2023-302 Judicial Branch Procurement

January 9, 2024
2023-302

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

This report concludes that over the past decade, during which the California State Auditor’s Office (State Auditor) has been responsible for regularly auditing the Judicial Council of California (Judicial Council), the Judicial Council has made substantial progress in improving its procurement and payment policies and practices. However, opportunities still exist to strengthen certain purchasing and reporting practices.

In 2011 the State enacted the California Judicial Branch Contract Law (judicial contract law), which, subject to certain exceptions, requires Judicial Branch entities to comply with the provisions of the Public Contract Code that apply to the procurement of goods and services for state agencies and departments. Subject to legislative appropriation, the judicial contract law also requires the State Auditor to conduct a biennial audit of the Judicial Council’s compliance with the judicial contract law. We have now conducted six biennial audits of the Judicial Council and issued 24 recommendations to improve its procurement and payment policies and practices. ¹  The Judicial Council has fully implemented each of those 24 recommendations from our past audits, and among those recommendations were the following: the Judicial Council should implement procedures and training for ensuring that internal controls over payments and procurements are followed; and it should include a final verification step in its procurement process to ensure that managers with appropriate signature authority approve procurements.

In the latter half of 2023, we conducted the statutorily required biennial audit of the Judicial Council’s procurement policies, performing a detailed review of 40 selected procurements and their corresponding payments. We found that the Judicial Council is generally in compliance with the judicial contract law, but we noted some areas in which it can continue to improve its practices. We reached four specific conclusions relating to policies, procedures, and reporting for procurements and payment processes.

Although the Judicial Council’s Contracting Manuals Comply With Legal and Administrative Requirements, It Could Strengthen Its Fraud Reporting Requirements

The judicial contract law requires the Judicial Council to adopt a Judicial Branch Contracting Manual (contracting manual) incorporating procurement and contracting policies and procedures that all Judicial Branch entities must follow. The law also requires each Judicial Branch entity, including the Judicial Council itself, to adopt a local contracting manual (local manual) for procurement and contracting for goods and services by that specific Judicial Branch entity. These manuals must be consistent with the Public Contract Code and contain provisions substantially similar to the State Administrative Manual (SAM) and State Contracting Manual (SCM). The text box describes the purpose and content of these two types of manuals. Our prior audits of the Judicial Council dating back to 2017 concluded that both the contracting manual and the Judicial Council’s local manual appropriately complied with state requirements, and our review for this audit found that those manuals continue to generally comply with requirements in state law.

However, our review did find that the Judicial Council could improve the contracting manual’s language regarding fraud reporting so that it more closely aligns with the language in Section 20080 of SAM. Specifically, SAM requires that state agencies report actual or suspected fraud or errors, the latter of which, in this context, means an unusual event causing impairment or inaccuracy in the procurement process or related documentation. SAM also provides examples of potentially fraudulent incidents, and it outlines mechanisms for reporting fraud. Despite these requirements, we found that the language in the contracting manual, which the Judicial Council said contemplates fraud reporting, lacks specificity. For example, the contracting manual requires that all personnel involved in the procurement process consult with the Judicial Branch entity’s procurement and legal staff or the Judicial Council’s Legal Services office when questions arise regarding acceptable or unacceptable behavior when dealing with bidders or vendors. However, it lacks several elements found in SAM, such as an explicit requirement for reporting actual or suspected fraud and examples of potentially fraudulent activities. Instead, the Judicial Council has personnel policies that encourage both Judicial Council and court employees to promptly raise concerns about improper governmental activities—including fraud—to independent parties, such as the Judicial Council’s internal audit services. The Judicial Council provides staff with an annual reminder of these policies.

However, including language in its contracting manual that is substantially similar to the fraud reporting requirements found in the SAM will bring the Judicial Council into closer compliance with the judicial contract law and ensure that all Judicial Branch entities—including the Judicial Council and courts—receive adequate guidance about how and to whom they should report fraud. In the case of the Judicial Council, such positions include its principal manager of audit services and its chief administrative officer. Judicial Council staff acknowledged that it could improve the contracting manual’s requirements on fraud reporting by bringing them into closer alignment with SAM’s requirements on fraud reporting. In acknowledging this improvement, Judicial Council staff noted that the voting members of the Judicial Council must formally approve any revisions to the contracting manual. Because of the importance of establishing clear guidance for reporting suspected or actual fraud, we believe it is critical that Judicial Council staff develop proposed revisions to the contracting manual as part of the process to update the contracting manual in 2024. In doing so, Judicial Council staff should clarify the fraud reporting requirements, and the Judicial Council’s voting members should formally approve revisions aimed at strengthening its contracting manual’s guidance.

The Judicial Council Has Not Consistently Adhered to Certain Procurement Requirements

Although the Judicial Council has generally adhered to the requirements set forth in the contracting manual, it has not always followed solicitation requirements that would ensure that it awards contracts for goods and services to appropriate bidders. The contracting manual establishes several requirements that Judicial Branch entities, including the Judicial Council, must follow to ensure that goods and services are procured appropriately. These requirements include the following:

• The establishment of positions responsible for the approval of procurements. The Judicial Council’s local manual designates approval authority for procurements to specific supervisor and manager positions based on dollar thresholds.
• A separation of duties between the purchaser and the approving supervisor or manager.
• The use of certain solicitation processes for competitively bid procurements.
• Documented approval of certain non-competitively bid procurements by authorized approvers.

The contracting manual also prohibits what is known as contract splitting. In particular, the contracting manual states that a series of related goods or services that would normally be combined and bid as one job cannot be split into, for example, separate, smaller‑value contracts to avoid adhering to competitive solicitation requirements.²

We found that these requirements, if followed, generally establish strong controls over Judicial Council procurements. To evaluate adherence to these controls, we reviewed a selection of procurements that the Judicial Council made from July 2021 through June 2023 and found that it complied with the contracting manual’s requirements for 36 of the 40 procurements we reviewed. We did not identify any instances of contract splitting. However, for four of the procurements we reviewed, we found that the Judicial Council did not follow all of the contracting manual’s requirements.

For one of these four procurements, the Judicial Council did not award an Information Technology (IT) service contract to a California-certified small business because staff did not apply to the vendor’s bid a small business preference that state law requires. Both state law and the contracting manual require the Judicial Council, when evaluating bids for IT services or goods, to apply a 5 percent small business preference to the bids of qualifying vendors certified as small businesses by the Department of General Services. Had the staff member responsible for evaluating the bids applied this small business preference to the certified vendor during the evaluation process for this IT service contract valued at nearly $500,000, the vendor would have been awarded the contract. Instead, the Judicial Council improperly awarded the contract to an international IT services company. When we spoke with Judicial Council management about this procurement, they acknowledged that the staff member should have applied the small business preference to the bid and that the approving supervisor should have discovered this error when approving the procurement.

Additionally, we found that the Judicial Council used an incorrect solicitation process for three procurements for IT services, including the procurement we described in the previous paragraph. The contracting manual generally requires that competitively bid procurements for IT goods and services be solicited through one of three solicitation processes: a request for quote (RFQ), an invitation for bid (IFB), or a request for proposal (RFP). As the text box shows, the contracting manual requires that the Judicial Council choose the appropriate solicitation process, which it determines by the value or complexity of the procurement. Of the three procurements that the Judicial Council did not solicit properly, one IT service contract valued at roughly $230,000 was solicited using an RFQ and two IT service contracts valued at about $286,000 and nearly $500,000, respectively, were solicited using an IFB. According to the contracting manual, a procurement for IT services valued at $100,000 or more must be solicited using an RFP, which requires proof of bidder qualifications and a more detailed review of submitted bids by an evaluation team. Although the Judicial Council solicited for these procurements using competitive processes, because the procurements were for IT services valued at more than $100,000, the Judicial Council should have solicited them using an RFP. When the Judicial Council does not follow the appropriate solicitation process for a procurement, it misses the opportunity to use procurement controls that better ensure the award of contracts to qualified, competent bidders. Further, when procurements are not subject to the correct solicitation process, the Judicial Council increases the likelihood of procuring goods and services that do not provide the best possible value for the State.

Finally, the Judicial Council executed a purchase order of approximately $69,000 without proper authorization. Judicial Council management acknowledged that the unauthorized purchase order was an oversight and affirmed that the purchase order should have received the signature of an authorized approver. Although the purchase appeared reasonable, because the Judicial Council did not adhere to procurement controls established by the contracting manual, it risked purchasing a service that was not in the best interest of the State.

When we spoke with Judicial Council management about these four procurements, they acknowledged that these procurements did not adhere to the contracting manual’s requirements. For the three procurements that did not undergo the appropriate solicitation processes, Judicial Council management explained that the supervisor responsible for reviewing and approving these procurements should have discovered these errors when approving the procurements. Further, Judicial Council management has developed a training action plan in response to this audit’s findings that, if implemented as planned, would train staff involved in the procurement process about when appropriate approval is required and when certain solicitation processes are needed. Because it is important that competitively bid procurements adhere to contracting requirements that help small businesses and allow the Judicial Council to procure goods at the best value for the State, the Judicial Council must ensure that staff receive the necessary training to understand and adhere to these controls.

The Judicial Council Could Improve Its Financial Reporting by Revising Its FI$Cal Processes

Although the procurement information that we reviewed in the Judicial Council’s financial management system—the Financial Information System for California (FI$Cal)—was complete, we found that the Judicial Council did not always record contract dates accurately. FI$Cal is an online system that state departments use to manage accounting, procurement, budget, and cash management information. One of the main purposes of implementing FI$Cal across multiple state departments is to allow the public a transparent view of state finances and the use of public funds. Therefore, it is important that the Judicial Council enters accurate data into the system.

To evaluate the accuracy of the procurement information that the Judicial Council recorded in FI$Cal, we reviewed the contracts of 29 procurements that it entered into the system from July 2021 through June 2023. These procurements were separate from the 40 procurements that we tested for adherence to procurement internal controls. For these 29 procurements, we compared information on each contract to their respective fields in FI$Cal. We found that the Judicial Council accurately recorded in FI$Cal the vendor and total dollar amount for all 29 procurements.

However, the Judicial Council did not always record in FI$Cal the accurate start or end dates of contracts for these 29 procurements. Specifically, we identified that the start dates for 22 of the 29 procurements did not reflect the date when the Judicial Council executed the associated contract. Of these 22 procurements that we identified as having inaccurate start dates, seven were off by 30 or more days from the start date of the actual contract. According to the contracts manager, there are two different reasons why the start dates were not recorded accurately. He explained that when the Judicial Council initiates a contract in FI$Cal, it creates a requisition to initiate the contract process that includes the date on which the requisition was created. To link the requisition to the contract in FI$Cal, the Judicial Council sometimes has to create an earlier start date for the contract to encompass the date on which the requisition was created. As such, the start dates recorded for many contracts in FI$Cal are earlier than the dates on which the Judicial Council executed the contracts. The contracts manager further explained that sometimes FI$Cal generates start dates for contracts that are later than the actual start date for the contract, and staff may not revise the dates to reflect the dates on which the Judicial Council executed the contracts. When the Judicial Council does not record start dates accurately in FI$Cal, it risks providing the public with an incomplete accounting of the number of contracts that it entered into during a particular fiscal year.

We also identified that the end dates in FI$Cal for 10 of the 29 procurements did not reflect the date on which the associated contract actually expired. Of these 10 procurements that we identified as having inaccurate end dates, at least eight were off by 30 or more days from the end date of the actual contract.³ However, when Judicial Council management explained the reasons for why these inaccuracies occurred, we found that their explanations were generally reasonable and that it may not have been possible to accurately record the end dates in question at the time. According to Judicial Council management, FI$Cal requires the Judicial Council to assign an end date to all contracts in the system. As a result, management explained that, in some instances, staff had to input an estimated date of when the contract might expire. In other instances, the Judicial Council indicated that it had to extend the end date in FI$Cal for a short‑term contract to allow the system enough time to process the contract before its end date in the system. As such, the end dates for some contracts in FI$Cal are later than their actual date of expiration. Although the reasons for why these end dates are inaccurate appear reasonable, it is good practice to record all information into FI$Cal accurately. Therefore, it is important that the Judicial Council record accurate end dates into the system when possible.

The Judicial Council acknowledged that these dates were inaccurate and informed us in November 2023 that it recently discovered that it could record dates in FI$Cal accurately, explaining that it has revised its processes for doing so. Further, the Judicial Council stated that it can manually revise the inaccurate dates that currently exist in FI$Cal to reflect the actual dates on the contracts. When we asked Judicial Council management how they are now able to accurately record the dates, they stated that they believe recent changes to FI$Cal functionality allow them to do so. Given that the Judicial Council is now able to record accurate contract dates and manually revise inaccurate dates in FI$Cal, the Judicial Council should take the actions needed to ensure its contract information in FI$Cal is accurate.

The Judicial Council Follows Its Processes for Ensuring That It Makes Appropriate Payments

The Judicial Council has established appropriate procedures to govern how it processes payments, and it follows those procedures when paying vendors. Our review found that the Judicial Council has established appropriate controls for payments to ensure that, among other things, it is paying for goods and services it contracted for and received in satisfactory condition. For example, the Judicial Council specifies that vendors’ invoices should include detailed descriptions of the goods or services they provided and that staff should verify before authorizing payment that the Judicial Council received satisfactory goods or services. The Judicial Council also relies on requirements established in FI$Cal that help ensure that it properly authorizes purchases and payments and that an appropriate separation of duties exists to mitigate the risk of errors or fraudulent payments. For example, the Judicial Council requires certain staff to review and approve in FI$Cal receipt of goods and services when the Judicial Council receives them. The Judicial Council also authorizes separate staff members to process and approve payment for those goods and services and to verify that the payment and processing approvals are similarly recorded in FI$Cal. The controls established in FI$Cal appropriately enforce this segregation: the system does not allow staff authorized to approve the requisition for a good or service to also approve payment for that good or service. We evaluated the Judicial Council’s adherence to these controls by reviewing 40 payments made from July 2021 through June 2023, and we found that the Judicial Council followed its procedures outlined in the contracting manual governing payments and that it made those payments appropriately.

By January 2025, the Judicial Council should correct in its FI$Cal data the inaccurate contract dates for procurements dating back to July 1, 2021.

Respectfully submitted,

MIKE TILDEN, CPA
Chief Deputy State Auditor

January 9, 2024

Staff:
Laura Kearney, Deputy State Auditor
Grayson Hough
William Goltra
Richard D. Power, MBA, MPP

Legal Counsel:
Katie Mola, Senior Staff Counsel

1. Reports 2013-302 & 2013-303, December 2013; report 2015-302, December 2015; report 2017-302, December 2017; report 2019-302, December 2019; and report 2021-302, January 2022. ↩︎
2. The contracting manual does not require a competitive procurement for purchases that cost less than $10,000. As a result, the contracting manual prohibits Judicial Branch entities from splitting transactions costing more than $10,000 into multiple transactions costing less than $10,000 to avoid competitive bidding requirements. ↩︎
3. Of these 10 procurements, one had a contract that did not have an end date and instead specified that the contract would end upon final payment by the Judicial Council. For this reason, we could not identify by how many days the end date recorded in FI$Cal may differ from the date upon which final payment is actually made by the Judicial Council. ↩︎