Performance audit, Registrar of Contractors

              DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
August 14, 1984
Members of the Arizona Legi sl ature
The Honorable Bruce Babbitt, Governor
Mr. David M. Talamante
Registrar of Contractors
Transmitted herewith i s a report of the Auditor General, A Performance
Audit of the Registrar of Contractors. This report i s i n response to an
April 27, 1983, resolution of the Joint Legislative Oversight Committee.
The performance audit was conducted as a part of the Sunset Review set
forth i n A. R. S, SS41- 2351 through 41 - 2379.
The blue pages present a summary of the report; a response from the
Registrar of Contractors i s found on the yellow pages.
My staff and I will be pleased to discuss or clarify items i n the report.
Respectful ly submitted,
DbugHs R. Norton
Auditor General
Staff: K i 11 iam Thomson
Peter N. Francis
Arthur E. Heikkil a
Carl E. Tolleson
Jerome E. Miller
Kurt L, Schulte
Enclosure
1 1 1 WEST MONROE SUITE 600 PHOENIX. ARIZONA 85003 ( 602) 255- 4385
SUMMARY
The Office o f the Auditor General has conducted a performance audit o f the
Registrar o f Contractors ( ROC) i n response t o an A p r i l 27, 1983,
resolution o f the J o i n t L e g i s l a t i v e Oversight Commi ttee. This performance
audit was conducted as p a r t o f the Sunset Review set f o r t h i n Arizona
Revised Statutes ( A. R. S. ) $ 941 - 2351 through 41 - 2379.
The Arizona Registrar o f Contractors was establ ished by the Legislature i n
1931. The Agency has the primary r e s p o n s i b i l i t y f o r regulating a l l
r e s i d e n t i a l contractors i n the state. The Registrar, appointed by the
Governor, oversees a l l day- to- day operations o f the Agency. The duties o f
the Agency i n c l ude eval uating appl ications f o r examination and 1 icensure,
administering examinations, annual ly renewing 1 icenses, i n v e s t i g a t i n g
consumer complaints lodged against licensed and unlicensed contractors,
conducting administrative hearings, promul gating rules and regul ations,
and administering the c o n t r a c t o r ' s recovery fund, which was establ i shed i n
1981 to compensate consumers f o r damages by 1 icensed contractors.
The Registrar o f Contractors' Level
of Regulation Could Be Reduced ( see page 13)
Some contractor regulation i s necessary i n Arizona. However, the low
p o t e n t i a l f o r harm indicates r e g i s t r a t i o n rather than 1 icensure f o r most
trades would offer s u f f i c i e n t consumer protection. I n addition, a
r e g i s t r a t i o n system may provide more consumers the p r o t e c t i o n o f f e r e d by
the Registrar o f Contractors' complaint resolution process and the
recovery fund.
Licensure i s necessary f o r a few trades, such as e l e c t r i c i a l and plumbing,
d i r e c t l y affecting health and safety. I n addition, the p o t e n t i a l f o r
financial harm necessitates some consumer protection. However, the low
p o t e n t i a l f o r harm t o the public health and safety indicates t h a t a
r e g i s t r a t i o n system o f regulation would be s u f f i c i e n t for most trades. An
analysis o f nearly 700 ROC consumer complaints showed t h a t only one
complaint involved a potential for harm to public health and safety.
Thus, for most trades, s t r i c t entry requirements are unnecessary.
In fact, registration rather than licensure may protect more consumers by
possibly making more contractors subject to the Registrar of Contractors'
complaint resolution and recovery fund processes. Under a registration
system, contractors would not be required to meet unnecessarily
restrictive entry requi rernents.
The Legi sl ature shoul d consider amending the statutes re1 ated to 1 icensi ng
of contractors to require 1 icensure for only heal t h - and safety- re1 ated
trades and to institute a registration system for a1 1 other trades.
Licensed Contractor Enforcement
Requires Improvement ( see page 23 )
Current enforcement of contractor standards and other industry
requirements i s weak and has not prevented some chronic offenders from
repeating viol ations.
The ROC has not aggressively disciplined contractors violating i t s
statutory provisions. The ROC has not imposed any sanctions against
violators in some valid cases. In one case, the ROC allowed a repeat
offender t o continue working i f repairs were made, although the contractor
was serving mu1 tip1 e concurrent probations. Consequently, i t has not
deterred some contractors from repeating statutory viol ations numerous
times. In addition, compl aint history data i s not effectively utilized,
and a full range of sanctions i s not available to the Registrar.
The Registrar of Contractors should take s t r i c t e r action against
contractors wi t h h i stories of repeat viol ations. Further, the Registrar
of Contractors should introduce contractors' case histories as evidence i n
administrative hearings. The Registrar of Contractors shoul d a1 so provide
contractors' case history summaries to consumers. Finally, the
Legisl ature shoul d empower the Registrar of Contractors t o impose civil
penal ties against contractors found i n violation of i ts statutory
provi sions.
Contractor Bonding Requi rements
Lould Be t l iminated ( see page 33)
Bonding provides l i t t l e consumer r e s t i t u t i o n y e t unnecessarily r e s t r i c t s
entry i n t o the construction industry. Both the Registrar and contractors
coul d real ize s i g n i f i c a n t savings i f t h i s requirement were dropped.
Bonding has provided 1 i ttl e consumer protection. An analysi s o f recovery
fund claims shows t h a t consumers do not receive t o t a l r e s t i t u t i o n from
bonds. I n addition, our survey o f several bonding companies and an
analysis o f ROC case bond payments found t h a t the construction industry,
not the consumer, benefits the most from bonding. However, the
construction industry can protect i t s e l f through generally accepted c r e d i t
practices or establ i shing i t s own bonding requirements. Without bonding,
consumers would s t i l l have the contractors' recovery fund, which provides
greater f i n a n c i a l protection than bonding and i s less costly t o
contractors.
Both the Agency and contractors could r e a l i z e a savings i f the statutory
bonding requirement were el iminated. Contractors coul d save an estimated
$ 1.8 m i l 1 ion. We calculated t h a t the ROC could save approximately $ 32,000
i n personal services costs i f bonding were el iminated.
The Registrar o f Contractors' Computer System Requi res
Im~ rovedM anaaement ( see paw 41 1
A1 though the Registrar's electronic data processing ( EDP ) system has
improved i t s efficiency, our review i d e n t i f i e d several weaknesses. The
ROC has not prepared and maintained plans f o r the data processing
section. I n addition, the Registrar's s t a f f does not always use the data
processing system t o f u l l capacity. Our EDP review also disclosed some
deficiencies i n the Registrar's data processing access controls and i n i t s
backup and contingency pl an. F i n a l l y , the data processing section
standards and procedures manual i s weak, and EDP t r a i n i n g of Agency
personnel has been i nadequate. Computer operator manual s shoul d e x i s t t o
c l e a r l y out1 i ne operational steps t o be f o l l owed.
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND . . . . . . . . . . . . . . . . . . . . . 1
SUNSET FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINDIBNE GR EID: U CTEHDE . R. E. GIS. TR. AR. O. F . CO. N. TRA. C. TO. RS.' L. EV. EL. O. F . RE. G. UL. AT. ION. C. OU. LD. . 13
Current regul ation . . . . . . . . . . . . . . . . . . . . . . . . 13
Some regulation i s necessary . . . . . . . . . . . . . . . . . . . 13
Low p o t e n t i a l f o r harm indicates r e g i s t r a t i o n s u f f i c i e n t . . . . . 15
Registration may provide more consumers protection . . . . . . . . 21
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 22
FINDING I I : LICENSED CONTRACTOR ENFORCEMENT REQUIRES IblPROVEP1EFlTS . . 23
Enforcement authority . . . . . . . . . . . . . . . . . . . . . . 23
Enforcement has been weak . . . . . . . . . . . . . . . . . . . . 24
Complaint h i s t o r y should be u t i l i z e d. . . . . . . . . . . . . . . 28
C i v i l penal t i e s needed . . . . . . . . . . . . . . . . . . . . . . 29
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 31
FINDING 111: CONTRACTOR BONDING REQUIREMENTS COULD BE ELIKINATEC . . 33
Statutory bonding requirements . . . . . . . . . . . . . . . . . . 33
Bonding provides 1 it tl e consumer protection . . . . . . . . . . . 34
Bonding unnecessarily r e s t r i c t s entry i n t o the construction industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Eliminating bonding woul d provide savings t o both the Agency and contractors . . . . . . . . . . . . . . . . . . . . . . 39
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 40
TABLE OF CONTENTS ( Concl ' d )
Page
FINDIRNEGQ UIVIR : E S TIMHEP RORVEEGDIS TMRAANRA GOEFM ECNOT NT. RA. CT. OR. S .' C. OM. PU. TE. R . SY. ST. EN. . . . . . . 41
Computer obtained to improve time1 i ness and efficiency of operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
No plan e x i s t s f o r data processing operations. . . . . . . . . . . 42
EDP system underutilized . . . . . . . . . . . . . . . . . . . . . 42
Weaknesses e x i s t i n data processing internal controls and backup . 43
EDP section 1 acks an adequate standards and procedures manual. . . 45
Agency personnel lack adequate EDP training. . . . . . . . . . . . 46
Recommends t i o ns. . . . . . . . . . . . . . . . . . . . . . . . . . 47
OTHER PERTINENT INFORMATION. . . . . . . . . . . . . . . . . . . . . . 49
A G E N C Y R E S P O M S E . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIST OF TABLES
Page
TABLE 1 - A c t i v i t y f o r Registrar of Contractors Fiscal
Years 1980- 81 Through 1984- 85 . . . . . . . . . . . . . . . 2
TABLE 2 - AYgeeanrcsy 1E98x0p- e8n1d iTtuhrreousg h( A 1c9tu83a- l8 4o r. A. pp. rov. ed.) . F. isc. a. l . . . . . . 3
TABLE 3 - Current Fees Charged by The Registrar o f Contractors. . . . 4
TABLE 4 . Differences Between Registration and Licensure. . . . . . . 16
TABLE 5 - Sample Results o f Complaints Against Contractors
Indexed as t o Seriousness . . . . . . . . . . . . . . . . . 18
TABLE 6 - Disposition o f Sampled Complaints That Went t o Hearing
f o r Fiscal Year 1982- 83 . . . . . . . . . . . . . . . . . . 25
TABLE 7 - Registrar of Contractors' Current Hearing Decision
O p t i o n s . . . . . . . . . . . . . . . . . . . . . . . . . . 30
TABLE 8 - Summary o f Cash Bond Payments Made t o Consumers and
Other Groups During Fiscal Years 1977- 78 and 1982- 83. . . . 35
TABLE 9 - Protection Amounts Provided by Bonding and Recovery
Fund and Costs t o Contractors . . . . . . . . . . . . . . . 37
TABLE 10 - Two Bonding Companies' Minimum Financial Requirements . . . 39
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit of the
Registrar of Contractors ( ROC) i n response to an April 27, 1983,
resolution of the Joint Legislative Oversight Committee. T h i s performance
audit was conducted as part of the Sunset Review set forth i n Arizona
Revised Statutes ( A. R. S. ) 5541 - 2351 through 41 - 2379.
H i story of Contractor Regulation
Contractor regulation i n the United States has developed from simp1 e
bui 1 ding 1 aws early i n this country's h i story to the various requirements
now found i n every state. As early as 1625 the f i r s t building law was
adopted i n America. By the end of the 19th century various e n t i t i e s were
developing standards for the construction industry. The f i r s t model
building codes were developed i n 1905 by the National Board of Fire
Underwriters. Today, trade specialty codes are used by local
jurisdictions as standards for workmanship and safety. Other forms of
regulation include zoning, building permits and field inspections.
Moreover, some states have found i t necessary to find additional ways to
protect the consumer from incompetent contractors. According to Hawaii's
Sunset Eva1 uation Report, 21 s t a t e s require 1 icensure of contractors,
usually through a state board or commission. Other states have l e f t this
responsi b i l i ty completely to 1 ocal jurisdictions.
Regulation of Contractors in Arizona
The Arizona Registrar of Contractors was established by the Legislature i n
1931. In 1981, foll owing the 1979 Auditor General Sunset Review and the
1981 Contractors' Regulatory Study Commi ssion analysis, the Legislature
insti tued major changes. The 1981 1 egis1 ation deregul ated commercial
contractors and establ i shed a contractors ' recovery fund. Changes
involving classification, entry requirements, examinations and the hearing
process were a1 so instituted.
The Registrar of Contractors has the primary responsibility for regulating
a1 1 residential construction contractors i n the state. The Regi s t r a r , who
is appointed by the Governor, oversees a l l day- to- day operations of the
Agency. The duties of the Agency include evaluating applications for
examination and licensure, administering examinations, annually reviewing
licenses, investisatins consumer complaints lodged against licensed and
unlicensed contractors, conducting admini strative hearings, promul gating
rules and regulations, and administering the recovery fund. Table 1 shows
a summary of examinations and licenses issued by the ROC for the l a s t 3
years and expected 1 icensi ng activity for 1983- 84 and 1984- 85.
TABLE 1
ACTIVITY FOR
REGISTRAR OF COMTPACTORS
FISCAL YEARS 1980- 81 THROUGH 1984- 85
FY FY F Y FY 1983- 84 FY 1984- 85
1 980- 81 1981 - 82( 1) 1 982- 83 Estimated Estimated •
Appl icants for
Examinations 4,359 2,650 2,987 3,100 3,500
Licenses :
Issued
Renewed
Complaints Received
Licensed 3,906 3,247 2,982 3,928 3,500
Unl icensed 1,288 2,696 2,560 3,300 3,000
Cease and Desist
Orders Served 546 1,389 1,350 1,824 1,600
Heari ngs 1,211 557 51 4 575 620
1 Deregulation of commercial contractors became effective i n fiscal year
1981 - 82.
( 2) License renewal was staggered beginning i n fiscal year 1983- 84.
Source: Regi s t r a r of Contractors ' budget request for f i scal year 1984- 85
Budget and Personnel
The ROC'S operating budget is appropriated from the general fund. Table 2
provides budget information for 1980- 81, 1981- 82, and 1982- 83, and
estimated figures for f i scal year 1983- 84.
TABLE 2
AGENCY EXPENDITURES ( ACTUAL OR APPROVED)
FISCAL YEARS 1 980- 81 THROUGH 1 983- 84
Actual Actual Actual Approved
1980- 81 1981 - 82 1 982- 83 1983- 84
Full - time enpl oyees 74.7
Expenditures:
Personal services $ 1,133,200
Employee re1 ated 224,000
Professional services 61 ,300
Travel -
In s t a t e 88,700
O u t of state 1 ,500
Other operating 238, l Ot!
Equ i pnen t 32,300
Total
Expenditures $ 1.779.700 $ 1.843.500 $ 1,653.100 $ 1.864.000
Source: Cornpiled by Auditor General s t a f f froni Joint Legislative Budaet
Committee Appropriations Report and Registrar of Contractors' budget
requests.
The Agency collects fees for 1 icenses and license renewals. These
receipts are deposited into the general fund. The ROC, unlike most
regulatory agencies, does not have i t s own special fund. In addition,
contractor cash deposit bonds are held by the State Treasurer for
distribution. Table 3 shows the current fees charged by the Agency.
TABLE 3
CURRENT FEES CHARGED EY THE
REGISTRAR OF CONTRACTCRS
New 1 icense and examination fee
Examination retake
Staggered renewal
Recovery fund ( i n i t i a l fee)
Business management book
Name change fee
Change o f qua1 i fyi ng party
Sol ar c e r t i f i c a t i o n
C e r t i f i c a t i o n s
I n a c t i v e status
Posting 1 i s t
$ 1 35 speci a1 ty contractor
21 0 general contractor
85 speci a1 ty contractor
1 10 general contractor
Source: Registrar o f Contractors
The ROC has 70 budgeted positions f o r f i s c a l year 1984. Plost o f i t s s t a f f
are assigned t o the Licensing and Compliance Departments.
The Agency's central o f f i c e i s located i n Phoenix w i t h i n the c a p i t o l
complex. I n addition, the ROC maintains s i x f i e l d o f f i c e s , i n Tucson,
Flagstaff, Prescott, Lake Havasu City, Yurna and Lakeside. Except f o r
Tucson, f i e l d o f f i c e s are s t a f f e d by one i n d i v i d u a l whose duties focus
p r i m a r i l y on 1 icensed compl a i n t investigations and unlicensed a c t i v i t y .
Tucson has ten employees and performs a l l ROC a c t i v i t i e s .
Audit Sco~ e and Puruose
The purpose of our review of the Registrar of Contractors was to address
the 12 Sunset Factors set forth i n A. R. S. S41- 2354 and to evaluate the
effectiveness of the Agency. Speci fical ly, we examined:
o whether the current level of regulation of contractors i s
appropriate;
e the extent to which the ROC has been able to effectively enforce
statutes and standards governing the contracting industry;
Q whether contractor bonding i s necessary;
Q the extent to which the Agency's EDP system i s effectively and
efficiently u t i l ized; and
a whether unlicensed contractor enforcement could be strengthened.
The Auditor General and staff express appreciation to the Registrar of
Contractors and staff for their cooperation and assistance during the
course of our audit.
SUNSET FACTORS
I n accordance with Arizona Revi sed Statutes ( A. R. S. ) S41- 2354, the
Legislature should consider the f o l l owing 12 factors i n determining
whether the Arizona Registrar o f Contractors ( ROC) should be continued or
termi nated.
1. Objective and purpose i n establishing the Agency
The objective and purpose i n establishing the Arizona Registrar o f
Contractors i s to protect the public health, safety and welfare. The
Legislature stated t h i s i n t e n t i n the 1 aws o f 1981 :
" It i s the purpose and i n t e n t of the l e g i s l a t u r e t o
continue the r e g i s t r a r o f contractors agency i n order
t o protect the pub1 i c health, safety and welfare by
providing f o r the continued 1 i censi ng, bonding and
regulation of contractors engaged i n residential
construction."
To p r o t e c t p u b l i c health, safety and welfare, the ROC c l a s s i f i e s and
qua1 i f i e s applicants f o r 1 icensure, investigates compl a i n t s against
1 icensed contractors and enforces against construction by unl icensed
contractors. I n addition, the ROC i s responsible f o r administering
the contractors ' recovery fund.
2. The effectiveness with which the Agency has met i t s objective and
purpose and the e f f i c i e n c y w i t h which it has operated
The Agency has generally been e f f e c t i v e i n meeting i t s stated
objective and purpose. However, improvements are needed. The ROC has
not aggressively d i sci pl ined 1 icensed contractors v i o l ating statutory
provisions. Consequently, it has not deterred some contractors from
repeating statutory v i o l ations numerous times. I n addition, compl a i n t
h i s t o r y data i s not e f f e c t i v e l y u t i l i z e d and a f u l l range o f sanctions
i s not available t o the Registrar ( see page 28).
The ROC needs t o improve management o f i t s electronic data processing
system. Our review disclosed weaknesses i n : 1 ) pl anni ng,
2) u t i l ization, 3) i n t e r n a l control s, 4) documentation o f procedures,
and 5 ) t r a i n i n g ( see page 41 ) .
3. The extent t o which the Agency has operated w i t h i n t h e p u b l i c i n t e r e s t
The Agency operates w i t h i n the public i n t e r e s t by ensuring t h a t
1 icensed contractors i n Arizona meet minimum standards. I n addition,
the ROC investigates and resol ves compl a i n t s against 1 icensed
contractors and enforces against construction by unlicensed
contractors. However, because the ROC has not aggressively
d i sci p l i ned contractors repeatedly v i 01 a t i ng statutory provisions,
f u t u r e consumers could be harmed ( see page 27).
4. The extent t o which rules and regulations promulgated by the Agency
are consistent with the 1 egis1 a t i v e mandate
The ROC i n i t i a t e d substantial changes t o i t s rules and regulations
based on the statutory changes r e s u l t i n g from the 1979 Auditor General
Sunset Review and 1980 Contractors' Regul atory Study Commission
findings and recommendations. The r u l e changes r e f l e c t the
deregul ation o f commerci a1 , i n d u s t r i a l and publ i c works construction.
The changes include modifications t o scope o f practice, consol i d a t i o n
o f some license t i t l e s , and changes t o various other requirements.
The rules and regulations were reviewed by the Attorney General t o
ensure 1 egal i ty.
5. The extent t o which the Agency has encouraged input from the public
before promulgating i t s rules and regulations and t h e e x t e n t to which
it has informed the public as t o i t s actions and t h e i r expected impact
on the publ i c
The Agency has f u l f i l l e d requirements f o r p u b l i c n o t i c e o f Agency
actions and changes i n r u l e s and regulations. When rules were changed
i n 1983, public hearings were held i n Tucson and Phoenix. The ROC
also sends copies of proposeci rules changes to those trade
associations or contractors requesting such information.
6. The extent to which the Agency has been able to investigate and
resolve complaints that are w i t h i n i t s jurisdiction
The Agency investigates complaints against both 1 icensed and
unl icensed contractors. If necessary, the Agency's admini strative
hearing officers adjudicate complaints against licensed contractors.
Complaints against unlicensed contractors are adjudicated by the
courts.
The ROC has not aggressively disciplined contractors violating
statutory provisions. Consequently, i t has not deterred some
contractors from numerous repetitions of statutory violations. In
addition, complaint history data i s not effectively utilized ( see page
28) and a full range of sanctions i s not available to the Registrar
( see page 30). The ROC also investigates complaints against
unlicensed contractors and can issue cease and desist orders or
citations t o those individuals.
7. The extent to which the Attorney General or any other applicable
agency of state government has the authority to prosecute actions
under enabl i ng 1 egi sl ation
The RGC has full authority to enforce i t s enabling statutes. A. R. S.
532- 1166. A directs the Attorney General or county attorney to
represent the Agency in all legal actions. The same statute
authorizes the Agency to seek injunctive re1 ief against statute
violators. A. R. S. 532- 1 164 makes certain violations of the enabling
statutes cl ass 1 misdemeanors.
8. The extent to which the Agency has addressed deficiencies i n the
enabling statutes which prevent i t from fulfil 1 ing its statutory
mandate
The ROC has been active in submitting legislation to increase i t s
effectiveness. Since 1981 , the ROC has submi tted several successful
1 egi sl ati ve proposal s re1 ating to revocation or suspension of a
contractor's 1 i cense, minimum fines for viol ations of ROC statutes,
increased recovery fund payment 1 imits and payment of attorney's fees,
and other changes regarding 1 icensing, bonding and discipl i nary
actions.
In 1984 the ROC made an unsuccessful attempt to establish i t s own fund
and increase i t s fees.
9. TIie extent t o which changes are necessary i n the laws of the Agency to
adequately comply w i t h the factors listed i n the Sunset 1 aws
Based on our audit work, we recommend the Legislature consider the
foll owing changes to the Registrar of Contractors' statutes:
Amend the statutes relating to licensing of contractors to
require 1 icensure of only health- and safety- re1 ated trades and
to institute a registration system for all other trades.
0 Eliminate examinations and entry requirements for a1 1 b u t health-and
safety- re1 ated trades.
0 Authorize the Registrar of Contractors to impose civil penalties
against contractors i n vi 01 ation of statutory provisions of
A. R. S. $ 32- 1154.
o El iminate A. R. S. $ 32- 1 152 as i t relates t o bonding.
10. The extent to which the termination of the Agency would significantly
harm the pub1 ic health, safety or welfare
Temii nation of the Registrar of Contractors would eliminate the
Agency ' s complaint resol ution process, which general ly affords the
consumer an inexpensive, timely forum to resolve probl ems w i t h
contractors. The ROC, through i t s admini strative hearings, has the
power to suspend or revoke a contractor's 1 icense i f the contractor i s
found i n viol ation of the statutes. In addition, continued licensure
for the health- and safety- related trades ensures some competency i n
those trade areas.
Termination of the Registrar of Contractors would a1 so eliminate the
contractors ' recovery fund. The recovery fund provides financial
resti tution to consumers harmed by 1 icensed contractors.
11. The extent to which the 1 evel of regulation exercised by the Agency i s
appropriate and whether less or more stringent levels of regulation
would be appropriate
Lie reconimend changes i n the ROC'S level of regulation i n two areas.
First, because 1 icensure i s not necessary for most trades, the
Registrar of Contractors' 1 evel of regulation could be reduced. Some
regulation i s necessary i n Arizona. However, the low potential for
harm caused by contractors indicates registration rather than
licensure for most trades would offer sufficient consumer protection.
In addition, a registration system may provide more consumers the
protection offered by the Registrar of Contractors' processes and the
recovery fund.
Secondly, the statutory bonding requirement for contractors i s
unnecessary and coul d be el imi nated. Bonding provides 1 i t t l e consumer
restitution while unnecessarily restricting entry into the
construction industry . E o t h the Agency and contractors woul d real ize
considerable savings i f this requirement were dropped.
12. The extent t o which the Agency has used p r i v a t e contractors i n
the Performance o f i t s duties and how e f f e c t i v e use o f Private
contractors could be accompl i shed
The ROC said it has used private contractors as needed t o assist
i n the performance o f i t s duties. Private contractors have
analyzed the bonding program, revised the 1 icense appl i c a t i on
form and business management book, done laboratory analyses, and
typed t r a n s c r i p t s f o r the Agency. I n addition, the ROC has
retained private attorneys as administrative hearing o f f i c e r s on
a temporary basis. The i n i t i a l EDP programming f o r the ROC'S
computer system was also done by a private contractor.
FINDING I
THE REGISTRAR OF CONTRACTORS' LEVEL OF REGULATION COULD BE REDUCED
Because licensure i s not necessary for most trades, the Registrar of
Contractors' ( ROC) 1 evel of regulation coul d be reduced. Some regul ation
i s necessary i n Arizona. However, the low potential for harm caused by
the construction industry indicates registration rather than licensure for
most trades would offer sufficient consumer protection. In addition, a
registration system would provide more consumers the protection offered by
the Registrar of Contractors' processes and the recovery fund.
Current Regulation
Arizona Revised Statutes ( A. R. S. ) require 1 icensure of a1 1 contractors
working on residential structures. To obtain a license a contractor must
pass both a business and trade examination, i f required, have the
requisite experience, procure a contractor's 1 icense bond, and pay the
license fee and initial recovery fund assessment. Before 1981 the
statutes also required commercial contractors to be licensed. However,
that year the Legislature deregulated commercial contracting, concl uding
that commercial regulation was not necessary for the protection of the
pub1 ic heal t h y safety and we1 fare.
Some Reaul ati on
Is Necessary
Some regulation of contractors i s needed in Arizona. Licensure is
necessary for trades directly affecting health and safety. However,
licensure i s not necessary for other trades.
CSG Criteria - The Council of State Governments ( CSG) has established
criteria for determining the proper 1 evel of industry regul ation.
According to CSG, state regulation of an occupation or profession i s
justified if the unregulated practice of that occupation could cause
significant harm to public health, safety or welfare. To assess the
potential for harm, the Council of State Governments, i n i t s publication
Occupational Licensing: Questions a Legislator Should Ask, has formulated
three questions that should be addressed. These questions are:
1. Whether the unlicensed practice poses a serious risk to the consumer's
1 ife, heal t h and safety or economic we1 1 - being;
2. Whether users of the service can be expected to possess the knowledge
needed to properly evaluate the qua1 i fications of those offeri ng
services; and
3. Whether licensing benefits to the public clearly outweigh any
potential harmful effects such as the price for services or
avai 1 ability of service providers.
In evaluating the risk to the public, both the seriousness of potential
harm and the probability that such harm would actually occur should be
considered. The potential for public harm must outweigh the possible
negative effects of 1 icensure. A l e s s r e s t r i c t i v e 1 eve1 of regulation,
such as registration, i s appropriate i f there i s no significant potential
for publ ic harm and i f consumers have the knowledge and ability to protect
themselves through other means.
Licensure of Health and Safety Trades - The state should retain licensure
requi rernents for those construction trades wi t h potenti a1 for serious
public harm. These health and safety trade areas include electricial,
plumbing and mechanics, including heating, air conditioning and
refrigeration contractors.
Other states' sunset reviews noted the potential for serious public harm
that could be caused by any of these health- and safety- related trades. A
North Carolina review of i t s Examiners of Electrical Contractors' Eoard
concl uded that " the total absence of regulation i n electrical contracting
would endanger the publ ic health, safety and we1 fare." Pl umbers may a1 so
affect the health, safety and welfare of the public. Plumbers work
directly w i t h home water and sewer lines. A Utah audit report stated that
contami nation could easily occur if work was not done properly.
An Auditor General survey of the 50 states found that 29 states licensed
one or more of the health- and safety- related trades we identified. Some
s t a t e s t h a t do not license contractors a t the s t a t e level s t i l l regulate
these trades through individual state boards for each trade or by giving
1 ocal jurisdictions regulation authority.
Some Regulation Necessary For Other Trades - Some regulation of other
trades i s necessary for two reasons. First, contractors can potentially
cause major financial ham. Without regulation, consumers would not have
the restitution processes avai lab1 e to them through the ROC'S complaint
resolution process and the contractors' recovery fund. Second, unlike
many states, Arizona does not place any regulatory powers a t the local
1 eve1 except building code standards enforcement.
Low Potential For Harm
Indicates Keaistration Sufficient
The low potential for harm to public health and safety indicates that a
registration system of regulation would be s u f f i c i e n t f o r most trades.
Many other states have less contractor regulation than Arizona. Our
analysis of the ROC'S consumer cornpl aints showed financial harm, not
public health and safety, i s the primary problem. Because of the low
potential for harm, entry requirements are unnecessary.
Registration/ Licensure Differences - The basic distinctions between
registration and 1 icensure invol ve prerequisites and prequal ifications.
Under a registration system, any person desiring to engage i n an
occupation may do so upon paying a registration fee, b u t there are no
prerequisites or prequal ifications. In contrast, a 1 icensure system may
require a demonstration of competency by means of an examination, and
fulfillment of specified education and experience requirements. Under a
registration system i t i s s t i l l unlawful to practice without being
registered. The foll owing tab1 e highlights the distinctions between
registration and licensure.
TABLE 4
DIFFERENCES BETWEEN
REGISTRATION AND LICENSURE
R e g i s t r a t i o n L i censure
Yes Yes
2. Experience requirement No Yes
3. Exami nation I n some
cases
4. Financial protection f o r consumer* Yes Yes
5. State may revoke o r suspend those
who v i o l ate standards o f practice Yes Yes
* We recommend the e l i m i n a t i o n o f t h e c o n t r a c t o r bond requirement,
making the recovery fund the primary means o f consumer f i n a n c i a l
protection ( see F i nding 111, page 33).
l o s t States Have Less Reaulation Than Arizona - I;; ost states e i t h e r do not
regulate c o r ~ t r a c t o r s a t a1 1 o r j u s t regulate health- and safety- re1 ated
trades. Consumers i n those states use other methods t o resolve problems
with contractors. Only 20 states license or r e g i s t e r most contractor
trades. Three states, k'ashington, Oregon and A1 aska, use a r e g i s t r a t i o n
system t o regulate contractors. Twelve s t a t e s l i c e n s e o n l y specific
contractors who could be harmful t o p u b l i c health and safety, sgch as
e l e c t r i c i a n s and pl umbers. The remaining states have no 1 icensi ng
requirements a t the s t a t e l e v e l . However, some l o c a l j u r i s d i c t i o n s i n
these states regulate e l e c t r i c i a n s and plumbers.
Consumers i n states not l i c e n s i n g any o r most contractors can use other
methods t o resol ve prob1er; is w i th contractors. Consumers i n these states
can appeal t o the Attorney General Consumer Fraud Division, the Better
Business Bureau or a consumer a f f a i r s o f f i c e , the courts, l o c a l b u i l d i n g
departlnents, bonding conipanies, pol ice, 1 ocal 1 icensincj or industry
boards, and t h e i r c i t y counci 1 t o resolve contractor complaints.
Complaints Indicate Financial Ham, Mot Health and Safety, i s the Primary
Problem - Our analysis of the ROC'S complaints indicates financial ham,
not public health and safety, i s the primary problem consumers experience
w i t h contractors. An Auditor General analysi s of c o ~ pali nts against
contractors indicates residenti a1 contractors pose 1 i t t l e harm to pub1 ic
health and safety. We sampl ed 672 compl a i nts ( 31 9 compl ai nts against
unlicensed contractors and 353 against licensed contractors) for fiscal
year 1982- 83 and found only one related to health and safety.* Also, most
compl aints ( 54 percent) were not re1 ated to contractor performance. These
complaints concerned advertising , monetary di sputes and other matters.
The foll owing table indexes the complaints i n relationship to seriousness.
3 Unl i censed cases incl uded both consumer compl ai nts and i nvesti gative
actions initiated by the Registrar of Contractors.
TABLE 5
SWPL E RESULTS OF COMPLAINTS AGAINST CONTPACTORS
INDEXED AS TO SERIOUSEJESS
Poor Workmanshi p/
Fi nancial Harm
Aesthetics
Health and Safety
Contracti ng wi thout
a 1 icense
Adverti si ng wi thou t
a license
Other
Total
Licensed Unlicensed
Work of substandard quality 2 30 2 7
Work of standard or better
than standard quality but
customer is dissatisfied
w i t h the results
The work resulted i n a
dangerous situation for the
consumer or general public
Source: kudi tor General analysis of sat- cpl e complaints against 1 icensed
and unlicensed contractors for fiscal year 1982- 83. Total
compl aints received during the period was 5,542.
( 1 ) Miscellaneous compl aints against 1 icensed contractors include failure
to pay subcontractors, 2- year s t a t u t e of limitations, comercial
complaints, monetary disputes, and i nconplete i nformation.
( 2) Mi scel laneous complaints against unlicensed contractors include
monetary disagreements and unfair competition allegations.
Consumers can suffer financial harm because of poor work~ anship by
contractors. Consumers may suffer from such things as failure by the
contractor to do the agreed upon work, shoddy b u t safe workmanship,
aesthetically inferior materials, and delay or f a i l u r e t o complete a
project. The fol lowing examples from our survey of c o ~ pali nts i 11 ustrate
the financial harm consumers may suffer from contractors.
Case One
A consumer paid $ 1,729 to have awnings instal led. The awnings
leaked. The contractor went bankrupt. The consumer filed i n
court and was awarded a recovery fund payment of $ 503.50.
Case Two
A contractor replaced grass w i t h gravel and grass grew through
the gravel. The contractor resolved the problem by redoing the
work.
Case Three
A consuri~ er paid $ 2,210 to have insulated coating instal led. The
coating chipped, flaked and peeled. The contractor repaired the
work.
Case Four
A contractor i nstal 1 ed wal lpaper. The wall paper was wrinkled
and the seams d i d not match. The contractor redid the work to
the consumer's satisfaction.
Case Five
A contractor installed stucco siding. The siding cracked and
f e l l off. In this case, the contractor did not respond to an
ROC citatior, or repair the substandard work. The contractor's
license was later revoked.
Entry Requirements Unnecessary - Because of the low potential for public
harm, entry requirements such as examinations and experience are
unnecessary. The 1979 Auditor General Sunset Review of the ROC
recommended the elimination of the examination requirements. In addition,
consumers have some abil i ty and know1 edge to protect themselves against
i ncompetent contractors.
Entry requirements are necessary when there i s a significant potential for
immediate, irreparable publ ic ham, such as i n the medical profession.
Practitioner screening and entry requirements protect against immediate
danger to public health and safety that could be caused by professions
w i t h a high risk for public harm. However, most contracting cannot
seriously endanger the public health and safety.
The 1979 Auditor General Sunset Review of the Registrar of Contractors
recommended the elimination of trade examinations. Our 1979 Sunset Review
found that examinations did not evaluate the appl icants ' know1 edge,
competency, and technical ski1 1 i n contracting. In addition, the report
found no correlation between applicants' success i n psssing trade
exani nations and subsequent success or f a i l ure i n the contracti ng
industry. Finally, even i f examinations were effective i n screening
applicants, the low potential for serious publ ic harm i n most trades does
not justify the inlposition of s t r i c t prequal ifications.
In recent years, the Registrar has reduced the number of trades subject to
unnecessary examination and experience requirements. A. R. S. § 32- 1122. A. 4
a1 lows the Registrar to eliminate exami nation requirements for trades not
significantly impacting publ ic health and safety. In addition, A. R. S.
$ 32- 1122. E. 1 permits the Registrar to reduce the 4 year experience
requirement i f the Registrar considers i t excessive. Since 1980, the
agency has reduced the number of license classifications from 618 to
approximately 113, and now requires exams for only 30 of the trades that
it currently regul ates. A1 1 1 13 trades, however, have some experience
requirement ranging up to 4 years.
Although the statutes allow the Registrar to reduce entry requirements,
the Agency i s not required to do so. Thus, many trades that do not impact
public health and safety continue to be subject to unnecessary entry
requirements.
Since most contracting has the potential f o r f i n a n c i a l harm rather than
health and safety- related harm, consumers have some a b i l i t y t o protect
themsel ves.
a Consumers can evaluate qual i f i c a t i o n s before h i r i n g a contractor
t o perform work. References can be checked, previous customers
can be contacted, and the contractor's work on p r i o r jobs could be
inspected. Consumers can also obtain complaint h i s t o r y
information from the Registrar of Contractors or the Better
Business Bureau. I n most cases, a consumer would have ample time
t o check qual i f i c a t i o n s before engaging a contractor.
a Unlike consumers o f highly technical medical and other services,
consumers have some proficiency t o evaluate the q u a l i t y o f work
performed by contractors. I n some cases consumers can v i s u a l l y
inspect work and note flaws and deficiencies t h a t indicate
substandard work.
F i n a l l y , consumers have avenues f o r redress from f i n a n c i a l harm
caused by contractors. Consumers can appeal t o the State Attorney
General ' s Consumer Fraud Division or the 1 ocal courts f o r recourse
from contractors. I n addition, consumers can receive monetary
r e s t i t u t i o n from the contractors' recovery fund. The fund was
established i n 1981 t o cover claims against contractors. A f t e r
obtaining a court judgment against a licensed contractor, a
consumer may receive up t o $ 15,000 from the recovery fund.
Registration May Provide
More Consumers Protection
Registration, rather than licensure, may protect more consumers by
possibly bringing more contractors i n t o the Registrar of Contractors'
complaint resolution process and the recovery fund.
Some contractors practice illegally because they are unable to meet
licensure requirements. An Auditor General survey of 15 unlicensed
contractors found that most remained unlicensed because of bonding and
examination requirements.*
Consumers using unlicensed contractors have l i t t l e recourse except the
courts to resol ve problems wi t h contractors. If more unl icensed
contractors became registered, more consumers would have access to the
Agency ' s two main consumer protection programs - the complaint resol ution
process and the recovery fund. The complaint resolution process affords
consumers a quicker and less expensive alternative than a court case to
resolve disputes w i t h contractors. In addition, the Agency would have the
power to affect the registration status of a contractor not complying w i t h
ROC statutes, rules and regulations.
CONCLUSION
Some regulation is s t i l l required because of potential financial harm to
the consumer. However, the Registrar of Contractors' 1 eve1 of regulation
should be reduced for most trades because most contractors pose l i t t l e
harm to pub1 ic heal t h and safety. A less restrictive system could provide
more consumer protection i f i t resulted in more unlicensed contractors
becoming registered.
RECOMblENDATIONS
1. The Legislature should consider amending the statutes relating to the
licensing of contractors to require licensure for only health- and
safety- related trades and t o institute a registration system for all
other trades.
2. The Legisl ature shoul d consi der amending the statutes to el imi nate
examinations and entry requirements for a1 1 b u t health- and
safety- related trades.
* We attempted to contact 319 unlicensed contractors identified i n our
sarnpl e of compl aints against- unl icensed contractors. However, many
had their telephones disconnected or numbers changed, and others would
n o t respond to our questions.
FINDING I1
LICENSED CONTRACTOR ENFORCEMENT REQUIRES IMPROVEMENTS
The Registrar of Contractors ( ROC) needs to strengthen and improve i t s
enforcement of statutory provisions. Current enforcement of contractor
standards and other practice requirements i s weak and has not prevented
some chronic offenders from repeating violations. In addition, complaint
history data i s not effectively utilized, and a full range of sanctions i s
not available to the Registrar.
Enforcement Authority
The Registrar's statutory purpose i s to protect the public by regulating
contractors engaged in residential construction. Arizona Revised Statutes
( A. R. S. ) $ 32- 1104. A. 4 states that the Registrar shall employ such
personnel and provide such equipment and records necessary to enforce the
statutory provisions governing contracting. In addition, A. R. S. $ 32- 1 154
states that the Registrar " shall upon the written compl aint of any person,
investigate the acts of any contractor within the state. . ." and may
suspend or revoke the license of a contractor found guilty of committing
an unlawful act. Examples of unlawful acts include poor workmanship,
failure to complete work, failure to take corrective action, false
advertising and fail ure to meet other practice or business requirements,
Complaints against 1 icensed contractors are hand1 ed through the Registrar
of Contractors' two- step complaint resolution process. The f i r s t step i s
investigation of the complaint. The second step i s sending unresolved
complaints to administrative hearings. Each complaint i s assigned to an
inspector who determines the validity of the complaint and recommends any
corrective action t o be taken by the contractor.
If t h i s corrective action i s not taken or the homeowner i s not s a t i s f i e d
with the repairs, the homeowner can request a hearing. It i s the
Registrar's p o l i c y t o require the hearing request t o be made i n w r i t i n g .
During the hearing it i s the complainant's r e s p o n s i b i l i t y t o present
evidence demonstrating the contractor's v i o l a t i ons. Once the proceedings
are concluded, t h e p r e s i d i n g hearing o f f i c e r issues a decision and order.
This statement documents the o f f i c e r " evaluation o f the case and includes
a recommendation f o r disposition. E i t h e r p a r t y may request a rehearing,
and may appeal t o the Superior Court i f s t i l l not s a t i s f i e d .
Enforcement Has Been Weak
The ROC has not aggressively d i s c i p l i n e d contractors v i o l a t i n g statutory
provisions. Consequently, it has not deterred some contractors from
repeating s t a t u t o r y v i o l a t i o n s numerous times.
I n our analysis, we sampled 353 o f the 2,982 complaints f i l e d against
licensed contractors i n f i s c a l year 1982- 83. O f these, 68 ( 19 percent)
went t o hearing, with decisions rendered on 64 cases. As o f July 20,
1984, two cases were s t i l l pending. Thirty- nine percent o f the cases
going t o hearing resulted i n suspension or revocation of the contractors'
license. However, s i x o f the seven revocations occurred because the
contractor f a i l e d t o appear a t the hearing. I n 24 v a l i d cases, sanctions
did not go i n t o e f f e c t because, according t o the Registrar, the contractor
repaired or completed the work. Fifteen o f the 18 suspensions remained i n
effect u n t i l completion o f the repair work o r u n t i l payment was made t o
the complainant. The f o l l owing tab1 e shows the breakdown o f sanctions
imposed against contractors.
TABLE 6
DISPOSITION OF SAMPLED COMPLAINTS THAT WENT
TO HEARING FOR FISCAL YEAR 1982- 83
Disposition
Compl ai n t withdrawn
Not appl icabl e
Closed
Probation
Probation until compl iance
Suspension
Suspension until compl iance
Revocation
Revocation - contractor did
not appear
Total
Number Percent of Total
Our analysis also disclosed some contractors who had multiple complaints
filed against them during this period. Two contractors with many
complaints against them were selected for further study and their entire
complaint histories were examined.
Case I
A small roofing contractor accumulated 63 complaints in 6 years.
These 63 complaints were for poor workmanship or failure to complete
work. Some of these complaints took up to 90 days to resolve, w i t h
three hearings lasting as long as 270 days. Fourteen of these cases
went to hearing. Disciplinary action was taken in nine of these
cases. Four of the other five hearing cases resulted from valid
complaints in which the contractor had committed a clear statutory
violation, b u t were closed with no discipl inary action taken against
the contractor. One case was withdrawn.
The nine disciplinary actions taken included suspension or revocation
of license and probation. This contractor's f i r s t probation was i n
1980 and lasted 120 days. The second and third probations were
overlapping and extended from October 1982 to May 1983. These were
for 3 and 5 months, respectively. During the 7- month probationary
period 10 additional complaints were filed against this contractor. One
complaint was filed during the 1 month of over1 ap while the contractor was
serving two simul taneous probations. ( The RCC provided no explanation for
t h i s overlap, except that hearing cases are usually treated
independently. ) Final ly, i n January 1984, the Registrar suspended this
contractor's license for failure to post an additional $ 2,000 bond. In
March 1984 the Registrar revoked the contractor's license. Because this
revocation was appealed, it did not take effect until July 30, 1984.
While the revocation was pending this contractor had six additional
hearings that resul ted i n the foll owi ng actions:
1. A revocation because of default, which was reheard and changed to
a 1 0- day suspension followed by a 90- day probation.
2. A 15- day suspension followed by a 75- day probation w i t h another
$ 2,000 bond increase.
3. Dismissed, no punishment a1 though a clear violation of statutes.
4. A 60- day probation.
5. A revocation for poor workmanship and wrongful acts.
6. A revocation by defaul t.
Despite t h i s contractor's lengthly pattern of poor workmanshi p hi s
license was not suspended until January 1984. The fact that two of
his probationary periods were overlapping indicates the ROC may not
properly exami ne a contractor Is compl ai n t h i story before i ssui ng a
decision. While this contractor's complaint hi story spans 6 years and
contains numerous cases that were drawn out by his refusal or
reluctance to make repairs, this issue was only addressed in one of
the most recent cases. The hearing decision stated that ". . . a
contractor i s not entitled to an endless succession of opportunities
and an undeterminate time period i n which to accomplish proper
construction work." The Registrar has f e l t that i t i s better to allow
a contractor to correct faulty workmanship t h a n to impose harsher
penal ties.
The second case example describes a remodeling contractor who also had
many complaints, almost ha1 f of which went to hearing.
Case I1
This contractor had accumulated 29 complaints in 70 months. Nine of
the 13 cases that went to hearing were deemed valid. However, the
Registrar has taken action on only two of these cases. Although the
Registrar had statutory authority to take action i n the other seven
cases, these were closed or dismissed because repair work had been
done or settlement reached. The f i r s t action was a 30- day probation,
from December 13, 1978 t o January 13, 1979. The second action was a
15- day suspension followed by a 45- day probation, from April 21, 1979
t o June 21, 1979. The suspension resulted from the f i r s t two
complaints filed against the contractor.
Comment
The only di sci pl inary actions taken by the Registrar resul ted from the
f i r s t two valid cases. The other seven valid cases were resolved with
no sanctions imposed.
Effect of Weak Enforcement - The weak enforcement of statutes combined
w i t h 1 enient hearing decisions causes several problems. Contractors who
continuously violate statutes and are found guilty of poor workmanship and
failure to complete work pose potential harm to the public. Future
customers of the contractor are n o t protected from experiencing the same
pattern of substandard work. Also, resources are not being effectively
and efficiently u t i l ized when the Registrar must process the complaints
filed against chronic violators. If enforcement were strengthened, the
Compliance and Hearing Departments could devote their resources to other
problem contractors.
A primary cause of this weak enforcement i s ROC'S policy of mediating
complaints rather than taking action against incompetent contractors.
This does not provide incentive for the contractor to do competent work
the f i r s t time because the complaint resolution process gives the
contractor numerous opportunities t o make repairs. This pol i c y could
provide the contractor economic incentive t o do shoddy work. If the work
r e s u l t s i n a complaint, then the contractor can make the necessary repairs
without severe penal ties. If the consumer does not f i l e a complaint then
the contractor may have saved labor and materials.
Complaint H i story
Should be U t i l i z e d
Currently, the ROC does not adequately consider a contractor's record o f
p r i o r v i 01 ations before making enforcement decisions. According t o the
Registrar's rules, t h i s i s allowed but i s seldom done. This information
should be introduced as evidence i n hearings and should be made r e a d i l y
available t o the public.
The Registrar o f Contractors' r u l e R 4- 9- 17 states i n p a r t that:
" I n any d i s c i pl inary proceeding conducted by the
Registrar, the 1 icensee's e n t i r e 1 icense f i l e including
the record of p r i o r c i t a t i o n s and decisions may be
considered by the Registrar i n making h i s decision and
order i n the case before him, provided these records
are i ntroduced i nto evidence. "
The ROC seldom uses t h i s complaint history data because it feels it would
be too time consuming t o manually sort f i l e s and compile t h i s information
f o r each case. However, we found the data i s readily available i n the
Agency f i l e s . Each case i s considered independently except i n instances
i n which a contractor has many hearings i n a short time and the hearing
o f f i c e r i s a1 ready aware that the contractor i s a repeat v i o l a t o r .
Introduction of t h i s data as hearing evidence may help strengthen
enforcement o f industry standards. Examination o f the contractor's e n t i r e
license f i l e and record of c i t a t i o n s and decisions should give the hearing
o f f i c e r a b e t t e r understanding o f the p o t e n t i a l t h r e a t the contractor
poses t o the pub1 i c . I n t h i s way, the decision and order can be issued
accordingly.
This complaint h i s t o r y data should also be r e a d i l y available t o the
public. According t o the head of the Licensed Compliance Division, a l l
contractor complaint information i s open t o t h e p u b l i c , but i s not e a s i l y
obtainable. He said many people request information over the telephone,
and the ROC Compl iance D i v i s i o n secretaries attempt t o compile b r i e f
summations o f a c o n t r a c t o r ' s complaint h i s t o r y . However, these requests
are too numerous f o r t h e s e c r e t a r i e s t o provide much d e t a i l . Also, the
secretaries are r e l u c t a n t t o d i v u l g e t o o much information because they do
not have construction experience and a r e u s u a l l y not f a m i l i a r w i t h the
compl a i n t circumstances. Consequently, they usual ly t e l l the people t o
come down t o the o f f i c e and examine the f i l e s themselves. This could be
inconvenient f o r people l i v i n g outside the Phoenix metropolitan area.
Computerization o f the Compliance D i v i s i o n complaint case data would
r e s u l t i n quick, e f f i c i e n t consumer access t o the information. The
secretaries would not have t o spend time manually searching the f i l e s t o
answer consumer telephone information requests. Instead, t h i s
information could be compi 1 ed by computer and mai 1 ed t o homeowners making
t e l ephone requests. The Oregon D i v i s i o n o f Contractors mai 1 s contractor
complaint data t o homeowners who request t h i s information. Oregon went t o
t h i s system a f t e r receiving complaints from contractors t h a t inaccurate
information was being given out over the telephone. Providing consumers
with computerized complaint h i story data woul d increase t h e i r awareness o f
a contractor' s status and competence.
C i v i 1 Penal t i e s Needed
The Registrar o f Contractors does not have a f u l l range o f enforcement
options. Current punishment options are l i m i t e d t o probation, bond
increase, and suspension or revocation o f license. Authority t o impose
c i v i l penal t i e s woul d provide an e f f e c t i v e , intermediate sanction short o f
suspension o r revocation o f license.
Current punishment options are l i m i t e d and not always used. The options
avail able t o the hearing o f f i c e r are 1 i sted and described i n the f o l l owing
tab1 e.
TABLE 7
REG1 STRAR OF CONTRACTORS '
CURRENT HEARING DECISION OPTIONS
Deci s i on
D i smi ssal
Probation
Suspension
Revocation
Bond increase
Description
Lack o f evidence, no basis f o r action,
compl iance or settlement
Monitor a c t i v i t y
No work u n t i l r e p a i r or f o r a specified
time, no work or bidding on new
contracts
License inval i d unless appealed or u n t i l
reapplication a f t e r 1 year
I n conjunction with other d i s c i p l i nary
actions
( 1 ) This action should be authorized and a1 1 owed as a d i sci pl inary option
even i f the statutory bonding requirement i s eliminated ( see Finding
111, page 33.)
C i v i l penal t i e s would be a viable sanction midway between probation and
suspension i n l e v e l of severity. C i v i l penal t i e s would impact the
contractor f i n a n c i a l l y and not j u s t a f f e c t t h e l i c e n s e status. Currently,
only the courts can levy fines or monetary penalties against contractors.
The Registrar does not have t h i s statutory authority. The Arizona
Veterinary Board and Structural Pest Control Board have t h e o p t i o n to
impose c i v i l penalties. Other s t a t e s ' c o n t r a c t o r regulatory agencies also
have t h i s option. California can fine contractors up t o $ 3,000 per
offense, and V i r g i n i a can fine contractors up t o $ 1,000 per offense.
CONCLUSION
The Registrar of Contractors ' complaint resolution process needs
improvements to enhance consumer protection. The process has not deterred
some contractors from repeating s t a t u t o r y v i o l a t i o n s .
RECOMMENDATIONS
1. The Registrar o f Contractors should take s t r i c t e r enforcement actions
against contractors with a h i s t o r y o f numerous repeat violations.
2. The Registrar of Contractors should summarize and introduce
contractors' case h i s t o r i e s as evidence i n administrative hearings-
3. The Registrar of Contractors should provide contractors' case h i s t o r y
summaries t o consumers.
4. The Legislature should empower the Registrar o f Contractors t o impose
c i v i l penalties against contractors i n v i o l a t i o n o f statutory
provisions of A. R. S. 532- 1 154.
FINDING 111
CONTRACTOR BONDING REQUIREMENTS COULD BE ELIMINATED
The statutory bonding requirement f o r contractors i s unnecessary and could
be el iminated. Bonding provides 1 i t t l e consumer p r o t e c t i o n w h i l e
unnecessarily r e s t r i c t i n g entry i n t o the construction industry. Both the
Registrar of Contractors ( ROC) and contractors could real i z e s i g n i f i c a n t
savings i f t h i s requirement were dropped.
Statutory Bonding Requirements
Arizona Revised Statutes ( A. R. S. ) $ 32- 1 152 requires t h a t 1 icensed
contractors maintain a bond between $ 1,000 and $ 15,000, depending upon the
type of license issued and t h e projected work volume. Contractors may
obtain bonds through a surety company, by depositing the required bond
amount i n cash with the State Treasurer, or by assigning a c e r t i f i c a t e o f
deposit, investment c e r t i f i c a t e or share account i n the required amount t o
the Registrar o f Contractors.
A contractor's bond i s subject t o claims by a v a r i e t y o f e n t i t i e s ,
i ncl udi ng consumers, contractors and materi a1 s suppl i ers. According t o
A. R. S. $ 32- 1152. E:
" The bonds or deposit required by subsection B o f t h i s
section shall be for the b e n e f i t of and shall be
subject t o claims by the r e g i s t r a r of contractors f o r
f a i l u r e t o pay any sum required pursuant t o t h i s
chapter or by any person who, a f t e r entering i n t o a
construction contract i nvol v i ng a r e s i d e n t i a l structure
with the p r i n c i p a l , i s damaged by the f a i l u r e of the
p r i n c i p a l t o perform the contract or by any person
furnishing labor, materials or construction equipment
on a rental basis used i n the d i r e c t performance of a
construction contract involving a r e s i d e n t i a l
structure. "
The statutes further state that the person seeking compensation through a
bond or cash deposit must sue the surety company and the contractor if
claiming against a surety hand or sue only the contractor i f claiming
against a cash deposit. The surety bond or cash deposit i s subject to
claims until i t i s exhausted. In addition, the court may award reasonable
attorney fees i n a judgment against a surety bond or cash deposit.
Finally, the claimant must f i l e s u i t w i t h i n 2 years of the act or delivery
of goods.
Before the inception of the contractors' recovery fund, a contractor's
license bond was the only source of compensation for consumers for
contractor malfeasance. The recovery fund was established i n 1981 to
provide consumers additional financi a1 protection.
Bondi na Provides L i t t l e
Consumer Protection
Bonding has provided 1 i t t l e consumer protection. In addition, a survey of
several bonding companies and an analysis of Agency cash bond payments
indicates that the construction industry, not the consumer, benefits most
from bonding. The major beneficiaries of the bonding requirement do not
need statutory protection. The recovery fund provides more consumer
protection than bonding.
Analysis Found L i t t l e Benefit to Consumers - We surveyed several bonding
companies and analyzed Agency cash bond payments and found that consumers
receive 1 i ttl e protection from bondi ng. According to the bonding
companies surveyed, most claims against bonds are made by materials
suppliers. Two bonding company representatives said that 80 percent of
the claims against bonds were from suppliers for nonpayment for supplies
and materials. All stated that very few claims were from homeowners.
We also analyzed cash bond payments, as was done for the 1979 Auditor
General Sunset Review. As shown i n Table 8, our analysis substantiated
the 1979 finding that consumers receive only a small portion ( 19 percent)
of the total payments.
TABLE 8
SUF4blARY OF CASH BOND PAYMENTS MADE
TO CONSUFlERS AND OTHER GROUPS DURING
FISCAL YEARS 1977- 78 AND 1982- 83
Percentage
of Cash Bond
Group Payments Received
Consumers 18.7%
Suppliers/ Contractors 58.0
Unions, Employees and
Trustees 2 3.3
Percentage
of Cash Bond
Group Payments Received
Consumers 19.3%
Contractors 12.6
Su ppl i ers 54.8
Bankruptcy Court 8.6
Government 4.7 m
Consumers have received 1 i t t l e restitution from bonds because suppl i e r s
and contractors also have access to the bonds and are usually in a better
posi ti on to anticipate impending contractor di fficul ties. This was best
summarized in our 1979 Auditor General Sunset Review of the Registrar of
Contractors.
The 1979 sunset Review of ROC concl uded that:
" 1. The consumer, according to Registrar personnel, i s
generally the l a s t to know that the contractor i s
i n trouble. Those who have daily business dealings
with the contractor, such as suppliers and other
contractors, are i n a better position to evaluate
the impending insolvency and are the f i r s t to take
action against the bond.
2. The consumer, unlike those who deal i n the bonding
process on a daily basis, will, i n most cases, f i l e
a complaint w i t h the Registrar. Unfortunately, by
the time the compl aint- f i 1 i ng consumer 1 earns that
monetary satisfaction will not be obtained through
the complaint process, i t i s generally too l a t e to
f i l e s u i t against the bond. . . ."
Suppliers and Contractors Do Not Require Protection - The major
beneficiaries of the bonding requirement, material s suppl i e r s and
contractors, do not need s t a t u t o r y p r o t e c t i o n against contractor
insolvency. Unl i ke consumers, suppliers and other contractors are
s u f f i c i e n t l y know1 edgeabl e t o protect themsel ves i n business transactions
with contractors. I n addition, the other two states with recovery funds
do not provide t h i s protection t o suppliers and contractors, nor does
Arizona provide t h i s protection i n other professions.
Suppliers and other contractors are able t o protect themselves without the
statutory bonding requirement. They can u t i I i ze general ly accepted c r e d i t
practices and can a l s o r e q u i r e bonds. Since 1981 when commercial
contractors were deregulated, no bonding requirement has existed f o r the
estimated 2,000 companies t h a t were previously 1 icensed. I n addition,
suppliers and contractors continue t o do business with what i s thought t o
be a l a r g e number o f i l l e g a l l y unlicensed contractors - a group t h a t has
never been covered by the R e g i s t r a r ' s bonding requi rement.
The other two states with recovery funds do not have statutory provisions
t h a t provide f i n a n c i a l p r o t e c t i o n f o r material s suppl i e r s or other
contractors. Neither V i r g i n i a nor Hawaii have contractor license bond
requirements t h a t provide suppl i e r or other contractor protection. I n
addition, n e i t h e r s t a t e a1 1 ows suppliers or other contractors access t o
recovery funds. Virginia, however, does give 1 ocal j u r i s d i c t i o n s the
option t o require bonding. I n addition, the Hawaii Contractors Board has
discretionary authority to impose bonds for various reasons.
Other regul ated professions i n Arizona do not have bonding requirements
t h a t provide protection to suppliers or others w i t h i n the profession. As
i n other business relationships, suppliers and other contractors can
themselves i n s t i t u t e the necessary procedures for financial protection.
Recovery Fund Provides Better Consumer Protection - The recovery fund
provides better protection for the consumer against unscrupulous or
insolvent contractors than does bonding, and is less costly t o the
contractors. As discussed previously, consumers are often unable t o claim
against contractors' bonds before they are exhausted by suppliers or other
contractors. In contrast, the recovery fund not only provides a higher
protection amount, b u t i t is 1 imited to claims by consumers only.
In addition to providing Kore protection, the recovery fund is less costly
to contractors than bonding. The i n i t i a l recovery fund fee is $ 75.
Subsequent annual renewal charges can vary according to the fund's needs.
However, since January 1983 there has been no annual renewal charge.
According to our survey of bonding companies, the current annual r a t e f o r
contractors' 1 icense bonds is $ 50 per $ 1,000 coverage. Table 9 shows the
protection provided by each and the costs to contractors.
TABLE 9
PROTECTION AKOUNTS PROVIDED
BY BONDING AKD RECOVERY FUND ANC
COSTS TO CONTRACTORS
Contractors
Bond
Amount $ 5- 1 5,000( 1 ) Total
Cost $ 250- 750
Subcontractors
$ 1- 7,500( 1) Total
$ 50- 375
Recovery Fund
Aiil ou n t $ 15 OCO per Cl aim, $ 75,000 Total $ 15 000 per Claim, $ 75,000 Total
Cost $ 7512) $ 75 ( 2 )
( 1 ) The amount varies based on work dollar volume.
( 2 ) I n i t i a l fee i s $ 75. Subsequent annual charges vary, and no fees have been
assessed since January 1983.
Bonding Unnecessari ly Restricts
Entry I n t o the Construction Industry
The bonding requirement unnecessarily r e s t r i c t s entry i n t o the
construction industry. The minimum f i n a n c i a l requirements f o r a bond can
exclude contractors from licensure.
F i nancial Requiren! ents R e s t r i c t Practice - The f i nancidl requirements t o
q u a l i f y f o r a bond may exclude some contractors from licensure. Some
unl icensed contractors we contacted i ndicated t h a t the bonding requirement
was one o f the major r e s t r i c t i o n s t o licensure. ROC s t a f f believe that
the main reason contractors practice without 1 icenses i s t h a t they cannot
meet the bond requirement. Some unlicensed contractors report t h a t they
do not have the ready cash ($ 1,000 t o $ 15,000) t o obtain a cash bond, or
do not meet the f i n a n c i a l requirements f o r a surety bond.
For a cash bond, investment c e r t i f i c a t e , share account or c e r t i f i c a t e o f
deposit, a contractor must provide the required bond amount i n cash, based
on the work voluti~ e. For subcontractors t h i s i s $ 1,000 t o $ 7,500. For
general contractors $ 5,000 t o $ 15,000 i s required. This money i s
refundable t o the contractor i f there are no outstandins claims a f t e r the
2- year statute o f 1 imitations f o r claims has expired.
Contractors must meet s t r i c t f i n a n c i a l requirements t o qualify for a
surety bond. According t o some o f the companies surveyed, the financial
requirements were increased because of t h e l a r g e number of contractor
i nsol vencies during the 1974- 75 recession. * Our survey found t h a t some
conlpanies have specific rnininum 1 i m i t s on contractor finances. For
example, two companies ' requir e ~ e n t sa re as fol 1o ws:
* We surveyed the four largest bonding companies as identfied by the ROC.
TABLE 10
TWO BONDING COMPANIES '
MINIMUM FINANCIAL REQUIREMENTS
Company A Company B
Working Capital $ 5,000 for a l l bond amounts $ 5,000 f o r $ 1 t o $ 5,000 bond
$ 10,000 for over $ 5,000 bond
Net Worth $ 50,000 for a l l bond amounts $ 25,000 f o r $ 1 t o $ 5,000 bond
$ 50,000 f o r over $ 5,000 bond
Depending upon the company, the contractor must meet other requirements t o
qualify f o r a bond. One company requires a minimum o f 3 years i n - s t a t e or
other work experience. Some require the contractor t o have other
insurance with the company. Bonding companies may a1 so require t h a t a
contractor show a n e t p r o f i t , or i n some cases a progressively increasing
p r o f i t before issuing a bond.
Eliminating Bonding Would Provide
Savings t o Both the Agency and Contractors
Both the Agency and contractors could r e a l i z e savings i f the statutory
bonding requirement were el iminated. We calculated t h a t the ROC could
save approximately $ 32,000 i n personal services costs i f bonding were
eliminated. The costs include two bonding clerks and other related
expenses. I n addition, by eliminating the bond f i l e from i t s computer the
ROC estimates it would free an additional 15 percent o f i t s computer
capacity. Consequently, it would be able t o delay future expansion.
Contractors would real i z e signi ficant savings i f bonding were el iminated.
We estimated contractors paid surety companies $ 1.8 m i l l i o n i n 1983. I n
addition, through February 1984 contractors had $ 5.8 m i l 1 ion deposited i n
e i t h e r cash bonds or c e r t i f i c a t e s o f deposit.
CONCLUSION
The contractor bonding requirement i s unnecessary and coul d be
eliminated. Bonding has provided l i t t l e consumer protection and r e s t r i c t s
entry i n t o the construction industry. Both the Agency and contractors
woul d real i ze s i g n i f i c a n t savings i f the bonding requirement were dropped.
RECOMMENDATIONS
1. The Legislature should consider eliminating A. R. S. $ 32- 1152 as it
r e l a t e s t o bonding.
2. If the statutory bonding requirement i s eliminated, the ROC should
e l i m i n a t e t h e two bonding clerk positions.
FINDING IV
TtiE REGISTRAR OF CONTRACTORS' COMPUTER SYSTEM REQUIRES IF. 1PROVED NANAGENEMT
The Registrar of Contractors ( ROC) needs to improve managenent of its
electronic data processing ( EDP ) system. A1 though the system has enhanced
operational efficiency, our review disclosed weaknesses in: 1 ) planning,
2 ) utilization, 3) internal controls, 4) documentation of procedures, and
5) training.
Computer Obtained to Improve
Time1 i ness and Efficiency of Operations
The Registrar purchased a computer system that was installed i n 1982. The
ROC was one of the f i r s t state agencies to develop a system independent of
the Department of Administration data center. The system hardware
consists of a minicomputer with 1O24K of memory, 15 multipurpose
terminals, one word processing terminal, one tape drive, two disk drives
and two printers. Risk Nanagement values this equipment a t $ 135,311. The
system i s administered by the assistant registrar and two data processing
equipment operators.
According to an Agency official, this system has resulted i n greater
fl exi bil i ty and improved operational efficiency. Information maintained
i n the computer includes licensing, compliance, hearing, recovery fund and
bonding data. Some of these f i l e s contain several thousand records, and
computerization allows quicker, more efficient storage, manipulation and
retrieval of data.
Before purchasing i t s own computer system, the ROC received computer
support from the Department of Administration data center. However, the
Registrar found this arrangement inadequate because i t was too time
consuming for data retrieval, the data was not current, and the compliance
and hearing data was incomplete.
The Auditor General EDP staff conducted a review of the POC's computer
system. The EDP staff regularly conducts EDP internal control reviews for
4 1
state agencies, counties and school d i s t r i c t s . These i n t e r n a l control
reviews evaluate both general and appl i c a t i o n control s. I n addition, the
EDP s t a f f performs evaluations using computer- assisted audit techniques.
I n some cases planning and development assistance i s a1 so provided. Their
findings and recommendations regarding the ROC computer system are
summarized be1 ow.
No Plan Exists For Data
Processing Operations
The Registrar has not prepared and maintained plans f o r the data
processing section. Planning i s a mechani sm f o r dealing with probl ems
before they occur. Resource planning transforms information describing
expected workload i n t o the hardware and s t a f f i n g plans necessary t o meet
data processing comitments.
Agency s t a f f indicated t h a t automating the accounting system and adding a
word processi ng terminal and a s t a t i s t i c a l package f o r examination
analysis would improve operations. These and other future requirements
have not been addressed i n a formal planning document. Planning documents
would help ensure t h a t current and future data processing needs are met,
and t h a t any modifications t o the system are d i r e c t e d toward satisfying
the Agency's objectives. Short and long range plans f o r projects,
personnel and equipment coul d increase the effectiveness of the system.
EDP System
Underutil ized
The Registrar's s t a f f does not always use the data processing system t o
f u l l capacity. Certain processes are s t i l l done manually t h a t could be
more e f f i c i e n t l y done on the computer. Also, the data processing section
i s not meeting the reporting needs o f the s t a f f .
The EDP systen i s not being used to i t s full capacity. For example, the
Licensing Division staff manually calculate the difference between two
dates for all license applications for licensing reports. This i s done to
determine the elapsed time from when an application i s received until a
1 icense is issued. A1 though the system i s capable of doing time analyses,
the ROC does not know how to use the computer f o r t h i s purpose. Also, the
staff must manually search microfiche for information because the
automated license f i l e i s not accessible by qualifying party name.
Computer programs can perforrr~ these functions nore efficiently.
Some of the staff reporting needs are not being met by the EDP section.
Every division manager or supervisor interviewed expressed a need for
additional reports, rancjing from statistical and timing analyses to word
processing and accounting i nf ormati on. The managers were hesitant t o
submit EDP user requests because of their unfamiliarity w i t h the systen
and i t s capabilities.
Weaknesses Exist i n Data Processi ng
Internal Controls and Backup
Our EDP review disclosed some deficiencies i n the Registrar's data
processing access control s and i t s backup and contingency plan. Gaining
access t o the computer i s too easy, and use of the computer i s not
restricted. Also, the backup and recovery procedures needed i n case of
business interruption are incomplete.
According to a guide published by The American Institute of Certified
Public Accountants ( AICPA), ". . . access controls provide safeguards to
ensure that EGP resources are properly utilized . . . Proper access
controls will assist in the prevention or detection of deliberate or
accidental errors caused by improper use or manipulation of data f i l e s ,
unauthorized or incorrect use of a computer program, and/ or improper use
of computer resources. "*
* Computer Services Executive Comi ttee, The Auditor's Study and
Evaluation of Internal Control i n EDP Systems ( New York: American
Institute of Certified Pub1 i c Accountants, 191 I ) .
Access Controls Not Utilized - The AICPA guide 1 i s t s three controls that
pertai n t o con~ puter access. These include:
" General control PIo, 13 - Access to program
documentation shaer'l d be limited to those persons who
require i t i n the performance of their duties.
General control No. 14 - Access to data f i l e s and
prograrns should be limited to those individuals
authorized to process or maintain particular systems.
General control 140. 15 - Access to computer hardware
shoul d be 1 imi ted to authorized individual s. ' I
The Registrar does not comply w i t h any of these controls. The system
allows easy access w i t h a one- character log- on command. In addition, the
Agency does not properly r e s t r i c t the ability to call up u t i l i t y programs
and change them. Moreover, the EDP staff does not always use the
password/ protect commands available to prevent unauthorized access to i t s
report writing software. The Agency could acquire the software to update
its operating system and use passwords to control access to the computer.
Also, the Agency could make better use of the system's optional f i l e
access control features.
The Agency does not appropriately r e s t r i c t the use of i t s computer
system. Corriputer prograr~ ls are available to any employee w i t h the 1 imited
know1 edge required to use them. Additional ly , programers frequently have
access t o a l l programs and data f i l e s i n the system. Unrestricted access
may result in unauthorized use of information, concealment of errors or
irregularities, and programs used contrary to management objectives.
Examples of potential problems could include the changing of a
contractor's license or bond status or incorrectly showing that license
and recovery fund fees had been paid.
Incomplete Backup and Recovery Plan - The Registrar has no w r i t t e n
contingency plans f o r disaster recovery. Backup f a c i l i t i e s have not been
tested t o check the c o m p a t i b i l i t y of equipment and the effectiveness o f
backup procedures. The Registrar does have a data entry contingency
support agreement with the Department of Administration, but it i s l i m i t e d
t o " backup support and a v a i l a b i l i t y o f data entry equipment i n the event
of disaster or i n t e r r u p t i o n to data entry equipment a t e i t h e r agency." An
e f f e c t i v e , workable agreement woul d cover machine time a v a i l a b i l i ty ,
appl i c a t i o n processing p r i o r i t i e s , information exchanges on equipment
configuration changes, and cost.
The computer can rapidly become an i n t e g r a l part o f Agency operations.
When it goes down, operations come to a s t a n d s t i l l , or creep along a t a
reduced rate. According t o an a u t h o r i t a t i v e EDP manual, ". . . it i s wise
t o give adequate consideration and planning f o r backup f a c i l i t i e s t h a t can
be used when such malfunctions occur."*
I n the Registrar's case, a system ma1 function or a disaster i n the system
would impair Agency operations. ROC would have t o revert t o manual
processing, which would r e s u l t i n slower response time t o the public.
Also, as the Agency i s continually adding more f i l e s , dependence on the
system i s increasing. I n the event o f system breakdown, people trained
only on the computer would have a d i f f i c u l t time adjusting t o manual
procedures. Also, new equipment may take a long time t o arrive, which
further emphasizes the need for an adequate backup and recovery plan.
EDP Section Lacks an Adequate
Standards and Procedures Manual
The data processing section's standards and procedures manual i s weak.
The manual 1 acks documentation, program and operati on standards.
Computer operator manual s shoul d be developed t h a t c l e a r l y out1 ine
operational steps t o be followed. Such manuals are useful i n t r a i n i n g new
x Martin B. Roberts, EDP Controls - A Guide For Auditors and Accountants
( New York: John Wiley & Sons, 1983)
operators and provide necessary documentation to compare actual
performance against planned operations. A manual shoul d i ncl ude
organization and job descriptions, appl ication documentation standards,
systems and project development, program change policies and backup
procedures. The American Institute of Certified Pub1 ic Accountants' - The
Auditor's Study and Evaluation of Internal Control i n EDP Systems states
i n general control No. 17: " A we1 l- written manual of systems and
procedures should be prepared for a l l computer operations and should
provide for management's general or specific authorization to process
transactions. "
Because the data processing section's standards and procedures manual i s
weak, most of the procedures for data processing operations are
unstructured and informal. EDP employees cannot determine whether their
work meets minimum standards. The a s s i s t a n t r e g i s t r a r , who oversees the
system, has no uniform basis for evaluating the effectiveness of the EDP
personnel. Staff turnover and the complexity of the data processing
environment increase the need f o r c l ear, comprehensive guide1 ines.
Uniform, written policies are essential to a re1 iabl e computer operation.
Agency Personnel Lack
Adeauate EDP Trai n i na
I t i s evident from the lack of knowledge about the system and i t s
capabilities expressed by the EDP staff and other Agency personnel that
they have not been adequately trained. Training appears to have taken
lower priority than i t should have i n ttie system implementation. Formal
training sessions need to be implemented. The division manasers need to
be shown how the computer can be applicable to their respective areas.
The EDP staff needs to be trained to maximize use of the system's
capabilities for such things as reports, timing analyses, accounting and
word processing.
CONCLUSION
The Registrar of Contractors does not get the maxirnun benefits from i t s
electronic data processing system. Improvements are needed i n planning,
util ization, internal controls, procedure documentation and training.
RECOMMENDATIONS
1. The Registrar o f Contractors should implement a plan t o d i r e c t data
processing e f f o r t s .
2. The Agency should develop a request form t o f a c i l i t a t e the management
o f user data processing requests.
3. The Agency should strengthen i t s data processing i nternal control s.
It should acquire a more recent version o f the Level- 6 operating
system, which uses passwords t o control cornputer access. Management
should r e s t r i c t access t o programs and data f i l e s and review a l l
program changes t o ensure t h a t they are authorized and compatible with
the objectives o f the Agency.
4. The Agency should expand and c l a r i f y i t s data processing backup and
recovery agreement. The contract should cover:
0 machine time a v a i l a b i l i t y ,
appl i c a t i o n processing p r i o r i t i e s ,
i nforriiation exchanges on equipment configuration changes, and
0 cost.
The Agency should also develop a disaster recovery contingency plan.
The plan should cover evacuation, emergency power- off procedures,
removal of data f i l e s and equipment, and resumption o f operations a t
the backup faci 1 i ty.
5. The Agency should develop an adequate standards and procedures
manual . The manual shoul d include:
0 organization and job descriptions,
0 appl i c a t i o n documentation standards,
e systems/ project devel opment,
e program change p o l i c i e s , and
0 backup procedures.
6. The data processing s t a f f should receive additional t r a i n i n g t o more
f u l ly u t i l ize the computer system.
OTHER PERTINENT INFORMATION
During the course of our audit, we reviewed information regarding
unlicensed contractor enforcement.
Arizona law requires a l l residential contractors to obtain a license to
work i n the state.* Contracting without a license is illegal under
Arizona Revised Statutes ( A. R. S.) $ 32- 1151 and i s a class 1 misdemeanor.
A contractor can be fined not less than $ 500 for the f i r s t offense and not
less than $ 750 for the second or any subsequent offense. Advertising
without a 1 icense is a1 so illegal unless " unlicensed" appears i n the
advertisement. T h i s violation under A. R. S. $ 32- 1165 i s a class 2
misdemeanor. Repeat violators of the advertising s t a t u t e s a r e issued
cease and desist orders. Fines can be levied by the courts for continued
advertising violations.
The Registrar of Contractors ( ROC) has nine investigators i n Phoenix and
Tucson for unl icensed contractor enforcement. A1 so, empl oyees a t the five
s a t e l l i t e offices throughout the state spend about 50 percent of t h e i r
time investigating complaints against unl icensed contractors. The
investigators monitor construction s i t e s for unlicensed contractors,
document compl ai nts agai nst unl icensed contractors, and investigate
i l l egal advertising. Investigators may issue cease and desist orders and
citations, depending upon the severi ty of the vi 01 a t i on. Investi gators
also a s s i s t i n preparing cases for court prosecution.
The ROC investigates consumer complaints, as well as generating i t s own
complaints. The Agency's unl icensed enforcement work1 oad consists mostly
of Agency- generated cases rather than compl ai nts by consumers. Our
analysis found that 81 percent of the complaints concerning unl icensed
contractors are generated by ROC investigators. Forty- four percent of
t h a t a c t i v i t y involved citing contractors f o r i l l e g a l advertising. The
* Licensure i s not required for projects of less than $ 750, including
1 abor and materials, under A. R. S. $ 32- 11 21 . A. 10.
49
investigators check the neighborhood and 1 ocal newspaper c l a s s i f i e d
advertisements d a i l y t o i d e n t i f y advertising by unlicensed contractors.
The investigators then contact these contractors l i s t e d using an assumed
name and phone number. The investigator then issues a cease and desist
order f o r i 11 egal adverti s i ng.
Both local o f f i c i a l s and ROC personnel state t h a t large numbers of
contractors work without 1 icensure. Two local c i t y b u i l d i n g inspectors
estimate large numbers o f unlicensed contractors working w i t h i n t h e i r
c i t i e s . The estimates are based on observations made during local
inspections and the o f f i c i a l s ' overall knowledge o f the area. One
inspector estimated as many as 20 percent o f a l l r e s i d e n t i a l contractors
i n h i s c i t y are unlicensed. Another said there are several known,
unlicensed r e s i d e n t i a l contractors working i n his c i t y .
ROC o f f i c i a l s say t h a t large numbers o f unlicensed contractors are s t i l l
working. One Agency o f f i c i a l stated t h a t there are " thousands and
thousands o f unl icensed contractors out there." S t i l l another admitted
t h a t they are j u s t h i t t i n g the t i p o f the iceberg i n t h e i r attempt t o
reduce unlicensed construction.
Other States - Some l o c a l i t i e s i n other states have used local b u i l d i n g
inspectors t o he1 p deter unl icensed contracti ng. One 1 ocal i t y simi 1 ar to
Phoenix has successfully coordinated local enforcement and prosecution.
States such as Colorado, New Mexico, and Minnesota have had success with
1 ocal b u i l d i n g inspectors enforcing against unl icensed practice. I n those
states inspectors have the power t o issue cease and desist orders to
unlicensed contractors, forcing termination o f t h e i r work. Those surveyed
gave several reasons f o r success. They noted t h a t inspectors are closer
t o the problem on a d a i l y basis, thereby making them more aware o f the
situation. A1 so, v i s i b i l i t y makes them more e f f e c t i v e . I f contractors
know the inspector who has t o inspect t h e i r work can c i t e them f o r
unlicensed a c t i v i t y or shut down the job, they are less 1 i k e l y t o work
without 1 icenses.
Denver coordinates 1 ocal enforcement with the courts t o reduce unl icensed
construction. I n Denver, building inspectors are responsible f o r
monitoring code v i o l a t i o n s and f o r enforcing the 1 icensing 1 aws.
Inspectors i n v e s t i g a t e j o b sites t o document any unl icensed a c t i v i t y . If
v i o l a t i o n s are found, the inspector can order work t o be stopped and issue
a court summons. These complaints are handled by the local courts and
resul t i n substantial fines. According t o the program administrator,
through t h i s j o i n t e f f o r t the c i t y estimates t h a t work by unlicensed
contractors has been reduced by 90 percent i n some trades, and 50 percent
overall .
Local s Favor Enforcement Responsi b i 1 i t y - Our survey of 1 ocal bui 1 ding
inspectors i n Arizona indicated they support increased enforcement
powers. Buil ding inspectors favor restoration o f A. R. S. $ 32- 1 168,
allowing them t o require licensure before issuing b u i l d i n g permits.
Giving local o f f i c i a l s increased powers, such as the a b i l i t y t o shut down
an unlicensed contractor j o b s i t e , would strengthen enforcement against
unlicensed contractors.
A survey of l o c a l m u n i c i p a l i t i e s found some i n favor of restoration o f
A. R. S. $ 32- 1168, which requires contractors t o provide proof o f licensure
before a b u i l d i n g permit i s issued. At l e a s t two m u n i c i p a l i t i e s already
have t h i s requirement. Local b u i l d i n g inspectors favor having the
authority to require contractors to show proof o f licensure. The
a v a i l a b i l i t y of the ROC weekly computer p r i n t o u t of licensed contractors
could help inspectors determine the v a l i d i t y o f the contractors' proof of
licensure.
Before 1981 , A. R. S. $ 32- 1 168 required c i t y building departments t o check
f o r a v a l i d contractor license before issuing a building permit. A. R. S.
$ 32- 1 168 stated :
" Each county, c i t y , o r other p o l i t i c a l subdivision or
authority of the state o r an agency, department, board
or commission o f the state which requires the issuance
o f a permit or license as a c o n d i t i o n precedent t o the
construction, a1 teration, improvement, demo1 i tion, or
r e p a i r f o r which a 1 icense i s required under t h i s
chapter shall as a part o f the application procedures
which it u t i l i z e s , require t h a t each applicant f o r such
permit or 1 icense f i l e a signed statement t h a t the
applicant i s currently licensed under the provisions of
t h i s chapter, with h i s license number. . . ." ( emphasis
added)
According t o the ROC, t h i s law was eliminated by mistake when new ROC
l e g i s l a t i o n was formulated i n 1981. The ROC favors reenactment o f A. R. S.
532- 1 168.
BRUCE BABBITT
GOVERNOR
DAVID M. TALAMANTE
REGISTRAR
August 10, 1984
Douglas R. Norton
Auditor General
111 West bnroe, Suite 600
Phoenix, AZ 85003
1818 WEST ADAMS
PHOENIX, ARIZONA 85007
( 602) 255- 1525
TUCSON OFFICE
416 WEST CONGRESS 85701
( 602) 628- 5378
Re : Performance Audit
Dear Hr. Norton:
My staff and I have had an opportunity to review the performance audit
completed by your office. We find ourselves in agreement with the basic
elants of your findings and anticipate supporting many of your recm-mendations
in the next legislative session. There are, however, some
conclusions with which we disagree or which require somg clarification.
I will attempt to briefly cover those areas in this response.
FINDING I
This finding recomnds that " registration" versus " licensing" be sub-stitutedforsm
of the contractor trades that present a low risk poten-tial
for harm to the public. While we agree with this position generally,
additional statutory amncknts are unnecessary to effect this recormn-dation.
Additionally, in reaching your finding and reconmendations, I
believe too little consideration has been given to the "~ lfare" aspect of
this agency's purpose for existence.
In setting forth the number one objective and purpose of the Registrar,
it is undisputed that: " It is the purpose and intent of the Legislature to
continue the Registrar of Contractors agency in order to protect the
public, health, safety and welfare". ( errphasis added) Finding number
one stresses the health and safety aspect with less regard for the econ-amic
well being of the consumer which should be on an equal ground. We
believe that licensing should continue not only for those trades that
directly affect health and safety but also for those trades which have
shown a history for a high potential of harm to the public's economic
well being i. e. welfare.
To do otherwise would open the door to fly- by- night contractors who could
easily register for a trade and obtain, in effect, the States ' seal of
approval. A registration without any prequalification would increase the
potential for harm to the public. Let me emphasize the I am speaking of
those non- health and safety trades which nevertheless have proven to be
high risk trades because of the potential for econamic ham. Furthemre,
the licensed contractors who are serious about maintaining a good business
relationship in this State would be subsidizing these high econamic risk
trades through their paymnts into the recovery fund. This office owes
licensed contractors a greater duty.
As noted in your report, this agency has taken positive steps to reduce
regulation wherever necessary and practical. These adjusmts were made
pursuant to existing authority in A. R. S . S32- 1122 ( A) ( 4) and 832- 1122 ( E) ( 1) .
We believe these existing statutes are sufficient to effect your recanmen-dations.
In my opinion, further legislative amendments ~ 70Uld not be help-ful.
FINDING I1
The reconmendation is that the Registrar take stricter enforcement actions
against contractors with repeat violations. We agree. In my opinion, this
agency has an excellent compliance and hearing staff and our statutes are
being effectively enforced. At least part of this problem, if not mst ,
can be attributed to the nature of this agency's statutorily imposed admln-istrative
process. When a repeat offender is before the Registrar, it is
alrnost always in the context of a camplaint filed by a h e r of the public.
If the Registrar revokes the license of a contractor in this context then
we deprive the complaining party of any relief under our statutes. The
revoked contractor has no incentive to perform any corrective or repair
work on behalf of the injured complainant if the license is to remain
revoked regardless of the repair or corrective work. Consequently, this
agency has attempted to discipline this category of contractor without
eliminating the complainant's remedy. The inducent to the contractor is
the retention of a license if the complaining party is satisfied.
A possible solution to the above d i l m is to allow the Registrar limited
authority to order payments from the recovery fund in those instances
where a revocation would otherwise deny the complainant of a remedy. This
alternative would prevent the failed but good- faith efforts noted in your
report. We suggest legislation be introduced providing the Registrar with
limited authority to order payrnent from the recovery fund in these types
of cases. This suggestion is made in addition to accepting your recorrmen-dation
that the Legislature authorize the Registrar of Contractors to impose
civil penalties for violations of A. R. S.$ 32- 1154.
The other tWR3 recamendations in Finding I1 deal with the use of a contrac-tor's
complaint history for our hearing purposes and for dissemination to
the public. We agree that Rule R4- 9- 17 should be utilized in determining
the appropriate discipline against a repeat offender. However, it is my
opinion that this rule applies only to prior administrative decisions and
order of this agency and not to camplaints that are resolved prior to
hearing. To conclude otherwise and allow the introduction of camplaints
not subjected to the administrative process would be a violation of the
contractor's constitutional due process rights.
The mre filing of a camplaint with this agency does not necessarily mean
that the contractor has performd improperly or is not fit to hold a li-cense.
This agency can only mSke that determination after an adminis-trative
hearing. To use the camplaints in the manner suggested in your
report, without the procedural safeguards of an administrative hearing,
would be improper.
The use of these same complaints in the licensing section of this agency
is a different matter. In all likelihood the simple filing of a complaint,
in the absence of a statute that states otherwise, is public information
that is accessible to the public. Colnputerization of the complaint case
data will help in this area. However, given the due process limitations
noted above, this data will have to be prepared very carefully in order to
insure fairness to the contractor.
Finding I11 recarm~ nds that the Legislature eliminate the bonding require-m
t imposed in A. R. S. § 32- 1152. We agree. Our own independent study and
experience confirms that consmers are afforded little protection through
the existence of the bond. The bond serves primarily as limited credit
insurance for suppliers and other licensed contractors. The recovery fund
has proven rnuch superior in providing protection to the public at a much
lower cost to the contractor. We also agree that this cost factor mec-essarily
restricts entry into the construction industry.
The elimination of the bond has a indirect relationship to the discussion
contained in Finding I. If the bond is eliminated for a trade that is also
reduced to a registration status, an influx of potential irresponsible con-tractors
could result. Although bonds do in fact act as an entry barrier
to the construction industry, they do help to discourage the fly- by- night
operator who is in business to make a profit and run. Consequently, I
d dli ke to reemphasize the point made in this response that those trades
with a history of high economic risk not be reduced to registration status
but continue as a licensed trade. I believe this to be necessary in light
of the reconmendation to eliminate the bonding requirerent for all trades.
The deficiencies with our data processing system expressed in this finding
generally do not reflect either the condition that actually exists or the
desired end product. Further, the potential negative effects alluded to in
the finding are hypothetical in nature with very little to suggest their
actual occurrence.
The camputer system installed at the Registrar of Contractors was an experi-rnent
in decentralized cquterization as opposed to the shared centralized
mainfrn approach. The experiment is not complete but is generally
perceived as a success by senior staff at the State Data Processing
division. One of the major strengths and reasons for the success of our
system is its lack of a highly structural, bureaucratic enviroment gen-erally
associated with a large computer system. Our success is attibutable
to remaining informal and flexible. In the evaluation of our system cri-teria
derived from a large scale data processing operation was used which
is neither appropriate nor desirable.
Other Pertinent Infomtion
Finally, the report ends with a discussion of the agency's enforcement of
the statutes prohibiting unlicensed contractor activity. It is noted that
a substantial part of the agency's activity is self- generated. I believe
this to be a positive factor in that the investigators are actively attempt-ing
to prevent harm to members of the public who may mmittingly employ an
unlicensed contractor. It should also be noted that licensed contractors
consider this active enforcement to be one of the mre important functions
of the agency. Given the time, mney and energy that a licensed contractor
has expended in obtaining a contractor ' s license, it would hardly be fair
for this agency to take a relaxed attitude towards enforcenwt against
unlicensed contractors.
We do agree, however, that the local building inspectors are somwhat closer
to this problem on a daily basis. The Registrar has, in the recent past,
attempted to revive A. R. S. § 32- 1168 as noted in your report. In order to
facilitate the reenacmt of the statute, we recorrmend that the investi-gatory
authority of the Registrar remain the s e . That is, the burden of
identifying the unlicensed contractor would remain with this State agency.
However, legislation is needed to allow the local authorities to act on
the investigation and reconmendation of this office. For example, if the
Registrar advises the local building inspection departmntthatthere are
unlicensed contractors working on a particular site, they would then with-hold
or revoke the building pennit. This remves the burden for the local
agencies of having to verify licensure each time a permit is issued.
One other statutory change mrits discussion here. Local officials c d d
also be instmntal in stopping unlicensed contractor activity, especially
as against repeat offenders and those who continue working unlawfully
despite the revocation of a building permit. Presently, A. R. S.$ 32- 1166
requires that any action for injunctive relief be made through the Attorney
General or the County Attorney's office. This statute could be amended to
allow prosecution at the city or tom level by that political subdivision's
attorney. The amendment muld be a minor change but would allow local
jurisdictions to take a direct hmd if unlicensed activity was a priority
or a particular problem within their jurisdiction.
This new procedure would complement the present misdemeanor prosecutions
at the local level. Our investigators could work with the city or town
officials to determine which cases might warrant civil prosecution at the
Superior Court level.
Taken in its entirety and given the statutory mandates of the Registrar,
we believe this report to be a positive one especially in the light of
the previous audit, campleted in October, 1979, which concluded that the
Registrar had failed to protect the public adequately. In the five years
since that audit, this agency has undergone a rerrarkably successful change.
Today, because of the efforts of my predecessor, Aaron Kizer. and his
staff, this agency is an effective office for consumer protection. Further-mre,
a healthy dialogue has been established with m y contractor asso-ciations
to the rrmtual benefit of the Registrar and the industry. We
intend to continue in the same manner.
Thank you for your kind cooperation and that of your staff.
% d M. Talamante
Registrar of Contractors