Feb 152009
Authors: Aaron Hedge

The CSU Athletic Department’s marketing firm was red-flagged in a 2005 university-commissioned audit report for alleged “sloppy” accounting practices — improprieties similar to those that have entangled the firm in financial and legal battles with three other schools nationally.

The audit of CSU’s relationship with New Jersey-based Nelligan Sports Marketing was conducted by an independent auditor and cites unjustified travel expenses, contradictory sponsorship payments and a budgeted salary for a position that didn’t exist, among others.

But citing large financial gains from the deal with NSM, the struggling Athletics Department overlooked the concerns raised in the audit and extended its contract with the firm, later offering the company marketing rights with departments university-wide.

T.J. Nelligan, the company’s chief executive officer, said recently that CSU’s 2005 audit merely outlined “minor mistakes,” and categorically denied any allegations of wrongdoing. No adverse action has ever been taken by CSU against the company.

While allegations surrounding NSM’s dealings with CSU were first raised in the audit four years ago, the company has been in news reports as recently as last fall for a reported financial controversy at Rutgers University.

Lawsuits over NSM’s business practices also cropped up between 2002 and last year at DePaul and St. John’s universities, a Collegian investigation found.

When the Collegian requested the CSU-sponsored audit report through open records laws, the university’s legal counsel said it couldn’t be located, but a copy of the document was leaked to the Collegian and authenticated by the private auditor, Fort Collins resident Alan Robinson.

The independent audit

The 2005 report outlines a long list of expenditures that were “inadequately documented, appeared to be unreasonable, represented budgeted rather than actual expenses, or were the result of sloppy or improper accounting practices,” according to the audit.

Financial discrepancies listed in the audit included:

An $823.20 expenditure on a flight by Nelligan that included a stop in Las Vegas that allegedly didn’t benefit CSU athletics. The expense was allowed by CSU Athletics

Two separate accounts of NSM official Mike Palisi spending contract money on hotels in Las Vegas instead of returning home to New Jersey, another expense allowed by CSU

Three separate accounts of Palisi spending contract money on hotel accommodation in Denver and Fort Collins on the same night. NSM said the credit card statement was inaccurate

Travel expenses to Los Angeles for NSM’s director of sales to attend a USC football game on the same night that there was a tournament in Denver. NSM said the director needed to represent CSU at both events

Several gas expenditures on the east coast that were accidentally charged to the account, which NSM didn’t pay back because they said the spending didn’t affect the partnership

And a $5,000 charge to the contract account for partial payment of a nearly $18,000 bill from AZ Part Rental, a Fort Collins party supply provider.

The report said “It appeared that NSM was to absorb the $5,000 expense — not charge it to the partnership.”

Despite Robinson’s concerns at the time, no official allegations were ever raised by CSU officials against NSM. In fact, CSU officials broadened NSM’s role at the university, asking its employees to handle marketing for several other departments including Alumni Relations.

“Our relationship and the results generated by Nelligan Sports Marketing have been tremendous in a short period of time, and we are optimistic both will continue to grow in the future,” said Gary Ozzello, the director for external operations in the Athletics Department, in an e-mail message.

CSU Interim President Tony Frank told student leaders last week that the department is the lowest-funded intercollegiate sports program in the Mountain West Conference.

Mark Devine, vice president of NSM, last month defended the company’s reporting practices and said he hopes to market regularly for every department at CSU in the near future to bolster finances here.

“We play whatever role they ask us to play,” he said. “Our job is to create a revenue stream. . As you know, the university is hurting.”

And Paul Kowalczyk, the athletic director who came to CSU in 2006 after NSM’s contract was renegotiated, lauded the company’s work for athletics, saying that CSU’s relationship with NSM is “very smooth.”

“These relationships can be smooth, and they can be bumpy,” Kowalczyk said. “Our relationship right now is very smooth because Mark Devine is the best in the country at what he does.”

CSU General Counsel Amy Parsons said the only report that has been filed since Robinson’s 2005 audit is a February 2006 independent review by Mercadien, P.C., a private accounting firm based out of Princeton, N.J. The report states that it was not an audit.

It reported that NSM brought in $2,030,665, which put the company over the $2 million mark and allowed it to extend its contract. Of the total amount collected, CSU received $729,616, or 36 percent, according to the report, which compiled data collected directly from NSM.

Since the renegotiation of the contract, the company has increased marketing revenue for Athletics by substantial numbers. Revenues are up from $600,000 to $929,838, or 55 percent, since 2005, Ozzello said.

A rough start

While the firm continues to represent CSU departments, however, the 2005 audit report and interviews with the auditor lay the track for a rocky start of CSU’s relationship with the company.

Robinson, the private auditor who conducted the investigation, said NSM didn’t respond to a number of inquiries during the process of the audit, which, Robinson noted in the report, brought into question the accuracy of the company’s financial reporting.

” . without original source documentation and certification of purpose and justification of expenses by the person incurring the expense the legitimacy or reasonableness is in doubt,” the report says.

Before the subsequent 2006 renegotiation of the contract, NSM had authority to draw a certain amount of contract money for company costs and was required to report the spending to the university. Remaining funds were split between the company and CSU.

But Edwin Routsinoja, controller for the CSU System during this time, said there was very little oversight allowed by the original agreement, which was drafted under then Athletic Director Jeff Hathaway.

Hathaway brought NSM to CSU in 2003 just before he left the department to Mark Driscoll, who ran it until early 2006.

Routsinoja said the university was eager to bring in a specialized marketing firm to offset dwindling university finances. Director for external operations Ozzello said marketing revenues were much smaller before 2005.

But citing “a heavy desire for this contract,” Routsinoja said CSU officials gave the company relatively free reign over contract money.

“We didn’t put very much into the contract” in the way of financial controls, he said. “They pretty much had license to charge whatever they wanted to the contract, so they were charging for expenditures that didn’t exist.”

And when Driscoll took the helm of the department, Routsinoja said, Hathaway’s contract with NSM “was kind of like an orphan child.”

“Mark Driscoll was kind of going on inertia. In other words, the thing was already rolling,” Routsinoja said, adding that NSM officials took full advantage of the thin oversight. “The potential for abuse turned into actual abuse.”

“It was kind of a sloppy job of contracting,” he added.

Nelligan defended the company against the allegations, citing the extension of the contract.

‘Abuse’ of revenue cash

When NSM began marketing for CSU, there was only a small staff here, including a director of marketing and a director of sales. So corporate officials with the company flew back and forth across the country for six months, trying “to keep CSU on its feet,” VP Devine said.

Since NSM has been here, it has brought in millions of dollars in marketing revenue that Nelligan said would not have come in otherwise. Revenue has increased by more than an average of 15 percent every year since 2005.

“The contract has been extended since (2005) for the extraordinary work we’ve done,” Nelligan said.

Under the original contract draft, NSM positions at CSU were paid out of the contract budget. At the time, the general manager duties, which Devine has taken care of since May 2006, were carried out by NSM Vice President Mike Palisi, who traveled from New Jersey to Fort Collins every week.

The actual position was never filled, but NSM gleaned $100,000 that year from the partnership fund to pay for it, according to the audit. The firm never clearly documented the full $100,000 worth of services, according to the 2005 audit report.

When asked to respond to the auditor’s inquiries about the salary money, NSM said that it is against company policy to provide specific information about salaries.

However, Nelligan told the Collegian that the $100,000 was well earned by Palisi.

Regarding the “inadequately documented” travel expenditures, Robinson said NSM claimed the expenditure records were inaccurate, but never provided him with evidence to back their claim.

“They said one thing. We said the credit card statement said something else,” Robinson said. “They couldn’t provide documentation to support their claim.”

NSM officials said they would reconstruct documentation of the travel for Robinson, but he never heard back from them, he said.

Nelligan didn’t respond to Collegian requests last month for reconstruction of those expenses.

The audit also shows that NSM had deferred $175,000 in sponsor payments from fiscal year 2004 to fiscal year 2005, padding the 2005 payments and allowing the company to reach reported revenue of $2 million that year, which automatically extended the contract an extra five years.

The re-evaluation of NSM’s contract with the university that resulted from the report was to reflect what Robinson called CSU’s “very precise accounting methods,” but company officials didn’t want a redraft, Robinson said.

“CSU required very precise accounting methods,” he said. “This audit imposed those standards on Nelligan, so they were really reluctant.”

The new contract allocates an undisclosed percentage of revenue money to the company, which it can use as it sees fit. The only requirement is that NSM bring in a certain amount of revenue, according to a copy of the contract obtained by the Collegian.

But it was unclear how much revenue is required because, under NSM’s direction, CSU heavily redacted the document when the Collegian requested it. Every monetary figure in the contract was blacked out when the Collegian received a copy.

Kowalczyk said the reason for redacting the figures is to protect to the company from competing bidders.

But Steve Zansberg, a Denver-based attorney for the Colorado Press Association and state news organizations, including the Collegian, said all contract terms between public institutions and private companies are public record.

“Outside of certain unique and extremely limited circumstances, a public institution has no business redacting a contract with a private company,” he said.

A redraft tightens the contract

After the 2005 audit report was filed, former CSU President Larry Penley mandated a redraft of NSM’s contract that effectively gave the company completely free, and unabated, usage of a portion of revenue.

Devine, the vice president who oversees operations at CSU, said in an interview last month that NSM is “a completely transparent company” that discloses all revenue information to the university. NSM is subject to annual audits that review the company’s revenues, and expenditures are not overseen by the university.

All audits are “from a revenue standpoint,” Devine said. “All expenses are ours.”

Current Athletic Director Kowalczyk provided a January 2006 audit report that said every suggestion in Robinson’s audit has been implemented.

The changes in NSM’s contract were drafted about a year before several key auditors left CSU under conflicts with Penley about the financial philosophy of his administration, which pushed tens of millions of dollars of tax and tuition money that could have gone to academics into swelling top-level administrative budgets.

A secret group of “about 12” concerned faculty, staff and community members sent an anonymous letter of grievance to the CSU System Board of Governors late last semester that requested an investigation into Penley’s mode of operation, including the university’s relationship with NSM.

The letter said the four auditors — three of whom signed confidentiality agreements and took large monetary incentives not to talk about any disagreement they may have had with the university — were all skeptics of NSM’s financial reporting

Former System Controller Routsinoja was the only one of the four who didn’t sign an agreement.

The other three, the former business manager for the Athletics Department, the former chief auditor for the System and the former vice president for Administrative Services, declined to talk to the Collegian during an eight-month investigation into Penley’s funding shifts.

Development Editor Aaron Hedge can be reached at news@collegian.com.

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