Auditors: University of Iowa needs more checks on new private bookstore operator

IOWA CITY — When the University of Iowa handed over operation in spring 2021 of its Hawk Shop and University Bookstore to a private partner — echoing the public-private partnership it entered a year earlier for operation of its utilities system — both sides signed a deal committing them to a list of responsibilities and obligations.

Among those was one UI’s new operating partner, Follett Higher Education Group, made to pay the university monthly royalties based on sales. Follett, according to the contract, also must document financial, oversight and procedural details.

But the university over its first year with Follett didn’t impose enough checks and balances to ensure it’s getting what it’s owed, according to a June internal audit presented to the Iowa Board of Regents.

“Royalty payments are not being reconciled against detailed transaction data, increasing the risk of incorrect payments,” according to the audit. “Management should request detailed monthly transaction data to periodically reconcile royalty payments to the detailed transactions.”

The store in the Iowa Memorial Union sells textbooks used in UI classes, computers, Hawkeye apparel and accessories and gifts, among other items.

Under the operating agreement — which the UI signed with Follett in March 2021 after experiencing net losses totaling hundreds of thousands from the Hawk Shop and University Bookstore over a five-year period — Follett must pay the university 16 percent of gross sales up to $10 million; 17 percent of gross sales between $10 and $12 million; and 18 percent of gross sales over $12 million.

Follett also annually must pass on 8 percent of gross sales on digital course materials and pay the university $250,000 for every five-year operating term; $100,000 annually for utilities; $50,000 a year to support student-life programming; and $10,000 annually for UI library programs.

Follett, under the deal, had to spend $1 million upgrading the bookstore and $110,000 on point-of-sale and store management systems. But auditors more than a year later found some store management and operation systems were lacking — like its checks on what customers get a discount.

‘Risk of non-compliance’

According to the agreement, UI employees get a 10 percent discount in the bookstore, and college departments can get a 20 percent discount on certain items. Among the simplest methods to apply the discount is for UI employees to use their “IowaOne card.”

The UI pays Follett for all IowaOne transactions and then passes on the discounted charges to the employee’s U-bill every month. But if a person shows an IowaOne card for a discount but pays using a different method, “There is no procedure to confirm that a person is currently affiliated with the university,” the audit said.

And discounted sales don’t go toward calculating UI’s royalty payments. From July 2021 through January 2022, discounted sales totaled $61,784.

“Management should work with Follett to implement a process to confirm everyone receiving a discount has their eligibility verified,” according to auditor recommendations, which the UI committed to attempt by November 2022. “Management will pursue, with Follett, the purchase of additional equipment to verify if a customer is a valid university employee who is eligible to receive a discount.”

The university also committed by December to start requesting that Follett produce detailed monthly transaction data “for a randomly chosen month twice a year” after auditors determined the UI is not checking the accuracy of its royalty payments against detailed sales data. According to its contract, though, it can.

The audit, additionally, found too few checks on contractual obligations in general.

“Responsibility for oversight of the operating agreement is unclear, increasing the risk of non-compliance and potential loss of revenue,” according to the audit. “The monthly labor, expense, royalty, and IowaOne card transactions are currently processed by the IMU accounting manager. These procedures are not documented, and the accounting manager is the only one who knows how to perform these tasks.”

Employee reimbursement

In fall 2020, the UI told The Gazette it had 17 full-time staffers and about 110 part-time student workers, with another six temporary employees for its Hawk Shop and University Bookstore. At the time of the transition to the private operator, the university reported 41 bookstore employees — with two who remained UI employees, despite the privatization, due to upcoming planned retirements.

Those two continued working in the bookstore, and Follett reimbursed the UI for paying their wages. But auditors found Follett wasn’t making those reimbursements “in a timely manner, increasing the risk of contractual non-compliance.”

As of mid-March, Follett hadn’t paid labor invoices for those employees for December 2021 or January 2022, totaling $28,194. Additionally, the December invoice included $3,089 in “extra compensation,” which was not discussed in the agreement.

In responding to auditor concerns, UI officials said they eventually did receive the payments for the employees, whose retirement dates were March and October.

“After October, this will no longer be an issue,” according to the UI response. “Management will continue to communicate with Follett management regarding any payments not made within 30 days of the invoice date. The last payment should be received in December 2022.”

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