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For Immediate Release
Contact: Steve Halvonik 717 787-1381
Audit Text

Auditor General Jack Wagner Calls for Reform Of State’s Methods for Awarding Vendor Contracts

Releases audit faulting state’s $592 million in contracts with Deloitte Consulting

HARRISBURG, Pa., Oct. 21, 2009 – Auditor General Jack Wagner today called for the Rendell administration to reform its process of awarding contracts to private vendors after finding the state paid $592 million to Deloitte Consulting LLP for computer-related services over a four-year period while also giving it an additional $2.25 million in economic-development grants to help it service those same state contracts.

In a 179-page special performance audit issued today, Wagner said that $382 million worth of contracts initially awarded to Deloitte swelled by 55 percent, to $592 million, due to administration-approved change orders, sole-source contracts and emergency contracts – indications of potential flaws in the bidding process for procurement of services. Auditors also found shoddy monitoring and record-keeping, and were thwarted by the Department of General Services’ refusal to provide public documents, raising concerns about whether taxpayers overpaid for its services, Wagner added.

Wagner said the audit also raised concerns about the transparency of the bidding process and a lack of centralized oversight authority. He also said his audit highlighted the need for legislative action to curtail excessive spending in the procurement process created as a result of sole-source and emergency contracts and change orders.

“With the state facing billion-dollar budget deficits because of our national economic crisis, the state must do all that it can to make every dollar count – and to make sure that every dollar is accounted for,” Wagner said.

“I have always believed that taxpayers are best served when the contracting process is transparent and truly competitive; when the execution of contracts follows clear lines of accountability; and when the results of the contract meet performance benchmarks that are clear and measurable. This is a textbook case of what happens when accountability, competition and transparency are not present in the daily operation of state government.”

“The Department of General Services, which has primary responsibility for bidding contracts and monitoring the performance of vendors, simply fell down on the job with regard to Deloitte Consulting.”

Auditors also faulted the Department of Community and Economic Development for providing Deloitte with a $750,000 economic-development grant for job creation or retention that was used to purchase office furniture and equipment. In addition, DCED gave Deloitte $1.5 million in tax credits for job retention or creation while it was receiving $592 million in contract payments from state government.

The director of the Governor’s Action Team, a unit within DCED that negotiates incentive packages, said that DCED knew that Deloitte had possessed contracts with the state but it was unaware of the dollar volume.

Wagner said that DCED violated the law and program guidelines when it awarded Deloitte a credit of $3,000 per job created rather than $1,000 per job created.

“The $2.25 million awarded to Deloitte seems to indicate that state government violated the spirit as well as the letter of the law in awarding public tax dollars to a company receiving more than a half-billion dollars in state contracts.” Wagner said.

While DGS generally oversees the state’s procurement of goods and services, Wagner’s auditors found that the agency delegated daily monitoring of Deloitte’s Information Technology services to various other state agencies using those services. Auditors also determined that, as the result of an executive order, the Office of Administration’s Office of Information Technology was responsible for pre-approving IT contracts over $100,000.

Wagner called on the Rendell administration to reform the state’s procurement process so that all commonwealth agencies have standard operating procedures for procurement and to include proper reviews to ensure that the agencies’ procurement procedures are effective and in full compliance with state law.

His special performance audit determined that Deloitte was awarded 84 contracts, worth $592 million, during the audit period Jan. 1, 2004 to Dec. 31, 2007, including seven sole-source contracts totaling $29 million. The contracts required Deloitte to provide information technology services to 15 state agencies, including the Department of Public Welfare, the Department of Health, the Pennsylvania Department of Transportation and the Department of Labor & Industry. Auditors found that 19 contracts initially totaling $210 million included 84 change orders that inflated their cost to taxpayers by 57 percent, or an additional $120 million.

The contracts contained a “knowledge transfer” provision that required Deloitte to train state workers so that they could eventually assume daily control of the state’s computer systems. But according to agency managers and employees interviewed by Wagner’s auditors, the knowledge transfer portion of the contract was insufficient in many areas and in others there lacked sufficient staff levels to effectively transfer knowledge, Wagner said.

Auditors determined that the administration’s procurement structure diffused oversight and permitted individual agencies to choose participants in proposal evaluation committees, increasing the potential for conflicts of interest in choosing winning bidders.

After several media outlets published excerpts of a preliminary draft of this report in February, DGS provided the Department of the Auditor General with additional documents that auditors had requested. However, DGS and several state agencies did not provide all of the documents requested because they said that they had been lost or destroyed, including one by the Department of Education after the audit had begun. As a result of incomplete documentation, Wagner’s auditors received complete documentation on only 25 of 58 contracts let out for bids during the audit period.

Wagner’s audit made 37 recommendations on how DGS can restore taxpayer confidence by improving accountability, transparency and competition in the procurement process. He recommended that:

• DGS should ensure that agencies develop procedures to document preparation and approval of Requests for Proposal and that agencies’ RFP evaluation committees follow procedures and document committee meetings.
• DGS and DCED should coordinate to verify whether vendors seeking grants and tax credits already have state contracts.
• DGS should ensure that state agencies are enforcing the knowledge transfer provision of contracts to guarantee that state employees can operate all computer systems.
• DGS should develop and enforce ethical standards to prevent real or perceived conflicts of interest involving state employees approving procurement contracts.
• The procurement process should be centralized with all contracts coordinated through DGS.
• Legislation should be considered to tighten up and centralize the bidding process.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the Commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts more than 5,000 audits per year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department’s Web site at www.auditorgen.state.pa.us.

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