The controversial report from the City Auditor on Procurement, Phase 2, was on Council's agenda June 7, referred from the Audit Committee meeting of May 20, 2010. City Manager Owen Tobert also presented a Report to Council that gave the findings of an internal review that was conducted since May 20. There have been no circumstances of procurement fraud found through this preliminary internal review, and the City Auditor has produced no evidence of specific fraud situations.
Notwithstanding the lack of evidence of procurement fraud, the Administration believes it is urgent to investigate all allegations of procurement impropriety, and has received the go-ahead from Council to bring in external auditors to look at high-risk files, those where substantial dollars are at risk, and those that warranted further analysis based on the preliminary internal review.
1) Was there any fraud?
No evidence of fraud or procurement impropriety has been seen in the preliminary review.
In the last two weeks, the Chief Financial Officer, Eric Sawyer, led a review of over 600 procurement purchase orders and files that were part of the City Auditor's review, and covered the period of January 2006 through April 2009. All Whistle-Blower Program files from inception of the program to May 20, 2010 were also reviewed, based on information provided by the City Auditor.
There are 29 purchase orders of 462 reviewed with insufficient information presently available, and they require a further review. There are nine single-sourced files out of 70 contracts reviewed that have insufficient paperwork attached to the file, and need a further review.
The City Manager has received the go ahead from City Council to obtain the services of an independent external auditor to review these, and other potential high risk files.
2) What did the Chief Financial Officer find when he reviewed the procurement files?
In the sample taken for the preliminary review, appropriate authorization for all change orders were adequately authorized and documented.
There were 740 purchase orders for work, goods or services over the value of $25,000 which had changed by 50% or more from the original purchase order. The internal review looked at purchase orders which represented 80% of total value of those change orders. By Council policy, all expenditures greater than $200,000 above the Council-approved capital budget must be reported to Council and the increase in budget approved by Council. This did occur in all cases examined in the review.
3) Is there a missing paper trail?
Of the 462 contracts looked at in the preliminary review, 433 had the necessary paper work in place. The preliminary review saw 29 of 462 contracts reviewed for which no reference file or other designation was found. This will have to be further investigated.
Of the balance of the 462 original files included in the Auditor's report:
- 109 (42%) were cancelled, which explains why no paper work existed
- 137 file numbers were found and associated with paperwork
- 16 were to ENMAX
- 50 were to entities that own proprietary rights to pre-existing equipment, software license and maintenance renewal. No file numbers were assigned
- 121 IT POs - buyers can issue POs without going through Supply Management. No file numbers were assigned in the Supply Management system.
4) Why did so many City purchase orders go over their original amount and require change orders?
The City routinely completes infrastructure through a process called construction management.
Under that process, an external construction project manager is hired to oversee the planning, co-ordination and procurement for a project from inception to completion. That construction manager co-ordinates and administers all contracts for services that will result in a functionally and financially viable project that is completed on time, within budget and in accordance with required quality standards. The external construction manager typically does not perform construction with his/her own forces. Instead, all work is subcontracted through competitive bids.
The construction manager administers all of the separate subcontractors and The City pays them through change orders issued against the original purchase order. As the work is subcontracted and the change orders are submitted, the overall project costs are added to the original purchase order awarded for the construction manager. On the surface, it appears as though the original contract has increased when in fact the costs are only being added in increments as portions of the work is tendered and approved. Eventually, the overall contract budget ceiling is reached once all of the work is awarded.
The original PO may increase through multiple change orders without going over the project budget envelope approved by Council. Should a capital project require an increase in the amount of the total project budget envelope, that change must be reported to and approved by Council.
Council has approved all budget changes associated with any of the POs in question.
5) What is an external auditor going to do?
The City's Internal Control Risk Management group, led by the Chief Financial Officer, did a preliminary review of the questionable procurement files. However, a more complete and structured risk-based review of procurement activities that occurred over the 2006 – 2009 time period is required to provide further assurance to Council and the public as to the absence of any fraud and any procurement impropriety.
A risk-based review will not go back over the 200,000 procurement files opened in that time period, but will look at those files that have the greatest potential for risk to occur, such as purchases made without purchase orders, POs where there was only one bidder, contracts by business units without Supply Management's involvement and so on. They will also look at purchasing trends for such things as repetitive purchases below authority limit.