WASHINGTON -- Federal auditors are urging the U.S. government to take back $1.1 million from a South Carolina manufacturing assistance group because of accounting deficiencies that failed to document claimed expenses or included costs of helping businesses outside the state.
The audit by the U.S. Commerce Department's office of inspector general also challenges an additional $2.3 million in costs submitted by the Columbia-based South Carolina Manufacturing Extension Partnership and four of its contractors over 21 months from 2005 to 2007.
The vendors whose expenses have been questioned are manufacturing support programs at the University of South Carolina in Columbia, Clemson University, Greenville Technical College and the South Carolina Export Consortium, an affiliate of the S.C. Chamber of Commerce.
The auditors examined the ledgers of two other SCMEP contractors -- Midland College and Trident College -- but found nothing objectionable.
The audit findings may force the SCMEP -- the umbrella organization -- to send money back to Washington.
And the audit findings could lead the state government, which provides matching funds, to demand refunds at a cash-strapped time when legislators have made $1.1 billion in budget cuts and South Carolina's 11 percent unemployment rate is the nation's second-highest.
"Our audit found that the recipient (SCMEP) could not properly support approximately $3.4 million in costs claimed by four of its sub-recipients," the Commerce Department inspector general reported.
Katie McKevitt oversaw the audit as regional inspector general in the IG's Southeastern office in Atlanta.
Under the Manufacturing Extension Partnership program created by Congress in 1988, McKevitt said, the Commerce Department supplies one-third of the funds, but it oversees spending from all federal, state, university and corporate sources.
McKevitt said the South Carolina entities didn't provide details that tied the claimed expenses to specific projects under the MEP program and failed to meet other federal accounting requirements.
"They had spent money that was obviously unallowable under everyone's standards," McKevitt said in an interview.
The South Carolina groups under fire vehemently dispute the audit findings and are fighting the federal bid to recoup $1.1 million.
"We don't expect any of that to hold up," said John Irion, president of the S.C. Manufacturing Extension Project.
Irion said he is working with grant administrators at the National Institute of Standards and Technology, the Commerce Department agency that runs the MEP program, to resolve the problems raised by the audit.
"They've approved the contracts every year for the 15 years that we've had our partnership," Irion said. "The people who granted us the money have said everything we're doing is OK. We have a good relationship with them. We're not worried about passing muster with them."
Irion hired a Washington law firm that specializes in federal compliance to produce a lengthy rebuttal of the audit, complete with citations of court rulings and federal laws, but the auditors rejected the rebuttal before issuing their March 6 report.
Irion's group and its four partners have until April 5 -- 30 days from the audit's issuance -- to respond to its findings. The National Institute of Standards and Technology then will have 30 days to determine whether it agrees with the auditors' findings and recommended actions.
Jerry McMahan, deputy regional inspector general, said "the process gives them a chance to resolve whatever problems there are."
McKevitt, however, said her office gets the final call.
"If NIST and our office don't agree that everything is OK, then the bill (demanding federal reimbursement) will be sent out," she said.
South Carolina was one of three states to set up the first Manufacturing Extension Partnership programs in 1989, a year after Congress passed a law aimed at enabling colleges and universities to help smaller manufacturers improve their management and apply evolving technologies to new products.
Irion said his agency and its partners have helped thousands of small and medium-sized manufacturers across South Carolina run their businesses better, learn cutting-edge technologies, make new products and export them to expanding markets overseas.
Irion, though, declined repeated requests to provide the names of some of the companies that have benefited from his program.
Irion said National Institute of Standards and Technology officials had told him not to identify the companies, but Roger Kilmer, NIST director of the national Manufacturing Extension Partnership, said through an aide that no such restrictions had been imposed.
Christine Cole, director of Clemson Apparel Research at the Upstate university, said she and her employees spent months trying to provide the federal auditors the information they sought.
"It's very disappointing," Cole said. "We've spent an enormous amount of time answering the auditors' questions. We're frustrated because we still don't feel like we've had a breakthrough in comprehension."
In addition to its assistance to manufacturers under the MEP program, Cole said, Clemson Apparel Research has almost $2 million in contracts with the Pentagon, helping it design new military uniforms and make protective clothing against biological and chemical attacks.
Under its MEP contract, Cole said, her research group is helping about 50 apparel and fabric firms, half in South Carolina and half in other states.
But the auditors found that 97 percent of $45,000 in invoices they reviewed from Clemson Apparel Research was for out-of-state work, which they said is not permitted by its contract with the South Carolina Manufacturing Extension Partnership.
A major client, the auditors found, is the Quantico Marine Corps Base in Virginia.
Gail Shurling, associate director of USC's Center of Manufacturing and Technology, said her center uses the university accounting system that tracks spending and income tied to 1,600 federal research grants it receives each year.
Now, Shurling said, the audit has forced her center to form a separate accounting system just for its participation in the MEP program.
"We've had to completely change the accounting system that's used on 1,600 other federal grants," Shurling said. "We just thought it was the most bizarre thing in the world."
The auditors found that the South Carolina Export Consortium hadn't spent all the funds provided by SCMEP and didn't meet its matching-share requirement of getting two-thirds of its money from non-federal sources.
The auditors invalidated a $2,049 expense for a foreign trip the group's president, Fred Monk, took in 2006 because he hadn't cleared it in advance with the federal grant providers.
Monk, who is helping a group of South Carolina manufacturers prepare for a trade mission to Poland, said he hadn't known of that advance-notice requirement.
Monk expressed surprise over the auditors' findings.
"We felt very good about the information that we gave them," Monk said. "We believed that everything was in compliance."
The audit findings
— S.C. Manufacturing Extension Partnership and four contractors failed to document $3.4 million in claimed expenses from July 1, 2005, through March 2007
— The U.S. Department of Commerce should recover $1.137 million, its share of the undocumented expenses
— The Commerce Department should "disallow" an additional $2.273 million in claimed expenses, opening the door for the state government and other fund-providers to seek refunds
Read the audit and the S.C. Manufacturing Extension Partnership's response at: http://www.oig.doc.gov/oig/reports/2009/ATL-18567.pdf