Recommendations

Elaine M. Howle State Auditor December 19, 2019 2019‑302 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: The Judicial Council of California (Judicial Council) is the policymaking and administrative body of the California courts, and this letter report summarizes our most recent review of the Judicial Council’s contracting and procurement practices. As part of our statutorily required biennial review of the Judicial Council’s compliance with the California Judicial Branch Contract Law (judicial contract law), we identified no reportable concerns in several areas we examined, as we mention in the Scope and Methodology in the Appendix. However, we identified the following two concerns: • The Judicial Council did not include all legally required information on the contracting activities of the Judicial Branch of California (Judicial Branch) in its semiannual reports for fiscal years 2017–18 and 2018–19. Specifically, the Judicial Council did not include in the semiannual reports information regarding the Judicial Branch’s payments and the contract amendments that the Judicial Branch made during the reporting periods. The Judicial Council did not include the information for various reasons, including its own inconsistent entry of information and limitations of the publicly available Financial Information System for California (FI$Cal) website, which lacks up‑to‑date data. By not including this information, the Judicial Council failed to comply with state law and did not provide the Legislature with complete information. • The Judicial Council did not always follow its policies when procuring goods and services. Specifically, two supervisors—who each had Judicial Council authorization to approve procurements with costs up to $500,000—approved five procurements for information technology (IT) goods or services, legal services, or fees paid to a national organization, with costs ranging from $572,000 to $2.7 million. By approving procurements that they should not have, staff bypassed one of the controls the Judicial Council put in place to reduce the risk of fraud and to ensure that it procures goods and services at the best value for the State. This finding is similar to one we included in our 2017 report, Judicial Council of California: It Needs to Follow Competitive Bidding Processes More Consistently and Establish Clear Guidance for Invoice Processing, Report 2017‑302. Background The Judicial Council’s Role The Judicial Branch is a separate, independent branch of California state government. The branch includes several entities, such as the California Supreme Court (Supreme Court), the six Courts of Appeal, the 58 Superior—or trial—Courts, and the Judicial Council. The Judicial Council is the policymaking body for the state court system; it includes staff who provide various services, 621 Capitol Mall, Suite 1200 | Sacramento, CA 95814 | 916.445.0255 | 916.327.0019 fax | www.auditor.ca.gov California State Auditor Report 2019-302 2 December 2019 including budgeting, accounting, human resources, and IT. Additionally, the Judicial Council’s staff can assist the courts in the procurement of goods and services. To improve the administration of justice, the California Constitution requires the Judicial Council to perform certain actions, such as making recommendations to the courts, the Governor, and the Legislature, and adopting rules for court administration practice and procedure. For example, during the legislative session for 2017 and 2018, the Judicial Council sponsored 13 bills on topics including judgeships, court proceedings, and infractions. State Contracting and Procurement Requirements The Public Contract Code (contract code) generally governs contracts entered into by public entities. It establishes how public entities should solicit bids or proposals, evaluate those bids or proposals, and award contracts. In enacting the contract code, the Legislature intended to achieve certain objectives, such as ensuring that public entities comply with competitive bidding statutes; providing all qualified bidders with a fair opportunity to enter the bidding process; and eliminating favoritism, fraud, and corruption in the awarding of public contracts. The State Administrative Manual (SAM) and the State Contracting Manual (SCM) furnish additional procurement guidance from the Department of General Services (DGS) to public entities. SAM is a reference resource for statewide management policy, while SCM provides policies, procedures, and guidelines to promote sound business decisions and practices in securing necessary services for the State while remaining in line with the contract code. For example, the contract code allows DGS to determine when public entities may award a contract for services valued at less than $20,000 without competition. SCM clarifies that state agencies are not required to competitively bid contracts less than $10,000, though they should document evidence that pricing for these contracts is fair and reasonable. The California Judicial Branch Contract Law In 2011 the State enacted the judicial contract law, which requires Judicial Branch entities—as the Judicial Branch Entities text box lists—to comply with the provisions of The judicial contract law defines a Judicial Branch entity the contract code that apply to state agencies and as the Supreme Court, the Courts of Appeal, the Superior departments for goods and services, subject to Courts, the Judicial Council, and the Habeas Corpus certain exceptions. The judicial contract law also Resource Center. requires the Judicial Council to adopt and publish Source: Judicial contract law. a contracting manual for all Judicial Branch entities (judicial contracting manual) that is consistent with the contract code and substantially similar to SAM and SCM, which it did in 2011. Additionally, the judicial contract law requires each Judicial Branch entity to adopt a local contracting manual (local manual) for procurement and contracting of goods and services. The judicial contracting manual requires that the local manuals identify individuals with responsibility and authority for specific procurement activities. The judicial contracting manual additionally identifies items the local manuals may include, such as instructions on setting up and maintaining official procurement files and signature authorizations. California State Auditor Report 2019-302 3 December 2019 The judicial contract law also requires the Judicial Council to provide reports to the Legislature and the California State Auditor (State Auditor) every six months that provide information related to certain Judicial Branch contract procurement activities. In addition to other information, the reports must include lists of the payments and contract amendments that the Judicial Branch made during the reporting period. Finally, the judicial contract law requires the State Auditor, subject to legislative appropriation, to conduct a biennial audit of the Judicial Council’s compliance with the judicial contract law and report its findings, as we do in this report. AUDIT FINDINGS The Judicial Council Did Not Include Required Information in Its Semiannual Reports for Fiscal Years 2017–18 and 2018–19 The judicial contract law requires the Judicial Council to provide a report to the Joint Legislative Judicial Council Semiannual Reporting Requirements Budget Committee and the State Auditor twice each year regarding certain Judicial Branch Each semiannual report must contain the procurement activities during the previous following information: six‑month period. The judicial contract law • A list of all contractors or vendors receiving payments requires these reports to include the information from any Judicial Branch entity, including a separate listed in the text box. In these semiannual reports, listing for each distinct contract identifying the following: the Judicial Council reports on the Judicial Branch – The amount of payments to each contractor or vendor. entities in two groupings: Superior Courts— consisting of the 58 trial courts—and non‑Superior – The type of service or good provided. Courts—consisting of the Supreme Court, the – The Judicial Branch entity with which the contractor or six Courts of Appeal, the Habeas Corpus Resource vendor contracted. Center, and the Judicial Council. • A list of all contract amendments made during the report period identifying for each: Contrary to the judicial contract law requirements, – The contractor or vendor. the Judicial Council did not include some – The type of service or good provided. payments its non‑Superior Court entities made – The nature of the contract amendment. in each of its fiscal year 2018–19 semiannual reports. Specifically, we estimate that the Judicial – The duration of the contract amendment. Council’s February 2019 report, which covered – The cost of the contract amendment. July through December 2018, did not include Source: Judicial contract law. roughly 2,200 payments totaling $46 million from December 2018. Furthermore, we estimate that in its August 2019 report, which covered January through June 2019, the Judicial Council did not include nearly 2,800 payments totaling about $74 million from June 2019. The excluded transactions amount to about 20 percent of the non‑Superior Court entities’ payment activity for each period. California State Auditor Report 2019-302 4 December 2019 The Judicial Council did not provide information regarding these payments at the time it published its reports because the publicly available FI$Cal website does not provide up‑to‑date payment data.1 Although Judicial Council staff are able to input transactions and access current data, FI$Cal only reports those transactions older than 60 days on its publicly available website. The judicial contract law requires the Judicial Council to submit its semiannual report within roughly one month after the end of the reporting period. Therefore, for example, on August 1, 2019, when the Judicial Council published its report covering the period January 1, 2019, through June 30, 2019, the FI$Cal system website would have been missing transactions for June 2019. Although those transactions would have subsequently become available on the FI$Cal website after about 30 days, the Judicial Council did not report them at the required time. We did not identify this issue in the two fiscal year 2017–18 reports because the Judicial Council generated spreadsheets of the required data itself and posted them on its own website. Additionally, the Judicial Council did not always identify the Judicial Branch’s contract amendments in its reports nor did it always include other required information. FI$Cal lacks a dedicated field to identify whether a procurement is an original contract or an amendment, so Judicial Council staff sometimes use the item description field to do so. Out of a selection of 15 procurements from the fiscal year 2018–19 semiannual reports that we reviewed, four were contract amendments that the Judicial Council did not identify as such. In these four instances, staff did not use the item description field to identify the procurements as amendments. Similarly, we identified five instances in which the Judicial Council did not include the duration of the contract amendments in the item description field, and five instances in which it did not include the nature of the contract amendments. This information was not included because the Judicial Council lacks sufficiently specific procedures that instruct staff to enter required information into the item description field, so staff use this field inconsistently. Consequently, there may be additional instances of missing information associated with contract amendments. Finally, for more than 500 contracts that Superior Court entities amended in each fiscal year we reviewed, the Judicial Council did not identify the service or good provided. According to its director of branch accounting and procurement, the Judicial Council identifies the service or good in its reports only when an amendment changed the service or good provided. He also stated that he believed the reason for this approach was that reviewers of the report would have the original contract and it would be easier for them if the Judicial Council only updated this information when it changed. Nonetheless, by not including the required information, the Judicial Council failed to provide the Legislature with complete information within the statutorily required timelines to evaluate key procurement activities of its Judicial Branch entities. For example, for procurements missing information, a reviewer of the report may have difficulty evaluating whether it was appropriate to amend a contract rather than obtain a new contract. After we brought this concern to the Judicial Council’s attention, the principal manager of audit services said that he expects that the Judicial Council will have further discussions with FI$Cal staff to address any findings resulting from our work. Additionally, the director of branch accounting and procurement stated that, because the Judicial Council developed special tables to create the Superior Court contract amendment report, it will need to investigate how it could always include the Superior Courts’ information related to the contracted service or good. 1 The Judicial Branch adopted FI$Cal as its procurement and accounting system for all its non‑Superior Court entities in fiscal year 2018–19. Stakeholders can use the publicly available FI$Cal website to create lists of payments and contract amendments. California State Auditor Report 2019-302 5 December 2019 The Judicial Council Did Not Always Follow Its Approval Policies When Procuring Goods and Services The Judicial Council requires its staff to obtain approval from specific managers when executing procurements with costs up to and greater than $500,000, while staff can also obtain approvals for contracts with costs less than $500,000 from specific supervisors. The Judicial Council determined the cost limit for these managers’ and supervisors’ approvals by evaluating the responsibilities of their positions, the qualifications the Judicial Council expects individuals in those positions to hold, and the consideration required to make appropriate decisions for procurements of different dollar amounts. The Judicial Council established this policy even though the judicial contracting manual does not specifically require it to. We reviewed 40 procurements that the Judicial Council made from July 1, 2017, through June 30, 2019. Of these, 10 were procurements for goods or services with costs greater than $500,000. For five of these 10 higher‑cost procurements, the Judicial Council staff obtained signatures from one of two supervisors who were not authorized to approve procurements costing more than $500,000. The costs of the procurements that the supervisors approved ranged from $572,000 to $2.7 million and were for court‑appointed legal counsel, software products, database maintenance, and fees paid to a national organization related to state courts. Without obtaining the appropriate approvals, the Judicial Council bypassed one of the controls intended to reduce the risk of fraud and ensure the Judicial Council only procures appropriate goods and services at the best value. When the Judicial Council procures goods or services without the appropriate approvals, it increases the risk that the terms of those procurements may not be optimal or that the procurements may be inappropriate. Further, when the Judicial Council’s staff do not obtain approval for procurements from the appropriate individuals, it increases the possibility of misuse of public funds. At our request, the principal manager over procurement, who could have approved the five procurements we identified, reviewed those procurements and determined that he would have approved them if Judicial Council staff had routed them to him. The Judicial Council staff were able to procure the goods and services without appropriate approval because the Judicial Council does not include a step in its procurement process to ensure that staff obtain appropriate approvals. The Judicial Council acknowledged that the two supervisors who approved the five procurements did not have sufficient signing authority to do so. According to the principal manager of audit services, it was an error that the staff and supervisors did not obtain the appropriate approvals that occurred because the Judicial Council had a vacancy in a mid‑level manager position at the time of the procurements. After we informed the Judicial Council of the inappropriate approvals, the principal manager over procurement stated that he addressed the issue by holding a discussion with supervisory staff to ensure that they clearly understood the approval authority policy, and by sending an email to supervisory and management staff to remind them of the policy and its location in the local manual. Nevertheless, we question whether a discussion with staff and an email reminder will adequately address the issue because we reported a similar finding in our 2017 audit. At that time, we found that one of the Judicial Council’s contract supervisors who had approval authority limited to less than $50,000 approved a procurement costing $345,000. Because of the potential consequences of the Judicial Council’s staff procuring goods and services without the appropriate approvals, and because we found additional instances that occurred during the period covered by this audit, the Judicial Council should establish stronger controls to prevent this problem in the future. For example, California State Auditor Report 2019-302 6 December 2019 the Judicial Council could require those individuals approving entries of procurements in FI$Cal to verify that appropriate managers or supervisors approved the procurements and signed the hard copy contracts. Additionally, we determined that the supervisor’s improper approval of one of those five contracts caused the Judicial Council to violate its legal requirement to notify the State Auditor of that procurement. The judicial contract law requires the Judicial Council to notify the State Auditor in writing within 10 business days each time it executes a contract with a cost greater than $1 million; the law excludes IT procurements that are subject to review and recommendations by the California Department of Technology and certain construction contracts. However, the Judicial Council did not notify the State Auditor within the required time frame of a $2.7 million contract for legal representation in juvenile dependency proceedings. As we discuss previously, the supervisor who approved that contract did not have authority to approve contracts with costs greater than $500,000. That supervisor also failed to inform the contracts manager who typically sends the notices to the State Auditor that the Judicial Council needed to do so. Recommendations To ensure that it complies with state law, maintains appropriate transparency, and provides the Legislature with all legally required information regarding its contracting and procurements, the Judicial Council should take the following actions by February 2020: • Develop and implement a method to include all of the non‑Superior Court entities’ information required by the judicial contract law when submitting semiannual reports. For instance, if the publicly available FI$Cal website does not provide all the required information, the Judicial Council should implement an alternate reporting mechanism, such as providing summary information from FI$Cal data not available to the public. • Establish a procedure that requires procurement staff to consistently include all necessary information in FI$Cal when processing contract amendments. • Develop and implement a method to ensure that it includes in its reports all required contract amendment information related to the Superior Courts. To better limit the risk of inappropriate procurements and to ensure it procures goods and services at the best value, the Judicial Council should immediately revise its procurement process to include a final verification step to confirm that managers with appropriate signature authority approve its procurements. California State Auditor Report 2019-302 7 December 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 Date: December 19, 2019 California State Auditor Report 2019-302 8 December 2019 APPENDIX Scope and Methodology We conducted this audit according to the audit requirements contained in the contract code section 19210, which is part of the judicial contract law. We also conducted this audit in accordance with standards of the U.S. Government Accountability Office (GAO), which we are statutorily required to follow. The judicial contract law requires the State Auditor, upon legislative appropriation, to perform biennial audits of the Judicial Council. The table lists the audit objectives we developed and the methods we used to fulfill those objectives. Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Determine whether the judicial contracting • Compiled revisions to the contract code, SAM, and SCM that occurred from July 1, 2017, manual is consistent with the requirements through June 30, 2019, and identified significant changes that impact the Judicial Council. set forth in the judicial contract law. • Compared the significant changes we identified in the contract code, SAM, and SCM to the judicial contracting manual and determined whether the judicial contracting manual is consistent with requirements set forth in the judicial contract law. We did not identify any reportable findings related to this objective. 2 Determine whether the Judicial Council’s Determined that the Judicial Council did not make any changes to its local manual and local manual conforms to the judicial verified that changes to the judicial contracting manual did not impact the local manual’s contracting manual. compliance. We did not identify any reportable findings related to this objective. 3 Assess the Judicial Council’s internal • Reviewed the judicial contracting manual, the Judicial Council’s local manual, and the Judicial controls over procurement practices and Council’s procedures and interviewed staff to assess the Judicial Council’s internal controls then determine whether it complied over contracting and procurement. with those controls and other key • Using data from the Judicial Council’s FI$Cal system and its previous Oracle system, identified requirements—including requirements procurements from the period July 1, 2017, through June 30, 2019. related to competitive bidding and • Judgmentally selected 40 of those procurements—15 agreements, 20 purchase orders, sole‑source contracting—when and five contract amendments—and tested them for compliance with requirements of the completing its procurements. judicial contracting manual and the Judicial Council’s local manual, including requirements concerning procurement approval, segregation of duties, competitive bidding, and other key controls. 4 Assess the Judicial Council’s internal • Reviewed the judicial contracting manual, the Judicial Council’s local manual, and the Judicial controls over payment practices and Council’s procedures and interviewed staff to assess the Judicial Council’s internal controls determine whether the entity complied over payments. with those controls. • Selected one invoice payment from each of the 40 procurements we selected to address Objective 3 and tested for compliance with requirements of the judicial contracting manual and other procedure documents, including requirements concerning invoice approval, proper authorizations, and segregation of duties. 5 Evaluate the Judicial Council’s contracts • Identified a provision of the judicial contracting manual that prohibits Judicial Branch entities to determine whether the Judicial Council from splitting transactions costing more than $10,000 into multiple transactions costing less inappropriately split any contracts to than $10,000 to avoid competitive bidding requirements. avoid necessary approval or competitive • Using data from the Judicial Council’s FI$Cal system, identified vendors from which the bidding requirements. Judicial Branch made multiple procurements of less than $10,000 during the period July 1, 2017, through June 30, 2019. • Assessed procurement documentation to determine whether any of those multiple procurements should have been a single competitively bid procurement. We did not identify any reportable findings related to this objective. California State Auditor Report 2019-302 9 December 2019 AUDIT OBJECTIVE METHOD 6 Assess the reliability of data used in the • Obtained data generated from the Judicial Council’s FI$Cal and previous Oracle systems used Judicial Council’s semiannual reports in its semiannual reports for the period July 1, 2017, through June 30, 2019. on Judicial Branch contracts and payments, • Haphazardly selected hard copy procurement files and searched for those procurements in as necessary, for the purpose of establishing either the semiannual report listings or FI$Cal and Oracle systems to determine whether the testing selections. procurements appeared in the systems and were accurate. • Haphazardly selected payment invoices using the Judicial Council’s semiannual reports, reviewed the hard copy invoice records related to each payment, and verified that the amounts in the reports match the amounts on the invoices. • Performed this objective in accordance with generally accepted government auditing standards, which we are statutorily required to follow. • Determined that these data are sufficiently reliable for the audit purpose of selecting our testing items, and for relying on the information the Judicial Council provided in its semiannual reports. • We did not identify any reportable findings related to this objective. Source: Analysis of the judicial contract law, the State Auditor’s planning documents, and information and documentation identified in the table column titled Method. California State Auditor Report 2019-302 10 December 2019 * * California State Auditor’s comment appears on page 14. California State Auditor Report 2019-302 11 December 2019 1 California State Auditor Report 2019-302 12 December 2019 California State Auditor Report 2019-302 13 December 2019 California State Auditor Report 2019-302 14 December 2019 COMMENT California State Auditor’s Comment on the Response From the Judicial Council of California To provide clarity and perspective, we are commenting on the Judicial Council’s response to our audit. The number below corresponds to the number we have placed in the margin of the Judicial Council’s response. 1 The Judicial Council’s comment that its staff were unaware at the time it prepared the semiannual report of any delays between its entry of payment data into FI$Cal and when that data would subsequently become available to the public appears to be incorrect. In each of its semiannual reports for fiscal year 2018–19, the Judicial Council informed the reports’ users that they can see all procurement transactions and historical payment data older than 60 days on FI$Cal’s website.