Special Review State Highway Administration Procurement Process for Consulting Contracts May Have Been Circumvented Contract of $750,000 Was Awarded in Potential Violation of State Ethics Laws October 2004 OFFICE OF LEGISLATIVE AUDITS DEPARTMENT OF LEGISLATIVE SERVICES MARYLAND GENERAL ASSEMBLY
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October 19, 2004 Senator Nathaniel J. McFadden, Co-Chair, Joint Audit Committee Delegate Charles E. Barkley, Vice-Chair, Joint Audit Committee Members of Joint Audit Committee Annapolis, Maryland Ladies and Gentlemen: We conducted a review of an allegation received through our fraud hotline related to possible improprieties in the procurement process for seven traffic study contracts totaling $5.25 million that were awarded in April 2003 by the State Highway Administration (SHA). Under this procurement process, a $750,000 contract was to be awarded to each of the top seven bidders based on SHA s evaluation of all bids received. Our review disclosed that the competitive bid process may have been circumvented as a number of discrepancies were disclosed. Specifically, three firms that were awarded contracts were not originally identified as one of the top seven firms in the written evaluations available for our review. Additionally, documentation was not available to explain why the three firms were awarded contracts. Furthermore, one of these firms employed the spouse of an SHA management employee who had significant involvement in the procurement process. This firm was awarded one of the $750,000 contracts despite being ranked only 12 th and 14 th best on the evaluations available for our review. Our review also disclosed that four management employees involved in this procurement process, including the aforementioned management employee, had not filed Financial Disclosure Statements with the State Ethics Commission for the last six years as required. As a result of our findings, we referred this matter to appropriate law enforcement. The investigation of this matter is ongoing. Respectfully submitted, Bruce A. Myers, CPA Legislative Auditor
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Scope, Objective, and Methodology We conducted a review of an allegation related to the SHA that was received through our fraud hotline. This allegation related to possible irregularities in the awarding of consulting contracts for traffic studies by an SHA management employee. The purpose of our review was to determine whether the allegation we received was valid. This review was performed in accordance with State Government Article, Section 2-1220 of the Annotated Code of Maryland. Our review consisted of tests, analyses, observations, and discussions with SHA personnel as we deemed necessary to determine the validity of the aforementioned allegation. Our review did not constitute an audit conducted in accordance with generally accepted government auditing standards. Had we conducted an audit in accordance with generally accepted government auditing standards, other matters may have come to our attention that would have been reported. Our review was conducted primarily from February through April 2004. SHA s response to our findings and recommendations are included in an appendix to this report. As prescribed in the State Government Article, Section 2-1224 of the Annotated Code of Maryland, we will advise SHA regarding the results of our review of its response. 3
Background Information Agency Responsibilities The Transportation Article, Section 8-201 of the Annotated Code of Maryland establishes the State Highway Administration (SHA) in the Maryland Department of Transportation. SHA is responsible for the planning, selection of locations, construction, improvement, and maintenance of the State highway system. SHA maintains a headquarters in Baltimore City and operates various field locations throughout the State. 4
Contract Procurement Findings and Recommendations Finding 1 Our review of the procurement of seven traffic study contracts totaling $5.25 million disclosed that the competitive bid process may have been circumvented. Furthermore, one contract for $750,000 was awarded in violation of specific contract provisions and potential violation of State ethics laws. Analysis Our review of SHA s procurement and subsequent award in April 2003 of seven traffic study contracts totaling $5.25 million disclosed a number of discrepancies which indicated that the competitive bid process may have been circumvented. Furthermore, an SHA management employee had significant involvement in the procurement process and the employee s spouse was employed by a firm awarded one of the contracts totaling $750,000. SHA headquarters performs certain functions relating to the awarding of contracts for its various field locations, such as preparing an independent evaluation of bids. In addition, a screening committee (consisting of specified SHA employees) makes recommendations to headquarters for contract awards based on an evaluation of bids prepared by the respective unit requesting the services, as well as the independent evaluation prepared by headquarters. We were advised by SHA management that considerable weight is given to the evaluation prepared by the requesting unit since they are the end users of the service being procured. Under the aforementioned procurement process, seven contracts for $750,000 each (for a total of $5.25 million) were awarded for various traffic studies to the seven bidders that received the highest evaluation rankings. The screening committee for the aforementioned procurement was advised that written evaluations had been prepared by four management employees at the unit to support the unit s final ranking of the top seven bidders. However, our review disclosed that only one such evaluation could be located, and we were advised that the remaining written evaluations were either discarded or not prepared. This is significant because the one unit evaluation available, as well as the independent evaluation prepared by headquarters had not included three of the firms ultimately awarded contracts in their rankings of the top seven firms. For example, for one of the firms, the one written evaluation that could be located at the unit and the headquarters evaluation ranked the firm as 14 th and 12 th best, respectively; however, the final recommendation from the screening committee to headquarters 5
had this firm ranked within the top seven firms. Although adequate documentation did not exist to support this ranking, the firm was ultimately awarded a contract. Our review also disclosed that this firm employed the wife of one of the management employees of the requesting unit, who was responsible for preparing a written evaluation (that could not be located) and who also served as a member of the screening committee. Furthermore, this employee s spouse was employed by this firm as early as December 2002 and was paid approximately $20,000 by the firm during the period December 2002 through September 2003. Finally, we also noted that this management employee had not filed Financial Disclosure Statements with the State Ethics Commission for several years as required (see finding 2). The combination of the management employee s involvement in the procurement process and the employment of his spouse by the firm that was awarded a contract violated specific provisions of the contract. Specifically, the contract stipulates that no employee during his tenure or for one year thereafter shall have any interest, direct or indirect, in this contract or the proceeds thereof. Furthermore, this situation also violated the conflict of interest provision of this contract which specified It is unlawful for any State officer, employee or agent to participate personally in his official capacity through decision, approval, recommendation, advice, or investigation in any contract or other matter in which he, his spouse has a financial interest. This arrangement also appears to violate State ethics laws which state that an employee may not participate in a matter if the employee or, a qualifying relative of the employee, has an interest in the matter and the employee knows of the interest. Finally, a Governor s Executive Order, dated January 17, 2003, provides that employees shall endeavor to avoid any actions creating the appearance that they are violating applicable law or the ethical standards in applicable regulations. In view of the above information and certain other matters that came to our attention during our review, our findings were forwarded to law enforcement. Recommendation 1 We recommend that SHA consult with appropriate law enforcement officials to determine what action, if any, should currently be taken to follow up on this matter. We further recommend that SHA establish adequate procedures to help ensure, in the future, that all contracts are properly competitively bid and that adequate documentation is maintained. 6
Finding 2 Four management employees involved in procuring the traffic studies contracts had not filed Financial Disclosure Statements with the State Ethics Commission for the last six years as required. The apparent conflict of interest noted in Finding 1 should have been disclosed if the Financial Disclosure Statement had been submitted. Analysis Our review disclosed that the four management employees involved in the procurement process for the seven traffic studies contracts totaling $5.25 million had not filed Financial Disclosure Statements with the State Ethics Commission as required for the last six years (1998 to 2003). The apparent conflict of interest noted in Finding 1 should have been disclosed if the Financial Disclosure Statement had been submitted. The State Ethics Law generally requires employees that are a grade 16 or above to prepare and submit a Financial Disclosure Statement to the Ethics Commission covering the calendar year immediately preceding the year of filing by April 30 th. Recommendation 2 We recommend that the SHA inform all applicable employees of the requirements for completing Financial Disclosure Statements as required by the State Ethics Law and ensure that the required Statements are filed annually. We also recommend that SHA contact the State Ethics Commission concerning the need for employees to file retroactive statements for previous years. 7
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Maryland Department of Transportation State Highway Administration Draft Audit Report Special Review Recommendation 1 We recommend that SHA consult with appropriate law enforcement officials to determine what action, if any, should currently be taken to follow-up on this matter. We further recommend that SHA establish adequate procedures to help ensure, in the future, that all contracts are properly competitively bid and that adequate documentation is maintained. Response 1 The Administration agrees with the Auditors recommendation. The FBI, in coordination with the Office of the Inspector General (OIG), Department of Transportation, is currently conducting an investigation into this matter. Several SHA employees have been interviewed and/or subpoenaed regarding this case. Also, our Attorney General s Office has been in contact with the U.S. Attorney s Office. We were informed on October 6 by OIG that the investigation is ongoing. Once the investigation is completed by the FBI and OIG, SHA will take whatever followup action is required based on the conclusions of the investigation. On August 12, 2004, a memorandum was issued by SHA s Administrator, Mr. Neil Pedersen, to the Senior Management Team (SMT) outlining the responsibilities and duties of employees involved in the process of evaluating consultants. As part of the evaluation process, each member of the evaluation team must complete a Conflict of Interest Statement before any evaluations for a specific project begin. All Statements are being maintained by the Office of Consultant Services (OCS) and will become part of the official procurement file. Also, designated Screening Committee members will be required to complete a Consultant Evaluator Conflict of Interest Statement, at the beginning of the Screening Committee meeting, for each project that is presented. When, during an evaluation, an employee recognizes that any statement contained in the employee s Conflict of Interest Statement was not true when made or is no longer true, the employee must bring that fact to the attention of the Procurement Officer immediately. In addition, on August 23, 2004, a memorandum was issued by Mr. Pedersen to the SMT forwarding comprehensive guidelines that were developed to assist in the evaluation of Consultant Technical Proposals and Expressions of Interest. This memo also served to clarify the retention policy to be followed for all documents related to architectural and engineering procurements. Recommendation 2 We recommend that the SHA inform all applicable employees of the requirements for completing Financial Disclosure Statements as required by the State Ethics Law and ensure that the required Statements are filed annually. We also recommend that SHA contact the State Ethics Commission concerning the need for employees to file retroactive statements for previous years. Response 2 The Administration agrees with the Auditors recommendation. A memo was issued on August 26, 2004 to the SMT that provides guidance as to which employees should be filing Financial
Disclosure Statements as required by the State Ethics Law. Each Senior Manager was required to compile a list of all those employees within his/her respective responsibility center who should be filing the Statements, based on the criteria provided to them. The list, along with forms for adding or deleting employees/positions, were due to the Employee Services Division (ESD), Office of Administration, by September 30, 2004. The list will be reviewed by SHA s Deputy Administrators to ensure compliance with the law as well as consistency in filing throughout SHA. The four employees who were cited in the report have been included on the list. We will contact the State Ethics Commission for guidance regarding the need for some employees, including the four who were cited, to file retroactive Statements. Each year, ESD issues the Statements to all employees who are required to file them. In future years, beginning with calendar year 2005, ESD will reissue the criteria to all Senior Managers, along with the forms for adding or deleting employees. We will continue to review these lists on an annual basis to ensure compliance and consistency. On Thursday, September 30, Mr. Pedersen met with SHA s SMT. At that meeting, he emphasized the importance of disclosing any potential conflicts of interest and the need to ensure that all employees who should be filing Financial Disclosure Statements are filing them.
AUDIT TEAM Richard K. Drain, CPA Audit Manager Nicholas L. Marrocco, CPA Senior Auditor