Department of Education Internal Audit Vendor/Contract ...

Department of Education Internal Audit

Vendor/Contract Management Review

Issue Date: September 2016 Report Number: FY2016-04

Department of Education Vendor/Contract Management Review Executive Summary

AUDIT OF:

DATE:

AUDIT RATING:

Vendor/Contract Management Review Fieldwork performed April 2016 ? July 2016

Acceptable

[ X ]

Marginal

[ ]

Unacceptable [ ]

INTRODUCTION: In connection with the Department of Education's (DOE) Updated Risk Assessment and Internal Audit Plan approved on August 4, 2015, Internal Audit (IA) performed a "Vendor/Contract Management Review." The purpose of this project was to review the DOE's current vendor/contract management policies and processes as it relates to management's due diligence over vendor oversight, purchasing authority, contract administration and accountability for goods and services provided.

BACKGROUND: In accordance with Chapters 103D and 103F, Hawaii Revised Statutes (HRS), the central procurement and authority for the DOE rests with the Superintendent of Education as the DOE's Chief Procurement Officer (CPO). However, this authority may be delegated to complete all procurement needs of the DOE in an effective and efficient manner. As the CPO, she has delegated certain procurement and contracting responsibilities to the Deputy Superintendent, Senior Assistant Superintendent, Assistant Superintendents, Complex Area Superintendents, Principals, Directors and Section Administrators with spending authority. Only these personnel are authorized to commit the DOE contractually and only within limits of their delegated authority.

Along with this delegation, administrators are responsible for the administration of their contracts. Contract administration involves those activities performed by DOE officials after a contract has been awarded to determine how well the DOE and the contractor performed to meet the requirements of the contract. It encompasses all dealings between the DOE and the contractor from the time the contract is awarded until the work has been completed and accepted or contract terminated, payment has been made, and dispute (if any) have been resolved. As such, contract administration constitutes the primary part of the procurement process that assures the department receives the goods and services in accordance with the contract before payment is made.

The Procurement and Contracts Branch (PCB) under the Office of Fiscal Services (OFS) is the office that provides administrative support and technical expertise in the procurement and contracting of goods and services, as well as ensuring compliance with all federal and state procurement laws, rules, regulations and departmental procurement policies.

Procurement procedures and effective contract administration practices are documented in the "Guidelines for Procurement and Contracting" by the PCB. These guidelines as well as other procurement tools are available via the Procurement Database on Lotus Notes or on the DOE's intranet.

Amy Kunz is the Senior Assistant Superintendent and Chief Financial Officer (CFO) of OFS. Lois Mow, Director of PCB, oversees eight (8) specialists and two (2) support staff. The PCB staff assists the field with large purchase contracts ($25,000 and over) to ensure that proper procurement processes are followed prior to the execution of the contracts. In addition, the Education Division of the Department of the Attorney General's office reviews these larger purchase contracts. Outside of PCB, there is a DOE Procurement and Distribution Specialist II and two (2) support staff in the Project Control Section in the Office of School Facilities and Support Services (OSFSS) that handle procurement for construction

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Department of Education Vendor/Contract Management Review Executive Summary

contracts (except Repairs and Maintenance). In addition, small purchases (under $25,000) exempt goods or price list purchases are handled at the school/office levels (See appendix for matrices).

SCOPE and OBJECTIVES: The scope of our review focused on the DOE's contract/vendor management process as it relates to

management's due diligence over vendor oversight, purchasing authority, contract administration and

accountability for large purchase contracts ($25,000 and over) of goods and services provided. We

reviewed the design and operating effectiveness of the existing control procedures in place. The scope of

our review specifically focused on the processes related to the following subcategories that IA deemed as

high risk in our project-level risk assessment: Contract Formation Contract Administration and Vendor Monitoring

The scope of any detailed testing will cover the fiscal year 2015 and current fiscal year 2016 up to March 2016. The following table summarizes the large purchase contracts ($25,000 and over) that were processed through PCB and were "active" during 07/01/2014 ? 03/31/2016:

Type of Project? Program Services (i.e. consulting, evaluation services, implementation of programs) Special Education Services IT Systems and Services Repair & Maintenance Services After-School Care Services Professional Development & Training Services Various Goods Various Grants Accounting, Auditing & HR Services

# of Contracts

48 58 28 106 21 25 21 22 9

$ Amount of Contracts?

$63,806,866 $46,991,153 $40,620,052 $28,173,610 $16,779,895 $11,203,053 $4,760,454 $4,333,425 $1,146,895

?Does not include price/vendor list and purchase order projects. ?Includes only initial contract dollar amount, it does not include any supplemental agreements or modifications.

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Department of Education Vendor/Contract Management Review Executive Summary

The Procurement Cycle is five phases (see PCB's picture below). Phases 1 and 2 are Planning the Procurement and Selecting the Source. Phases 3 - 5 include Finalizing the Contract, Monitoring the Performance and Closing the Procurement. This review excluded processes related to the Phases 1 and 2 as this was covered in the Internal Audit "Procurement and Contracting Process Review" in July 2012.

Phase 1

Phase 5

Phase 2

Phase 4

Phase 3

In addition, this review also excluded construction contracts that are processed by OSFSS as these were reviewed in the "Construction Process and Internal Controls Review" performed by Deloitte & Touche LLP in April 2012 and July 2013. We did however follow-up with management on the status of their corrective action plans that involved Phases 3 ? 5 of the Procurement Cycle.

The objectives of our review included the following: 1. To obtain a general understanding of the design and operating effectiveness of the vendor/contract management policies and processes. 2. To review, evaluate and test the adequacy of current vendor/contract management policies and processes as they relate to management's due diligence over vendor oversight, purchasing authority, contract administration and accountability for goods and services provided. 3. To provide recommendations based on leading practices to improve the efficiency and effectiveness of vendor/contract management.

OBSERVATIONS:

Based upon our review, we found the DOE's controls related to vendor/contract management and administration are functioning at an "acceptable" level. An acceptable rating indicates that no significant deficiencies exist, while improvement continues to be appropriate; controls are considered adequate and findings are not significant to the overall unit/department.

Please refer to the Risk Ratings section of this report (page 5) for a complete definition of the ratings used by IA and the Observations and Recommendations section for a detailed description of our findings.

We discussed our preliminary findings and recommendations with Management and they were receptive to our findings and agreed to consider our recommendations for implementation.

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Department of Education Vendor/Contract Management Review Executive Summary

Each observation presented in this report is followed by specific recommendations that will help to ensure that control gaps are addressed and, if enforced and monitored, will mitigate the control weaknesses. In summary, our observations are as follows:

1. Need for better oversight, monitoring and accountability at the school/office level 2. Need for better tracking and monitoring of contracts and vendors 3. Strengthening controls over IT vendors PLANNED FOLLOW UP BY MANAGEMENT AND INTERNAL AUDIT: IA will follow up with Management on their progress of completion for their action plans and report accordingly through the audit committee quarterly updates.

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