Recommendations

Judicial Branch Procurement Courts Generally Met Procurement Requirements, but Some Need to Improve Their Payment Practices January 2021 REPORT 2020‑301 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 14, 2021 2020-301 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As required by state law, my office conducted an audit of certain judicial branch entities’ 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 (judicial contracting manual) that is consistent with the Public Contract Code and establishes the policies and procedures for procurement and contracting that all judicial branch entities, including superior courts, must follow. This report concludes that the five courts we reviewed for this audit—the superior courts in Alameda, Contra Costa, Lake, Orange, and San Bernardino counties—adhered to most of the required and recommended procurement and contracting practices that we evaluated, but they could improve in certain areas. Specifically, three courts did not always follow required or recommended payment practices that help to safeguard public funds. For example, the Alameda court made $16,000 in questionable payments because it did not match invoices to appropriate supporting documentation for two payments we reviewed. In addition, four courts have failed to consistently comply with state law requiring them to notify my office when they enter into high-value contracts, which limits my office’s ability to identify in a timely and accurate manner contracts that may warrant review. Finally, two courts could improve their local contracting manuals by including certain information, such as a policy on legal review of contracts, that the judicial contracting manual recommends and the courts had no compelling reason to exclude. 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 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 v January 2021 Contents Summary 1 Introduction 5 Three Courts Did Not Always Adhere to Payment Requirements or Recommendations 9 Four Courts Failed to Consistently Report High-Value Contracts 15 Two Courts Lack Recommended Information in Their Local Contracting Manuals 19 Other Area We Reviewed 23 Appendix Scope and Methodology 25 Responses to the Audit Superior Court of California, County of Alameda 27 California State Auditor’s Comment on the Response From the Superior Court of California, County of Alameda 29 Superior Court of California, County of Contra Costa 31 Superior Court of California, County of Lake 33 California State Auditor’s Comment on the Response From the Superior Court of California, County of Lake 35 Superior Court of California, County of Orange 37 California State Auditor’s Comments on the Response From the Superior Court of California, County of Orange 41 Superior Court of California, County of San Bernardino 43 California State Auditor’s Comments on the Response From the Superior Court of California, County of San Bernardino 45 vi Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 1 January 2021 SUMMARY For this fifth biennial audit of the procurement and contracting practices of California superior courts, we reviewed the superior courts in Alameda, Contra Costa, Lake, Orange, and San Bernardino counties. We determined that these five courts adhered to most of the required and recommended procurement and contracting practices that we reviewed; however, they could make certain improvements to better ensure the responsible stewardship of public funds. We reviewed the selected courts’ practices related to contracts, payments, and purchase card transactions for fiscal year 2019–20. This report concludes the following: Three Courts Did Not Always Adhere to Payment Requirements or Page 9 Recommendations We found that three courts did not always follow established payment procedures, increasing the risk of misusing public funds. The Alameda court made questionable payments totaling $16,000 because it did not match invoices to appropriate supporting documentation for two of 18 payments we reviewed, and it routinely did not adhere to authorization limits for approving invoices. The Orange court also exceeded its authorization limit for one of 10 payments we reviewed, and the Lake court did not fully separate payment duties as recommended so that no one person is in a position to initiate or conceal errors or irregularities for six of 10 payments we reviewed. The courts whose purchase card transactions met our threshold for review (Contra Costa, Orange, and San Bernardino) generally used purchase cards appropriately. Many of the purchase card transactions we reviewed were emergency purchases related to the 2019 coronavirus disease pandemic and were exempt from competitive bidding requirements. The processes courts followed for these emergency transactions and the goods and services they purchased were reasonable. Four Courts Failed to Consistently Report High-Value Contracts Page 15 Some courts have not fully complied with state law that generally requires them to notify the California State Auditor’s Office (State Auditor) within 10 business days of entering into contracts estimated to cost more than $1 million. The Alameda court had four such contracts in fiscal year 2019–20 but did not notify us of any because it did not have sufficient policies and procedures in place for doing so. The Contra Costa, Orange, and San Bernardino courts did notify us about some high-value contracts they had in fiscal year 2019–20 but failed to notify us about others for various reasons, including 2 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 staff error, a gap in their notification procedures, or incorrect interpretation of the notification requirement. By not fully complying with the notification requirement, these courts have limited our ability to identify in a timely and accurate manner contracts that may warrant review. Page 19 Two Courts Lack Recommended Information in Their Local Contracting Manuals Two courts do not have information in their local contracting manuals that would help ensure that their staff members follow appropriate contracting processes. The Alameda and Lake courts each omitted from their local contracting manuals certain provisions that the Judicial Branch Contracting Manual (judicial contracting manual) recommends courts include. Specifically, the Alameda court did not identify requirements for legal review of contracts, and both the Alameda and Lake courts lacked a plan for administering contracts. Neither court had a compelling reason for not including the recommended information. In addition, we reviewed a selection of contracts from each of the five courts to determine whether the courts followed required procurement and contracting practices. We found no reportable issues in this area. Summary of Recommendations Alameda, Lake, and Orange County Superior Courts To ensure appropriate expenditures of public funds, the courts should follow required and recommended practices for approving invoices and separating payment duties. Alameda, Contra Costa, Orange, and San Bernardino County Superior Courts To comply with the requirements of state law, the courts should implement procedures to notify the State Auditor within 10 business days of entering into all contracts estimated to cost more than $1 million and not exempt from the notification requirement. CALIFORNIA STATE AUDITOR | Report 2020-301 3 January 2021 Alameda and Lake County Superior Courts To ensure staff members have sufficient guidance about appropriate contracting practices, the courts should include in their local contracting manuals information that the judicial contracting manual recommends. Agency Comments The courts generally agreed with our recommendations. The Orange and San Bernardino courts disagreed with certain aspects of our finding that they did not fully comply with the requirement to notify our office about high-value contracts. 4 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 5 January 2021 Introduction Background The California Judicial Branch Contract Law (judicial contract law) went into effect in 2011. It generally requires all judicial branch entities to comply with the provisions of the Public Contract Code that are applicable to state agencies and departments 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. The judicial contract law also imposes reporting requirements on judicial branch entities. Specifically, it requires that judicial branch entities notify the California State Auditor’s Office (State Auditor) within 10 business days of all contracts for goods and services they enter into that involve a total cost estimated at more than $1 million in value, with limited exceptions such as trial court construction contracts. The law further specifies that all administrative and information technology (IT) projects of the Judicial Council or the courts with a total cost estimated to exceed $5 million are exempt from this reporting requirement and shall be subject to the review of the California Department of Technology. The law also requires the Judicial Council to submit semiannual reports to the Legislature and the State Auditor containing specified information about most of the judicial branch’s contracting activities. The Judicial Council prepares the semiannual reports using information that judicial branch entities are responsible for providing to it. In addition, and subject to legislative appropriation, the judicial contract law directs the State Auditor to audit judicial branch entities other than the Judicial Council every two years to assess their implementation of the judicial contract law. This is our fifth biennial audit report; in all, the five reports so far have covered procurement practices at 24 of the State’s 58 superior courts since the judicial contract law went into effect in 2011. For this audit, we selected the superior courts in the counties of Alameda, Contra Costa, Lake, Orange, and San Bernardino. We audited two of our selected entities—the superior courts in the counties of Alameda and Orange—previously, in 2014 and 2012, respectively. As state law requires, we based our selection of the courts we examined on factors including, but not limited to, each court’s size, total volume of contracts, previous audits or known deficiencies, and significant or unusual changes in management. Table 1 provides the relative size, workload data, and volume of expenditures of the five superior courts we selected for this audit. 6 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 Table 1 The Five Courts We Reviewed Varied in Size, Workload, and Volume of Expenditures COUNTY SUPERIOR COURT ALAMEDA CONTRA COSTA LAKE ORANGE SAN BERNARDINO Total expenditures, fiscal year 2019–20 $110,398,000 $62,951,000 $4,800,000 $207,031,000 $145,752,000 Total contract payments, $19,196,000 $16,401,000 $1,675,000 $35,465,000 $25,920,000 fiscal year 2019–20 Case filings, fiscal year 2018–19 224,000 112,000 10,000 410,000 287,000 Judges, total authorized positions as of 73 38 4 127 73 June 30, 2019 Court employees, total authorized 749 337 35 1,516 1,098 positions for fiscal year 2019–20 Source: The Judicial Council’s 2020 Court Statistics Report; the Judicial Council’s Semiannual Report on Contracts for the Judicial Branch for July 1 through December 31, 2019, and for January 1 through June 30, 2020; and the superior courts’ budget reports for fiscal year 2019–20. Note: Data in this table are unaudited and rounded. 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 is a reference resource for statewide management policy, and the State Contracting Manual provides the policies, procedures, and guidelines to promote sound business decisions and practices in securing necessary services for the State. The Public Contract Code contains, among other provisions, competitive bidding requirements for public entities. Competitive bidding requirements help to provide all qualified bidders with a fair opportunity to enter the bidding process, and to eliminate favoritism, fraud, and corruption in the awarding of public contracts. In addition to establishing procurement requirements consistent with the law, the judicial contracting manual also contains recommended procurement practices for courts. Although those provisions are not mandatory, the judicial contracting manual favors the use of recommended practices unless courts have good business reasons for deviating from those recommendations. textbox Consistent with the Public Contract Code, the judicial contracting manual generally requires judicial branch entities to secure competitive bids or proposals for each contract, with certain exceptions, as the text box shows. For example, state law and the judicial contracting manual exempt purchases under $10,000 from competitive bidding requirements as long as a contracting entity determines that the price is fair and reasonable. State procurement CALIFORNIA STATE AUDITOR | Report 2020-301 7 January 2021 rules and the judicial contracting manual also do not require competitive bids on contracts Judicial Purchases That Can Be Exempt From for emergency purchases or contracts with Competitive Bidding Requirements governmental entities. • Purchases under $10,000 The judicial contracting manual also allows several • Emergency purchases types of noncompetitive procurements. Two types • Purchases from government entities that judicial branch entities can use are sole-source procurements and certain leveraged procurement • Legal services agreements (leveraged agreements), including state • Purchases through certain leveraged leveraged agreements. The judicial contracting procurement agreements manual defines a sole-source procurement as one • Purchases from business entities operating in which an entity affords only one vendor the community-based rehabilitation programs opportunity to provide goods or services after the entity shows appropriate justification for doing • Licensing or proficiency testing examinations so. An entity may use a leveraged agreement to • Purchases through local assistance contracts purchase goods and services from certain vendors • Sole-source purchases on the same or substantially similar contract terms as those negotiated by the State or another • Purchases from certified small businesses entity without having to seek competitive bids. • Purchases from disabled veteran business enterprises The Department of General Services administers some leveraged agreements for use by state Source: State law and the judicial contracting manual. agencies and local governments so that they may buy directly from suppliers through existing state contracts and agreements. The judicial contracting manual includes a process for using leveraged agreements, but it recommends that judicial branch entities consider whether they can obtain better pricing or terms by negotiating directly with vendors or soliciting competitive bids. 8 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 9 January 2021 Three Courts Did Not Always Adhere to Payment Requirements or Recommendations Key Points • The Alameda, Lake, and Orange courts did not always follow required practices or recommended safeguards when making payments. As a result, each court increased its risk of improper payments, and the Alameda court made $16,000 in questionable expenditures. • The courts generally used purchase cards appropriately, and emergency purchase card transactions related to the 2019 coronavirus disease (COVID-19) also appeared to be appropriate and reasonable. The Alameda, Lake, and Orange Courts Did Not Always Follow Payment Safeguards, Increasing the Risk of Improper Payments Following proper procedures for processing payments, including reviewing the accuracy of invoices, establishing proper levels of approval authority (authorization limits), and separating invoice approval duties from payment duties, is critical for ensuring that courts use public funds appropriately. However, we found that three courts—Alameda, Lake, and Orange—did not always follow these safeguards, which increases the risk of improper payments. Specifically, the Alameda court made roughly $16,000 in questionable payments in fiscal year 2019–20 because staff bypassed proper safeguards for approving invoices. According to the Judicial Council’s Trial Court Financial Policies and Procedures Manual (procedures manual), which the judicial contracting manual instructs courts to follow when processing payments, court staff must match invoices against appropriate supporting documentation, such as a contract, to ensure that the court is paying the vendor the correct rate for the goods or services provided. However, of the 18 payments (totaling approximately $1.5 million) we reviewed at the Alameda court, a division director approved two payments that exceeded contracted rates by 1 $3,330 and $12,690, respectively. The two payments were for legal representation provided by private attorneys. Although the contracts allowed for expenses in excess of the contracted rates (extraordinary expenses) if attorneys submitted requests and the court approved them, the division director approved the payments without determining whether requests had been submitted and approved, and we found that the court had no record of approval for the extraordinary expenses it paid. The division director indicated that she did not request supporting documentation for the $3,330 overpayment because she did not notice the discrepancy between the contracted rate and the invoice rate. For the $12,690 overpayment, she approved the payment on the basis of the attorney’s declaration that he provided additional services, not documentation showing that the court approved the extraordinary expenses. Because the Alameda court did not 1 For the five superior courts we reviewed, we began by reviewing 10 payments for each court. If we saw issues that warranted additional review of a court’s payment processes, we reviewed eight additional payments. 10 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 match the amounts vendors charged to appropriate supporting documentation in these two cases, it made payments that lacked justification. The Alameda court also allowed staff to disregard their authorization limits when approving invoices. Specifically, the Alameda court’s accounts payable manual identifies dollar limits up to which it authorizes court employees in certain positions to approve invoices for payment. Adhering to such authorization limits reduces the court’s risk of making inappropriate payments, but the Alameda court frequently did not do so. For the 18 payments we reviewed, nine court employees approved 13 invoices that exceeded their authorization limits by amounts ranging from $1,300 to more than $317,000. According to the court’s accounts payable manual, an executive, such as the court’s executive officer, must approve any payments over $10,000. However, 12 of the 18 payments we reviewed were for invoice amounts greater than $10,000, and none of the 12 invoices received executive approval. Rather, managers and directors who had lower authorization limits generally approved the invoices. In one case, a nonsupervisory staff member with no authority to approve invoices did so for an invoice for more than $317,000 from a vendor that collects debts owed to the court, without additional review from higher-level staff. The court’s executive officer and the court’s finance and facilities director explained that they intended the court to adhere to authorization limits when approving the contracts or other underlying agreements associated with these payments, not when approving invoices. However, the court’s accounts payable manual clearly instructs staff to act within the scope of their authority when processing invoices, and both the executive officer and finance and facilities director agreed that they should do so. Nine court employees approved 13 invoices that exceeded their authorization limits by amounts ranging from $1,300 to more than $317,000. The Lake court increased its risk of making improper payments by not always fully separating payment duties. According to the procedures manual, courts must assign work in a manner that ensures that no one person is in a position to initiate or conceal errors or irregularities, and the judicial contracting manual recommends that different employees be responsible for approving invoices and preparing payments. However, for six of CALIFORNIA STATE AUDITOR | Report 2020-301 11 January 2021 the 10 payments we reviewed at the Lake court (accounting for approximately $32,000 of the total $133,000 in expenditures we reviewed), the court’s executive officer approved invoices and also posted payments in the court’s accounting system. The executive officer stated that this was because the court has limited staff and explained that a staff member other than herself initially entered payment information into the accounting system. Because two individuals were thus involved in payment duties, court staff members deemed this approach to separating those duties adequate. Yet, the executive officer still performed two payment duties, and a process that does not fully separate payment duties is inherently higher in risk than one that does. The court indicated that its risk is mitigated because a Judicial Council staff member provides quarterly review of the court’s accounts. Nonetheless, it would be a good practice for the court to take mitigating actions of its own, and the court sometimes did so. For example, in two other instances we reviewed, the executive officer approved invoices and posted payments, but the court also documented secondary approval of the invoices by other staff members. We believe the court should consistently incorporate an additional safeguard such as this when it cannot fully separate payment duties. It would be a good practice for the Lake court to take mitigating actions of its own when it cannot fully separate payment duties. At the Orange court, we reviewed 10 payments totaling just over $533,000 and identified one instance in which a staff member approved an invoice of more than $160,000 for legal services without seeking executive approval. The court’s accounts payable procedures manual directs accounts payable staff members to obtain approvals for invoices from managers, using a system that requires an additional level of approval by an executive for any payments exceeding $50,000. However, a supervisor at the Orange court informed us that staff who specialize in reviewing court documents, including validating legal invoices (specialists), handle the approvals for certain invoices, such as those for payments to lawyers who provide legal representation for low-income defendants, and they do so outside of the system that requires a second level of approval for invoices totaling more than $50,000. The reason that the court does not process legal invoices through the normal system is because of concerns about confidentiality, according to the court’s chief financial and administrative officer. 12 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 Although the $160,000 payment we reviewed was appropriate per the terms of the court’s contract, the court bypassed a key safeguard and increased the risk of improper payments for this invoice and others that specialists handled. The chief financial and administrative officer agreed that the court should incorporate additional approvals for these types of invoices when they are for payments above a certain dollar limit, and he said he would have staff members look into finding a balance between confidentiality and appropriate safeguards. The Courts Generally Conducted Purchase Card Transactions Appropriately The courts whose purchase card transactions we reviewed generally used their purchase cards 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 Alameda, Contra Costa, Orange, and San Bernardino courts used CAL-Cards and other purchase cards, primarily for travel-related expenses; the Lake court did not use a purchase card. Proper safeguards over purchase cards help ensure that courts use public funds appropriately. 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. Because courts provide purchase cards so individuals can make purchases directly from vendors, the cards are subject to abuse if the courts do not strictly oversee their use. We reviewed purchase card transactions at three courts— Contra Costa, Orange, and San Bernardino—because their total value of purchase card payments during fiscal year 2019–20 met our threshold for reviewing individual transactions. The total value of the Alameda court’s purchase card payments did not meet our threshold for reviewing individual transactions. The purchases we reviewed generally complied with applicable requirements. We reviewed six transactions at each of the three courts, focusing on purchases that exceeded the $1,500 transaction limit established in the judicial contracting manual. The judicial contracting manual allows courts to deviate from that limit but recommends that they document alternative procedures, such as setting different transaction limits, in their local contracting manuals. The Contra Costa and San Bernardino courts adopted the judicial contracting manual’s limit of $1,500, although they had procedures allowing approval of higher purchase limits in certain cases. The Orange court’s local contracting manual set higher transaction limits ranging from $5,000 to $25,000 for certain staff members, which the court’s chief financial and administrative officer deemed reasonable given the court’s size and its business needs. CALIFORNIA STATE AUDITOR | Report 2020-301 13 January 2021 All transactions we reviewed appeared to be reasonable and had appropriate supporting documentation, such as purchase request approvals and receipts for goods. The purchases we reviewed generally complied with applicable requirements. Emergency Purchase Card Transactions Related to COVID-19 and Exempt From Competitive Processes Appeared to Be Reasonable In March 2020, the Governor proclaimed a state of emergency in California to address the global COVID-19 outbreak. Because the state of emergency began during our audit period of fiscal year 2019–20, many of the purchase card transactions we reviewed were for goods such as hand sanitizer or protective equipment. Most of these purchases were under $10,000 in value, which is the threshold at which state law and the judicial contracting manual’s competitive bidding requirements typically apply. Regardless of the value of a good or service, state law and the judicial contracting manual also exempt contracting entities from competitive bidding requirements when they make emergency purchases that are necessary for the immediate protection of life, health, property, or essential public services. The urgency of the courts’ COVID-19 related purchases, the possibility of increased prices for high- demand goods, and the potential deviation from certain standard purchasing requirements together introduced additional risk for the misuse of public funds. Despite the increased risk, the COVID-19 related purchases we reviewed appeared to be appropriate. We identified 12 purchases related to COVID-19 among the 18 purchase card transactions we reviewed for the Contra Costa, Orange, and San Bernardino courts. These 12 purchases totaled approximately $65,000. The courts made the purchases from March through June 2020 to obtain goods including hand sanitizing supplies, face masks, and electronic equipment for a virtual courtroom. In each case we reviewed, the courts had documentation showing the approval of the purchase request and the receipt of a good for which the court had a reasonable need due to the public health emergency. 14 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 Recommendations Alameda County Superior Court To ensure that it expends public funds appropriately, the court should immediately require staff to match invoices to appropriate supporting documentation and to adhere to the established authorization limits when approving invoices. Lake County Superior Court To reduce the risk of improper payments, by July 1, 2021, the court should revise its payment process to incorporate an alternative safeguard in any instance when it is not practical to fully separate payment duties. Orange County Superior Court To ensure appropriate approval of all payments, by July 1, 2021, the court should revise its payment process to consistently require two levels of approval for all invoices above a certain dollar limit. CALIFORNIA STATE AUDITOR | Report 2020-301 15 January 2021 Four Courts Failed to Consistently Report High-Value Contracts Key Points • Although state law generally requires that a court notify the State Auditor of a contract with a total estimated cost of more than $1 million, the Alameda court failed to comply with this requirement and did not report four such contracts that it entered into during fiscal year 2019–20 worth approximately $20 million combined. • During fiscal year 2019–20, the Contra Costa, Orange, and San Bernardino courts all failed to report five required contracts worth nearly $19 million combined. The Alameda Court Failed to Report Contracts Worth Approximately $20 Million The Alameda court did not comply with the legal requirement to report certain contracts. As we discuss in the Introduction, the judicial contract law requires courts to notify the State Auditor in writing within 10 business days of entering into a contract with a total cost estimated at more than $1 million; the law excludes only IT projects valued at more than $5 million that are subject to review and recommendations by the California Department of Technology and certain contracts related to trial court construction. The Alameda court had four contracts in fiscal year 2019–20 that it should have reported to us, but failed to do so. The contracts, which were for services such as janitorial services, ranged in value from $2 million to approximately $12.3 million and together were worth approximately $20 million. In addition to not complying with the law, the court’s failure to notify our office about its high-value contracts as required limits our ability to assess in an accurate and timely manner whether the court’s contracts warrant review. The Alameda court’s director of finance and facilities, who oversees its contracting activities, acknowledged that the court did not notify our office about contracts over $1 million in estimated value because it did not have procedures in place to do so and because of a lack of knowledge and training for individuals responsible for handling the notifications. The judicial contracting manual details the notification requirement, and the Alameda court also included information about it in a version of its local contracting manual that was effective through January 2020. However, the director of finance and facilities explained that the court later revised its local contracting manual and inadvertently omitted that information from its current local contracting manual. After we discussed this finding with the Alameda court, the court began adding procedures for identifying and reporting contracts over $1 million to its process for reviewing contracts, consistent with state law and the judicial contracting manual. 16 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 The Contra Costa, Orange, and San Bernardino Courts Did Not Consistently Report All High-Value Contracts Although the other three courts that had contracts valued at over $1 million during fiscal year 2019–20 were aware of the notification requirement and reported certain high-value contracts to our office, the Contra Costa, Orange, and San Bernardino courts did not do so in all cases where the law required it. The Contra Costa court notified us about one high-value contract, the Orange court notified us about two, and the San Bernardino court notified us about three such contracts. However, the Contra Costa court failed to inform us about one contract worth $1.2 million, and the Orange and San Bernardino courts each failed to inform us about two contracts that were worth $5.5 million for the Orange court and nearly $12 million for the San Bernardino court. The Contra Costa court failed to report a contract for IT services provided by the county of Contra Costa that was worth $1.2 million in fiscal year 2019–20. According to the analyst responsible for notifying our office of such contracts, the court did not notify us in this circumstance because the court’s contractual agreement with the county was originally established in 1998, and the notification requirement in state law became effective in 2011. However, the law applies to contracts entered into or amended from October 1, 2011 on. The court entered into a new contract with the county in 2016 that replaced the 1998 contract. This contract was therefore subject to the legal requirement, and by failing to notify our office, the court did not comply with the law. Similarly, the Orange court failed to comply with state law when it did not report one IT contract valued at $1.2 million that it entered into during fiscal year 2019–20 and one legal services contract that was worth $4.3 million in fiscal year 2019–20. The court’s chief financial and administrative officer stated that the court uses an automated reporting process to notify our office of contracts that qualify for reporting, and the lack of reporting for the IT contract was due to a gap in the automated process. He stated that because the court entered into the IT contract based on an existing state contract, it did not process this contract in the typical way and therefore did not enter the contract into a system that automatically issues notifications to our office. In addition, the court’s contracts and procurement manager explained that the court did not notify us about the legal services contract because a staff member made an error entering contract information into the system. The court’s chief financial and administrative officer explained that the court will refine and implement appropriate processes and systems to ensure that our office is notified about any contracts valued above $1 million. CALIFORNIA STATE AUDITOR | Report 2020-301 17 January 2021 Additionally, the San Bernardino court incorrectly exempted two high-value contracts from the notification requirement in state law. Specifically, the court failed to report two contracts for medical benefits plans worth $7 million and $4.9 million that it entered into during fiscal year 2019–20. The contracts and procurement manager at the court explained that the court had relied on direction that it received in response to a question a court staff member asked a Judicial Council staff member in 2013, which the court misinterpreted as excluding contracts for services such as medical benefits plans from the notification requirement in the judicial contract law. The manager indicated that the court now properly understands the requirement and stated that it will immediately begin notifying our office of these types of contracts when their estimated value is more than $1 million. Recommendation Alameda, Contra Costa, Orange, and San Bernardino County Superior Courts To comply with the requirements of state law, each court should immediately implement policies and procedures for notifying the State Auditor within 10 business days of entering into all contracts with estimated values over $1 million, except those contracts exempted from the notification requirement in state law. 18 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 19 January 2021 Two Courts Lack Recommended Information in Their Local Contracting Manuals Key Points • The Alameda court’s local contracting manual lacked certain information recommended by the judicial contracting manual. Specifically, the court failed to include a legal review policy and contract administration plan in its local contracting manual. • The Lake court also did not include the recommended contract administration plan in its local contracting manual. The Alameda Court Did Not Include a Legal Review Policy in Its Local Contracting Manual Although all five courts met the requirements for local contracting manuals, two courts did not include some information recommended by the judicial contracting manual. Local contracting manuals serve to supplement the judicial contracting manual. They provide specific details on procurement policies and procedures for each court in order to familiarize court employees with the court’s specific purchasing and contracting practices. The judicial contracting manual requires that the court’s local contracting manual contain certain information, such as the court’s organizational structure, including the individuals with responsibility and authority for procurement activities. In addition to the required information, the judicial contracting manual recommends that a local contracting manual should contain some additional information unless a court has a good business reason for excluding it. However, two courts did not follow certain recommendations or provide a compelling reason for disregarding the judicial contracting manual’s guidance. The Alameda court’s local contracting manual did not establish clear guidelines for when staff should submit contracts for legal review (legal review policy). The judicial contracting manual recommends that courts adopt a legal review policy, and it provides circumstances in which courts should require legal review of contracts. For example, courts should require legal review of contracts that provide for the performance of high-risk activities, such as operating heavy equipment. However, the current version of the Alameda court’s local contracting manual does not include a legal review policy. The court’s executive officer explained that this is because the court may not be able to obtain legal review promptly. The judicial contracting manual provides that courts can arrange for legal review of their contracts through in-house legal staff, retained counsel, or the Judicial Council’s Legal Services office. The court’s executive officer explained that the court sometimes seeks legal review from one of its staff attorneys but prefers to rely on the Judicial Council. He expressed concern that the Judicial Council can have a backlog of legal review requests from multiple entities and that legal review can sometimes be delayed as a result, so formally documenting requirements for legal review of contracts could potentially hold the court to standards that would be difficult to uphold in practice. However, the executive officer was unable to demonstrate that 20 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 such a backlog had prevented the court from obtaining legal review in a timely manner. Therefore, we believe the court’s reason for not having a recommended legal review policy is inadequate, and the executive officer indicated that the court is open to adding a legal review policy in its local contracting manual. The Alameda and Lake Courts Did Not Include a Contract Administration Plan in Their Local Contracting Manuals Neither the Alameda nor the Lake courts included a recommended plan for administering contracts (contract administration plan) in their local contracting manuals. The purpose of such a plan is to detail the court’s contract administration practices and establish clear lines of authority for the management and conduct of contract administration functions—information that should help staff members perform their duties appropriately. For example, the San Bernardino court’s local contracting manual refers to the judicial contracting manual’s guidance on contract administration; it then supplements that guidance with additional information, such as clarifying that the staff member who fulfills the role of contract administrator is responsible for notifying the State Auditor of high-value contracts. The director of finance and facilities at the Alameda court stated that the contract administration plan was inadvertently omitted from the current local contracting manual during revision and, as we described above, she attributed the court’s failure to notify our office of high-value contracts in part to a lack of knowledge on behalf of the responsible individuals. A contract administration plan that addressed contract administration practices and management could have prevented this lack of knowledge. The director of finance and facilities agreed that it is a good practice to include the contract administration plan in the local contracting manual, as the judicial contracting manual recommends, and said the court will do so. An administrative services manager at the Lake court explained that the court did not include a contract administration plan in its local contracting manual because the court has a very limited number of staff members involved with contract administration activities and including such a plan is not a mandatory provision. However, having a contract administration plan as recommended by the judicial contracting manual could help the court ensure that knowledge of those activities transfers effectively when staff members transition in or out of key roles, particularly if a transition should occur unexpectedly. The Lake court’s executive officer stated that the court would review the judicial contracting manual and consider updating the local contracting manual to incorporate the recommended contract administration plan. CALIFORNIA STATE AUDITOR | Report 2020-301 21 January 2021 Recommendations Alameda County Superior Court To ensure appropriate administration and review of its contracts, by July 1, 2021, the court should revise its local contracting manual to include a contract administration plan and legal review policy, as recommended by the judicial contracting manual. Lake County Superior Court To ensure appropriate administration of its contracts, by July 1, 2021, the court should revise its local contracting manual to include a contract administration plan, as recommended by the judicial contracting manual. 22 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 23 January 2021 OTHER AREA WE REVIEWED To address the audit requirements contained in the judicial contract law, we also reviewed a selection of each court’s contracts to assess whether each court complied with applicable requirements. Table 2 shows the results of our review. Table 2 Other Area We Reviewed as Part of This Audit The Courts We Reviewed Generally Complied With Other Procurement and Contracting Requirements We reviewed a selection of contracts for each court to determine whether the courts adhered to requirements for awarding contracts. We examined 50 contracts (10 from each court) that were active during fiscal year 2019–20 and were worth approximately $84 million in total value. We determined that all five courts met procurement and contracting requirements set forth in the judicial contracting manual and each court’s local contracting manual. Courts competitively awarded 48 percent of the contracts we reviewed, totaling $45 million in value. For all such contracts, the courts either achieved competition by securing multiple bids or made a reasonable effort to achieve competition by advertising the contracting opportunities. The remaining contracts we reviewed, worth $39 million, were noncompetitive. For those contracts, the courts met applicable requirements from the judicial contracting manual, such as documenting the justification for using a sole‑source procurement to obtain goods or services from only one vendor. We conducted this audit in accordance with generally accepted government auditing standards and under the authority vested in the California State Auditor by Government Code 8543 et seq. 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 the audit objectives. 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 14, 2021 24 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 25 January 2021 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 Alameda, Contra Costa, Lake, Orange, and San Bernardino counties. The Table below lists the audit objectives and the methods we used to address them. Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, and regulations Reviewed relevant state law and the judicial contracting manual, as well as significant to the audit objectives. each court’s policies and procedures. 2 Based on risk factors specified in the judicial contract law, Evaluated all 58 California superior courts and ranked them based on the identify five judicial branch entities, excluding the Judicial following: significant changes that have occurred since 2018 that may Council, for audit to assess their implementation of the impact compliance with the judicial contract law; the amount of time since judicial contract law. they were last audited by our office or the Judicial Council and previous audit results or known deficiencies; significant changes in management or employee turnover; the complexity and size of the courts and their existing contracting practices and procedures; the volume and type of procurements made by the courts relative to total judicial branch procurements and to county populations; and substantial changes to the number and amount of total procurements from fiscal years 2018–19 to 2019–20. 3 For the five superior courts selected for this audit, perform • Obtained versions of each court’s local contracting manual that were the following: applicable during fiscal year 2019–20 and assessed whether the local a. Determine whether each court has developed its own contracting manuals conformed to the judicial contracting manual’s local contracting manual and assess its conformance to requirements and recommendations. the judicial contracting manual. • Based on factors including contract value and type of goods or services b. Assess each court’s compliance with key safeguards procured, judgmentally selected 12 contracts for each court that were related to procurement and contracting in the judicial active in fiscal year 2019–20 using the Judicial Council’s Semiannual contracting manual and its local contracting manual, Report on Contracts for the Judicial Branch (semiannual report) for fiscal including those related to competitive bidding, year 2019–20 or, for the Lake court, the court’s ad hoc report of contracts sole‑source contracting, and payment and deliverable active during that period. review and oversight. • Based on factors including payment value, judgmentally selected c. Evaluate each court’s contracts to determine whether 18 payments for each court (12 payments associated with the contracts it may have inappropriately split contracts to avoid we selected and six not associated with those contracts) using a fiscal obtaining necessary approvals or compliance with year 2019–20 payment report provided by each court. competitive bidding requirements. • To gain assurance that data used to select contracts and payments were d. Review the appropriateness of each court’s CAL‑Card or complete, traced source documents to the reports we used for selection. other court‑issued purchase card transactions when the Determined the payment reports were generally complete, although we value of those transactions meets a certain threshold. could not trace source documents to the Orange court’s payment report because the Orange court does not maintain paper payment records. Determined the semiannual reports were generally complete for the Alameda, Contra Costa, Orange, and San Bernardino courts but incomplete for the Lake court. Obtained an alternative data source, the Lake court’s ad hoc report of contracts, to mitigate the risk of selecting contracts from incomplete data. continued on next page . . . 26 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 AUDIT OBJECTIVE METHOD • For each court, reviewed 10 contracts and 10 payments (six associated with contracts we selected and four not associated with those contracts) against key requirements and safeguards identified in our review of the judicial contracting manual, local contracting manual, and other relevant policies and procedures. Followed up with court staff to determine the cause of any exceptions. • If exceptions in the first 10 items warranted further review of a court’s contract or payment processes, reviewed additional items. Reviewed 10 contracts for each of the five courts; 10 payments for the Contra Costa, Lake, Orange, and San Bernardino courts; and 18 payments for the Alameda court. • For each court, used the semiannual reports and the court’s list of active contracts to identify contracts newly valued over $1 million in fiscal year 2019–20. For any such contracts, reviewed the contracts and courts’ documentation of notifications sent to our office. In cases where the courts did not notify us of the contracts as required, interviewed court staff to obtain information about why we were not notified. • Used the semiannual reports and the Lake court’s ad hoc contract report to identify instances when courts may have split contracts. For the identified instances, we evaluated additional information, such as payment reports and contract documents, to identify whether a court entered into contracts with the same vendor for similar goods or services during the same time frame for the purposes of avoiding competitive bidding. Determined there was no evidence indicating that any of the five courts split contracts. • Determined whether each court used purchase cards and reviewed monthly purchase card statements for transactions that appeared questionable based on the amount or vendor. Based on factors including transaction value, reviewed a judgmental selection of six transactions at each of the three courts whose total value of fiscal year 2019–20 purchase card transactions met our threshold for review. For the selected transactions, reviewed purchase requisitions and receipts, and interviewed court staff to further assess any transactions that appeared questionable. Source: Analysis of state law and information and documentation identified in the column titled Method. CALIFORNIA STATE AUDITOR | Report 2020-301 27 January 2021 * 1 * California State Auditor’s comment appears on page 29. 28 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 29 January 2021 COMMENT CALIFORNIA STATE AUDITOR’S COMMENT ON THE RESPONSE FROM THE SUPERIOR COURT OF CALIFORNIA, COUNTY OF ALAMEDA To provide clarity and perspective, we are commenting on the Alameda court’s response to our audit. The number below corresponds to the number we have placed in the margin of the Alameda court’s response. The Alameda court’s intention to revise and update its 1 authorization limits does not address our concern that it has not required staff to adhere to authorization limits when approving invoices. As noted on page 10, we found that despite having established authorization limits in place for approving invoices, the court allowed staff to disregard these authorization limits when approving invoices. Such actions undercut the court’s management controls designed to reduce its risk of making inappropriate payments. Instead, the court should take steps to ensure that court staff adhere to authorization limits when approving invoices. 30 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 31 January 2021 32 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 33 January 2021 * * California State Auditor’s comment appears on page 35. 34 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 1 CALIFORNIA STATE AUDITOR | Report 2020-301 35 January 2021 COMMENT CALIFORNIA STATE AUDITOR’S COMMENT ON THE RESPONSE FROM THE SUPERIOR COURT OF CALIFORNIA, COUNTY OF LAKE To provide clarity and perspective, we are commenting on the Lake court’s response to our audit. The number below corresponds to the number we have placed in the margin of the Lake court’s response. The Lake court’s response indicates that the court believes it 1 has significantly limited its risk through its current approach to segregation of payment duties, but as we indicate beginning on page 10 in the report, the executive officer still performed two payment duties, and a process that does not fully separate payment duties is inherently higher in risk than one that does. Further, although the court did include additional safeguards in some instances, it did not consistently do so. Therefore, to further reduce the risk of making improper payments, the court should consistently incorporate an additional safeguard when it cannot fully separate payment duties. 36 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 37 January 2021 * * California State Auditor’s comments appear on page 41. 38 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 1 2 3 CALIFORNIA STATE AUDITOR | Report 2020-301 39 January 2021 40 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 41 January 2021 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE SUPERIOR COURT OF CALIFORNIA, COUNTY OF ORANGE To provide clarity and perspective, we are commenting on the Orange court’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of the Orange court’s response. The court’s partial rejection of our conclusions and 1 recommendations is inconsistent with both its acknowledgment that it did not notify us about all contracts as required by state law, and its indication that it will take additional action to ensure future compliance with the requirement. We stand by our conclusions and recommendations and provide further comments on the Orange court’s response below. The court’s response that it did not achieve 100 percent compliance 2 as shown in the instance of two of 10 contracts we reviewed indicates a misunderstanding of our work in this area. On page 16, we explain that the court notified of us about two high-value contracts that were subject to the requirement but did not notify us about another two. We reviewed the court’s compliance with the legal requirement to notify us about high-value contracts by identifying such contracts in fiscal year 2019–20 contract reports we obtained from the Judicial Council and the court. This was in addition to and distinct from our review of a selection of 10 of the court’s fiscal year 2019–20 contracts to determine whether the court adhered to requirements for awarding contracts, the results of which we summarize on page 23. Our conclusion that the court failed to consistently report 3 high-value contracts per state law is accurate and fair. We explain on page 16 that the court notified us about two such contracts but did not notify us about two others, which the court acknowledges in its response. Also, we do not state that the court was operating without any policies or procedures for complying with the notification requirement. Rather, as we describe on page 16, although the court was aware of the notification requirement and reported certain high-value contracts to our office, it did not do so in all cases for the reasons we note. Although the court does have policies and procedures in place for complying with the notification requirement, it needs to update its procedures to address the deficiencies we describe and ensure it notifies us about all contracts as required by law. We stand by our recommendation that it should do so. 42 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 CALIFORNIA STATE AUDITOR | Report 2020-301 43 January 2021 * 1 2 * California State Auditor’s comments appear on page 45. 44 Report 2020-301 | CALIFORNIA STATE AUDITOR January 2021 1 CALIFORNIA STATE AUDITOR | Report 2020-301 45 January 2021 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE SUPERIOR COURT OF CALIFORNIA, COUNTY OF SAN BERNARDINO To provide clarity and perspective, we are commenting on the San Bernardino court’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of the San Bernardino court’s response. It is unclear why the San Bernardino court states that it disagrees 1 with our finding since it acknowledges that it has now notified our office about the medical benefit plans contracts in question, and has revised its policies to ensure future compliance with the notification requirement in state law. Moreover, as we describe on page 17, the court’s contracts and procurement manager explained that the court had misinterpreted direction from a Judicial Council staff member about whether contracts for services such as medical benefit plans were subject to the notification requirement in state law, and she indicated the court now properly understands the requirement. The clarification the court provides in its response regarding its earlier misinterpretation does not alter our conclusion that it failed to consistently report high-value contracts as required by state law. State law establishes which contracts are subject to the notification 2 requirement. As we describe on page 5, the law generally requires courts to notify our office of high-value contracts for goods and services and excludes only certain contracts from that requirement, such as trial court construction contracts. Of the exclusions provided in the law, there is no exception to the notification requirement related to contracts for medical benefit plans or for employment-related contracts that are required by state law. Further, the court did not cite any authority excluding these types of service contracts in its response. The table to which the court refers is unaudited background information obtained from reports provided by the Judicial Council. That information is not relevant to our finding that the court incorrectly exempted two contracts from the notification requirement set forth in state law.