Alumnus Charges Deficit Fraud

Harvard must find original ways to manage current financial resources even as it develops new resources, according to the University's annual report released last week.

But at least one longstanding critic of Harvard's financial practices charges that Harvard is saying one thing and doing another.

Albert F. Gordon Jr. '59, a frequent contributor to the University, said yesterday that Harvard administrators have used unorthodox accounting techniques to inflate Harvard's budget deficit, perhaps as a tactic to lure new donors.

The new financial report says that the University's deficit decreased by more than $4 million over the last fiscal year, from $41.9 to $37.4 million.

Last year's deficit, in turn, was more than $4 million larger than the year before. According to the 1991 financial report, the increase was due to a new system of accounting implemented last year, under which Harvard includes the estimated replacement value of campus buildings in its expenses.

Harvard administrators have acknowledged that the new system differs from the standard technique of depreciation employed by most universities.

Vice President for Finance Robert H. Scott, who prepared the report with Treasurer D. Ronald Daniel, said last week that including the cost of replacing buildings gives a more accurate financial picture of the school.

"The new report is designed to identify what we believe to be the true costs of maintaining this institution," Scott said.

But Gordon said yesterday that the procedure is "not generally accepted." The report makes it appear as though the University is running a large deficit, he said, although standard accounting practices would show only a small loss, or even surplus.

"No corporation does it this way," Gordon said. "What you do in normal accounting is you depreciate the cost of the facility, not the replacement value. This is unconventional...It's a way of squirreling away money."

Gordon said the University may be including replacement values in order to make donors believe Harvard is in worse financial shape than it actually is.

"Very few people understand [the technique];they think Harvard is running a deficit and theyare shocked," said Gordon. "This could be apositive in trying to get money in the big[capital] campaign."

But Scott, in the report's introduction, writesthat the University must look to managing currentresources as much as it looks to create new ones.

"[I]t is becoming increasingly clear thatHarvard's ability to pursue its educational andresearch missions to the fullest extent dependsjust as much on our skill in finding new ways tomanage existing resources...as it does on ourproficiency at identifying and raising newresources," the report says.

Gordon also criticized the report's failure todisclose Harvard's major stock holdings, apractice the University ended last year.

"The financial report is basically the reportof a financial company and it should have all thefinancial data," said Gordon. "It is just anotherexample of them taking away disclosure and makingit more secretive."

But Scott said the changes were implemented tomake the report more interesting and readable."Our goal was to make our financial report looklike the report of a regular corporation and tomake it more readable to those used to readingsuch reports," he said.

Scott said details of Harvard's actual holdingsare not as important. "The breakdown of stocksheld is not particularly interesting because itchanges all the time," he said. "At least I don'tthink it is particularly interesting."

But Gordon disputed that argument. "I don'tagree with him at all; [the stockholdings] arevery interesting," said Gordon. "If you saw thatthey had drug companies, food companies, sometechnology companies, I would be impressed. But ifyou saw that they had a bunch of steel companies,utilities, and oil companies, I would say thesepeople were asleep at the switch."

Gordon, who has been critical of theUniversity's failure to disclose its high-riskprivate placement holdings, said the latest movewas a means of maintaining a consistent policy atthe expense of accuracy.

"It seems to be an incomplete policy which theyhave recognized as inconsistent and to make itconsistent they've cut out more information,"Gordon said. "They're probably embarrassed bytheir holdings."

The financial report also says that Harvard'sincome from the endowment, research support,tuition and gifts increased last year by 7.2percent to $1,224.8 million. The 11.8 percent rateof return for fiscal 1992 was a marked improvementfrom the previous year, but still laggedsignificantly behind the national average forcolleges and universities.

Had Harvard's investments performed at thenational average, the University's endowment wouldhave generated about $45 million more.

Stephen E. Frank contributed to thereporting of this article.

"Very few people understand [the technique];they think Harvard is running a deficit and theyare shocked," said Gordon. "This could be apositive in trying to get money in the big[capital] campaign."

But Scott, in the report's introduction, writesthat the University must look to managing currentresources as much as it looks to create new ones.

"[I]t is becoming increasingly clear thatHarvard's ability to pursue its educational andresearch missions to the fullest extent dependsjust as much on our skill in finding new ways tomanage existing resources...as it does on ourproficiency at identifying and raising newresources," the report says.

Gordon also criticized the report's failure todisclose Harvard's major stock holdings, apractice the University ended last year.

"The financial report is basically the reportof a financial company and it should have all thefinancial data," said Gordon. "It is just anotherexample of them taking away disclosure and makingit more secretive."

But Scott said the changes were implemented tomake the report more interesting and readable."Our goal was to make our financial report looklike the report of a regular corporation and tomake it more readable to those used to readingsuch reports," he said.

Scott said details of Harvard's actual holdingsare not as important. "The breakdown of stocksheld is not particularly interesting because itchanges all the time," he said. "At least I don'tthink it is particularly interesting."

But Gordon disputed that argument. "I don'tagree with him at all; [the stockholdings] arevery interesting," said Gordon. "If you saw thatthey had drug companies, food companies, sometechnology companies, I would be impressed. But ifyou saw that they had a bunch of steel companies,utilities, and oil companies, I would say thesepeople were asleep at the switch."

Gordon, who has been critical of theUniversity's failure to disclose its high-riskprivate placement holdings, said the latest movewas a means of maintaining a consistent policy atthe expense of accuracy.

"It seems to be an incomplete policy which theyhave recognized as inconsistent and to make itconsistent they've cut out more information,"Gordon said. "They're probably embarrassed bytheir holdings."

The financial report also says that Harvard'sincome from the endowment, research support,tuition and gifts increased last year by 7.2percent to $1,224.8 million. The 11.8 percent rateof return for fiscal 1992 was a marked improvementfrom the previous year, but still laggedsignificantly behind the national average forcolleges and universities.

Had Harvard's investments performed at thenational average, the University's endowment wouldhave generated about $45 million more.

Stephen E. Frank contributed to thereporting of this article.