Report 2011-120 Recommendation 38 Responses

Report 2011-120: California Department of Transportation: Its Poor Management of State Route 710 Extension Project Properties Costs the State Millions of Dollars Annually, Yet State Law Limits the Potential Income From Selling the Properties (Release Date: August 2012)

Recommendation #38 To: General Services, Department of

To ensure that the construction unit complies with the State's procurement laws and policies, General Services should conduct an investigation of the small businesses we discussed in the report to determine if they are performing a commercially useful function.

1-Year Agency Response

In its audit report, the State Auditor expressed concerns related to if two firms used by DCU, Blue Eagle Enterprises and Knight Muse & Associates, were performing a commercially useful function (CUF). Consequently, DGS' Office of Audit Services (OAS) was tasked with performing an audit of those firms compliance with the state's CUF provisions.

In a report dated April 29, 2013, OAS presented its conclusion that Blue Eagle Enterprises and Knight Muse & Associates were performing a CUF in providing goods and materials to DCU. Specifically, the firms were independently performing such key activities as researching and obtaining pricing information from suppliers, ordering products from those suppliers, coordinating delivery or pick-up of goods, directly paying for product costs, and billing and collecting amounts due from DGS for filled orders. Further, the firms are independent businesses (sole proprietorships) subject to a risk of loss that took title to the goods, paid sales tax on goods sold to the state, reported cost of goods sold on the federal tax return filed for their business and did not subcontract any of its primary operating responsibilities to another firm.

It should be noted that the State Auditor also expressed concerns that two other suppliers used by DCU, Nizami Supplies and Skyward Supplies, may not have performed a CUF. Although competing for numerous procurements, the two firms have been awarded an insignificant amount of purchase orders (three) by DCU. Therefore, OAS did not include those firms in the scope of its audit.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

General Services stated that its office of audit services, in consultation with its construction unit and office of small business and disabled veterans business enterprise services, is investigating the small businesses discussed in the report to determine if they are performing a commercially useful function. General Services stated the review is in its final stages and is expected to be completed in March 2013.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

60-Day Agency Response

General Services stated that its office of audit services, in consultation with its construction unit and office of small business and disabled veterans business enterprise services, is investigating the small businesses discussed in the report to determine if they are performing a commercially useful function. (See 2013-406, p. 177)

California State Auditor's Assessment of 60-Day Status: Partially Implemented

All Recommendations in 2011-120

Agency responses received after June 2013 are posted verbatim.