Professionalism/Stanford Research Scandal

Stanford University was involved in one of the biggest research fund scandals in the early 1990s. In 1991, government auditors found luxury items (i.e. bottle of wine, flowers, silk sheets, fine silverware, yacht, and wedding ceremony) listed as “indirect and incidental research expenses” when, in fact, they were the personal expenses of Donald Kennedy, the President of Stanford. The scandal ultimately triggered the resignation of Kennedy and revealed similar behavior at other universities across the nation.

Stanford University's seal.

Background

Donald Kennedy

Stanford had a history of high indirect cost reimbursement rates. Indirect costs are any overhead charges a university incurs as part of any research project. These overhead charges can be anything, including utility and maintenance bills, subscriptions to scientific journals, salaries of administrative assistants, and travel expense for scholars to scientific conferences. The “sticker price” of a federal research grant does not cover indirect costs but the government reimburses a percentage of these expenses back to the university, which is funded by taxpayer dollars.

The average reimbursement rate for most universities at that time was roughly 55%, but Stanford’s average reimbursement rate was in the high 70% range. From 1981-1992, Stanford had received over $800 million in indirect expense reimbursement on top of the $2 billion it had already received in research grants and contracts.

Every university negotiates its indirect cost reimbursements with a single federal agency. In Stanford’s case, this was the Office of Naval Research (ONR).

Office of Naval Research, the federal agency responsible for Stanford's reimbursements

Paul Biddle was the ONR's on-site negotiator to Stanford. Biddle’s suspicions of Stanford’s “creative accounting” methods arose in 1989 when he conducted informal discussions with various professors at the university. All the professors expressed great concern over Stanford’s high reimbursement claims and were worried that those claims would price them out of the market for future grants and contracts. This sparked Biddle’s investigation of Stanford’s books. Biddle, in an early interview, stated, “Schools think of research in the national interest. When you start thinking of research from the federal government as an income stream, you have a problem because you start thinking of profit.”

Once in question, Stanford (under the direction of Donald Kennedy) instituted rigorous new accounting procedures, repaid the government $2.2 million, and hired multiple external auditors to review their books. But this was too little, too late. Paul Biddle had already launched a full investigation into Stanford, which was headed by the Justice Department and ONR, and the government sent 30 of its auditors to Stanford to find all discrepancies in the accounting ledgers. After the investigation concluded, Stanford and the federal government settled and Stanford paid back $1.2 million of the alleged $800 million it overcharged and received a clean bill of ethical health from the ONR. Even after all the allegations and investigation, the ONR still supported Stanford and claimed they had done nothing wrong. This “intimate relationship” between the ONR and Stanford was the main reason the scandal took place and shortly after, the Naval Investigative Service (NIS) launched an investigation into the Stanford-ONR relationship. Those documents are classified and have not been released to the public, and thus the outcome is unknown. The public claims Stanford got off too easy and called for the resignation of President Donald Kennedy. Kennedy eventually resigned after the 1992 academic year.

Who’s to blame?

Stanford

Investigation after the incident revealed that the problem on Stanford’s side was in the MoU, the Memorandum of Understanding, a document between Stanford and the ONR, expressing an agreement to use a different method for cost determination and cost allocation rather than the default one defined by the Office of Management and Budget. The original intention of the MoU was to make cost allocation better represents the true cost incurred and allocable to the government. However, Stanford had over 80 active MoUs with the ONR, which is the largest number of MoUs one organization had. Cal Tech, which came second in terms of the number of MoUs with the government, only had 13 .

Not only was the sheer number of Stanford’s MoUs alarming because no other university in the nation had that high number of private agreements with the government concerning the amount of research funding it was getting, the content of the MoUs themselves were also suspicious because some of them allowed for significant increases in the allocation of indirect costs and other were entirely based on so called “special studies” between the university and ONR. For example, one of the MoUs allowed the use of special study results for the allocation of a library cost pool that resulted in 12.5 million of indirect costs. Whereas under the default method, only 5.2 million would have been charged to the government, a difference of over 7 million dollars and the cost allocation process at Stanford is largely driven by these 80 MoUs and special studies that had all been approved by the ONR in past years.

Office of Naval Research

After this evidence was made public, the media blamed Stanford, but a closer look at the side of the ONR reveals a different story. In March 1990, the whistle blower Paul Biddle wrote a 27 page memo to his superiors, charging that senior officers in his organization had historically given special treatment to Stanford, and had stepped in whenever the university's accounting came into question. In Biddle’s words, “Compared to a lot of institutions, we have a lot of innovative ways … to associate costs with research,” which is referring to the large number of MoUs Stanford had with the ONR because he also stated that “anything the University felt may be beneficial to them has been characterized and documented in the format of a MoU.” Biddle accused that “senior management cast a blind eye to significant infractions by Stanford” because of the special Navy-Stanford relationship.

Why did This Relationship Exist?

It is difficult to determine how the close relationship between Stanford and the ONR began. One reason for ONR's lax audit standards is that in the 1980s, the government designated universities as low-risk contractors due to severe budgetary and staffing restrictions. Consequently, the university audits fell behind. Stanford’s 1980 costs were not audited until 1984. There has also been some speculation that the ONR viewed the Stanford case as a “too big to fail” situation where if Stanford’s misuse of funding was revealed then the ONR would be dragged down with it. It can also be seen as the ONR simply acting with the culture at the time, several other large research universities were found to have acted similarly to Stanford although on a much smaller scale. Ultimately, the exact reason that this relationship existed was Stanford’s excellent reputation as a research institution and the ONR tolerating this misuse until Biddle blew the whistle.

The Aftermath

At the congressional hearing focused on monitoring university research grants, which took place on May 9th 1991 as a result of what happened at Stanford, representatives from Government Accountability Office testified that a number of Stanford’s MoUs were based on questionable assumptions and inadequate justifications for the allocation method used. Serious deficiencies in Stanford’s cost allocation practices combined with inadequate audit and legal reviews by the ONR were responsible for the significant overcharges to the government. To this accusation, University representatives responded that the rules concerning research costs were vague, and therefore could be used to legally charge the government for costs not related to research. What happened at Stanford can be described by as “a story of taxpayer dollars going to bloated overhead than to scientific research, a story of excess and arrogance, compounded by lax government oversight,” spoken by John Dingell at the hearing.

Generalizing

Plato - The School of Athens.

Gordon Gee

These evidences show that there were ethical infractions on both sides. Stanford was unethical to have knowingly used loopholes in the rules to charge the government for various costs unconnected with sponsored research. The ONR was unethical to have not monitored the activities concerning research funds with the degree of responsibility and accountability it holds to the public.

Ring of Gyges

Stanford’s misuse of funds illustrates Plato’s Ring of Gyges mentality. The leadership at Stanford believed they were unaccountable for their actions because of some perceived veil of secrecy by claiming their expenditures as “indirect costs.” Stanford’s leaders thought they could take what they wanted, assuming the role posited by Glaucon in Plato’s Republic, although this is not something unique to their leadership. In 2012, it was discovered that E. Gordon Gee , president of Ohio State University, had spent an inordinate amount of university funds on personal expenditures during his second stint as president. Since his return in 2007, Gee has spent nearly $7.7 million on housing and entertainment, including at least $895,000 for gatherings, $574,000 for private jet travel, and even $64,000 on a personal bow tie collection, all on top of a $333,812 bonus which made his 2012 salary $2.14 million. A similar abuse of leadership in a university occurred at Southern Methodist University in the 1980s when university officials facilitated the payment of collegiate athletes on their football team, creating a “quasi-professional” athletic program at the school. All of these exemplify these leaders’ belief that they held the Ring of Gyges and would be able to act invisibly to get what they wanted. Unfortunately for them this was not the case and each has been made accountable for the consequences of their actions.

Professional Client Relationship

The actions of the ONR also lend an important lesson in not allowing yourself to become too close to your clients. As can be seen in the Enron scandal, allowing yourself to become too close to the institution you work with to the point where your success is synonymous with their own can be dangerous and can even destroy a company. When it was discovered the Arthur Andersen was enabling Enron to misrepresent their earnings and financial statements, both companies went under. Although Arthur Andersen's conviction was eventually overturned which would have theoretically allowed them to continue operations, they would have had no credibility making it difficult to get any customers. Although the ONR and Stanford case is not as extreme, a similar situation arose. Both organizations were working very closely together and the ONR began viewing Stanford's research as a source of income and profit. This made it difficult for the ONR to want to reveal Stanford's misuse of the funds because they were benefiting from it. When organizations breach the professional client relationship and begin to work in the interest of the other organization, they can become tied up in something that ultimately leads to the downfall of one or both parties.