Procurement Due Diligence & Written Determination
by Emily A. Powell, CPA, Senior Associate
Posted on September 8, 2021
A.R.S. §15-213 requires school districts to follow procurement practices adopted by the State Board of Education. The School District Procurement Rules are based on the Arizona Procurement Code (A.R.S. Title 41, Ch. 23), which is the legislative authority and guidance for procurement. With the Arizona Procurement Code nearing 150 pages, the area of procurement can seem quite daunting to tackle for districts. From an auditor’s perspective, we like to break down testing procurement into five sections: due diligence, sealed procurements, emergency procurements, sole source vendors, and written quotes. This article will focus on the area of due diligence, and how to best prepare for your Uniform Systems of Financial Records (USFR) compliance audit.
Due Diligence Basics
Per the Arizona Auditor General website, “Due diligence is the process of obtaining and reviewing documentation to verify that the procuring entity procured contracts pursuant to the School District Procurement Rules and determining that the contract price and terms are favorable to the district to receive the best value for the good or service desired.” The appropriate amount and involvedness of due diligence to be performed by a district will vary based on district size and the number of contracts entered into during a fiscal year. It is not necessary for districts to perform due diligence for every contract procured through cooperative purchasing. Most of the time, districts will perform due diligence on a sample of contracts procured by a particular cooperative or lead. It is up to your district to create a due diligence system that best fits your internal controls, size, and assessed risk. However, districts should ensure all contracts are valid and include the desired goods and services.
The Importance of Due Diligence
It may seem like the due diligence element of the procurement process is yet another hurdle to jump through before making a purchase. However, the purpose is to consistently, fairly, and competitively expend public resources. Whether utilizing a public procurement unit or another lead entity’s contract, it is ultimately your district’s name that is signing off on the vendor, contract, and purchase. The responsibility falls on your district to ensure the contract is valid, active, and procured in accordance with the School District Procurement Rules.
Audit Requirements Part One – Due Diligence
Due diligence, at a minimum, should include verification that the cooperative contract was awarded through a competitive process. Some large public procurement units, such as Mohave Educational Services Cooperative and 1GPA, have their own procurement compliance questionnaires (PQ) for each solicitation, which a district can download and use as the beginning of their own due diligence documentation. If a PQ is not available, districts should review a sample of cooperative contracts issued by each lead district to ensure compliance with procurement rules and retention of all necessary documents. When considering contracts, a district should always keep in mind the basis for evaluating and awarding a contract, which includes a price analysis to determine fairness and reasonableness, and a review of the cooperative contract’s terms and conditions. It is vital for districts to evaluate the frequency and/or severity of any contract deficiencies to determine if they can rely on that contract in good faith. Districts should carefully research goods or services and determine in writing that the pricing and/or contract terms are fair and reasonable. This could include comparisons on similar goods or services previously purchased, other districts purchasing the same item, or online price research, to name a few strategies.
Audit Requirements Part Two – Written Determination
In addition to the due diligence documentation, auditors are also looking for the written determination compliance component. Districts should prepare and maintain written determinations, as required by AAC R7-2-1004, to support their reason(s) for the selection of a particular vendor, including any specified professional services, construction, construction services, or materials to an entity selected from a qualified select bidders list, or through a school purchasing cooperative. The determination, whether a checklist or written paragraph, should specify the reason(s) your district selected a specific co-op/contract, along with how the determination was made. This documentation should be included in the procurement file. Written determination reasoning should ultimately be why a contract is in the best interest of your district. Examples could include an explanation of:
- Pricing
- Availability of goods/services
- Manufacturers offered
- Expertise
- Serviceability to the District
- Satisfactory history with the District
While due diligence can be prepared on a sample of contracts from each cooperative or lead agency, it is important to understand that the written determination is required for the use of all cooperative contracts.
How to Best Prepare for a Due Diligence Audit
It is suggested that districts keep an updated list of all cooperatives utilized during the fiscal year. From this list, you can ensure the District maintains a current purchasing agreement with each cooperative the District made purchases through in the fiscal year. Each cooperative listed should have a sub-list of all the contracts used under them during the year. (Hint: This will help you down the line when your auditor asks you the number of cooperative contracts utilized in the fiscal year for the USFR Compliance Questionnaire). Make sure your list has all relevant and up-to-date information related to each contract, including expiration dates, names of lead districts, and contract numbers to name a few. From this list, the District can set a benchmark and/or sample percentage to calculate the number of contracts you should be performing due diligence on under each cooperative. It is important to stay current and ensure you are performing due diligence on new contracts. While auditors only look at a “sample of your sample”, we try not to review the due diligence and written determination for a contract more than once to ensure the District is continuing to perform these duties. Maintaining a list will help streamline the sample selection process for due diligence contracts and written determinations.
Resources/Sources
Beyond the School Procurement Code, Districts should read the newly issued 2021 USFR. Once opened, click on the green button labeled “Refer to USFR Compliance Questionnaire” and scroll to the procurement section. Get familiar with the procurement requirements and ensure your district is in compliance with all applicable areas (see link below; section starts on page 360 of the PDF and page 17 of the USFR Compliance Questionnaire itself).
In addition, a sample written determination checklist can be downloaded here
Source: https://www.azauditor.gov/reports-publications/school-districts/faqs/procurement
https://hm.cpa/wp-content/uploads/Procurement-Due-Diligence.pdf
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