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- Superior Court of California, County of Alameda
- Superior Court of California, County of Contra Costa
- Superior Court of California, County of Lake
- California State Auditor's Comment on the Response From Superior Court of California, County of Lake
- Superior Court of California, County of Orange
- Superior Court of California, County of San Bernardino
Superior Court of California, County of Alameda
December 16, 2020
Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, suite 1200
Sacramento, CA 95814
Dear Ms. Howle,
The Superior Court of California, County of Alameda (Court) has reviewed the findings and recommendations included in the California State Auditors draft report titled “Judicial Branch Procurement: Courts Generally Met Procurement Requirements, But Some Need to Improve Their Payment Practices,”. The Court agrees with the recommendations contained in the report and has provided our response to the recommendations, as detailed below.
Recommendation:
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.
Alameda Court Response:
Recommendation:
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.
Alameda Court Response:
The Court has amended its contract review form to identify contracts valued over $1 million and has begun to notify the State Auditor of contracts meeting the threshold in compliance with state law. The local contract manual will also be revised to include information about the notification requirement, as this was inadvertently omitted from the most recent version of the local contract manual.
Recommendation:
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.
Alameda Court Response:
The Court will revise its local contract manual to include a contract administration plan and legal review policy.
We would also like to thank your staff for the professional, respectful, and courtesy manner in which they conducted themselves when working with our staff, during the audit process.
Sincerely,
Chad Finke,
Court Executive Officer
cc:
Hon. Tara M. Desautels, Presiding Judge
Elizabeth Erickson, Assistant Executive Officer
Melanie Lewis, Finance & Facilities Director
Comments
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 authorization limits does not address our concern that it has not required staff to adhere to authorization limits when approving invoices. As noted, 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.
Superior Court of California, County of Contra Costa
December 14, 2020
Ms. Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle,
Thank you for the opportunity to review and respond to the draft audit report titled Judicial Branch Procurement: Courts Generally Met Procurement Requirements, But Some Need to Improve Their Payment Practices. The Contra Costa Superior Court (Court) is responding to the following recommendation:
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.
We agree with the above recommendation. The Court already has a process in place to track the value of its contracts in order to notify the State Auditor whenever a contract exceeds $1 million, or the total value of a contract and subsequent amendments reaches $1 million. The report identified one Memorandum of Understanding (MOU) with the County of Contra Costa (County) for over $1 million that was not notified. We entered into this MOU in 2016 to detail out the terms and conditions for information technology services that the County has continued to provide after the Court separated from the County as a result of the Lockyer-Isenberg Trial Court Funding Act of 1997. The Court will update its tracking process to include the tracking of MOUs to ensure notification to the State Auditor when the total value of purchase orders issued or to be issued against MOUs exceeds $1 million or is estimated to exceed $1 million. We plan to complete this process update by February 28, 2021.
Sincerely,
Kate Bieker, Court Executive Officer
Superior Court of California, County of Contra Costa
cc.
Hon. Barry Baskin, Presiding Judge
Superior Court of California, County of Contra Costa
Superior Court of California, County of Lake
December 16, 2020
Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Re: Response to Draft Audit Report
The Superior Court of California for the County of Lake (Court) has reviewed your draft audit report pertaining to our procurement and contracting practices. The audit is required by the Public Contract Code and the Court greatly appreciates the professionalism and work of the audit team. The Court is pleased with the draft report’s overall positive conclusion that the Court generally met procurement requirements, as evidenced by the limited number of audit findings. The State Auditor’s draft report provides the Court with two recommendations, which are addressed below.
Recommendation #1—Segregation of Duties
During its fieldwork, the audit team reviewed a sample of invoices and resulting payments to vendors for various contracts and purchase orders. The draft report takes issue with the Court’s segregation of duties when processing and ultimately approving these payments. Specifically, the audit team notes that the individual who approves an invoice for payment also approves the equivalent entry in our Phoenix accounting system through the “posting” of the transaction. The Court will carefully consider the audit team’s recommendation to further segregate these functions and will consult with the Judicial Council’s accounting and procurement staff when deciding on any corrective action that is necessary.
For context and clarity, the Court has already segregated the duties for many of its key purchasing and accounting activities prior to the audit. For example, the Court has different individuals who: (1) initiate purchase requisitions and confirm the receipt of goods, (2) match vendor invoices to the pricing and terms of the relevant contract or purchase order, and (3) ultimately approve payments to vendors. Importantly, the individual approving payment—the focus of this audit finding— does not maintain the master vendor file in the accounting system and thus cannot create fictitious vendors. Further, the payment approver can only approve accounting transactions entered by someone else and cannot both self-initiate (i.e. “park”) a transaction and then approve (“post”) it on her own. The Court believes its current internal control structure significantly limits the risk of any single individual creating or concealing payment errors. Nevertheless, the Court welcomes the audit team’s observations as an opportunity to further review and potentially enhance its internal controls.
Recommendation #2—Local Contracting Manual
Section 19206 of the Public Contract Code requires the Judicial Council to adopt a Judicial Branch Contracting Manual and for the Court to similarly develop a local contracting manual that is consistent with state law and is substantially similar to the provisions contained in the State Administrative Manual and State Contracting Manual. The audit team recommends that the Court update its local contracting manual to include a contract administration plan in order to ensure staff have sufficient guidance on duties related to the management and administration of contracts. The Court agrees with the recommendation and intends to update its local manual on or before July 1, 2021.
Again, the Court and its management team appreciates the work of the State Auditor’s staff and views the audit as an important tool for transparency and for promoting continual improvement in our procurement practices. Please feel free to contact me at (707) 263-2575 should you have any questions regarding the Court’s response.
Sincerely,
Krista D. Levier
Court Executive Officer
Comments
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 has significantly limited its risk through its current approach to segregation of payment duties, but as we indicate 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.
Superior Court of California, County of Orange
December 16, 2020
Elaine M. Howle, CPA
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Re: Orange County Superior Court’s Written Response to “Judicial Branch Procurement: Courts Generally Met Procurement Requirements, But Some Need to Improve Their Payment Practices” Report 2020-301
Dear Ms. Howle:
This letter is the Orange County Superior Court’s written response to the “Judicial Branch Procurement: Courts Generally Met Procurement Requirements, But Some Need to Improve Their Payment Practices” Report 2020-301 received from you on December 10, 2020.
The Orange County Superior Court (“Orange Court”) values strategic planning, careful execution, and regular monitoring and adjustments through extensive use of data analytics. Our comprehensive approach has many checks and balances and internal controls that help to not only minimize the risk of inappropriate use of funds, but more importantly, ensure optimal use of funds that are well aligned with the Orange Court’s strategic goals and mission.
The Orange Court’s strategic goals include enhancing access and use of data-driven decision making for continuous improvement. The audit conducted by the California State Auditor’s office of our procurement practices was helpful in reviewing our existing processes and internal controls, consistent with our goal of continuous improvement. It is important to note that the areas audited is a subset of a continuum of end-to-end internal controls and monitoring process utilized by the Orange Court that includes strategic planning, budget development, expenditure monitoring, project ideation and prioritization, resource allocation, procurement, automated work flow purchase approvals, and extensive use of interactive dashboards:
- The Orange Court has an extensive strategic planning process that is the foundation for the annual budget and expenditure plan, which is developed with input from approximately 65 cost center managers with review and approval from the Orange Court’s executive management team, finance committee, executive committee, and the Presiding Judge.
- The annual expenditure plan is routinely monitored by cost center managers through interactive Power BI dashboards that integrate near real time information from the State’s SAP Financial System.
- These expenditures are also monitored by a dedicated team of budget analysts who work closely with the cost center managers.
- In addition, a monthly dashboard of the budget, actuals to date, variances, and revised budget projection is shared by the Chief Financial and Administrative Officer with the executive management team and the Presiding Judge (PJ) and Assistant Presiding Judge (APJ).
- These interactive dashboards are available on the Orange Court’s intranet site to all cost center managers, executive management team, and PJ / APJ.
- Coupled with this process, the Orange Court has developed an in-house invoice approval workflow process that has been in place since 2017. This workflow system ensures a stringent approval process and documents the entire invoice approval process.
- The Orange Court also implemented a 3rd party portfolio management tool to capture project ideas and to track medium to large scale projects that typically involves a public bid process administered by our procurement team. This is in addition to the existing contract management system utilized by the Orange Court that automatically notifies the CA State Auditor’s office of contracts above $1 million when statutorily required.
I. The Orange Court Did Not Always Follow Payment Safeguards, Increasing the Risk of Improper Payments
The Orange Court concurs with the recommendation in the Report and will revise our payment process to consistently require two levels of approval for all invoices above a certain dollar limit. Generally, invoices greater than $50,000 are approved by both a cost center manager and a department chief. The Orange Court developed and implemented an extensive accounts payable approval workflow process that has been in place for several years. This workflow system ensures a stringent approval process and documents the entire invoice approval process. The $160,000 payment highlighted in the Report was an exception to our process that was put in place with Presiding Judge and executive management approval to balance confidentiality and timely payments for attorneys providing representation for children and families (juvenile dependency counsel). The Orange Court is committed to continuous improvement and will explore options to incorporate alternate defense billing invoices into our accounts payable approval process to ensure we have at least two approvals for any invoice above a certain dollar threshold.
II. Court Failed to Consistently Report High-Value Contracts
The Orange Court concurs in part and rejects in part the State Auditor’s conclusions and recommendations that the Orange Court failed to consistently report high-value contracts.
The Orange Court acknowledges that it did not achieve 100% compliance in reporting all high-value contracts per state law as shown in the instance of 2 of the 10 contracts reviewed by the State Auditor, and that it should implement enhancements to its existing policies and procedures for notifying the State Auditor within 10 business days of entering all contracts with estimated values over $1 million, except for those contracts exempted per state law.
However, the Orange Court rejects as inaccurate and unfair the characterization that it failed to consistently report high-value contracts per state law and should immediately implement policies and procedures for notifying the State Auditor within 10 business days of entering all contracts with estimated values over $1 million when statutorily required. This description portrays the Orange Court as not complying time after time with the state law requirement to notify the State Auditor within 10 business days of entering all contracts with estimated values over $1 million and operating without any policies or procedures for such compliance.
The Orange Court added its automated K2 BSA notification workflow to its existing Contract Management Data System (CMDS) in 2012 to reduce its risk of noncompliance with the state law requirement that each court notify the State Auditor within 10 business days of entering a contract with an estimated value over $1 million unless exempt per state law. The Orange Court’s automated K2 BSA notification workflow requires Procurement Staff to enter the same contract information for all signed, written contracts into CMDS from SAP for the automated K2 BSA statutory notification to be sent to the State Auditor.
In the first instance where the State Auditor found that the Orange Court failed to report an IT purchase order contract valued at $1.2 million entered in fiscal year 2019-20, this failure was due to an unintentional error in not entering the purchase order contract information into CMDS for the automated K2 BSA statutory notification to be sent to the State Auditor. The Orange Court had issued a purchase order on its form for this procurement per California Cooperative Agreement No. 7-14-70-04. As the Cooperative Agreement itself was the existing written contract, Procurement Staff did not draft and have a separate written contract signed. Since a separately signed, written contract did not exist for this purchase order, Procurement Staff did not process the purchase order information into CMDS in the typical way a separately signed, written contract would have been, and consequently, the K2 BSA system did not have the information to generate and send a statutory notification to the State Auditor. To reduce the risk of recurrence of such an instance, Orange Court Procurement has added the following narrative to its existing CMDS workflow process: “Enter all approved POs with an Overall Contract Value of more than $1 million into CMDS, regardless of whether the Court signed a written contract for the PO so that the Court’s automated system can send the requisite BSA Notice to the State Auditor.”
In the second instance where the State Auditor found that the Orange Court failed to report a legal services contract worth $4.3 million in fiscal year 2019-20, this failure was due to human error when entering the contract information into CMDS. The Orange Court is currently researching the implementation of appropriate process enhancements to further reduce the risk of human error that could result in noncompliance with the state law requirement to notify the State Auditor within 10 business days of entering a contract with an estimated value over $1 million when statutorily required. This research includes the accessibility of exportable contract data from SAP and CMDS for review and comparison at regular intervals to verify compliance with the state law requirement.
Thank you for your time and consideration.
Sincerely,
David Yamasaki
Court Executive Officer
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 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 as shown in the instance of two of 10 contracts we reviewed indicates a misunderstanding of our work in this area. 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 in Table 2.
Our conclusion that the court failed to consistently report high‑value contracts per state law is accurate and fair. We explain 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, 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.
Superior Court of California, County of San Bernardino
December 16, 2020
Elaine Howle, California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle:
Thank you very much for the opportunity to review the draft audit report performed in accordance with Public Contracting Code (PCC) sections 19201 through 19210. The audit team was extremely professional, responsive, and courteous and the audit process went smoothly, despite the varied challenges presented by the COVID-19 (coronavirus) pandemic.
In response to the draft report, the Superior Court of California, County of San Bernardino (Court) respectfully submits some additional clarification regarding the reporting of two benefit contracts and disagrees with the finding. As stated in the draft report, the Court was working under prior direction and interpretation that benefit contracts did not need to be reported pursuant to section PCC 19204, as the code specifically references “goods and services.” This interpretation was premised upon both the Judicial Council of California’s staff guidance and a local understanding related to other requirements regarding benefits.
Benefit contracts are unique from other “services” provided under contract in that they are required as a condition of employment and subject to the terms of negotiated contracts with local labor unions. In the instance of both benefit contracts, the Court adhered to all local policies, procedures, and agreements with local labor unions. Also of note, the table presented as background information regarding the audit excludes these contract amounts as they are not included in the portion of the general ledger coding string for operating expenditures and equipment (“goods and services”); rather, they are included as part of employee benefit costs. The interpretation issue was related to “service”, as benefits are required both locally per existing bargaining agreements and personnel policies and under California law.
Additionally, the Court would like to note that immediately upon being advised that the benefit contracts were included as part of PCC 19204 reporting requirements, they were reported to the California State Auditor, and the court adjusted its internal policies accordingly to ensure future compliance.
Respectfully,
Nancy CS Eberhardt
Court Executive Officer
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 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, 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 requirement. As we describe, 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.