REPORT OF INTERNAL AUDIT

Transcription

1 REPORT OF INTERNAL AUDIT PRESENTED TO AUDIT/TASK: #04-02, Sole Source Vendors AUDIT CLIENT: Purchasing / Cross-Functional AUDIT DATE: February 2, 2004 REPORT DATE: April 13, 2004 AUDITOR: Steven R. Rehn CIA, CBA, CFSA APPROVAL: Steven C. Purvis CPA INTRODUCTION The Office of Internal Audit undertook a review of recent purchasing activities specifically with respect to Sole Source Vendors in accordance with Boise Municipal Code, Title 1, Chapter 9. Sole Source purchasing activities may involve the department or division originating the purchase request, the City s Purchasing Agent, and / or the Mayor and City Council, depending on the amount of expenditure being contemplated. As such, it is cross-functional in nature, with its sole significant control point residing in the City s Purchasing Department. Generally, municipalities are required to follow either formal or informal bidding procedures in their procurement activities. Under the governing code and statute, formal bidding must occur at a level where expenditures will exceed $25,000. Under $25,000 an informal bidding process may be followed that, though less rigid, still requires a minimum of three quotes. Under certain circumstances, cities may not be required to follow normal bidding procedures. They may, instead, deal directly with a single vendor when that vendor is considered to be a sole source for the goods or services subject to

2 acquisition. Sole Source procurement activities are specifically allowed under both Idaho State Statutes and Boise City Code. This method of procurement may be utilized in those situations where one or more of the following conditions exist: There is an emergency condition; or there is an imminent threat to life, the public welfare, or property Compatibility of equipment, components, or services is of paramount importance A sole supplier s product is needed for purposes of trial or testing Mass-produced, or copyrighted materials such as movies, books, etc are being acquired No functional equivalent exists for the product or service being acquired Service is being acquired from a public utility Trademarked goods or other merchandise are being acquired for resale Competitive solicitation would be impractical, disadvantageous, or otherwise unreasonable given the circumstances Even though normal bidding processes may not be followed, there are established requirements that must be met in these purchasing situations. A Sole Source situation must be justified, and it must be declared. The purchase may be subject to public notice requirements, and is always subject to approval at the appropriate level. SCOPE AND METHODOLOGIES Based on the requirements associated with these types of purchases, specific objectives were established for the audit that included the following: Ensure that the requesting department/division has made an appropriate determination as to the available source(s) of goods or services being acquired Ensure that Sole Source declarations, approvals, and prerequisite requirements are observed, and are in compliance with governing laws, rules, and regulations Ensure that purchasing activities are administered in a sound manner, and that City resources are expended properly and wisely In order to properly gauge current practice, the review included all identifiable Sole Source acquisitions that occurred between October 1, 2002 and February 14, The audit tests performed consisted of interviews, review of transaction-related file documentation, and detailed attribute testing of both hardcopy and computerized purchasing records. Where definitive populations were available, and it was reasonable 2

3 to do so, statistical sampling techniques were utilized that provided for a minimum 90% level of confidence, and a 10% or better precision level. During the audit, a total of 287 individual Purchase Orders were reviewed at various depths, with detailed testing procedures applied to a sample of 41 of those Purchase Orders. Testing, interviews and observations were deemed to be sufficient to provide adequate support for the audit findings noted. The audit was conducted in accordance with Generally Accepted Government Auditing Standards, and with the International Standards for the Professional Practice of Internal Auditing. EVALUATION AND COMMENTS Based on the work performed, it appears that activities surrounding Sole Source procurement transactions are generally Satisfactory. Detailed testing and review did not result in the identification of patterns or widespread practices that ran counter to governing statute and code, or established City Purchasing Policy. Deficiencies that were discovered tended to be of an isolated nature, and were specific to a particular acquisition type or vendor. Refer to the FINDINGS AND RECOMMENDATIONS section for additional details. Internal Audit noted that a certain amount of change has occurred within the Purchasing function that should have a positive impact on procurement activities. A new Purchasing Agent was hired recently. The City s Purchasing Manual, historically maintained in hardcopy form, has been updated and made available to all City staff in an electronic format - which itself will be considerably easier to maintain in a current status. Also, consideration is being given to various measures that would streamline bidding processes, and thereby facilitate the acquisition process. Generally speaking, these types of changes are viewed as representing needed enhancements to the control environment surrounding the purchasing function. Additionally, the Purchasing Department is uniquely positioned to serve as a key control point in virtually all material procurement transactions that may occur. Internal Audit concurs with those changes already implemented, and believes that the pursuit of additional control enhancements in the Purchasing area is advisable. As the City s specialists in purchasing matters, the department is uniquely positioned to provide other City departments with valuable information and insights with respect to fulfilling legal requirements. And, as a key control point, Purchasing is in a position to monitor material purchasing transactions, and to intervene where necessary in order to ensure compliance with all applicable laws, rules, and regulations. 3

4 One area that appears to be deserving of additional management attention pertains to the City s Code sections relative to purchasing, Title I, Chapter 11; and to the City s Purchasing Manual. Idaho State Statute establishes the guidelines municipalities must adhere to with respect to procurement activities. Internal Audit noted that language contained within Boise City s Code, and within the Purchasing Manual is not always properly aligned with that contained within the governing Idaho Statute. Failure to include all pertinent statutory requirements within both the Code and the Manual could result in unwitting violations of the statute based solely on a lack of knowledge. For example, consulting the Code or the Manual as they currently exist would not provide field managers with a complete description of all requirements associated with Sole Source Procurements neither the Code, nor the Manual contain references to publication requirements associated with Sole Source procurements in excess of $25,000. The pursuit and implementation of enhancements in the control environment surrounding Purchasing activities will serve to not only protect the City s resources, but also to help ensure the most efficient use of those resources as well. 4

5 FINDINGS AND RECOMMENDATIONS 1. FINDING: SOLE SOURCE JUSTIFICATION Internal Audit tested various transactions to ensure that Sole Source declarations were appropriate for the various acquisitions being contemplated. Essentially, no functional equivalent for the goods/services in question should have been available in the Boise vicinity; or other extenuating circumstances should have been present that prevented the departments / divisions from securing multiple quotes or bids. Two instances were noted where designation of vendors as being the sole source for the goods or services acquired did not appear to be reasonable and proper. Purchase Order #7129 was issued by the Library on 8/15/03 in the amount of $2,646.00, and was designated as a Sole Source procurement. The service being acquired was annual maintenance on a copier. Audit inquiries through the manufacturer indicated there were three authorized dealers in the Boise City area that could potentially provide service and maintenance on the unit. The vendor that was unilaterally chosen by the department does not appear to be the sole source for this particular service within the vicinity. Purchase Order #7929 was issued by the Police Department on 2/3/04 for repair of collision damage to a patrol car. Total cost of the repair in question was $3,794.00, with the service being designated as a Sole Source procurement. Review of local business listings in the Boise telephone book indicated this is a service that is widely available in the area the telephone book lists approximately 48 vendors within the Boise / Garden City area. RECOMMENDATION: Internal Audit recommends that departments / divisions originating Sole Source purchase orders receive further instruction and reinforcement with respect to the reasoning behind, and use of this particular designation. This action could be easily accomplished through written communication from the City s Purchasing Department. Additional scrutiny on the part of Purchasing when Sole Source procurement requests are received would also enhance the controls surrounding these types of activities. 5

6 MANAGEMENT RESPONSE: Purchase Order #7129 Library Response Regarding the Library s identification of a sole source vendor for office machine maintenance, management and staff of the Library have been unable to locate information that would support the original sole source declaration. Further, the staff member that originally made the determination has terminated employment with the Library, further complicating staff s ability to document the determination. Library management has determined that at least one other vendor in the Boise vicinity is qualified to provide this service. Accordingly, management will obtain competitive quotes at the next annual contract cycle. Management has also instructed appropriate members of the library staff to monitor maintenance contracts for all vendors and equipment more closely going forward. Staff will revise procurement procedures for such contracts to require a second review by a senior staff member whenever a sole source procurement declaration is sought. Management will also request additional assistance and instruction regarding the sole source procurement process. Purchasing Division Response 1.0 The Vendor for this copier is IKON and Danka (another Canon recognized dealer) has been issued a City Purchase Order for copier maintenance supporting a need to reinforce Sole Source Vendor applications. Also, the need to address consolidation of services for the City as a whole is reinforced through research confirming the Internal Audit Finding. 6

7 MANAGEMENT RESPONSE: Purchase Order #7929 Police Department Response The Police Department agrees with the audit findings in regards to the use of sole source as justification of purchase orders to Harold s Auto Body. However, Police would like it noted that the use of sole source to award the multiple repair jobs was recommended and approved by Boise City Purchasing during the fiscal years audited. We realize the nature of this audit is not to fix blame, but rather ensure appropriate interpretation of purchasing policy. We consider the Purchasing Department to be the City resource for interpreting purchasing policy and followed their recommendation. 7

8 2. FINDING: Testing for Sole Source declarations also resulted in the discovery of procurement activities that appear to have been of a size and nature as to require formal bidding, but where no such bidding occurred. Boise City Code, Title 1, Chapter 11 specifies the following: To determine the appropriate bid method for accomplishing the expenditure, the period over which funds are to be expended shall be calculated as either one year, or the exact time period, as specified by the bid documents The Code also specifies: all contemplated expenditures with an estimated cost in excess of the amount defined in State Code Section ($25,000) shall be awarded through formal, written bid procedures Purchase Order #7929 was issued by the Police Department on 2/3/04 for repair of collision damage to a patrol car, as noted at Finding #1, above. Further inquiry and analysis revealed the following: (1)The City (Police and City Shop primarily) has been utilizing one particular body shop as a de facto, contracted Sole Source for at least the last two fiscal years; (2)Working through the City s Risk Management department, estimates are obtained from an independent service; (3)The vendor is contacted and, if agreeable to the estimated amount, is awarded the work; and, (4)Aggregate expenditures over the last two fiscal years with this particular vendor have been significant totaling $117, for FY 02 and FY 03. Also, FY 04 expenditures to date have exceeded the $25,000 annual threshold, totaling $30, as of February 14, Under current practice goods and services valued in excess of $25,000 annually have effectively been acquired without oversight and approval by the Mayor and City Council, as required by both State Statute and City Code. RECOMMENDATION: Internal Audit recommends that the City pursue a formal bidding process with respect to auto-body / collision repair services particularly in light of expenditure levels recently experienced. Following a formal bidding process for this service would fulfill the stated purpose of the City s Code section governing purchasing activities: (the) purposes and policies of this code are..to ensure fair and equitable treatment of all persons who deal with the procurement system of Boise City (and) to foster effective broad-based competition within the free enterprise system 8

9 MANAGEMENT RESPONSE: Police Department Response The Police Department agrees with the audit findings in regards to the use of sole source as justification of purchase orders to Harold s Auto Body. However, Police would like it noted that the use of sole source to award the multiple repair jobs was recommended and approved by Boise City Purchasing during the fiscal years audited. We realize the nature of this audit is not to fix blame, but rather ensure appropriate interpretation of purchasing policy. We consider the Purchasing Department to be the City resource for interpreting purchasing policy and followed their recommendation. Purchasing Division Response 1.0 State Statute section L. h. includes where competitive solicitation is impractical, disadvantageous or unreasonable under the circumstances. The Audit Finding states designation of the vendor as the sole source for the goods or services acquired did not appear to be reasonable and proper. This opinion does not appear to permit the use of section h stated above. The City may find that competitive solicitation is disadvantageous to the economic outcome in some circumstances so we need to preserve the ability to proceed when those opportunities exist. The documentation to proceed with any such disadvantageous designation needs to be precise and included with the files for these purchases. 2.0 The use of Harold s Auto Body evolved from 1) bidding each event requiring body repair, 2) using Idaho Claims to determine a reasonable repair for each event, 3) experiencing quality issues with other body repair facilities, and 4) loss of police equipment when the cars are under the control of other body repair facilities. The evolution of exclusive use of Harold s was not well documented and therefore not defendable. The use of Purchasing professionals in a centralized (consolidation of multiple department needs or annual services) application would assist in providing proper documentation and ensuring processes are maintained. 3.0 State Statute section C. states that estimated expenditures over $25,000 need to go through a formal bid. The estimated or anticipated expenditures for any one Vendor will need to be coordinated through Purchasing and will need to be analyzed with information from the Purchasing 9

10 software through the payments made to individual Vendors, specifically referred to as the Vendor History File. The individual departments should not be expected to research these opportunities but will benefit from any cost reductions the City can obtain by performing these annual reviews and consolidating the purchase through competitive bidding were appropriate. The Purchasing Division will address supporting these additional efforts, the anticipated cost savings and code compliance will support any additional staff requirements. 4.0 Formal bidding for auto body repairs has been initiated with the assistance from other departments to provide adequate technical specifications for auto body repair and related services such as pickup and delivery of automobiles by the repair provider. 10

11 3. FINDING: PUBLICATION REQUIREMENTS Internal Audit tested a number of transactions to ensure that various legal requirements had been observed with respect to the acquisitions. One of the requirements tested for pertained to compliance with publication notices. Under Idaho State Statute L., the City is required to publish notice of a Sole Source Procurement a minimum of 10 working days prior to the award of a Sole Source Procurement contract. Audit identified a total of nine transactions within a population of FY 03 and FY 04 Sole Source Procurements that qualified for publication. In eight of the nine qualifying transactions, publication requirements were met. In one, they were not. Purchase Order #7771 was issued as a Sole Source Procurement for Parks and Recreation (Warm Springs Golf Course), and provided for the acquisition of various Titleist products, golf balls, and Acushnet brand golfing products for purposes of resale in the amount of $101, Publication in The Idaho Statesman occurred on December 31, The first payment voucher was processed under the Purchase Order on January 7, 2004 in the amount of $2, a total of four (4) working days subsequent to publication. Evidence indicates the contract was essentially awarded in advance of the required 10- working-day limit, which is a violation of the State Statute referenced above. RECOMMENDATION: Controls should be strengthened in order to ensure that all legal requirements associated with Sole Source Procurements are strictly observed. Purchasing procedures should ensure that approvals are withheld until a minimum of 10 working days has elapsed subsequent to publication. The City is obligated to ensure that all interested parties / vendors are treated fairly. 11

12 MANAGEMENT RESPONSE: Purchasing Division Response 1.0 State Statute requires publication of notice of a sole source procurement at least ten (10) working days prior to the award. The Purchasing Division will not approve any Purchase Orders prior to the ten day requirement and will instruct Department personnel not to make commitments for purchases or contracts in compliance with the publication requirements. 2.0 All State Statutes take precedence of the Municipal Code, therefore the Code can be more stringent than the Statute but cannot weaken the intent of the Statute. While efforts have been made to make the Code and the Statute complimentary, the exact wording may not be exact in all cases and will be a constant review requirement to maintain the Code as well as the Purchasing Manual in compliance with the Statutes. As the Statutes are modified, the Code and Manual both need to be kept in compliance. MANAGEMENT PARTICIPANTS Bill Albert, Purchasing Division Manager Lt. Jim Tibbs, Acting Chief of Police Boise City Police Kevin Booe, Interim Library Director Patricia Peterson, Administrative Division Commander Boise City Police Dennis Falconer, Lead Mechanic City Shop Jack Taddicken, Police Fleet Specialist 12