“AUDIT EXCELLENCE” Central Ohio Organization of Public Purchasers

1. “AUDIT EXCELLENCE” Central Ohio Organization of Public Purchasers Presented by: James Milton Senior Audit Manager Cleveland Region

2. AGENDA • What is an Audit? • How does an audit affect “purchasers? • Internal Controls • Compliance • Biding Laws - Ohio vs. Federal • Findings for Recovery

3. WHAT IS AN AUDIT? • Financial statement opinion – public interest, bond ratings, & financial management • Determine compliance with state & local laws, contracts & covenants • Evaluate internal control and provide recommendations

4. WHAT IS AN AUDIT? • Audits are performed on an annual or biannual basis in Accordance with GAGAS & GAAS • Exception: Subject to OMB Circular A-133 (expend greater $500,000 or more in one year) must be audited annually

5. WHAT IS AN AUDIT? • The Auditor of State performs audits of all local governments, state agencies, boards & commissions including all colleges and universities • Some audits are performed by Independent Public Accountants (IPAs) on a contract basis.

6. HOW DOES AN AUDIT AFFECT ME ?? • How does an Audit affect a purchaser of a particular entity? • Remember… GAGAS Reporting • Internal Controls • Compliance

7. INTERNAL CONTROLS

8. Internal Controls:Five Components More than just control procedures

9. Internal Control Objectives • How do you prevent errors? • If an error occurs, will you detect it?

10. Control Environment: Starts at the Top! • “Tone at the Top” for ethical behavior • Committed to internal controls • Code of conduct • Hiring qualified job applicants

11. Risk Assessment • Answer: Ask more questions: • What can go wrong? • How can we avoid it? • Particularly critical when things change: • Reorganization, new systems or computers, new transaction types, etc.

12. Monitoring A process that assesses the quality of internal control performance over time • Management / supervisory reviews • Critical when it is impractical to segregate duties • Analytical reviews

13. CONTROL DEFICIENCIES …. • What is the lingo? • Control Deficiency • Significant Deficiency • Material Weakness • Noncompliance

14. COMPLIANCE LAWS & REGULATIONS

15. LAWS AND REGULATIONS • State & Federal Laws • Contracts • Grant agreements • Other

16. OHIO COMPLIANCE SUPPLEMENT • What is an OCS? • Where do I find it? • Who puts it together? • Why do I need to know this?

17. OCS - Defined • The OCS includes certain laws and regulations which are of considerable public interest, or are of the type auditors generally consider “direct and material”. • Though the OCS is not a comprehensive listing of applicable laws and regulations, it is designed to help auditors and public offices identify and familiarize themselves with certain laws and regulations which generally apply to a variety of local governments.

18. Where Do I Find the OCS? • http://www.auditor.state.oh.us/services/lgs/publications/LocalGovernmentManualsHandbooks/ohio_compliance_supplement.htm • Available by : • Entire Supplement (pdf) • PDF version by section • Microsoft Word Version by section

20. Who Puts the OCS Together? AUDITOR OF STATE • Legislative Affairs • Legal Division • Center for Audit Excellence • Significant new or revised legal and regulatory requirements financial or audit impact • Comments we receive from auditors and clients • Implementation Instructions & Identifies updates

21. Why Do I need to Know This? • Auditors design their tests to reasonably assure detection of material misstatements resulting from: • violations of provisions of laws, regulations, contracts, or grant agreements that directly and materially affect the determination of financial statement amounts. • Management is responsible for designing, implementing and complying with applicable laws and regulations

22. Why do I need to know this? • EFFICIENCIES • You know what the Auditor is going to ask you • You know what records the Auditor is going to request • You can better improve your operations by implementing controls to help ensure compliance with laws and regulations • BETTER AUDIT REPORTS!!!

23. OCS • OCS – APPENDIX F – LEGAL MATRICES • Each matrix matches the applicability of OCS steps to various entity types • The information does not necessarily encompass every item requiring testing for these entities • When references to specific code sections are made, you should read those sections • l

25. BIDDING LAWS vs FEDERAL PROCUREMENT RULES clarification

26. OHIO COMPETITIVE BIDDING REQUIREMENTS • The CFAE receives many questions regarding Federal Procurement rules and how they differ from Ohio Competitive Bidding requirements. • Although similar in many ways, there are some important differences that should be clarified.

27. Ohio Competitive Bidding(Everyone) • Requirement placed on entities to ensure the best quality for the best price. • Bidding thresholds are set by Ohio statute. • Notice is required in newspaper of general circulation. • Requirements vary slightly by entity.

28. Ohio Competitive BiddingEveryone • RC 9.312 states that the government shall accept only the “lowest responsive and responsible bid.” • The government has the option of rejecting all the bids if none are acceptable. • If two or more bids are equal and are lower than any others, the board may accept either. • The government may not divide work between two equal bidders.

29. Ohio Competitive BiddingEveryone • Determining the lowest bid seems easy enough. • Determining whether a bidder is “responsible” may present problems. • The General Assembly did not provide a definition of “responsible.”

30. Ohio Competitive BiddingEveryone • The courts and the Ohio AG have furnished some guidance for “responsible”: • General ability and capacity to carry on the work, • Equipment and facilities • Promptness • The quality of work previously done by bidder • Personal qualities such as competence • Integrity and judgment

31. Ohio Competitive BiddingCounties • Expenditures exceeding $25,000 whether purchased, leased or leased for purchase must be bid. • Item purchased, leased, or leased for purchase obtained through competitive bidding in excess of $25,000.

32. Ohio Competitive BiddingCounties • Exemptions: • Emergency – unanimous vote by commissioners for less than $50,000 or there is a physical disaster. • Still requires information estimates from 3 prospective contractors. • Single Source/Supplier – not required for entity owned or leased where limited to sole supplier. • Government Seller

33. Ohio Competitive BiddingCounties • Exemptions (Continued): • Other types • Department of Job and Family Services, child care services for employees, youth offenders and medical services. • Criminal justice/social services. • Property leased/stored defined by statute.

34. Ohio Competitive BiddingMunicipalities • Required: • City purchases in excess of $25,000 and Village purchases in excess of $50,000 (unless Village Administrator). • Other requirements: • Cash payment for contract price. • Modification by director agreed to in writing.

35. Ohio Competitive BiddingMunicipalities • Exceptions: • Emergency 2/3 vote of members required • Public Auction/Sale for used equipment and supplies • Government to Government purchase • Force Accounts • Home Rule Powers

36. Ohio Competitive BiddingTownships • Required: • Purchase of machinery, materials and supplies, fire protection, lighting, energy savings, and communication required in excess of $50,000. • Footbridge repairs = $15,000 • Exception for emergency, government to government contract and contracts under ORC §5513.01.

37. Ohio Competitive BiddingTownships • Required (Continued): • Maintenance/Roads required in excess of $15,000/mile. • Exception for emergency and government to government contract. • Fire and Ambulance required in excess of $25,000. • Special Requirement: Bids opened and read publicly by advertisement for bidders.

38. Ohio Competitive BiddingSchools • Board seeks building, repair, improvement or destruction of school building in excess of $25,000. • Exceptions: • Urgent necessity or security • Acquisition of education materials • Availability by single source • Installment payment contract for purchase or service of emergency conservation measures

39. Ohio Competitive BiddingEveryone • The following do not require Ohio comp. bidding: • Textbooks • Computer hardware and software used for special purposes • Educational materials used in teaching • Motor vehicles, except school buses (RC 3313.172, 3327.08) • Services • Insurance • Fuel • Energy conservation measures (with restrictions provided by statute)

40. Ohio Competitive BiddingEveryone • The following do not require Ohio comp. bidding (continued): • In cases of urgent necessity, or for the security and protection of public property • Certain conditions must be met for each entity type in order to declare an emergency and legally avoid competitive bidding. • Painting the hallway is not an emergency. • Replacing a roof after a tornado could be.

41. Ohio Competitive BiddingEveryone • Additional exemptions (Continued): • RC 307.86 (for counties) – Professional services of an accountant, architect, attorney at law, physician, professional engineer, construction project manager, consultant, surveyor, or appraiser, by or on behalf of the contracting authority. • Certain shared-savings contracts.

42. Ohio Competitive BiddingEveryone • Additional exemptions (Continued): • Any item that is available and can be acquired only from a single source (must adopt a resolution by 2/3 vote that this is the case). • Ohio courts recognize not all procurements of services by public bodies are amenable to competitive bidding. • Known as the “sole-source doctrine” - bids need not be solicited for certain specialized services. [State ex rel. Doria v. Ferguson (1945) 145 Ohio St. 12, para. 2 of the syllabus]

43. Ohio Competitive BiddingEveryone • Ohio Sole-Source Doctrine (Continued) • An exception exists where the contract involves the performance of personal services of a specialized nature requiring the exercise of peculiar skill and aptitude. • Artistic nature; monopolistic, because of the function to be performed thereby; dependent upon a single means which is the subject of an exclusive patent, or franchise, or sole source of supply.

44. Ohio Competitive BiddingEveryone • Ohio Sole-Source Doctrine (Continued) • The common thread throughout the sole source case law is a rational, subjective belief that the chosen contractor delivers the best value for the work because it is uniquely qualified, or that it is physically impossible for the work to be performed by others. • Ohio competitive bidding requirements do not apply where this is the case.

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

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

47. Key Federal Procurement Guidance / Regulations • EDGAR (Education Department General Administration Regulations) Part 74 -Administration of Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations • (Authority: 20 U.S.C. 3474; Circular A-110) • EDGAR Part 80 – Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments • (Authority: 20 U.S.C. 3474; Circular A-102)

48. Federal Procurement MethodsCompetition • All procurement transactions will provide for full and open competition to the maximum extent practicable. • Agencies shall not place unreasonable requirements on firms in order to qualify. • Awards are made that are responsive to the solicitation and is most advantageous to the recipient, price, quality, and other factors considered.

49. States: Follow same policies and procedures in accordance with state law for procurements with non-Federal funds. All contracts/orders will include any clauses required by Federal statute and executive orders. • Other Grantees/Subgrantees: -Develop Policies and Procedures -Maintain Effective Contract Administrative System -Identify Conflicts of Interest -Conduct Pre-solicitation Reviews -Encourage Economy and Efficiency -Use of Excess Property -Use of Value Engineering -Determining Contractor Responsibility -Maintain Contract Award Decision Documentation -Limited Use of T&M Contracts -Settling Contractual Matters -Develop Protest Procedures • -Ensuring Competition -Utilize Various Procurement Methods -Contracting with Small Businesses -Performing Cost/Price Analysis -Making Procurements Available for Agency Review -Bonding Requirements -Inclusion of EDGAR Provisions -Contracting with Faith-Based Organizations EDGAR Part 74.40 thru 74.48 **Snapshot** EDGAR Part 80.36 Procurement Standards Procurement Standards/ Requirements Procurement Requirements Higher Education Institutions, Hospitals, and Other Non-Profit Organizations: -Recipient Responsibilities -Codes of Conduct -Competition -Procurement Procedures -Cost/Price Analysis -Procurement Records -Contract Administration -Contract Provisions

50. Federal Procurement Methods Maintain Contract Award Decision Documentation • Contract award decision documentation provides history of the procurement. • Examples of procurement documents to maintain in the record: • Rationale for method of procurement • Selection of contract type • Basis of Contractor selection or rejection • Basis of contract price