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“AUDIT EXCELLENCE”

Central Ohio Organization of Public Purchasers

Presented by:

James Milton

Senior Audit Manager

Cleveland Region

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AGENDA• What is an Audit?

• How does an audit affect “purchasers?– Internal Controls

– Compliance• Biding Laws - Ohio vs. Federal

• Findings for Recovery

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WHAT IS AN AUDIT?

– Financial statement opinion – public interest, bond ratings, & financial management

– Determine compliance with state & local laws, contracts & covenants

– Evaluate internal control and provide recommendations

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WHAT IS AN AUDIT?

• Audits are performed on an annual or biannual basis in Accordance with GAGAS & GAAS

• Exception: Subject to OMB Circular A-133 (expend greater $500,000 or more in one year) must be audited annually

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WHAT IS AN AUDIT?

• The Auditor of State performs audits of all local governments, state agencies, boards & commissions including all colleges and universities

• Some audits are performed by Independent Public Accountants (IPAs) on a contract basis.

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HOW DOES AN AUDIT AFFECT ME ??

• How does an Audit affect a purchaser of a particular entity?–Remember… GAGAS Reporting

• Internal Controls• Compliance

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INTERNAL CONTROLS

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Internal Controls:Five Components

More than just control procedures

Control environment

Information & communication

Risk assessment

Monitoring

Control procedures

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Internal Control Objectives

–How do you prevent errors?–If an error occurs, will you

detect it?

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Control Environment: Starts at the Top!

• “Tone at the Top” for ethical behavior

• Committed to internal controls

• Code of conduct• Hiring qualified job

applicants

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Risk Assessment

• Answer: Ask more questions:–What can go wrong?–How can we avoid it?

• Particularly critical when things change:–Reorganization, new systems or

computers, new transaction types, etc.

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Monitoring

A process that assesses the quality of internal control performance over time Management / supervisory reviews

Critical when it is impractical to segregate duties

Analytical reviews

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CONTROL DEFICIENCIES ….

• What is the lingo? –Control Deficiency

–Significant Deficiency

–Material Weakness

–Noncompliance

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COMPLIANCE LAWS & REGULATIONS

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LAWS AND REGULATIONS

• State & Federal Laws• Contracts• Grant agreements• Other

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OHIO COMPLIANCE SUPPLEMENT

• What is an OCS?• Where do I find it?• Who puts it together?• Why do I need to know this?

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OCS - Defined• The OCS includes certain laws and regulations

which are of considerable public interest, or are of the type auditors generally consider “direct and material”.

• Though the OCS is not a comprehensive listing of applicable laws and regulations, it is designed to help auditors and public offices identify and familiarize themselves with certain laws and regulations which generally apply to a variety of local governments.

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Where Do I Find the OCS?

• http://www.auditor.state.oh.us/services/lgs/publications/LocalGovernmentManualsHandbooks/ohio_compliance_supplement.htm

• Available by :– Entire Supplement (pdf)– PDF version by section– Microsoft Word Version by section

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Who Puts the OCS Together?AUDITOR OF STATE

• Legislative Affairs• Legal Division• Center for Audit Excellence

– Significant new or revised legal and regulatory requirements financial or audit impact

– Comments we receive from auditors and clients– Implementation Instructions & Identifies updates

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Why Do I need to Know This?• Auditors design their tests to reasonably

assure detection of material misstatements resulting from:– violations of provisions of laws, regulations,

contracts, or grant agreements that directly and materially affect the determination of financial statement amounts.

• Management is responsible for designing, implementing and complying with applicable laws and regulations

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Why do I need to know this?• EFFICIENCIES

– You know what the Auditor is going to ask you– You know what records the Auditor is going to

request– You can better improve your operations by

implementing controls to help ensure compliance with laws and regulations

–BETTER AUDIT REPORTS!!!

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OCS• OCS – APPENDIX F – LEGAL MATRICES• Each matrix matches the applicability of

OCS steps to various entity types• The information does not necessarily

encompass every item requiring testing for these entities

• When references to specific code sections are made, you should read those sections

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BIDDING LAWS vs

FEDERAL PROCUREMENT RULES

clarification

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OHIO COMPETITIVE BIDDING REQUIREMENTS

• The CFAE receives many questions regarding Federal Procurement rules and how they differ from Ohio Competitive Bidding requirements.

• Although similar in many ways, there are some important differences that should be clarified.

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Ohio Competitive Bidding(Everyone)

• Requirement placed on entities to ensure the best quality for the best price.

• Bidding thresholds are set by Ohio statute.• Notice is required in newspaper of general

circulation. • Requirements vary slightly by entity.

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Ohio Competitive BiddingEveryone

• RC 9.312 states that the government shall accept only the “lowest responsive and responsible bid.”

• The government has the option of rejecting all the bids if none are acceptable.

• If two or more bids are equal and are lower than any others, the board may accept either.

• The government may not divide work between two equal bidders.

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Ohio Competitive BiddingEveryone

• Determining the lowest bid seems easy enough.

• Determining whether a bidder is “responsible” may present problems.– The General Assembly did not provide a

definition of “responsible.”

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Ohio Competitive BiddingEveryone

• The courts and the Ohio AG have furnished some guidance for “responsible”:

– General ability and capacity to carry on the work,– Equipment and facilities– Promptness – The quality of work previously done by bidder– Personal qualities such as competence– Integrity and judgment

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Ohio Competitive BiddingCounties

• Expenditures exceeding $25,000 whether purchased, leased or leased for purchase must be bid.– Item purchased, leased, or leased for

purchase obtained through competitive bidding in excess of $25,000.

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Ohio Competitive BiddingCounties

• Exemptions:– Emergency – unanimous vote by

commissioners for less than $50,000 or there is a physical disaster.• Still requires information estimates from 3

prospective contractors.– Single Source/Supplier – not required for entity

owned or leased where limited to sole supplier.– Government Seller

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Ohio Competitive BiddingCounties

• Exemptions (Continued):– Other types

• Department of Job and Family Services, child care services for employees, youth offenders and medical services.

• Criminal justice/social services.• Property leased/stored defined by statute.

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Ohio Competitive BiddingMunicipalities

• Required:– City purchases in excess of $25,000 and

Village purchases in excess of $50,000 (unless Village Administrator).

– Other requirements:• Cash payment for contract price.• Modification by director agreed to in writing.

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Ohio Competitive BiddingMunicipalities

• Exceptions:– Emergency 2/3 vote of members required– Public Auction/Sale for used equipment

and supplies– Government to Government purchase– Force Accounts– Home Rule Powers

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Ohio Competitive BiddingTownships

• Required:– Purchase of machinery, materials and

supplies, fire protection, lighting, energy savings, and communication required in excess of $50,000.• Footbridge repairs = $15,000• Exception for emergency, government to

government contract and contracts under ORC §5513.01.

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Ohio Competitive BiddingTownships

• Required (Continued):– Maintenance/Roads required in excess of

$15,000/mile.• Exception for emergency and government to

government contract.

– Fire and Ambulance required in excess of $25,000.• Special Requirement: Bids opened and read

publicly by advertisement for bidders.

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Ohio Competitive BiddingSchools

• Board seeks building, repair, improvement or destruction of school building in excess of $25,000.– Exceptions:

• Urgent necessity or security• Acquisition of education materials• Availability by single source• Installment payment contract for purchase or

service of emergency conservation measures

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Ohio Competitive BiddingEveryone

• The following do not require Ohio comp. bidding:– Textbooks– Computer hardware

and software used for special purposes

– Educational materials used in teaching

• Motor vehicles, except school buses (RC 3313.172, 3327.08)

• Services• Insurance• Fuel• Energy conservation

measures (with restrictions provided by statute)

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Ohio Competitive BiddingEveryone

• The following do not require Ohio comp. bidding (continued):– In cases of urgent

necessity, or for the security and protection of public property

– Certain conditions

must be met for each entity type in order to declare an emergency and legally avoid competitive bidding.• Painting the hallway is

not an emergency.• Replacing a roof after a

tornado could be.

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Ohio Competitive BiddingEveryone

• Additional exemptions (Continued):– RC 307.86 (for counties) – Professional services

of an accountant, architect, attorney at law, physician, professional engineer, construction project manager, consultant, surveyor, or appraiser, by or on behalf of the contracting authority.

– Certain shared-savings contracts.

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Ohio Competitive BiddingEveryone

• Additional exemptions (Continued):– Any item that is available and can be acquired

only from a single source (must adopt a resolution by 2/3 vote that this is the case).

• Ohio courts recognize not all procurements of services by public bodies are amenable to competitive bidding.

• Known as the “sole-source doctrine” - bids need not be solicited for certain specialized services. [State ex rel. Doria v. Ferguson (1945) 145 Ohio St. 12, para. 2 of the syllabus]

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Ohio Competitive BiddingEveryone

• Ohio Sole-Source Doctrine (Continued)– An exception exists where the contract involves

the performance of personal services of a specialized nature requiring the exercise of peculiar skill and aptitude.

• Artistic nature; monopolistic, because of the function to be performed thereby; dependent upon a single means which is the subject of an exclusive patent, or franchise, or sole source of supply.

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Ohio Competitive BiddingEveryone

• Ohio Sole-Source Doctrine (Continued)– The common thread throughout the sole source

case law is a rational, subjective belief that the chosen contractor delivers the best value for the work because it is uniquely qualified, or that it is physically impossible for the work to be performed by others.

– Ohio competitive bidding requirements do not apply where this is the case.

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Ohio Competitive BiddingEveryone

• A particular project cannot be done “piecemeal” in order to evade the dollar limitations of the statute (State ex rel. Kuhn v. Smith (C.P. 1963), 92 Ohio Law Abs. 527, 25 O.O.2d 203, 194 N.E.2zd 186).

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FEDERAL PROCUREMENT RULES

IMPORTANT NOTE:

We will focus on USDE Federal Procurement rules since they are representative of most Federal agencies. However, you should use caution referencing Code of Federal Regulations. This slide show includes references to EDGAR (codified in Title 34 of the CFR). Auditors should refer to the A-102 Common Rule for other Federal Agencies. See chart at: http://www.whitehouse.gov/omb/grants_chart.

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• EDGAR (Education Department General Administration Regulations) Part 74 -Administration of Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations

– (Authority: 20 U.S.C. 3474; Circular A-110)

• EDGAR Part 80 – Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments

– (Authority: 20 U.S.C. 3474; Circular A-102)

Key Federal Procurement Guidance / Regulations

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• All procurement transactions will provide for full and open competition to the maximum extent practicable.

• Agencies shall not place unreasonable requirements on firms in order to qualify.

• Awards are made that are responsive to the solicitation and is most advantageous to the recipient, price, quality, and other factors considered.

Federal Procurement MethodsCompetition

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• States: Follow same policies and procedures in accordance with state law for procurements with non-Federal funds. All contracts/orders will include any clauses required by Federal statute and executive orders.

• Other Grantees/Subgrantees:

-Develop Policies and Procedures

-Maintain Effective Contract Administrative System

-Identify Conflicts of Interest

-Conduct Pre-solicitation Reviews

-Encourage Economy and Efficiency

-Use of Excess Property

-Use of Value Engineering

-Determining Contractor Responsibility

-Maintain Contract Award Decision Documentation

-Limited Use of T&M Contracts

-Settling Contractual Matters

-Develop Protest Procedures

• -Ensuring Competition

-Utilize Various Procurement Methods

-Contracting with Small Businesses

-Performing Cost/Price Analysis

-Making Procurements Available for Agency Review

-Bonding Requirements

-Inclusion of EDGAR Provisions

-Contracting with Faith-Based Organizations

EDGAR Part 74.40 thru 74.48 **Snapshot** EDGAR Part 80.36

• Higher Education Institutions, Hospitals, and Other Non-Profit Organizations:

-Recipient Responsibilities

-Codes of Conduct

-Competition

-Procurement Procedures

-Cost/Price Analysis

-Procurement Records

-Contract Administration

-Contract Provisions

Procurement Standards

Procurement Requirements

Procurement Standards/

Requirements

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• Contract award decision documentation provides history of the procurement.

• Examples of procurement documents to maintain in the record:– Rationale for method of procurement

– Selection of contract type

– Basis of Contractor selection or rejection

– Basis of contract price

Federal Procurement Methods Maintain Contract Award Decision Documentation

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• Small Purchases• Sealed Bid• Competitive Proposals• Non-Competitive Proposals

• Additional Source– State Cooperative Purchasing (ORC 125.04)

Federal Procurement Methods

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Small Purchases

• Defined as simple and informal procurement methods for securing services, supplies, or other property that do not cost more than the simplified acquisition threshold currently set at $150,000 (see 41 U.S.C. 403(11)) OR STATE BIDDING THRESHOLD.

• Price or rate quotations shall be obtained from an adequate number of qualified sources.

Sealed Bids (Formal Advertising)

• Bids are publicly solicited and a firm-fixed price contract (lump sum or unit price) is awarded to the responsible bidder whose bid, conforming with all the material terms and conditions of the invitation for bids, is the lowest price. (See EDGAR 80.36(d)(2)(i and ii) for the conditions required to use sealed bidding.)

Competitive (Negotiated) Proposals

• Normally conducted with more than one source submitting an offer, and either a fixed-price or cost-reimbursement type contract is awarded. It is generally used when conditions are not appropriate for the use of sealed bids. (See EDGAR 80.36(d)(3)(i. through v.) for the conditions required to use competitive proposals.)

Non-competitive Proposals (Sole-Source)

• Procurement through solicitation of a proposal from only one source, or after solicitation of a number of sources, competition is determined inadequate.

• Noncompetitive procedures may be used only when an award of a contract using small purchase procedures, sealed bids, or competitive proposals is infeasible. (See EDGAR 80.36(d)(4)(A. through D.) for the conditions for use of noncompetitive proposals.)

• Cost analysis is required.• Grantees and subgrantees may be required to submit the

proposed procurement to the awarding agency for pre-award review.

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Federal Procurement Methods Small Purchases ($<150k)

• Standardized - Price is the overriding factor and involves standardized products or services (e.g., office equipment and supplies).– Entities may use relatively simple and informal procurement

methods by obtaining price or rate quotations from an adequate number of qualified sources.

• Non-Standardized – Price is not the overriding factor and relative quality and performance must be evaluated (e.g., consultant services). – Entities must seek proposals from adequate number of

qualified sources and identify the evaluation factors and their relative importance.

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Federal Procurement Methods Sealed Bids ($>150k)

• For purchases of $150,000 or more, must use competitive sealed bidding (formal advertising).– Or use appropriate Ohio competitive bidding

threshold if applicable to type of purchase.

• Invitation for bids must be publicly advertised.• Bids shall be solicited from an adequate

number of known suppliers, providing them sufficient time prior to the date set for opening the bids.

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Federal Procurement Methods Competitive Proposals

• May be used when the conditions are not appropriate for the use of competitive sealed bidding, small purchases, or non-competitive proposals.

• Use of competitive proposals is appropriate when there may be a variety of methods to achieve the results contained in the RFP.

• Evaluation factors will focus on approach, program design, innovation and experience.

• Contracts are either fixed-price or cost-reimbursement.

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Federal Procurement Methods Competitive Proposals

• Used for qualifications-based procurement of professional services whereby competitors' qualifications are evaluated and the most qualified competitor is selected, subject to negotiation of fair and reasonable compensation.

• Entities must have a method for conducting technical evaluations of the proposals received and for selecting awardees.

• Awards will be made to the responsible firm whose proposal is most advantageous to the program, with price and other factors considered.

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Federal Procurement Methods Competitive Proposals

• Requests for proposals should be publicized and identify all evaluation factors and their relative importance.

• Any response to publicized requests for proposals shall be honored to the maximum extent practical.

• Proposals should be solicited from an adequate number of qualified sources.

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Federal Procurement Methods Non-competitive Proposals

• Used only when the award of a contract is infeasible under small purchase, competitive sealed bidding or competitive proposals and one of the following applies: • Sole source purchases• Emergency• The federal agency authorizes noncompetitive proposals.• After solicitation of a number of sources, competition is

determined inadequate.• Equipment or services for technical equipment where prices

established by law and interchangeability with existing equipment is required.

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Federal Procurement Methods Take-Away

• Laws and regulations: most restrictive apply• Federal A-102 Common Rule

• Local Laws / Regulations

• Resolutions/Policy of Local Government

• Local Procurement Plan

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Federal Procurement Methods Take-Away

• Certain types of costs are exempt from State law, but not Federal if all or part of costs are charged to Federal programs.

• For example:• Professional services

• Textbooks, motor vehicles, fuel, educational materials, etc.

• Cost-sharing contracts

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FINDING FOR RECOVERY (FFR)

• What is a finding for recovery?

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FINDING FOR RECOVERY• Under Ohio Rev. Code Sections 9.24(H)(3) and

117.28, a finding for recovery may exist when:– Public money has been illegally expended;– Public money that has been collected has not been

accounted for;– Public money that is due has not been collected; or

when– Public property has been converted or

misappropriated

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ADDITIONAL CONSIDERATIONS

• The AOS does not generally issue FFRs where the amount in question aggregates $500 or less.

• However, we will consider all potential FFRs regardless of the amount– IE: alcohol purchases; timing of FFR; other

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FINDING FOR RECOVERY DATABASE

• Audit Bulletins – 2003-009 : Unresolved Findings for

Recovery Database (ORC Section 9.24)

– 2004-006:   Unresolved Findings for Recovery Database (ORC Section 9.24) (makes clarifications and gives definitions from 2003-09)

• http://www.ohioauditor.gov/resources/findings/default.htm

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Athens 800-441-1389Canton 800-443-9272

Cincinnati 800-368-7419 Cleveland 800-626-2297 Columbus 800-443-9275

Dayton 800-443-9274 Toledo 800-443-9276

Youngstown 800-443-9271

STRUCTURE OF AOS OFFICE

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AUDIT EXCELLENCE

Prepared by James Milton, ClevelandLaushe Building

615 Superior AvenueCleveland, Ohio 44113

Presented byPresenter Phone: (800) 626-2297E-mail: jfmilton@ohioauditor.gov

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88 East Broad StreetColumbus, Ohio 43215

Phone: (800) 282-0370 Fax: (614) 466-4490E-mail: contactus@ohioauditor.gov

www.ohioauditor.gov