Audit Presentation Final

State of Maryland Highway Audit: Audit Issues

State of Maryland State Highway Administration Audit:Audit IssuesPresented By:Victoria EspinalAndrew HemingerMai NguyenJustin Straub

Scope, Objective, MethodologyConducting a review of several allegations related to SHA , received through fraud hotlinePossible conflicts of interest involving several senior SHA management employees responsible for certain construction-related contractsPurpose: Determine whether the allegations were valid and if the related activities violated State Law, regulations, and policiesConsisted of tests, analyses, observations, and discussions with SHA personnel and others

IntroductionSHA is responsible for the planning, construction, improvement, maintenance, and operations of the State highway system. SHA entered into multi-year contracts with engineering firms to provide both construction management and inspection services for SHA construction projects.Structure of Contracting ProcessSeparate contracts are issued for each of the seven SHA district officesSHAs Office of Construction (OOC) was responsible for developing the scope of contracts on behalf of the district officesThe Office of Procurement and Contracts (OPC) was responsible for conducting the actual procurementsBoth units were responsible for independently evaluating and rating proposals, and comparing their resultsAfter resolving any discrepancies, the final rankings are submitted to an independent screening committeeThe screening committee makes a recommendation to the SHA Administrator for awarding the contractStructure of Contracting ProcessFraudulent SchemesEmployees were diverting funds from contracts to be used on other over budget projects or for expenses that were not included in the scope of work that had been approved by the Board of Public WorksEmployees that diverted funds to over budget projects would later go work for the contractors that were hired for the over budget projectsTwo anonymous tips were sent to the State Highway Administration concerning the collusion and fraudFinding 1A senior Office of Constructions (OOC) management employee appeared to have solicited funds from firms doing, or seeking to do, business with SHA potentially violating State Ethics Laws, a Governors Executive Order, and SHA policiesEvidenceA senior OOC management employee appeared to solicit funds from contractors doing or seeking to do business with the SHAThe employee was a partial owner of an out-of-state company that promoted sports activities and events7 contractors that do business with the SHA were listed as sponsors of a charity event hosted by the employees company. 5 of the firms had ongoing contracts with the SHA, which were procured by the OOCAnalysisShould an employee from the OOC been able to procure a contract?Should the employees relationship with other companies be disclosed, even if the relationship was non-profit?ResultThe employee may have violated State Ethics Laws, a Governors Executive Order, and SHA policies2 of the 5 firms with contracts were awarded two $16 million contracts shortly after the sporting eventThe employees business interest was not always reported on the annual Financial Disclosure Statements filed with the State Ethics Commission

RecommendationsThe SHA should:Take appropriate action regarding the employees violations of State Ethics Laws, Executive Order, and SHA ethics policiesEnsure employees comply with laws and regulationsRefer the matter to the State Ethics CommissionFinding 2A former senior management employee was hired by a firm doing business with SHA within 12 days of retirement and subsequently worked on an SHA contract that, as an employee, this individual had helped to procureEvidenceA former senior SHA management employee started working for a firm doing construction management and inspection services for the SHA within 12 days of retiring from the SHAThe employee was directly involved in the SHAs procurement of a contract with the firmAfter being hired by the firm, the employee was directly involved with overseeing the contract as an executive of the firmAnalysisDo you think employees who retire from a government agency should be prevented from going to work for firm who do business with that agency?Would a grace period, similar to a non-compete clause in a private sector contract, be effective?

ResultThe employee awarded a $16 million to a private firm to provide construction management servicesThis was the first time in SHA history where the SHA utilized an outside firm to provide construction management services rather than using the SHAs own staffThis senior employee also approved the scope and award amount of the contractWithin 10 months after retiring, the employee approved 2 invoices totaling $96,896 as an executive of the firmRecommendationsThe SHA should:Take appropriate action and refer the matter to the State Ethics CommissionEnsure employees comply with the Law and regulationsFinding 3SHA did not ensure that firms doing business with SHA complied with State Ethics Laws and SHA policies regarding the hiring of former State employeesEvidenceSHA employees are routinely hired by firms doing business with the SHANo attempts were made to identify these employees and ensure that their employment doesnt violate State Ethics Laws and SHA policiesFirms would advertise in their construction bids that no learning curve would be needed because their staff included former SHA employees

AnalysisShould other government agencies, such as the State Ethics Commission, oversee and regulate the SHA in its bid selection process?Many of the contractors implied that the revolving door between the SHA and its contractors is a good thing, because they work more efficiently. Is this attitude wrong? If so, how?ResultAnother former employee was hired within 9 months of retirement from the SHAThe SHA advised that this did not conflict with State Laws and regulations or SHA policiesThey argued that as long as the former employees were working on different projects, there were no problemsHowever, there is no way of knowing whether the firms use former SHA employees on SHA contractsRecommendationsThe SHA should:Periodically obtain a record of former SHA employees from those firms that have contracts with the SHARefer these records during the invoice payment approval process to determine if the firms were in compliance with the Law and SHA regulation prohibiting former employees from working on contracts that they were involved in procuringFinding 4SHAs procurement of two $16 million contracts circumvented certain established independent bid evaluation processes and was not adequately documentedEvidenceThe SHA did not perform a complete rating of the technical proposals as requiredThe OPC only evaluated and rated 4 out of 14 categories used to rank firms, which accounted for less than 50% of the possible points for ranking the firmsSHAs independent contract approval process provided by the screening process was compromised. 2 of the 4 members on the committee were not designated to serve on the committeeSHA could not document certain key components of the rating processSHA did not document how disparities between the evaluation by the OCC and OPC were resolvedAnalysisIf the SHA did not reconcile the differences between the OOC and OPC, could the selection committee been influenced by either the OOC or the OPC?

ResultBasically, recommendations to award contracts were deferred to the OCC, since the OCC personnel were the ultimate end users of the contracts2 of the members of the selection committee were OOC employees who had previously evaluated and rated the firms being selected in the bidding processRecommendationsThe SHA should:Ensure that the OPC evaluates all proposal categoriesDocument the resolution of rating variance between the OPC and OOCEnsure that bid evaluations and ratings are fully and properly documentedEstablish a written policy regarding the membership of the screening committee, and make sure that the screening committee remains independentFinding 5SHA solicited the cooperation of two of the firms involved in the hotline allegation to redirect contract funds from the two aforementioned $16 million contracts for unrelated projects, and/or to conceal overspending on other contracts, thereby circumventing Board of Public Works oversight and approval.EvidenceA senior SHA management employee sent a letter to a contractor asking them to use funds from the contractors contract (its $16 million construction management and inspection services contract) to provide technical support, maintenance, and enhancements the OOCs IT system The SHA considered this an extension of their Supplemental Construction Inspection Contract The contractor said it was a different task unrelated to the contract, but agreed to do it anyways

DiscussionDoes this modification fall outside of the scope of the SHAs contract (Highway Construction) with the contractor?Why would the government allow SHA offices to unilaterally make extensions to contracts?Were the internal controls sufficient enough to prevent this from happening, or were they circumvented by the SHA employee?ResultThe SHA did not maintain records to account for the potential financial impact of these activitiesIt is estimated that $1.5 million had been diverted from the $16 million contract to cover over-expenditures on other projects in other SHA districtsTwo paid invoices submitted by one of the contractors revealed that the majority of funds (71 percent of $250,583 and 65 percent of $274,505) related to projects were not within the scope defined by the Board of Public WorksRecommendationsThe SHA should:Take appropriate corrective measuresDevelop Procedures and controls to ensure contract funds are used only as authorizedDocument the basis of contract amounts submitted to the Board of Public WorksObtain Board of Public Works approval for significant contract modifications and changesReferencesMyers, Bruce A. Special Review of the Department of Transportation State Highway Administration. Office of Legislative Audits. June 24, 2011