AUDIT ON PROFESSIONAL SERVICE CONTRACTS

ISSUED: March 8, 1999 AC-01-32-99
THE UNITED STATES VIRGIN ISLANDS
VIRGIN ISLANDS BUREAU OF AUDIT AND CONTROL
AUDIT REPORT
AUDIT OF THE MANAGEMENT AND CONTROLS
OVER PROFESSIONAL SERVICE CONTRACTS
Executive Summary
The following summarizes the major findings resulting from the Audit of the Management and Controls Over Professional Service Contracts (AC-01-32-99)
Finding 1 – Accountability (pages 5 to 12)
– The Virgin Islands Government has lost control over the awarding and management of professional service contracts.
– Out of 479 contracts valued at $108 million processed in 1996 and 1997, files for 145 were not provided for review.
– Guidelines established by the Department of Property and Procurement to deal with the awarding of professional service contracts were not being followed.
– Contracts were being awarded on a sole source basis without justification or the involvement of the Department of Property and Procurement.
– Departments were not adequately monitoring professional service contracts to ensure compliance with the various contract provisions.
– Departments were making duplicate payments and were paying contractors in excess of the contract amounts.
Finding 2 – Contract Employment (pages 13 to 19)
– Departments were circumventing the personnel laws by hiring individuals through professional service contracts to positions that should be filled through the Personnel Merit System.
– Retirees were receiving retirement annuities, as well as, being compensated through professional service contracts in violation of the Virgin Islands Code.
– Departments were issuing contracts and "stipend" agreements to employees in violation of the conflict of interest provisions of the Virgin Islands Code.
Finding 3 – Contract Payments (pages 20 to 22)
– The Department of Finance did not have sufficient controls to effectively monitor payments to contractors.
– The Financial Management System does not associate encumbrance information to a particular contract.
– Contracts were being paid without evidence of a fully approved contract.
– Contractors were being paid through the payroll system resulting in the inability to properly monitor payments.
March 8, 1999

Honorable Charles W. Turnbull
Governor of the Virgin Islands
Government House
Kongens Gade
St. Thomas, Virgin Islands 00802
Honorable Vargrave A. Richards
President
23rd Legislature
Capital Building
St. Thomas, Virgin Islands 00802
Dear Governor Turnbull and Senator Richards:
Attached is the final report of our audit of the management and controls over professional service contracts.
The objectives of the audit were to determine if professional service contracts were: (i) awarded in compliance with applicable laws, and rules and regulations; and, (ii) monitored for compliance to contract terms by the Department of Property and Procurement and the various requesting departments.
The results of our review showed that the Virgin Islands Government had lost control of professional service contracts. Specifically, we found that: (i) the Depatment of Property and Procurement had given up its responsibility of awarding, accounting for, and managing professional service contracts, as required by the Virgin Islands Code; (ii) departments and agencies were independently entering into professional service contracts, sometimes without the apparent approval or knowledge of the Department of Property and Procurement; (iii) there was little monitoring of services to ensure that they were being provided in accordance with contract terms; (iv) individuals were being hired through professional service contracts rather than the normal government personnel system; (v) some Virgin Islands Government pensioners were also given professional service contracts in violation of the Virgin Islands Code; (vi) some professional service contracts were awarded in violation of the conflict of interest provisions of the Virgin Islands Code; and, (vii) the Department of Finance did not have sufficient controls to ensure that contract payments were proper and in accordance with contract terms.
An exit conference was held on February 2, 1999, with the acting Commissioner of the Department of Property and Procurement at which time he concurred with most of the recommendations made. The report was also discussed with the acting Commissioner of the Department of Finance, who also was in general concurrence with the recommendations. A copy of the response from the Department of Property and Procurement is included as Appendix I beginning on page 23. As of the issuance of this report, we did not receive a response from the Department of Finance. The additional information needed to resolve the recommendations are detailed as Appendix II beginning on page 28.
We have summarized at the end of each finding, the Departments' responses, and have also included our comments. They can be found on pages 11, 18 and 22.
If you or your staff requires additional information, please call me at 774-6426.
Sincerely,
Steven van Beverhoudt, CFE, CGFM
Inspector General
Attachment:
TABLE OF CONTENTS
Page
INTRODUCTION
Background 1
Objectives and Scope 2
Prior Audit Coverage 2
AUDIT RESULTS
Conclusions 4
Finding 1 – Accountability 5
Criteria 5
Adherence to Guidelines 6
Fully Signed Contracts 7
Sole-Source Justification 7
Business License 8
Miscellaneous Encumbrance Documents 8
Guidelines Checklist 8
Additional Contracts 8
Departmental Reviews 8
Contract Awarding 9
Monitoring 9
Contract Payments 10
Recommendations 11
Property and Procurement's Response 11
Inspector General's Comments 12
Finding 2 – Contract Employment 13
Criteria 13
Personnel Contracts 13
Contract Employees 14
Retirees 15
Conflict of Interest 16
Stipend Agreements 17
Recommendations 18
Property and Procurement's Response 18
Inspector General's Comments 19
TABLE OF CONTENTS
Page
Finding 3 – Contract Payments 20
Background 20
Contract Numbers 20
Valid Contracts 21
Contractor Payments 21
Payroll Payments 21
Recommendations 22
Inspector General's Comments 22
APPENDICES
I Department of Property and Procurement's Response 23
II Additional Information Needed to Clear Recommendations
From Follow-up System 28
III Official Report Distribution 30
INTRODUCTION
BACKGROUND
The authority to contract for professional services for the Virgin Islands Government is vested in the Department of Property and Procurement (Property and Procurement). Title 31, Section 239 (a) (4) of the Virgin Islands Code (Code) provides that the Government may negotiate professional service contracts on an open market basis, provided that the services are procured by competitive negotiation, wherever practicable.
Title 31, Subchapter 239 of the Virgin Islands Rules and Regulations (Rules and Regulations) details the policies and procedures that must be used by Executive Branch departments and agencies in connection with procurement on the open market (by competitive negotiation) as authorized by the Code. Included in this subchapter are; the basic requirements for negotiations, who is authorized to negotiate, and the different circumstances under which negotiation is permitted.
Subsection 239-3 of the Rules and Regulations states; "The authority to negotiate contracts will be exercised exclusively by the Department of Property and Procurement except as may be otherwise provided by law and/or Rules and Regulations." The subsection further states; "The proper exercise of the negotiating authority would ordinarily require actual negotiations with interested suppliers beyond the solicitation of proposals."
In May of 1992, the former Commissioner of Property and Procurement issued "Guidelines for Submission of Contracts for Professional Services to the Department of Property and Procurement." The guidelines contained 21 items that if
not met would result in the return of the proposed contract to the respective department. The guidelines also contained a copy of a standard contract form to be used by the departments and a guidelines checklist to be used by Property and Procurement personnel. These guidelines will be discussed in greater detail in the Audit Results section of this report.
Records at Property and Procurement showed that in fiscal year 1996 and 1997 respectively, 273 professional service contracts valued at $53 million and 206 professional service contracts valued at $55 million were processed; or a combined total of 479 professional service contracts valued at $108 million.
OBJECTIVES AND SCOPE
The objectives of the audit were to determine if professional service contracts were: (i) awarded in compliance with applicable laws, and rules and regulations; and, (ii) monitored for compliance to contract terms by Property and Procurement and the various requesting departments.
Our review of professional service contracts was performed at Property and Procurement, the Department of Finance (Finance), and at several departments where selected professional service contracts originated.
As part of our review, we evaluated the internal controls over the awarding of professional services contracts to the extent necessary to accomplish the audit objectives. Weaknesses identified during the review are discussed in the Audit Results section of this report.
Except for limitations to our independence as detailed in the succeeding two paragraphs, the audit was performed in accordance with "Government Auditing Standards" issued by the Comptroller General of the United States. We included tests and procedures that were considered necessary under the circumstances.
The second General Standard of the "Government Auditing Standards" states; "In all matters relating to the audit work, the audit organization and the individual auditors, whether government or public, should be free from personal and external impairments to independence, should be organizationally independent and should maintain an independent attitude and appearance."
Under the current organizational structure, the Virgin Islands Bureau of Audit and Control (Audit Bureau) is not organizationally independent. Budget and personnel limitations have adversely affected the Audit Bureau's ability to fully carry out our responsibilities.
PRIOR AUDIT COVERAGE
We are unaware of any audits of professional service contracts conducted during the last five years.

In January 1992, the Audit Bureau issued report AC-02-11-92 "Audit of the Capital Improvement Program: Acquisition of the Program Manager." We found that: (i) the Virgin Islands laws and regulation, as they pertained to the procurement of the consultant, were not followed; (ii) the contract for program management was not competitively negotiated or documented; (iii) the resultant contract was not in the best interest of the Virgin Islands Government; and, (iv) an amendment to the original contract was a new work requirement that was not negotiated in accordance with Virgin Islands laws. In June 1992, the contract between the Virgin Islands Government and the program manager was terminated.

In July 1992 the Office of Inspector General, Department of the Interior issued Report No. 92-I-10867 "Personnel Management Practices, Division of Personnel, Government of the Virgin Islands." Among other findings, the report found that government departments and agencies entered into personal service contracts to hire employees that should have been hired under the Personnel Merit System. It was recommended that rules and regulations be developed for the use of professional service contracts. The rules should: (i) restrict the use of professional service contracts to fill positions already existing and should be added to the Personnel Merit System; and, (ii) ensure that the Director of Personnel reviews and authorizes such contracts.
In June 1989 Report No. 89-88 entitled "Professional and Consulting Services, Government of the Virgin Islands" was issued by the Office of Inspector General, Department of the Interior. This report indicated that in 1986 and 1987, 475 professional service contracts were issued valued at $29.9 million. Among other findings, it was reported that: (i) files maintained by Property and Procurement contained insufficient information to evaluate the acquisition process; (ii) departments did not follow established rules and regulations for the procurement of professional services; (iii) departments were contracting for services directly without the involvement of Property and Procurement; and, (iv) contracts were procured under the sole-source provision of the Code, without proper justification. No response was received, and all recommendations remained unresolved.
AUDIT RESULTS
CONCLUSIONS
The results of our review showed that the Virgin Islands Government had lost control of professional service contracts. Specifically, we found that: (i) Property and Procurement had given up its responsibilities of awarding, accounting for, and managing professional service contracts, as required by the Code; (ii) departments and agencies were independently entering into professional service contracts, sometimes without the apparent approval or knowledge of Property and Procurement; (iii) there was little monitoring of services to ensure that they were being provided in accordance with contract terms; (iv) individuals were being hired through professional service contracts rather than the normal government personnel system; (v) some Virgin Islands Government pensioners were also given professional service contracts in violation of the Code; (vi) some professional service contracts were awarded in violation of the conflict of interest provisions of the Code; and, (vii) Finance did not have sufficient controls to ensure that contract payments were proper and in accordance with contract terms. FINDING 1 – ACCOUNTABILITY
The Virgin Islands Government, through Property and Procurement, had lost control over the awarding and management of professional service contracts. Although specific guidelines were established, these guidelines were not being followed. In addition, contracts were being awarded and payments were being made without the apparent knowledge of Property and Procurement. As a result, there was no assurance that all contracts could be accounted for, or were awarded in accordance with the Code.
Criteria
In addition to Title 31, Section 239 (a)(4) of the Code, which authorizes the Government to competitively negotiate professional service contracts, and Title 31 Subchapter 239 of the Rules and Regulations, which establishes detailed policies and procedures, in 1992 Property and Procurement issued guidelines for the submission of professional service contracts.
These guidelines, issued on May 15, 1992 to all department and agency heads, contained 21 items that if not met would result in the proposed contract being returned to the requesting agency. Some of the specific guidelines reviewed as part of our audit, included:
– "Each contract must be accompanied by a letter of justification . . . describing the services to be provided, the maximum compensation for the services, the terms of the contract and the Request for Proposal (RFP) number under which the services were procured by Property and Procurement.
– If an agency is submitting a contract not competitively procured by Property and Procurement through the RFP process, the justification letter must explain how the contractor was chosen and why the services should not be competitively procured pursuant to 31 VIC 239 (a)(4). Where more than one contractor is available to provide a particular service, the ‘sole-source' justification cannot be used.
– The term of the contract should commence either ‘upon the signature of the Governor' or on a specific date which comes after the contract has been signed by the Governor. Contracts submitted after the co
ntract term has already commenced will not be accepted.
– A copy of the contractor's current license to do business in the V.I., as required by Title 27 of the Virgin Islands Code, should accompany the contract."
The guidelines also contained a copy of a standard professional services contract. A checklist to be used by Property and Procurement personnel to ensure that the guidelines were being followed was also included.
Adherence to Guidelines
In order to verify Property and Procurement's adherence to the guidelines, we requested a listing of all professional service contracts issued in fiscal years 1996 and 1997. Two lists for each year were provided to us; the first was a computer generated list containing 233 and 185 contracts for 1996 and 1997 respectively. The second list entitled "Register of Professional Contracts" listed 273 and 206 contracts as "processed" in 1996 and 1997 respectively, or 479 in total. We define the term "processed" as, contracts that were assigned contract numbers and moved through the system, although some may not have been finally approved. Property and Procurement's contract files were reviewed; however we were only able to identify files for 334 contracts as having been "processed". There were, 145 contract files that were not provided for review; therefore, we could not obtain copies of the proposed contract documents or any information related to the proposal. In addition, with the contract files reviewed, there was no way of determining whether the various contracts were actually approved or not.
We also contacted the Department of Justice (Justice) for contract information, since all contracts must be reviewed for legal sufficiency, and Finance where the funds must be encumbered, or set aside. At Justice, we located copies of 2 contracts not found at Property and Procurement, and at Finance, we located 41 contracts that were not found at Property and Procurement.
Files at Property and Procurement were very limited in the documents that they contained. Most files contained a copy of a contract, although all were not signed. Some files contained a letter from the department requesting the approval of the contract on a sole- source basis, and copies of miscellaneous encumbrance documents certifying that funds were available. Fewer contained copies of business licenses, or payment documents. In addition, although Property and Procurement personnel were required to use the guidelines checklist, most files reviewed did not contain the list.
The following two schedules summarize; (i) the number of contract files that were available at Property and Procurement for review; and, (ii) the documents contained in the professional service contract files reviewed.
Summary of Contract Files Reviewed at Property and Procurement
1996 1997 Combined
Number of Contracts
Processed 273 206 479
Less: Number of Files
Reviewed 179 155 334
Number of Files
Not Found 94 51 145
Summary of Documents Contained in Contract Files
1996 1997 Combined
Documents Yes No Yes No Yes No
Fully Signed
Contracts 166 13 122 33 288 46
Sole-Source
Justification 31 148 54 101 85 249
Business License 88 91 78 77 166 168
Miscellaneous
Encumbrance
Document 123 56 113 42 236 98
Guidelines
Checklist 3 176 68 87 71 263
Fully Signed Contracts. Property and Procurement, as the central control agency responsible for the awarding and managing of all professional service contracts for the Virgin Islands Government, should, at a minimum, have copies of contracts that have been fully executed and signed by all parties. Of the 334 contract files reviewed, 46 files did not contain an original or a copy of a fully executed contract.
Sole-Source Justification. In accordance with the Code, Rules and Regulations, and Property and Procurement's guidelines, all contract negotiations are required to be conducted by Property and Procurement. In addition, if a department is recommending sole- source procurement, a letter of justification should be sent fully explaining the reason why competitive procurement should not be used. Of the 334 contract files reviewed, an RFP was submitted on only 20 contracts. In addition 249 contract files contained no evidence of justification for the apparent sole-source contracting.
Business License. Title 27 of the Code requires all individuals or entities doing business in the Virgin Islands to have a current business license. In addition, Property and Procurement guidelines require that a copy of the current business license be included as a part of the professional service contract package. Our review of the 334 contract files showed that 168 files did not contain a copy of a business license or evidence that one was seen by Property and Procurement officials.
Miscellaneous Encumbrance Documents. Property and Procurement guidelines require departments to show that there are sufficient funds to cover the cost of the proposed contracts. Of the 334 contract files reviewed, there were 98 instances in which no evidence of an approved miscellaneous encumbrance document was provided.
Guidelines Checklist. As previously indicated, in May of 1992, the former Commissioner of Property and Procurement issued guidelines for departments to follow when submitting professional service contracts for approval. The guidelines also contained a checklist to be used by Property and Procurement personnel in order to certify that the guidelines were being followed.
Only 71 of the 334 files reviewed contained copies of completed checklists. There were 263 files with no checklists or any evidence that the contracting criteria were being followed.
Additional Contracts
In addition to the contract files located at Property and Procurement, there were 14 miscellaneous encumbrance documents, unidentified on Property and Procurement records that were also located at Finance for which $1.3 million was expended. This situation raised serious concerns, because without proper controls at Property and Procurement, the possibility exists that contracts were being awarded or amended, and processed without the knowledge, or at least documented evidence at Property and Procurement.
We will discuss additional concerns, relating to the payment of contracts by Finance without evidence of a fully executed contract in Finding 3 of this report.
Departmental Reviews
In addition to the lack of control and oversight of professional service contracts by Property and Procurement, many departments and agencies were not monitoring the services being provided by various contractors. Also, most contracts were being awarded on a sole- source basis, without Property and Procurement's involvement.
As previously discussed, since Property and Procurement had lost substantial oversight of the awarding and monitoring of professional service contracts, it was necessary to review the amount of oversight being performed at the departmental level. In order to determine the level of oversight and monitoring being performed, we selected 61 professional service contracts valued at $6.3 million from 14 departments and agencies. As part of our review, we attempted to determine: (i) how the contracts were awarded and what documents were available to show the selection and the negotiation process; (ii) who monitored the work of the contractors and what reports were submitted; and, (iii) how the contractors were paid and who monitored the payments. The following summarizes the findings from our reviews of the sampled agencies.
Contract Awarding. Departments and agencies were entering into contractual relationships on a sole-source basis, without adhering to the competitive negotiation requirements established by Property and Procurement. Of the 61 professional service contracts reviewed, 50 were awarded on the sole-source basis, many with little or no justification as to why this method of contracting was used. Compensation for some of these contracts was in excess of $500,000. For example:
– Property and Procurement ent
ered into a sole-source professional service contract with a firm to represent the Government, as insurance adjusters, in negotiations with the insurance company providing insurance coverage for properties damaged by Hurricane Marilyn. The contractor was to be paid based on the insurance proceeds received, but could not exceed $1.2 million. Records provided to us showed that the Government was billed more than $500,000 for services provided. There were no records provided to show why the contract was not competitively awarded. In addition, Property and Procurement officials did not provide documents to show the work performed, nor evidence of who monitored the work of the contractor.
– Property and Procurement also entered into a sole-source contract with a local architectural and engineering firm in clear violation of the specific competitive negotiation requirements for architectural and engineering contracting detailed in the Rules and Regulations. The architectural and engineering firm was to provide assistance to the insurance adjusters, mentioned in the previous example above, in negotiations with the insurance company providing insurance coverage for the Government. The contractor was to be compensated at 1% of the insurance proceeds received, not to exceed $800,000. The contractor billed the Government $620,000 for claimed services provided. Again, we were not provided with any evidence to justify the sole-source contract, reports to show the work performed by the contractor, or who monitored the performance of the contractor.
Monitoring. Contractors were being paid for claimed services without evidence that the work of the contractors was being monitored. Most contract files reviewed provided little or no evidence that departmental personnel were monitoring the work of the contractors or ensuring that status reports were being submitted. The following are examples:
– The Department of Health (Health) entered into a 1-year professional service contract for consultation services to analyze the immunization programs for Health. The contractor was to be paid $20,000 for the work. Among several requirements, the contractor was to provide monthly reports of activities undertaken and completed along with the progress to date. We were provided with copies of monthly reports submitted by the contractor, and most consisted of one or two sentence statements of a general nature. For example one such report stated, ". . . Review current grant application requirements and program needs." No specific activity report with completed tasks and progress to date was included. The contractor received $1,665 monthly for a total of $19,980.
– In September 1996, Health entered into a 1-year professional service contract with a local architectural and engineering firm to provide construction management in the renovation of Health facilities in the territory. The contractor was to be paid $87,000 plus up to an additional $5,000 for travel expenses. The contractor was to provide, among other documents, weekly inspection reports, reports on site meetings, and monthly project progress reports. After numerous requests by us for copies of reports filed, we were provided with a 1-page report dated October 1998. The contractor was paid $55,000 on this contract.
Contract Payments. Departments and agencies were not monitoring payments on professional service contracts, resulting in duplicate payments being made, and contractors being paid in excess of the contract amounts. For example:
– The Bureau of Internal Revenue (Internal Revenue) entered into a professional service contract to provide computer training for 25 Internal Revenue employees. The contractor was to be paid $75,000 for the services. On two occasions, duplicate invoices totaling $16,600 were paid for the services provided. In addition, payments to the contractor exceeded the contract amount by $7,000.
– Internal Revenue also contracted the same contractor referenced in the previous paragraph to provide temporary employee services. The contractor was to be paid $30,000; however, total payments amounted to $41,000, $11,000 in excess of the contract amount.
– Finance contracted with the same contractor noted in the Internal Revenue examples above, to provide temporary employees to assist with a re-engineering project at Finance. The contract was expected to last one year, and the contractor was to receive $150,000. We were not able to get any information from department officials regarding the awarding process or monitoring. We found no evidence in the files provided of competitive negotiations. Records also showed that the contractor continued to provide employee services for several months beyond the one year contract period, with billing from the contractor totaling more than $225,000, or $75,000 over the contract amount. Finance officials did not provide any evidence that the contract was extended or a new contract awarded. There was also no evidence to show if monitoring was performed by Finance officials.
Recommendations
We recommend that the Commissioner of Property and Procurement:
1. Reissues the established guidelines to each department and agency over which Property and Procurement has contracting responsibility.
2. Strictly enforces the guidelines, especially the competitive negotiation provisions, when proposed contract requests are being submitted by the various departments and agencies.
3. Ensures that Property and Procurement personnel adhere to the guidelines provisions as established, including the use of the required guidelines checklist.
4. Establishes procedures to require the withholding of the final payment of the contract until all contract provisions have been met by the contractor, and an official from the originating department certifies that all deliverables have been received by the Government.
Property and Procurement's Response
The acting Commissioner of Property and Procurement indicated concurrence with three of the four recommendations made in this section of the report.
Regarding the first recommendation on the reissuance of the professional service guidelines, the acting Commissioner indicated that they would be reissued by February 26, 1999.
For the second recommendation dealing with enforcement of the guidelines, it was indicated that departments and agencies will also be informed that any contract proposal not in compliance with the guidelines will be returned to the respective department.
The third recommendation dealt with Property and Procurement personnel's adherence to the guidelines to ensure that the guidelines checklist is completed. In the response it was indicated that effective March 1, 1999, completed checklists must be attached to the pending contract before approval.
The acting Commissioner did not agree with the fourth recommendation, which dealt with the withholding of the final payment, similar to construction contracts, until all contract provisions were met. It was felt that, ". . . the internal controls for professional service contracts, do not have to be as stringent as those for construction contracts." The response further stated that; "To retain a percentage of payment throughout the life of the . . . contract places a burden on the internal monthly processing of payments. . . . Progress Reports or whatever deliverables . . . should be the part of enforcement . . . ."
Inspector General's Comments
The responses to the first three recommendations are sufficient for us to consider them resolved. We do however, request a copy of the guidelines once they are reissued.
Regarding the fourth recommendation, we do agree that the monthly withholding of a percentage can create a record keeping "nightmare". This was not the intent of the recommendation. However, we still maintain that some type of withholding of payment (We recommend the final payment.) be enforced until all deliverables are received by the Government. As shown throughout the report, contractors were being paid for services with no evidence being shown as to what
services were provided. The Government has been spending about $50 million a year on professional service contracts, and departmental officials should be held accountable for the disbursement of these funds. By withholding the final payment until an official from the contracting department certifies receipt of all deliverables ensures accountability for the disbursement of badly needed funds. We have revised the recommendation to clarify our position on this issue.
FINDING 2 – CONTRACT EMPLOYMENT
Departments and agencies were circumventing the personnel laws of the Virgin Islands Government by hiring individuals through professional services contracts to positions that should have been included in the Personnel Merit System. Retirees receiving retirement annuities were also being compensated through professional service contracts in violation of the Code. In addition, the Virgin Islands conflict of interest laws were being violated by territorial employees receiving additional compensation from departments and agencies for which they were employed.
Criteria
Title 3, Section 451a (c) of the Code states "All positions in the Executive Branch of the United States Virgin Islands Government not exempted under subsection (b) of this section [subsection (b) identifies 8 groups of positions to be considered as exempt] shall be in the career service."
All employee positions, whether career service or exempt, should be processed through the Virgin Islands Government's Division of Personnel, in accordance with the Code.
Regarding additional compensation to retirees, Title 3, Section 706(c) of the Code, states "Any member receiving a service retirement annuity who reenters the service of the Government may continue to receive his annuity while in receipt of salary from the Government either by appointment or on a contractual basis, for a period of time not to exceed 75 days. At the end of such period, the service retirement annuity shall be canceled and the member shall thereupon again become a contributor to the system."
Title 3, Chapter 37 of the Code covers the conflict of interest provisions for the Virgin Islands Government. Specifically, Section 1102 states; "No territorial officer or employee shall: (i) be financially interested in any contract made or negotiated by him in his official capacity, or by any public agency of which he is a member."
Personnel Contracts
As part of our review of professional service contracts, we identified 90 individuals who received contracts with the Virgin Islands Government during fiscal years 1996 and 1997. In order to determine if these individuals were receiving a pension or were active employees of the Government, we submitted the names of the 90 contractors to the Government Employees Retirement System (GERS) and the Division of Personnel for verification of annuity or employment.
Three specific areas of concern were found by this review of professional service contracts with individuals. The first concern dealt with the fact that contracts were being awarded to individuals for services that should have been performed by employees hired through the Division of Personnel and the Personnel Merit System or unions, where applicable. The second concern dealt with the practice of awarding contracts to Virgin Islands Government retirees who were also receiving a pension, a practice that violates the Code. Finally, the apparent violation of the conflict of interest laws by awarding contracts to active employees to perform services within the department or agency for which they were employed, or were negotiated during their official capacity as employees of the Government.
Contract Employees. Government departments and agencies were entering into professional service contracts to hire employees who should have been hired under the Personnel Merit System. We reviewed 10 professional service contracts valued at $318,000 that were awarded for positions or with responsibilities similar to positions in existing categories of the government workforce. Some of these positions include an internal revenue officer, an office manager, and a staff physician. The following are examples:
– Internal Revenue hired a "Revenue Collection Consultant" for $50,000. The compensation provision of the contract stated that the contractor would be paid biweekly ". . . in the manner provided for regular employees, less the appropriate deductions for withholding and social security taxes." The contractor also accrued annual and sick leave at the rate of regular employees. This individual received all of the benefits of a regular employee, except being hired through a contract rather than through the Division of Personnel as required by the Code.
We questioned two additional areas in this contract, the first dealt with the payment of social security taxes, and the second dealt with the accumulation of annual and sick leave. We contacted officials at the Payroll Section of Finance who indicated to us that the contractor was on the payroll system as a regular employee. Accordingly, the Government was paying ½ of the individual's social security taxes (FICA) as would be done for regular employees, resulting in an additional annual benefits/income to the contractor of about $3,800.
Relating to the accumulation of annual and sick leave, Justice, in reviewing another professional service contract, indicated that pursuant to Title 3, Section 581 and an opinion of the Attorney General, an independent contractor was not entitled to leave benefits, benefits given to this contractor as part of the contract with Internal Revenue.
– The Office of the Lieutenant Governor hired a retired Government employee at a salary of $50,000 to serve as the "Director of Administration and Business Management", a position that was previously filled through the Division of Personnel. In reviewing the preliminary contract, Justice disallowed some of the responsibilities assigned to the individual. Specifically the authority to supervise employees within the section for which the contractor was to head and the responsibility of being a certifying officer for the office, neither of which is allowable of an independent contractor. In our opinion, these responsibilities should be included in the duties of the head of the office. We were also concerned about the possibility of the individual collecting a pension during the same period; an issue discussed later in this section of the report.
– Justice hired an "Office Manager" for $35,000 to, among other duties, oversee "the maintenance and day to day operations of the St.Croix Office of the Attorney General", a responsibility that should include the supervision of office personnel. This responsibility appears to be in direct conflict with Justice's position as it relates to an independent contractor supervising regular government employers noted in the previous example. In addition, the responsibilities detailed in the contract are similar to those of any office administrator hired through the Division of Personnel.
– The Governor Juan F. Luis Hospital entered into a professional service contract with the then Commissioner of Health to serve as a Staff Physician III, a position currently being filled through the Division of Personnel. The contractor was to function as a surgeon on call, with a compensation of $79,061 per year payable biweekly for two years. There was an option to renew the contract for an additional two years.
Retirees. Departments were entering into professional service contracts with Virgin Islands Government retirees in violation of the Code, which prohibits retirees from receiving their pension plus additional compensation for services provided beyond 75 days. If the individual receives compensation in excess of the 75-day limit, the pension must be suspended. We identified 9 individuals with professional service contracts who were retirees from Government service. These individuals had contracts in excess of the 75-day limit established by the Code, an
d were receiving the additional compensation. For example:
– The Office of the Lieutenant Governor hired an individual in April 1997, who had retired in November 1992 after 30 years of Government service. The individual was receiving an annual pension of $38,000 as well as, an additional $50,000 from the professional service contract. The contract extended for two years through December 1998.
– In 1996 and 1997, Health hired an individual who had retired from the Government in October 1992, and was receiving a pension of $31,000 per year. The contractor was providing consulting services to Health and was paid $21,500 and $31,200 in 1996 and 1997 respectively.
– The Department of Public Works (Public Works) entered into a two-year contract for $30,200 and $31,500 for 1996 and 1997 respectively. The individual had retired from the Government in 1995, and was receiving a pension of $45,000 per year.
Conflict of Interest. Departments were issuing contracts to employees of departments for which they were employed, in violation of the conflict of interest laws. Title 3, Section 1102 states that "No territorial officer or employee shall: (i) be financially interested in any contract made or negotiated by him in his official capacity, or by any public agency of which he is a member."
We identified at least one contract where, in our opinion, Title 3, Section 1102 of the Virgin Islands Code, as it relates to conflict of interest, was violated. In addition, the section of this report dealing with "stipend" agreements may also involve potential conflict of interest issues. As an example:
– Public Works entered into a professional service contract with a corporation to coordinate the development and implementation of a solid waste management plan for the Virgin Islands. The corporation's president was the former chairperson of the Governor's Solid Waste Management Committee, whose responsibility was to develop a plan to deal with solid waste in the Virgin Islands. The individual was also serving as the Director of the Virgin Islands Energy Office. The contract covered a period of two years, with a basic compensation totaling $200,000.
According to documents reviewed, the individual resigned from the Energy Office "effective at the close of business, . . . September 16, 1997", the same day that the 12-page contract was signed by the Commissioner of Public Works and submitted to Property and Procurement for approval.
Records obtained by us showed that the corporation was formed on May 5, 1997, a business license was issued on July 23, 1997, and a Certificate of Good Standing was issued on September 15, 1997. Public Works officials could not provide any information to us on how this contract was devised, negotiated and awarded. We were told that it was generated from "the hill", a common reference to Government House.
Based on the information reviewed, there are two basic areas of concern. The first
deals with the all too common practice of awarding contracts on a sole-source basis with no documented evidence of competitive negotiation. The second concern deals with the possible violation of the conflict of interest provisions of the Code. The fact that the contractor resigned on the same day that the contract was submitted to Property and Procurement for approval makes it obvious that the contract had been discussed and prepared while the individual was employed by the Government and also serving as chairperson of the Governor's Solid Waste Management Committee. The formation of the corporation in May 1997 and the issuance of a business license in July 1997 further supports our position that this contract, in our opinion, was awarded in violation of the conflict of interest provisions of Title 3 Section 1102 of the Code.
Stipend Agreements
We have received numerous claims that various Government officials were receiving additional compensation in the form of "stipends". We attempted to get copies of some of these "stipends" agreements; however, we were only able to obtain one such document; a "stipend" agreement between the Virgin Islands Government and the then Tax Assessor. The agreement commenced on May 1, 1995 and continued as long as the individual remained in the position of Tax Assessor, an exempt position in the Government service.
The agreement required the Tax Assessor to ". . . conduct a survey of the Government's real property holdings, as well as provide in-house and on-site training to field appraisers in the Office of the Tax Assessor." The agreement further stated that ". . . the performance of such services would be complementary to the traditional role of Tax Assessor, but would require additional time and effort supplementary to the execution of the statutory duties of Tax Assessor." In return the individual was paid $20,000 per year in addition to the regular approved annual salary of $52,000. The agreement was signed by the individual, the Director of Personnel, approved for legal sufficiency by the Attorney General and approved by the acting Governor. We were not provided with any documentary evidence to show that the work was performed or that it was performed during a time other than when functioning as the Tax Assessor.
Several areas of concern are raised by this "stipend" agreement. The first concerns the nature of the agreement and the possible violation of the conflict of interest laws; the second deals with the type of work and whether it is in addition to the responsibilities of the Tax Assessor; and, finally, the lack of verification of the work performed.
Regarding the first issue, we question whether this "stipend" agreement is not in fact a professional service contract. Black's Law Dictionary defines a contract as "A promissory agreement between two or more persons that creates, modifies, or destroys a legal relation. . . . An agreement upon sufficient consideration, to do or not to do a particular thing. . . . A deliberate engagement between competent parties, upon a legal consideration, to do, or abstain from doing some act. . . . A contract or agreement is either where a promise is made on one side and assented to on the other; or where two or more persons enter into an engagement with each other by a promise on either side". On the other hand, Black's Law Dictionary defines a stipend as "A salary; settled pay". This agreement required a service, a survey of the Government's real property holdings and training for the field appraisers, for which the individual was to collect a fee of $20,000 per year.
If it is determined that the agreement is in fact a contract, which in our opinion it is, the contract would be in violation of the conflict of interest laws of the Virgin Islands, detailed in Title 3 Section 1102, since the individual would have entered into a contractual agreement to provide a service with the agency for which he was a member.
The second area of concern deals with the "additional services" to be provided by this agreement. A survey of the Government's real property holdings and training for employees at the Tax Assessor's Office, in our opinion, should fall within the responsibilities of the Tax Assessor as the person who is the head of that office.
The final area of concern deals with the lack of documented evidence to show that this "additional work" was in fact performed, and was performed in addition to the 8 hours – a-day responsibilities as required of an employee of the Government.
As previously stated, we did not have access to the other "stipend" agreements; however, if the one reviewed by us is an example of the others; we feel they should be thoroughly reviewed for possible violations of the Code.
Recommendations
We recommend that the Commissioner of Property and Procurement:
1. Seeks the assistance of the Director of the Division of Personnel and the Attorney General in reviewing all current professional service contracts to de
termine those that violate the Personnel Merit System laws of the Virgin Islands, and ensure that the related positions are filled according to law. In addition, ensure that procedures are in place to prevent future violations.
2. Seeks the assistance of the Director of Personnel and the Administrator of the Government Employees Retirement System to ensure that retirees are not receiving a pension in addition to compensation through professional service contracts. Also, establish procedures to review potential contractors' employment history to ensure that the provisions of the Code relating to employing retirees are not violated.
3. Seeks the assistance of the Attorney General in determining if the conflict of interest laws of the Virgin Islands are being violated by departments who issue contracts to employees. Take steps to correct deficiencies found.
4. Requests a determination from the Attorney General whether the "stipend" agreements are in fact professional service contracts, and as such a violation of the conflict of interest laws. Take steps to curtail the practice.
Property and Procurement's Response
The February 18, 1999 response indicated agreement with the four recommendations made in this section of the report.
In response to the first recommendation, the acting Commissioner indicated that efforts will be coordinated with the Division of Personnel and the Office of the Attorney General to determine Government services being provided by contract that should be provided through the personnel merit system. A system will be developed with Personnel to prevent future occurrences. Department heads will be notified of the requirements for implementation within two months of the start of the next fiscal year.
For the second recommendation, relating to retirees also being compensated through professional service contracts, it was indicated that Property and Procurement will coordinate with the Government Employee's Retirement System to identify individual contractors who are receiving a pension, as well as, being compensated through contracts. This recommendation will be implemented within two months of the next fiscal year.
Regarding the third and fourth recommendations, dealing with contracts that violate the conflict of interest provisions of the Code and the issuance of "stipend" agreements, an opinion from the Attorney General will be requested to determine the actions needed.
Inspector General's Comments
The responses to the four recommendations made in this section of the report are sufficient for us to consider them resolved. FINDING 3 – CONTRACT PAYMENTS
Finance does not have sufficient controls to effectively monitor contract payments to ensure that they are proper and are in accordance with contract provisions. Specifically, the system currently in use does not associate a particular miscellaneous encumbrance document to a specific contract; payments are being made on contracts without evidence of a valid and fully executed contract, as well as, illegally on the open market; contractors are being paid in excess of the amounts agreed to in the contracts; and, contractors are being paid through the ordinary payroll system resulting in the inability of Finance officials to properly monitor payments.
Background
Finance, as the financial arm of the Executive Branch, is responsible for the payment of all expenses of the various departments and agencies of the Virgin Islands Government. As part of that responsibility, Finance is required to have sufficient controls to monitor and ensure that disbursements of Government funds are proper, and in accordance with the Code and established procedures.
Over the past ten years, an automated Financial Management System (FMS) has been established by Finance to provide all of the accounting and payment services of the Government. Among its many features, the FMS keeps a record of all miscellaneous encumbrance documents processed through Finance. Every time a department decides to enter into a contractual relationship, the department is required to certify that there are funds available to meet the potential obligation. This certification is done with a miscellaneous encumbrance document.
Finance also keeps a filing system, by department, for the various contracts, related miscellaneous encumbrance documents, encumbrance liquidation records, and supporting information generated in each fiscal year. Officials at Finance indicated to us that according to procedures, no contract payments are made unless a fully executed contract is provided to Finance.
Contract Numbers
During our review of the encumbrance information maintained on the FMS, we identified more than 400 miscellaneous encumbrance documents related to professional service contracts. However, we were not able to directly associate the encumbrances to a particular contract, since the contract numbers were not included as a part of the computer file. Our review of the document files also failed, in some instances, to provide an association between encumbrance documents and contracts. Accordingly, we could not ensure that all contracts for which payments were made were identified.
This weakness in controls prevented Finance personnel from effectively monitoring contracts and payments, and ensuring that departments and agencies had sufficient funds before entering into contractual agreements.
Valid Contracts
As part of our review of the contract files maintained by Finance, we identified 53 contracts, with payments in excess of $10.5 million, for which no fully executed contract was available. This is contrary to Finance's established procedures, which requires a valid contract be available before payments are made.
We were also provided documents from Public Works showing where more than $6 million was spent for roadside cleanup work for which no contracts existed. Between January 1997 and December 1998, more than $5 million was paid to 16 contractors to provide roadside cleanup on St. Thomas. On St. Croix, a similar situation existed with 7 contractors incurring $1 million for roadside cleanup services. These services were provided and payments were made without the existence of contracts. During the 24-month period, these contractors received between $100,000 and $830,000 in fees for services. This practice is in clear violation of the procurement laws of the Code, and if proper controls were in place at Finance, should not have been paid without valid contracts in place. We will review this area in more detail as part of a subsequent audit.
Contractor Payments
This lack of controls over contracts has also resulted in contractors being paid in excess of the agreed to amounts. For example:
– As mentioned earlier in this report, Internal Revenue hired a contractor to provide temporary employee services. The contractor was to be paid $30,000 for the work; however, our review of the payment files at Internal Revenue showed that the contractor was paid $11,000 in excess of the contract amount. Proper monitoring by Finance should have alerted officials that this overpayment was being made.
Payroll Payments
Some contractors were being paid through the payroll system. This resulted in the Government paying additional compensation to the contractors by paying the employer's share of the contractor's FICA taxes amount. In the example previously cited in Finding 2, a contractor from Internal Revenue received an additional $3,800 in benefits, since the Government paid its share of the FICA taxes as if the individual were an employee.
Recommendations
We recommend that the Commissioner of Finance:
1. Ensures that a system is established to record all contract numbers with the related encumbrance documents as they are entered into the FMS.
2. Ensures that no payments are made without evidence of a valid and fully executed contract.
3. Requires that all contracts are processed in accordance with the contracting procedures established by Finance and not through the payroll system.
Inspector General's Co
mments
Although contact was made on several occasions requesting comments from the acting Commissioner of Finance, as of the issuance of this report, a response has not been received. We consider all three recommendations in this section of the report to be valid, and therefore, must treat them as unresolved.
ADDITIONAL INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Additional Information Needed
Finding
1-1 Resolved Provide a copy of the guidelines once reissued.
1-2 Resolved No additional information needed.
1-3 Resolved Same as 1-2 above.
1-4 Unresolved Reconsider recommendation as revised.
Finding 2:
2-1 Resolved Same as 1-2 above.
2-2 Resolved Same as 1-2 above.
2-3 Resolved Same as 1-2 above.
2-4 Resolved Same as 1-2 above.
Finding 3:
3-1 Unresolved Provide evidence to show that the FMS files will associated contracts and encumbrance documents.
3-2 Unresolved Provide evidence to show that procedures are in place to ensure that contract payments are not made unless a valid contract is provided.
ADDITIONAL INFORMATION NEEDED TO CLEAR RECOMMENDATIONS FROM FOLLOW-UP SYSTEM
Recommendation
Number and Status Additional Information Needed
3-3 Unresolved Provide evidence to show that contractors will be paid through the established procedures and not through the payroll system. OFFICIAL REPORT DISTRIBUTION
Virgin Islands Government
Office of the Governor 3
Office of the Lieutenant Governor 1
Department of Property and Procurement 1
Department of Finance 1
Office of Management and Budget 1
Department of Justice 1
23rd Legislature 15
Legislative Post Auditor 1
United States Government
Office of Inspector General –
Department of Interior 1
Department of Justice 1
ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED TO
THE VIRGIN ISLANDS BUREAU OF AUDIT AND CONTROL BY:
Calling: Sending Written Documents to:
(340) 774-3381 V.I. Bureau of Audit and Control
or N0. 75 Kronprindsens Gade
(340) 774-3388 St. Thomas, Virgin Islands 00802