Internal Audit Services

REPORT ON THE REVIEW OF

ALLEGATIONS CONCERNING CUSTOM FIT

IAS-23-63

April 25, 2024

Auditor:
Janna Hawkins, CIA, CFE

Integrity · Accountability · Security

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April 25, 2024

Dr. John O’Neil

Vice President for Operational Strategy
Utah State University
Logan, Utah 84322-1400

Dear Vice President O’Neil:

Internal Audit Services completed a review of allegations concerning Custom Fit. The audit
objective was to determine the validity of allegations concerning misuse of Custom Fit funds
and quantify any losses, if applicable. On July 31, 2023, your office and the Audit, Risk and
Compliance Committee Chair approved a deviation from the audit plan so we could conduct this
audit.

The attached report discusses our observations and recommendations for areas in which
controls should be improved. The report also includes the verbatim audit responses from units
or specific personnel noted in the audit.

We express our sincere appreciation to employees of Technology, Design and Technical

Education, Business Services, Human Resources and Information Technology for their
cooperation. Please let us know if you have any questions about the report or would like to
discuss the recommendations.

Sincerely,

Jodi Bailey, CPA, CFE, CIA, CCSA

Chief Audit Executive

JB/cd

1430 Old Main Hill Logan, UT 84322-1430 | (435) 797-1084 | usu.edu/internal-audit-services

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EXECUTIVE SUMMARY

Why We Conducted This Audit

The university received a report alleging Custom Fit at USU Eastern Price was withdrawing or
allocating 100 percent of training funds, reimbursing companies 50 percent, with the remaining
50 percent unaccounted for. The report also expressed concerns that the former Small Business
Development Center (SBDC) specialist was paid from Custom Fit funds but wasn’t reporting to
work. In addition, there were allegations of inappropriate working relationships and/or hiring
practices which were referred to Human Resources (HR) for further investigation.

What We Assessed

We reviewed the following:

• Custom Fit training reimbursements paid from July 1, 2021 to November 30, 2023.
• Equipment purchased by Custom Fit in fiscal years (FYs) 2022 and 2023.
• Payroll transactions, including leave recorded, for the SBDC specialist from July 1, 2021
to February 1, 2024.
• Grant 203685 from the Governor’s Office of Economic Opportunity for SBDC.
• Custom Fit data reported to Utah System of Higher Education (USHE) for FYs 2020-
2022.
• Summary of emails sent from the SBDC specialist’s account from July 1, 2021 to August
15, 2023.
• Key employees’ email activity containing the name of the SBDC specialist from October
1, 2021 to September 12, 2023.

We also conducted interviews with current and former employees.

What We Found

We reviewed transactions in Banner and reimbursements in EZ-Buy. We didn’t see any evidence
to support the allegations of improper billing or budgeting related to Custom Fit training funds.
Training funds were accounted for and expenses were reasonable.

Custom Fit funds compensated the SBDC specialist when there were periods of not reporting to
work and/or no evidence of work product. Based on our observations, $114,302.98 of Custom
Fit salary and benefits do not appear to be substantiated.

We also identified unallocable payroll expense totaling $43,167.45 on an SBDC grant.

We have recommendations for four areas.

Custom Fit
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CONTENTS

BACKGROUND 1

OBJECTIVES 1

SCOPE 1

CONCLUSIONS 2

MISALLOCATION OF CUSTOM FIT FUNDS 5

UNALLOCABLE PAYROLL EXPENSE ON CONTRACT/GRANT 10

EMPLOYMENT OF RELATIVES POLICY 13

CUSTOM FIT CARRYFORWARD BALANCES 16

AUDITOR’S COMMENT 18

DISTRIBUTION LIST 19

Custom Fit
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 Internal Audit Services

BACKGROUND

The Governor’s Office of Economic Opportunity supports Custom Fit to help companies remain
competitive through skilled workforce and to promote economic development in Utah. The
funds for Custom Fit are appropriated from the State Legislature annually. Custom Fit is
managed through the Utah System of Higher Education (USHE).

Custom Fit pays or reimburses up to 50 percent of the training cost for a company’s employees
with the company paying at least 50 percent of the training cost.

The Small Business Development Center (SBDC) is funded by a federal grant and provides a
variety of services to companies to help them prosper. These services include consulting and
training to draft business plans, marketing, budgeting, start-up assistance, employee
management, etc. The SBDC and Custom Fit mission and duties are complimentary, so
historically, some SBDC/Custom Fit employees have allocated their responsibilities between
these two functions and fund sources.

The university received a report alleging Custom Fit at USU Eastern Price was withdrawing or
allocating 100 percent of the training funds but reimbursing companies only 50 percent, with
the remaining 50 percent unaccounted for. The report also expressed concerns that the former
SBDC specialist (subsequently referred to in this report as the SBDC specialist) was paid from
Custom Fit funds but wasn’t reporting to work. In addition, there were allegations of
inappropriate working relationships and/or hiring practices, which were referred to Human
Resources (HR) for further investigation.

OBJECTIVES

The objectives were to:

• Determine the validity of the allegations.
• Quantify university losses, if applicable.
• Identify related control weaknesses.

SCOPE

We reviewed the following:

• Custom Fit training reimbursements paid from July 1, 2021 to November 30, 2023.
• Equipment purchased by Custom Fit in fiscal years (FY) 2022 and 2023.
• Payroll transactions, including leave recorded, for the SBDC specialist from July 1, 2021
to February 1, 2024.
• Grant 203685 from the Governor’s Office of Economic Opportunity for SBDC.

Custom Fit
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• Custom Fit data reported to USHE for FYs 2020-2022.

• Summary of emails sent from the SBDC specialist’s account from July 1, 2021 to August
15, 2023.
• Key employees’ email activity containing the name of the SBDC specialist from October
1, 2021 to September 12, 2023.

We also conducted interviews with Protected Information .

Our audit work was conducted in conformance with the International Standards for the
Professional Practice of Internal Auditing.

CONCLUSIONS

Custom Fit Policies and Procedures

During our audit work, Protected Information told us there were no documented policies and
procedures governing use of Custom Fit funds. This also expressed concerns about
Protected Information

the quality of training which had been subsidized in the past. This Protected Information
developed their own procedures but didn’t have the authority to implement or
enforce them.

USHE Policy R432, Custom Fit states “An institution shall determine priorities within available
funds to target company utilization of Custom Fit Training for maximum economic and
workforce impact according to the needs and circumstances of its region and the state…”
USHE Policy R432 also encourages institutions to establish policies, procedures and guidelines
governing the use of Custom Fit funds to prioritize most economical businesses.

The Protected Information , who was hired in April 2023, shared

concerns about a company, which had previously received $20k in training reimbursements.
This amount far exceeded benefits to other companies. When asked the company, the
Protect

company manager said their training budget relies on Custom Fit funds. The Protected Information
noted the lack of clearly defined guidelines in the past could be
construed as discrimination or favoritism.

In response to the concerns shared by Protected Information , we

summarized Custom Fit training cost reimbursements for July 1, 2021 to November 30, 2023 for
96 companies. The reimbursements totaled $359,423.91. We noted the following:
• Three companies received 36.2 percent of all training reimbursements.
• The company with the most reimbursements received 16.9 percent of all training
reimbursements, nearly double the training reimbursements to the other two companies.

Custom Fit
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Prior to end of FY 2023, there were no documented limits as to how much funds a company
could receive per year or training amount each company’s employee could receive per year.
However, the Protected Information has now documented these limits in
the training reimbursement agreements. The annual reimbursement amount per company is
$10,000 (half of $20,000 training cost) and maximum of $2,500 per individual employee’s
training.

Protected Information raised questions about the appropriateness of

reimbursing training costs of subcontractors of companies seeking Custom Fit training dollars.
To address this concern, the Protected Information updated procedures
to clearly stipulate in the reimbursement agreements that the beneficiaries of training dollars
must be “W-2/W-4 employees.”

The Protected Information has also included specific documentation

requirements for companies to submit for reimbursement. This helps ensure the companies
have met the requirements for Custom Fit training funds.

Training Costs

The Protected Information provided us a report of FY 2023 training transactions from

a software system they used to track their budget. The report showed 100 percent of the
training expense for each company as “obligated” and “spent.” Historically, Custom Fit
coordinated and paid directly for the employee’s training and then, invoiced companies for
50 percent. However, to avoid the challenges of collecting from companies for their 50
percent share of the training expense, Custom Fit now reimburses companies up to 50
percent if there’s a training agreement and documented proof of training expense. This
documentation includes proof of payment, certificates of completion of training, attendance
rosters, etc.

The previous method of direct payment for training and would explain why the report was
designed to show 100 percent “spent” with the “contribution” representing 50 percent or less
of the total training cost.

In Banner, we identified 25 companies that received Custom Fit training reimbursements

greater than $2,000 between June 2022 and July 2023. They were all properly reimbursed at
50 percent or less of the actual training expense as per USHE guidelines.

Custom Fit
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In FY 2023, Custom Fit purchased the following equipment for USU Eastern to provide training:
• Fork lift for Trucking Department – $15,765.52
• Printing and cutting equipment – $10,136.25

These equipment purchases appear to be allowable uses of Custom Fit funds.

Based on our review of the Custom Fit budget report and expenses, we didn’t see any evidence
to support the part of the allegations for improper billing or budgeting. Training funds were
accounted for and expenses were reasonable.

Custom Fit Payroll Misallocation

The allegations stated the SBDC specialist was being paid but had not been reporting for work.

The SBDC specialist was hired July 19, 2021 as a business consultant Sr. As of February 1,
2024, the university paid him (including benefits) from Custom Fit fund sources:
• $149,784.32 from Custom Fit and Custom Fit Program income
• $30,583.65 from Match for Grant 203685 (Custom Fit fund 130247)

From July 2022 to February 1, 2024, all compensation for the SBDC specialist was from Custom
Fit funds. Based on our observations, $114,302.98 of salary and benefits do not appear to be
substantiated.

We address this further in the section, Misallocation of Custom Fit Funds.

Unallocable Payroll Expense on Contract/Grant

Although payroll expense related to a SBDC grant wasn’t included in the allegations, we noted
the SBDC specialist was paid a total of $43,167.45, including benefits from SBDC grant 203685.
There was no evidence of relevant work, so this payroll expense appears to be unallocable to
the grant.

We address this further in the section, Unallocable Payroll Expense on Contract/Grant.

In addition to payroll misallocation and unallocable payroll expense charged to a grant, we also
identified additional areas where controls could be strengthened. We discuss our observations
and recommendations in the following pages.

The SBDC specialist’s employment with the university was terminated January 26, 2024.

Custom Fit
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Policy/Guidance 363.3 RESPONSIBILITY

(continued) 3.1 Department Heads and Supervisors
Responsible for reviewing employees’ absences to ensure that this
policy is followed. Responsible for working with employees and
Human Resources to coordinate sick leave with other benefits.”

Observations We reviewed monthly payroll for the SBDC specialist and compared
it to email activity, leave charged, Custom Fit training agreements
and observations from colleagues to determine if the salary and
benefits appeared to be substantiated. Based on our observations,
$114,302.98 of Custom Fit salary and benefits did not appear to be
substantiated.

The breakdown by fiscal year is as follows:

• FY 2022 – $11,501.44
• FY 2023 – $33,571.04
• FY 2024 – $69,230.50 (through February 2024)

From July 2022 to the final payroll transactions we reviewed in

February 2024, the SBDC specialist’s salary and benefits were fully
funded from Custom Fit. However, based on an interview with the
SBDC specialist, statements from Protected Information
and Custom Fit training agreements, it appears the SBDC specialist
only did intermittent work.

We interviewed the SBDC specialist on October 20, 2023. He stated

the following during the interview:
• He has not worked for SBDC/Custom Fit since
Protected Information

was hired on April 1,

2023.
• When asked about his current role and job responsibilities.
He replied, it was “difficult to describe right now…it’s
transitional.”
• When asked about daily duties, the SBDC specialist replied
that it depends on the day and who asked for assistance,
but involved “research and looking into things” – like
programs they should offer, restarting programs,
acquisition of equipment, etc.

Custom Fit
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Effect • Unsubstantiated payroll expenditures could jeopardize future

state appropriations.
• Undermines morale of other employees who notice preferential
treatment being provided to a specific employee.

Recommendation The Protected Information over the

Custom Fit indexes should work with Business Services and TDTE
to reimburse Custom Fit indexes for unsubstantiated payroll
expenses.

Supervisors have a responsibility to ensure employees comply with

Human Resources policies related to attendance, authorized
absences and employee disability benefits. The Protected Information
should ensure employees are reporting to work or taking
leave to record absences.

Responses Response from Protected Information

The Protected Information has and will annually review USU
policies 345, 363, 351, 357, and 363. will also follow up with
Protected I

each subordinate monthly to make sure that all attendance

absences are recorded. In addition, any employees that fall under
the guidelines of Policy 351, will counsel with the HR office
Protected

regularly, to make sure the situation is appropriately dealt with.

The Protected Information are

currently working together on a plan to reimburse the Custom Fit
indexes for unsubstantiated payroll expenses.

Protected Information
Completion date: Monthly, Annually, Ongoing

Response from Protected Information

I concur.

Custom Fit
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Responses Response from Protected Information

(cont’d.)
I concur.

AUDITOR’S COMMENT

Internal Audit Services will conduct a follow-up review to assess implementation of the
recommendations and responses contained in this report. We have closed the allegation case
which prompted this audit.

JB/cd

Custom Fit
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DISTRIBUTION LIST

David A. Petersen, Chair – Audit, Risk and Compliance Committee, Member – Board of Trustees
Jacey Skinner, Chair – Board of Trustees, Member – Audit, Risk and Compliance Committee
Kent Alder, Member – Board of Trustees, Member – Audit, Risk and Compliance Committee
Heather Mason, Member – Board of Trustees, Member – Audit, Risk and Compliance Committee
Clark Whitworth, Member – Board of Trustees, Member – Audit, Risk and Compliance Committee
Elizabeth Cantwell, President
Larry Smith, Provost
Kerri Davidson, Vice President of Institutional Affairs and Chief of Staff
David Cowley, Vice President for Finance and Administrative Services
Mica McKinney, Vice President for Legal Affairs and General Counsel
Kenneth L. White, Vice President/Dean, College of Agriculture and Applied Sciences
Dan Christensen, Controller
Doug Bullock, Associate Vice President, Human Resources
Doug Miller, Associate Vice President, USU Eastern
Whitney Pugh, Executive Director, Business Services
Brian Warnick, Department Head, Technology, Design, and Technical Education
Robert Powell, Associate Department Head, Technology, Design and Technical Education
Michael Finnerty, State Director of Utah Small Business Development Center, Extension
Ethan Migliori, Director of Noncredit Training, Technology, Design, and Technical Education
Roger Koyle, Regional Director, Small Business Development Center, USU Eastern
Nancy Hanks, Assistant to the President
Andi McCabe, Assistant Provost
Bryan Arnell, Financial Officer, Business Services, College of Agriculture and Applied Sciences
Becca Seamons, HR Specialist – Employee Relations, Human Resources
Ashley Child, Business Manager, Business Services, Technology, Design, and Technical Education
Tiffany Allison, Assistant to the Vice President for Finance and Administrative Services
Tammy Firth, Executive Assistant to the Vice President and Dean, College of Agriculture and
Applied Sciences
Janalyn Brown, Staff Assistant, President’s Office

Custom Fit
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