Audit Report on the Small Procurement Practices of the Department of Business Services

EXECUTIVE SUMMARY

The New York City Department of Business Services (DBS) was established pursuant to Local Law 61 on July 1, 1991. DBS assists small businesses through a variety of programs. In addition, DBS purchases goods and services for the Fulton Fish Market, and the Mayor’s Office of Film, Theatre, and Broadcasting, and it funds the New York City Economic Development Corporation (EDC) through a contract.

During Fiscal Year 2001, DBS encumbered funds for small procurements totaling $772,944.Small procurements are defined as the purchase of goods and services totaling $25,000 or less; construction and construction-related services totaling $50,000 or less; and information technology totaling $100,000 or less.

The objectives of the audit were to determine whether DBS complied with applicable purchasing procedures regarding its small procurements, including the City’s Procurement Policy Board (PPB) Rules, Comptroller’s Directives #1, #6, #24, and #25, and its own formal procedures.

The scope of our audit was small procurements for the period July 1, 2000, through June 30, 2001.

To gain an understanding of DBS purchasing procedures, we interviewed the agency’s Contracting and Procurement Officer, Fiscal Director, Accounts Payable Supervisor, Chief Auditor, and Budget Analyst. We also reviewed DBS’s Fiscal Unit Procedures Manual and Agency Procurement Procedures, and applicable Comptroller’s Directives and PPB Rules.

To determine whether DBS complied with PPB Rules and Comptroller’s Directives, we selected two random samples: a sample of 27 purchase orders (that represented 107 invoices and 79 payment vouchers), totaling $129,350, from 284 purchase orders; and a sample of 13 miscellaneous vouchers, totaling $14,724, from 47 miscellaneous vouchers.

We reviewed the supporting documentation for each of our sampled transactions to determine whether:

• Purchasing documents were appropriately prepared and approved.
• Purchases were made through the City’s Requirements Contracts, when available.
• Object codes were correctly charged.
• Bids were solicited in accordance with PPB Rules.
• Payments were supported by invoices and were for agency-related expenses.

We determined whether the same or similar goods or services were purchased during Fiscal Year 2001 from the same vendor within one month, using different purchase orders. We then determined whether purchase orders from a vendor, when totaled, exceeded the small purchase limits of § 3-08 of the PPB Rules even though they were individually below those limits.

This audit was conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS) and included tests of the records and other auditing procedures considered necessary. This audit was performed in accordance with the City Comptroller’s audit responsibilities as set forth in Chapter 5, § 93, of the New York City Charter.

DBS generally complied with applicable PPB Rules, Comptroller’s Directives, and its own formal procedures, when processing small procurements. However, there were problems with some of its purchasing practices.

Of the sample of 27 purchase orders, DBS failed to solicit the required bids for three (28%) of the 11 purchase orders that required competitive bidding. These three purchases totaled $25,261. DBS officials stated that two of the three purchases were for consulting services that were sole-source and therefore did not require bids. However, we did not see PPB-required written documentation stating that only one source for these purchases was available. For the third purchase, training courses from Learning Tree International, DBS officials stated that it did not have to be competitively bid since it fell under § 1-02 of the PPB Rules, Transactions Not Subject to the PPB Rules. However, this section of the PPB Rules is limited to attendance at training seminars (i.e., a class for a special purpose). Learning Tree International offers training courses that are general in nature and widely offered by numerous suppliers.

DBS made a purchase totaling $51,065 for training courses offered by Learning Tree International by issuing three purchase orders a few days apart. The purchase orders were each under $25,000; however, when added together, they exceeded this amount. Had the three purchase orders been made as one purchase, DBS would have had to award a contract under the more competitive provisions of § 3-02 of the PPB Rules (rather than § 3-08), which requires, among other things, public advertisement of the opportunity to bid on a contract.

A total of 11 (41%) purchase orders, totaling $53,923, from the sample of 27 purchase orders were charged to incorrect object codes. The use of the correct object code allows an agency to categorize the type and amount of a particular expense item within a fiscal year. This information is used to generate the year-end reports that identify expenditure patterns.

Purchase orders for seven (26%) of the sampled 27 purchases were prepared and approved after the date of the invoices. For example, the order for a purchase made from D & R Auto Parts was dated July 18, 2000, and the invoice was dated July 10, 2000. Purchase orders are used to document the approval to purchase an item and to clearly state to the vendor the items ordered and terms of the sale. Preparing a purchase order after an item has been received defeats this purpose.

DBS did not pay 14 (14%) of the 107 invoices in the sample within the time frames specified by the PPB Rules. These invoices were paid from 31 to 150 days past those time frames. Late payments can cause DBS to incur additional expenses.

Only six of the 107 invoices in the sample were "clocked in" when received by DBS, either by using a date stamp or by writing the date on the invoice. The City’s Financial Management System (FMS) uses the clock-in date to determine an agency’s adherence to § 4-06 of the PPB Rules regarding timeliness of payments. If DBS does not clock in invoices when they are received, FMS uses an earlier date (the date of the invoice, or the fifth day after the postmark date on the envelope containing the invoice). This affords the agency less time to pay the invoice and remain in compliance with the prompt payment procedures outlined in the PPB Rules.

DBS does not maintain signatures on file for department heads or their designees who are authorized to approve purchase requisitions (prior to their submission to DBS’s Fiscal Division) and certify invoices to be paid. Comptroller’s Directive #24 states that the signatures of employees authorized to sign certifications must be on file.

For 20 (26%) of the 79 voucher packages reviewed in the sample, not all parts, especially the invoice, were marked "vouchered." By not stamping all parts of the voucher file as "vouchered," especially all copies of the invoices, DBS increases the chance of duplicate payments.

A payment, totaling $20,000, was made by DBS to the Economic Development Corporation (EDC) for reimbursement of its share of the cost to install wall coverings and carpet on its floor. DBS and EDC occupy premises at 110 William Street. As part of its contract with DBS, EDC is to pay all maintenance and lease charges, and DBS is to reimburse EDC for a portion of these charges. DBS procurement files for this purchase contained a purchase requisition, a purchase order, and a memo from EDC asking DBS for reimbursement. However, the DBS files did not contain any invoices to support the installation of wall coverings and carpet, or any information on how its share of the costs was allocated.

DBS did not use an existing Requirements Contract for the purchase of ten Laser Jet Toner Cartridges (4V), totaling $1,289. DBS purchased the toner cartridges from Big Apple Office Supplies (an outside vendor) when it could have purchased the toner cartridges from Industries for the Blind of NYS, a vendor with a City Requirements Contract.

This audit makes 10 recommendations to DBS officials, the most significant of which are that DBS should:

• Ensure that bids are solicited in accordance with PPB Rules.
• Ensure that purchases are charged to the correct object codes.
• Ensure that reimbursements made to EDC for expenses incurred are supported withinvoices and with information on how its share of the costs was allocated.

The matters covered in this report were discussed with officials from DBS during and at the conclusion of this audit. A preliminary draft report was sent to officials from DBS and discussed at an exit conference on April 18, 2002. On May 13, 2002, we submitted a draft report to DBS officials with a request for comments. We received a written response from DBS on June 3, 2002. DBS officials generally agreed with the audit’s findings and recommendations and have taken steps to implement most of the audit’s recommendations. The response stated:

"With the recent transition, [the] Commissioner . . . has begun a process of reorganizing the agency structure and streamlining its operations with the intent to be more efficient and productive to better serve the small business community. . . . we have already implemented controls and procedures that can be expected to eliminate the issues identified."