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—

• 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).

• The bids for two of the projects included both a fake bid and a bid from an associated company.

• 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.