By James V. Grimaldi and Jacqueline Trescott
Washington Post Staff Writers
Thursday, June 21, 2007
Leaders of the Smithsonian in the past seven years took extraordinary steps to keep secret the amount of top executives' compensation, lavish expense-account spending, ethical missteps and management failures, an independent report released yesterday shows.
Former secretary Lawrence M. Small, with the help of his top deputy, Sheila P. Burke, took advantage of a vast gap in oversight to set his own salary, spend freely, take unlimited leave and ignore policy to pursue private agendas, according to the independent review committee, which was established by the Smithsonian Board of Regents to investigate reports of excessive spending and management abuses.
Compounding the problem, traditional institutional watchdogs, including the Board of Regents, general counsel, inspector general and chief financial officer, all failed in their duties to rein in excesses, the panel found in its report.
The efforts at concealing lavish expenses included Smithsonian management ordering the alteration of accounting records to obscure a $14,000 Learjet flight that Small took to pick up an award and meet potential donors, the investigators said. A Smithsonian spokeswoman said the accounting change was a reclassification that is "common practice for a variety of innocent reasons."
Charles Bowsher, the former U.S. comptroller general who conducted the investigation, said the panel did not find illegalities, but said that Internal Revenue Service regulations might have been breached. "We certainly had concerns in the tax area and that is why we are calling for a full audit of Mr. Small and Mrs. Small's travel expenses, and that could have tax consequences, no question about that," Bowsher said. He singled out Small's Smithsonian-paid, first-class trip to Hawaii with his wife, Sandra, as one that might be considered taxable income.
Efforts to hide key management decisions about the publicly funded museum complex occurred at the beginning of Small's tenure in 2000, when he was hired to be the 11th secretary of the 160-year-old institution, overseeing a $1 billon budget, 18 museums and the National Zoo. To "conceal the true size of his pay," Small was given a $150,000-a-year housing allowance, the independent investigators said.
"There was concern, among the limited number of former Regents involved in setting Mr. Small's compensation, that there would be adverse publicity if the Smithsonian announced that Mr. Small was being hired at a salary in excess of $500,000 a year," the report said.
Small's employment agreement was derided by the panel's investigators as being amateurish and negotiated without legal counsel. "Only a few people were involved in negotiating his initial contract and, until quite recently, in fully discussing and understanding the full scope of his total compensation package," the report said. "The Regents involved in contract discussions with Mr. Small appear to have acquiesced to Mr. Small's demands without questioning the appropriateness" of the arrangement.
After the initial compensation level was set, Small, whose compensation as a top banker at Fannie Mae included a $1 million-a-year annual retirement payment, was allowed essentially to set his own salary with scant review by the regents, the panel said. Small hired a consulting firm to prepare a report "primarily intended to justify the substantial 2001 increase in Secretary Small's compensation."
The regents were hampered because "Small limited the flow of information so as to prevent the board from hearing criticism of his stewardship," the panel said. But the panel also lambasted the Board of Regents for failing to "look behind the tightly controlled data provided by Mr. Small. Nor did it engage in the active inquiry of Mr. Small and Smithsonian management that would have alerted the board to problems."
The panel consisted of Bowsher, Stephen D. Potts, former director of the U.S. Office of Government Ethics, and A.W. "Pete" Smith, a retired business executive. Their work was supported by attorneys from Williams & Connolly and Arnold & Porter.
The panel also cited the failure of what they called the "gatekeepers," including the general counsel, who is also the chief ethics officer, and the inspector general, for failing to engage in aggressive oversight of Small and his management team.
"The general counsel and inspector general did not play these monitoring roles because Mr. Small isolated them not only from the Board of Regents, but also from having any meaningful oversight of the secretary's office," the report said.
Inspector General A. Sprightley Ryan was criticized for narrowing an audit earlier this year of Small's expenses. By scaling it back, the panel said, "it afforded the Smithsonian an opportunity to influence the results in a manner that would have been precluded had the original request been honored."
As a result, Smithsonian staff, rather than the inspector general, "selected the transactions for review and determined the business nature of such transactions," the panel said.
In reply, Ryan said the panel was "inaccurate" in saying that she had ever planned an audit of Small's expense spending and she denied that Small and his senior staff interfered with the review. "An audit would have taken much longer and would have consumed substantially more resources -- resources we do not have," Ryan wrote the panel.
The chief financial officer was criticized for failing to review, or retain copies of, Small's expense reports for his office, travel and official entertainment over the past seven years. "There was never a review or even spot-checking of the expense records maintained by the Office of the Secretary," the report said. Small's spending at times went so unchecked that in 2000 and 2001, Small's chief of staff gave him signed, blank expense-account authorizations.
"When questioned on his expenses, he reacted with arrogance and a sense of entitlement," said Sen. Charles E. Grassley (R-Iowa), who has led an investigation by the Senate Finance Committee's Republican staff. "The Smithsonian and the American people suffered in the meantime."
The committee added new details to an earlier Washington Post report that Smithsonian management ordered a change in accounting records regarding Small's institution-paid charter flight on a Learjet to San Antonio in May 2001. Small said he had taken the charter because there were no commercial flights available and he needed to attend a Smithsonian-related event.
The panel found that Small had gone to Texas to receive an award from the American Academy of Achievement, an organization headed by former student-loan business executive Catherine Reynolds and her husband, Wayne. A few days after the award ceremony, Reynolds announced that the charitable foundation that bears her name would give $38 million to the Smithsonian to create a hall of achievement for prominent Americans that was similar to American Academy of Achievement. She later withdrew the gift after a storm of objections from Smithsonian curators and others.
After the initial travel voucher was submitted to pay for the flight, accounting officials received a note asking for a change. In the report's appendix, the handwritten note from the Smithsonian comptroller to two financial officers states, "Please stop payment. Sheila Burke called me and this is not a SI travel expense." The note dated July 2001 directed that the funds come from "Larry's personal funds that he contributed to S.I."
However, the records were not changed until the Smithsonian got a call from The Post asking about the Learjet fight. Ann Ruttle, a former accounting employee, told The Post that after reporters inquired, she was subsequently ordered by one of the two supervisors to change the travel voucher. She strongly objected, saying it was improper and unethical, but followed the orders of her supervisor.
A Smithsonian spokesman told reporters at the time that the flight was paid for out of Small's personal funds donated to the institution.
"There was, however, no such fund, and the flight was paid for from several Smithsonian funds," the independent panel said.
Asked about the handwritten memo, Bowsher said it "could possibly be" some type of violation. "You need a lot of evidence," he said, noting that such evidence might be found "if they went in there and checked it out. This is more about reorganizing at the board and management level."
Small declined to meet with the committee when the panel refused ground rules Small set for an interview, said Paul Martin Wolff, an attorney with Williams & Connolly law firm, which participated in the investigation. Small's lawyer, according to the panel, wanted to see related documents before agreeing to an interview. Burke agreed to a two-hour interview without ground rules, Wolff said.
The committee met with Supreme Court Chief Justice John Roberts on two occasions and received a letter from Vice President Cheney. Roberts and Cheney, by statute, serve on the Board of Regents, though Cheney has never attended a regents meeting. Roberts, who regularly attends meetings, indicated his desire to remain on the board, though the panel suggested his duties be largely ceremonial. Cheney's letter posed a series of questions regarding the unusual dual status of the Smithsonian, which is both a creation of Congress and a nonprofit corporation.
The episode has left a blemish on the Smithsonian's reputation and created "a real morale problem" among employees who saw a double standard at play, Bowsher said. "The people in the Smithsonian live by the rules," Bowsher said. "Then they saw a person at the top living so well. The credibility . . . got a little bit tarnished."
The Smithsonian seemed to be running on its own, said Bowsher, with "management being away too much and regents not spending enough time" on Smithsonian business.
Panel member Smith, former president of the management consulting firm Watson Wyatt, said the regents' inaction during Small's tenure was troublesome. Early in Small's stint, news reports detailed the staff's unhappiness with the secretary.
"One would think now that the regents then might have said, 'Gee, that's a lot of smoke, and let's see if there is really any fire,' " Smith said. If they had acted then, "they probably would have had a come-to-Jesus meeting with Larry Small and said this can't go on."