Appendix 2

Competitive Bidding Requirements

In its December 2004 audit report, Office of the Secretary of State: Clear and
Appropriate Direction Is Lacking in Its Implementation of the Federal Help America
Vote Act, BSA found, among other things, that the Office used questionable practices
when procuring goods and services using HAVA Title I, Section 101 funds. Specifically,
the Office used an exemption from competitive bidding it had requested and received
from DGS for 46 of the 77 HAVA contracts it entered into between June 2003 and
September 2004. These 46 contracts totaled more than $1.5 million. The justification the
Office provided DGS for this exemption was the urgent need to meet deadlines set forth
in HAVA. However, most of the contracts entered into under the no-bid exemption were
for services that did not relate to any specific HAVA deadline and could have been
competitively bid had the Office planned better. Because the Office used the no-bid
exemption rather than competitively bidding, the State has less assurance that it received
the best value for its HAVA expenditures.

BSA found the Office did not follow its policy and obtain competitive offers for most of
its CMAS procurements. Specifically, BSA found the Office did not obtain comparison
quotes from other qualified vendors for 10 of the 12 HAVA-expensed purchase orders it
made using CMAS. As the entity that oversees the CMAS program, DGS is responsible
for developing the program’s policies and procedures. In May 2003, DGS issued a
management memorandum requiring state agencies to solicit three price quotations for
CMAS purchases over $5,000. Although the memorandum explained that all
constitutional officers, including the Office, were exempt from the requirements it
imposed, the Office’s policies’ state that the Office will go along with the spirit of the
management memorandum and comply with its intent. Nevertheless, the Office did not
attempt to obtain any comparison quotes from qualified vendors for two of the three
HAVA-expensed CMAS purchase orders BSA reviewed, and the Office’s contracts
officer could only document that one of the other nine CMAS purchase orders had
comparison quotes.

In addition, State procurement policy requires State agencies to obtain at least two
informal bids for all commodity purchases over $5,000. Of the three commodity
purchases BSA reviewed, two were for more than $5,000, yet the Office did not seek
informal bids for either of them. By not adhering to State procurement rules, the Office
failed to assure that it received the best value for its use of HAVA funds.

BSA also found that the Office appeared to have split purchase orders to avoid CMAS
procurement limits and competitive bidding requirements. Rather than obtain
competitive bids and use one contract, the Office used multiple CMAS contracts to
procure IT consulting services totaling $631,000 from one vendor and $1,145,000 from
another. In January 2003, DGS set the CMAS order limit at $500,000 on all IT purchases
and stipulated that if the total of multiple purchase orders exceeds that limit, state

* Contracts and Procurements: Policy and Procedure Manual, distributed by the Office of the Secretary of
State, Management Services Division (Revised February 29, 2004).

13


> A properly authorized purchase document.

> Documentation verifying the goods/services were satisfactorily
received and/or performed.

> An accurate and correct supplier invoice.

PAM (Chapter 9, Section A, Topic 5-Payment of Invoices) defines an “accurate”
invoice as including the following:

Agency order number or contract number.

Identification of goods acquired, quantities, unit price, extension,
description, etc.

Sales tax and/or use tax as a separate line item from goods.
Services provided, service period, unit price (i.e. hourly, monthly) and
quantity applicable to the service.

Accurate billing address as stated on the purchase order or contract.
Supplier invoice number.

Supplier invoice date.

Company name and remittance address.

Payment terms offered.

VV WV

VVVVV

* The total procurement award for the questionable contracts reviewed is $3,021,400. As of July
26, 2005, the procurement award amount not yet spent is $1,058,056.

88,421; Unsupported

Cost Exceptions. We took exception to $88,421 in personal service costs for
the period of July 2003 through June 2004. This amount represents a portion of
three employees’ salaries and benefits that were incorrectly charged to HAVA.
Specifically, these employees had 100 percent of their time charged as devoted to
HAVA-related activities. However, upon reflection, these employees told us that
they each spent only part of their time on HAVA duties. As a result, we
subtracted the percentage of their time spent on non-HAVA duties from their
salaries and benefits and took exception to these amounts. OMB Circular A-87,
Attachment A, Section C, requires costs charged to federally funded programs be
necessary, reasonable, and allocable to that program.

Unsupported Costs. We classified $937,269" in personal service costs charged
to HAVA from July 2003 to June 2004, as unsupported because the Office did
not use timesheets or the certifications required by federal cost principles to
support the time 22 employees spent on HAVA activities. OMB Circular A-87,
Attachment B, Section 8.h, requires that salary charges for employees working
only on a single federal award be supported by periodic certifications that the
employees worked solely on that program for the period covered by the
certification. Certifications are to be prepared at least semi-annually and signed



Mr. Roger La Rouche
Page 2
November 30, 2005

We appreciate the opportunity to review and comment on the draft report. Please contact Dora Mejia,
Chief of the Management Services Division to discuss this response.

Sincerely,

Enclosure


Attachment 1

United States Department of the Interior
Office of Inspector General

Western Region
Federal Building

2800 Cottage Way, Suite E-2712
Sacramento, California 95825,

October 11, 2005
7430

Ms. Gracia Hillman, Chair

U.S. Election Assistance Commission
1225 New York Avenue, N.W., Suite 1100
Washington, D.C. 20005

Dear Ms. Hillman:

In response to your request for an audit and in accordance with the May 11, 2005
Memorandum of Understanding, we are enclosing the report Audit of Expenditures by the
California Secretary of State's Office Under the Help America Vote Act of 2002, Report No.
W-RR-OIG-0005-2005. Our audit of expenditures totaling $8,733,552 made by the State of
California’s Office of the Secretary of State under Title I, Section 101, of the Help America
Vote Act (HAVA) of 2002, resulted in questioned costs of $3,860,361. This audit is a follow
on to a report by the California Bureau of State Audits that identified deficiencies in
administering HAVA funds by the Office of the Secretary of State.

Of the questioned amount, we took exception to $777,502 because the expenditures did
not conform to federal cost principles, that is, they were related to the purchase of capitalized
general purpose equipment and promotional items or memorabilia, were not related to HAVA,
or were contract costs paid that were outside the terms of the contract. We classified
expenditures of $3,082,859 as unsupported because they lacked the support documentation
required by both federal and California state regulations.

On July 7, 2005, we met with officials of the Secretary of State’s Office, who generally
concurred with our findings and bases for questioned costs. These officials also provided
additional information or supporting documents regarding questioned costs, which we
incorporated into the draft as appropriate.

We incorporated, as appropriate, the U.S. Election Assistance Commission’s (EAC)
September 23, 2005 comments. As requested, we also are providing, under separate cover,
schedules detailing the cost exceptions and unsupported costs and our bases for questioning
these costs.


agencies should document why the orders are separate. Nevertheless, no documentation
was evidenced explaining why the CMAS purchase orders for IT consulting services
were separate and not combined. As a result of these practices, the State is less sure that
the Office obtained the best value for the purchases it made with HAVA funds.

14


Unsupported Costs: $9,261

The SOS disagrees with this finding. Please see our discussion under consultant services, Item
(b) regarding the prior administration’s reliance on an exemption from the bid requirement for
constitutional officers.

County Grants
Cost Exception: $68,901 and $104,519

The SOS does not disagree with this finding. Per OMB Circular A-87, general-purpose
equipment is not allowed as a direct charge to a federal grant, except where approved in advance
by the awarding agency. While the EAC is authorized to waive or delegate the prior approval
requirement this office has been unable to confirm that a waiver was requested by the prior
administration.

Administrative Indirect Costs

Unsupported Costs: $108,077

The SOS disagrees with this finding. In May 2005, an Indirect Cost Rate Proposal was prepared
by the SOS and submitted to the EAC for final approval. The SOS is awaiting EAC approval of
the plan. Not having an approved plan, the SOS used a conservative estimate in applying an
indirect rate. The SOS proposes to adjust the 10% rate and use the rate justified in the indirect
cost rate proposal once the Indirect Cost Rate Proposal receives EAC approval.

Interagency Costs
Unsupported Costs: $25,616

The SOS disagrees with this finding. We believe that the costs were adequately documented in
accordance with OMB Circular A-87 as each individual contract specifically states the services to
be provided. Please see our discussion under consultant services regarding insufficient invoices.

Office Equipment
Unsupported Costs: $7,289

The SOS disagrees with this finding. This purchase was competitively bid. Two quotes were
documented within the procurement file, both from Leverage Purchasing Vehicles, CMAS and
Wester States Contract Alliance. The CMAS vendor was chosen based upon lowest price.

Travel
Cost Exception: $294
The SOS disagrees with this finding. The invoice does contain the approval signature.

Other
Cost Exception: $15
The SOS does not disagree with this finding.

Unsupported Costs: $425
The SOS disagrees with this finding. These HAVA purchases were for paper for the Voter
Outreach Project, name badges for hearings, flyers, and signage for a public hearing


Attachment 2

BRUCE MCPHERSON | SECRETARY OF STATE | STATE OF CALIFORNIA

MANAGEMENT SERVICES
1500 11th Street, qth floor | Sacramento, CA 95814 | www.ss.ca.gov

November 30, 2005

Mr. Roger La Rouche

Acting Inspector General

USS. Election Assistance Commission
1225 New York Avenue, N.W., Suite 1100
Washington, D.C. 20005

Dear Mr. La Rouche:

The Office of the Secretary of State (SOS) has reviewed the U.S. Election Assistance Commission’s
(EAC) draft report, “Audit of Expenditures by the California Secretary of State’s Office Under the Help
America Vote Act of 2002” (HAVA) and submits the attached comments regarding the draft for the
EAC’s consideration.

This office has been subject to audits of its performance by the Bureau of State Audits (BSA), and now
the EAC to evaluate the SOS’ use and planned use of HAVA federal funds. In its review of SOS’
performance for meeting a critical HAVA requirement, the U.S. Department of Justice recognized, “A
lack of adequate planning and action by the prior leadership of the Office of the Secretary had put the
state in imminent danger of not having a HAVA-compliant statewide voter registration system in place by
the January 1, 2006 deadline.” As our response to the BSA’s report in December 2004 indicated, “This
office was overburdened by a cyclone of unprecedented and historic forces:

* acombination of three elections — a first-ever statewide recall election, a presidential primary,
and a presidential general election;

* anation-wide controversy over electronic voting that threatened to undermine public confidence
in the equipment used to cast and count ballots; and

¢ the management of HAVA, a complex law with built-in ambiguities and little administrative
guidance. This office historically has not administered federally funded programs.”

We note that both of these perspectives are fundamentally accurate on their face. But it is no less true of
the circumstances faced by this administration, and it is fair to say that during the eight months of this
administration the SOS has taken significant steps to better monitor expenditures and abide by grant
administration requirements in order to comply with relevant laws, regulations, and policies. We’ve
implemented many of the BSA’s recommendations, which we understand served as a basis for some of
these findings, and continue to make changes to improve the program’s effectiveness, achieve compliance
with HAVA’s mandates, and restore public confidence in the SOS.


> Agreed-upon procedures engagements to monitor subrecipients who
are exempted from OMB Circular A-133 under Section 200(d),
subject to the conditions listed in A-133, Section 230(b)(2). These
engagements must be conducted in accordance with either the
American Institute of Certified Public Accountants’ generally
accepted auditing standards or attestation standards. The engagements
must be paid for and arranged by a pass-through entity and address
only one or more of the following types of compliance requirements:
activities allowed or unallowed; allowable costs/cost principles;
eligibility; matching, level of effort, earmarking; and, reporting.

Since the general auditing services provided to the Office did not meet any of the
above criterion, we took exception to the audit costs associated to this consulting
service contract.

Unsupported Costs. We classified as unsupported $322,393 in expenditures
arising from contracts not meeting the State’s competitive bidding requirements.
Please see Unsupported Costs, Explanatory Note (1). The $322,393 in consultant
contract expenditures were incurred from January 1, 2005 through July 26, 2005,
and are in addition to the $1,672,529 in unsupported expenditures incurred as of
December 31, 2004.

11



Objective and Scope

The objective of this audit is to (1) identify those transactions in which funding was used
for an unallowable purpose or without required documentation or support and

(2) estimate the total amount of money, if any, that the Office spent on unallowable
purposes or that was not supported by required documentation. The scope of this audit
was all HAVA Title I, Section 101 funds expended or obligated by the State of
California, Office of the Secretary of State, as of December 31, 2004. We also reviewed
obligations paid after December 31, 2004.

Our audit was performed, as applicable, in accordance with the Government Auditing
Standards issued by the Comptroller General of the United States. Accordingly, we
included such tests of records and other auditing procedures as we considered necessary
under the circumstances. Because of the narrow objective and scope of our audit, we
performed a limited review of the system of internal controls. Further, we did not rely
upon the system of internal controls over the procurement and accounts payable
processes because BSA, in its December 2004 and March 2005° audit reports, found that
the Office overrode and, in many cases, lacked adequate controls to ensure that it
appropriately administered HAVA Title I, Section 101, funds. We conducted our
fieldwork from June 2005 through July 2005 at the Office of the Secretary of State in
Sacramento, California.

Results of Audit

Of the $14,922,867 in expended and obligated HAVA Title I, Section 101, funds as of
December 31, 2004, we reviewed $4,977,829 in expenditures and $3,755,723 in paid
obligations® for a total of $8,733,552 in reviewed expenditures. The $4,977,829
represents about 93 percent of the $5,335,268 in total reported expenditures, and the
$3,755,723 represents about 39 percent of the $9,587,599 in total reported obligations.

Of the $4,977,829 in reviewed expenditures, we classified $3,269,791 as questioned
costs,’ consisting of $509,325 in cost exceptions and $2,760,466 in unsupported costs;
and of the $3,755,723 in reviewed obligations, we classified $590,570 as questioned
costs, consisting of $268,177 in cost exceptions and $322,393 in unsupported costs. In
total, we questioned $3,860,361 in HAVA expenditures, consisting of $777,502 in cost
exceptions and $3,082,859 in unsupported costs.

5 State of California: Internal Control and State and Federal Compliance Audit Report for the Fiscal Year
Ended June 30, 2004, issued March 2005 (Report No. 2004-002).

© These were obligated amounts as of December 31, 2004, and paid after that date.

7 A cost is questioned if the cost: (1) resulted from a violation or possible violation of a provision of a law,
regulation, contract, grant, cooperative agreement, or other agreement or document governing the use of
federal funds; (2) at the time of the audit, was not supported by adequate documentation; or (3) appeared
unreasonable and did not reflect the actions a prudent person would take in similar circumstances.


Contents

Page
Background 1
Prior Audit Coverage
Objective and Scop:
Results of Audit.
Appendices

1 Cost Category Composition
2 Competitive Bidding Requirements.

GIOSSALY oo... sseseeeesseesesesneeeevessscsvesssssussesessesssucnesseasascussesssssaonecessestecesesecnenesnensseneanenense® 15
Abbreviations:
BSA ci eseccsecssecssesssesssecseecuesssssssssesnscssvcesessresuessncssussareeneessessesseneaness Bureau of State Audits

CMAS. California Multiple Award Schedule
.. Department of General Services
.S. Election Assistance Commission
. General Services Administration
.. Help America Vote Act of 2002
Information Technology
.Office of the Secretary of State
.. Office of Inspector General
Office of Management and Budget
Purchasing Authority Manual
State of California


We appreciate the opportunity to assist the EAC in its efforts to improve the
administration of federal elections. If you have any questions, please do not hesitate to call me
at (916) 978-5653.

Sincerely,

Gtllecis

Michael P. Colombo
Regional Audit Manager

Enclosure

ec: Roger La Rouche, Acting Inspector General
U.S. Election Assistance Commission


Appendix 1

Inejuded Aceoun

Consultant Services 1) Administrative Fees
2) Voting Systems and Procedures

Personal Services Costs 1) Personal Services Costs

Printing, Postage and Shipping 1) Paper, Forms and Stationery

2) Freight and Drayage

3) Courier Service

4) Postage Meter Rental, Repair and Supplies

County Grants. 1) County Grants

Administrative Indirect Costs 1) PFA Expenditures

Interagency Costs 1) Administrative Consultants
2) DGS Fees

3) Attorney General

Office Equipment 1) Minor EDP Equipment

2) Photography

3) Minor Office Equipment

4) Maintenance Purchases

5) Service Equipment and Install
6) CALNET/CALDEX

7) Pagers

8) Voice Mail

Travel i) Commercial Air Transportation
2) Per Diem

3) Private Car

4) Rental Car

5) Rail, Bus, Taxi, Parking and Toll
6) Overtime Mileage — Taxable

Other 1) Miscellaneous Non-EDP Supplies

2) Meetings and Conferences

3) Advertising

4) Building Security

5) Tuition and Registration Fees

6) Miscellaneous Expense In-State

7) State Vehicles - DGS

8) Pamphlets and Brochures

9) Office Equipment Rental Repair and Supplies
10) Hearings and Investigation

zs — a

12


Prior Audit Coverage

The Bureau of State Audits (BSA) for the State of California conducted an audit of
HAVA funds expended or obligated by the Office as of June 30, 2004.4 The objective of
the audit was to review and evaluate relevant laws, rules, and regulations to determine
whether the Office (1) used HAVA funds only for allowable purposes and in accordance
with Section 28 of the State’s Budget Act of 2003 and (2) implemented HAVA in
compliance with federal requirements. The audit also evaluated the Office’s policies and
procedures for administering HAVA funds, including the process of awarding and
disbursing those funds, and determined whether the Office effectively oversaw the use of
funds it awards to ensure that recipients use them only for allowable purposes.

BSA’s audit found problems with regard to the Office’s administration of HAVA funds.
Specifically, the Office:

>» Had inadequate planning and poor management practices, which hampered its
efforts to implement HAVA provisions promptly.

> Disregarded proper controls, and its poor oversight of staff and consultants led
to questionable uses of HAVA funds.

> Avoided competitive bidding for many contracts paid with HAVA funds by
improperly using a State of California, Department of General Services (DGS)
exemption from competitive bidding and by not following the State’s
procurement policies.

> Bypassed the Legislature’s spending approval authority when it executed
consultant contracts and then charged the associated costs to its HAVA
administration account.

> Failed to disburse HAVA funds to counties for the replacement of outdated
voting machines within the time frame outlined in its grant application
package and county agreements.

Based on a sampling of HAVA Title I, Section 101 expenditures, the BSA audit found
several instances in which the Office paid employees or contractors with HAVA funds
for activities that did not appear to relate to the acceptable uses outlined in Section 101
and did not comply with other applicable state and federal laws and regulations. The
BSA audit covered about 25 percent of the approximately $3.4 million in HAVA Title I,
Section 101 expenditures as of June 30, 2004. BSA made 17 recommendations in its
audit report to the Office. In its June 16, 2005 letter to BSA, the Office reported that 11
of the recommendations have been implemented and it is working to implement the
remaining 6 recommendations. The EAC contracted with the Department of the Interior,
Office of Inspector General (OIG), to audit more expenditures than previously covered,
and to include expenditures reported as of December 31, 2004.

* Office of the Secretary of State: Clear and Appropriate Direction Is Lacking in Its Implementation of the
Federal Help America Vote Act, issued December 2004 (Report No. 2004-139).


Response to Questioned Costs

Consultant Services

Cost Exceptions: $43,306 and $163,658

The Secretary of State’s Office (SOS) does not disagree with this finding. Costs were disallowed
because payment was made in excess of the hours allowed under the contract and a contract
amendment was executed after the fact that increased the number of available contract hours.
While it is true that the administration of this contract failed to comply with the State’s
procurement standards, the costs charged were reasonable and necessary to move toward
compliance with HAVA mandates.

Unsupported Costs: $1,672,529 and $322,393

The SOS disagrees with this finding. The EAC classified as unsupported consultant contracts
because it found, “The office bypassed these requirements by (a) inappropriately using a DGS
exemption from competitive bidding; (b) not obtaining the required number of comparison quotes
when making California Multiple Award Schedule (CMAS) and other procurements; and (c)
splitting purchase orders to avoid CMAS procurement limits and competitive bidding
requirements.”

In response to Item (a) - The SOS applied for and was awarded a Contract Advertising Exemption
Request (SCR) for HAVA related contracts from the Department of General Services (DGS).

Our review of the contract files confirmed that every one of the referenced contracts and purchase
orders met the parameters as stated in the SCR based upon the urgent need to timely meet the
State’s HAVA requirements mandated for the past two federal elections of March 2004 and
November 2004, Though the act was signed into law in October 2002, funding was not provided
until February 2003 via an omnibus bill. At the time of the request, the deadline for
implementing these reforms was January 1, 2004, consequently, the prior SOS sought an
exemption for the one-year contract period beginning September 1, 2003 through

August 30, 2004

In response to Item (b) - On May 28, 2003 DGS issued Management Memo 03-10 requiring state
agencies to solicit three price quotations for CMAS purchases over $5,000. The memo exempted
Constitutional officers from these requirements. While historically the SOS Office operates in
compliance with the spirit of the management memos, it appears that the previous management
relied on its exemption in order to procure services for translation services and technical support
for its database systems.

In response to Item (c) - While four contracts were awarded to the same contractor for services,
these contracts were awarded for four distinct and separate projects.

¢ The first contract was entered into to complete a statewide inventory of all voting systems
hardware, firmware and software including county specific unique systems used by
counties to conduct an election, specifically the March 2, 2004 statewide primary
election.

¢ The second contract was for the creation of the Voting Systems Advisory Project Work
Plan. The work plan consisted of the following: (1) project management and
administration; (2) testing and examination of new or modified voting systems and
periodic retesting of installed voting systems; (3) On-site review of county voting


U.S. ELECTION ASSISTANCE
COMMISSION
OFFICE OF INSPECTOR GENERAL

FINAL REPORT:

AUDIT OF EXPENDITURES
OF HELP AMERICA VOTE ACT FUNDS
BY THE CALIFORNIA OFFICE OF THE
SECRETARY OF STATE

Report No.
E-HP-CA-01-06
December 2005


Amount Explanatory
Cost Category Reviewed Notes

Consultant Services $2,429,684 $43,306 $1,672,529 (1)
Personal Services Costs 1,173,596 88,421 937,269 (2)
Printing, Postage and Shipping 866,549 308,388 9,261 @)
County Grants 230,041 68,901 (4)
Administrative Indirect Costs 108,077 108,077 (5)
Interagency Costs 103,781 25,616 (6)
Office Equipment 28,081 7,289 (72)
Travel 18,068 294. (8)
Other 19,952 15 425 (9)

Subtotal $4,977,829 $509,325 $2,760,466
County Grants $3,009,395 $104,519 (10)
Consultant Services 746,328 163,658 322,393 (1)

Subtotal $3,755,723 $268,177



In broad terms, we took exception to those expenditures related to the purchase of
capitalized general purpose equipment, promotional items and memorabilia, costs not
related to HAVA, contract costs paid that were outside the terms of a contract, and costs
that did not conform to federal cost principles. In addition, we classified as unsupported
those expenditures lacking adequate support documentation, including expenditures
related to personal service costs, procurement awards, indirect costs, and other costs.

Procurement award expenditures were generally classified as unsupported because
competitive bidding requirements were not met. The expenditures we specifically
classified as cost exceptions and unsupported costs and the reasons why we questioned
such costs are detailed in Table 2 and the explanatory notes. To assist your review,
please see Appendix 1 for a listing of accounts that comprise the cost categories used.
Findings pertaining to personal services (the lack of time and attendance records and
required certifications) and the failure of the Secretary of State’s Office to follow State
procurement policy, including competitive bidding, parallel the findings of BSA.


Background

The U.S, Election Assistance Commission (EAC) i is an independent, bipartisan agency
authorized by the Help America Vote Act of 2002! (HAVA) to assist states and insular
areas with improving the administration of federal elections and to provide funds to states
and insular area governments to help implement these improvements. The EAC serves as
a national clearinghouse to provide information regarding federal elections. In fiscal year
2003, the U.S. General Services Administration (GSA) disbursed $27,340,830 to the
State of California (State), pursuant to HAVA Title I, Section 101, for activities to
improve the administration of elections. The State of California, through the Office of
the Secretary of State (Office), has expended approximately $5.3 million of these funds,
and obligated approximately $9.6 million, as of December 31, 2004, for a total
expenditure and obligation amount of about $14.9 million. See Table 1 below.

Table 1
HAVA Title I, Section 101, Funds Disbursed, Expended, Obligated, & Unexpended
(Amounts as of December 31, 2004)

Disbursed $27,340,830
Expended $5,335,268
Obligated 9,587,599
Expended & Obligated 14,922,867
Unexpended/Unobligated $12,417,963

Source: Amounts shown per Financial Status Report (SF-269) provided by the Office to EAC.

When the funds were disbursed by GSA, the State of California was notified that the
funds were to be used in keeping with HAVA, Office of Management and Budget (OMB)
Circulars A-87, A-102 and A-133,? the Cash Management Improvement Act, and the
Uniform Administrative Requirements for Grants and Cooperative Agreements With
State and Local Governments (“Common Rule,” Administrative Requirement, 53 FR
8087, March 11, 1988).

' Public Law 107-252 (42 U.S.C. 15301). In addition to establishing the EAC, the Act established a
program to provide funds to states to replace punch card voting systems and established minimum election
administration standards for states and units of local government with responsibility for the administration
of federal elections.
? OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments; OMB Circular A-
102, Grants and Cooperative Agreements With State and Local Governments; and OMB Circular A-133,
Audits of States, Local Governments, and Non-Profit Organizations.

3 In lieu of 53 FR 8087, we used GSA’s uniform administrative requirements for grants and cooperative
agreements with state and local governments (“Common Rule,” Code of Federal Regulations, Title 41,
Subtitle C, Section 105-71) because regulations have not yet been formulated for EAC.


oe

Term

Definition

Capitalized Capitalized equipment is an article of nonexpendable, tangible personal
Equipment property having a useful life of more than one year and an acquisition cost
which equals or exceeds the lesser of the capitalization level established by the
governmental unit for financial statement purposes, or $5,000. The Office’s
_capitalization level is $5,000.
CMAS This is a procurement method allowing State agencies to avoid administrative

time and expense of a formal competitive bid process by purchasing goods and
services under pre-established contracts awarded and maintained by DGS.

Indirect Costs

Indirect costs are those incurred for common or joint purposes. These costs
benefit more than one cost objective and cannot be readily identified with a
particular final cost objective. Indirect costs are normally charged to federal
awards by the use of an indirect cost rate. Typical examples of indirect costs
may include certain state/local-wide central service costs, general
administration of the grantee department or agency, accounting and personnel
services performed within the grantee department or agency, depreciation or
use allowances on buildings and equipment, and the costs of operating and
maintaining facilities.

Indirect Cost
Rate

An indirect cost rate is the ratio (expressed as a percentage) of the indirect costs

to a direct cost base (normally consisting of either total direct salaries and

wages or total direct costs exclusive of any extraordinary or distorting
_expenditures).

Indirect Cost

An indirect cost rate proposal is the documentation prepared by a governmental

Rate Proposal_| unit to substantiate its request for the establishment of an indirect cost rate.

Obligations Obligations are the amounts of orders placed, contracts and subgrants awarded,
goods and services received, and similar transactions during a given period that
will require payment by the grantee during the same or a future period.

PAM The Purchasing Authority Manual ensures the application of consistent and

sound business practices in State purchasing. It contains purchasing authority
requirements, including statutes, regulations, policies, procedures and best
practices applicable to acquiring goods and services and provides State
procurement and contracting officers and procurement staff with the
requirements for obtaining and maintaining delegated purchasing authority.

15


The legislation, as amended, creating the Office of Inspector General requires that
we report to Congress semiannually on all audit reports issued, actions taken to
implement our recommendations, and recommendations that have not been implemented.
Therefore, this report will be included in our next semiannual report.

If you have any questions about this report, please contact me at (202) 566-3121.

Attachments (2)


by the employee or supervisor. Salaries and wages for employees working on
more than one federal award or on one federal and one non-federal award are to
be distributed and supported by personnel activity reports or equivalent
documentation that reflect an after-the-fact distribution of each employee’s actual
activity.

* The $937,269 amount is less the $88,421 in cost exceptions. The entire $1,025,690 ($937,269 +
$88,421) in personal service costs charged to HAVA from July 1, 2003 to June 30, 2004, was
questioned,

Printing, Postage and Shipping: st Exceptions - $308,388; Unsupported

Cost Exceptions. We took exception to $308,388, consisting of (a) $224,632 for
postage to mail absentee ballot applications and (b) $83,756 for promotional
items and memorabilia (T-shirts, buttons, balloons, and other souvenirs), which
are not allowed under OMB Circular A-87, Attachment B, Section 1.{(3). In July
2004, the Office paid $727,500 in postage to mail 3.75 million permanent
absentee ballot applications. It did not consult county election officials, who by
law process all absentee applications. After county registrars expressed concerns
about applications sent to voters already registered as permanent absentee voters,
the Office canceled mailing any remaining applications and received a credit of
$502,868 from the U.S. Postmaster, leaving a cost of $224,632 for postage
already expended. We found the $224,632 cost unreasonable and therefore not
allowable under OMB Circular A-87, Attachment A, Section C, which defines
allowability, in part, by “whether the cost is of a type generally recognized as
ordinary and necessary for the operation of the governmental unit or the
performance of the Federal award.” Since county election officials normally
process all permanent absentee voter applications, we concluded that the
$224,632 cost was not ordinary or necessary for performing the HAVA award.

Unsupported Costs. We classified as unsupported $9,261, consisting of (a)
$9,187 in printing charges for pollworker brochures arising from a purchase order
that did not meet the State’s requirement to obtain at least two informal bids for
non-information technology (IT) purchases valued from $5,000 to $25,000, and
(b) $74 in charges that lacked a detailed invoice. Please see Unsupported Costs,
Explanatory Note (1), for PAM requirements for accurate and correct invoices.

County Grants: Cost Exceptions - $68,901.

Cost Exceptions. We took exception to $68,824 in grant payments to counties
for voter education and/or pollworker training, which were used to purchase
capitalized general purpose equipment, such as an envelope printer and mail
processing system. OMB Circular A-87, Attachment B, Section 15.b(1), states
that capital expenditures for general purpose equipment are not allowed as direct
charges to a federal grant, except where approved in advance by the awarding



Unsupported Costs. We classified $425 as unsupported because the supporting
invoices did not include legible item descriptions, making it impossible to
determine allowability.

ounty Grants. Cost Exceptions - $104,519.

Cost Exceptions. From our review of county grant purchases of general purpose
equipment costing $5,000 or more, we took exception to $34,707 in capitalized
equipment because prior approval or a waiver for the prior approval requirement
was not obtained from EAC. From our review of county grant purchases of
general purpose equipment costing less than $5,000 (non-capitalized equipment),
we noted numerous charges, specifically by Los Angeles County, related to the
purchase of over 100 laptops and carrying cases, personal computers, monitors,
printers, over 4,500 cell phones (to be distributed among the County’s 5,000
voting precincts), and an array of other electronic and audio equipment, including
a pressure washer. Of the almost $2.5 million grant provided to Los Angeles
County for voter education and pollworker training assistance, we identified
$478,101 or 19 percent spent on capitalized and non-capitalized equipment. We
did not evaluate whether the counties followed appropriate policies and
procedures when using HAVA grant funds to procure goods and services because
the procurement award documents were located at the county level, and time
constraints did not allow for this type of review. In addition to taking exception
to the $34,707 in capitalized equipment, we took exception to $69,812 in
promotional items and memorabilia (e.g., T-shirts, pens, and buttons).

58; Unsupported

Cost Exceptions. We took exception to $163,658 in audit costs. In October
2004, the Office solicited for an array of administrative consulting services,
including general auditing and reporting services. The scope of work to the
$798,890 consulting services contract that was later awarded included four
components: internal control evaluation/compliance auditing, performance
measurement, project management, and project oversight. We took exception to
the consultant services fees associated with the internal control
evaluation/compliance auditing component because audit costs are not allowed as
a direct cost to a federal grant. OMB Circular A-87, Attachment B, Section 4,
provides that only the following types of audits may be directly charged to a
federal grant award:

> Audits required by, and performed in accordance with, the Single
Audit Act, as implemented by OMB Circular A-133, “Audits of
States, Local Governments, and Non-Profit Organizations.”

> Audits approved by the awarding agency as a direct cost to an award.

10



these findings, and continue to make changes to improve the program’s effectiveness,
achieve compliance with HAVA’s mandates, and restore public confidence in the SOS
[Office of the Secretary of State].”

Regarding the questioned costs, the Office agreed with findings totaling
$1,714,477 and disagreed with findings totaling $2,145,884. The principal area of
disagreement is with the $1,994,922 of consultant contracts that the audit classified as
unsupported because the purchases did not meet the State’s competitive bidding
requirements or were not adequately substantiated by invoices. The response states that
the Office followed the appropriate requirements for the award of the consultant
contracts, and that the costs of services invoiced under the contracts were sufficiently
documented.

Comments from the DOI-OIG

At our request, the DOI-OIG reviewed the Office’s response. In regard to the
consultant contracts, the DOI-OIG said:

the findings pertaining to the Office’s questionable practices when
procuring goods and services . . . parallel the findings of the Bureau of
State Audits (BSA) report. . .. Based on our review of documents, we
concur with BSA’s audit findings and conclusions.

Regarding the issue of insufficient invoices, . . . [w]e do not believe that
the Office could have adequately evaluated the consultant services
invoices against each individual contract because the invoices did not
identify the specific activity being billed or how much time was spent on
each activity.

Recommendations to the Executive Director
We recommend that the Executive Director:
1. Resolve the questioned costs.

2. Take other action as appropriate to ensure that the Secretary of State complies
with requirements for the use of HAVA funds.

Please provide us with your written response to the recommendations by March 3,
2006. Your response should include a copy of the final determination that was
communicated to the Secretary of State and a description of any oversight or additional
reporting requirements imposed on the Office. If corrective actions will be completed
over time, submit a plan of action, which includes milestone dates and the names of
responsible officials.


systems and procedures; (4) sample testing of voting system components in select
counties on election day; and (5) on-site observation of voting systems used in selected
counties on election day.

¢ The third contract was to conduct a parallel monitoring program to test the accuracy of
the Direct Recording Electronic voting systems to record, tabulate and teport votes under
simulated voting conditions on election day.

¢ The fourth contract was for review, analysis, and evaluation of all aspects of voting
systems security for both external and internal voting system applications.

The January 2003 CMAS agency packet cited in the audit is not specific as to types of
documentation required, it simply states "document why the orders are distinct", which consisted
of the purchase order and supporting scope of work, and the contract request form submitted by
the Division. We believe these three documents meet the documentation requirement.

In addition, costs were disallowed because of insufficient invoices. The referenced invoices are
for consultant contract services received for HAVA related activities. Specifically, the report
cites DGS’ December 2004 Purchasing Authority Manual (PAM) that dictates DGS’ payment
fundamentals. The invoices are for consultant contract services received. Per the December 2004
PAM Manual, Section 1.2 Scope of Manual, “The PAM contains purchasing authority
requirements, including statutes, regulations, policies, procedures and best practices applicable to
the acquisition of non-information technology (non-IT) goods and information technology (IT)
goods and services. Also included is how departments may apply for purchasing authority,
maintain compliance with the purchasing authority program and the ‘how’s and why’s” of
competitive bidding, non-competitive contracting and leveraged procurement agreements (LPA).”
The manual does not apply to non-IT services. We believe that the costs for non-IT consulting
services were adequately documented in accordance with OMB Circular A-87 as each individual
contract specifically details the services to be provided.

We would like to point out that our current process requires the relevant Division Chief to
approve all invoices for payment confirming that services were received. Lastly, to ensure the
costs are accurately charged, the HAVA Coordinator must also approve all invoices for HAVA
related activities.

Personal Services Costs
Cost Exception: $88,421
The SOS does not disagree with this finding.

Unsupported Costs: $937,269

The SOS does not disagree with this finding. As noted in your report, monthly personnel activity
Teports were not implemented during the period under review and, in place of the activity reports,
time surveys were used to support the charged pay. The lack of personnel activity reports
supporting HAVA activities makes it impossible to confirm that time was actually spent by
employees on HAVA activities as approved by the prior management. Timesheets have since
been developed to ensure appropriate record keeping of time spent on HAVA activities, including
instructions for completing the timesheets.

Printing, Postage and Shipping
Cost Exception: $308,388

The SOS does not disagree with this finding.


U.S. ELECTION ASSISTANCE COMMISSION
OFFICE OF INSPECTOR GENERAL
1225 New York Ave. NW — Suite 1100
Washington, DC 20005

December 19, 2005
Memorandum

To: Mr. Thomas Wilkey
Executive Director, U.S. Election Assistance Commission

From: Roger La Rouche “Rog Likeo Che

Acting Inspector General

Subject: Audit Report on the Expenditures of Help America Vote Act Funds by the
California Office of the Secretary of State

The Election Assistance Commission (Commission) contracted with the Office of
Inspector General, U.S. Department of the Interior (DOI-OIG), to audit the expenditure
of payments authorized by the Help America Vote Act of 2002 (HAVA) by the
California Office of the Secretary of State (Office). The Commission arranged for the
audit to follow up on a prior report by the California Bureau of State Audits (BSA) that
identified questionably uses of HAVA funds by the Office.

Summary of DOI-OIG Audit Findings

The DOI-OIG audit (Attachment 1) questioned the Office’s use of HAVA funds
totaling $3,860,361 because:

> The expenditures ($777,502) did not conform to federal costs principles.
For example, the Office used HAVA funds for salaries and benefits
applicable to non HAV A-related activities, unreasonable postage costs,
improper promotional items and memorabilia, and costs outside of contract
terms.

> The expenditures ($3,082,859) lacked supporting documentation required by
federal and California state requirements. This consisted principally of
charges for personnel costs that were not substantiated by employee activity
reports or certifications and the costs of consultant contracts that were
awarded without adequate competition.

Response from the Office of the Secretary of State

In its November 30, 2005 response to the report (Attachment 2), the Assistant
Secretary of State, Operations, said that the current administration has “implemented
many of the BSA recommendations, which we understand served as a basis for some of


Jnsupported

Cost Exceptions. We took exception to attorneys’ fees of $43,306, consisting of
$42,256 in paid legal services in excess of the hours allowed under the contract
with the law firm and $1,050 in paid legal services for non-HAVA related speech
writing. Under OMB Circular A-87, Attachment A, Section C, costs that are
allowable and chargeable to a federally funded program must be necessary,
reasonable, allocable to that program, and authorized or not prohibited under state
or local laws or regulations. In addition, the Code of Federal Regulations, Title
41, Subtitle C, Section 105-71.136, requires that grant recipients and
subrecipients maintain a contract administration system ensuring contractors
perform in accordance with the terms, conditions, and specifications of their
contracts or purchase orders.

Unsupported Costs. We classified as unsupported $1,672,529 because of
questionable Office practices when procuring consultant services, and
insufficient invoices. We classified as unsupported $1,440,567 in expenditures
arising from 34 contracts not meeting the State’s competitive bidding
requirements.” The Office bypassed these requirements by (a) inappropriately
using a DGS exemption from competitive bidding; (b) not obtaining the required
number of comparison quotes when making California Multiple Award Schedule
(CMAS) and other procurements; and (c) splitting purchase orders to avoid
CMAS procurement limits and competitive bidding requirements. Our findings
parallel the findings of BSA’s December 2004 audit report, which stated that the
Office did not follow State procurement policies for many HAVA purchases,
including competitive bidding and may not have obtained the best value for
goods and services purchased with HAVA funds (see Appendix 2). In addition
to the OMB Circular A-87 requirement that costs charged to a federal grant be in
consonance with State law, the Code of Federal Regulations, Title 41, Subtitle C,
Section 105-71.136, requires states to follow the same policies and procedures to
procure property and services whether non-federal or federal funds are used to
make the procurements.

In addition, we classified as unsupported $231,962 charged to HAVA without
sufficient invoices. Under OMB Circular A-87, Attachment A, Section C.1j,
costs that are allowable and chargeable to a federally funded program must be
adequately documented. Further, under the California Department of General
Services, Procurement Division’s December 2004 Purchasing Authority Manual
(PAM), (Chapter 9, Section A, Topic i-Payment Fundamentals), a Department
cannot process or release payment to any supplier for goods and/or services
without having all of the following in its possession:



agency. Section 15.b(4) further states that federal awarding agencies are
authorized at their option to waive or delegate the prior approval requirement.
We determined that the Office did not obtain advance approval for its purchases
of capitalized equipment nor did it obtain a waiver for the prior approval
requirement from the EAC. We also took exception to $77 in promotional items
and memorabilia (stickers).

Administrative Indirect Costs: Unsupported Costs - $108,077.

Unsupported Costs. We classified all of the indirect costs of $108,077 as
unsupported because the Office did not prepare an indirect cost rate proposal.
The Office charged indirect costs of $108,077 to HAVA, Title I, Section 101 for
fiscal years 2003 and 2004, using an indirect cost rate of 10 percent. Although
the indirect cost rate appeared reasonable, the Office did not prepare an indirect
cost rate proposal to support the rate used. OMB Circular A-87, Attachment E,
Section D, states that all departments or agencies of a governmental unit desiring
to claim indirect costs under federal awards must prepare a certified indirect cost
rate proposal and related documentation to support those costs. In addition, the
proposal and related documentation must be retained and available for audit.

orted Costs - $25,616.

Unsupported Costs. We classified $25,616 as unsupported because the Office
lacked detailed invoices for some interagency agreements with the California
State University, Sacramento, the California Senate Rules Committee, and DGS.

orted Costs - $7,289.

Unsupported Costs. We classified as unsupported $7,289, consisting of (a)
$6,802 in laptop purchases arising from a purchase order that did not meet the
State’s requirement to obtain at least two informal bids for IT goods and services
valued from $5,000 to $100,000, and (b) $487 in phone charges that did not have
sufficient support documentation.

Travel: Cost Exceptions - $294.

Cost Exceptions. We took exception to $294 because an invoice did not have an
approval to pay signature. The State’s PAM requires a properly authorized
purchase document prior to the release of payment.

Other: Cost Exceptions - $15; Unsupported Costs - $425.

Cost Exceptions. We took exception to $15 for the purchase of a frame because
the expense was non-HAVA related.