Internal Purchasing Order by eav10157


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									                                                INTERNAL AUDIT REPORT

December 22, 1997

TO:           Stockton City Council

FROM:         F. Michael Taylor, City Auditor

We have completed an audit of the Purchasing System. Our audit was conducted in
accordance with Generally Accepted Government Auditing Standards.


Purchasing, or procurement, is a City-wide function. In one way or another, every City
employee participates in the purchasing process. Procurement begins with identifying a
need for a good or service. As employees identify needs, they are communicated to those
who can authorize acquisition. Decisions are made about what to purchase, what method
to use and which vendor to engage.

Some goods are maintained in an inventory system for use as needed. Departments can
requisition goods from inventory with charges applied using internal billing. Unlike most
procurement activity, purchases to replenish stock are based on inventory levels rather than
on specific needs of end users.

The City=s purchasing activity is governed in a number of ways. Article XX of the City
Charter sets forth broad guidelines. Beginning with Section 3-100, the Stockton Municipal
Code provides additional guidance. Administrative directives, which include the
purchasing manual, document details on how procurement is to occur.

The Purchasing Division is a unit of the City=s Finance Department. It is headed by the
Purchasing Agent. Within this division are two senior buyers, one buyer, and clerical
assistants. The Purchasing Agent also supervises Central Duplicating and Central Stores.
Supervisors in these two areas are responsible for purchasing activity in their units.

A number of methods can be used by the City to procure goods and services. Below is a
brief description of methods used.

       Requisition/Purchase Order - As needs are identified, departments can enter
       requests into the electronic system. The requisition allows the department to
       describe what they need, indicate the account(s) to be charged and provide
       estimated costs. They can also indicate a vendor on the requisition. Once the
       request is approved at the department level, it is transmitted to The Purchasing
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      Division. The Purchasing Division processes the request and generates a
      purchase order for the selected vendor. Purchase orders can also be entered
      directly by personnel who are authorized to purchase. During fiscal year 1997,
      approximately 5,300 purchase requisitions and 8,800 purchase orders were
      entered into the system.

      Confirming Purchase Order - There are times when a critical need and limited time
      does not permit the regular requisition/purchase order process to occur. In these
      cases, a department can contact The Purchasing Division and get a confirming
      purchase order number which can be used with a vendor. This process is not
      permitted for capital outlay purchases.

      Blanket Order - The Purchasing Division has negotiated with 112 vendors
      throughout the City to provide goods and services to City employees on a walk-in
      basis. Employees may make purchases up to $400 per transaction by presenting a
      City ID, providing a City account number and signing for goods received.

      Request For Proposal (RFP) - Many goods and services are awarded using a
      bidding process. Certain services do not lend themselves to an award based solely
      on low bid. In these cases, the City can issue a request for proposal. Proposals
      are evaluated and agreements negotiated with the responder deemed best suited
      to provide the needed service to the City.

      Authorization for Payment (AP) - Not all expenditures are based on competitive
      procurement. For items such as membership dues, subscriptions, utility bills, and
      property taxes, payment is initiated using an authorization for payment form. Once
      the department completes and signs the form, it is sent to accounts payable. Prior
      to payment, the Purchasing Division reviews Authorizations for Payment.

      Petty Cash - Some departments still have petty cash funds which are used to make
      small dollar purchases. As funds are used, the department requests reimbursement
      from Finance.

A portion of the City=s purchasing activity is administered using a purchasing/inventory
module which is part of the City=s integrated financial system supplied by HTE, Inc.
Departments can enter purchase requisitions, approve requisitions for processing, check
the status of orders, and authorize payment for goods and services received.
Approximately 300 individuals have some level of processing authority in the City=s
electronic system.
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The purpose of our audit was to determine if internal control weaknesses were present in
the City=s system for purchasing goods and services. We also sought to determine
compliance with City Charter, Stockton Municipal Code, and City policy.


In our audit, we considered transactions and procedures through December 24, 1996. Our
work included procedures both in the Purchasing Division and in the individual operating
units throughout the City. We included purchasing activity in the City=s warehouse
operations, but other warehouse functions were not part of this audit. In the electronic
system, we reviewed some basic internal control needs, but a thorough examination of the
electronic system was not made.


Our audit was performed using the standard office methodology of documenting and
evaluating internal controls. We documented our understanding of the purpose, objectives,
and essential functions of the system using narrative descriptions and data flow diagrams.
Our understanding was gained through interviews, reading, and observation. Transactions
and controls were tested to verify our understanding of the internal control system. We then
evaluated operating procedures and the existing internal control system both in the
Purchasing Division and throughout the City.


The City=s system for procuring goods and services includes a number of internal control
measures which protect City resources. Internal controls are present both in the manual
and electronic processes of procurement transactions. We found in our audit that
weaknesses exist in the internal control system. Based on the results of our audit, it is our
opinion that additional controls are needed to provide an adequate system of internal
control for the procurement process.

During the course of our audit, City staff have taken a number of steps to improve the
internal control system. Among the improvements that have been implemented or are in
the process of being implemented are the following:

       The schedule of employees required to make annual Fair Political Practices
       Commission (FPPC) filings has been updated to include all positions with buying
       authority in the Purchasing Division.

       The electronic system was upgraded to improve accountability. The name of the
       person who receives goods/services is now retained and displays on the inquiry
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      screen. Previously, the name was overwritten when accounts payable processed
      the payment.

      The form used to request electronic system access has been modified to document
      requests to remove access for individuals when they no longer need access.

      The purchase order form has been modified to have only two copies, instead of
      three. The third copy had been identified as the accounts payable copy. Accounts
      payable had been getting the top copy and the third copy was not being used.

      A user-friendly purchasing manual has been developed for City employees.

      When entering requisitions, departments are now instructed to include Anot to
      exceed@ language to show the amount which can be encumbered for a purchase.

      The Purchasing Division is coding purchase orders to vendors who do not have a
      business license ANOBL@ for no business license. The coding does not print on the
      purchase order but can be used to generate and forward a report to the Treasury
      Division for follow-up.

      The Purchasing Division initiated a semiannual communication to departments
      asking for a review of account authority and a report back on changes that need to
      be made. This process will help maintain control over who can authorize purchases
      and where those costs will be allocated.

      City policy on the use of authorizations for payment has been revised to better
      restrict their use.

      The City Manager has issued an administrative directive that provides guidance on
      authority for making budget transfers.

We appreciate staff=s efforts to initiate improvements as soon as weaknesses were

Management has prepared action plans to address other audit findings. Among those are
the following:

System Security

      Fifteen employees are able to access security tables for the purchasing/inventory
      module. These tables are used to assign the various levels of authority in the
      electronic system. Management plans to provide these individuals with a security
      manual and training by December 31, 1997. Management plans no reduction in the
      number of employees with security table access.
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Separation of Duties

       Procedures for purchases using blanket vendors do not provide adequate
       separation of duties. A single individual could control the transaction at the
       department level. The Finance Department has modified the City=s blanket order
       stamp to include a line for an authorized signature. A supervisory signature will be
       required to authorize payment using City funds. By May, 1998, the City will explore
       alternatives to the blanket purchase order process.

       In the purchase requisition/purchase order process, many City employees have
       been granted system functions which allow them to control the entry, approval and
       receipt functions in operating departments. By March 31, 1998, the Finance
       Department will develop and implement written guidelines that require two different
       employees be involved in the processing of any transaction.

Policies and Procedures

       The competitive process is not clearly defined for purchases under $20,706. By
       June 30, 1998, the Finance Department will recommend to the City Manager an
       administrative guideline that will more clearly define the competitive process.

Transaction Approval

       The City=s approval process has not always been followed for purchase
       transactions. On November 18, 1997, the City Council awarded a contract for
       security services. On December 16, 1997, the City Council awarded a contract for
       cellular telephone services. By January 31, 1998 staff plans to ask the City Council
       award contracts for use of temporary employment agencies and for computer
       training services. By February 28, 1998 staff plans to ask the City Council to award
       a contract for consulting services related to the City=s micro-computer network.


       The insurance monitoring process allows contractor=s insurance to expire prior to
       completion of contracts. For some types of contracts, Risk Management is not
       involved in the process which can allow contracts to be executed without the
       necessary insurance. Management has formed a quality service program team to
       review the entire risk management transfer system, including the internal controls
       issues raised in the audit. By June 30, 1998, the team will have completed their
       review of the risk management transfer system and made the necessary internal
       control improvements.

Auditing will conduct follow-up reviews, as necessary, to verify that corrective action has
been taken on the conditions noted.
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We recommend that the City Council review and revise existing Council Policy 300-1 to
cover the broad range of purchases made using the Request For Proposal process.

SERVICES. It has been used by staff to guide development of Requests For Proposals for
other uses as well. Since it is being used for a broader range than architectural and
engineering services, auditing recommends that the policy be revised to formally reflect its
broader use.

Original signed by:


cc:    Dwane Milnes, City Manager
       R. Thomas Harris, City Attorney
       Katherine Gong Meissner, City Clerk
       L. Patrick Samsell, Director of Finance
       Eugene Painchaud, Purchasing Agent

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