More Failed IT System Implementations
We recently blogged about the problematic ERP system implementation undertaken by the State University of New York’s Downtown Medical Center (SUNY DMC, or “the Center”). We reported that the Center spent $2 million over four years, and at this point about five percent of the Center’s departments were using the system. The New York State Comptroller’s Office concluded—
It has been more than four years since the initial implementation began, however, and a majority of the Center’s units are not currently using the software as was intended. Thus, we find that management did not effectively implement or use the product it purchased, thereby diminishing its value.
But we don’t want SUNY DMC to feel that it is alone in having a problematic IT system implementation. No. SUNY DMC has lots of company in that regard.
For example, Federal Times reported that the U.S. Air Force has experienced similar problems. Reporting on USAF testimony before the Senate Armed Services Committee’s Subcommittee on Readiness and Management Support, Federal Times stated—
A seven-year, billion dollar investment by the Air Force in a new logistics management system has turned out to be a bust, officials say. ‘I am personally appalled at the limited capability the program has produced relative to that amount of investment,’ Air Force Comptroller Jamie Morin told the Senate Armed Services readiness and management support subcommittee on Wednesday.
The Air Force is now trying to sort out what can be salvaged from its investment on the Expeditionary Combat Support System and map out a way forward in a new report likely to be delivered to Congress next month.
So SUNY DMC should not feel too sad at having wasted only $2 million over four years. That amount pales in comparison to the USAF’s $1 billion waste over seven years. We wonder if CSC (the Air Force’s prime contractor) will be held accountable in some fashion.
In related news, this story at The Southeast Texas Record concerned a lawsuit against an accounting firm that installed software at a medical practice. The owners of the medical practice filed suit because they allege that the accounting firm botched the installation, which permitted an employee to embezzle $1 million over a five year period. The story reported—
The [accounting] firm … installed an accounting software system used by the medical practice's employees … However, when installing the software, the accounting firm failed to install a security function that would prevent manipulation of the system, the suit states.
In turn, an employee at the medical office allegedly embezzled nearly $1 million … from 2005 until September 2010, the complaint says.
‘Defendants, despite obvious indications of embezzlement in the records that were sent to them monthly and which they were responsible for reviewing and reconciling, failed to notice the irregularities, advise Plaintiffs of ways to identify or check for the same, and/or expose the embezzlement,’ the suit states. ‘Defendant … Begnaud in fact, would ridicule Plaintiffs when they would express to him they were not receiving the monies as indicated in the quarterly statements prepared by Defendants and provided to them.’ It was not until Sept. 23, 2010, that the [owners] discovered the embezzlement, the suit states.
The [owners] allege negligence against the defendants, saying they negligently failed to properly train the plaintiffs on the software and failed to properly install the software, among other negligent acts. They also allege negligent misrepresentation and breach of fiduciary duty against the defendants.
We should note (in a subtly self-serving way) that government contractors seeking to implement a new accounting system—or, indeed, any significant management system—need to navigate far more than simply the software. Policies, procedures, and practices all need to be updated and enhanced. Disclosure Statements may need to be revised. The last thing a company needs is to have a Business System declared to be inadequate because a system implementation was blown.
We also want to point out that the funds spent on a system implementation that went wrong are subject to being questioned by government auditors as being unreasonable. If upheld by a Contracting Officer, those questioned costs would then be unallowable. So not only would you have wasted time and money, such funds would not be recoverable in billings to the U.S. government.
Which would really be adding insult to injury.
The GSA Spending Spree
NOTE: This article contains a big, fat, factual error. Please see the UPDATE AND CORRECTION link at the bottom for a correction and an apology.
Readers of this blog might be wondering why we have not been all over the stories of the General Services Administration “conferences” like white on rice. After all, the story is relevant to many themes which form the basis for article after article on this site—themes such as lax oversight, the importance of instilling a culture of compliance, and holding management accountable for investing in adequate internal controls. More fundamentally, the stories of waste and abuse at the GSA are further evidence (if further evidence was even needed) that a monocular focus on fraud, waste and abuse by government contractors is misplaced and ignores the similar levels of fraud, waste and abuse within the Federal government itself. So why have we not been gloatingly reporting these stories, diving into slice after slice of Schadenfreude pie?
Well, let’s answer that oh-so-reasonable question. We’ve been holding-off on this one for two reasons. The first reason is that the story is still developing. We’re pretty sure we have the waste and abuse parts of the picture, but we’re still missing the third part of the triumvirate: we need the fraud/corruption part. And while there have been tantalizing hints of bribery and kick-backs, we haven’t yet seen anything solid. So there’s that.
The second reason we’ve been holding-off is that we’ve been listening to Vern Edwards. Vern Edwards, for those who may not know, is a demi-god in the pantheon of government contracting experts. We don’t always agree 100% with Mr. Edwards—but when he speaks, we listen. And this is what he said about the GSA spending spree—
Before you start trashing GSA with comments about how you are shocked, shocked by their behavior, keep in mind that what happened was a direct result of the rise of entrepreneurship in government that has been going on at all levels, federal, state, and local. … GSA's mistake in this case was in operating like a firm in the private sector trying to reward and motivate its people to get more business. This is what they had been led to believe that they ought to do. It is a natural outcome of the acquisition reform movement that sprung up during the 1990s during the Clinton Administration's "Reinventing Government" phase and the growing use of clueless political appointees to run agencies. Their mistake was in failing to recognize what is going on in America and realize that they were still functioning within the public sector. … GSA is a good outfit. They'll bounce back. The question now is whether entrepreneurial government was a mistake.
So we’ve been holding-off and watching and reading. Now we’re ready to offer some comments, keeping in mind that the story is still developing and we’ll likely have more to say about it in the near future.
Let’s start with this USA Today story, written by Andy Medici of the Federal Times and published on April 17, 2012. Mr. Medici (he of that noble Firenze ruling family) wrote that the Las Vegas conference debacle was part of a pattern, part of a culture of waste and abuse that was endemic to GSA Region 9. He reported that the Region 9 executive in charge of organizing that $822,000 “conference” in Vegas, Mr. Jeff Neely, “also spent thousands of taxpayer dollars on a variety of wasteful trips and events, according to lawmakers and GSA's top investigator.” Mr. Medici wrote—
In October, Neely took a nine-day trip to Hawaii to attend a one-hour ribbon cutting. He went on another five-day trip to Atlanta in November to attend a conference of questionable value. He also organized a four-day trip to Napa Valley in Northern California that cost more than $40,000 and a $150,000 intern conference in Palm Springs, Calif. [Brian Miller, GSA’s Inspector General, reported that] ‘Spending was part of the culture of Region 9.’ In addition, Miller's office found that thousands of dollars of equipment — iPods, gift cards and other items — Neely's Region 9 office bought for an employee awards program went missing or was stolen. Miller said his office tracked one of the missing iPods to Neely's daughter.
Among the investigations still in the pipeline: possible waste and mismanagement concerning the intern conference in California and another conference that Miller declined to discuss. Neely's office organized both.
In an email Neely wrote in preparation for the 2010 Las Vegas conference, he said, ‘Why not enjoy it while we have it?’ …
Even after top GSA officials became aware in May 2011 of the inspector general's concerns about Neely's spending, they awarded him a $9,000 bonus.
Just to add some fuel to the Neely funeral pyre, this article reported that his wife accompanied him on several official trips he took on behalf of the GSA. That fact would be meaningless, except (according to the report), “The government picked up her tab and she directed event planners to spend government money and arrange lodging for relatives during a trip to Las Vegas in 2010.”
Having been now duly sensitized to the management decisions of Mr. Neely, let us also note that he did not act alone or in a vacuum. Here’s a link to a Fox News report that discusses how GSA officials were “grilled” by members of the House Oversight and Government Reform Committee. Fox News reported that—
Members of the House Oversight and Government Reform Committee at times yelled at the representatives from the General Services Administration called to testify Monday, demanding strict punishment. The acting chief of the agency later assured lawmakers that he's ordered a few GSA officials to repay the government for their personal expenses and will refer any ‘criminal activity’ that is uncovered to law enforcement. …
Rep. Elijah Cummings, D-Md., top Democrat on the panel, said the allegations against Neely document an ‘indefensible and intolerable pattern of misconduct.’
Cummings, referring to internal documents allegedly showing Neely gloating about the money he was spending, accused Neely and his wife of blowing through federal dollars, as if they believed they were ‘some kind of agency royalty who used taxpayer funds to bankroll their lavish lifestyle.’
‘They violated one of the most basic tenets of government service. It's not your money,’ Cummings said.
Other agency officials, both current and former, apologized for the 2010 Western Regions Conference and condemned the over-the-top spending documented in the inspector general's report.
Martha Johnson, the administrator who resigned after the report was made public, called the Western Regions Conference -- which had been escalating in cost for years -- a ‘raucous, extravagant, arrogant, self-congratulatory event that ultimately belittled federal workers.’
She personally apologized, while defending the work of the GSA as a whole. ‘I am extremely aggrieved by the gall of a handful of people to misuse federal tax dollars, twist contracting rules and defile the great name of the General Services Administration,’ she said.
David Foley, a GSA official who was captured on video joking about the agency's spending at the 2010 conference, also apologized at the hearing. Foley said that he didn't know the ‘over-the-top’ expenses were being paid for with government money. …
Two other GSA officials were fired after the inspector general report found the agency spent more than $820,000 on the 2010 conference.
Miller said Monday that investigations are ongoing, and that his department is looking at possible bribery and kickback schemes.
Here’s an Associated Press video.
Let’s conduct an investigation of our own. Let’s look at how the GSA was able to afford such lavish parties. After all, every other Federal agency is having a budget crisis; cutbacks are everywhere. Although the Vegas “conference” took place in 2010, that was not so long ago. Federal spending has been under scrutiny since 2009. So we wonder: where did GSA get the money?
Astute readers might already know or have guessed the answer. GSA obtained its funds from contractors as a condition of contract award. It’s called the Industrial Funding Fee (IFF). Since 1995, GSA has required contractors with Multiple Award Schedule (MAS) contracts to pay a quarterly fee, based on sales generated by the MAS contract(s), in order to fund the cost of administering the contracts and providing goods and services to the rest of the Executive Branch. The IFF has generated so much money for the GSA that it no longer needed to reply on funds appropriated by Congress. Seems like a great success!
The problem is that the IFF has been too successful for GSA. In 2002, the U.S. General Accounting Office (now called the Government Accountability Office) reported that "from fiscal year 1999 to 2001, the revenue generated by [IFF] fees exceeded [FSS] program costs by 53.8%, or $151.3 million. Program customers are, in effect, being overcharged for the contract services they are buying. Nevertheless, program officials have not adjusted the fee." When Congress learned about this finding, hearings were scheduled. GSA then decided to lower the IFF from 1.0% to 0.75% on its own. Since 2003, the IFF rate has been 0.75%.
In addition, GAO issued a 2011 report that discussed the interagency fees charged by GSA to other agencies to recover its administrative costs on non-MAS acquisitions, which ranged from 1 to 12 percent. (The report looked at many interagency support services but we are focusing here only on GSA.) GAO reported—
According to agency officials, the fee revenue generated from the sales orders of the interagency contract programs is intended to cover costs and contributions to reserves, where permitted; however, the programs are not required to break even on an annual basis. As such they are permitted to have excess revenue or costs that exceed their revenue in a given year. According to officials from the selected programs we reviewed, each program is managed with a goal of having its revenues and costs, including contributions to reserves, break even over a period oup to 5 years. We observed, however, that four of the six programs generated excess revenue over their costs for almost every fiscal year since fiscal year 2007.
While not all GSA interagency programs generated “excess revenue over their costs,” GAO reported that the GSA MAS program generated an average of $62 million in excess revenue over costs each year between 2007 and 2010. Even though the IFF had been lowered in 2003, GSA continued to generate tremendous cash income from its MAS program sales. And GSA retained all of its excess revenue in its “reserves”—and gave nothing back to the U.S. Treasury or to the taxpayers.
In February 2012, the GAO reiterated its 2011 findings about the GSA MAS program and reiterated its recommendation that—
… the Administrator of General Services direct the Federal Acquisition Service Commissioner to develop and implement guidance for evaluation of current fee rates when an individual program consistently transfers excess revenue to the reserve funds. Such an evaluation would allow GSA to determine whether a reduction in the fee rate of any of its programs might be warranted. A reduction of the fee rate for the MAS program alone would provide federal agencies potentially significant cost savings.
In our view, when examined in this context, the now infamous Las Vegas “conference” of 2010 was simply a symptom of an agency culture that took every opportunity to generate income. And then the agency took that income and kept it in its own pockets, even though it was clearly excess to current and future needs. To make things worse, there was an actual incentive to spend lavishly on any activity that could possibly be called “business-related”—since spending lavishly would tend to reduce the “excess revenue” figures being reported by GAO to Congress.
So that’s the deal. If the excess IFF funds weren’t spent on conferences and award programs, then GAO and Congress would want the excess funds given to the Treasury. Worse yet, there would be pressure to reduce the IFF rate in order to move to a break-even state. And then the high-living days would come to an end.
Remember Mr. Edwards’ words. And remember that the MAS program had generated profits since inception, and had lived off the Congressional appropriation grid all the while. Though Congressman Cummings wagged his finger and asserted that it was not GSA’s money, he was actually mistaken. It was the agency’s money, because they generated it without Congressional appropriations. The problem was, GSA was too successful at income generation, and all that “excess revenue” created incentives to spend the money, lest Congress want its piece of the action.
Neely didn’t act alone or in a vacuum. And GAO and Congress knew about the excessive IFF rates for years. So when everybody is acting shocked and appalled at the wasteful spending, remember what you’ve learned in this article. There are very few clean hands in this mess.
UPDATE AND CORRECTION
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Procurement Problems at Savannah River
In 2008, a Limited Liability Company called “Savannah River Nuclear Solutions” (SRNS) became the management and operating (M&O) contractor for the Department of Energy (DOE) at the Savannah River site. Fluor Federal Services, Newport News Nuclear, and Honeywell International are the three parent companies of SRNS, “who is responsible for environmental cleanup, national security activities and operation of the Savannah River National Laboratory.”
The DOE Inspector General recently reviewed SRNS’s procurement activities related to acquisitions of services from its three parents. As the DOE IG reported—
To help ensure that procurements from affiliates are free from conflicts of interest, adequately competed and reasonable in cost, the Department's contractors are required to obtain approval of related party procurements from Federal officials. For the SRNS contract, the Department established a requirement that procurements from the parent or an affiliate, regardless of type or amount, be submitted for approval prior to award.
The DOE IG reported that, in 2009, SRNS had entered into non-competitive contracts for personnel services from both Fluor and Newport News. In the first fourteen months of activity, “126 purchase orders … valued at approximately $26 million” had been issued to the two parent companies. The DOE IG had a problem with this. Specifically, the DOE IG found—
Although specifically required under the terms of its contract, SRNS also did not obtain approval for subsequent modifications that increased the budget ceilings for those contracts from $5 million to $40 million in one case, and, from $500,000 to $15 million in the other; [failed to demonstrate] that the affiliates were the only sources capable of providing the expertise necessary to perform the needed services, a pre-requisite for noncompetitive awards to affiliate companies; and [failed to perform] cost analyses to ensure the reasonableness of the cost of affiliate personnel services, as required.
The DOE IG provided details regarding its findings. Here’s one snippet from the report—
For example, SRNS issued noncompetitive purchase orders to obtain the services of an internal auditor and a project controls scheduler from a parent company, Fluor. In the first order, the period of performance was approximately 21 months, at an estimated cost of $400,412, which included $310,013 in labor and $90,399 in estimated travel related to temporary living expenses and periodic trips home. In the second order, the period of performance was approximately 24 months, at an estimated cost of $408,515, which included $285,406 in labor and $123,109 in estimated travel. In neither case did SRNS demonstrate that the individuals solely possessed special expertise or that the acquisitions were reasonable in cost.
How did this situation happen? The DOE IG had the answer—
The noncompetitive acquisitions occurred and persisted because the Department did not effectively administer the SRNS contract as it pertains to the procurement of affiliate personnel services. For example, Department contracting officials were apparently unaware that they had approved, in June 2010, an exemption from Federal requirements for the acquisition of affiliate personnel services as part of a multiple modification initiative to SRNS' procurement manual.
Furthermore, Department contracting officials stated that they were aware that SRNS had proposed using affiliate personnel services, but they were unaware of how extensively the services were being used. Additionally, the Department was not notified of a potential OCI because SRNS' General Counsel determined that SRNS did not need to submit a representation regarding such a potential conflict to the Department for these two noncompetitive contracts with parent companies. According to senior contractor officials, SRNS had tacit approval to use affiliate personnel services because the intention had been disclosed in the contract proposal prior to award of the management and operating contract. As a result, even though specifically required under the terms of its contract, SRNS never submitted its affiliate personnel service contracts with Fluor and Newport News to the Department for approval.
With respect to whether or not disclosure of use of affiliated services created a “tacit approval” on the part of DOE, the DOE IG had this to say—
SRNS sought to rely on inclusion of its intent to acquire personnel services as tacit approval for the process, yet violated a major condition of its original proposal. Specifically, the SRNS proposal stated that ‘Should the availability of critical skills become an issue … we will fill any short-term gaps by drawing from the qualified personnel of our member companies.’ SRNS defines short-term assignments as work expected to last less than 12 months. However, of the 42 purchase orders in our sample, 22 contain assignments that have lasted 12 months or longer.
Oops!
We have discussed the operation of joint ventures in this blog before. Companies wishing to enter into JVs for performance of government contracts should consider the following words of the DOE IG report—
We also noted that SRNS officials directly involved in the overall management and administration of the two affiliate contracts had what we considered to be an apparent conflict of interest in that they were assigned to SRNS but remained employees of the parent companies. The relationship of these SRNS employees to the affiliates, coupled with their responsibilities associated with administering the two affiliate contracts, calls into question SRNS' ability to provide assurance that it was performing objectively and without bias, and, as a result, preventing the affiliates from receiving an unfair competitive advantage. No instance of personal enrichment came to our attention during the course of our review. In our opinion, however, the appointment of affiliate personnel to key management positions, whose roles include administering the two affiliate contracts, creates a potential conflict of interest that had not been evaluated by SRNS, had not been brought to the attention of the Department, and was contrary to the very explicit terms of the master contract.
DOE’s Environmental Management team did not fully agree with the findings in the DOE IG report. In particular—
… EM concluded that corporate reachback is not a procurement action and is not subject to a determination that the affiliate is the sole-source of needed expertise. Finally, EM stated that corporate reachback costs are subject to the same requirements for reimbursement as any other costs and only reimbursed to the extent that the costs are allowable and reasonable.
The fact of the matter is that many joint ventures and M&O teams are largely unpopulated and use employees badged to their home companies. This DOE IG audit report points out some significant problems with that approach. We still think such an approach is viable; however, we also think that companies need to be explicit in the management approach and provide details in their proposal regarding exactly how they intend to operate after contract award.
New York State Comptroller Finds Fraud and Corruption at SUNY Medical Center
The State University of New York’s Downstate Medical Center (“the Center”) has been in operation since 1860. It operates five medical colleges and a hospital, and instructs about 1,600 students. In addition, according to this audit report released by the Office of the New York State Comptroller, the Center’s lax internal control environment facilitated (1) big-rigging by one vendor, (2) instances of contract awards without any bids being received, (3) intentional circumvention of procurement policies and procedures, (4) poor planning and outright mismanagement of vendor contracts, (5) possible conflicts of interest, and (6) a botched ERP system implementation.
And all that was reported in an audit report of less than 20 pages. We’re thinking that DCAA might learn a thing or two from these guys. We also think our readers might learn a thing or two from the details of the Center’s approach to (mis)management.
Here’s what we think you need to know.
In 2010, the NY State Comptroller’s Office received three anonymous letters “alleging waste, abuse and fraudulent activity relating to procurement activities at the Center.” The auditors were called in and were able to substantiate some of the allegations. We are going to discuss three of the auditors’ reported findings.
The Eagle Two Problem
The auditors determined that Eagle Two Construction (owned by Roxane Tzitzikalakis, whom we shall henceforth refer to as “Roxy T.”) was an affiliated entity of RJS Construction and JIT Enterprises LLC, all of which were located at 294 20th Street, Brooklyn, NY. In addition, another company, Workshop Group, Inc., was also located at the exact same address, although it had been disclosed as a subcontractor to Eagle Two. The auditors reported, “In all cases, we found if one of these affiliated companies bid against Eagle Two, Eagle Two won the project.”
Hmmm….
The audit report stated—
Ms. Tzitzikalakis failed to disclose her ownership of JIT on the vendor responsibility forms Eagle Two was required to file with the State and still has not disclosed it [on] the current disclosure forms as required. Additionally, she did not disclose her ownership of RJS until questioned by State officials. Center officials claimed they were unaware of the connection between Eagle Two and any of the other companies. Nevertheless, we found there was ample information available to Center officials (contractor certification provided in their vendor responsibility filings, etc.) that showed these relationships. Therefore, Center officials should have been aware of the connection and these companies should not have been allowed to compete against each other for the same work.
(Emphasis added.) The auditors reviewed bids received by the Center on several projects that had been awarded to the affiliated entities. The auditors found—
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The bids for all six projects included at least one bid submitted as a competing bid against Eagle Two that was either: a fraudulent bid, or a bid from a company either owned by Ms. Tzitzikalakis (RJS) or an associated company (Workshop Group).
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The bids for two of the projects included both a fake bid and a bid from an associated company.
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On two of the six projects, Ms. Tzitzikalakis submitted both the fake and affiliated company bids along with her Eagle Two bid.
The audit report provided a good summary of what went wrong. We have italicized a couple of key sentences in the follow quote that you may wish to consider.
A Facilities Coordinator (Coordinator) at the Center was responsible for receiving the bids for two projects. The Comptroller’s examination revealed that, for two projects in which Mirage and Workshop Group supposedly submitted bids against Eagle Two, Ms. Tzitzikalakis herself provided the Coordinator with contact information for Workshop Group and Mirage, her alleged competitors. Exacerbating this suspect procedure for securing competing bids, when the Coordinator’s efforts to contact the companies with the information provided by Ms. Tzitzikalakis proved unsuccessful, instead of questioning the legitimacy of the ‘bids,’ the Coordinator instead accepted the supposed competing bids directly from Ms. Tzitzikalakis purportedly on behalf of the two companies bidding against her company. The Comptroller’s staff confirmed though evidence imbedded on the Coordinator’s computer that she received at least one ‘bid’ purportedly from Mirage from Eagle Two. … The Comptroller’s examination revealed that the Mirage bid was a forgery and that Workshop Group is a closely affiliated company with Eagle Two.
Confronted with the fact that she accepted ‘competing bids’ from the eventual successful bidder itself and the lack of any confirmation of the legitimacy of the losing bids, the Coordinator admitted she should not have accepted the alleged competing company bids from Ms. Tzitzikalakis. … The Coordinator declared that she accepted the bids because she was having difficulty getting three bids for the projects and was under pressure from superiors to get the work done quickly. The Coordinator’s superior at the time was an Assistant Vice President at the Center.
During our audit, we interviewed several management employees who were responsible for approving and processing bid documents …. These individuals, whose signatures were on the bid packages, claimed that they merely signed off on the documents and denied knowledge as to where the bid documents originated from or who was responsible for obtaining them. Although the Center’s internal processes required them to approve the bid packages, they took no responsibility for receiving or reviewing the bids or ensuring a thorough review of the bid process.
Looking deeper at some of the Eagle Two projects, the auditors concluded that “facts strongly suggest work was awarded to Eagle Two’s affiliates and to Eagle Two as separate projects to avoid submitting change orders, which would have drawn attention to the possibility that work on the kitchenette units exceeded the original contract price.” This finding was related to a project that had been awarded to Eagle Two for renovation of kitchenette units. The auditors noted that, “Though the contract term was three years, the total amount of the contract, $531,552, was expended in just six months.”
Hmmm….
(We note that the faster-than-scheduled expenditure of contract funds was also a factor in SAIC’s CityTime project FUBAR.)
Looking deeper at Eagle Two, the auditors determined that Roxy T’s father (Demitrios T.) was “involved” in the company’s daily operations. The auditors also determined that “Center staff and management were well aware” of the connection between Demitrios T. and the Eagle Two entities. That would be a problem “because Mr. Tzitzikalakis previously owned Foundation Construction before he was convicted of various felonies in connection with submitting falsified and inflated invoices to the New York City Department of Citywide Administrative Services.”
Hmmm….
The TSIG Problem
Technical Systems Integration Group Consulting (TSIG) was one of the Center’s vendors. The auditors found a “questionable relationship” between TSIG and one of the Center’s project managers. We offer a fairly lengthy snippet (with italics) because we think there are some lessons to be learned. In the words of the audit report—
The Center paid TSIG approximately $262,000 between February 2005 and November 2010. TSIG conducted assessments and inspections for the Center, usually in preparation for accreditation by The Joint Commission (TJC), which occurs every three years. The Center first hired TSIG for emergency accreditation services in January 2005. Officials stated they needed to hire a vendor quickly to repair substandard work performed by a prior vendor hired to prepare the Center for the upcoming accreditation. Reportedly, TSIG, was the only vendor, of three that submitted a bid, that could start immediately and the company was hired to complete the work for $64,000. Since TJC accreditation occurs every three years, the Center’s management could and did plan, by hiring a consultant to perform work, to be ready for the assessment. Had the Center hired a competent vendor initially there would have been no need to hire a vendor under emergency circumstances. However, poor planning reduced the Center’s ability to effectively utilize competitive bidding. Furthermore, our audit noted that, after the emergency purchase, TSIG was favored and received substantial additional work through management’s circumvention of State procurement processes.
For example, between April and August 2006, the Center paid TSIG $72,000 for monthly assessments, consulting, and training services. According to Center records, no other bids were received for these services. Thus, there is no assurance that fair competition occurred or a reasonable price was paid. Additionally, in February 2007, the Center again purchased assessment services from TSIG to prepare for a future TJC assessment. … Center staff personally recommended TSIG be awarded the contract and, although the services were advertised in the Contract Reporter as required, the ad stated that the contract was going to be awarded to TSIG (not competitively bid). TSIG was paid $82,750 for its services.
As part of the recommendation, written by Center officials to award TSIG the $82,750 contract, officials specifically praised a TSIG representative who had worked closely in the past with the Center. The next month (March 2007), shortly before TSIG was awarded the contract, this representative was hired as a project manager by the Center. Later, as the project manager, he oversaw and approved work as acceptably completed for the $82,750 project. Again, in December 2007, the same project manager requisitioned and approved work completed for services awarded to TSIG with a total cost of $18,534.
In July 2007, TSIG submitted a proposal to the Center for the sale of licenses for its Environmental Care Tracker (ECT) software; a proprietary software offered only by TSIG. Prior to submitting this proposal, TSIG had approached their prior employee (now a project manager for the Center) regarding the Center’s use of ECT. In June 2008, a five year, $30,000 contract was executed for the use of the ECT software. The advertisement placed in the Contract Reporter requested vendors provide consulting services for ECT software. As the software is offered only by TSIG, other potential vendors were not considered. As of November 2010, the Center paid $12,000 of the $30,000 ECT contract. After interviewing the intended users of the software, we found most were not currently using nor had ever used the software. …
We found no evidence that Center management considered the possibility of recusing the project manager from working with or on projects where TSIG was the vendor, or that the project manager considered recusing himself, as required by the State Ethics Commission opinion addressing this issue. …
Hmmm….
One other vendor (HOK) was examined. Auditors determined that “Center officials worked with HOK management in an effort to circumvent contracting procedures. We found the officials attempted to award millions of dollars in work to HOK rather than utilize competitive bidding.”
The Lawson ERP Problem
According to the audit report, the Center embarked on an implementation of a Lawson ERP system in 2007. By 2011 (four years later), about $2 Million had been expended in the implementation effort. The auditors found that—
As of July 2011, only 10 of more than 200 departments within the Center are using the software and responsibility for implementing the software has changed at least once. … According to officials, the 10 units using the software represent approximately 75 percent of the total dollar volume of supplies ordered in the hospital; however, the university is not using the procurement software in any of its units (though the budget planning module is in use). … It has been more than four years since the initial implementation began, however, and a majority of the Center’s units are not currently using the software as was intended. Thus, we find that management did not effectively implement or use the product it purchased, thereby diminishing its value.
Recommendations/Responses
The audit report made several recommendations for corrective action/improvement, as perhaps our readers may well imagine. We think it will be interesting for our readers to review the Center’s responses to those recommendations.
Recommendation 1: Establish and promote a control environment at SUNY Downstate Medical Center that supports internal controls and compliance with applicable laws including, fair and competitive purchasing of goods and services, and compliance with the Public Officers Law.
Response: SUNY Downstate Medical Center (DMC) currently has the required separation of duties that establish the control environment necessary to ensure compliance with applicable laws.
Recommendation 3: Strengthen procurement oversight to assess whether lack of competence is affecting the performance of the procurement offices and to detect future potential and actual instances of procurement, fraud, waste, and abuse.
Response: Procurement process elements have been designed to strengthen internal controls. Departments and staff are aware of their responsibilities and these responsibilities will be reinforced at staff meetings and in performance programs.
Recommendation 5: Monitor purchases to assure they are justified, necessary, and being used to prevent waste of Center resources especially in emergency situations which limit purchase options reducing chances of obtaining a reasonable price and quality goods and services. Identify, assess, and mitigate risks which may hinder the Center’s mission or objective relating to purchasing.
Response: SUNY DMC does and will continue to monitor purchases to ensure they are justified and reasonable; however, emergency situations must and will be responded to in the manner in which is required for the circumstances.
Recommendation 6: Cooperate with any Joint Commission on Public Ethics review that may occur as a result of this audit.
Response: SUNY DMC does and will continue to cooperate with all reviews by outside agencies. SUNY DMC is confident that the matter discussed in this report, termed “relationships with vendors,” does not rise to any level of ethical or, moreover, legal violations. Furthermore, SUNY DMC believes that the available supporting documentation and analysis of the facts as it relates to the referenced State Ethics Commission opinion supports SUNY DMC’s position.
Yeah, with that kind of attitude, we expect to be hearing about SUNY DMC again in the future.
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Section 39 of the Office of Federal Procurement Policy (OFPP) Act requires the OFPP to issue, annually, an executive compensation “benchmark” amount that establishes an allowability ceiling on compensation of contractor executives. The benchmark amount is set at the median (50th percentile) amount of compensation over a recent 12-month period for the five most highly compensated employees in management positions at each home office and each segment of all publicly-owned companies with annual sales over $50 million, and the determination is based on analysis of data made available by the Securities and Exchange Commission (SEC). As defined by the Cost Principles at FAR 31.205-6(p), executive compensation means the total amount of wages, salaries, bonuses, restricted stock, deferred and performance incentive compensation, and other compensation for the year, whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the year. For government contractors, executive compensation in excess of the annual OFPP benchmark/ceiling amount is unallowable. Period.
