FINANCIAL INFRASTRUCTURE The Indirect Cost Controversy

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here can be no doubt that the indirect cost controversy that began in 1990 cast a long shadow over virtually every aspect of life at Stanford for several years. Normal relations with the federal government became strained, interactions with other universities were at times difficult, morale among faculty and staff was low, and the institution was forced to take drastic action to avert a financial crisis. It is testimony to the fundamental strength of the university that it survived the worst days of this controversy and that the important work of teaching, learning, and research continued at a high level.

In my first State of the University Address, delivered in April 1993, I mentioned that, at that time, the qui tam suit filed against Stanford two years earlier by Paul Biddle, the former Office of Naval Research (ONR) representative at Stanford, remained under seal in federal court, while the Department of Justice was continuing its investigation of the allegations in order to decide whether it would join the suit. I also mentioned our estimate that by spring of 1993, Stanford had spent about $25 million and 125 person years to address issues raised by federal government auditors. By then we had provided the Defense Contract Audit Agency with 115,000 pages of documents, and the Justice Department with 150,000 pages.

Finally, in December 1993, more than three and one-half years after Biddle had made his first charges, the Justice Department declined to enter the lawsuit brought by Biddle. Meanwhile, Stanford was pressing two appeals with the Armed Services Board of Contract Appeals in response to ONR's unilateral reduction, back in 1991, of Stanford's indirect cost recovery rate.

On October 17, 1994, Stanford and the United States government agreed to a settlement of all disputed matters related to the billing and payment of the indirect costs of federally sponsored research at Stanford for the years 1981 through 1992. In settling this contractual dispute, the Office of Naval Research, the responsible government agency, acknowledged that "the Navy has concluded that it does not have a claim that Stanford engaged in fraud, misrepresentation, or other wrongdoing with respect to the Memoranda of Understanding, costs, submissions, claims or other matters covered by the settlement agreement."

Weighing the costs and benefits of settlement was made difficult because of the pending Biddle suit. Given "issue overlap," it was not clear to me that I should dismiss our appeal, which was finally approaching trial before the Armed Services Board of Contract Appeals. We expected a favorable ruling by the Board, and, therefore, the Board's resolution of these issues might have had significance for the qui tam suit. On the other hand, our differences with the government had gone on all too long, and normal relations were highly desirable. Eventually, I came down in favor of normalizing our relationship with the Office of Naval Research. The days and nights preceding the decision were intense. Stanford's team working on the issues, including the Board of Trustees' Special Committee on Indirect Cost Oversight, was highly professional, able, and constructive.

The settlement required Stanford to pay the government an additional $1.2 million as an adjustment for all the years 1981 through 1992 and dismiss its appeals concerning 1991 and 1992. In coming to the settlement, ONR acknowledged that the documents governing Stanford's accounting practices (known as Memoranda of Understanding, or MoUs) were valid and binding agreements between the government and Stanford.

As a normal business settlement, this was unremarkable. Over the course of twelve years, Stanford had conducted research under nearly 18,000 federally sponsored contracts and grants involving many millions of transactions and dollars. Adjustments when closing out the books for open years are normal and expected under the applicable government rules, and the amount of the adjustments for the years settled were within the normal range.

Yet this case was not normal. No sponsored research dispute at Stanford--nor I believe at any university--has ever received as much attention and scrutiny as indirect costs at Stanford. Now, almost four years after the formal settlement of the indirect cost controversy, some effects remain. Stanford is still under closer scrutiny from the federal government than is normal at most universities. Despite the fact that we have agreed to use the government auditors' preferred methods, we continue to go through extraordinary numbers of audits, negotiations, and reviews. The regulations governing indirect cost administration have been changed frequently, each time with the effect of transferring to the university--all universities--costs of research that had previously been shared by the government. Stanford's reputation, even among colleagues at other universities, probably has not yet fully recovered.

There was much pain and distress as the public controversy developed. To the extent that errors were made, I deeply regret it. Because the government was ten years behind in its audits, despite repeated requests by Stanford for audits, such inadvertent errors had not yet been detected. But also regrettable were the irresponsible accusations against Stanford and university officials. To this day, I get letters from alumni who simply assume that the sensational headlines they read told the truth and gave a fair picture. In our overheated public life, the presumption of innocence no longer seems to hold. For a lawyer, the ease with which accusations were made against the university, complex accounting issues irresponsibly simplified, and vast costs imposed is disheartening because the story is in no way unique. It seems that many regulatory disputes these days are prejudged by government officials and then tried in legislative committees and the media. And as I write this, though Biddle's suit was dismissed by the trial court in 1996, his appeal is still going on, still costing money--more than seven years after his initial accusations.