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- Three Courts Did Not Always Adhere to Payment Requirements or Recommendations
- Four Courts Failed to Consistently Report High-Value Contracts
- Two Courts Lack Recommended Information in Their Local Contracting Manuals
- Other Area We Reviewed
Three Courts Did Not Always Adhere to Payment Requirements or Recommendations
Key Points
- The Alameda, Lake, and Orange courts did not always follow required practices or recommended safeguards when making payments. As a result, each court increased its risk of improper payments, and the Alameda court made $16,000 in questionable expenditures.
- The courts generally used purchase cards appropriately, and emergency purchase card transactions related to the 2019 coronavirus disease (COVID-19) also appeared to be appropriate and reasonable.
The Alameda, Lake, and Orange Courts Did Not Always Follow Payment Safeguards, Increasing the Risk of Improper Payments
Following proper procedures for processing payments, including reviewing the accuracy of invoices, establishing proper levels of approval authority (authorization limits), and separating invoice approval duties from payment duties, is critical for ensuring that courts use public funds appropriately. However, we found that three courts—Alameda, Lake, and Orange—did not always follow these safeguards, which increases the risk of improper payments. Specifically, the Alameda court made roughly $16,000 in questionable payments in fiscal year 2019–20 because staff bypassed proper safeguards for approving invoices. According to the Judicial Council’s Trial Court Financial Policies and Procedures Manual (procedures manual), which the judicial contracting manual instructs courts to follow when processing payments, court staff must match invoices against appropriate supporting documentation, such as a contract, to ensure that the court is paying the vendor the correct rate for the goods or services provided. However, of the 18 payments (totaling approximately $1.5 million) we reviewed at the Alameda court, a division director approved two payments that exceeded contracted rates by $3,330 and $12,690, respectively.For the five superior courts we reviewed, we began by reviewing 10 payments for each court. If we saw issues that warranted additional review of a court’s payment processes, we reviewed eight additional payments. The two payments were for legal representation provided by private attorneys. Although the contracts allowed for expenses in excess of the contracted rates (extraordinary expenses) if attorneys submitted requests and the court approved them, the division director approved the payments without determining whether requests had been submitted and approved, and we found that the court had no record of approval for the extraordinary expenses it paid. The division director indicated that she did not request supporting documentation for the $3,330 overpayment because she did not notice the discrepancy between the contracted rate and the invoice rate. For the $12,690 overpayment, she approved the payment on the basis of the attorney’s declaration that he provided additional services, not documentation showing that the court approved the extraordinary expenses. Because the Alameda court did not match the amounts vendors charged to appropriate supporting documentation in these two cases, it made payments that lacked justification.
The Lake court increased its risk of making improper payments by not always fully separating payment duties. According to the procedures manual, courts must assign work in a manner that ensures that no one person is in a position to initiate or conceal errors or irregularities, and the judicial contracting manual recommends that different employees be responsible for approving invoices and preparing payments. However, for six of the 10 payments we reviewed at the Lake court (accounting for approximately $32,000 of the total $133,000 in expenditures we reviewed), the court’s executive officer approved invoices and also posted payments in the court’s accounting system. The executive officer stated that this was because the court has limited staff and explained that a staff member other than herself initially entered payment information into the accounting system. Because two individuals were thus involved in payment duties, court staff members deemed this approach to separating those duties adequate. Yet, 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. The court indicated that its risk is mitigated because a Judicial Council staff member provides quarterly review of the court’s accounts. Nonetheless, it would be a good practice for the court to take mitigating actions of its own, and the court sometimes did so. For example, in two other instances we reviewed, the executive officer approved invoices and posted payments, but the court also documented secondary approval of the invoices by other staff members. We believe the court should consistently incorporate an additional safeguard such as this when it cannot fully separate payment duties.
At the Orange court, we reviewed 10 payments totaling just over $533,000 and identified one instance in which a staff member approved an invoice of more than $160,000 for legal services without seeking executive approval. The court’s accounts payable procedures manual directs accounts payable staff members to obtain approvals for invoices from managers, using a system that requires an additional level of approval by an executive for any payments exceeding $50,000. However, a supervisor at the Orange court informed us that staff who specialize in reviewing court documents, including validating legal invoices (specialists), handle the approvals for certain invoices, such as those for payments to lawyers who provide legal representation for low-income defendants, and they do so outside of the system that requires a second level of approval for invoices totaling more than $50,000. The reason that the court does not process legal invoices through the normal system is because of concerns about confidentiality, according to the court’s chief financial and administrative officer. Although the $160,000 payment we reviewed was appropriate per the terms of the court’s contract, the court bypassed a key safeguard and increased the risk of improper payments for this invoice and others that specialists handled. The chief financial and administrative officer agreed that the court should incorporate additional approvals for these types of invoices when they are for payments above a certain dollar limit, and he said he would have staff members look into finding a balance between confidentiality and appropriate safeguards.
The Courts Generally Conducted Purchase Card Transactions Appropriately
The courts whose purchase card transactions we reviewed generally used their purchase cards 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 Alameda, Contra Costa, Orange, and San Bernardino courts used CAL-Cards and other purchase cards, primarily for travel‑related expenses; the Lake court did not use a purchase card. Proper safeguards over purchase cards help ensure that courts use public funds appropriately. 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. 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.
We reviewed purchase card transactions at three courts—Contra Costa, Orange, and San Bernardino—because their total value of purchase card payments during fiscal year 2019–20 met our threshold for reviewing individual transactions. The total value of the Alameda court’s purchase card payments did not meet our threshold for reviewing individual transactions. The purchases we reviewed generally complied with applicable requirements. We reviewed six transactions at each of the three courts, focusing on purchases that exceeded the $1,500 transaction limit established in the judicial contracting manual. The judicial contracting manual allows courts to deviate from that limit but recommends that they document alternative procedures, such as setting different transaction limits, in their local contracting manuals. The Contra Costa and San Bernardino courts adopted the judicial contracting manual’s limit of $1,500, although they had procedures allowing approval of higher purchase limits in certain cases. The Orange court’s local contracting manual set higher transaction limits ranging from $5,000 to $25,000 for certain staff members, which the court’s chief financial and administrative officer deemed reasonable given the court’s size and its business needs. All transactions we reviewed appeared to be reasonable and had appropriate supporting documentation, such as purchase request approvals and receipts for goods.
Emergency Purchase Card Transactions Related to COVID-19 and Exempt From Competitive Processes Appeared to Be Reasonable
In March 2020, the Governor proclaimed a state of emergency in California to address the global COVID-19 outbreak. Because the state of emergency began during our audit period of fiscal year 2019–20, many of the purchase card transactions we reviewed were for goods such as hand sanitizer or protective equipment. Most of these purchases were under $10,000 in value, which is the threshold at which state law and the judicial contracting manual’s competitive bidding requirements typically apply. Regardless of the value of a good or service, state law and the judicial contracting manual also exempt contracting entities from competitive bidding requirements when they make emergency purchases that are necessary for the immediate protection of life, health, property, or essential public services. The urgency of the courts’ COVID-19 related purchases, the possibility of increased prices for high-demand goods, and the potential deviation from certain standard purchasing requirements together introduced additional risk for the misuse of public funds.
Despite the increased risk, the COVID-19 related purchases we reviewed appeared to be appropriate. We identified 12 purchases related to COVID-19 among the 18 purchase card transactions we reviewed for the Contra Costa, Orange, and San Bernardino courts. These 12 purchases totaled approximately $65,000. The courts made the purchases from March through June 2020 to obtain goods including hand sanitizing supplies, face masks, and electronic equipment for a virtual courtroom. In each case we reviewed, the courts had documentation showing the approval of the purchase request and the receipt of a good for which the court had a reasonable need due to the public health emergency.
Recommendations
Alameda County Superior Court
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.
Lake County Superior Court
To reduce the risk of improper payments, by July 1, 2021, the court should revise its payment process to incorporate an alternative safeguard in any instance when it is not practical to fully separate payment duties.
Orange County Superior Court
To ensure appropriate approval of all payments, by July 1, 2021, the court should revise its payment process to consistently require two levels of approval for all invoices above a certain dollar limit.
Four Courts Failed to Consistently Report High-Value Contracts
Key Points
- Although state law generally requires that a court notify the State Auditor of a contract with a total estimated cost of more than $1 million, the Alameda court failed to comply with this requirement and did not report four such contracts that it entered into during fiscal year 2019–20 worth approximately $20 million combined.
- During fiscal year 2019–20, the Contra Costa, Orange, and San Bernardino courts all failed to report five required contracts worth nearly $19 million combined.
The Alameda Court Failed to Report Contracts Worth Approximately $20 Million
The Alameda court did not comply with the legal requirement to report certain contracts. As we discuss in the Introduction, the judicial contract law requires courts to notify the State Auditor in writing within 10 business days of entering into a contract with a total cost estimated at more than $1 million; the law excludes only IT projects valued at more than $5 million that are subject to review and recommendations by the California Department of Technology and certain contracts related to trial court construction. The Alameda court had four contracts in fiscal year 2019–20 that it should have reported to us, but failed to do so. The contracts, which were for services such as janitorial services, ranged in value from $2 million to approximately $12.3 million and together were worth approximately $20 million. In addition to not complying with the law, the court’s failure to notify our office about its high-value contracts as required limits our ability to assess in an accurate and timely manner whether the court’s contracts warrant review.
The Alameda court’s director of finance and facilities, who oversees its contracting activities, acknowledged that the court did not notify our office about contracts over $1 million in estimated value because it did not have procedures in place to do so and because of a lack of knowledge and training for individuals responsible for handling the notifications. The judicial contracting manual details the notification requirement, and the Alameda court also included information about it in a version of its local contracting manual that was effective through January 2020. However, the director of finance and facilities explained that the court later revised its local contracting manual and inadvertently omitted that information from its current local contracting manual. After we discussed this finding with the Alameda court, the court began adding procedures for identifying and reporting contracts over $1 million to its process for reviewing contracts, consistent with state law and the judicial contracting manual.
The Contra Costa, Orange, and San Bernardino Courts Did Not Consistently Report All High-Value Contracts
The Contra Costa court failed to report a contract for IT services provided by the county of Contra Costa that was worth $1.2 million in fiscal year 2019–20. According to the analyst responsible for notifying our office of such contracts, the court did not notify us in this circumstance because the court’s contractual agreement with the county was originally established in 1998, and the notification requirement in state law became effective in 2011. However, the law applies to contracts entered into or amended from October 1, 2011 on. The court entered into a new contract with the county in 2016 that replaced the 1998 contract. This contract was therefore subject to the legal requirement, and by failing to notify our office, the court did not comply with the law.
Additionally, the San Bernardino court incorrectly exempted two high-value contracts from the notification requirement in state law. Specifically, the court failed to report two contracts for medical benefits plans worth $7 million and $4.9 million that it entered into during fiscal year 2019–20. The contracts and procurement manager at the court explained that the court had relied on direction that it received in response to a question a court staff member asked a Judicial Council staff member in 2013, which the court misinterpreted as excluding contracts for services such as medical benefits plans from the notification requirement in the judicial contract law. The manager indicated that the court now properly understands the requirement and stated that it will immediately begin notifying our office of these types of contracts when their estimated value is more than $1 million.
Recommendation
Alameda, Contra Costa, Orange, and San Bernardino County Superior Courts
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.
Two Courts Lack Recommended Information in Their Local Contracting Manuals
Key Points
- The Alameda court’s local contracting manual lacked certain information recommended by the judicial contracting manual. Specifically, the court failed to include a legal review policy and contract administration plan in its local contracting manual.
- The Lake court also did not include the recommended contract administration plan in its local contracting manual.
The Alameda Court Did Not Include a Legal Review Policy in Its Local Contracting Manual
Although all five courts met the requirements for local contracting manuals, two courts did not include some information recommended by the judicial contracting manual. Local contracting manuals serve to supplement the judicial contracting manual. They provide specific details on procurement policies and procedures for each court in order to familiarize court employees with the court’s specific purchasing and contracting practices. The judicial contracting manual requires that the court’s local contracting manual contain certain information, such as the court’s organizational structure, including the individuals with responsibility and authority for procurement activities. In addition to the required information, the judicial contracting manual recommends that a local contracting manual should contain some additional information unless a court has a good business reason for excluding it. However, two courts did not follow certain recommendations or provide a compelling reason for disregarding the judicial contracting manual’s guidance.
The Alameda court’s local contracting manual did not establish clear guidelines for when staff should submit contracts for legal review (legal review policy). The judicial contracting manual recommends that courts adopt a legal review policy, and it provides circumstances in which courts should require legal review of contracts. For example, courts should require legal review of contracts that provide for the performance of high-risk activities, such as operating heavy equipment. However, the current version of the Alameda court’s local contracting manual does not include a legal review policy. The court’s executive officer explained that this is because the court may not be able to obtain legal review promptly. The judicial contracting manual provides that courts can arrange for legal review of their contracts through in-house legal staff, retained counsel, or the Judicial Council’s Legal Services office. The court’s executive officer explained that the court sometimes seeks legal review from one of its staff attorneys but prefers to rely on the Judicial Council. He expressed concern that the Judicial Council can have a backlog of legal review requests from multiple entities and that legal review can sometimes be delayed as a result, so formally documenting requirements for legal review of contracts could potentially hold the court to standards that would be difficult to uphold in practice. However, the executive officer was unable to demonstrate that such a backlog had prevented the court from obtaining legal review in a timely manner. Therefore, we believe the court’s reason for not having a recommended legal review policy is inadequate, and the executive officer indicated that the court is open to adding a legal review policy in its local contracting manual.
The Alameda and Lake Courts Did Not Include a Contract Administration Plan in Their Local Contracting Manuals
Neither the Alameda nor the Lake courts included a recommended plan for administering contracts (contract administration plan) in their local contracting manuals. The purpose of such a plan is to detail the court’s contract administration practices and establish clear lines of authority for the management and conduct of contract administration functions—information that should help staff members perform their duties appropriately. For example, the San Bernardino court’s local contracting manual refers to the judicial contracting manual’s guidance on contract administration; it then supplements that guidance with additional information, such as clarifying that the staff member who fulfills the role of contract administrator is responsible for notifying the State Auditor of high-value contracts. The director of finance and facilities at the Alameda court stated that the contract administration plan was inadvertently omitted from the current local contracting manual during revision and, as we described above, she attributed the court’s failure to notify our office of high-value contracts in part to a lack of knowledge on behalf of the responsible individuals. A contract administration plan that addressed contract administration practices and management could have prevented this lack of knowledge. The director of finance and facilities agreed that it is a good practice to include the contract administration plan in the local contracting manual, as the judicial contracting manual recommends, and said the court will do so.
An administrative services manager at the Lake court explained that the court did not include a contract administration plan in its local contracting manual because the court has a very limited number of staff members involved with contract administration activities and including such a plan is not a mandatory provision. However, having a contract administration plan as recommended by the judicial contracting manual could help the court ensure that knowledge of those activities transfers effectively when staff members transition in or out of key roles, particularly if a transition should occur unexpectedly. The Lake court’s executive officer stated that the court would review the judicial contracting manual and consider updating the local contracting manual to incorporate the recommended contract administration plan.
Recommendations
Alameda County Superior Court
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.
Lake County Superior Court
To ensure appropriate administration of its contracts, by July 1, 2021, the court should revise its local contracting manual to include a contract administration plan, as recommended by the judicial contracting manual.
Other Area We Reviewed
To address the audit requirements contained in the judicial contract law, we also reviewed a selection of each court’s contracts to assess whether each court complied with applicable requirements. Table 2 shows the results of our review.
Table 2
Other Area Reviewed as Part of This Audit
| The Courts We Reviewed Generally Complied With Other Procurement and Contracting Requirements |
|
We reviewed a selection of contracts for each court to determine whether the courts adhered to requirements for awarding contracts. We examined 50 contracts (10 from each court) that were active during fiscal year 2019–20 and were worth approximately $84 million in total value. We determined that all five courts met procurement and contracting requirements set forth in the judicial contracting manual and each court’s local contracting manual. Courts competitively awarded 48 percent of the contracts we reviewed, totaling $45 million in value. For all such contracts, the courts either achieved competition by securing multiple bids or made a reasonable effort to achieve competition by advertising the contracting opportunities. The remaining contracts we reviewed, worth $39 million, were noncompetitive. For those contracts, the courts met applicable requirements from the judicial contracting manual, such as documenting the justification for using a sole‑source procurement to obtain goods or services from only one vendor. |
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 14, 2021