funds were deposited with monies from The Big Time in an account registered under The Big Time's tax identification number.

• Lack of documentation to substantiate receipts and deposits, in violation of district policy, as well as athletic department ledgers that do not match the records of banks and outside vendors. Auditors cited this as their greatest obstacle in verifying financial reports.

Big losses

The winter basketball event reported about $180,000 in net receipts, including entry and admission fees, and more than $247,000 in disbursements for 2002. Including district expenditures of about $57,000, last year's event ran almost $125,000 in the red. For the three years of the audit, from 2000 to 2002, the tournament lost more than $162,000. Those losses were made up by the district's athletic department budget.

Amid those losses, the district's middle school athletics program was canceled in May 2002 because of unexpected shortfalls in the district's general fund. The program, which costs about $350,000 per year, was saved by private fund-raising and a one-time donation of $250,000 from the Las Vegas City Council. Increased funding from the Legislature will allow middle school athletics to continue this year.

Deputy Superintendent of Instruction Agustin Orci said the Prep Classic was supposed to be a self-sustaining event, independent of the district's athletic budget.

"That should not have happened," Orci said.

But it was McKay's bookkeeping that confounded auditors.

"In all three years under audit, the Director (McKay) used multiple personal credit cards for Tournament transactions as well as multiple bank accounts (personal, personal business, Tournament and CCSD) for Tournament deposits and transactions," auditors reported.

Records kept by commercial banks, outside vendors and other entities conflict with reports and ledgers kept by McKay, leading auditors to conclude that "financial reports provided by the Director contained false and incomplete information."

In one instance, an adidas invoice for $2,664.44 appeared to be bogus, the audit said.

"Indications that the invoice was not authentic included: no company logo on the invoice, a remit address to the adidas representative rather than to an accounts payable department."

McKay explained to auditors that the check in question, recorded as a payment to adidas, a shoe and athletic apparel manufacturer, actually was a payment that should not have been paid with Prep Classic funds. McKay said that money has been reimbursed.

"He did not have an explanation for why he had an invoice for items he did not purchase from adidas," the audit reported.

Because the district lacks the authority to compel outside entities to turn over documentation of Prep Classic transactions or related financial records, Garcia said he has turned to law enforcement agencies that can subpoena such records.

Conflicts of interest

At the heart of many of the problems cited in the audit were the multiple hats worn by McKay in the local athletic community.

In addition to being the district's athletic director and organizer for the Holiday Prep Classic, McKay also was the treasurer for the Southern Nevada Officials Association. The group provides game officials for sporting events including district games, meets and matches. The district has between 6,000 and 8,000 sporting events each year.

McKay also was director of The Big Time tournament, a major recruiting event for high school players and college coaches. Although the tournament is played at valley high school gymnasiums, it is not sponsored by the district.

The audit says McKay deposited Prep Classic revenues into an account for The Big Time, then reimbursed himself for Prep Classic expenses. In 2000 and 2001, McKay charged $176,768.39 in Prep Classic costs on personal credit cards, after which he transferred $198,089.19 from the tournament bank account to his credit cards, an overpayment of $21,320.80.

Prior to 2002, the audit shows, McKay used a Bank of America account under The Big Time's tax identification number to deposit and disburse funds for the Prep Classic. Commercial bank records show $38,930 in Prep Classic funds were deposited into The Big Time account and wrongly identified as Big Time deposits by McKay.

Of the $38,930, the audit said $15,000 had been reimbursed by McKay, $5,340 was used to offset unpaid Prep Classic expenses, and the remaining $18,590 was used to pay for a district football tournament.

But auditors found an additional $3,150 was paid to McKay for arranging the football tournament. Auditors said that was inappropriate, because McKay was in charge of organizing such activities as district athletic director. When McKay retired in June, his annual salary was $87,732, not including a $2,800 longevity stipend.

"We believe that this $3,150 should be returned to the district," auditors reported. "Additional funds could be due from the Director, if further information can be obtained."

McKay's multiple hats created situations where he was the only person dealing with financial transactions between different entities.

As treasurer of the officials association, the audit found, McKay was billing the district for game officials, then approving those bills as athletic director. He then received the district's payment and deposited them as the treasurer for the officials group.

Garcia said McKay was directed to resign as treasurer of the group in 2002, and McKay complied. That situation never should have happened, Garcia said.

"He was the responsible authority who overstepped his authority," Garcia said.

School district General Counsel Bill Hoffman said it is clear in district policy that employees are to avoid entering outside employment that presents a conflict of interest with their district positions. It is the responsibility of the employee to seek clarification if they are in doubt. Hoffman said the district legal department provides employees with opinions on those matters.

"People who operate outside district regulations do so at their own jeopardy," Hoffman said. "Conflict of interest is a very clear obligation for all employees to understand."

Lack of internal controls

Auditors said internal controls in the athletics department were not adequate and that the most difficult obstacle to overcome in tracking Prep Classic funds was McKay's failure to document deposits and expenditures, as required by law and district policy.

That forced auditors to turn to third parties for transaction information. Discrepancies were found in check records, with a random review of 73 checks showing 11 had different payees on the canceled bank copies than were stated in McKay's ledgers. In six of those cases, the checks were written out to McKay himself or to his credit card account, which was used for Prep Classic expenses. Ledgers wrongly identified most of those six checks as money market transfers.

Legal sources said the check discrepancies and McKay's commingling of district and private funds may create problems with the Internal Revenue Service, which sets strict guidelines on how the finances of tax-exempt organizations are to be reported and maintained. The district wants that issue and the other questionable practices uncovered by auditors resolved quickly, Garcia said.

The commingling of district funds with The Big Time money is clearly a problem, Hoffman said, and it's a theme that runs throughout the audit. The Holiday Prep Classic is a district event and should have conducted business under the district's tax identification number. Hoffman said the situation may have to be resolved with the IRS.

Tax attorney Jay R. Cohen, who has practiced law in Las Vegas since 1991, called several facets of the audit unsettling. Before becoming an attorney, Cohen was an IRS auditor.

"It's inappropriate and could lead to significant penalties," Cohen said when asked about the problem presented by using one group's tax identification number for an unrelated activity. "And, although it's unlikely, it could jeopardize the protected (tax-exempt) status of the school district."

Cohen said the failure to maintain accurate records and supporting documentation is a concern. He also said the problem in reconciling the checks was a problem.

"If I had those things before me as an auditor, I'd be very interested in pursuing a review," Cohen said.

McKay said that, although he opened a Prep Classic account under the umbrella of The Big Time, funds were not combined. Two accounts existed: one for the Prep Classic, which has since been closed, and another for The Big Time.

McKay said he opened the account to write checks to pay vendors. When he ran the Prep Classic as a high school administrator, he used the school account for that, he said. But when he became a district administrator, no similar account existed. He could have submitted an invoice for payment that would have been processed through the district's Division of Business and Finance, but that resulted in complaints from vendors who had to wait 60 to 90 days for payment.

McKay said he did not approach anyone at the district about creating an athletic department checking account.

"It probably wasn't a good decision at the time," McKay said of creating a Prep Classic account under The Big Time tax identification number. "But it made the money accessible for doing business."

"We've been running this tournament the same way for 26 years, and no one has ever asked anything before about the way it's been run."

Corrective measures

Hoffman said several steps have been taken to ensure problems uncovered by the audit are never repeated. A new athletic director has been named: Bill Garis, who was principal of Sierra Vista High School. A full-time accountant has been assigned to the district athletics department. The accountant will work with Garis, but Hoffman said the position reports to the Business and Finance office. And the district is conducting training for employees on financial rules and regulations, as well as their ethical obligations regarding conflicts of interest.

"As the superintendent has said, we're sending a very clear message, and have always sent a clear message, that if you mismanage funds, you're in trouble," Hoffman said. "It's a unique situation. It's a disappointing situation. We don't anticipate that it will happen again."