TxDOT Internal Audit Internal Audit Report Purchase of Services Audit

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1 TxDOT Internal Audit Internal Audit Report Purchase of Services Audit Objective To determine if purchase of services processes and activities are designed and operating to ensure goods and services are delivered effectively. In addition, to determine if purchasing oversight is appropriate and supportive of applicable service levels and risk mitigation. Opinion Based on the audit scope areas reviewed, control mechanisms are effective and substantially address the risks considered significant relative to financial reporting reliability, operational execution and regulatory compliance for the purchase of services program. Control improvement opportunities identified involve activities that have the potential to negatively impact the achievement of the program s objectives. Overall Assessment Satisfactory Finding 1 Issue Title Findings POs for equipment repairs that do not require bids were not processed or designated correctly. Control Design x Operating Effectiveness x Rating Needs Improvement x = design or effectiveness of associated controls were assessed in this audit. Management concurs with the above finding and has prepared an action plan to address the deficiencies. Internal Environment The General Services Division (GSD) has established a structured environment for the purchase of goods and services. The purchase of services program involves specific levels of purchase authority for GSD and the Region Support Centers. Various tools have been developed including flow charts, electronic purchasing system, newsletter and training to mitigate the risks associated with this program. In addition, the purchasing program has been in good standing with the National Institute of Governmental Purchasing since Summary Results Scope Area Finding Evidence No Bid Purchase Orders Equipment repairs 1 38% (15 of 39 POs) weren t processed or designated correctly in the Divisions/Offices and portions of the four Regions. Contract Management None No issues identified. Non-Professional Services Emergency Purchase Orders None No issues identified. 1 of 5 September 26, 2012

2 Audit Scope This audit covered non-professional purchase of services and focused on the critical components of the purchase of services program based on risks including no bid purchase orders (POs) for equipment repairs, contract management of non-professional services and emergency POs issued from September 2011 through March The audit was performed by Veronica Chacon, Jill Collett, David Kossa, and Dennis Olson and oversight was provided by Raymond Martinez. The audit was conducted during the period from February 7 through August 3, Methodology The Audit work included reviewing state purchasing laws, department and region policies and procedures, existing purchasing and equipment flow charts and other supporting information; interviewing the appropriate purchasing staff in GSD and the four Region Support Centers (North, South, East and West); analyzing purchase of services data from September 2011 through March 2012; and the non-statistical sampling of no bid POs for equipment repairs, non-professional service POs for contract management and emergency POs. The no bid POs were reviewed to determine if they were processed correctly, if the service and invoice were adequately verified, and if there is any internal oversight. The non-professional service POs for contract management were reviewed to determine if the service and invoice were adequately verified, and if there is any internal oversight. The emergency POs were reviewed to determine if there was proper justification and authorization, if the end user s needs were met and if there is any internal oversight. Audit testing was conducted in the Divisions and Offices in Austin and the four Region Support Centers. Background This report was prepared for the Transportation Commission, TxDOT Administration and Management. The report presents the results of the Purchase of Services Audit which was conducted as part of the Fiscal Year 2012 Audit Plan. The State Comptroller delegates certain purchase authority to GSD. GSD purchases for the Divisions/Offices in Austin and the Districts/Regions when purchases are above the local authority. GSD delegates limited purchase authority to the Region Support Centers. The Region Support Centers purchase for the corresponding Districts and Regions when purchases are within the local authority. We conducted this performance audit in accordance with Generally Accepted Government Auditing Standards and in conformance with the International Standards for the Professional Practice of Internal Auditing. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that 2 of 5 September 26, 2012

3 the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. A defined set of control objectives was utilized to focus on financial, operational and regulatory goals for the identified scope areas. Our audit opinion is an assessment of the health of the overall control environment based on (1) the effectiveness of enterprise risk management activities throughout the audit period and (2) the degree to which the defined control objectives were being met. Our audit opinion is not a guarantee against financial misstatement, operational sub-optimization or regulatory non-compliance, particularly in areas not included in the scope of this audit. Best Practice The West Region conducts monthly post PO reviews (minimum of 5 POs or 10%) to verify compliance with department requirements, these reviews are documented on a spreadsheet and any concerns are addressed with the appropriate purchaser during their annual performance evaluation, as needed. Detailed Finding and Management Action Plan (MAP) No. 1: POs for equipment repairs that do not require bids were not processed or designated in accordance with department requirements. In the current control environment, it was assessed that some employees do not fully understand the equipment repair process and the difference between determinate and indeterminate repairs. Thirty-eight percent (38%) of the no bid POs for equipment repairs that were sampled (15 of 39 POs) weren t processed or designated in accordance with department requirements. The total amount of these 15 POs was approximately $70,000. More specifically: 6 POs weren t issued before the work was authorized (indeterminate POs) Divisions/Offices and East 1 PO was issued for a higher amount than the estimate - West 4 POCNs (purchase order change notices) weren t issued before the work was authorized when the cost exceeded the estimate North and South 7 POs weren t correctly designated as determinate (commercial) or indeterminate (internal) repairs South and East (Note: 3 of these 7 POs were also in the 11 POs population mentioned above) The requirements for processing and designating no bid POs for equipment repairs are included in the TxDOT Purchasing Manual (Chapter 4, Section 28), which states: Commercial Repairs - a repair where the extent or scope of the repair is known and the cost is determinable. 3 of 5 September 26, 2012

4 Quotes under the No Bid Limit (< $5,000): The purchaser may issue the PO after the repair is complete only if documentation is in the PO file showing a quote was obtained and approved before the repair was made. Quotes over the No Bid Limit (> $5,000): The Automated Purchasing System ( APS ) PO shall be issued prior to the work being started with a not to exceed amount as the PO total. Internal Repairs A repair where the extent of the repair is not known and cannot be determined until the equipment is dismantled. Less than $25,000: The purchaser must issue a PO prior to authorizing the vendor to begin work. The purchaser will issue a POCN if the cost to complete the original repair exceeds the estimate. Complete the POCN prior to authorizing the vendor to complete the additional work. Effect/Potential Impact: If a purchase of service or cost increase isn t properly processed or authorized by the purchaser, state funds could be obligated inappropriately (e.g. services that are unrelated to the user request, restricted by purchasing regulations or inappropriate could be authorized without the purchaser s knowledge). If a PO is incorrectly designated, the required bids may not be obtained (e.g. 3 quotes are required for determinate purchases over $5,000 but not for indeterminate purchases). There may also be some confusion about the requirements in the Purchasing Manual on processing and designating POs under $5,000. These POs totaled approximately $10 million from September 2011 through March Management Action Plan: Action Plan Owner Implementation Date GSD met with all Regional Fleet Managers to GSD Director Done discuss the equipment repair process. Revised the Estimate & Authorization Vehicle of Purchasing (Glenn Hagler) Done Repair form used by the South Region to document their quotes. GSD developed changes to address the Oct 1, 2012 discrepancies in Finding 1 and clarify the equipment repair process. GSD will revise the Purchasing Manual to address the discrepancies in Finding 1 and clarify the requirements. Dec 31, of 5 September 26, 2012

5 Summary Results Based on Enterprise Risk Management Framework ERM Component Organizational Tone Control Activities Ethical Culture & Attitude Planning Forecasting Goal-Setting Cost-Benefit Analysis Business Continuity Evaluations/Analysis Management Action Plans F, O, R F, O, R O, R 1) No Bid POs Policies/Procedure Development & Maintenance Finding 1 Approvals/Authorizations Finding 1 Supporting Evidence/Records Availability Segregation of Duties Safeguarding Assets Information Classification Information Input Information Processing Output/Reporting and Messaging Safeguarding Assets Reconciliations Peer Reviews Audit Results Dashboard Business Objectives (Financial, Operational, Regulatory) Internal Environment Objective Setting Event Identification Risk Assessment Risk Response Control Activities Information & Communication Monitoring Purchase of Services Audit Scope Areas Evaluated Management Representations Scope Area Assessment 2) Contract Mgmt 3) Emergency POs Rating Key (White indicates not included in audit scope.): Exemplary Satisfactory Needs Improvement Unsatisfactory Closing Comments The results of this audit were discussed with the GSD Interim Director and Region Support Center Directors in an exit conference held on August 30, The results were also provided to the Office of General Counsel and the Chief Strategy and Administration Officer via . We thank the purchasers, shop employees and other employees contacted during this audit for their assistance and cooperation. 5 of 5 September 26, 2012

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