Recommendations

Judicial Branch Procurement Some Superior Courts Generally Followed Requirements but Could Improve Their Procurement Practices January 2019 REPORT 2018-301 CALIFORNIA STATE AUDITOR 621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814 916.445.0255 | TTY 916.445.0033 For complaints of state employee misconduct, contact us through the Whistleblower Hotline: 1.800.952.5665 Don’t want to miss any of our reports? Subscribe to our email list at auditor.ca.gov For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255 This report is also available online at www.auditor.ca.gov | Alternative format reports available upon request | Permission is granted to reproduce reports Elaine M. Howle State Auditor January 15, 2019 2018-301 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: Pursuant to Chapter 31, Statutes of 2013, the California State Auditor presents this audit report assessing five superior courts’ compliance with the requirements of the California Judicial Branch Contract Law (Judicial Contract Law), Public Contract Code sections 19201 through 19210. The Judicial Contract Law requires the Judicial Council of California (Judicial Council) to adopt and publish a Judicial Branch Contracting Manual, which establishes the requirements and recommended practices for procurement and contracting that all judicial branch entities, including superior courts, must follow. The Judicial Council published its latest version of the manual in 2018. This report concludes that the five courts we reviewed for this audit—the superior courts in Imperial, Los Angeles, Monterey, Santa Barbara, and Santa Clara counties—adhered to most required and recommended procurement practices that we evaluated, but they could improve. For example, the Santa Clara court did not have an agreement on file for certain services it purchased, and it lacked appropriate documentation for three other contracts. The other four courts also lacked appropriate documentation for one contract each. In addition, staff at the Monterey court approved seven payments that exceeded their payment authorization limits by amounts ranging from $2,000 to more than $107,000. We also identified one instance in which the Imperial court processed a payment without appropriate prior written approval, and the Santa Barbara court’s payment process lacked a documentation step that would increase the court’s assurance that payments are appropriate. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor 621 Capitol Mall, Suite 1200 | Sacramento, CA 95814 | 916.445.0255 | 916.327.0019 fax | www.auditor.ca.gov iv Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2018-301 v January 2019 CONTENTS Summary 1 Introduction 3 All Five Courts Could Improve Their Contracting Practices 7 Four Courts Could Improve Their Processes for Handling Payments to Vendors and Recording Receipt of Goods and Services 11 Three Courts Could Improve Their Purchase Card Practices 15 Appendix Scope and Methodology 19 Responses to the Audit Superior Court of California, County of Los Angeles 21 California State Auditor’s Comments on the Response From the Superior Court of California, County of Los Angeles 23 Superior Court of California, County of Monterey 25 Superior Court of California, County of Santa Barbara 27 Superior Court of California, County of Santa Clara 29 vi Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2018-301 1 January 2019 SUMMARY For this fourth biennial audit of the contracting and procurement practices of California superior courts, we reviewed the superior courts in Imperial, Los Angeles, Monterey, Santa Barbara, and Santa Clara counties. We determined that these five courts adhered to most of the required and recommended contracting and procurement practices for which we tested; however, they could make certain improvements to ensure that they have appropriate controls in place and receive the best value for their procurement dollars. We reviewed the selected courts’ procurement practices related to contracts, payments, and purchase card transactions. This report concludes the following: All Five Courts Could Improve Their Contracting Practices Page 7 We reviewed 12 contracts at each of five courts and found varying levels of noncompliance with appropriate contracting practices: Santa Clara did not have an agreement on file to support a $582,000 services payment that it made, and it lacked appropriate supporting documentation for three additional contracts, including one for $778,000 to procure temporary staff. Although the other four courts generally followed the applicable procurement requirements that we tested, we identified certain issues at each one. Four Courts Could Improve Their Processes for Handling Payments to Page 11 Vendors and Recording Receipt of Goods and Services We found that some courts did not always use proper internal controls when processing payments and could therefore not ensure that they used public funds appropriately: the Monterey court did not always follow the payment authorization limits it established. For seven of the 18 payments we examined, court employees approved payments that exceeded their authorization levels by amounts ranging from $2,000 to more than $107,000. Further, the Santa Clara court did not always fully separate duties so that no one person controlled more than a single key aspect of payment processing. All five courts we examined routinely verified the delivery of goods and services before they paid vendors, but we identified certain limited exceptions. Three Courts Could Improve Their Purchase Card Practices Page 15 Several courts may have put public funds at risk when they violated the procurement policies included in the Judicial Branch Contracting Manual (judicial contracting manual): the Santa Clara court exceeded both single‑transaction and daily limits for purchase card transactions, and the Imperial and Santa Barbara courts each established transaction limits for some users, but did not document those deviations as the judicial contracting manual requires. 2 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Summary of Recommendations The superior courts we reviewed should ensure that they award their contracts competitively when appropriate and that they assess and document best value and fair and reasonable pricing when warranted. Courts should also ensure that they have all agreements for goods or services documented in the procurement file. The courts should ensure that payment duties are adequately separated. Courts should also require that staff submit packing slips or receipts to verify delivery before invoices are paid. Finally, courts should ensure that staff are aware of, and abide by, the judicial contracting manual’s purchase card transaction limits and should document in their local manuals as appropriate any alternative purchase card limits. Agency Comments The Monterey and Santa Barbara courts each agreed with our recommendations to them, while the Santa Clara court stated that it will take certain actions in response to our recommendations to it. The Los Angeles court disagreed with our finding pertaining to it. The Imperial court did not submit a written response to our report. CALIFORNIA STATE AUDITOR | Report 2018-301 3 January 2019 INTRODUCTION Background The California Judicial Branch Contract Law (Judicial Contract Law) went into effect in 2011. It requires all judicial branch entities to comply with the provisions of the Public Contract Code that are applicable to state agencies and that relate to the procurement of goods and services. It also requires the Judicial Council of California (Judicial Council)—which is the policymaking body of the California court system responsible for ensuring the consistent, independent, impartial, and accessible administration of justice in the State—to create a contracting manual for all judicial branch entities, such as superior courts, and for these entities to adopt local contracting manuals. In addition, the Judicial Contract Law directs the California State Auditor’s Office (State Auditor), subject to legislative approval, to audit five judicial branch entities other than the Judicial Council every two years to assess their implementation of the Judicial Contract Law. This is our fourth audit of judicial procurement since 2011. The Judicial Branch Contracting Manual The Judicial Contract Law requires the provisions of the Judicial Branch Contracting Manual (judicial contracting manual) to be substantially similar to those of the State Administrative Manual and the State Contracting Manual and to be consistent with the Public Contract Code. The State Administrative Manual provides general fiscal and business policy guidance to state agencies, while the State Contracting Manual provides more specific guidance regarding procurement and contract management. The Judicial Purchases That Are Exempt From Public Contract Code contains, among other provisions, Competitive Bidding Requirements competitive bidding requirements for state agencies. The Legislature’s objectives in enacting these laws included • Purchases under $10,000. providing all qualified bidders with a fair opportunity to • Emergency purchases. enter bids and eliminating favoritism, fraud, and corruption in the awarding of public contracts. In addition to • Purchases from government entities. establishing procurement requirements, the judicial • Legal services. contracting manual also contains recommended • Purchasing through certain leveraged procurement practices for courts. Although those procurement agreements. provisions are not mandatory, the judicial contracting manual states that courts should follow the recommended • Purchases from business entities operating practices unless they have good business reasons for community rehabilitation programs. doing otherwise. • Licensing or proficiency testing examinations. • Purchases through local assistance contracts. Like the Public Contract Code, the judicial contracting manual generally requires judicial branch entities to secure • Sole-source purchases. competitive bids or proposals for each contract, with certain Source: Judicial contracting manual, August 2018. exceptions, as the text box shows. For example, the judicial contracting manual exempts purchases under $10,000 from 4 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Sole-Source Procurement competitive bidding requirements as long as a court determines that the price is fair and Under a sole-source procurement, only one vendor is afforded reasonable. State procurement rules and the judicial the opportunity to provide the goods or services. Before contracting manual also do not require competitive a court enters a sole-source procurement, it must request bids for contracts for emergency purchases or for use of the sole-source approach, and an appropriate court authority (such as the presiding judge or court executive contracts that are with governmental entities. officer) must approve the request. The request should include the following information: The judicial contracting manual also allows for several types of noncompetitive procurements. • Description of the goods and services to be procured. Two types that judicial branch entities can use are • Explanation of why the goods and services cannot be sole‑source procurements and certain leveraged procured competitively. procurement agreements (leveraged agreements). • Description of the effort made to solicit competitive bids, A sole‑source procurement is one in which an if any. entity affords only one vendor the opportunity to provide goods or services, as the text box describes. • Documentation that the pricing offered is fair and reasonable. An entity can use a leveraged agreement to • Explanation of special factors affecting the cost or other purchase goods and services from certain vendors aspect of the procurement, if any. on the same or substantially similar terms without Source: Judicial contracting manual, August 2018. having to seek competitive bids, as the text box explains. The Department of General Services administers some leveraged agreements for use by state agencies and local governments so that they Leveraged Procurement Agreement may buy directly from suppliers through existing contracts and agreements. The judicial contracting A leveraged procurement agreement allows multiple manual includes a process for using leveraged entities to make purchases in order to take advantage of agreements, but it recommends that judicial branch their combined buying power to reduce prices, improve entities consider whether they can obtain better terms and conditions, or improve procurement efficiency. pricing or terms by negotiating with vendors or The judicial contracting manual recommends that courts soliciting competitive bids. determine whether pricing is fair and reasonable when using leveraged procurement agreements because the courts may be able to obtain better prices by Audits of California Superior Courts negotiating directly with the vendors or by conducting competitive procurements. Including this report, we have issued four audit Source: Judicial contracting manual, August 2018. reports covering procurement practices at 21 of the State’s 58 superior courts since the Judicial Contract Law went into effect in 2011. We based our selection of the courts we examined on factors including a court’s size, total volume of contracts, previous audits or known deficiencies, and significant or unusual changes in management. We selected only courts we had not already audited. CALIFORNIA STATE AUDITOR | Report 2018-301 5 January 2019 California’s superior courts are also subject to audit from several other agencies. The Office of Audit Services of the Judicial Council conducts court audits. Likewise, the California State Controller’s Office’s Division of Audits, which performs independent audits of government agencies that spend state funds, also conducts audits of superior courts. Finally, the California Department of Child Support Services—which works with parents and guardians to ensure children and families receive court‑ordered financial and medical support—also conducts such audits. Since 2011 entities have conducted a total of 93 audits of California’s superior courts. The Figure on the following page shows a map of California’s 58 counties, their relative population sizes, the superior courts that we have audited, and those that have been audited by the Judicial Council or another independent body since 2011. 6 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Figure Most Superior Courts Have Been Audited Since 2011 DEL NORTE SISKIYOU MODOC Auditing Agency State Auditor Judicial Council SHASTA LASSEN Other: State Controller’s Office or California HUMBOLDT TRINITY Department of Child Support Services Not audited TEHAMA PLUMAS County Population BUTTE Small GLENN SIERRA MENDOCINO Medium LAKE COLUSA SUTTER YUBA NEVADA PLACER Large YOLO EL DORADO SONOMA NAPA ALPINE SOLANO SACRAMENTO AMADOR CALAVERAS MARIN SAN TUOLUMNE JOAQUIN MONO CONTRA COSTA SAN FRANCISCO ALAMEDA STANISLAUS MARIPOSA SAN MATEO SANTA CLARA MADERA MERCED SANTA CRUZ FRESNO SAN BENITO INYO MONTEREY TULARE KINGS SAN LUIS OBISPO KERN SAN BERNARDINO SANTA BARBARA VENTURA LOS ANGELES ORANGE RIVERSIDE SAN DIEGO IMPERIAL Source: Analysis of the State Auditor’s audits and the Judicial Council’s record of audits performed by it, the State Controller’s Office, and the California Department of Child Support Services. CALIFORNIA STATE AUDITOR | Report 2018-301 7 January 2019 All Five Courts Could Improve Their Contracting Practices Key Points • The Santa Clara court did not always follow appropriate contracting practices. It did not have an agreement on file to support $582,000 it paid for services that the county provided in fiscal year 2017–18. It also lacked appropriate supporting documentation for three non‑competitively bid contracts, including one for $778,000 to procure temporary staff. • Although the other four courts we visited generally followed the applicable procurement requirements that we evaluated, we identified certain issues at each one. For instance, the Los Angeles court lacked documentation showing that it had acquired goods at the best value for one contract, while the Monterey court lacked documentation of fair and reasonable pricing for one contract. Furthermore, the Santa Barbara and Imperial courts each lacked written justification for entering into a sole‑source contract. The Santa Clara Court Did Not Always Follow Applicable Contracting Practices According to the judicial contracting manual, each court should establish contracting processes and levels of approval authority that are consistent with applicable law and the rules of the court and that promote responsible stewardship of public funds. The manual further recommends that courts determine and document whether prices are fair and reasonable when following a noncompetitive process. We reviewed 12 contracts at each of the five county superior courts we audited. Although the courts generally adhered to most of the contracting provisions we tested, we observed that the Santa Clara court did not always follow applicable contracting practices. For instance, the Santa Clara court lacked a written agreement—such as a contract—to substantiate $582,000 for services that Santa Clara County billed to it for fiscal year 2017–18. A 2016 memo from the county executive officer indicated that after the Santa Clara court separated its operations from those of the county in July 1997, the county continued to provide various services to the court in accordance with an agreement between the two. The memo also stated that the agreement was renewed and extended through June 2016; however, the Santa Clara court could not provide a copy of an agreement covering fiscal year 2017–18. Without an agreement, the court has not demonstrated proper stewardship of public funds and has less assurance that it obtained and paid for agreed‑upon services from the county. In three other instances, Santa Clara court staff failed to adhere to contracting requirements, thereby reducing assurance that the prices the court paid were fair and reasonable. In the first case, in fiscal year 2015–16, the court appears to have 8 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 neither competitively awarded a contract for temporary staff nor justified contracting for the staff as a sole‑source procurement. A purchase order for the services in fiscal year 2017–18 shows an amount of $778,000. According to the court’s general services manager, the court’s human resources department contracted for temporary workers for a project without obtaining bids. The manager stated that once the court’s procurement/contracts and accounting departments learned of the hiring, staff scrambled to create an agreement even though the human resources department had not created a sole‑source justification document. Thus, the court failed to competitively award the contract or to document its reason for using a sole‑source procurement, as the judicial contracting manual requires. In the two other cases, the Santa Clara court entered into leveraged procurement agreements without documenting whether it determined the prices were fair and reasonable. The judicial contracting manual recommends that after identifying a leveraged procurement agreement, courts determine fair and reasonable pricing and also consider negotiating with vendors or conducting competitive bidding to Methods for Determining Whether a Procurement Price Is Fair and Reasonable obtain better pricing. The text box describes methods for determining whether a price is fair and The State Contracting Manual describes the following reasonable. The general services manager for the methods that help ensure buyers obtain fair and Santa Clara court explained that when the court reasonable prices: needs to make certain procurements, he identifies • Performing a price comparison. agreements he can leverage on the Judicial Council’s website. According to the general services manager, • Using prices from an established catalog or market a previous information technology (IT) director pricing media. for the court was part of the evaluation team for • Using prices set by law or regulation. one of the two leveraged agreements in question • Using historical pricing. and therefore had knowledge of the pricing for one of these contracts. In the other instance, the • Using an experienced buyer who knows that the price Santa Clara court extended an existing agreement is fair and that the cost of verification would exceed for collection services for another year and an any benefit. additional $1.35 million. However, the court’s Source: Department of General Services’ State Contracting procurement files included no documentation that Manual, Volume 2. the court assessed whether either of the leveraged agreements’ prices was fair and reasonable. The Los Angeles, Monterey, Santa Barbara, and Imperial Courts Could Improve Their Contracting Practices Although the other four courts we visited generally adhered to applicable contracting requirements, we identified certain documentation issues related to their contracting practices. CALIFORNIA STATE AUDITOR | Report 2018-301 9 January 2019 For example, the Los Angeles court did not demonstrate that it obtained best value for $253,000 in goods it acquired under one contract in fiscal year 2017–18. In 2012 the court selected two vendors for a master services agreement, which is a type of leveraged agreement. However, the court did not specify how its officials would select which of the two vendors to use when placing an order under the agreement other than the court would select the vendor at its discretion. Although the judicial contracting manual does not identify the specific procedures a court should follow when making purchases under a leveraged agreement the court created, an underlying premise of the manual is that courts should obtain best value when acquiring goods and services. We therefore expected the Los Angeles court to have included in its procurement files evidence of which of the agreement’s two vendors offered the best value for the goods acquired; however, it did not. In addition, during our audit period, the Monterey court used a 2013 leveraged procurement agreement to obtain Internet services worth up to $78,000 in fiscal year 2017–18. Guidance for agencies using this agreement strongly encourages them to obtain multiple quotes for services to obtain the best price. Furthermore, the judicial branch manual recommends that agencies using leveraged agreements determine whether pricing is fair and reasonable and document how they selected leveraged agreements, including the best‑value criteria they used. However, Monterey’s procurement file does not show that the court performed these steps, indicating that the court may have missed an opportunity to procure Internet services at a lower cost. Using older agreements heightens the risk that a court may not be receiving the best value for its procurement dollars. We found similar issues at the Santa Barbara and Imperial courts. When we tested three sole‑source contracts at the Santa Barbara court, we found that the procurement file for one contract—worth about $18,000 in fiscal year 2017–18—did not contain an approved sole‑source justification. Likewise, one of the three sole‑source contracts—valued at $194,000 over three years—that we tested at the Imperial court did not have a sole‑source justification on file for a renewal that the court signed in fiscal year 2017–18. Recommendations The Santa Clara court should ensure that it supports all payments with a contract or purchase order that clearly states the terms and pricing for any goods or services received. The court should also ensure that it competitively awards its contracts as appropriate and that it properly documents its fair and reasonable pricing determinations, including those for applicable leveraged agreements. 10 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 The Los Angeles court should ensure that it documents best value in its procurement files when selecting vendors from leveraged procurement agreements. The Monterey court should ensure that it documents fair and reasonable pricing from vendors in its procurement files. The Imperial and Santa Barbara courts should ensure that they document their justifications and approvals for using noncompetitive procurements. CALIFORNIA STATE AUDITOR | Report 2018-301 11 January 2019 Four Courts Could Improve Their Processes for Handling Payments to Vendors and Recording Receipt of Goods and Services Key Points • Although the Monterey court had payment authorization limits in place, it did not always follow them. For seven of the 18 payments we examined, court employees approved payments that exceeded their authorization levels by amounts ranging from $2,000 to more than $107,000. • The Santa Clara court did not always fully separate duties in payment processing. For three of the 18 payments we examined, the court’s director of finance approved the invoices for payment and also posted them for payment in the court’s financial system. • All five courts we reviewed routinely verified the delivery of goods and services before they paid vendors, but we identified certain limited exceptions at the Imperial and Santa Barbara courts. Although the Monterey Court Had Payment Authorization Limits in Place, It Did Not Always Follow Them Following proper internal controls over the processing of payments is a critical step for ensuring that courts use public funds appropriately. However, when we reviewed 18 payments at each of the five superior courts we audited, we found that the Monterey court did not consistently comply with its own payment authorization limits. Specifically, the Monterey court’s local contracting manual includes dollar limits up to which it authorizes court employees in specified positions to approve invoices for payment. Adhering to such authorization limits increases the court’s assurance that it makes appropriate payments. However, the court did not consistently follow these authorization limits during fiscal year 2017–18. Six court staff members who approved seven of the 18 payments (39 percent) we reviewed did so for amounts above their authorization limits. The payments exceeded the staff members’ authorization limits by amounts ranging from $2,000 to more than $107,000. For example, the court’s chief information officer approved a $157,500 payment even though he only had the authority to approve payments up to $50,000. This lack of consistent adherence to the payment approval limits increases the court’s risk of making inappropriate payments. The court’s chief financial officer explained that in one of these instances, he approved a payment because the appropriate person was unavailable when the court needed to make the payment, although the court could provide no documentation that it authorized the chief financial officer to do so. The chief financial officer stated that the other six instances were the result of oversights on the part of the court. He also noted 12 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 that the court plans to remind staff who approve or process payments of individuals’ limits and to cover the topic during future trainings. The Santa Clara Court Did Not Always Fully Separate Duties in Payment Processing We found that although the Santa Clara court provides its staff with payment process instructions, including a list of each individual’s role and a flowchart illustrating the steps of the payment process, its internal controls do not cover one area. The State Contracting Manual, which provides guidelines to promote sound business decisions and practices for the State, notes that state entities should separate key duties and responsibilities for approving invoices and preparing payments. When courts make payments without separation of duties—meaning splitting responsibilities so that no one person controls more than a single key aspect of a purchasing activity—it increases the risk of improper expenditures, which then puts public funds at risk. However, staff at the Santa Clara court did not practice such separation of duties in certain instances. Specifically, in three of 18 cases we reviewed at the Santa Clara court, the director of finance approved the invoices for payment and also posted them for payment in the court’s financial system. The court’s payroll manager noted that in the past, different individuals had approved and posted these three payments, and she was unsure why this process had changed. She stated that the court will work to ensure that in the future, different people approve and post payments. The Imperial and Santa Barbara Courts Could Better Document the Receipt of Goods and Services The judicial contracting manual states that before processing and releasing any payment to a vendor, a court should have documentation verifying that the vendor has provided the goods or properly performed the services for which the court is paying. At each of the five courts we audited, court staff routinely verified the delivery of goods or services before the courts made the payments we reviewed. However, we identified certain concerns at two of the courts. Specifically, an internal practice allowed the Imperial court to process one payment—$4,100 for telecommunications services—without the appropriate prior written approval. Staff explained that when a payment amount matches the contract amount, the court does not require an approval of the individual payment. This internal practice CALIFORNIA STATE AUDITOR | Report 2018-301 13 January 2019 contradicts the judicial contracting manual’s guidance on documentation and bypasses a key opportunity to ensure the appropriateness of every payment. At the Santa Barbara court, staff noted that although vendors may provide packing slips or receipts, the court does not require them when processing payments. The judicial contracting manual states that courts should inspect delivered goods and retain documentation of the inspection’s results in a procurement file. According to an accounting supervisor, the Santa Barbara court currently has three methods to demonstrate the receipt of goods or services: a receipt, a packing slip, or an email from court staff verifying that they have received the goods or services. He indicated that the former chief financial officer required only an email as assurance that the court had received goods or services. The accounting supervisor acknowledged that such emails are a weakness in the court’s payment process and that the court intends to reinstate the requirement for packing slips or receipts. This change would increase the court’s assurance that its payments are appropriate. In contrast, the Monterey court has a useful policy as part of its vendor payment process in which an accounts payable staff member matches the details of an invoice to equivalent details on a packing slip, shipping order, or receiving report before the court approves payment for goods or services. Recommendations The Monterey court should revise its guidance regarding invoice approval limits to include a description of circumstances under which it will allow exceptions to such limits, and it should inform court staff of the revisions. The Santa Clara court should establish and implement procedures to ensure that adequate separation of duties exists for procurement. These procedures should specifically prevent a single individual from both approving an invoice’s amount and then also authorizing its payment. To ensure the appropriateness of every payment, the Imperial court should require all invoices to receive approval before it processes their payment. The Santa Barbara court should reinstate its previous requirement that staff submit packing slips or receipts before its payment of invoices. 14 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2018-301 15 January 2019 Three Courts Could Improve Their Purchase Card Practices Key Points • In one instance, the Santa Clara court exceeded the judicial contracting manual’s purchase card transaction limit by almost $7,000 and its daily purchasing limit by nearly $3,400. • The Imperial and Santa Barbara courts did not document purchase card transaction limits that deviated from the judicial contracting manual’s guidelines, which specifically require such documentation. The Santa Clara Court Exceeded Both the Transactional and Total Daily Limits in One Instance Proper controls over purchase cards help ensure that courts use public funds appropriately. The state‑administered procurement card program, CAL‑Card, is available to all superior courts, although they are also allowed to use other purchase cards. The Imperial, Monterey, Los Angeles, and Santa Barbara courts use CAL‑Cards; the Santa Clara court uses a different vendor for its purchase cards. When courts make payments that exceed approved transaction limits on purchase cards or do not follow judicial contracting manual policies, they may put public funds at risk. Further, because courts often provide purchase cards to individuals so they can buy directly from vendors, the cards may be subject to abuse if the courts do not properly oversee their use. We tested purchase card transactions at two county superior courts—Monterey and Santa Clara—because their total purchase card payments for fiscal year 2017–18 exceeded either $100,000 or 10 percent of the court’s procurements during the fiscal year. We did not find any exceptions in our review of the Monterey court’s purchase card transactions; the text box describes the strong internal purchase card controls we found at the Monterey court. However, we did find one instance in which the Santa Clara court made a purchase card payment that exceeded the judicial contracting manual’s transactional and total daily limits. The Monterey Court’s Controls Over Its The Santa Clara court has five purchase cards, four Purchase Card Transactions of which are dedicated to certain categories, such as staff training and travel, and the fifth of which • The Monterey court has five purchase cards, each of which has an automatic transaction limit of $1,500. is assigned to the court’s chief executive officer. When we tested six purchase card payments, we • All procurements made using purchase cards must be found that an $8,390 purchase of staff IT training initiated by approved requisitions. exceeded both the judicial contracting manual’s • The Monterey court’s alternative procedure for making $1,500 per‑transaction maximum and its suggested travel arrangements using purchase cards is documented, daily purchase limit of $5,000, although the purchase as the judicial contracting manual requires. was otherwise appropriate. By not consistently Source: Analysis of documents provided by the Monterey court. following the judicial contracting manual’s required and suggested transaction limits, the court increases 16 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 the risk that its staff will use purchase cards inappropriately. Although the payroll manager asserted that the Santa Clara court does not have a transaction limit for this card, the court did not include this information in its local contracting manual as the judicial contracting manual requires. The Imperial and Santa Barbara Courts Did Not Document Purchase Card Transaction Limits That Deviated From the Judicial Contracting Manual’s Guidelines Although we did not test individual purchase card payments at the Imperial, Los Angeles, or Santa Barbara courts because the total payments did not meet our review threshold, we identified concerns about purchase card transaction amount limits at the Imperial and Santa Barbara courts that exceeded the judicial contracting manual’s recommended limits. The manual states that courts can use purchase cards for a maximum of $1,500 per transaction. However, the Imperial court established single‑transaction limits of $2,000 for four of its nine purchase cards, of $5,000 for three of its purchase cards, and $10,000 for one of its purchase cards. Similarly, the Santa Barbara court established a transaction limit of $2,500 for three of its seven purchase cards. Although the judicial contracting manual allows courts to establish purchase card procedures that deviate from its policies, the manual states that courts should document any such alternative procedures and incorporate them into their local manuals. The Los Angeles court, for instance, established an alternative procedure to increase its purchase card transaction limit to $5,000, which it documented in its local manual and in its policies and procedures. At the time of our audit, neither the Imperial nor the Santa Barbara court had incorporated their alternative procedures into their local manuals. Without properly documented or built‑in transaction limits, the Imperial and Santa Barbara courts increase the risk that their staff will use purchase cards inappropriately. Staff at the two courts noted that they will update their local manuals to reflect their alternative procedures for purchase card transaction limits. Recommendations The Santa Clara court should ensure that its staff abide by the judicial contracting manual’s purchase card transaction limits, or it should document an alternative transaction limit in its local contracting manual. The Imperial and Santa Barbara courts should document their alternative purchase card procedures regarding transaction limits in their local manuals. CALIFORNIA STATE AUDITOR | Report 2018-301 17 January 2019 We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. 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 specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor January 15, 2019 18 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2018-301 19 January 2019 APPENDIX Scope and Methodology We conducted this audit pursuant to the audit requirements contained in the Judicial Contract Law. Our audit focused on the superior courts in Imperial, Los Angeles, Monterey, Santa Barbara, and Santa Clara counties. The table below lists the audit’s objectives and the methods we used to address them. Table Audit Objectives and the Methods We Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, and Reviewed relevant state laws and rules, as well as each court’s relevant policies regulations significant to the audit objectives. and procedures. 2 Based on risk factors specified in the California Evaluated all 58 California superior courts and ranked them based on significant changes Judicial Branch Contract Law (Judicial Contract that have occurred since 2016 that may impact compliance with the Judicial Contract Law; Law), Public Contract Code section 19210(a)(1), the amount of time since it was last audited and previous audit results or known deficiencies; identify five judicial branch entities excluding significant changes in management or employee turnover; the complexity and size of the the Judicial Council of California for audit to courts and its existing contracting practices and procedures; the volume and type of assess their implementation of the Judicial procurements made by the court relative to total judicial branch procurements and to county Contract Law. population; and substantial changes to the number and amount of total procurements in the previous year. 3 For the five superior courts selected for audit: a. Determine whether each court has Reviewed each court’s local contracting manual applicable for fiscal year 2017–18, developed its own local contracting manual, compared provisions to the judicial contracting manual applicable for the same year, and and assess its conformance to the judicial queried court staff regarding any questionable discrepancies. Each of the five courts we contracting manual. reviewed had a local manual that generally conformed to the judicial contracting manual, as required. At the time of our fieldwork, the Santa Clara Court had updated its local manual to align to the most recent judicial contracting manual, published in August 2018; similarly, the Los Angeles and Santa Barbara courts’ staff told us they had begun updating their local manuals to align to the August 2018 judicial contracting manual, and the Monterey court’s staff said it planned to update its local manual in early 2019. Staff at the Imperial court told us it had not yet established a process for updating its local contracting manual to align to the August 2018 judicial contracting manual. b. Assess each superior court’s internal Reviewed each court’s local contracting manual and interviewed key staff regarding the controls over contracting and procurement court’s procurement processes. We judgmentally selected 12 contracts at each court and determine whether the court followed from the contracts that were active during fiscal year 2017–18, as reported in the Judicial those controls. Council’s Semiannual Report on Contracts for the Judicial Branch (semiannual reports) posted on the Judicial Council’s website. We also judgmentally selected 18 payments at c. Assess each superior court’s compliance each court from the payments each court reported to us for fiscal year 2017–18. We tested with key elements of the judicial contracting each of these contracts and payments and queried court procurement staff regarding manual and its local contracting manual any exceptions. and procedures, including those related to competitive bidding, sole‑source contracting, and payment and deliverable review and oversight. d. Evaluate each superior court’s contracts Reviewed the list of contracts that were active at each court during fiscal year 2017–18, to determine whether it may have as reported in the semiannual reports posted on the Judicial Council’s website, to identify inappropriately split contracts to instances in which courts might have split a contract into multiple contracts to avoid avoid obtaining necessary approvals competitive bidding or necessary approval requirements. We followed up with court staff as or complying with competitive needed regarding additional clarification on the items we tested. We did not find evidence of bidding requirements. contract splitting at any of the five courts we reviewed. continued on next page . . . 20 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 AUDIT OBJECTIVE METHOD e. Review the appropriateness of each Determined whether each court used purchase cards to make purchases and reviewed the superior court’s state purchase card monthly statements for these cards. We tested a judgmental selection of six transactions (CAL‑Card) or other court‑issued purchase at each of the two courts whose purchase card transactions exceeded our threshold card transactions when those transactions of $100,000. exceed a total of $100,000 or 10 percent of all reported procurement payments for a one‑year period. Sources: Analysis of the Judicial Contract Law and of information and documentation identified in the table column titled Method. Assessment of Data Reliability In performing this audit, we relied upon electronic data extracted from the information systems of the Judicial Council and three of the superior courts we audited. Specifically, to select contracts for testing the superior courts’ compliance with procurement procedures, we used the Judicial Council’s semiannual report for the periods from July 2017 through December 2017 and from January 2018 through June 2018. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, or recommendations. To gain assurance that the population from which we selected contracts for our compliance testing was complete, we selected six contracts from each of the five superior courts—for a total of 30 contracts—and traced them to the semiannual reports. We noted no exceptions to completeness for the contracts we selected from the Monterey court’s iShare/Procurement System or those we selected from the Santa Barbara court. However, we found that the reports did not include one contract each that we selected from the Imperial Court, the Los Angeles court’s Novatus system, or the Santa Clara court. We therefore deemed the information in the semiannual reports for the Imperial, Los Angeles, and Santa Clara courts incomplete. Although we recognize that these limitations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations. CALIFORNIA STATE AUDITOR | Report 2018-301 21 January 2019 * 1 * California State Auditor’s comments begin on page 23. 22 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 2 CALIFORNIA STATE AUDITOR | Report 2018-301 23 January 2019 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE SUPERIOR COURT OF CALIFORNIA, COUNTY OF LOS ANGELES To provide clarity and perspective, we are commenting on the response to our audit report from the Superior Court of California, County of Los Angeles (Los Angeles court). The numbers below correspond to the numbers we placed in the margin of the Los Angeles court’s response. We appreciate the Los Angeles court’s comments and have 1 clarified our finding and recommendation to better reflect our position. We stand by our recommendation that the court should ensure it documents best value when selecting vendors from which it acquires goods and services under leveraged procurement agreements. Based on additional information provided by the Los Angeles 2 Court, we amended the text to state that the semiannual reports did not include one contract from the Los Angeles court’s Novatus system. 24 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Blank page inserted for reproduction purposes only. CALIFORNIA STATE AUDITOR | Report 2018-301 25 January 2019 26 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 CALIFORNIA STATE AUDITOR | Report 2018-301 27 January 2019 Judge Patricia Kelly Darrel E. Parker Presiding Judge Court Executive Officer December 12, 2018 Elaine M. Howle, CPA California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 94815 RE: Report No. 2018-301 Dear Ms. Howle: The Santa Barbara Superior Court reviewed the draft audit report, Judicial Branch Procurement, Report 2018-301. We agree with the recommendations contained within the report, and are including the courts strategies and timelines to attain compliance below. Recommendation # 1 - Santa Barbara court should ensure they document their justifications and approvals for using noncompetitive procurements. Santa Barbara agrees that the justification and approvals for using noncompetitive procurements must be clearly documented in all contract files. An additional procurement specialist is now assisting with the workload to allow for more time and focus on each individual procurement. Additionally, procurement presently utilizes a contract summary at the inception of the procurement which serves as a check-list to ensure that no steps are over-looked, and all required documentation is accounted for in each procurement file. Estimated completion date: March 31, 2019 Recommendation # 2 - Santa Barbara court could better document the receipt of goods and services. The Santa Barbara court should reinstate its previous requirement that staff submit packing slips or receipts before payment of invoices. The court agrees that better documentation should be used for the receipt of goods and services. Santa Barbara Court will reinstate the previous requirement that staff submit packing slips or receipts prior to the payment of invoices. We agree that this will further assure that payments are appropriate. The court is currently revising the forms and procedures to include in an updated local contracting manual, and posted to the court intranet. Training on the updated policies and procedures will be provided to court staff to ensure compliance. Estimated completion date: March 31, 2019 Page 1 of2 28 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019 Judge Patricia Kelly Darrel E. Parker Presiding Judge Court Executive Officer Recommendation # 3 - Santa Barbara court should document their alternative purchase card procedures regarding transaction limits in their local manuals. Santa Barbara agrees that alternative procedures should be documented in the local contracting manual. The court began revising its local contracting manual earlier this fiscal year. If we determine that it is necessary to maintain alternate limits on any of the court credit cards, those limits will be documented in the manual. Estimated completion date: March 31, 2019 Thank you for your time and communication with us throughout the process. We appreciate the recommendations made, and will utilize the opportunity to further improve our practices. Sincerely, �et:f:dge Superior Court of California, County of Santa Barbara Cc: Darrel E. Parker, Superior Court Executive Officer Page 2 of2 CALIFORNIA STATE AUDITOR | Report 2018-301 29 January 2019 30 Report 2018-301 | CALIFORNIA STATE AUDITOR January 2019