A performance audit of Administration-Divisions of Finance & Surplus Property

              STATE OF ARIZONA
OFFICE OF ' PHE
AUDITOR GENERAL
A PERFORMANCE AUDIT
OF THE
R DEPARTMENT OF ADMINISTRATION-DIVISIONS
OF FINANCE & SURPLUS PROPERTY
DECEMBER 1981
A REPORT TO THE
ARIZONA STATE LEGISLATURE
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
December 18, 1981
Members of the Arizona Legislature
The Honorable Bruce Babbitt, Governor
M r . Robert B. Tanguy, Director
Department of Administration
Transmitted herewith is a report of the Auditor General, A Performance
Audit of the Department of Administration Divisions of Finance and Surplus
Property. This report is i n response to a January 30, 1980, resolution of
the Joint Legislative Oversight Committee. This performance audit was
conducted as a part of the Sunset review s e t f o r t h i n A. R. S. $ 541- 2351
through 41- 2379.
The blue pages present a summary of the report; responses from the
Director, Department of Administration, former Acting Director, Department
of Administration, Assistant Director for Finance and Assistant Director
for Surplus Property are found on the yellow pages preceding the
appendices.
My s t a f f and I w i l l be pleased t o discuss or c l a r i f y items i n t h e r e p o r t .
' ~ e s ~ e c t f uslulb~ m itted,
~ ougyas R. Norton
Auditor General
Staff: Gerald A. Silva
Coni Rae Good
Brian C. Dalton
Dawn R. S i n c l a i r
Michael T. Murphy
Gloria G. Glover
Samuel L. Harris
Richard D. Stephenson
Enclosure
cc: Donald Olson, Assistant Director
Von Monroe Bull, Assistant Director
1 11 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
OFFICE OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF THE
DEPARTMENT OF ADMINISTRATION
FINANCE D I V I S I O N
AND
SURPLUS PROPERTY DIVISION
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 81- 14
TABLE OF CONTENTS
FINANCE DIVISION
INTRODUCTION AND BACKGROUND - FINANCE DIVISION
STATE PURCHASING OFFICE
GENERAL ACCOUNTING OFFICE
SURPLUS PROPERTY DIVISION
APPEND1 CES
APPENDIX I - Legislative Council Memorandum 0- 81- 20,
April 23, 1981
APPENDIX I1 - Legislative Council Memorandum 0- 81- 23,
April 21, 1981
APPENDIX 111 - Legislative Council Memorandum 0- 81- 22,
May 11, 1981
APPENDIX I V - Legislative Council Memorandum 0- 81- 34,
July 7, 1981
APPENDIX V - Legislative Council Memorandum 0- 81- 37,
July 7, 1981
APPENDIX V I - Results of Auditor General survey of State
agencies and p o l i t i c a l subdivisions
APPENDIX V I I - Legislative Council Memorandum 0- 80- 21,
April 29, 1981
APPENDIX V I I I - Legislative Council Memorandum 0- 81- 40,
July 20, 1981
APPENDIX I X - Legislative Council Memorandum 0- 81- 65,
July 16, 1981
APPENDIX X - Legislative Council Memorandum 0- 81- 63,
July 2, 1981
APPENDIX X I - Major findings, recommendations and corrective
action i n response to Federal reviews of the
Surplus Property Division
APPENDIX X I 1 - Legislative Council Memorandum 0- 81- 62,
July 1, 1981
* A separate table of contents is contained i n each section.
DEPARTME! NT OF ADMINISTRATION
FINANCE D I V I S I O N
State Purchasing O f f i c e
General A c c o u n t i n g O f f i c e
INTRODUCTION AND BACKGROUND - FINANCE DIVISION
The Office of the Auditor General has conducted a performance audit of the
Department of Administration, in response to a January 70, 1980,
resolution of the Joint Legislative Oversight Committee. This performance
audit was conducted as a part of the Sunset review set forth in Arizona
Revised Statutes ( A. R. s. ) fj $ 41- 2351 through 41- 2379.
The Finance Division, formerly the Department of Finance, was incorporated
into the Department of Administration in 1973.
DOA- Finance, through the authority of A. R. S. $$ 41- 721 through 41- 740, is
responsible for
- installing and maintaining a uniform system of accounting;
- . evaluating and planning improvements in State fiscal matters;
- developing and maintaining a comprehensive long- range plan for
capital outlay; and
- recommending administrative reorganization and management
practices.
The Finance Division is funded by appropriations from the Legislature.
Table 1 presents a summary of full- time employees, actual expenditures for
fiscal years 1977- 78 through 1979-, 80, estivated expenditures for fiscal
year 1980- 81 and the appropriation for 1981- 82.
TABLE 1
SUMNARY OF DOA- FINANCE FULL- TIME EQUIVALENT
EMPLOYEES ( FTE) AND ACTUAL AND PROJECTED EXPENDITURES
FOR FISCAL YEARS 1977- 78 THROUGH 1981- 82"
Personal services
Employee- related expenditures
Professional and outside services
Trave 1 :
In S t a t e
Out of S t a t e
, Other operating expenses
Equipment
Total
lo
- FTE
Fiscal Years
1977- 78 1978- 79 1979- 80 1980- 81"" 1981- 82"""
* Source: DOA- Finance a s s i s t a n t d i r e c t o r .
** Amounts represent June 30th actual amounts, which may be changed by
13th- month adjustments. Does not include $ 68,000,000 teachers'
retirement monies. *** Does not include $ 74,800,000 teachers' retirement monies.
DOA- Finance is comprised of s i x organizational units: Automation Section;
Executive Budget Office; General Accounting Office; Operations Analysis;
F a c i l i t i e s Planning and Construction Section and the S t a t e Purchasing
Office.
The scope of the performance audit was limited t o reviews of the S t a t e
Purchasing Office, . F a c i l i t i e s Planning and Construction Section and the
General Accounting Office due t o time and s t a f f resource constraints. The
r e s u l t s of reviews of the State Purchasing Office and the General
Accounting Office are contained i n separate sections of t h i s report. I n
addition, a review of the Department of Administration - Surplus Property
Division is included as a separate section of the r e p o r t .
Additionally, questions have arisen concerning some information obtained
during the course of the review of the F a c i l i t i e s Planning and
Construction Section. In the i n t e r e s t s of f a i r n e s s and accuracy, the
r e s u l t s of that review are not included i n t h i s report. A s e p a r a t e r e p o r t
on the F a c i l i t i e s Planning and Construction Section w i l l be released i n
early 1982.
The Auditor General expresses g r a t i t u d e t o the a s s i s t a n t d i r e c t o r f o r
Finance and h i s s t a f f f o r t h e i r assistance and consideration during the
course of the audit.
DEPARTMENT OF ADMINISTRATION
FINANCE DIVISION
State Purchasing Office
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDING I
S t a t e government purchasing operations are excessively
decentralized and not adequately controlled.
CONCLUSION
RECOMMENDATION
FINDING I1
Improvements are needed i n the S t a t e Purchasing
o f f i c e ' s q u a l i t y control program.
CONCLUSION
RECOMMENDATIONS
FINDING I11
Improvements are needed i n the vendor complaint
process to ensure vendor compliance with S t a t e
purchasing contracts.
CONCLUSION
RECOMMENDATIONS
FINDING I V
Improvements are needed i n the management
information system used by the S t a t e Purchasing
Office.
CONCLUSION
RECOMMENDATIONS
FINDING V
The term contract used by the S t a t e Purchasing
Office needs to be revised because it may not
serve t h e b e s t i n t e r e s t s of the State.
CONCLUSION
REC OlrlMENDATI ON
FINDING V I
Procedures used by the S t a t e Purchasing Office
to s o l i c i t bids may not be i n compliance with
s t a t u t o r y requirements.
CONCLUSION
REC OIIIMENDATIONS
WRITTEN RESPONSE TO THE AUDITOR GENERAL REPORT
Page
41
SUMMARY - STATE PURCHASING OFFICE
The State Purchasing Office ( SPO) was created by the Legislature i n 1967
and incorporated i n t o DOA- Finance i n 1977. SPO is responsible f o r
reviewing and monitoring the purchasing a c t i v i t y of S t a t e agencies,
prescribing standards and procedures, maintaining an inventory of S t a t e
property and purchasing r i s k management services.
The purchasing function i n S t a t e government is operationally
decentralized. Although a l l S t a t e agencies, except the u n i v e r s i t i e s , the
l e g i s l a t i v e and j u d i c i a l branches, the Lottery Commission, and Arizona
Correctional Enterprises, are required by s t a t u t e to use t h e s e r v i c e s of
SPO, the ten l a r g e s t agencies, designated as purchase- authorized, are able
to buy most items without obtaining prior approval from SPO. SPO provides
for . the purchase of some high- volume and common- use items through
negotiation of supply contracts and awards contracts f o r s p e c i a l purchases
by agencies which have not been granted purchase- authorized s t a t u s .
Therefore, SPO's primary duty is contract administration.
Delegations and grants of authority t o purchase- authorized agencies is
excessive. In addition, SPO has f a i l e d to f u l f i l l its statutory
r e s p o n s i b i l i t y to monitor and review the purchasing a c t i v i t i e s of State
agencies. A s a r e s u l t , the S t a t e , purchasing system has been decentralized
to a degree t h a t exceeds l e g i s l a t i v e i n t e n t , and the S t a t e may incur
unnecessary costs because user agencies do not always use supply contracts
or follow required bidding procedures. SPO lacks enforcement capability
to ensure agency compliance with established p o l i c i e s and procedures.
Further, purchasing s t a f f may be duplicated i n purchase- authorized
agencies and SPO. Greater economy and efficiency could be obtained by
e i t h e r 1) granting SPO additional enforcement powers by allowing SPO to
absorb an agency's purchasing s t a f f i f SPO determines t h a t the agency's
a c t i v i t i e s do not warrant purchase- authorized s t a t u s , or 2) c e n t r a l i z i n g
a l l purchasing a c t i v i t i e s and s t a f f i n SPO, except f o r purchases below a
specified d o l l a r l i m i t . ( page 7)
SPO also is responsible f o r monitoring the q u a l i t y of goods purchased by
S t a t e agencies. SPO has not developed adequate programs to evaluate
vendor q u a l i f i c a t i o n s or p r e t e s t products p r i o r to contract award t o
ensure t h a t contracts a r e awarded only to responsible vendors and only f o r
products which meet s p e c i f i c a t i o n s . Additionally, t e s t i n g of products
received by agencies is limited and r e s p o n s i b i l i t y f o r inspection of most
goods has been delegated to user agencies. SPO needs t o develop a quality
control program which w i l l ensure t h a t the S t a t e does not incur excessive
product costs or receive lower quality goods than the cost warrants.
( page 19)
Because SPO lacks s u f f i c i e n t s t a t u t o r y authority t o investigate and
resolve complaints and user agencies do not comply with SPO's requirements
to submit a l l complaints regarding vendor products or performance, the
complaint process is fragmented among several agencies. In addition, SPO
has not developed written procedures f o r i$ s own s t a f f . A s a r e s u l t ,
complaint resolution is inconsistent, sometimes i n e f f e c t i v e and may be
untimely. The s t a t u t e s need t o be amended t o grant SPO specific
r e s p o n s i b i l i t y and authority for investigating and resolving complaints,
including provisions f o r sanctions against vendors who f a i l t o perform.
( page 27)
SPO negotiates term contracts, or supply agreements, f o r high- volume and
common- use commodities such a s food items and some o f f i c e supplies and
furniture. These contracts a r e f o r i n d e f i n i t e q u a n t i t i e s and may be used
by any S t a t e agency. The management information system does not provide
s u f f i c i e n t l y d e t a i l e d information to i d e n t i f y every item which should be
placed on a term contract or forecast the needs of S t a t e agencies.
( page 35) Further, SPO may not have f u l f i l l e d its administrative
r e s p o n s i b i l i t y i n t h a t its term contract form has not been reviewed or
approved by the Attorney General. The contract form needs to be revised
because the Office may not be able to monitor or enforce provisions of a
contract. The present form, and future changes to the form, should be
reviewed and approved by the Attorney General t o correct any
deficiencies. ( page 41)
Arizona s t a t u t e s r e q u i r e b i d s to be s o l i c i t e d from a l l qualified suppliers
who appear on the master bid l i s t , including out- of- State vendors. A s a
r e s u l t of a S t a t e Purchasing Office i n t e r p r e t a t i o n of the s t a t u t e s , SPO
does not always s o l i c i t bids from out- of- State vendors on the bid list.
In addition, SPO has not developed a bid list which allows s o l i c i t a t i o n of
bids from qualified vendors only. The provisions of the s t a t u t e s
governing bidding procedures need t o be reviewed t o determine i f
out- of- State vendors are intended f o r exemption. a age 45)
Consideration should be given t o the following recommendations:
1. Strengthen the r o l e of SPO through one of the following
a l t e r n a t i v e s :
- A l t e r n a t i v e 1
e Amend A. R. S. $ 41- 729 t o a) s p e c i f i c a l l y require
agencies to follow SPO- established procedures,
b) provide sanctions for agency noncompliance, and
c) provide f o r the absorption of an agency's purchasing
s t a f f by SPO i n the event SPO revokes its
purchase- authorized s t a t u s .
iii
a SPO review each purchase- authorized agency t o determine
i f its purchasing operations are economical and
e f f i c i e n t .
a Require agencies to submit copies of purchase orders
f o r SPO raview.
Centralize S t a t e purchasing a c t i v i t i e s and s t a f f i n SPO and
allow agencies to purchase c e r t a i n products or products t h a t
cost l e s s than a specified amount only.
2. The Legislature a) amend A. R. S. $ 41- 729, subsection A, to
require e x p l i c i t l y t h a t SPO e s t a b l i s h a q u a l i t y control program,
. and b) appropriate funds f o r the implementation of the program.
3. SPO develop a quality control program t o include:
- Testing of delivered goods,
- Inspection of goods a t r e c e i p t , and
- Requiring vendors to submit t e s t r e s u l t s a s required by
specifications.
User agency input and paqticipatiop should be included i n the
program's development, and the program should be written to
include standards f o r documentation of a c t i v i t i e s .
4. SPO study a plan f o r vendor evaluation. I f these functions are
i n s t i t u t e d , the following should be included:
- Development of vendor q u a l i f i c a t i o n c r i t e r i a ,
- Requirement t h a t vendors submit information which SPO
requires f o r evaluation, and
- Agency input to evaluate vendors under contract.
5. A. R. S. $ 41- 729, subsection A, be amended t o provide the S t a t e
Purchasing Office with s p e c i f i c r e s p o n s i b i l i t y and authority f o r
investigating and resolving complaints as follows:
- Recognize SPO as the sole e n t i t y with such authority f o r
vendors under term contracts and require a l l agencies to
submit complaints concerning vendors i n writing to SPO,
- Provide for a formal suspension or debarment procedure and
other sanctions which may be invoked against vendors for
f a i l u r e to perform, and
- Provide for an appeal process f o r vendors against whom
action has been taken.
6. The S t a t e Purchasing Office develop and implement i n t e r n a l s t a f f
procedures f o r i n v e s t i g a t i n g and resolving complaints, including
guidelines f o r
- Documentation of complaints and actions,
- Appropriate action under varying circumstances, and
- Time frames f o r actions.
7. SPO request budget authorization to i n s t i t u t e a study t o
determine the f e a s i b i l i t y of an i n t e r n a l management information
system to review and r e c o ~ d agency, purchasing documents for use
i n contract administration decisions.
8. The Finance Division continue accounting system development and
assess the AFIS purchasing module i n terms of present information
inadequacies.
9. The present term contract form, and future changes t o the form,
be reviewed and approved by the Attorney General.
10. The Legislature review the provisions of A. R. S. $ 41- 730,
subsection A, to determine i f out- of- State vendors are intended
f o r exemption.
11. SPO f u r t h e r r e f i n e the master bid list to i d e n t i f y vendors who
are able to supply the product f o r which a bid is s o l i c i t e d .
INTRODUCTION AND BACKGROUND
The S t a t e Purchasing Office ( SPO) was created by the Legislature i n 1967
"... in order to make s t a t e government more economical and efficient...."
The Office vas incorporated i n t o the Division of Finance, part of the
Department of Administration ( DOA-~ inance) i, n 1973.
Under the provisions of Arizona Revised S t a t u t e s ( A. R. s.) $ 541- 729 through
41- 731, SPO is responsible f o r reviewing and monitoring the purchasing
a c t i v i t y of S t a t e agencies, prescribing standards and procedures,
maintaining an inventory of S t a t e property and purchasing r i s k management
services.
The purchasing function i n S t a t e government is operationally
decentralized. Although a l l S t a t e agencies, except the u n i v e r s i t i e s , the
l e g i s l a t i v e and j u d i c i a l branches, the Lottery Commission, and Arizona
Correctional Enterprises, are required by s t a t u t e to use the services of
SPO, the t e n l a r g e s t agencies, designated as purchase- authorized, are able
to buy most items without obtaining prior approval from SPO. SPO provides
for the purchase of some high- volume and common- use items through
negotiation of supply contracts and awards contracts f o r special purchases
by agencies which have not been granted purchase- authorized s t a t u s .
Therefore, SPO's primary duty is contract administration.
Table 1 contains full- time equivalent employee numbers and estimates of
expenditures f o r the S t a t e Purchasing Office from f i s c a l year 1977- 78
through 1981- 82.
TABLE 1
FTE
Expenditures
SUMMARY OF FULL- TIME EQUIVALENT EMFLOYEES ( FTE)
AND ACTUAL AND PROJECTED EXPENDITURES FOR THE STATE
PURCHASING OFFICE FOR FISCAL YEARS 1977- 78 THROUGH 1981- 82"
Fiscal Years
Estimated a
1977- 78 1978- 79 1979- 80 1980- 81"" 1981- 82"""
Personal services $ 280,000
Employee- related expenditures 48,200
Professional and outside services
Travel:
In State 1,200
Out of S t a t e 1,200
Other operating expenses 74,300
~ ~ u i ~ r n e n t
Total
Y Source: Assistant d i r e c t o r , DOA- Finance.
+* Amounts are based on June 30th actual amounts, and may be changed
by July 1981 adjustments.
w*+ Amounts are based on 1981- 82 budget appropriation.
SUNSET FACTORS
Nine f a c t o r s were reviewed to aid i n the process of determining whether
the Department of Administration- Division of Finance, S t a t e Purchasing
Office should be continued or terminated, i n accordance with Arizona
Revised S t a t u t e s ( A. R. s. ) 5541- 2351 through 41- 2379.
SUNSET FACTOR: OBJECTIVE AND PURPOSE
I N ESTABLISHING THE OFFICE
The S t a t e Purchasing Office ( SPO) was created by the Legislature i n 1967
to "... make s t a t e government more economical and efficient...." Pursuant
to Arizona Revised S t a t u t e s ( A. R. s.) 541- 729, subsection A., SPO is
required to investigate and review types of items and services purchased
by S t a t e agencies and procurement methods used by agencies, to prescribe
standards of quality and procurement procedures, to maintain c a p i t a l
equipment inventories and t o purchase r i s k management services.
SPO has f u r t h e r i d e n t i f i e d its functions and r e s p o n s i b i l i t i e s as
- Awarding S t a t e contracts for large- volume and common- use items,
- Processing individual purchases of $ 5,000 or more,
- Maintaining a current inventory of State- owned personal property,
and
- Reviewing the purchasing practices and procedures of
purchase- authorized S t a t e , agencies, to ensure conformance with
applicable s t a t u t e s .
Local governments and other p o l i t i c a l subdivisions, such a s school
d i s t r i c t s , may also use contracts negotiated by SPO.
SUNSET FACTOR: THE DEGREE TO WHICH THE OFFICE
HAS BEEN ABLE TO RESPOND TO THE NEEDS OF THE
PUBLIC AND THE EFFICIENCY WITH WHICH I T HAS OPERATED
SPO attempts to respond t o the needs of the public by 1) e f f e c t i n g
economies through negotiating with vendors contracts which provide lower
prices t o State agencies, 2) monitoring the q u a l i t y of goods purchased,
and 3) contributing to Arizona's economic growth by providing its vendors
with the opportunity t o obtain S t a t e contracts.
The use of term contracts has enabled agencies to obtain goods a t lower
prices than those available without such contracts. A survey of State
agencies indicated t h a t users a r e s a t i s f i e d with t h e q u a l i t y of products.
However, lack of adequate management information impairs SPOfs a b i l i t y to
i d e n t i f y every type of purchase which should be on contract. ( page 35)
In addition, SPO's monitering of the quality of products purchased with
public monies is limited and poorly documented. ( page 19)
SPO has afforded Arizona vendors an opportunity to obtain S t a t e contracts
by 1) providing adequate time before t h e c l o s i n g of bids and
2) evaluating bids i n a timely manner. A survey of vendors revealed that
they are s a t i s f i e d with SPOfs overall performance and plan t o continue
seeking SPOfs business. However, procedures used t o s o l i c i t bids may not
be i n compliance with s t a t u t o r y requirements. ( page 45)
Our review of SPO operations revealed t h a t SPO's l e v e l of efficiency is
affected adversely by
- A lack of adequate management information to administer
contracts. ( page 35)
- Inadequate SPO monitoring of the purchasing a c t i v i t i e s of State
agencies. ( page 12)
- I n s u f f i c i e n t control through the provisions of term contracts.
( page 41)
SUNSET FACTOR: THE EXTENT TO WHICH THE
OFFICE HAS OPERATED I N THE PUBLIC INTEREST
SPO is an administrative agency providing services t o other S t a t e agencies
and local governmental j u r i s d i c t i o n s . Since SPO has obtained lower prices
for these e n t i t i e s , it appears to have operated within the public i n t e r e s t .
SUNSET FACTOR: THE EXTENT TO WHICH THE
- ~
RULES AND REGULATIONS PROMULGATED BY THE OFFICE
ARE CONSISTENT WITH THE LEGISLATIVE MANDATE
In l i e u of promulgating r u l e s and regulations, SPO appropriately has
issued a p o l i c i e s and procedures manual f o r S t a t e agencies. According t o
a Legislative Council memorandum dated April 23, 1981, issuance of the
manual s a t i s f i e s SPO's s t a t u t o r y r e s p o n s i b i l i t y under A. R. S. $ 41- 729,
subsection A, paragraph 2, to " Prescribe s'tandards of q u a l i t y , standard
s p e c i f i c a t i o n s and methods...." The memorandum s t a t e s i n part:"
" . . . mem he Legislature has not s p e c i f i c a l l y required the
issuance of regulations to s e t purchasing standards,
s p e c i f i c a t i o n s and methods. The purchasing section
i t s e l f does not have authority to promulgate
regulations although the a s s i s t a n t d i r e c t o r f o r finance
who heads the division of which the purchasing section
is a p a r t may issue regulations.. .. To accomplish the
l e g i s l a t i v e i n t e n t we believe t h a t the purchasing
section could e i t h e r promulgate regulations through the
a s s i s t a n t d i r e c t o r f o r finance or, as is the case,
issue a policy and procedures manual."
Directives i n the manual are binding on a l l S t a t e agencies. SPO presently
is r e v i s i n g t h e manual and intends to put the provisions i n the form of
regulations i n the f u t u r e . A review of the present manual did not reveal
provisions t h a t were inconsistent with Legislative i n t e n t .
SUMSET FACTOR: THE EXTENT TO WHICH'THE OFFICE HAS
ENCOURAGED INPUT FROM THE PUBLIC BEFORE PROMULGATING
-- -
ITS RULES AND REGULATIONS AND THE EXTENT TO WHICH
I T HAS INFORMED THE PUBLIC AS TO ITS ACTIONS
AND THEIR EXPECTED IMPACT ON THE PUBLIC
SPO has s o l i c i t e d input for the revision of the p o l i c i e s and procedures
manual from the Purchasing Advisory Council, which is comprised of
representatives from purchase- authorized agencies. Nonpurchase- authorized
agencies have not been involved i n developing new policies and procedures.
A survey of user agencies indicated t n a t most agencies are notified i n
writing about changes i n procedures and receive copies of new ones.
* Appendix I contains the memorandum t e x t .
5
SUNSET FACTOR: THE EXTENT TO WHICH THE OFFICE
HAS BEEN ABLE TO INVESTIGATE AND RESOLVE
COIPLAINTS THAT ARE WITHIN ITS JURISDICTION
Complaints are received from user agencies and from vendors. Although
agencies are required by the procedures manual t o submit complaints t o SPO
i n writing, many complain d i r e c t l y to the vendor or do not complain i n
writing, impairing the effectiveness of SPO's complaint- handling
function. ( page 27)
Our review revealed t h a t the complaint- resolution process is fragmented,
sometimes i n e f f e c t i v e and may be untimely. age 27)
SUNSET FACTOR: THE EXTENT TO WHICH THE ATTORNEY GENERAL
OR OTHER APPLICABLE AGENCY OF STATE GOVERNMENT HAS THE
AUTHORITY TO PROSECUTE ACTIONS UNDER THE ENABLING LEGISLATION
Although the enabling l e g i s l a t i o n does not define action f o r prosecution
by the Attorney General, SPO has recourse against vendors for
unsatisfactory performance of c o n t r a c t u a l o b l i g a t i o n s through the Office
of the Attorney General. According to SPO o f f i c i a l s , absence of specific
redress has not caused problems.
SUNSET FACTOR: THE EXTENT TO WHICH THE OFFICE HAS
ADDRESSED DEFICIENCIES I N ITS ENABLING STATUTES WHICH
PREVENT I T FROM FULFILLING ITS MANDATE
SPO supported l e g i s l a t i o n introduced i n 1981 which would have
1) standarized purchasing authority among S t a t e agencies, 2) f u r t h e r
centralized the purchasing function, 3) provided f o r warehousing,
4) enlarged the scope of cooperative purchasing with non- State p o l i t i c a l
subdivisions, and 5 ) c l a r i f i e d procedures regarding the master bid list.
The b i l l did not pass. E a r l i e r l e g i s l a t i v e proposals supported by SPO
could not be i d e n t i f i e d .
SUNSET FACTOR: THE EXTENT TO WHICH CHANGES ARE
NECESSARY I N THE LAWS OF THE OFFICE TO ADEQUATELY
CONPLY WITH THE FACTORS LISTED I N THIS SUBSECTION
See pages 18, 25, 32 and 49.
FINDING I
STATE GOVERNMENT PURCHASING OPERATIONS ARE EXCESSIVELY DECENTRALIZED AND
NOT ADEQUATELY CONTROLLED.
The S t a t e Purchasing Office ( SPO) was created by the Legislature " to make
s t a t e government more economical and e f f i c i e n t . " Our review revealed
that 1) excessive amounts of authority have been delegated or granted t o
user agencies, and 2) SPO has f a i l e d t o f u l f i l l its s t a t u t o r y
r e s p o n s i b i l i t y to monitor and review the purchasing a c t i v i t i e s of State
agencies. A s a r e s u l t , the S t a t e purchasing system has been decentralized
to a degree t h a t exceeds l e g i s l a t i v e i n t e n t , and the S t a t e may incur
unnecessary costs because of user agency noncompliance with SPO procedures.
~ e g i s l a t i v eI n t e n t
The 1967 enactment creating the Purchasing Division ( now DOA- Finance,
State Purchasing o f f i c e ) reads:
" It is the intention of t h i s l e g i s l a t u r e : t h a t a
system of purchasing f o r s t a t e agencies be established
i n order to make s t a t e government more economical and
efficient...."
According to a l e g i s l a t o r who cosponsored the 1967 b i l l , t h e Legislature
intended t h a t the S t a t e ' s purchasing system be characterized by a high
degree of c e n t r a l i z a t i o n .
Centralized purchasing as a means . to achieve purchasing economies and
efficiency is recognized and supported by such organizations a s the
Council of S t a t e Governments, the National Association of S t a t e Purchasing
Officials ( NASPO), the U. S. Law Enforcement Assistance Administration and
the American Bar Association ( ABA). For example, ABA's Model Procurement
Code for S t a t e and Local Governments contains the following commentary:
"... experience has shown that a cohesive and integrated
procurement system, r a t h e r than one which is fragmented
or diffused, w i l l promote efficiency and economy and
w i l l best conserve the taxpayer's monies." (~ mphasis
added)
The Council of S t a t e Governments and NASPO, i n S t a t e and Local Government
Purchasing, f u r t h e r s t r e s s t h i s :
"... it is axiomatic t h a t purchasing programs be b u i l t
on a centralized authority and with centralized
responsibility."
Our review revealed t h a t SPO has delegated excessive authority t o user
agencies and has done so without due consideration given to questions of
economy, efficiency or effectiveness.
Delegations and Grants
Of Authority To S t a t e Agencies
Arizona law provides t h a t the a s s i s t a n t d i r e c t o r f o r finance may delegate
purchasing authority and, i n f a c t , requires such delegation under c e r t a i n
circumstances. A. R. S. $ 41- 729, subsection B, paragraph 2, defines the
parameters for delegation, s t a t i n g i n part:
" The a s s i s t a n t d i r e c t o r f o r finance, through the
purchasing section, may: ,
" 2. Authorize any budget u n i t d i r e c t l y to purchase, -
rent or otherwise provide f o r s p e c i f i e d s u p p l i e s ,
materials, equipment or contractual services. The
a s s i s t a n t d i r e c t o r f o r finance s h a l l grant such
authority to any budget unit which demonstrates the
a b i l i t y to procure such s p e c i f i e d s u p p l i e s , m a t e r i a l s ,
equipment or c o n t r a c t u a l s e r v i c e s a t the same or l e s s
cost as would be available through t h e s e c t i o n of
purchasing." ( Emphasis added)
A s of August 1, 1981:
- Agencies are required to use term contracts* negotiated by SPO.
Commodities such as vehicles and data processing equipment, while
not under term contract, must be contracted f o r by SPO.
- Ten agencies, designated as purchase- authorized, may purchase
d i r e c t l y a l l items except those under t e r n contract and those
s p e c i f i c a l l y excluded by SPO. These agencies must follow bidding
and other purchasing procedures as specified by SPO.
- Agencies referred to a s nonpurchase- authorized may make d i r e c t
purchases of $ 500 o r l e s s p e r t r a n s a c t i o n of items not on term
contract or s p e c i f i c a l l y excluded by SPO. Other purchases must
be referred to SPO.
- Several agencies are s t a t u t o r i l y exempt from using SPO. These
agencies are the Lottery Commission, Arizona Correctional
Enterprises, the u n i v e r s i t i e s and the l e g i s l a t i v e and j u d i c i a l
branches.
These delegations appear to be excessive when compared t o other s t a t e s '
delegations. A 1979 Council of S t a t e Governments survey showed t h a t 35 of
the 49 s t a t e s with c e n t r a l purchasing a u t h o r i t i e s provided some exemptions
from the c e n t r a l authority. However, the report noted that " ~ r i z o n a
reports an unusually large number of such exemptions." Most s t a t e s exempt
the u n i v e r s i t i e s and the l e g i s l a t i v e and j u d i c i a l branches. Table 2
summarizes the Council' s survey reLsults. ,
* Term contracts, or supply agreements, are indefinite- quantity
contracts through which any agency may purchase. Term contracts are
used f o r high- volume and commonly used commodities, such as food items
and some o f f i c e supplies and furniture.
TABLE 2
A SUMMARY OF THE 1979 COUNCIL OF STATE GOVERNMENTS
STATE PURCHASING SURVEY RESULTS
Exemptions from Centralized Purchasing Authority
Centralized
Purchasing
Authority
X
X
X
X
X
X
X
X
X
X
XI***
X
X
X
X
X
X
X
X
X
X
X
X
S t a t e Legislative
Universities Branch
J u d i c i a l Number of
Branch Other Agencies
3
- S t a t e
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
I l l i n o i s
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total
* Does not include Drug Control D i s t r i c t ; granted purchase authorization
i n November 1380. Includes Grime and Fish Department which has
s t a t u t o r y exemptions f o r c e r t a i n items up to specified d o l l a r l i m i t s .
Does not include s t a t u t o r y exemptions f o r l e g i s l a t i v e and j u d i c i a l
branches.
** Constitutional o f f i c e s are exempt.
*** Only one u n i v e r s i t y i s exempt. Other u n i v e r s i t i e s i n the s t a t e are not
exenpt .
**** Although Hawaii has a centralized purchasing a u t h o r i t y , it i s not
mandatory f o r any agency to buy through c e n t r a l purchasing.
.*. Includes elected officials. Supreme Court only.
e. Includes quasi- state agencies, the number of which is not l i s t e d i n
.... survey responses. Includes public benefit corporations, a u t h o r i t i e s and commissions, the
number of which is not l i s t e d i n survey responses.
The other 19 s t a t e s shown i n Table 2 which grant exemptions, on the
average, have done so f o r two agencies only. Arizona has delegated
authority to ten agencies* which purchased 52 percent of the $ 50.6 million
spent on m a t e r i a l s , s u p p l i e s and equipment"" from July 1980 through
May 19, 1981. Accordingly, these agencies d i r e c t l y purchase a s i g n i f i c a n t
proportion of the commodities consumed by the State.
Of the ten purchase- authorized agencies, eight have not been c r i t i c a l l y
reviewed by SPO to determine i f such delegation is more e f f i c i e n t o r
economical than using centralized purchasing. In f a c t , SPO o f f i c i a l s
s t a t e d t h a t seven agencies were, i n e f f e c t , " grandfathered" as
purchase- authorized agencies when the 1967 enactment b i l l was passed.
These agencies are the Departments of Corrections, Education, Economic
Security, Game and Fish, Health Services, Public Safety and Transportation.
The 1967 enactment b i l l provided t h a t
" . . . existing purchasing procedures of s t a t e agencies
such as the board of regents be retained unless changes
w i l l r e s u l t i n greater economies...."
According to a former SPO administrator, the s t a t u t e intended t h a t - any
agency which had an existing purchasing s t a f f would be a
purchase- authorized agency. A s a r e s u l t the seven agencies were granted
purchase- authorized s t a t u s without review by SPO to determine i f revoking
t h e i r exempt s t a t u s would r e s u l t i n more economical or e f f i c i e n t
purchasing.
Further, there is no available documentation t o j u s t i f y exempt s t a t u s
being granted t o three agencies granted exempt s t a t u s since 1967:
Division of M i l i t a r y A f f a i r s , Arizona Criminal I n t e l l i g e n c e Systems Agency
( formerly Drug Control ~ i s t r i c t ) and S t a t e Compensation Pund. In
addition, SPO audits of purchase- authorized agencies have not been
s u f f i c i e n t i n scope to determine i f t h e i r purchase- authorized s t a t u s
should be continued.
* Beyond the s t a t u t o r i l y exempt agencies.
Purchases of food, o f f i c e and i n s t i t u t i o n a l supplies, equipment and
other supplies only.
SPO F a i l s to F u l f i l l Statutorv R e s ~ o n s i b i l i t v
to Review S t a t e Agencies' A c t i v i t i e s
A. R. S. $ 41- 729, subsection A, d e f i n e s t h e r e s p o n s i b i l i t i e s of the Office
and s t a t e s i n part:
" The purchasing section s h a l l have the following duties:
" 1. Investigate and review the type, c o s t , quality and
quantity of s u p p l i e s , m a t e r i a l s , equipment and
c o n t r a c t u a l s e r v i c e s presently used by a l l budget
u n i t s of the s t a t e and the methods by which such
supplies, materials, equipment and contractual
services are acquired, delivered, accepted, stored
and d i s t r i b u t e d by all budget units."
The delegation of purchasing authority t o user agencies does not r e l i e v e
SPO of t h e r e s p o n s i b i l i t y to investigate and review the purchasing
a c t i v i t y of those exempt agencies. According to a Legislative Council
memorandum dated April 21, 1981:"
" Since the i n v e s t i g a t i o n and review is mandatory and
comprehensive, any exception must be s p e c i f i c a l l y
authorized. Quite simply t h e r e a r e no exceptions.
" The issue of d i r e c t purchasing by budget u n i t s is a
separate and i r r e l e v a n t consideration....
" The conclusion that the i n v e s t i g a t i o n and review
function is mandatory for a l l items used by a l l budget
u n i t s is reinforced by 1975- 76 Op. Att'y Gen. 75- 11
( 1975):
"' The Purchasing Section is not only authorized t o
" purchase, rent or otherwise provide for" the
needs of s t a t e budget u n i t s under A. R. S.
$ 41- 729.~, it is als; OBLIGATED to engage i n
numerous types of a c t i v i t i e s t h a t provide the
basis for an e f f e c t i v e and e f f i c i e n t purchasing -
program under A. R . S. $ 41- 729.~. ' " (~ mphasis added)
Further, according to a Council of S t a t e Governments survey of s t a t e s ,
such i n v e s t i g a t i v e and review functions 1) may be used to ensure
compliance with established procedures, and 2) are important factors when
purchasing authority has been delegated to user agencies.
* Appendix I1 contains the memorandum t e x t .
Notwithstanding s t a t u t o r y r e s p o n s i b i l i t y , 1) SPO does not currently
engage i n a c t i v i t i e s designed t o monitor and review the purchasing
a c t i v i t i e s of S t a t e agencies, and 2) SPO's limited agency reviews
conducted i n previous years were i n e f f e c t i v e and lacked enforcement power.
Arizona's accounting system does not provide s u f f i c i e n t l y detailed
expenditure information to allow SPO to review types of purchases and
vendors used by S t a t e agencies." Other means are available under existing
s t a t u t e s , however, to allow SPO to monitor State agencies' purchasing
procedures. These other means are for SPO to: 1) review purchasing
documents, and 2) pre- approve or issue purchase orders or claims.
Because of SPO's s t a f f l i m i t a t i o n s and the high volume of S t a t e purchasing
documents, the only p r a c t i c a l review method is reviews of purchase orders
and on- site agency audits. However, SPO discontinued on- site agency
audits i n November 1978 and reviews of purchase orders i n December 1980.
However, even when used by SPO, these a c t i v i t i e s proved to be i n e f f e c t i v e
due to: 1) the narrow scope of the audits, and 2) SPO's lack of
enforcement capability.
Narrow Scope
SPO buyers had conducted annual audits on most agencies, 5ut were required
to review only a minimum of 24 purchase orders issued during a two- month
period. Our review of those SPO audits completed between July 1977 and
November 1978 indicated t h a t 1) eleven percent of t h e a u d i t s were not
documented, and 2) SPO buyers f a i l e d t o t e s t the minimum number of
transactions i n 77 percent of the cases for which documentation was
available. For example, SPO buyers reviewed an average of only 14, and as
few as two, purchase orders per audit. Further, audit findings and
recommendations were not on f i l e f o r 19 percent of the SPO audits we
reviewed.
* See page 37 f o r d e t a i i s regarding deficiencies i n the accounting
system.
Inadequate Enforcement Capability
SPO's review of agency purchasing was i n e f f e c t i v e primarily because the
Office cannot: 1) compel agencies to submit copies of t h e i r purchase
orders f o r review, or 2) enforce compliance with audit recommendations or
purchasing procedures.
According to a Legislative Council memorandum dated April 27, 1981," the
p o l i c i e s and procedures established by SF0 are binding i n - a l l user
agencies:
" I f t h e standards [ prescribed i n the policy and
procedure manual] apply to the purchasing section, then
a fortiori*" they must apply t o those s t a t e agencies
which are not authorized to make t h e i r own purchases
but rather have t h e i r purchases made by the purchasing
section.
" Similarly purchase authorized agencies are also
subject to the manual's d i r e c t i v e s . Since t h e i r
authority is derived from t h a t belonging to the
purchasing section t h e s e ' o t h e r budget u n i t s a r e bound
by a l l the procedures and r e s t r i c t i o n s t h a t govern
purchasing by the purchasing section. ' " ( ~ m ~ h a s i s
added)
The SPO procurement manual s t a t e s t h a t an agency's approval as a
purchase- authorized agency may be withdrawn for cause and, according to a
Legislative Council memorandum dated May 11, 1981,*** SPO has authority to
take such actions:
" The power granted to the a s s i s t a n t d i r e c t o r f o r
finance, through the purchasing section, to authorize a
budget u n i t to purchase is discretionary and the power
of the a s s i s t a n t d i r e c t o r f o r finance, through the
purchasing section to revoke any authority he gave a
budget u n i t to nurchase is i m ~ l i e d .
* Appendix I contains the memorandum t e x t .
** Based on the foregoing conclusion t h a t the standards apply to the
purchasing section, t h i s conclusion is even more certain.
H* Appendix I11 contains the memorandum text.,
"... if a budget u n i t demonstrates the a b i l i t y t o
procure c e r t a i n s u p p l i e s , m a t e r i a l s , equipment or
c o n t r a c t u a l s e r v i c e s a t the same or l e s s cost as the
purchasing section, it is mandatory t h a t the a s s i s t a n t
d i r e c t o r f o r finance authorize the budget unit to
engage i n purchasing. Presumably, i f the budget u n i t
f a i l e d to continue to demonstrate t h a t a b i l i t v . the
a s s i s t a n t d i r e c t o r for finance could exercise his
discretion to purchase or to authorize the budget unit
to purchase directly." ( ~ m ~ h a saidsd ed)
A s previously noted, purchases by purchase- authorized agencies represented
52 percent of t o t a l d o l l a r s spent f o r S t a t e supplies, materials and
equipment from July 1980 through May 19, 1981. Thus, while SPO may have
the authority to revoke an agency's purchase- authorized s t a t u s , such
action is not a viable a l t e r n a t i v e , because SPO lacks: 1) adequate s t a f f
to absorb the purchasing duties of agency employees, or 2) t h e a u t h o r i t y
to absorb the purchasing s t a f f of any agency whose purchase- authorized
s t a t u s is withdrawn.
Duplication of Staff
Each purchase- authorized agency has developed a separate s t a f f for
purchasing a c t i v i t i e s . A s a r e s u l t , purchasing s t a f f may be duplicated
among purchase- authorized agencies, and agency practices do not comply
with SPO p o l i c i e s and procedures.
A s of July 1, 1981, administrative, buyer and c l e r i c a l s t a f f employed by
purchase- authorized agencies was' more t i a n three times t h a t of SPO.
Table 3 presents a comparison of s t a f f i n g l e v e l s f o r the purchasing
function, excluding warehouse employees of the agencies."
* SPO is prohibited by s t a t u t e from warehousing. Purchase- authorized
agencies have 25 warehouse employees.
TABLE 3
COMPARISON OF PURCHASING STAFF OF STATE PURCHASING OFFICE
AND PURCHASE- AUTHORIZED AGENCIES AS OF JULY 1, 1981
Administrative positions
Buyers
Clerical positions
Total ( excluding warehouse
s t a f f )
S t a t e Purchasing Purchase- authorized
Office Agencies
More c e n t r a l i z a t i o n of the S t a t e purchasing function could produce
economies by eliminating duplications i n existing agency purchasing
s t a f f s . According to SPO, the consolidation of its presently diffused
purchasing a c t i v i t y would r e s u l t i n a 15 percent reduction i n t o t a l
purchasing s t a f f and a 20 percent reduction i n s t a f f i n g c o s t s due to the
elimination of duplicative administrative positions. These reductions
would be achieved through a t t r i t i o n and selective replacement.
Agency Purchasing Practices Do Not
Comply with Established Procedures
SPO has established purchasing procedures which are binding on S t a t e
agencies. Our review revealed t h a t user agency purchasing p r a c t i c e s a r e
not i n compliance with established , procedure, s i n that 1) available term
contracts are not always used, and 2) bidding procedures and emergency
purchases are not documented adequately. A s a r e s u l t , the cost of some
purchases may be excessive and the related purchase t r a n s a c t i o n s i n v a l i d .
During the course of our audit we reviewed a random sample of 238 agency
purchase orders and claims f o r compliance with S t a t e purchasing
requirements. Our review revealed t h a t agencies did not use available
term contracts 15 percent of the time, and they purchased a brand other
than the one specified i n the term contract f i v e percent of the time.
Thus, agency practices were not i n compliance with SPO requirements f o r 20
percent of the items we reviewed.
Audit s t a f f also reviewed several d i r e c t agency purchases to determine if
required bidding procedures were followed. Our review revealed t h a t
purchase- authorized agencies had not adhered to prescribed bidding
procedures f o r 33 percent of the purchases reviewed i n t h a t they
1) f a i l e d t o s o l i c i t the required number of bids, or 2) had not
documented t h a t single- source purchases were j u s t i f i e d or approved by SPO.
Because term contract prices generally are lower than p r i c e s a v a i l a b l e
without such a contract, agency noncompliance may r e s u l t i n excessive
costs. The d o l l a r impact of such noncompliance cannot be determined,
however, because h i s t o r i c a l data concerning purchases of individual items
is not available.
Additionally, purchase transactions which do not comply with SPO policy
and procedure may be i n v a l i d , according to a Legislative Council
memorandum dated July 1, 1981:"
"... each budget u n i t must follow the s p e c i f i c a t i o n s ,
standards and methods of the purchasing section.
"... the f a i l u r e to comply with the requirements of the
purchasing section would render the action taken
invalid." ( Emphasis added)
Therefore, it is possible t h a t c o i t r a c t s e i t e r e d i n t o by S t a t e agencies
which do not comply with SPO bidding procedures, as well a s purchases not
made from term contract vendors, may be invalid.
It should be noted t h a t a t l e a s t one purchase- authorized agency has
implemented purchasing p o l i c i e s and procedures which d i r e c t l y countermand
SPO procedures. The manual for t h i s agency s t a t e s i n part:
* Appendix I V contains the memorandum t e x t .
17
"... in accordance with Departmental Policy and
Procedures, when the S t a t e Purchasing Manual is a t
variance with the Procurement Regulations approved by
Administrative Nanagement of [ the agency], . . . then the
requirements of Lthe agencyl, as s t i p u l a t e d , s h a l l be
adhered to and s h a l l take precedence over the S t a t e
Purchasing Manual. "
CONCLUSION
Arizona's purchasing procedures are excessively decentralized and
characterized by s i g n i f i c a n t noncompliance with S t a t e Purchasing Office
procedures. SPO has not reviewed those agencies with delegated purchasing
authority f o r economy or efficiency and has f a i l e d to maintain its
mandated review of purchasing a c t i v i t i e s . A s a r e s u l t , the S t a t e may
incur excessive costs for supplies, materials and equipment and duplicate
purchasing a c t i v i t i e s e x i s t .
RECOMMENDATION
Consideration should be given to the following a l t e r n a t i v e s :
Alternative I
1. Amend A. R. S. 541- 729 to: a) s p e c i f i c a l l y require agencies to
follow SPO established procedures, b) provide sanctions for
agency noncompliance, and c ) provide f o r the absorption of an
agency's purchasing s t a f f by SPO i n the event SPO revokes its
purchase- authorized s t a t u s . I
2. SPO review each purchase- authorized agency t o determine i f its
purchasing operations are economical and e f f i c i e n t .
3. Require agencies to submit copies of purchase orders for SPO
review.
Alternative I1
Centralize S t a t e purchasing a c t i v i t i e s and s t a f f i n SPO and allow agencies
to purchase c e r t a i n products or products t h a t a r e below a specified cost
only.
FINDING I1
INPROVENENTS ARE NEEDED IN THE STATE PURCHASING OFFICE'S QUALITY CONTROL
PROGRAN .
The S t a t e Purchasing Office ( SPO) is charged with the s t a t u t o r y
r e s p o n s i b i l i t y of monitoring the q u a l i t y of goods purchased by S t a t e
agencies. Our review revealed t h a t SPO is not f u l f i l l i n g t h a t
r e s p o n s i b i l i t y i n that its vendor evaluation and products- testing programs
are limited and poorly documented. A s a r e s u l t , agencies may incur
excessive costs when product price is compared to product quality.
Statutory Responsibility f o r Quality Control
A. R. S. $ 41- 729, subsection A, requires SPO to monitor the q u a l i t y of goods
purchased by user agencies:
" The purchasing section s h a l l have the following duties:
" 1. Investigate and review the type, cost, q u a l i t y and
quantity of s u p p l i e s , m a t e r i a l s , equipment and
c o n t r a c t u a l s e r v i c e s p r e s e n t l y used by a l l budget
u n i t s of the State.. . ." ( Emphasis added)
The Office has not f u l f i l l e d its s t a t u t o r y r e s p o n s i b i l i t y t o review the
quality of goods purchased. Our' review Pevealed t h a t SPO does not:
1) evaluate vendor q u a l i f i c a t i o n s adequately, 2) have established
c r i t e r i a by which to evaluate vendors, 3) document preaward t e s t s of
products adequately, 4) have a formal program to inspect products
delivered to agencies, and 5) document or monitor product complaints from
agencies adequately.
Inadequate Vendor Evaluations
SPO preselection procedures consist of vendor evaluations and preaward
testing. These procedures are designed to ensure t h a t contracts are
awarded only t o responsible vendors and only f o r products which meet
specifications. However, SPO's vendor evaluations lack s u f f i c i e n t
frequency and scope t o be effective a s a control mechanism and its
preaward t e s t i n g is severely impaired because of limited scope and
inadequate documentation.
The Council of S t a t e Governments, i n S t a t e and Local Government
Purchasing, a report issued i n conjunction with the National Association
of S t a t e Purchasing O f f i c i a l s , supports preaward evaluation of vendors.
The report s t a t e s , i n part:
" Purchasing must determine supplier r e s p o n s i b i l i t y
before awarding a contract.
"... In - addition to the potential savings i n
administrative, s o l i c i t a t i o n , and bonding costs, it
brings d i s c i p l i n e and structure to the process of
determining s u p p l i e r c a p a b i l i t y and responsibility."
SPO's sole means of evaluating the q u a l i f i c a t i o n s of a bidder p r i o r to
awarding a contract is through a vendor v i s i t program. When SPO buyers
v i s i t vendors they 1) inspect f a c i l i t i e s and interview appropriate
personnel, and 2) determine i f the vendor has the general capacity to
perform on current or future contracts. The buyers obtain information
concerning working conditions, lead times f o r delivery and f i n a n c i a l
condition. However, the buyers have v i s i t e d vendor f a c i l i t i e s so
infrequently as to render the program ineffective. Further, SPO buyers do
not verify the information they obtain from vendors during a v i s i t .
Between December 1979, the implementation date of new procedures, and
March 1, 1981, SPO's ten buyers have: 1) completed l e s s than ten percent
of the 20 monthly vendor v i s i t s required by SPO, 2) on the average,
completed a t o t a l of only 1.75 vendor v i s i t s a month, and 3) v i s i t e d only
25 of the approximately 3,000 vendors on the master bid list.
In addition t o being i n s u f f i c i e n t i n number, vendor v i s i t s are of
questionable worth i n view of the f a c t that the buyers do not v e r i f y t h e
information they gather on vendor v i s i t s . According to an SPO o f f i c i a l ,
buyers do not have access to vendor records to allow f o r an adequate
i n v e s t i g a t i o n of vendor q u a l i f i c a t i o n s .
The American Bar Association has suggested s t a t u t o r y provisions f o r
managing the purchasing function. The Model Procurement Code f o r S t a t e
and Local Governments contains a provision granting a purchasing agency
the authority to inspect t h e p l a n t and records of a vendor under contract,
as well as t o require bidders to supply information concerning t h e i r
a b i l i t i e s t o f u l f i l l contract requirements. The Code o f f e r s the following
commentary:
"( 1) To obtain t r u e economy, the [ s t a t e ] must minimize
the p o s s i b i l i t y of a subsequent default by the
contractor, l a t e d e l i v e r i e s or o t h e r u n s a t i s f a c t o r y
performance which would r e s u l t i n additional
administrative c o s t . . . i t is important t h a t the bidder
or offeror w i l l be a resdonsible eontractor-- that the
contractor has the f i n a n c i a l a b i l i t y , resources,
s k i l l s , capability and business i n t e g r i t y necessary to
~ e r f o r mt he contract." ( Em~ hasisa dded)
No Established C r i t e r i a f o r Vendors
SPO has not established formal c r i t e r i a f o r vendor q u a l i f i c a t i o n s ,
although SPO's procedure manual s t a t e s that such c r i t e r i a w i l l be
developed:
" Supplier q u a l i f i c a t i o n c r i t e r i a are established f o r
the following reasons.
" 1. To insure that the supplier can f u l f i l l h i s
contract with t h e S t a t e .
" 2. To insure t h a t the S t a t e g e t s the q u a l i t y and
quantity of materials covered i n the contract."
Since s p e c i f i c c r i t e r i a against which vendors are to be evaluated has not
been developed, SPO l a c k s t h e means to determine i f a vendor is, i n f a c t ,
qualified and able t o perform s a t i s f a c t o r i l y .
Preaward Testing Is Limited
and Poorly Documented
Preaward t e s t i n g involves the evaluation of product samples to ensure t h a t
contracts a r e awarded only to vendors supplying products which meet
specifications. Such t e s t s include visual inspections, laboratory study
and in- service product t r i a l s . Preaward t e s t i n g can be used f o r a wide
variety of goods, and the r e s u l t s of such t e s t s and the samples tested can
serve as a standard against which the quality of goods a c t u a l l y delivered
can be measured. Accordingly, t e s t e d samples should be retained when
p r a c t i c a l and the r e s u l t s of such t e s t s should be documented. SPO does
neither i n most cases.
According t o SPO buyers and the a s s i s t a n t administrator, numerous products
are pretested. However, our review of vendor and contract f i l e s indicated
that t e s t r e s u l t s are not documented i n that samples tested and t e s t
r e s u l t s were not on f i l e for most products. The only evidence of preaward
t e s t i n g available i n SPO f i l e s was the r e s u l t s of t e s t s of food products
conducted by a panel of user agency personnel.
Further, product s p e c i f i c a t i o n s gometimes, require bidders to submit
evidence of t e s t s t h a t demonstrate that the product meets established
standards. SPO does not enforce t h i s requirement f o r a l l products and
vendors. Although SPO o f f i c i a l s s t a t e d t h a t new vendors are required to
submit evidence of product t e s t s , audit s t a f f was unable t o locate such
documentation i n SPO's f i l e s . SPO's f a i l u r e t o document the r e s u l t s of
preaward t e s t s , o r enforce its own requirement that vendors submit t e s t
r e s u l t s , precludes it from providing assurance t h a t contracts are awarded
for products which meet the q u a l i t y requirements of user agencies.
Control Subsequent to Award Is I n s u f f i c i e n t
In addition to ensuring t h a t contracts are awarded to responsible vendors
f o r products which meet standards, the q u a l i t y control function should,
according to the Council of State Governments, include r e s p o n s i b i l i t y for
monitoring the quality of items received by agencies. Neither SPO nor
user agencies have established adequate inspection and t e s t i n g programs
f o r most of the products purchased by the State.
SPO has delegated r e s p o n s i b i l i t y f o r the inspection of most goods t o user
agencies. This practice is not, however, adequate to ensure t h a t the
goods received are of the q u a l i t y required by specifications. The Council
of S t a t e Governments, i n S t a t e and Local Government Purchasing, commented:
" Even when receiving personnel attempt to inspect
d e l i v e r i e s , sometimes a l l they can do e f f e c t i v e l y is
look f o r damage because they have no guidelines to
' follow and sometimes they are not even given a copy of
the specifications. Without a formal program,
therefore, it seems there can be l i t t l e assurance t h a t
inspections are made and t h a t they are thorough."
- . ( Bhphasis added)
A majority of s t a t e s use c e n t r a l purchasing inspectors to a s s i s t or
supplement inspection a t the agencies. A 1979 survey of s t a t e s conducted
by the Council of S t a t e Governments indicated t h a t 26 s t a t e s follow such a
practice. In some instances, product nonconformance with s p e c i f i c a t i o n s
I
can be detected only by conducting t e s t s o r inspections on products
delivered. To t h i s end, some s t a t e s have established t e s t i n g programs i n
conjunction with s t a t e u n i v e r s i t i e s or technical schools.
The SPO t e s t i n g program is limited to meat, paint and antifreeze. The
meat- testing program is i n e f f e c t i v e because samples a r e s e n t to a
California laboratory* and t e s t r e s u l t s a r e not received before the meat
is consumed. The paint and antifreeze t e s t s are performed by the
Department of Transportation laboratory.
* There is no USDA- certified laboratory i n Arizona.
Only two Arizona agencies have t e s t i n g f a c i l i t i e s . These two agencies use
t h e i r l a b o r a t o r i e s only f o r specialized items, such as construction
materials and police equipment.
Neither SPO nor S t a t e agencies perform s u f f i c i e n t product inspections and
t e s t s t o determine t h a t products delivered are of adequate quality and
meet specifications.
Inadequate Docrimentation and
Nonitoring of Agency Complaints
Because SPO does not have a viable vendor evaluation program it is
e n t i r e l y dependent on agency complaints to i d e n t i f y poor vendor
performance or products. However, our review of SPO complaint procedures
revealed t h a t complaints are not adequately documented or consolidated
i n t o a f i l e of complaints f o r each vendor."
A survey of 20 western s t a t e purchasing programs by the Auditor General
revealed t h a t only two s t a t e s , California and North Dakota, use systematic
vendor- product evaluation programs.
The California o f f i c e of procurement returns a copy of each purchase order
to the agency which requisitioned goods. The back of the purchase order
contains questions concerning delivery and compliance with s p e c i f i c a t i o n s ,
and must be returned by the agency., I
The purchasing agency i n North Dakota requests user agencies t o r a t e
vendors against whom complaints are f i l e d or who are being considered for
a contract by the department of accounts and purchases. User agencies are
asked to evaluate vendors regarding delivery, s u b s t i t u t i o n of products and
customer service.
* See page 28 f o r d e t a i l s regarding deficiencies i n documentation of the
complaint process.
Agencies May Have Incurred Excessive Costs
Failure to ensure t h a t q u a l i t y goods are received when needed c r e a t e s t h e
potential for the S t a t e to incur excessive expenses i n t h a t
- Items which are not available from contract vendors because of
l a t e or inadequate d e l i v e r i e s may have to be purchased a t higher
prices from noncontract suppliers.
- Products may be purchased more frequently due t o inadequate
product performance.
- Products of lower q u a l i t y may be substituted without detection by
t h e u s e r agency.
C ONCLUSI OM
The State Purchasing Office has not f u l f i l l e d its r e s p o n s i b i l i t y to
monitor the q u a l i t y of goods received by S t a t e agencies. SF0 has not
developed and implemented adequate procedures for: 1) prequalifying
vendors, 2) evaluating vendor performance, 3) t e s t i n g products prior t o
contract award, and 4) inspecting and t e s t i n g products on receipt. A s a
r e s u l t , a p o t e n t i a l e x i s t s f o r the S t a t e to incur excessive product costs
or receive lower q u a l i t y goods than the cost warrants.
RECOBMENDATIONS
Consideration should be given to the following recommendations:
1. The Legislature a ) amend A. R. S. $ 41- 729, subsection A, t o
require e x p l i c i t l y t h a t SPO e s t a b l i ~ h a quality control program,
and b) appropriate funds for the implementation of the program.
2. SPO develop a q u a l i t y control program t o include:
- Testing of delivered goods,
- Inspecting goods a t r e c e i p t , and
- Requiring vendors to submit t e s t r e s u l t s a s required by
specifications.
User agency input and p a r t i c i p a t i o n should be included i n the
program's development, and the program should be written to
include standards for documentation of a c t i v i t i e s .
3. SPO study a plan f o r vendor evaluation. I f these functions are
i n s t i t u t e d , the following should be included:
- Development of vendor q u a l i f i c a t i o n c r i t e r i a ,
- Requirement t h a t vendors submit information which SPO
requires f o r evaluation, and
- Agency input to evaluate vendors under contract.
FINDING I11
IMPROVEMENTS ARE NEEDED IN THE VENDOR COftPLAINT PROCESS TO ENSURE VENDOR
COMPLIANCE WITH STATE PURCHASING CONTRACTS.
The State Purchasing Office ( sPo) requires State agencies to submit
complaints regarding vendor products or performance as a means of
monitoring vendor compliance with State purchasing contracts. Our review
revealed that SPO cannot monitor vendor compliance adequately because
1) the complaint process is fragmented among several agencies, and 2) SPO
has not developed written procedures to ensure that complaints are
resolved in a consistent and timely manner. As a result, the vendor
complaint process is not documented adequately, and complaints are not
resolved effectively or in a timely manner.
Fragmentation of the Complaint Process
Arizona statutes do not specifically provide SPO with responsibility for
investigating and resolving complaints. A. R. S. $ 41- 729, subsection A,
requires SPO to specirj. how State purchasing activities must be conducted:
" The purchasing section shall have the following duties:
2. Prescribe... methods for the acquisition, delivery,
acceptance, storage, retention and distribution for all
supplies, materials, equippent and pontractual services
of budget units."
Accordingly, through its policies and procedures manual, SPO requires
State agencies to submit in writing all complaints concerning vendors.
Because SPO does not have means of enforcing this policy, agencies do not
comply with the requirement and may resolve complaints without contacting
SPO. As a result, the complaint process is fragmented among several State
agencies.
An Auditor General survey of user agencies* indicated t h a t , of the
respondents, 37 percent do not f i l e written vendor complaints with SPO.
Inconsistent Complaint Resolution and Use
SPO does not resolve or use consistently those vendor complaints it does
receive. When SPO receives a complaint it is reviewed by the a s s i s t a n t
administrator, who r e f e r s it along with recommended actions to the buyer
responsible f o r that contract item. SPO has not, however, developed
written procedures or guidelines regarding the action to be taken i n
specific circumstances or the time frame f o r such action.
A s a r e s u l t , complaints are resolved inconsistently, sometimes
i n e f f e c t i v e l y and may not be resolved i n a timely manner.
Doclmentation Is Inadequate
Complaint documentation is e s s e n t i a l as a basis f o r 1 ) establishing
c r i t e r i a f o r awarding vendor contracts, and 2) imposing sanctions against
vendors. The Council of S t a t e Governments, i n S t a t e and Local Government
Purchasing, a report issued i n conjunction with the National Association
of S t a t e Purchasing O f f i c i a l s , s t r e s s e s the importance of adequate
documentation:
" Instances of nonconformance with s p e c i f i c a t i o n s ,
noncompliance with contractual terms and conditions, or
other types of complaints concerning s u p p l i e r s t
performance should be recorded and referred to central
purchasing. ... A f i l e of complaint forms and information
on the action taken can serve as a record to help
purchasing agents deal e f f e c t i v e l y with suppliers.
" A l l records of complaints, actions taken, and the
f i n a l resolution should be f i l e d c e n t r a l l y so that they
are accessible to a l l who have a need to review them."
(~ rnphasis added)
* Appendix V I contains the tabulated r e s u l t s of t h i s survey.
2 8
SPO does not maintain a comprehensive c e n t r a l f i l e of complaints against
vendors because 1) as noted above, agencies do not submit a l l complaints,
and 2) SPO does not record most of the verbal complaints it does
receive. Our review of SPO f i l e s revealed that 77 percent of the
complaints which user agencies told audit s t a f f they had submitted t o SPO
were not i n vendor f i l e s . Further, agency purchasing s t a f f members said
t h a t some of these complaints had been made verbally; t h u s , SF3 not only
does not enforce its own requirement t h a t complaints be written, but
neither does it document verbal complaints. I n addition, the complaints
t h a t a r e documented i n SPO f i l e s are not complete regarding actions taken
a g a i n s t t h e vendor. Our review of complaints on f i l e a t SPO and those
i d e n t i f i e d from surveys of S t a t e agencies and interviews with user agency
purchasing o f f i c i a l s revealed t h a t 56 percent of the complaints were not
documented as to what, i f any, action SPO took to resolve them.
Action. Taken on Complaints Is Ineffective
The most common action taken by SPO to resolve complaints is to warn
vendors verbally. SPO r e l i e s heavily on verbal warnings because,
according t o SPO o f f i c i a l s , vendor performance usually improves a f t e r such
warnings. However, our review revealed t h a t several vendors continued to
have numerous complaints f i l e d against them a f t e r being warned by SPO.
The following case i l l u s t r a t e s t h i s occurrence, a s well as the e f f e c t s of
incomplete documentation on t h e c o n t r a c t award process:
I
August 15, 1980
A S t a t e agency complained t o SPO t h a t a food vendor f a i l e d t o meet
contract requirements because 1) his product did not conform to
s p e c i f i c a t i o n s , 2) the weight was i n c o r r e c t , and 3) the price on the
invoice was incorrect.
September 5, 1980
SPO advised the agency t h a t the vendor had been contacted and the problem
should be resolved by the vendor and the agency.
September 5, 1980
The same agency complained t o SPO t h a t the same vendor f a i l e d to meet
delivery requirements.
September 15, 1980
SPO awarded a food contract to the same vendor.
September 18, 1980
SPO sent a l e t t e r t o the vendor warning t h a t the contract could be
canceled and stated:
" Without q u a l i f i c a t i o n , t h e r e have been more
discrepancy reports received from the agencies on your
contract performance than a l l other commodities
combined. This record could g r e a t l y a f f e c t our
decisions on future contracts."
September 24, 1980
The same agency complained t o SPO t h a t the same vendor had f a i l e d to meet
contract requirements, because d e l i v e r i e s were short i n weight and both
quantity and invoice price were incorrect.
October 2. 1980
SPO awarded a new contract to the vendor.
,
October 3, 1980
SPO again warned the vendor i n writing that continued poor performance
could r e s u l t i n contract cancelation.
It should be noted t h a t SPO o f f i c i a l s stated t h a t they consider the
substance of complaints as well as t h e i r number i n awarding contracts.
However, our review revealed that 1) SPO reawarded contracts t o vendors
who had been accused i n agency complaints of providing poor quality
products and inadequate d e l i v e r i e s , and 2) these same o f f i c i a l s described
such f a i l u r e s a s " . . . very serious problems.. ." which " . . . cannot be
tolerated...."
Currently, SPO may cancel a contract with a vendor or f i l e s u i t against a
vendor through the Office of the Attorney General. Further, a Legislative
Council memorandum dated April 29, 1981,* s t a t e s t h a t SPO may remove
vendors from the bid list and, therefore, preclude them from future
bidding and award. The memorandum s t a t e s i n part:
" The s t a t e purchasing section does not have s p e c i f i c
s t a t u t o r y authority from the Legislature to remove a
vendor from the master vendor bid list. However, the
grant of an express power c a r r i e s with it the authority
to exercise a l l other a c t i v i t i e s reasonably necessary
to carry it i n t o e f f e c t . . . . i t can be reasonably implied
that the s t a t e purchasing section could... remove those
s u* 4~ ~ l i e trhse o f f i c e f e e l s are not a* ualified t o suLmA l v "
the item the s t a t e seeks to purchase.
" Such a determination ( t h a t a supplier is not
q u a l i f i e d ) could be based on the past h i s t o r y of the
supplier i n f u l f i l l i n g contract requirements ...."
, ( Emphasis added)
Arizona s t a t u t e s do not, however, s p e c i f i c a l l y provide f o r 1) sanctions
against vendors who do not f u l f i l l c o n t r a c t u a l o b l i g a t i o n s , or
2) procedures to be followed when sanctions are imposed against a vendor.
The Model Procurement Code developed by the American Bar Association
contains specific provisions for suspension and debarment from bidding and
other penalties available t o procurement administrators, authority for
I
resolution of c o n t r a c t d i s p u t e s and procedures f o r appeals by vendors.
* Appendix VII contains the memorandum.
3 1
Action May Not Be Taken in A Timely Manner
SPO appears to take an unreasonably long time to respond to those few
complaints against vendors it receives. During fiscal years 1979- 80 and
1980- 81, SPO received approximately 50 complaints or an average of only
three complaints per buyer per year. However, based on our review of
adequately documented complaints on file at SPO, buyers take an average of
seven working days to initiate action on complaints. In our opinion,
seven working days is excessive, given the few complaints SPO receives and
the potential adverse effects in terms of lost productivity and higher
costs that can result from such delays.
CONCLUSION
SPO cannot adequately monitor vendor compliance with State contracts
because it 1) lacks sufficient statutory authority to investigate and
resolve complaints, 2) is not always notified of complaints against
vendors, and 3) has no means to enforce compliance with its policies and
procedures. In addition, SPO has not developed adequate guidelines or
procedures for complaint resolution and has not documented vendor
complaints adequately. As a result, SPO is not consistently resolving
complaints effectively or in a timely manner.
RECOMMENDATIONS
Consideration should be given to the following recommendations:
1. A. R. S. $ 41- 729, subsection A, be ? mended to provide the State
Purchasing Office with specific responsibility and authority for
investigating and resolving complaints as follows:
- Recognize SPO as the sole entity with this authority for
vendors under term contracts, and require agencies to submit
complaints concerning vendors in writing to SPO,
- Provide for a formal suspension or debarment procedure and
other sanctions which may be invoked against vendors for
failure to perform, and
- Provide for an appeal process for vendors against whom
action has been taken.
2. SPO develop and implement internal staff procedures for
investigating and resolving complaints, including guidelines for
- Documentation of complaints and actions,
- Appropriate action under various circumstances, and
- Time frames for actions to be taken.
FINDING I V
IMPROVENENTS ARE NEEDED I N THE MANAGEMENT INFORPIATION SYSTEN USED BY THE
STATE PURCHASING OFFICE.
The management information system available to the S t a t e Purchasing Office
( SPO) is inadequate i n that financial data now available contains
i n s u f f i c i e n t d e t a i l t o be used i n decision- making. A s a r e s u l t , SPO's
a b i l i t y to administer contracts is impaired, and the S t a t e may be
incurring an unknown but p o t e n t i a l l y s i g n i f i c a n t amount of unnecessary
costs for purchases.
Present Accounting System Does
Not Provide Adequate Information
The management information system used by a purchasing authority should
provide s u f f i c i e n t data upon which purchasing o f f i c i a l s may make sound
decisions. The Council of S t a t e Governments and the National Association
of S t a t e Purchasing O f f i c i a l s , i n S t a t e and Local Government Purchasing,
s t r e s s the importance of such information:
" A proper program s t r u c t u r e which is management
oriented is needed, a s are good information systems to
permit evaluations of h i s t o r i c a l bid- award information
and t o provide input t o plgnning, bydgeting, and market
analysis."
The S t a t e accounting system currently is the sole comprehensive source of
information concerning purchases by S t a t e agencies. This system does not
provide s u f f i c i e n t l y detailed purchasing information. For example,
purchase information is coded i n t o general categories such a s " office
supplies" i n the accounting system. A s a r e s u l t , s p e c i f i c usage
information f o r items such as pens, paper c l i p s or s t a p l e r s is not
available.
Additionally, S t a t e agencies' purchase documentation is inadequate to
allow SPO monitoring and review of t h e i r operations." For example, i n
many instances observed by audit s t a f f , agency purchase documentation was
so inadequate as to preclude the i d e n t i f i c a t i o n and subsequent review of
agency purchases. Our review revealed t h a t numerous claims contain such
general descriptions as " o f f i c e s u p p l i e s , " " groceries" or stock numbers
only for items such a s auto parts. Supporting documentation such as
invoices f o r many claims did not, i n most instances, provide s u f f i c i e n t
additional information t o i d e n t i f y the items purchased. A s a r e s u l t , SPO
cannot: 1) i d e n t i f y every item which should be placed on a term contract
basis, and 2) accurately determine the q u a n t i t i e s of items t h a t should be
purchased under contract.
I n a b i l i t y to Identify Items
to Be Placed on Term Contract
Term contracting is a purchasing technique t h a t establishes a source, or
sources, of supply for specific items during a defined time period. Term
contracts are awarded: 1) generally on a low- bid basis, and 2) f o r an
approximate quantity and a d e f i n i t e time period. According to the Council
of S t a t e Governments, term contracting provides numerous advantages,
including lower prices, through volume buying, and
he he he purchaser) can reduce administrative costs by
avoiding the highly r e p e t i t i v e a c t i v i t i e s involved i n
preparing and issuing I n v i t a t i o n s f 6 r Bids on the same
or s i m i l a r items, and i n receiving, controlling, and
evaluating the responses. Widespread use of term
contracting permits handling l a r g e r volumes of
purchases with fewer personnel."
* See page 16 f o r a review of agency purchasing a c t i v i t i e s .
High- volume- purchased items which are commonly used by numerous agencies
should be placed on term contracts bbcause they could be acquired a t lower
cost i f purchased through t e r n contracts. Those products f o r which term
contracts should be awarded, and t h e c o s t savings that would accrue t o the
S t a t e as a r e s u l t , cannot be determined currently because information
concerning actual usage of s p e c i f i c items is not available.
I n a b i l i t y t o Forecast Needs Accurately
Given the limited c a p a b i l i t i e s of the S t a t e accounting system, SPO cannot
compile h i s t o r i c a l data e s s e n t i a l to the administration of term contracts
such as agency purchases of s p e c i f i c items. In addition, SPO cannot
f o r e c a s t accurately the needs of user agencies or verify the accuracy of
agency purchasing projections.
SPO's e f f o r t s to develop additional term contracts are impeded f u r t h e r by
the agencies themselves i n that they do not, according to SPO o f f i c i a l s ,
1) produce r e l i a b l e projections of purchasing needs, and 2) submit
projections i n a timely manner, i n s p i t e of an SPO policy and procedure
manual requirement t h a t they do so. While Arizona s t a t u t e s do not
s p e c i f i c a l l y require agency compliance with SPO p o l i c i e s , a Legislative
Council memorandum dated April 23, 1981, concludes that such compliance is
implicit."
" The ( s t a t e Purchasing Office poucy and procedure)
manual requirements apply to the purchasing section,
non- purchase authorized agencies and purchase
authorized agencies."
Implied compliance with SPO p o l i c i e s notwithstanding, SPO has no means of
compelling agencies to comply with its policies. Such noncompliance may
impair SPO's term contract negotiations with current and prospective
vendors and r e s u l t i n vendors bidding higher prices because of
d i s s a t i s f a c t i o n with S t a t e purchasing practices.
* Appendix I contains the f u l l t e x t of the memorandum.
37
These inadequacies i n the accounting system were i d e n t i f i e d previously
during a 1978 Joint Legislative Budget Committee ( JLBC) management study.
The report s t a t e s i n part:
" Currently, estimates are presented i n commodity
surveys. The surveys have not proven as accurate as
would be desired. The accounting system does not
provide s u f f i c i e n t d e t a i l to be of appreciable value
f o r the planning of procurement." ( Emphasis added)
A former SPO o f f i c i a l also acknowledged the shortcoming of SPO's
management information system i n his reply t o the JLBC study:
" The lack of an automated systems approach and its
attendant Management Information System has relegated
the role of ( s t a t e ) purchasing buyers from a buyer or
procurement r o l e t o a large percentage of time spent on
basic c l e r i c a l duties .... Today the use of automated
systems within the finance function of s t a t e government
i n Arizona is improperly designed f o r the finance
needs. These shortcomings have not been r e c t i f i e d , and
as a r e s u l t , the finance system has not matured i n t o
other functions that should also be supported from the
basic finance package. Currently, it requires a major
c l e r i c a l e f f o r t to extract even the most basic
information from t h e c u r r e n t system i n Accounts &
Controls and/ or the Purchasing Office t o attempt t o
determine what is occurrine i n the Purchasing Office."
( Emphasis added)
I
A s of September 17, 1981, the S t a t e was attempting to implement a more
detailed centralized accounting system through the Arizona Financial
Information System framework ( AFIS). The AFIS project team has been
working with SPO and other agencies through the Purchasing Advisory
Council to determine and coordinate data needs. The AFIS general ledger
data base has been projected for implementation i n f i s c a l year 1982- 87,
with additional information packages designed f o r specific needs to be
implemented i n subsequent years. An AFIS purchasing module is scheduled
for development i n f i s c a l year 1983- 84. However, because of delays i n
AFIS implementation, SPO o f f i c i a l s are s k e p t i c a l t h a t these deadlines w i l l
be met.
CONCLUSION
The S t a t e Purchasing Office's management information system is inadequate
due to l i m i t a t i o n s of the s t a t e ' s accounting system. SPO is, therefore,
unable to identify accurately: 1) the q u a n t i t i e s of items needed by user
agencies, and 2) items to which cost saving may accrue through volume
buying. User agency noncompliance with SPO p o l i c i e s and procedures
regarding need projection surveys have impaired SPO's a b i l i t y to plan and
procure for the s t a t e ' s needs e f f i c i e n t l y .
Consideration should be given t o the following recommendations:
1. SPO request budget authorization to i n s t i t u t e a study to
determine the f e a s i b i l i t y of a n i n t e r n a l management information
system to review and record agency purchasing documents f o r use
i n contract administration decisions.
2. The Finance Division continue accounting system development and
assess the AFIS purchasing module i n terms of present information
inadequacies.
FINDING V
THE TERM CONTRACT FORM USED BY THE STATE PURCHASING OFFICE NEEDS TO BE
REVISED BECAUSE I T PTAY NOT SERVE THE BEST INTERESTS OF THE STATE.
The term contract form used by the S t a t e Purchasing Office may not serve
t h e b e s t i n t e r e s t s of t h e S t a t e . In addition, the Office may not have
f u l f i l l e d its administrative r e s p o n s i b i l i t i e s because t h e c o n t r a c t form
has not been reviewed and approved by the Attorney General.
SPO'S Term Contract Form
The term contract form used by SPO consists of the following items:
- A summary form which s p e c i f i e s procedures f o r bidding, an
agreement t o "... furnish the items specified, a t the prices
* indicated i n s t r i c t accordance with the i n v i t a t i o n for bid
s p e c i f i c a t i o n s , the... Standard Provisions, Terms and Conditions
and.. .~ ddendum[ a]. . ." and i d e n t i f i c a t i o n of the contract number,
award date and term.
- I n s t r u c t i o n s and conditions f o r submitting bids, including
provisions f o r modification of b i d s , cancelation by State and
o t h e r c o n t r a c t u a l obligations.
- Addendurns which specify additional terms and conditions.
I
However, t h e c o n t r a c t form does not, i n a l l cases, include s p e c i f i c a t i o n s
which i d e n t i f y the product to be delivered or delivery requirements.
Further, a review of t h e c o n t r a c t form as of June 30, 1981, by the
Assistant Attorney General assigned to SPO revealed t h a t it may not be
adequate. According to the Assistant Attorney General, the present
contract form precludes control by SPO over c o n t r a c t u a l o b l i g a t i o n s of
vendors. The Office may not be able to ensure t h a t the provisions of the
contract are met or be able to take s u f f i c i e n t c o r r e c t i v e a c t i o n against
breaches of contract.
Form Not Approved by Attorney General
The current term contract form has been used since January 1980 without
the approval of the Attorney General. An SPO o f f i c i a l said t h a t Office
management assumed t h a t the form had, a t some time, been reviewed because
it has always been the o f f i c i a l contract form during h i s tenure.
Failure to seek review and approval before use of the form may c o n s t i t u t e
a breach of t h e O f f i c e ' s administrative duties. A Legislative Council
memorandum dated July 20, 1981, concerning review of contracts, reads i n
part:*
" Available evidence supports a c l a s s i f i c a t i o n of the
term contract i n the same s t a t u s as the SPO policy and
procedures manual. Both are policy statements which i n
a l l likelihood hold the s t a t u s of administrative
rules.. . .
" Administrative rules must, under the Arizona
Administrative Rules Act ( A. R. s. T i t l e 41, chapter 6,
a r t i c l e l ) , be reviewed and c e r t i f i e d by the Attorney
General. It is a t l e a s t arguable t h a t i f such policy
statements as... term contracts... assume the s t a t u s of
administrative rules, then review by the Attorney
General is required.
" For the SPO to use a document , such as the.. . tern
contract with a high statewide d i s t r i b u t i o n without
making a good- faith e f f o r t t o secure legal review might
be remiss administratively on the part of the SPO...."
- ( Emphasis added)
* Appendix V I I I contains the t e x t of the memorandum.
42
However, f a i l u r e t o seek review does not invalidate a contract
automatically. The Legislative Council memorandum continues:
"... the f a c t t h a t such review has not been given i n the
past would not c o n s t i t u t e by i t s e l f s u f f i c i e n t grounds
to invalidate a contract which otherwise complies with
applicable s t a t e law. Contract v a l i d i t y can only be
s e t t l e d on a case- by- case basis through review of the
contract terms and standing of the p a r t i e s a t issue."
(~ mphasis added)
There have been no such t e s t s of the v a l i d i t y of the term contract form.
However, because SPO may not be able t o monitor e f f e c t i v e l y the
c o n t r a c t u a l o b l i g a t i o n s of vendors or take action i n response to
inadequate performance, the contract form may not be i n the best i n t e r e s t
of the State.
CONCLUSION
The State Purchasing Office may not have f u l f i l l e d its administrative
r e s p o n s i b i l i t y i n that its term contract form has not been reviewed or
approved by the Attorney General. A s a r e s u l t , the Office may not be able
to monitor or enforce provisions of a contract.
It is recommended t h a t the present term contract form, and future changes
to the form, be reviewed and approved by the Attorney General.
FINDING V I
PROCEDURES USED BY THE STATE PURCHASING OFFICE TO SOLICIT BIDS MAY NOT BE
I N CONPLIANCE WITH STATUTORY REQUIREMENTS.
Arizona s t a t u t e s prescribe procedures for s o l i c i t i n g bids for purchases i n
excess of $ 5,000. A s a r e s u l t of a State Purchasing Office i n t e r p r e t a t i o n
of the s t a t u t e s , bid s o l i c i t a t i o n procedures may not be i n compliance with
s t a t u t o r y requirements. In addition, SF0 has not developed a bid list
which alloVrs s o l i c i t a t i o n of bids from qualified vendors only.
Statutory Requirements
A. R. S. $ 41- 730. A requires competitive bidding f o r purchases i n excess of
$ 5,000 and s t a t e s i n part:
"... bids s h a l l be s o l i c i t e d from the maximum number of
qualified sources throughout the s t a t e consistent with
the item t o be purchased as determined by the a s s i s t a n t
d i r e c t o r f o r finance, but including a l l qualified
suppliers who prior to the issuance of the i n v i t a t i o n
notify the purchasing section i n writing t h a t they
desire to bid...." (~ mphasis added)
SPO Procedures Mav Not Be i n
Compliance with Statutory Requirements I
SPO has developed a master bid list of vendors who have expressed an
i n t e r e s t i n bidding by submitting applications t o SPO. Our review
revealed that SPO procedures f o r s o l i c i t i n g bids from these vendors may
not be i n compliance with s t a t u t o r y requirements.
A. R. S. $ 41- 730. A. requires s o l i c i t a t i o n of bids from " . . . a l l qualified
suppliers.. . ." According t o a Legislative Council memorandum dated
July 7 , 1981, such s o l i c i t a t i o n s must include out- of- State vendors
appearing on the master bid list. The memorandum reads i n part:"
* Appendix V contains the t e x t of the memorandum.
"... The bid s o l i c i t a t i o n must by s t a t u t e include a l l
qualified suppliers, with no s p e c i f i c l i m i t a t i o n as to
geographical residence, who, p r i o r t o the issuance of
the i n v i t a t i o n to bid, have notified the SPS [ s t a t e
Purchasing section] i n writing of the desire t o bid on
those items contained i n the i n v i t a t i o n . " ( ~ m ~ h a s i s
added)
In addition, a u t h o r i t a t i v e sources support the s o l i c i t a t i o n of bids from
a l l vendors on the bid list. The Council of State Governments, i n State
and Local Government Purchasing, a report prepared i n conjunction with the
National Association of State Purchasing O f f i c i a l s , contends t h a t a l l
bidders on the list should be s o l i c i t e d unless there a r e s p e c i f i c
provisions f o r exceptions and these exceptions are documented adequately.
According to t h e r e p o r t ,
" The purpose of the bidders list is to provide the
broadest competition among supplies who are qualified
and willing t o furnish items and services needed by
s t a t e and local governments. The general rule,
therefore. should be that when formal sealed bids are
reauired f o r a articular item. a l l bidders on t h a t
list should be s o l i c i t e d. ... Tllh ere must be some
provision for exceptions to the general r u l e , such
as... requirements f o r l o c a l services which would not be
of i n t e r e s t to non- local bidders.. . . Where not a l l
bidders on the bidders list a r e s o l i c i t e d , the required
documentation must not only j u s t i f y the action but also
show t h a t the maximum practicable competition was
sought. " ( ~ m ~ h a saidsd ed)
During the course of the audit we reviewed 29 contracts f o r purchases of
more than $ 5,000. Our review indicated t h a t , i n 45 percent of the cases,
i n v i t a t i o n s were not sent t o a l l vendors appearing on the master bid
list. In those 13 instances i n which bids were not s o l i c i t e d from every
vendor l i s t e d , half the vendors who had notified SPO t h a t they desired to
bid did not receive bid i n v i t a t i o n s .
When presented with these exceptions, an SPO spokesman claimed t h a t Office
understanding of the requirements of A. R. S. $ 41- 730.~ is t h a t they apply
only to in- State vendors. Consequently, i f the Office determines t h a t
t h e r e a r e s u f f i c i e n t in- State vendors to provide f o r competitive bidding,
i n v i t a t i o n s to bid are not sent to out- of- State vendors appearing on the
master bid list.
Such a procedure is not i n compliance with statutory requirements. The
s t a t u t e s do not contain provisions f o r exceptions and, according to the
Legislative Council memorandum, the Office cannot exercise d i s c r e t i o n i n
s o l i c i t i n g bids. The memorandum adds:
"... The agency has no s t a t u t o r y authority t o
discriminate a. g, ainst aualified out- of- state vendors on . L
the master vendor f i l e who have expressed an i n t e r e s t
i n bidding on a p a r t i c u l a r commodity by refusing to
send an i n v i t a t i o n to bid on the grounds that there are
already s u f f i c i e n t i n - s t a t e vendors.. . ." (~ mphasis
added)
In reviewing selected f i l e s i n which not a l l vendors received bid
i n v i t a t i o n s , a u d i t s t a f f noted t h a t some of the omitted vendors were
in- State suppliers. The a s s i s t a n t administrator admitted t h a t the
practice of not s o l i c i t i n g a l l in- State vendors was inappropriate.
Master Bid L i s t Is Not I
Adequately Refined
SPO's master bid list is not adequately refined to allow s o l i c i t a t i o n of
bids from qualified vendors only. The Council of S t a t e Governments, i n
S t a t e and Local Government Purchasing ( 1975), defined c r i t e r i a f o r
organizing a list of vendors, c l a s s i f i e d by commodity, t o whom bids should
be sent:
" The bidders list should be organized so that it
provides a n e f f e c t i v e means of s o l i c i t i n g qualified
suppliers.
" In structuring the bidders list, major commodity
c l a s s i f i c a t i o n groupings must f i r s t be established.
These groupings should r e f l e c t the p a r t i c u l a r function
with which a group of products is commonly associated.
Too frequently, t h i s f i r s t order of c l a s s i f i c a t i o n is
so general that it bears l i t t l e s p e c i f i c r e l a t i o n s h i p
t o items i n the group .... Different categories of
manufacturers are thereby included i n too broad a
c l a s s i f i c a t i o n , not a l l of which should receive a l l
s o l i c i a t i o n s f o r the c l a s s i f i c a t i o n . . . .
" Proper c l a s s i f i c a t i o n s are useful to the degree t h a t
products and s u ~ ~ l i e rasre closelv matched. This is
done by even f u r t h e r refinement....
" Each c l a s s i f i c a t i o n must be analyzed to determine the
proper l e v e l of d e t a i l f o r the products it covers.
"... This kind of subdivision provides a bidders list
t h a t is manageable and reduces wasteful s o l i c i t a t i o n . "
(~ mphasis added)
The f i ' r s t four d i g i t s of the SPO commmodity code represent a c l a s s of
commodities. The last f i v e d i g i t s i d e n t i f y the stock number f o r an
individual item within t h e c l a s s . SPO places each vendor on commodity
lists based on the f i r s t four d i g i t s of the appropriate nine- digit SPO
commodity code i n order to i d e n t i f y the items on which vendors expressed a
bidding i n t e r e s t . Therefore, since the four- digit code is not
s u f f i c i e n t l y refined, the vendor lists are too broad.
A s a r e s u l t , some vendors r e ~ e i v e ~ i n v i t a t i o ntso bid for products they
cannot provide. An Auditor General survey of vendors revealed t h a t the
most frequent reason f o r declining to bid was the vendor's i n a b i l i t y to
supply the product.
SPO administrators s t a t e d t h a t they plan to further r e f i n e the bid list.
CONCLUSION
The S t a t e Purchasing Office does not s o l i c i t bids from a l l vendors on the
master bid list for purchases i n excess of $ 5,000. Because A. R. S.
$ 41- 730. A may not provide f o r exceptions f o r out- of- State vendors, SPO
procedures may not be i n compliance with statutory requirements for
competitive bidding. In addition, SPO s o l i c i t s bids from unresponsive
vendors because bid list c l a s s i f i c a t i o n s are too broad.
Consideration should be given to the following recommendations:
1. The Legislature review the provisions of A. R. S. $ 41- 730. A to
determine i f out- of- State vendors are intended f o r exemption.
2. SPO f u r t h e r refine the master bid list to i d e n t i f y vendors who
are able t o supply the product f o r which a bid is s o l i c i t e d .
E'iPkRlKilENT OF kDKdilRISTWWTlQF1
STATE OF Ai3; ZG; dA
- - -- - ---
BRUCE HARBI !' T, Covernor
THE CAl'ITCL
P ~ O E I I I X . A ~ I Z O ~ 85A00 7 ROBERT 3. TAXGlYl, Dirzctor
DOXALD L. OLSOX, A s s i s t a n t D i r c c t ~ r
ll
December 11, 1981
M r . Douglas R. Norton, Auditor General
S t a t e Capitol
L e g i s l a t i v e Services Wing, S u i t e 200
Phoenix, Arizona 85007
Dear M r . Norton:
We a r e enclosing our response t o your Performance Audit findings
f o r the Department of Administration - Finance Division - S t a t e
Purchasing Office. As you can see, we a r e i n general agreement
with your findings and i n some cases have already prepared d r a f t
l e g i s l a t i o n t o place your recommendations i n e f f e c t .
Your Performance Team was v e r y p r o f e s s i o n a l and courteous i n the
conduct of t h i s a u d i t and we a r e convinced t h e r e s u l t s of t h e i r
e f f o r t s w i l l help us do our job b e t t e r .
Sincerely, A
Donald L. Olson
A s s i s t a n t D i r e c t o r f o r Finance ' Director
DL0 : ks
Enclosure
RESPONSE OF THE STATE PURCHASING OFFICE TO THE PERFORMANCE AUDIT CONDUCTED
BY THE OFFICE OF THE AUDITOR GENERAL AS PART OF THE SUNSET REVIEW.
FINDING I
STATE GOVERNMENT PURCHASING OPERATIONS ARE EXCESSIVELY DECENTRALIZED AND
NOT ADEQUATELY CONTROLLED.
This, in our opinion, i s the major finding of the performance audit. Effec-tive
resolution of this problem will establish the direction of purchasing
in the State of Arizona. The Audit conclusion in FINDING I succinctly re-fl
ects the ambiguous environment in which Arizona currently conducts i t s
purchasing operations.
Arizona's purchasing procedures are excessively decentral ized
and characterized by significant noncompl iance with State
Purchasing Office procedures. SPO has not reviewed those
agencies with delegated purchasing authority for economy or
efficiency and has failed t o maintain i t s mandated review of
purchasing activities. As a result, the State may incur ex-cessive
costs for supplies, materials and equipment and dupli-cate
purchasing activities exist.
We concur with the conclusion. However, as pointed out in the report, SPO
discontinued on- site agency audits in November 1978 and the review of pur-chase
orders in December 1980 because these activities proved t o be inef-fective.
The review of agency purchasing was ineffective primari ly because
SPO could not enforce compliance with audit recommendations or purchasing
procedures. ,
The Audit found that each purchase- authorized agency developed a separate
staff for purchasing activities. " As a result, purchasing staff may be
duplicated among purchase- authorized agencies ... . As of July 1, 1981
administrative, buyer and clerical staff employed by purchase- authori zed
agencies was more than three times that of SPO." The staff of SPO has re-mained
constant at 20 FTE1s for five years.
In FINDING I , the Audit provided two alternative recommendations. The two
a1 ternatives offer a choice between defined levels of efficiency and oper-ational
control, either of which can be implemented to result in a corres-ponding
improvement in purchasing operations within State government.
A1 ternative I, as stated in the Audit report, is as foll ows:
1. Amend A. R. S. § 41- 729 to: a) specifically require agencies
to fol low SPO establ i shed procedures, b) provide sanctions
FINDING I ( cont'd.)
for agency noncompliance, and c) provide for the absorption
of an agency's purchasing staff by SPO in the event SPO re-vokes
i t s purchase- authorized status.
2. SPO review each purchase- authorized agency to determine i f
i t s purchasing operations are economical and efficient.
3. Require agencies t o submit copies of purchase orders for
SPO review.
The centralization of procurement authority with selective and controlled
purchasing authority delegated to the'operating agencies i s a basic tenet
of effective publ ic procurement. The Counci 1 of State Governments, in
their comprehensive study of State and Local Government Purchasing, stated
that:
If a distillation can be made of a study which represents months
of dedicated effort and intensive cooperation by purchasing
officials and other public administrators, i t might be said
that where there is centralization, openness, impartially, and
professional ism, government i s we1 1- served by publ ic purchasing.
and further that:
The centralization of purchasing authority is also the centra-l
i zation of responsi bi l i ty and accountability, and the central
purchasing authority has the perspective of commonweal, not the
special program interests of indivi dual departments.
The advantages of A1 ternative I are:
1. I t would be relatively simple to implement.
I
2. I t addresses the operational areas that require control under
a decentral ized procurement organization.
3. I t defines the authority relationship between agencies and
the State Purchasing Office.
4. I t would provide the State with unified procurement policies
and procedures.
5. I t provides the standardization of forms and data flow to
develop a comprehensive purchasing information system.
6. I t may substantially reduce costs for procured goods and
services through more extensive and intensive use of State
contracts.
FINDING I. ( cont ' d. )
The disadvantages of A1 ternative I are:
1. There would be no cost reduction in retaining the current
dupl ication of s t a f f and resources.
2. A comprehensive agency audit program would require either
additional FTE authority or appropriation to contract for
outside auditors to perform the function.
3. I t would perpetuate the dysfunctional relationship inherent
i n the present organizational structure.
Proposed legislation to implement t h i s alternative has been drafted.
A1 ternative Recommendation 11, as stated i n the Audit report, i s as follows:
Centralize State purchasing a c t i v i t i e s and s t a f f in SPO and allow
agencies to purchase certain products or products that are below
a specified cost only.
The advantages of Alternative I1 are:
1. I t would reduce the overall operational cost and number of
F. T. E. currently assigned to purchasing operations for the
State.
2. I t may substantially reduce costs for procured goods and
services through more extensive and intensive use of State
contracts.
3. I t provides vendors w i t h a single point of contract which
i s responsible and accountable for the majority of the State
purchasing program. ( The 1, egi sl ativp branch, judi cia1
branch and universities would remain exempt from centralized
purchasing. )
4. I t provides for standardization of forms and data flow neces-sary
to develop a comprehensive purchasing information system.
5. The control of a l l procurement document flow would eliminate
the need for central purchasing to engage in extensive
inspections and audits of agency purchasing operations.
6. I t provides the State with unified procurement policies and
procedures.
7. I t would eliminate Arizona as one of the few s t a t e s t h a t have
not centralized control of t h e i r purchasing operations and
i t would provide for greater expertise through greater buying
speci a1 i zation.
FINDING I ( cont'd.)
The disadvantages of Alternative 11 are:
1. There would be a major change in present agency purchasing
procedures along with a reduction of agency purchasing
prerogatives.
2. I t would require more time and effort t o implement than
A1 ternati ve I.
3. There currently exists a need t o further develop the intra-structure
of the State Purchasing Office ( i . e. , computer-ization
and mode1 procurement code). Ideally, this develop-ment
should occur prior t o centralization.
If Alternative I1 is selected, a basic transition plan should be developed
in which the Purchasing Advisory Council would be closely involved in the
transi t i on process.
Summary
Whichever alternative i s selected and to whatever degree i t is implemented,
i t will be a significant step towards the ultimate objective of a materials
management organization that is responsible for, and responsive to, the
needs of the State of Arizona.
FINDING I1
IMPROVEMENTS ARE NEEDED IN THE STATE PURCHASING OFFICE QUALITY CONTROL
PROGRAM.
The SPO has promulgated detailed policies and procedures to using agencies
for monitoring and reporting vendor performance ( see Arizona Procurement
Manual ). These sections instruct agency personnel how to receive, inspect ,
and accept goods and how to report vendor performance deficiences. However,
the SPO is dependent upon reports from the user agencies to determine i f
products of satisfactory quality are being placed on contract and delivered
as awarded.
The report states SPO's sole means of evaluating the qualifications of a
bidder prior to awarding a contract is through a vendor visit program.
Vendor visits are a valuable f i r s t hand measure b u t they are not SPO's sole
means of evaluating the qua1 i fications of bidders. Vendor application, past
performance records, trade journal s , i nformati on from other governmental
enti t i tes, Thomas Register, Buyers Laboratory Reports, and buyer knowledge
are other methods used in vendor evaluation and selection.
FINDING I1 ( cont'd. )
The Audit appears to overemphasize the limited pre- award testing conducted
by the SPO. By far the majority of items selected for contract are com-mercial
ly accepted off- the- shelf i terns. To ascertain the capabilities of
whether Westinghouse or General Electric can produce light bulbs, for ex-ample,
would be an inefficient use of public funds. Independent laboratory
t e s t reports a r e u t i l i z e d in addition to tests which are conducted by the
State on selected products such as highway striping paint, food, building
maintenance and some t e x t i l e items. Further, a l l items placed on contract
are subject to evaluation prior to award. On major contracts or complex
commodi t i e s such as awards for computers, vehi cles , and office furniture,
the evaluation i s done by a committee of user agencies or other technically
qual i f ied personnel. In addition, some awards are made conditioned on
agency evaluation and acceptance.
The Audit suggests that consideration should be given to the following recom-mendations
:
1. The Legislature: a) amend A. R. S. 8 41- 729, subsection A , to
require e x p l i c i t l y t h a t SPO establish a quality control pro-gram,
and b) appropriate funds for the implementation of the
program.
2. SPO develop a quality control program to include:
- Testing of delivered goods, - Inspecting goods a t receipt, and
- Requiring vendors to submit t e s t results as required
by speci f i cations .
3. SPO study a plan for vendor evaluation. If these functions
are i n s t i t u t e d , the following should be included:
- Development of vendor qual i ficatiop c r i t e r i a ,
- Requirement that vendors submit information which
SPO requires for evaluation, and
- Agency input to evaluate vendors under contract.
We agree that an expansion of Arizona's quality control program should be
considered. The f i r s t step would be to develop a plan for a quality control
program that would consider the wide range of quality control applications,
including a cost- benefit analysis for each. Since a quality control pro-gram
would require the appropriation of additional funds, we suggest that
a higher priority use of funds would be the development of a purchasing
management information system ( see FINDING IV. ).
FINDING I11
IMPROVEMENTS ARE NEEDED IN THE VENDOR COMPLAINT PROCESS TO ENSURE VENDOR
COMPLIANCE WITH STATE PURCHASING CONTRACTS.
This Audit f i n d i n g i s generally accepted c o n d i t i o n e d b y t h e f o l l o w i n g ob-s
e r v a t i ons :
1. There were less than 20 w r i t t e n " complaints" against vendors
received i n t h e S t a t e Purchasing O f f i c e i n the past eighteen
( 18) months.
2. Most vendor problems are communicated by the user t o the
s t a t e buyer v i a phone, and are u s u a l l y resolved by phone
contacts w i t h the vendor and the agency.
3. The s i t u a t i o n described as a vendor problem by the user
seldom i d e n t i f i e s the r e a l problem o r the r e a l c u l p i t . A
vast m a j o r i t y o f cases are some v a r i a t i o n o f the f o l l o w i n g
t y p i c a l exchange:
Agency: " Vendor won't d e l i v e r my order."
Vendor Reply: " Agency i s 90 days past due i n payment
o f invoices f o r past d e l i v e r i e s . We
cannot a f f o r d t o c a r r y t h e State any
longer. "
Agency Accounting: " The vendor invoice does not match
the purchase order. "
I
Vendor: " We j u s t put our accounts receivable on a
computer and there have been some problems.
Can't the agency pay a t l e a s t something."
Agency: " We have a pol i c y against paying p a r t i a l de-l
i v e r i e s . "
Vendor: " But I delivered $ 19,000 worth o f a $ 20,000 order;
the other c h a i r ( o r beef sides) i s on back order,
e t c . , e t c . .
It i s o f t e n d i f f i c u l t t o i d e n t i f y the " bad guys" i n such cases.
The r e s p o n s i b i l i t y i s u s a l l y a m a t t e r o f degree. It would
c e r t a i n l y be improper t o give a vendor bad marks s o l e l y on the
basis o f a user complaint.
FINDING I11 ( cont'd. )
4. Whenever a buyer is convinced that a vendor has, by commission
or omission, failed to perform under the terms of a State con-t
r a c t , the State Purchasing Office will take action to terminate
the contract. SPO has taken this action.
The conclusion of the Audit for FINDING I11 was as follows:
SPO cannot adequately monitor vendor compliance with State contracts
because i t : 1 ) lacks sufficient statutory authority t o investigate
and resolve complaints, 2 ) is not always notified of compliants
against vendors, and 3) has no means t o enforce compl iance with i t s
policies and procedures. In addition, SPO has not developed adequate
guidelines and procedures for complaint resolution and has not docu-mented
vendor complaints adequately. As a result, SPO is not con-si
stently resolving complaints effectively or in a timely manner.
The Audit made the fol lowing recommendations:
1. A. R. S. 2 41- 729, subsection A, be amended t o provide the State
Purchasing Office with specific responsi bi 1 ity and authority
for investigating and resolving complaints as follows:
- Recognize SPO as the sole entity with this authority for
vendors under term contracts, and require agencies to sub-mi
t complaints concerning vendors in writing to SPO.
- Provide for a formal suspension or debarment procedure and
other sanctions which may be invoked against vendors for
failure t o perform, and
- Provide for an appeal process for vendors against whom
acti on has been taken.
2. SPO develop and implement internal staff procedures for investi-gating
and resolving complaints, including guidelines for:
- Documentation of complaints and actions,
- Appropriate action under various ci rcumstances , and
- Time frames for actions t o be taken.
The State Purchasing Office has taken positive action t o implement recom-mendations
of the Audit as follows:
1. A formal procedure for vendor suspension/ debarment, based on
the Model Procurenlent Code, has been developed by the SPO. The
procedure i ncl udes provi sions for a formal appeal s process.
Proposed legislation has been drafted.
2. The State Purchasing Office has developed a Vendor Deficiency
Report procedure that simp1 i fies the reporting process. The
procedure has specified time frames within which action by the
5 8
FINDING I11 ( c o n t ' d . )
State Purchasing Office must be taken. A t h r e e - p a r t form has
been developed t o f o r m a l l y record and r e ~ o r tth e a c t i o n taken
on vendor complaints. The procedures and r e p o r t form have
been reviewed and approved by the Purchasing Advisory Council.
FINDING I V
IMPROVEMENTS ARE NEEDED IN THE MANAGEMENT INFORMATION SYSTEM USED BY THE
STATE PURCHASING OFFICE.
The conclusion o f the Audit on FINDING I V was as f o l l o w s :
The State Purchasing O f f i c e ' s management i n f o r m a t i o n system i s
inadequate due t o l i m i t a t i o n s o f the S t a t e ' s accounting system.
SPO i s , t h e r e f o r e , unable t o i d e n t i f y a c c u r a t e l y : 1) the
q u a n t i t i e s o f items needed by user agencies, and 2) items t o
which cost savings may accrue through volume buying. User
agency non- compliance w i t h SPO p o l i c i e s and procedures re-gardi
ng need p r o j e c t i o n surveys have impaired SPO' s abi 1 i ty t o
plan and procure f o r the S t a t e ' s needs e f f i c i e n t l y .
A t t r i b u t i n g c u r r e n t inadequacy t o the l i m i t a t i o n o f the State accountina
system bypasses the premise t h a t w h i l e t h e two systems i n t e r f a c e they have
d i s c r e t e and separate f u n c t i o n s and each operate from a d i f f e r e n t informa-t
i o n data base, derived from separate sources. The basis f o r a r e l i a b l e
management i n f o r m a t i o n system i s c o n t r o l over the source documentation flow.
The A u d i t p r o v i ded the f o l l o w i n g recommendations :
8
1. SPO request budget a u t h o r i z a t i o n t o i n s t i t u t e a study t o de-termine
the f e a s i b i l i t y o f an i n t e r n a l management i n f o r m a t i o n
system t o review and record agency purchasing documents f o r
use i n c o n t r a c t a d m i n i s t r a t i o n decisions.
2. The Finance D i v i s i o n continue accounting system development
and assess the AFIS purchasing module i n terms o f present
i n f o r m a t i o n inadequacies.
We concur completely w i t h the A u d i t ' s f i n d i n g and recommendations.
The Purchasing Advisory Counci 1 has formed a committee t o a s s i s t i n the de-velopment
of the separate AFIS Purchasing Module. However, development o f
the Purchasing Module i s c u r r e n t l y on hold due t o the lack o f funding.
FINDING V
THE TERM CONTRACT USED BY SPO NEEDS TO BE REVISED BECAUSE IT MAY NOT SERVE
THE BEST INTERESTS OF THE STATE.
State Purchasing Office concurs that the contract form should be revised;
however, we do not consider the current form invalid.
In general, terms and conditions of the forms are not unlike those as used
by the Federal Government and other states. The education and experience
of the SPO purchasing staff provides a full awareness of the legal aspects
of procurement.
The form currently used, with minor modifications, was essentially composed
by the Attorney General's staff when SPO was created. On several occasions
the documents in their current form have been involved in litiqation pro-ceedings
without a question or protest regarding contract form.
The comments offered by the Arizona Legislative Council on the subject is
noted t o wit: ". . . the attached contract provides for compliance with
basic requisites of a valid contract. There is an offer, acceptance and
consideration promised. More over there is nothing per se invalid about a
contract evidenced by a standard written form such as attached. In fact
such instruments are the norm in the public as well as the private sector
. . .1 1 .
The fact that the present contract procedures and forms preclude control
over contractual obligations is a continuing concern shared by purchasing
management. Term contract pri ce agreements are establ i shed by the State
Purchasing Office based on estimated State agency requirements and stipu-lated
that purchases for State agency use wilul be from the contract vendors.
Agency purchase orders are issued independent of any central control. There-fore,
State contracts may be breached with the possibility of l i a b i l i t y t o
the State Purchasing Office.
The Audit report recommendation for FINDING V is ". . . that the present
term contract form, and future changes to the form, be reviewed and approved
by the Attorney General."
The State Purchasing Office has requested Attorney General review of ex-isting
contract documents and will seek further review if substantive
changes are indicated or proposed.
FINDING VI
PROCEDURES USED BY THE STATE PURCHASING OFFICE TO SOLICIT BIDS MAY NOT BE
IN COMPLIANCE WITH STATUTORY REQUIREMENTS.
The State Purchasing Office maintains the State vendor f i l e which is composed
of vendors who have completed applications to receive bid invitations issued
for special commodities and services. Other appropriate information is re-quired
on the vendor application and is reviewed by SPO staff prior to
listing the vendor on the automated bid l i s t retrieval system.
Vendors are requested t o identify commodity coding and descri ptive informa-tion
pertaining to the commodities of interest. The procedure employed a
four- digit code which was not sufficiently refined or specific. As a result
many vendors appear on bid l i s t s for products and services they cannot pro-vide.
Therefore, i t is possible t o issue a bid invitation to over one
hundred vendors to which the response is less than ten competitive bids.
The SPO is currently in the process of re- registering vendors under an ex-panded
classification system to purge the current f i l e and establish a more
effective and efficient f i l e . This will result in a bid l i s t that will better
identify vendors to a more specific commodity or service. Therefore, there
will be fewer " no bids". As an interim solution, buyers in the past re-viewed
the bid l i s t and deleted the names of unqualified vendors when issuing
a bid invitation. This deletion process was not arbitrary or discriminating
b u t was based on the buyer's knowledge and experience. Some of the reasons
vendors were deleted are as follows:
1. some are not able to supply product or service required in
normal course of business;
9
2. some are on the bid l i s t for commodities that are known not
to be the vendor's area of interest;
3. some vendors do not realize that the State does n o t maintain
a central receiving or warehouse faci 1 i ty to accept full
shipments;
4. some are out- of- state manufacturers that are known to have
in- state representatives currently on the bid l i s t ;
5. some vendors are known t o have limited repair or maintenance
capabi 1 i ties for a specific requirement b u t are otherwise
qua1 i fied vendors; and
6. some vendors have repeatedly returned " no bid" responses for
the same or similar i tems and are recognized by buyers.
FINDING VI ( cont'd. )
The SPO recognizes the statutory responsibility t o issue bid invitations to
a1 1 gual ified vendors who have expressed a desire t o receive bids. Never-theless,
in view of the Legislative Council memo dated 7- 7- 81, SPO has re-vised
internal procedures so that bids are now solicited from all vendors
on the master bid l i s t for that specific commodity classification.
The Audit report provided the following recommendation:
1. The Legislature review the provisions of A. R. S. 5 41- 730. A.
to determine if out- of- state vendors are intended for ex-empti
on.
2. SPO further refine the master bid 1 i s t t o identify vendors
who are able to supply the product for which a bid is
solicited.
SPO supports the Legislative Council opinion that ". . . the bid solicitation
must by statute include a1 1 qua1 ified suppliers, with no specific 1 imitation
as t o geographical residence . . .".
A preference in bidding i s opposed by SPO and all national public purchasing
organizations.
The vendor f i l e that will be reconstructed under the more detailed classifi-cation
system will be systematically refined as a result of bid experience.
This will result in a progressively higher rate of vendor response to bid
invitations.
DEPARTMENT OF ADMINISTRATION
FINANCE DIVISION
General Accounting Office
Table of . Contents
SUMMARY
INTRODUCTION AND BACKGROUND
SUNSET FACTORS
FINDING
Changes are needed to relieve the General Accounting
Office of the s t a t u t o r y r e s p o n s i b i l i t y t o determine
i f proposed expenditures appear to be f o r valid public
purposes and t o ensure t h a t the General Accounting
Office claims- processing procedures are i n compliance
with required procedures.
CONCLUSION
RECOMMENDATIONS
OTHER PERTINENT INFORMATION
WRITTEN RESPONSE TO AUDITOR GENERAL REPORT
Page
i
1
3
7
SUMMARY - GENERAL ACCOUNTING OFFICE
The General Accounting Office ( GAO,) formerly the Accounts and Controls
Office, is an organizational u n i t of DOA- Finance. GAO is responsible for
maintaining a centralized accounting system f o r the State. GAO's duties
include: 1) providing f i s c a l control over S t a t e spending through
claims- approval and warrant- writing functions, and 2) maintaining a
centralized reporting system and f i n a n c i a l records.
Arizona law requires GAO to review claims submitted by S t a t e agencies f o r
propriety and authenticity. While GAO has developed audit procedures t o
f u l f i l l t h i s r e s p o n s i b i l i t y and ensure agency compliance with other
s t a t u t e s governing expenditures, our review revealed some functions are
not performed and some existing procedures are not always followed. GAO's
delegation of some r e s p o n s i b i l i t i e s is not appropriate. age 7)
GAO does process claims i n a timely manner and discounts from vendors f o r
prompt payment normally are not l o s t . ( page 13)
Consideration should be given to the following recommendations:
1. Amend A. R. S. $ 35- 181.02 to
- Delete GAO's r e s p o n s i b i l i t y to determine t h a t claims a r e f o r
valid public purposes, I
- Recognize agency claim c e r t i f i c a t i o n a s s u f f i c i e n t evidence
of expenditure propriety, and
- Require GAO t o perform post audits of claims of agencies
audited triannually by the Office of the Auditor General, on
a selective basis, to ensure agencies are discharging t h e i r
duties properly.
Such a post audit should include:
1. Determining the propriety and valid public purposes of
claims,
2. Determining t h a t expenditures are properly approved,
3. Ensuring t h a t invoice amounts are not over or under
paid, and
4. Verifying t h a t expenditures are i n compliance with
applicable s t a t u t e s .
2. GAO require agencies to submit a separate c e r t i f i c a t i o n t h a t they
have complied with A. R. S. $ 541- 1051 through 41- 1056 f o r outside
professional services expenditures i n excess of $ 5,000.
3. GAO perform post audits of claims f o r outside professional
services i n excess of $ 5,000 on a s e l e c t i v e basis f o r agencies
audited triannually by the Office of the Auditor General.
INTRODUCTION - AND BACKGROUND
The General Accounting Office ( GAO,) forinerly the Accounts and Controls
Office, is an organizational u n i t of the DOA- Finance Division.
GAO, operating under the provisions of A. R. S. $ 41- 732, is responsible f o r
maintaining a centralized accounting system for t h e S t a t e . GAO's duties
include: 1) providing f i s c a l control over S t a t e spending through
claims- approval and warrant- writing functions, and 2) maintaining a
centralized reporting system and f i n a n c i a l records.
GAO is funded by appropriations from the Legislature.
Table 1 contains a summary of actual and projected full- time