INTERNAL AUDIT DIVISION CLERK OF THE CIRCUIT COURT

Transcription

1 INTERNAL AUDIT DIVISION CLERK OF THE CIRCUIT COURT INTERNAL AUDIT DIVISION CLERK OF THE CIRCUIT COURT AUDIT OF PURCHASING DEPARTMENT SOLE SOURCE CONTRACT PROCESS Ken Burke, CPA* Ex Officio County Auditor Robert W. Melton, CPA*, CIA, CFE Chief Deputy Director Audit Team Scott Stees, CIA, CISA, CFE, CGFO, Internal Audit Manager Deborah Cross-McCray, CIA, Internal Auditor II NOVEMBER 8, 2007 REPORT NO *Regulated by the State of Florida,

2 November 8, 2007 The Honorable Chairman and Members of the Board of County Commissioners We have conducted an audit of the Purchasing Department Sole Source Contract Process. Our audit objectives were to determine (1) compliance with laws, rules, regulations, policies and procedures for sole source purchases; (2) that internal controls over sole source procurements are followed; and (3) whether procurements identified as sole source are truly sole source. Except as noted in our report, we conclude that the Purchasing Department was generally in compliance with applicable laws, rules, regulations and policies except in documenting the research for justifying sole source purchases. Internal controls over sole source procurements were adequate, except where contract awards were late. The procurements designated as sole source were determined to be truly sole source, except for instances where there was no written justification explaining why goods could not be substituted or why other providers could not be used. Opportunities for improvement are presented in this report. We appreciate the cooperation shown by the staff of the Purchasing Department during the course of this review. Respectfully Submitted, Approved: Robert W. Melton, CPA*, CIA, CFE Chief Deputy Director Ken Burke, CPA* Ex Officio County Auditor *Regulated by the State of Florida

3 TABLE OF CONTENTS PAGE INTRODUCTION 4 OPPORTUNITIES FOR IMPROVEMENT 8 1. Departments Are Entering Into Sole Source Agreements Above Their Authorized Threshold And Are Receiving Services Prior To Contract Approval. 2. Purchasing And Departments Are Not Adequately Documenting Sole Source Decisions. 3. Conflict Of Interest Controls Could Be Strengthened Over Sole Source Procurements

4 INTRODUCTION Synopsis During the 15 month audit period, Pinellas County procured 183 purchases totaling $7,099,326 that were classified as sole source purchases. Internal controls were generally followed including compliance with laws, rules, policies and procedures. In 16% of the purchases reviewed, Pinellas County was receiving services 30 to 176 days before the contract was actually awarded. The Purchasing Department does little written documentation of their research to determine whether any other providers exist before awarding the sole source contract. In 23% of the purchases reviewed, required notification from the department to justify the sole source purchase was not found in the procurement file. Scope and Methodology We have conducted an audit of the Purchasing Department Sole Source Contract Process under the Board of County Commissioners. The audit covered a review of sole source procurements and expenditures of the Board of County Commissioners. The objectives of our audit were to: Determine compliance with laws, rules, regulations, policies and procedures for sole source purchases. Determine that internal controls over sole source procurements are followed. Determine whether procurements identified as sole source are truly sole source. To meet these objectives, we reviewed laws, rules, policies and procedures for sole source procurements. We reviewed procurement documentation to determine legal and policy compliance. We also conducted independent evaluations of sole source vendors and performed such other procedures as necessary. Page 4

5 Introduction Audit of Purchasing-Sole Source Contract Purchase Our audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing and, accordingly, included such tests of records and other auditing procedures as we considered necessary in the circumstances. The audit period was October 1, 2005 through January 31, However, transactions and processes reviewed were not limited by the audit period. Overall Conclusion The Purchasing Department was generally in compliance with applicable laws, rules, regulations and policies except in documenting the research for justifying sole source purchases. Internal controls over sole source procurements were adequate, except where contract awards were late. Internal controls could be strengthened by requiring departments to attest to no conflict of interest for sole source procurements. The procurements designated as sole source were determined to be truly sole source, except for instances where there was no written justification explaining why goods could not be substituted or why other providers could not be used. Background The Pinellas County Purchasing Ordinance Section describes the goal of Purchasing as follows: "The purpose of this division is to provide for the fair and equitable treatment of all persons involved in public purchasing by the county, to maximize the purchasing value of public funds in procurement, and to provide safeguards for maintaining a procurement system of quality and integrity. The Pinellas County Purchase Ordinance is modeled after the American Bar Association s Model Procurement Code. It includes elements from the Florida Statutes, Chapter 287, Procurement of Personal Property and Services. Purchasing Ordinance Section 2-180(a)(1) defines: A sole source purchase exists when research has determined there is only one potential provider for an item. The Pinellas County Purchasing Manual sets out special requirements for notification and advertisement for sole source procurements above $50,000. The counterpart to the County s sole source purchase is the State s exceptional purchase which includes purchases from a singe source as defined in Florida Statutes In the audit period, there were 183 sole source contracts awarded totaling $7,099,326. The following identifies areas having the greatest activity of sole source procurements in our audit period as Information Technology, Information Systems and Utilities. Page 5

6 Introduction Audit of Purchasing-Sole Source Contract Purchase Sole Source Procurements Department Name # Items Total Purchases In our review, we also identified that most sole source purchases were for repair and maintenance, software support, and proprietary products and services from the manufacturer. Although software represents a significant portion of sole source purchases, there are other sizeable purchases. The following table lists sole source purchases greater than $100,000 which demonstrate that there can be other large sole source expenditures. CONTRACT SS Information Technology 40 $ 2,261,802 Utilities Public Works 29 $ 1,024,462 Engineering 6 $ 891,360 Information Systems 36 $ 844,829 EMS/Fire Administration 5 $ 553,913 Communications 4 $ 322,817 Conventions and Visitor s Bureau 6 $ 214,934 General Services 3 $ 153,970 Animal Services 7 $ 146,794 All Other Departments 47 $ 684,445 Total 183 $ 7,099,326 Sole Source Contracts >$100,000 Excluding Software TITLE BUDGET AMOUNT REQUESTING DEPARTMENT MOSQUITO CONTROL PRODUCTS $ 560,000 PUBLIC WORKS SS SS EKG/DEFIBRILLATOR MAINTENANCE 464,572 SEWER INSPECTION EQUIPMENT REPLACEMENT PARTS AND REPAIRS 250,000 EMS/FIRE ADMINISTRATION UTILITIES DEPARTMENT SS SS COMMUNICATIONS SYSTEMS - TELEPHONE SWITCH MAINTENANCE 249,915 COMMUNICATIONS REPAIR AND UPGRADE SERVICES - CELLDOOR AND GATES - DETENTION CENTER 123,000 GENERAL SERVICES Page 6

7 OPPORTUNITIES FOR IMPROVEMENT Our audit disclosed certain policies, procedures and practices that could be improved. Our audit was neither designed nor intended to be a detailed study of every relevant system, procedure or transaction. Accordingly, the Opportunities for Improvement presented in this report may not be all-inclusive of areas where improvement may be needed. 1. Departments Are Entering Into Sole Source Agreements Above Their Authorized Threshold And Are Receiving Services Prior To Contract Approval. We found that 16% of the sole source purchases were entered into by the departments months before requisitions were sent to Purchasing. Departments generally do not prepare a purchase requisition until they receive the first invoice to be paid. All contracts were well above the department s $2,000 threshold limit. In our review, we examined 29 of 183 (or 16%) of the sole source purchases totaling $1,407,576 where the contract start date for service began 30 to 176 days before the contract award date, making them significantly late. The Purchasing Manual requires the originating department notify the Director of Purchasing, in writing, before entering into any sole source purchase exceeding the departmental threshold. The Purchasing Director must make the determination that the needed product or service is available from only one known source. The sole source purchase (except for proprietary software purchases, in most cases) at or above the bid threshold of $50,000 must be publicly advertised. The procurement is subject to approval by the Purchasing Director, County Administrator or Board of County Commissioners, depending on the dollar amount. The start date for the purchase order should always be after the procurement is approved and awarded to the vendor. We reviewed procurements that were awarded more than 30 days after the purchase order start date. The number of days late is defined as the time from the start date to the contract award date. In the following table, we summarize the type of sole source services received prior to the contract award date and the number of days significantly late. Work should not be performed before the contract is awarded. Page 7

8 TYPE OF PURCHASE Brochure Distributions Contracts Repair and Maintenance Contracts *Software Related Contracts # OF PURCHASES TOTAL AMOUNT TOTAL % SIGNIFICANTLY LATE 6 $ 130, % 47 to 52 days 3 $ 48, % 33 to 68 days 20 $ 1,228, % 32 to 176 days TOTAL 29 $ 1,407, % *Software related contracts include: software maintenance, upgrades, support and leasing. Purchasing uses the Contract Action Report to follow up with departments several months before the contract expiration date. This follow up is for all contracts, including sole source purchases. Sole source purchases that are made each year, such as software, are not flagged by Purchasing for continuing follow up with the originating departments to ensure timely submission of purchase requisitions for uninterrupted service. also do not take the initiative to submit a purchase requisition to ensure that a new contract is in place for continuous service. This situation usually results in departments waiting to receive a renewal notice or invoice from the vendor before taking any action to pay for the services they have been receiving. In addition, receiving goods and services from vendors prior to approval and award of the procurement raises several concerns: The departments Departments sometimes wait for an invoice rather than initiate action for a new contract. A. At the originating department s level, purchasing authority is limited to a $2,000 threshold. Acceptance of goods and services above the department s threshold obligates the County to pay for services received even without proper authorization. Additional time allowed on an expiring contract would also constitute an unauthorized contract extension. Therefore, accepting goods and services prior to the contract award would Additional work after the end of a contract is an unauthorized extension. also violate contract extension procedures, including the requirement that the contractor's performance be reviewed before extending contract services. In our analysis, 91% of the purchases consisted of software and maintenance agreements, and 87% of these purchases were for software related contracts. Maintenance agreements attached to new products or services are not adequately monitored by originating departments to ensure timely processing of renewed or Page 8

9 new contracts. The remaining purchases reviewed represent 9% of the purchases in our sample consisting of six contracts for brochure distribution. Monitoring contract expiration dates would allow persons involved in the procurement process adequate time to research potential providers. B. We found 27 of 29 (93%) of the contracts reviewed did not include purchasing discounts. The receipt of goods and services in advance of determining the price affects the County s bargaining position to get discounts or favorable terms and conditions. It also does not permit sufficient time to research other competing providers. Purchasing Manual procedures indicate: "In the event commodities, materials, equipment and/or services are available from only one manufacturer or provider (sole source) or reasonable and practicable (non-competitive) source and the cost exceeds two thousand dollars ($2,000), the Director of Purchasing or designee, upon approval of the County Administrator, shall solicit a quotation of cost from the sole source or noncompetitive source and negotiate terms and conditions with the vendor and department director (or designee) as needed." If the services for the contract period have already started, the vendor has no significant incentive to offer a discount. In the case where it is a sole source provider, there is even less chance that the quotation of cost would include any discounts. Purchasing staff interviewed indicated that most maintenance contracts are sole source; therefore, discounts are not normally pursued. Monitoring contract expirations would allow Purchasing time to negotiate terms and conditions of contracts and to pursue discounts. C. Services received prior to the contract award date may expose the County to potential liability. We found that purchase order forms contain the statement: The vendor shall maintain insurance acceptable to the County in full force and effect throughout the term of the purchase order," under the terms and conditions. In essence, if a liability issue arises prior to the contract award date, the terms and conditions of the purchase order would not protect the County s interest. Purchasing staff indicated that liability issues related to maintenance agreements seldom occur; therefore, management considers this situation low risk. Services received prior to contract award is a liability risk. Purchasing could be more proactive by monitoring expiring sole source purchases for renewals. Monitoring could include requiring the department to have the vendor make contact or send expiration notices to the department prior to renewal. Purchasing should also be reporting to management all departments that do not timely requisition goods and services. The report should highlight to Page 9

10 management departments that allow contracts for software and maintenance agreements to expire before submitting a requisition. Policy exceptions should be disclosed with the purchase request to the BCC for corrective action. In addition, timely requisitions would permit adequate research for additional suppliers, negotiation of terms and conditions including purchasing discounts, and insuring vendor liability coverage. We Recommend management: A. Restrict departments from contracting above their authorized level. Corrective action should be taken when appropriate. B. Attempt to negotiate purchase discounts on all contracts. C. Require department heads to cease receiving services prior to an approved contract, unless emergency justification exists pursuant to the County s emergency purchasing rules. Corrective action should be taken where appropriate. Management Response: The audit report indicates that ninety-one percent (91%) of sole source purchases are for computer software maintenance agreement renewals. Unfortunately, the software industry is known for its lack of timeliness in the delivery of renewal agreements. These agreements frequently contain terms or conditions that require the involvement of the County Attorney s Office. These negotiations can lead to further delays. In the interim, the County continues to utilize the software as our business relies upon it and we are obligated to continue to serve the public. This interim software use is a common practice in many jurisdictions and the County Attorney has opined that the practice is legal. The Purchasing Department is responsible for determining the method of procurement, not the requesting department. Research conducted by the Purchasing Department determines whether an item or service is sole source. Section of County Code does not require a justification letter from the requesting department for sole source purchases. However, the Code does require this documentation for non-competitive procurements. The internal procedures were ambiguous on this point and may have led the Internal Audit staff to conclude that documentation was required for both types of transactions. Thank you for pointing out the need to clarify the procedures and harmonize them with the Code. Page 10

11 2. Purchasing And Departments Are Not Adequately Documenting Sole Source Decisions. Purchasing staff do not document any research performed, and departments do not always provide written justifications for the Purchasing Director to make a determination that the procurement is sole source. As previously noted, Purchasing does publicly advertise for other vendors at or above the $50,000 bid threshold. The Purchasing Manual does not provide any guidelines for research or require documentation for research tools used, and how to record the results obtained. A uniform system of procurement promotes effective and ethical procurement of commodities and contractual Sole source purchases do not involve competition. services. Documentation of the actions taken is an important means of curbing any appearance of improprieties and establishes public confidence in the procurement process. Sole source purchases are an exception to standard competitive quotations or bidding, and as such, require additional efforts. Research to locate other providers is part of the detailed justification in a department decision to recommend a sole source provider. The justification should set forth the reasons for such a determination and include any supporting material. Uniform documentation should be maintained to reduce the appearance and opportunity for favoritism and inspire public confidence. According to Pinellas County Code, Section 2-180, a sole purchase exists when research has determined that there is only one potential provider for a product or service. A. Purchasing and the originating departments are not documenting research to ascertain if other providers exist on sole source procurements. According to the Purchasing Director, buyers' research is Research to ensure limited to the review of the selected providers are truly sole source provider s website to sole source is not determine if any other suppliers exist. always documented. Management considers documenting research to be very time consuming; therefore, they do not recommend performing vendor research below the $50,000 threshold. The Purchasing Manual, however, does require research for all purchases above the $2,000 threshold. The $2,000 threshold is in line with other counties, such as Hillsborough at $5,000, Sarasota at $3,000, Orange at $1,500 and Manatee at $1,000. In our review of procurement files, we found that some effort was made to solicit other providers through newspaper advertisement and the Purchasing website. Aside from advertising, 80% of the files reviewed had little or no documentation of any research effort done to find other providers. Since there is no Page 11

12 documentation of the research, the Purchasing Director or designee operate under the assumption that research was adequately and actually performed to determine no other providers exist. The Purchasing Director has suggested several research tools for buyers to use for specific types of purchases, but there is no documentation showing what research the buyer actually performed. We ascertained through discussion with management that the primary research tools are: National Institute of Government Purchasing (NIGP) commodity codes system, their Purchasing System, and external resources including ThomasNet, Online Yellow Pages, Florida Department of Management Services, networking with other providers, and contacts in other government entities. The buyers research should provide assurance that the product is a component or replacement part for which there is no commercially available substitute and can be purchased only from the manufacturer, sole distributor or provider. Purchasing needs a simplified method of documenting research in determining that no substitutes or other providers exist. B. Section 3.7 of the Purchasing The Purchasing Director Manual requires departments to must determine that the notify the Director of Purchasing product or service is in writing of any sole source only available from one procurement above the department s source. $2,000 purchasing threshold. The Purchasing Director must determine that the product or service is indeed available from only one source. In the written notification from the department there should be an explanation justifying why only this product or service from this vendor should be purchased. A request for proprietary items does not justify a sole source purchase, if there is more than one potential bidder for the item. Departments generally send notification by letter or . In our review, there were 7 of 30, or 23%, procurement files missing notification letters. The following is a summary of those purchases. Contract # Vendor Purchase Amount Amount Exceeding Department $2,000 Threshold Purchase Description Department ss Florida Sun Coast Tourism, Inc. $43, $41, Distribution of Flyers P.C. Conventions and Visitor s Bureau Page 12

13 Contract # Vendor Purchase Amount Amount Exceeding Department $2,000 Threshold Purchase Description Department ss JWC Environmenta $40, $38, Repair and Parts l Various ss ITT Flygt Corp. $37, $35, Flygt Pump P.C. Utilities/South Cross WWTP ss MGE UPS Systems $18, $16, MGE UPS System Various ss ITT Flygt Corp. $16, $14, Flygt Dewatering Pump P.C. Utilities/South Cross WWTP ss ITT Flygt Corp. $14, $12, Wemco Pump P.C. Utilities/South Cross WWTP ss Gardner Denver Blower Division $11, $9, Transducer P.C. Utilities/South Cross WWTP TOTAL $181, Purchasing procedures are not consistently followed for documenting decisions in awarding sole source contracts. In the table above, we identified one sole source purchase from Florida Sun Coast Tourism for distribution of flyers where there are other service providers. We observed that the Convention and Visitor s Bureau submitted several sole source requests for the same service using various providers. These requests were submitted to the Purchasing Department on the same date requesting flyer distribution for designated geographical locations. The Convention and Visitor s Bureau did not provide written documentation to justify this purchase as a sole source. The Purchasing Director recalled from previous years that certain restrictions were required for flyer distribution. Because there was no justification received from the department, it was assumed Page 13

14 by Purchasing that these restrictions were still in effect to prevent competition between the different providers. This request was submitted by the Convention and Visitor s Bureau without the required documentation; however, it was awarded by the Purchasing Department. In each case, notification/justification letters were not obtained as a condition of sole source awards. The Director of Purchasing indicated that the receipt of purchase requisitions is acceptable as a substitute for a notification letter on sole source purchases. In our observation, notification letters also include the department's justification and reasoning behind the sole source purchase. If the purchase requisition is sole source, it should be treated as a no substitute and require written justification be provided with the requisition. The justification should be reviewed by Purchasing and verified independently by their research. Allowing departments to avoid justification of sole source purchases weakens controls that would ensure competitive procurement practices are adequately followed. We Recommend management document how they determined that the purchase qualified as a sole source. The determination should include the buyer s research for other vendors, and substitute products based upon reasons given in the department s justification. We also recommend: A. The research a buyer performs needs to be documented along with their decision as to why this purchase is sole source. Research steps could be done by checklists or codes for efficiency. B. The requirements for an acceptable justification should be communicated to the departments. Management Response: We are pleased that Internal Audit found the items reviewed to be legitimate sole source purchases. The Purchasing Department documents sole source purchases and has a very specific procedure for formal purchases above the bid threshold of $50,000. In the abundance of caution, these purchases are published in a newspaper of general circulation and advertised on the department s website to determine if other potential vendors might exist. Purchases below the bid threshold of $50,000 (informal purchases) are researched by staff for potential vendors using internet sources such as the Thomas Register, Yellow Pages, and various manufacturer and supplier sites. We agree that the process for documenting these informal purchases can be improved and welcome suggestions from Internal Audit. Page 14

15 3. Conflict Of Interest Controls Could Be Strengthened Over Sole Source Procurements. The Purchasing Manual has a policy on Conflict of Interest, but it does not have an effective practice for departments. In sole source purchases, departments can determine product/service specifications to such a degree that only a single vendor can be selected for the purchase. This increases risk that a conflict of interest situation could occur at the Sole source purchases are a higher risk for conflicts of interest. department level. Department personnel may not understand how the ethical procurement standards apply to them since they are not in Purchasing. The Florida Statutes have an attestation requirement for conflict of interest that is not in our Purchasing Ordinance or Purchasing Manual. Florida Statute (20) provides for department personnel to attest that they have no conflict of interest for single source purchases above a certain dollar limit. The statute requires individuals taking part in the development or selection of criterion for the evaluation and award process, shall attest in writing that they are independent of and have "no conflict of interest" with the entities evaluated. Requiring attestation of "no conflict of interest" would provide a way to reinforce ethical standards at the department level. The Purchasing Manual describes certain ethical procurement standards and in turn also incorporates by reference the State Code of Ethics for Public Officers and Employees, Florida Statutes The prohibitions or conflicts mentioned include acceptance of any gift or benefit of any nature, and directly or indirectly contracting services from business entities that involve relatives. The policy summarily states that: The avoidance of actual or apparent conflicts of interest is a prime requisite to the efficient and sound operation of government and maintenance of the public trust. This policy goes on to also include the National Institute of Governmental Purchasing (NIGP) guidelines for Ethical Procurement. Purchasing personnel are very familiar and understand procurement ethics stated in their policy manual. Personnel in outside departments may not be aware that procurement ethics apply to them when they are working with a vendor. Asking individuals to attest to no conflict of interest on sole source purchases should help maintain public trust that these individuals were not influenced by the vendor. We Recommend that management require individuals attest to no conflict of interest when requisitioning goods or services from a single source provider. The attestation should accompany the justification and purchase requisition. Page 15

16 Management Response: The Purchasing Department is responsible for determining the method of procurement, not the requesting department. The Purchasing Department staff is actively involved in initiating contracts and fully adheres to ethical rules and procedures as outlined in the County Code and by the National Institute of Governmental Purchasing. One of the benefits of a centralized procurement function is that it mitigates potential conflicts as it removes the purchasing authority from the requesting department. We agree, however, that the requesting department, in some instances, may be able to influence the procurement method through their determination of specifications. We welcome assistance from Internal Audit to develop controls that are workable and do not impede the procurement process. Page 16