DENVER – An audit of the city’s purchasing and payment processes found unauthorized spending and a need for agencies to improve the documentation of payment support and policy exceptions, according to Denver Auditor Timothy M. O’Brien, CPA.
“We need to make sure the correct checks and balances are in place to get the city the best deals, save taxpayer dollars and avoid fraud or waste,” Auditor O’Brien said.
Every year, the Purchasing Division is responsible for procuring about $330 million in goods and services on behalf of the city. Those purchases can be made through either a purchase order, the bidding process, non-purchase order payments or credit cards.
The audit covered the period of nine months from August 28, 2017 to the end of May 2018. Purchasing was going through significant organizational and procedural changes. The division has a well-documented and detailed operational plan listing future improvements. Throughout the audit process, Purchasing and Accounts Payable were proactive in working towards implementing our recommendations.
Despite these notable steps, one area of concern is the number of large unauthorized payments made within city agencies. Even though the number of unauthorized purchases has decreased significantly over the last few years, as evidenced by the graph below, some of the documentation and approval of unauthorized purchases is inconsistent and incomplete. Some of the unauthorized spending was above $10,000, making them code violations.
There were also tracking issues with emergency purchase order numbers and payments made with purchasing cards called P-Cards under master purchase orders.
Generally, agencies are not supposed to split purchases into two payments to bypass purchasing limits. However, splitting is allowed for master purchase orders. This exception creates opportunities for misuse. In testing, the audit team found 188 instances of split P-Card transactions worth a total of $567,000 that were not allowed under procurement card rules.
Agencies are also not supposed to use P-Cards for recurring purchases unless they are part of a master purchase order. However, audit testing found $1.5 million in P-Cards violated this policy, which is about half of recurring P-Card transactions.
P-Card training is out of date by three years, and a single employee conducts the training for each individual P-Card holder. We recommend a standardized and updated training to ensure P-Card users adhere to the rules.
“Better training and awareness of rules and limitations will help fix some of these problems and ensure better accountability for agencies and employees,” Auditor O’Brien said.
We also found inconsistent and incomplete data in the procurement system that make tracking bid solicitations inefficient and unreliable. Right now, the city uses many different systems for bidding solicitations. We found inconsistencies between some of the systems we used for testing, which hinders the evaluation of the adequacy and accuracy of bid requirements, competition and bid awards.
One area of concern in the bidding process, according to the Auditor, is how bidding exceptions are approved. The bidding process was put into place to ensure adequate competition, so that the city gets the best possible prices for goods and services.
While there are legitimate scenarios where an exception could be made to skip the bidding process and still maintain the best interests of the city, approval documentation for these exceptions could be improved. Good examples of times when exception could be made are if there is no competition for a bid or if a subject matter expert has a professional preference. Inadequate bidding exception approval might lead to inappropriately circumventing the bidding process and potentially paying more for goods and services.
Among the audit team’s additional findings:
- The Purchasing Division is also monitoring how often change orders happen. Changes to purchase orders are allowed, giving Purchasing and the respective agencies the ability to make changes such as quantity, address, and item or freight cost. Without regular review, an agency could have an unusually high number of changes and Purchasing won’t know to work with them to avoid needing to make all those changes in the future.
- Some payments were processed without adequate support of the transaction. However, auditors found no evidence the city lost money on these transactions.
- The city could do a better job of reporting late payment interest, which is required by ordinance as a deterrent to keep agencies from paying invoices late.
The audit team also noted the city makes 60% of payments by check, which is more expensive than making electronic payments. Also, we found about 4,800 checks were held for pickup, which could increase the risk of fraud. We recommend reducing the number of checks written and held for pickup.
“Through stronger internal controls, procedural guidance and training the Purchasing Division and the Accounts Payable team will be able to reduce opportunities in city agencies for fraud and mistakes,” Auditor O’Brien said.