COMMITMENT • INTEGRITY • LEADERSHIP	View full PDF report
Judicial Branch Procurement Some Superior Courts Generally Followed Requirements but Could Improve Their Procurement Practices Report Number: 2018-301

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• All Five Courts Could Improve Their Contracting Practices
• Four Courts Could Improve Their Processes for Handling Payments to Vendors and Recording Receipt of Goods and Services
• Three Courts Could Improve Their Purchase Card Practices

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All Five Courts Could Improve Their Contracting Practices

Key Points:

• The Santa Clara court did not always follow appropriate contracting practices. It did not have an agreement on file to support $582,000 it paid for services that the county provided in fiscal year 2017–18. It also lacked appropriate supporting documentation for three non‑competitively bid contracts, including one for $778,000 to procure temporary staff.
• Although the other four courts we visited generally followed the applicable procurement requirements that we evaluated, we identified certain issues at each one. For instance, the Los Angeles court lacked documentation showing that it had acquired goods at the best value for one contract, while the Monterey court lacked documentation of fair and reasonable pricing for one contract. Furthermore, the Santa Barbara and Imperial courts each lacked written justification for entering into a sole‑source contract.

The Santa Clara Court Did Not Always Follow Applicable Contracting Practices

According to the judicial contracting manual, each court should establish contracting processes and levels of approval authority that are consistent with applicable law and the rules of the court and that promote responsible stewardship of public funds. The manual further recommends that courts determine and document whether prices are fair and reasonable when following a noncompetitive process. We reviewed 12 contracts at each of the five county superior courts we audited. Although the courts generally adhered to most of the contracting provisions we tested, we observed that the Santa Clara court did not always follow applicable contracting practices.

For instance, the Santa Clara court lacked a written agreement—such as a contract—to substantiate $582,000 for services that Santa Clara County billed to it for fiscal year 2017–18. A 2016 memo from the county executive officer indicated that after the Santa Clara court separated its operations from those of the county in July 1997, the county continued to provide various services to the court in accordance with an agreement between the two. The memo also stated that the agreement was renewed and extended through June 2016; however, the Santa Clara court could not provide a copy of an agreement covering fiscal year 2017–18. Without an agreement, the court has not demonstrated proper stewardship of public funds and has less assurance that it obtained and paid for agreed‑upon services from the county.

In three other instances, Santa Clara court staff failed to adhere to contracting requirements, thereby reducing assurance that the prices the court paid were fair and reasonable. In the first case, in fiscal year 2015–16, the court appears to have neither competitively awarded a contract for temporary staff nor justified contracting for the staff as a sole‑source procurement. A purchase order for the services in fiscal year 2017–18 shows an amount of $778,000. According to the court’s general services manager, the court’s human resources department contracted for temporary workers for a project without obtaining bids. The manager stated that once the court’s procurement/contracts and accounting departments learned of the hiring, staff scrambled to create an agreement even though the human resources department had not created a sole‑source justification document. Thus, the court failed to competitively award the contract or to document its reason for using a sole‑source procurement, as the judicial contracting manual requires.

In the two other cases, the Santa Clara court entered into leveraged procurement agreements without documenting whether it determined the prices were fair and reasonable. The judicial contracting manual recommends that after identifying a leveraged procurement agreement, courts determine fair and reasonable pricing and also consider negotiating with vendors or conducting competitive bidding to obtain better pricing. The text box describes methods for determining whether a price is fair and reasonable. The general services manager for the Santa Clara court explained that when the court needs to make certain procurements, he identifies agreements he can leverage on the Judicial Council’s website. According to the general services manager, a previous information technology (IT) director for the court was part of the evaluation team for one of the two leveraged agreements in question and therefore had knowledge of the pricing for one of these contracts. In the other instance, the Santa Clara court extended an existing agreement for collection services for another year and an additional $1.35 million. However, the court’s procurement files included no documentation that the court assessed whether either of the leveraged agreements’ prices was fair and reasonable.

The Los Angeles, Monterey, Santa Barbara, and Imperial Courts Could Improve Their Contracting Practices

Although the other four courts we visited generally adhered to applicable contracting requirements, we identified certain documentation issues related to their contracting practices.

For example, the Los Angeles court did not demonstrate that it obtained best value for $253,000 in goods it acquired under one contract in fiscal year 2017–18. In 2012 the court selected two vendors for a master services agreement, which is a type of leveraged agreement. However, the court did not specify how its officials would select which of the two vendors to use when placing an order under the agreement other than the court would select the vendor at its discretion. Although the judicial contracting manual does not identify the specific procedures a court should follow when making purchases under a leveraged agreement the court created, an underlying premise of the manual is that courts should obtain best value when acquiring goods and services. We therefore expected the Los Angeles court to have included in its procurement files evidence of which of the agreement’s two vendors offered the best value for the goods acquired; however, it did not.

In addition, during our audit period, the Monterey court used a 2013 leveraged procurement agreement to obtain Internet services worth up to $78,000 in fiscal year 2017–18. Guidance for agencies using this agreement strongly encourages them to obtain multiple quotes for services to obtain the best price. Furthermore, the judicial branch manual recommends that agencies using leveraged agreements determine whether pricing is fair and reasonable and document how they selected leveraged agreements, including the best‑value criteria they used. However, Monterey’s procurement file does not show that the court performed these steps, indicating that the court may have missed an opportunity to procure Internet services at a lower cost. Using older agreements heightens the risk that a court may not be receiving the best value for its procurement dollars.

We found similar issues at the Santa Barbara and Imperial courts. When we tested three sole‑source contracts at the Santa Barbara court, we found that the procurement file for one contract—worth about $18,000 in fiscal year 2017–18—did not contain an approved sole‑source justification. Likewise, one of the three sole‑source contracts—valued at $194,000 over three years—that we tested at the Imperial court did not have a sole‑source justification on file for a renewal that the court signed in fiscal year 2017–18.

Recommendations

The Santa Clara court should ensure that it supports all payments with a contract or purchase order that clearly states the terms and pricing for any goods or services received. The court should also ensure that it competitively awards its contracts as appropriate and that it properly documents its fair and reasonable pricing determinations, including those for applicable leveraged agreements.

The Los Angeles court should ensure that it documents best value in its procurement files when selecting vendors from leveraged procurement agreements.

The Monterey court should ensure that it documents fair and reasonable pricing from vendors in its procurement files.

The Imperial and Santa Barbara courts should ensure that they document their justifications and approvals for using noncompetitive procurements.

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Four Courts Could Improve Their Processes for Handling Payments to Vendors and Recording Receipt of Goods and Services

Key Points:

• Although the Monterey court had payment authorization limits in place, it did not always follow them. For seven of the 18 payments we examined, court employees approved payments that exceeded their authorization levels by amounts ranging from $2,000 to more than $107,000.


• The Santa Clara court did not always fully separate duties in payment processing. For three of the 18 payments we examined, the court’s director of finance approved the invoices for payment and also posted them for payment in the court’s financial system.


• All five courts we reviewed routinely verified the delivery of goods and services before they paid vendors, but we identified certain limited exceptions at the Imperial and Santa Barbara courts.

Although the Monterey Court Had Payment Authorization Limits in Place, It Did Not Always Follow Them

Following proper internal controls over the processing of payments is a critical step for ensuring that courts use public funds appropriately. However, when we reviewed 18 payments at each of the five superior courts we audited, we found that the Monterey court did not consistently comply with its own payment authorization limits. Specifically, the Monterey court’s local contracting manual includes dollar limits up to which it authorizes court employees in specified positions to approve invoices for payment. Adhering to such authorization limits increases the court’s assurance that it makes appropriate payments. However, the court did not consistently follow these authorization limits during fiscal year 2017–18. Six court staff members who approved seven of the 18 payments (39 percent) we reviewed did so for amounts above their authorization limits. The payments exceeded the staff members’ authorization limits by amounts ranging from $2,000 to more than $107,000. For example, the court’s chief information officer approved a $157,500 payment even though he only had the authority to approve payments up to $50,000.

This lack of consistent adherence to the payment approval limits increases the court’s risk of making inappropriate payments. The court’s chief financial officer explained that in one of these instances, he approved a payment because the appropriate person was unavailable when the court needed to make the payment, although the court could provide no documentation that it authorized the chief financial officer to do so. The chief financial officer stated that the other six instances were the result of oversights on the part of the court. He also noted that the court plans to remind staff who approve or process payments of individuals’ limits and to cover the topic during future trainings.

The Santa Clara Court Did Not Always Fully Separate Duties in Payment Processing

We found that although the Santa Clara court provides its staff with payment process instructions, including a list of each individual’s role and a flowchart illustrating the steps of the payment process, its internal controls do not cover one area. The State Contracting Manual, which provides guidelines to promote sound business decisions and practices for the State, notes that state entities should separate key duties and responsibilities for approving invoices and preparing payments. When courts make payments without separation of duties—meaning splitting responsibilities so that no one person controls more than a single key aspect of a purchasing activity—it increases the risk of improper expenditures, which then puts public funds at risk. However, staff at the Santa Clara court did not practice such separation of duties in certain instances.

Specifically, in three of 18 cases we reviewed at the Santa Clara court, the director of finance approved the invoices for payment and also posted them for payment in the court’s financial system. The court’s payroll manager noted that in the past, different individuals had approved and posted these three payments, and she was unsure why this process had changed. She stated that the court will work to ensure that in the future, different people approve and post payments.

The Imperial and Santa Barbara Courts Could Better Document the Receipt of Goods and Services

The judicial contracting manual states that before processing and releasing any payment to a vendor, a court should have documentation verifying that the vendor has provided the goods or properly performed the services for which the court is paying. At each of the five courts we audited, court staff routinely verified the delivery of goods or services before the courts made the payments we reviewed. However, we identified certain concerns at two of the courts. Specifically, an internal practice allowed the Imperial court to process one payment—$4,100 for telecommunications services—without the appropriate prior written approval. Staff explained that when a payment amount matches the contract amount, the court does not require an approval of the individual payment. This internal practice contradicts the judicial contracting manual’s guidance on documentation and bypasses a key opportunity to ensure the appropriateness of every payment.

At the Santa Barbara court, staff noted that although vendors may provide packing slips or receipts, the court does not require them when processing payments. The judicial contracting manual states that courts should inspect delivered goods and retain documentation of the inspection’s results in a procurement file. According to an accounting supervisor, the Santa Barbara court currently has three methods to demonstrate the receipt of goods or services: a receipt, a packing slip, or an email from court staff verifying that they have received the goods or services. He indicated that the former chief financial officer required only an email as assurance that the court had received goods or services. The accounting supervisor acknowledged that such emails are a weakness in the court’s payment process and that the court intends to reinstate the requirement for packing slips or receipts. This change would increase the court’s assurance that its payments are appropriate. In contrast, the Monterey court has a useful policy as part of its vendor payment process in which an accounts payable staff member matches the details of an invoice to equivalent details on a packing slip, shipping order, or receiving report before the court approves payment for goods or services.

Recommendations

The Monterey court should revise its guidance regarding invoice approval limits to include a description of circumstances under which it will allow exceptions to such limits, and it should inform court staff of the revisions.

The Santa Clara court should establish and implement procedures to ensure that adequate separation of duties exists for procurement. These procedures should specifically prevent a single individual from both approving an invoice’s amount and then also authorizing its payment.

To ensure the appropriateness of every payment, the Imperial court should require all invoices to receive approval before it processes their payment.

The Santa Barbara court should reinstate its previous requirement that staff submit packing slips or receipts before its payment of invoices.

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Three Courts Could Improve Their Purchase Card Practices

Key Points:

• In one instance, the Santa Clara court exceeded the judicial contracting manual’s purchase card transaction limit by almost $7,000 and its daily purchasing limit by nearly $3,400.


• The Imperial and Santa Barbara courts did not document purchase card transaction limits that deviated from the judicial contracting manual’s guidelines, which specifically require such documentation.

The Santa Clara Court Exceeded Both the Transactional and Total Daily Limits in One Instance

Proper controls over purchase cards help ensure that courts use public funds appropriately. The state‑administered procurement card program, CAL‑Card, is available to all superior courts, although they are also allowed to use other purchase cards. The Imperial, Monterey, Los Angeles, and Santa Barbara courts use CAL‑Cards; the Santa Clara court uses a different vendor for its purchase cards. When courts make payments that exceed approved transaction limits on purchase cards or do not follow judicial contracting manual policies, they may put public funds at risk. Further, because courts often provide purchase cards to individuals so they can buy directly from vendors, the cards may be subject to abuse if the courts do not properly oversee their use.

We tested purchase card transactions at two county superior courts—Monterey and Santa Clara—because their total purchase card payments for fiscal year 2017–18 exceeded either $100,000 or 10 percent of the court’s procurements during the fiscal year. We did not find any exceptions in our review of the Monterey court’s purchase card transactions; the text box describes the strong internal purchase card controls we found at the Monterey court. However, we did find one instance in which the Santa Clara court made a purchase card payment that exeeded the judicial contracting manual’s transactional and total daily limits.

The Santa Clara court has five purchase cards, four of which are dedicated to certain categories, such as staff training and travel, and the fifth of which is assigned to the court’s chief executive officer. When we tested six purchase card payments, we found that an $8,390 purchase of staff IT training exceeded both the judicial contracting manual’s $1,500 per‑transaction maximum and its suggested daily purchase limit of $5,000, although the purchase was otherwise appropriate. By not consistently following the judicial contracting manual’s required and suggested transaction limits, the court increases the risk that its staff will use purchase cards inappropriately. Although the payroll manager asserted that the Santa Clara court does not have a transaction limit for this card, the court did not include this information in its local contracting manual as the judicial contracting manual requires.

The Imperial and Santa Barbara Courts Did Not Document Purchase Card Transaction Limits That Deviated From the Judicial Contracting Manual’s Guidelines

Although we did not test individual purchase card payments at the Imperial, Los Angeles, or Santa Barbara courts because the total payments did not meet our review threshold, we identified concerns about purchase card transaction amount limits at the Imperial and Santa Barbara courts that exceeded the judicial contracting manual’s recommended limits. The manual states that courts can use purchase cards for a maximum of $1,500 per transaction. However, the Imperial court established single‑transaction limits of $2,000 for four of its nine purchase cards, of $5,000 for three of its purchase cards, and $10,000 for one of its purchase cards. Similarly, the Santa Barbara court established a transaction limit of $2,500 for three of its seven purchase cards.

Although the judicial contracting manual allows courts to establish purchase card procedures that deviate from its policies, the manual states that courts should document any such alternative procedures and incorporate them into their local manuals. The Los Angeles court, for instance, established an alternative procedure to increase its purchase card transaction limit to $5,000, which it documented in its local manual and in its policies and procedures.

At the time of our audit, neither the Imperial nor the Santa Barbara court had incorporated their alternative procedures into their local manuals. Without properly documented or built‑in transaction limits, the Imperial and Santa Barbara courts increase the risk that their staff will use purchase cards inappropriately. Staff at the two courts noted that they will update their local manuals to reflect their alternative procedures for purchase card transaction limits.

Recommendations

The Santa Clara court should ensure that its staff abide by the judicial contracting manual’s purchase card transaction limits, or it should document an alternative transaction limit in its local contracting manual.

The Imperial and Santa Barbara courts should document their alternative purchase card procedures regarding transaction limits in their local manuals

 

We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
California State Auditor

January 15, 2019

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