California State Auditor Report Number : 2016-301

Judicial Branch Procurement
The Five Superior Courts We Reviewed Mostly Adhered to Required and Recommended Practices,
but Some Improvements Are Needed

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• Three of the Five Superior Courts Could Improve Their Contracting Practices


• Two of the Five Superior Courts Had Some Weaknesses in Their Processing of Vendor or Purchase Card Payments

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Three of the Five Superior Courts Could Improve Their Contracting Practices

Main Points:

• The Riverside and San Diego courts had strong internal controls and followed required procurement procedures and recommended practices for both competitively bid and noncompetitive contracts.


• The San Joaquin, San Mateo, and Tehama courts did not always follow applicable requirements and recommended practices when entering into noncompetitive contracts. For example, these three courts did not always ensure that the prices they received for noncompetitive contracts were fair and reasonable.

Because three of the courts we reviewed did not always follow Judicial Council and state procurement requirements and recommended practices when entering into contracts, they may not be making the best use of public funds. For instance, receiving proper approval for contracts promotes responsible stewardship of public funds by ensuring multiple levels of review. Additionally, evaluating prices from other vendors, even when a contract will follow a noncompetitive process, is a recommended practice for ensuring that the court is obtaining the best value possible when purchasing goods and services. Table 3 summarizes our review of key procurement requirements and recommended practices for the 12 contracts, which include both competitively bid and noncompetitive contracts, that we reviewed at each of the five superior courts.

The Riverside and San Diego Courts Consistently Followed Procurement Procedure

All contracts—both competitive and noncompetitive—that we tested at the Riverside and San Diego courts followed applicable procurement procedures. For example, the judicial contracting manual suggests that contracts typically consist of three major elements: a statement of work, including the schedule of performance; pricing and payment; and other terms and conditions. The contracts of both courts that we tested consistently had those three elements. Additionally, all procurements that we reviewed were approved by authorized individuals and had contract managers assigned to oversee the delivery of the procured goods and services. Unlike the other courts we reviewed, the Riverside and San Diego courts consistently provided justification for noncompetitive contracts and determined that the prices of goods and services received under these contracts were fair and reasonable, when applicable. Further, both courts used a procurement summary to document the timeline and justification for each procurement. This summary helped the courts ensure that they procured the goods or services in compliance with the judicial contracting manual by including vendor selection information, the determination that the price paid was fair and reasonable, the type of solicitation used, and notes describing the decision‑making process during the procurement. We found that the summary the Riverside and San Diego courts used are sufficiently comprehensive and detailed, and thus they served as an effective control to ensure that the courts appropriately perform procurement activities.

The San Joaquin Court Did Not Consistently Follow Procedures for Noncompetitive Contracts, Particularly in Regard to Sole‑Source Procurements

The San Joaquin court followed judicial contracting manual requirements and recommended practices for competitive contracts, but it entered into several contracts that we reviewed without competitive bidding and without a written explanation or approval for bypassing the competitive procurement process. The judicial contracting manual allows for a noncompetitive, sole‑source procurement if goods or services cannot be procured competitively. Such a procurement is referred to as a sole‑source contract. If a court designates a contract as being sole source, the judicial contracting manual recommends that it explain why it could not obtain the goods or services through a competitive procurement. Further, the judicial contracting manual states that the court must obtain proper approval from its management for using a sole‑source procurement. Six of the 12 contracts we reviewed at the San Joaquin court were sole source. As Table 3 shows, although the San Joaquin court completed a sole‑source request and obtained proper approval for the request from the court executive officer for two of these six contracts, it did not do so for the remaining four contracts.

For example, the San Joaquin court entered into a three‑year contract, valued at $375,000, for mail‑processing services without a competitive bid. The court’s business services manager told us he believed that competitively bidding this contract was unnecessary because the court conducted a price comparison that determined that the selected vendor was offering the lowest price and it could provide certain services that the previous vendor could not perform. Although the judicial contracting manual recommends that the sole‑source request include documentation that the pricing offered is fair and reasonable, it also recommends other information be included—such as an explanation why the good or service cannot be procured competitively. The judicial contracting manual has these provisions in place to ensure fairness and to prevent favoritism in contracting.

In another of these contracts, the San Joaquin court entered into a blanket purchase order for $27,000 to buy copier toner without competitive bidding. The text box describes blanket purchase orders. The business services manager stated that the San Joaquin court used a blanket purchase order because this contract for copier toner is a repeated purchase and because the vendor provides a recycled toner that is of a quality that works well on the court’s printers. However, using a blanket purchase order as a sole‑source contract without justification and proper approval resulted in the court inappropriately bypassing the competitive procurement process for this purchase. Finally, the two other contracts involved software services that the San Joaquin court asserted only existing vendors could provide. Because the San Joaquin court did not go through the recommended steps necessary to justify these four contracts as sole‑source procurements, it did not have the required approval for bypassing the competitive procurement process, nor did it justify its decision not to procure the goods or services competitively.

In addition, for three of the unapproved sole‑source contracts, the San Joaquin court did not determine whether the prices it paid were fair and reasonable, as the judicial contracting manual recommends
for sole‑source and other noncompetitive contracts. The text box lists best practices for determining fair and reasonable pricing as set forth in the State Contracting Manual. For these three contracts, the San Joaquin court claimed that it did not perform a price comparison because the services it required were not available from other vendors. Despite this assertion, the State Contracting Manual describes methods, as shown in the text box, for determining that the pricing was fair and reasonable.

Finally, the San Joaquin court made a purchase through a leveraged procurement agreement without identifying all key contract elements specified in the judicial contracting manual and required by the agreement’s participating addendum. Specifically, for this purchase of multifunction copiers and related software, San Joaquin court did not complete a purchase order with the agreed upon rental term, type, and pricing. By not preparing a purchase order, San Joaquin court risks purchasing goods for purposes that are unclear or undefined.

The San Mateo Court Followed Procurement Policies but Did Not Follow Certain Recommended Practices for Two Noncompetitive Contracts

The San Mateo court followed judicial contracting manual requirements and recommended practices for competitive contracts but did not determine whether the price was fair and reasonable for one of the three noncompetitive contracts requiring such a determination that we reviewed at the court. This instance involved the use of a leveraged procurement agreement. Specifically, when a court is considering whether to use a leveraged procurement agreement, the judicial contracting manual recommends determining whether the pricing is fair and reasonable, because the price under a leveraged procurement agreement might not reflect volume discounts available from the vendor. Thus, the court might obtain better pricing by negotiating directly with the vendor or by performing price comparisons with other vendors.

However, the San Mateo court entered into a contract for armored car services in the amount of $3,700 under a leveraged procurement agreement without obtaining price comparisons from other suppliers to determine if the vendor was providing this service at a fair and reasonable price. In response to our inquiry, the senior accountant/buyer asserted that there was no need to determine fair and reasonable pricing and cited the section of the judicial contracting manual allowing courts to procure goods and services using a leveraged procurement agreement without having to conduct competitive bidding. However, the court’s response fails to acknowledge that the judicial contracting manual recommends that the court negotiate with the vendor in an effort to obtain better pricing when it uses leveraged procurement agreements. Without conducting such negotiations, the San Mateo court cannot know if it is getting the best price for goods and services purchased through a leveraged procurement agreement.

Finally, for another noncompetitive contract, the San Mateo court did not have adequate reasons for its procurement of the contract without competitive bidding. Specifically, this contract valued at more than $10,000 wherein a contractor would conduct landlord/tenant clinics and be a clinic advisor for an unlawful detainer settlement conference, San Mateo court officials stated that it was exempt from competitive bidding because the contract was for legal services. However, although possibly implied, nowhere in the contract does it explicitly state that the contractor is providing legal advice or acting in the capacity as an attorney. As a result, it is not apparent that the contract was for legal services. Without clearly explaining in the contract or in the contract file why a contract is exempt from competitive bidding or specifically stating the type of noncompetitive contract, the court runs the risk of entering into contracts that should have been competitively bid.

San Mateo court did not have adequate reasons for its procurement of a contract without competitive bidding.

The Tehama Court Did Not Consistently Follow Procedures for Noncompetitive Contracts, Particularly Regarding Fair and Reasonable Pricing

The Tehama court followed judicial contracting manual requirements and recommended practices for one competitive contract that we selected for review, but it determined the fair and reasonable price for only three of seven noncompetitive contracts that were recommended to have such an evaluation. Again, as noted previously, the judicial contracting manual recommends determining whether a price is fair and reasonable when entering into some noncompetitive contracts. Depending on the circumstance, the court executive officer explained that the court did not perform price comparisons, comparisons were not possible, or the price comparison was informal on these four contracts.

Further, although the Tehama court explained its use of a noncompetitive procurement for six of the eight noncompetitive contracts we reviewed, the remaining two had no explanation or proper approval. For instance, in January 2016, the Tehama court entered into a support agreement valued at $54,500 with the vendor that had provided its existing case management system. In response to our inquiry, the court executive officer explained that the court could not procure these services from another vendor. In another case involving a long‑standing contract for storage units valued at more than $7,000 a year, the court executive officer stated that the court performed an informal cost comparison and determined that the current vendor provides storage at the most affordable cost. The court executive officer’s explanations for both of these instances appear to be reasonable, but the court did not include them in the contract files to justify the use of sole‑source contracts nor did it obtain the prior approval required of sole‑source contracts. Doing so formalizes the court’s decisions to use sole‑source contracts and creates transparency, thereby reducing the perception that its purchasing decisions are arbitrary or favor certain vendors.

Tehama court explained its use of a noncompetitive procurement for six of eight noncompetitive contracts—the remaining two had no explanation or proper approval.

Finally, for an annual information technology maintenance contract valued at $10,000, Tehama court did not ensure that key elements were included in the contract and that an appropriate court official approved the contract. When we asked the court for the purchase order for this service, it could only provide us an accounting entry document, which did not indicate the terms and conditions of the contract or contain approval for the contract.

Recommendations

The superior courts we reviewed should follow the requirements and recommended practices of the Judicial Council and the State to ensure that they obtain the best value for the goods and services purchased through contracts they enter into by doing the following: 

• The San Joaquin, San Mateo, and Tehama courts should follow the recommended process for applicable noncompetitive procurements to ensure that vendors’ prices are fair and reasonable.


• The San Joaquin, San Mateo, and Tehama courts should follow the judicial contracting manual’s recommendations for procurement processes, and they should provide and consistently retain in contract files their justifications for entering into contracts that they have not competitively bid.


• The San Joaquin and Tehama courts should ensure that contracts include all required elements and are properly approved.

 

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Two of the Five Superior Courts Had Some Weaknesses in Their Processing of Vendor or Purchase Card Payments

Main Points:

• The Riverside, San Diego, and Tehama courts processed all of the vendor payments we tested in accordance with judicial contracting manual requirements and recommended practices as well as their internal control procedures. However, the San Joaquin and San Mateo courts did not consistently ensure that vendor payments were properly approved or that they made payments to vendors only after ensuring that the goods or services purchased were actually received.
• The Riverside and San Diego courts properly managed their staff’s use of purchase cards to buy goods. However, the staff of the San Joaquin court routinely did not follow its local policy for making purchases with its purchase cards that exceeded the limit of $1,500 per transaction. We did not test the purchase card payments for two courts—San Mateo and Tehama—because their total payments made through purchase cards did not meet our threshold for review.
  

Following proper internal controls over the processing of payments is critical for ensuring that courts use public funds appropriately. When courts make payments without proper approval or without verifying that goods or services were received, it increases the likelihood of improper expenditures, which puts public funds at risk. Moreover, 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. Table 4 summarizes our review of key procurement requirements and recommended practices for the 24 payments—18 made to vendors and six made on purchase cards—that we reviewed at each of the superior courts.

Table 4
Summary of Key Procurement Findings at Five County Superior Courts Relative Size and Workload Data
for Five County Superior Courts

County Superior Court	To Vendor					With Purchase Card
	Invoice Appropriately Approved	Goods or Services Were Received	Person Entering Invoice Into Accounting System Is Not the Person Issuing Payment	Good or Service Allowable		Purchase Is Within Single Transaction Limit	Buyer Is Authorized to Use Purchase Card	Receipt For Item Purchased	Good or Service Allowable
Riverside	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all		6 of 6 Complied with all	6 of 6 Complied with all	6 of 6 Complied with all	6 of 6 Complied with all
San Diego	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all		6 of 6 Complied with all	6 of 6 Complied with all	6 of 6 Complied with all	6 of 6 Complied with all
San Joaquin	18 of 18 Complied with all	17 of 18 Complied with most	18 of 18 Complied with all	18 of 18 Complied with all		0 of 6 Complied with fewer than 50 percent	6 of 6 Complied with all	6 of 6 Complied with all	6 of 6 Complied with all
San Mateo	17 of 18 Complied with most	17 of 18 Complied with most	18 of 18 Complied with all	17 of 18 Complied with most		None Tested*
Tehama	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all	18 of 18 Complied with all		None Tested*

The Riverside, San Diego, and Tehama Courts Appropriately Executed Their Payments 

All the vendor payments that we reviewed at the Riverside, San Diego, and Tehama courts were processed in accordance with the judicial contracting manual and each court’s own internal controls. For example, these three courts consistently ensured that an authorized individual approved invoices for payment, that the courts received the goods and services purchased, and that all purchases were for allowable goods or services. Because of these three courts’ strong controls and processes, we found that they executed the payment of state funds appropriately. Furthermore, for the six purchase card payments that we tested, the San Diego and Riverside courts made purchases that were within the per‑transaction limit set in their respective local contracting manual, allowed only authorized buyers to use the purchase cards, retained receipts for all purchases, and purchased only allowable goods.

Although the San Joaquin Court Generally Processed Vendor Payments Appropriately, It Consistently Exceeded Purchase Card Transaction Limits

Our review determined that the San Joaquin court appropriately processed almost all of the vendor payments that we tested. However, it approved one payment, for the purchase of bottled water for jurors, without ensuring that the amount of water that the vendor included on the invoice was the actual amount that the court received. The San Joaquin court purchased bottled water and related items for the exclusive use of jurors, an allowed expenditure, at a cost of more than $8,000 for fiscal year 2015–16. According to the business services manager, the court’s failure to verify the amount of water received was an oversight. As a result, the San Joaquin court ran the risk of being overcharged for the water.

The San Joaquin court also had weaknesses in its processing of payments made with purchase cards. All six purchase card payments we tested exceeded the limit of $1,500 per transaction set by the judicial contracting manual. These payments ranged from $1,795 to $2,500. However, the judicial contracting manual allows courts to establish alternative procedures to the $1,500 limit. As such, the court has a written policy that allows staff members to make purchases of more than $1,500 if they obtain prior approval and if they explain the necessity to exceed the $1,500 limit. Although five of the payments had prior approval by the chief financial officer or the chief executive officer, one payment did not have documented prior approval and none included the required explanation. Thus, none of the six purchase card transactions complied with the court’s policy when exceeding the $1,500 purchase card limit. The San Joaquin court believes that the authorization signature of either officer indicates that court management has provided a valid reason for exceeding the $1,500 limit. However, a signature is clearly not an explanation. By not following its written policy, the court increases the risk that its staff is using purchase cards inappropriately. 

The San Mateo Court Processed Two Payments Without Proper Approval or Evidence That the Goods or Services Were Received, and Also Made an Unallowed Purchase

The San Mateo court processed most of the 18 vendor payments we reviewed in accordance with applicable policies and procedures, but it made missteps in the handling of three payments. Specifically, one of the payments we tested lacked proper approval. In this instance, the court processed a payment of $40,000 for mediation services without approval from any of the court’s three top officers—the presiding judge, court executive officer, or finance director—which it requires for all payments of $25,000 or more. The deputy court executive officer acknowledged that the missing approval on the $40,000 payment was an oversight. In another instance, the San Mateo court made a payment of $3,000 for office supplies without verifying that they were all received. The budget analyst indicated that the court does not have a written policy that requires department managers to sign off on packing slips; however, the Judicial Council’s Trial Court Financial Policies and Procedures states that the courts must obtain proof of receipt of goods or services before authorizing a payment. 

The San Mateo court also purchased bottled water for its employees at an annual cost of $4,000, which was not allowed under state contracting policy. As noted earlier, a similar purchase of water by the San Joaquin court was allowed because the water was exclusively for jurors with no other reasonable access to water. Although the judicial contracting manual does not specify whether the purchase of bottled water is allowable, the judicial contract law requires the manual’s policies and procedures to be substantially similar to provisions in the State Administrative Manual and the State Contracting Manual, as mentioned in the Introduction. These manuals generally prohibit the purchase of water for employees except in limited circumstances, such as when a building’s water does not meet health standards. The budget analyst indicated that the court purchases the water for juror courtroom staff consumption—which is allowable when jurors and courtroom staff, such as judges and court reporters, do not have access to drinkable water—but that the court also allows its employees who do not work in the courtroom to consume this water. The deputy court executive officer acknowledged that there is no need for the San Mateo court to provide bottled water to its non‑courtroom employees, since the water available from the building is suitable for drinking. Because it is using public funds to provide bottled water to its employees when there is no compelling need, the San Mateo court has fewer funds to support its operations.

Recommendations

To ensure that they properly authorize payments and purchase only allowable items, the superior courts we reviewed should process payments in accordance with the requirements and recommended practices of the Judicial Council and the State by doing the following:

• The San Joaquin court should implement a process to ensure that its staff adheres to the requirements within its policy when exceeding the $1,500 per‑transaction limit for purchase cards as established in the judicial contracting manual.


• The San Joaquin and San Mateo courts should make sure that they are receiving the goods and services they ordered. They should also pay vendors only after verifying receipt of the goods or services.


• The San Mateo court should take steps to ensure that appropriate employees authorize all payments


• The San Mateo court should amend its bottled water service contract to ensure that water is purchased for use by jurors and court room staff only.

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 of Riverside, San Diego, San Joaquin, San Mateo, and Tehama counties. Table 5 lists the audit objectives and methods we used to fulfill those objectives.

Table 5
Audit Objectives and the Methods Used to Address Them

		Audit Objective	Method
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.		Reviewed relevant laws, regulations, administrative policies, and other background materials applicable to procurement and contracting by judicial branch entities, including the Judicial Branch Contracting Manual (judicial contracting manual).
2	Based on risk factors specified in Public Contract Code, Section 19210(a)(1), identify five judicial branch entities, excluding the Judicial Council of California, for audit to assess their implementation of the California Judicial Branch Contract Law.		Selected five judicial branch entities—the superior courts of Riverside, San Diego, San Joaquin, San Mateo, and Tehama counties—for audit based on our assessment of the level of risk across the range of factors contained in the Public Contract Code.
3	For the five superior courts selected for audit:
	a.	Determine whether each court has developed its own local contracting manual, and assess its conformance to the judicial contracting manual.	Obtained each court’s local contracting manual and compared each one to certain required and recommended practices in the judicial contracting manual. In conducting our review, we found that each court’s local contracting manual was materially in compliance with key provisions of the judicial contracting manual.
	b.	Assess each superior court’s internal controls over contracting and procurement and determine whether the court followed those controls.	Interviewed superior court staff, reviewed desk procedures and local contracting manuals, and identified key internal controls. . Determined whether the court followed these key controls by testing a selection of contracts active during fiscal year 2015–16 and payments made during fiscal year 2015–16.*
	c.	Assess each superior court’s compliance with key elements of the judicial contracting manual and its local contracting manual and procedures, including those related to competitive bidding, sole-source contracting, and payment and deliverable review and oversight.	Selected 12 contracts that were active during fiscal year 2015–16 using the contract lists available: the Judicial Council’s fiscal year 2015–16 Semiannual Reports on Contracts for the Judicial Branch (semiannual reports) and ad hoc reports provided by each superior court we audited when the semiannual report for January through June 2016 was not available. Determined whether each contract selected was subjected to competitive bidding and, if not, we determined whether the contract had approval and justification for being a noncompetitive procurement. Selected 18 payments—one for each of the 12 contracts mentioned above and another six payments made during the same period that were not related to a contract—to determine whether the superior court ensured that it had received the goods or services related to these purchases and that payments were properly approved.
	d.	Evaluate each superior court’s contracts to determine whether there is a risk of inappropriately splitting contracts in order to avoid necessary approvals or competitive bidding requirements.	Reviewed the fiscal year 2015–16 semiannual reports and the ad hoc reports to identify potential split transactions and reviewed those transactions. We did not identify any split transactions.
	e.	Review the appropriateness of each superior court’s state credit card (CAL-Card) or other court‑issued credit card transactions when those transactions exceeded a total of $100,000 or 10 percent of all reported procurement payments for a one-year period.	Performed this review for the San Diego, Riverside, and San Joaquin courts because the payment totals exceeded $100,000 and/or were more than 10 percent of total annual procurement payments made by the court. The Tehama and San Mateo courts were not tested because these courts did not have credit card payments totaling more than $100,000 or representing more than 10 percent of all annual procurement payments, as reported in the semiannual reports and the ad hoc reports for fiscal year 2015–16. However, we did review whether any purchases exceeded the $1,500 per transaction limit that the judicial contracting manual allows.

Assessment of Data Reliability

In performing this audit, we relied upon electronic data extracted from the information systems of the Judicial Council and the five superior courts. Specifically, to select contracts for testing superior courts’ compliance with procurement procedures, we used the Judicial Council’s Semiannual Report on Contracts for the Judicial Branch (semiannual report) for the period of July 2015 through December 2015. Because we began our fieldwork at the five superior courts before the Judicial Council published its second semiannual report, for the period of January 2016 through June 2016, we requested that the superior courts generate ad hoc contract reports (ad hoc reports) for this period using the same data that the Judicial Council relies upon to produce its semiannual report. We used these reports to select contracts for the second half of the fiscal year.

The U.S. Government Accountability Office, whose standards we are statutorily required to follow, require us to assess the sufficiency and appropriateness of computer‑processed information that we use to materially support our findings, conclusions, and 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 and ad hoc reports. We found that two of the six contracts we reviewed at the Tehama court were not included in these reports. Therefore, we determined that the Tehama court’s semiannual and ad hoc reports were incomplete. Tehama acknowledged these errors and indicated that they may be due to oversight. We were able to successfully trace the remaining contracts at the other four courts to the semiannual and/or ad hoc reports, and we determined that these court’s reports are complete.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code 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
State Auditor

Date: November 16, 2016

Staff:
John Baier, CPA, Audit Principal
Jerry A. Lewis, CICA
Idris H. Ahmed
Christopher Bellows
Joseph S. Sheffo, MPA
Lisa J. Sophie, MPH

Legal Counsel:
Amanda H. Saxton, Sr. Staff Counsel

For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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