March 29, 2012 Board of Education and Board Audit Committee, Houston Independent School District 4400 West

18th Street Houston, TX 77092 This report reflects the results of our performance audit related to Houston Independent School Districts (HISD) contract recommendation awards process. The objective of our performance audit was to assess adherence to policies, established procurement control processes, and all statutory procurement requirements regarding HISDs contract recommendation awards process for the period from July 1, 2010 through September 16, 2011. Our performance audit was conducted in accordance with the standards for performance audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Complete report requirements are contained in the Appendix to this report. KEY FINDINGS AND RECOMMENDATIONS Board Policy Issues Most board members indicated that they did not totally understand all the requirements of conflict of interest and ethics policies. We recommend that steps be taken to provide expanded discussion and training on existing conflict of interest and related procurement policies affecting board members to board members on at least an annual basis. Existing board policies on conflict of interest and related procurement policies affecting board members are quite stringent and make compliance for board members very difficult. As a result, HISD staff spends quite a bit of time in monitoring these policy requirements. We recommend that steps be taken to simplify these policies, including internal staff policies related to monitoring and activities of procurement evaluation staff.

3411 Richmond | Suite 500 | Houston, TX 77046 | (P) 713.621.1515 | (F) 713.621.1570 www.null-lairson.com

Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Procurement compliance issues HISD procurement activities are decentralized and subject to different levels of control within the organization. As a result, there are inconsistencies in procurement handling and especially procurement file documentation. We recommend that internal initiatives that began in the late fall of 2011 continue and that Procurement be involved on all purchases in some manner, even those that are being handled in other functional areas. HISD lacks procedures or policies to allow it to determine if there is a benefit of interest rather than a conflict. This is especially the case when board members are working specifically within their district. We recommend that board members communicate the extent of this type of assistance from existing vendors to the superintendent and that Procurement evaluate exposing these services to market competition. All of our findings are enumerated in the body of our report following. We appreciate the opportunity to work with Houston ISD on this project and wish to extend our thanks for the cooperation and assistance provided by district board members, former superintendents, and staff during the course of the project. Sincerely,

Null Lairson, P.C.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process

Table of Contents Section Background and Objectives Key Work Steps Findings and Recommendations Appendix - Government Auditing Standards report information Page Number 4 9 9 23

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process BACKGROUND AND OBJECTIVES HISD is the seventh largest school district in the country and the largest in Texas with over 203,000 students and over 300 campuses, encompassing 301 square miles within greater Houston. As such, HISD is a large Houston employer and user of services and goods. HISD employs over 32,500 full and part-time staff, with budgeted spending of over $1,360 million in pay and benefits for these positions. HISD budgeted spending for non-personnel costs is over $870 million. Hispanic and African American students make up over 88 percent of HISDs student population, shown below. HISD Students by Ethnicity 2011-12 Ethnicity
American Indian/Alaskan Native African American Asian Hispanic Native Hawaiian/Other Islander Two or More White Total

# of Students
476 51,015 6,665 126,707 228 1,522 16,453 203,066

% of all Students
0.3 26.5 2.9 61.7 0.2 0.6 7.8 100.0

Source: Texas Education Agency, PEIMS information for 2011-12

Over 40 percent of HISD students are in elementary grades, shown below. HISD Students by Grade Level 2011-12
Grade Level Kindergarten & Earlier Elementary 1-5 Middle School 6-8 High School 9-12 Total # of Students 33,659 82,163 38,830 48,414 203,066 % of all Students 16.58 40.46 19.12 23.84 100.00

Source: Texas Education Agency, PEIMS information for 2011-12

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Over 80 percent of HISD students are economically disadvantaged and over 60 percent of HISD students are considered at risk of dropping out of school based on Texas Education Agency indicators, shown below. HISD Students by Program 2011-12
Program LEP ESL Bilingual At Risk Title I Special Education Gifted/Talented Economically Disadvantaged* # of Students 60,639 12,829 42,330 125,758 191,346 15,898 30,591 163,199 % of all Students 29.86% 6.32% 20.85% 61.93% 94.23% 7.83% 15.06% 80.37%

*-Meets federal criteria for free and reduced price lunches Source: Texas Education Agency, PEIMS information for 2011-12

HISD operates under the auspices of the Texas Education Agency, using a core curriculum based on state guidelines for prekindergarten through twelfth grade. Instructional offerings include Magnet and Vanguard programs, charter schools, and alternative programs that use innovative instruction to help students who are at risk of dropping out of school. Also offered are programs in early-childhood education, Special Education, multilingual education, career and technology/ vocational education, and dual credit/advanced academics. ******************************************************************************************************** Over the past several years, HISD has come under public scrutiny related to contract awards and the perceived presence of school board member influence in awarding contracts to specific providers. In addressing that issue, the board audit committee hired Null Lairson, P.C. to conduct a performance audit related to HISDs contract recommendation awards process. The audit involved review of board policy information and procurement compliance with legal and internal policies. The audit focused on indicators of board compliance with policies during the procurement processes generally and for 15 contracts selected for detailed review by the audit committee and auditors. In many cases, the contracts pulled for compliance review had indicators through news stories and other information obtained during the audit that board member influence was in question. Specific testing scopes are contained in our detailed reports in accordance with Government Auditing Standards contained in the Appendix to this report. In accordance with the requested project scope, 15 contracts were selected for compliance review, stratified by amounts. A slight variance on the requested selection scope was obtained from the audit committee and is shown in comparison with requested stratifications. This variance had to do with the auditors risk based approach in selecting contracts during the audit. Null Lairson, P.C. 5

Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process HISD Contract Selection Stratification Strata
Greater than $100,000 $50,000 - $100,000 Less than $50,000
Source: Null Lairson P.C.

Contract Selections Planned Actual Scope Selections Variance 7 8 1 5 5 0 3 2 (1)

Contracts selected for detailed review included the following. The first five contracts were selected by the audit committee and the remainder were selected on a risk-based approach by auditors and ultimately approved as a selection by the audit committee. HISD Contracts Selected for Testing
No. 1 Stratum >$100K Final Projects/Contracts Selected Job Order Contract Program Project No. 10-01-05 Jamail & Smith Fort Bend Mechanical KBR, Kellogg, Brown and Root RHJ 2 >$100K Annual Building Envelope Maintenance/Repair Project No. 08-03-04 Charter Roofing Company, Inc State Roofing Company, Inc. Aztec Roofing and Sheetmetal Corporation 3 >$100K Minor General Contract Services Under $25,000 Project 10-07-13 DKC HRE - Healthy Resources Enterprises BD &W Hallmark Construction Sparks Construction Westco Ventures, LLC

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process
ITL - International Leading Technologies 4 >$100K Supplemental Bus Transportation Project No. 11-01-09 AFC Transportation Coach USA Goodman Bus Company Huerta Bus Services 5 >$100K Supplemental Painting Services $5 Million (over all contract) Pat F. Corte DBA Corte Enterprises Milam Company Painting, Inc. Westco Ventures, LLC Zuriel Enterprises Services 6 7 8 9 10 11 12 13 14 >$100K >$100K >$100K Project Grad Southwest Wholesale Nursery Community Education Partners, Inc.

$50K to $100K Space Center Houston $50K to $100K Stanley Security Solutions, Inc. $50K to $100K Cecilia Edwards $50K to $100K Stanbury Uniforms $50K to $100K Little Green Apples, Inc <$50K Morganti Texas, Inc.

15 <$50K Demetra Jones Source: Null Lairson, P.C.

Public schools in Texas and around the country deal constantly with issues related to procurement of goods and services. First, public schools must follow rigorous compliance requirements in procuring services under state and federal laws. Additionally, public schools may also adopt requirements that exceed minimums prescribed by either state or federal laws. Procurement then becomes an exercise in trying to find a balance in providing the best value for purchases while complying with all the legal and local requirements involved. Generally, public schools must provide personnel resources to provide for proper procurement activities.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Second, the public school industry is somewhat dependent on vendors for a variety of reasons. These reasons include strong vendor involvement in conferences and training programs for public school elected officials and staff. Many vendors target elected officials and key staff for purposes of gaining market share in the public school industry. This is the case for everything from school curriculum materials and construction resources to basic school supplies for teachers and students, school maintenance activities, and student-centered programs designed to provide safe and meaningful extracurricular activities. There is constant pressure on public school elected officials and key staff from the established vendor community to use resources for specific vendor products and services. For elected board members, the vendor community has historically provided resources through contributions to campaign funds so that the board members can be elected or stay in office. Generally, this is done in hopes that board members will look favorably upon them at some point in time when or if the vendor has a contract or bid to be approved by the school board. This situation provides a number of traps for board members as they try to adhere to policies established to negate these vendor pressures for contractual arrangements and funding. In essence, public schools must provide for policies and operating procedures to follow to try to keep from bowing to existing pressures from vendors that are the norm in the public school industry. Policies that are understood by board members and public school staff along with internal procurement systems that are designed to provide for fair and equitable purchases provide a strong foundation for providing the best value for the public school system. Perceptions regarding the subjects of this audit, board member influence on contracts and procurement compliance, can easily go out of control without well-designed processes that are effective. Based on the above discussion, it becomes imperative that public school systems such as HISD have reasonable policies and procedures for board members and public school staff to follow when it comes to basic procurement activities. Our audit findings show that HISD needs improvement in both areas to combat public perceptions relative to procurement activities. Fully understood policies and procurement practices are essential in providing both internal and external assurances. Our findings indicate two key things: 1. HISD board policy in this area is in need of review to simplify compliance for board members and staff. HISD has very stringent policies already adopted for procurement purposes. Policy should be made easier to understand and at the same time, board members and staff need to adhere to these poicies without fail. Board members should abstain from the procurement process and recognize the code of silence requirements of existing policy. 2. HISD procurement processes have not provided consistent documentation practices that provide the type of information that the School Board, the public, and HISD staff expect in response to questions related to procurements. Without a solid bridge document between staff evaluation committee recommendations on contracts and board recommendations to be voted on, it is left up to the procurement file reviewer to perceive what happens. Transparency questions also come into play without this consistency.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process

KEY WORK STEPS In order to address the objectives of the audit, we undertook the following key work steps in accordance with specified scope: Reviewed key written documentation regarding the purchasing function, including, but not limited to, board policy, organization charts, procedures memos, and procurement file information. Conducted interviews with senior staff and staff in Procurement, Finance, and Construction and Facility Services. Interviewed all board members related to the audit objectives. Interviewed current and prior HISD superintendents. Performed detailed walkthroughs for each contract selection from the issuance of the procurement request through contract execution. Conducted comparison analyses on like entity procurement policy requirements. Verified factual data from compliance findings with HISD senior staff. Finalized and presented our report.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process FINDINGS AND RECOMMENDATIONS Board Policy Issues Finding 1 Most board members indicated that they did not totally understand the requirements of conflict of interest and ethics policies. Policies can be even harder to understand due to the recent infusion of new policies for E-Rate purchases based on a federal compliance settlement. Three of these policies were covered at the recent board retreat: Policy CAA (Local) Fiscal Management Goals and Objectives; Policy BBFA (Local) Conflict of Interest Disclosures; and Policy BBF (Local) Ethics. There are also other policies as referenced in Policy CAA (Local) regarding conflicts of interest, ethics, and financial oversight: Code of ethics for employeesDH Financial conflicts of interest for all employees - DBD Financial conflicts involving federal funds - CBB Systems for monitoring the Districts investment program - CDA Budget planning and evaluation - CE Compliance with accounting regulations - CFC Activity fund management - CFD Criminal history record information for employees - DC Disciplinary action for fraud by employees - DCD, DCE, and DF series

All of these policies are available on HISDs web site at http://pol.tasb.org/Home/Index/592. Policy BBFA (Local) Conflict of Interest Disclosures is particularly onerous related to board member pecuniary interest by prohibiting an entity with family ties to a board member from doing business with HISD: the District shall not contract with a business entity in which a Trustee or anyone related to the Trustee in the first degree of consanguinity (blood) or affinity (marriage) as determined under Chapter 573, Government Code, has any pecuniary interest

Policy CAA (Local) Fiscal Management Goals and Objectives includes the following topics:

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process HISD Policy CAA (Local) Topics Section/Areas General Provisions page 2 1. Summary of related financial ethics governance documents Fraud and Financial Impropriety pages 2-5 1. Definition 2. Financial controls and oversight 3. Fraud prevention 4. Fraud investigations E-Rate Compliance Policy pages 5-11 1. Definitions 2. E-Rate goods and services 3. Disclosure of interest 4. Code of silence period 5. Monitoring and compliance review 6. Education and training Standard Bidding and Contracting - pages 11-14 1. Code of silence 2. Procurement methods 3. Time period 4. Violation 5. Formal Complaints
Source: HISD Policy Online Policy CAA (Local)

Of particular interest in this audit was the section of Policy CAA (Local) pertaining to the Code of Silence during the procurement process. At present, this is further complicated by the dual E-Rate compliance policy provisions. The policy prohibits contact with vendors during the process of procurement. The policy states: Code of Silence shall mean a prohibition on any communication regarding any RFP, bid, or other competitive solicitation (as defined in the procurement methods above) between: 1. Any person who seeks an award from the District or its affiliated entities (including, but not limited to, the HISD Foundation and the HISD Public Facility Corporation), including a potential vendor or vendors representative; and

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process 2. Board member, the Superintendent, senior staff member, principal, department head, director, manager, or other District representative who has influence in the evaluation or selection process

Furthermore, campaign contributions, gifts, donations, and any other items of value are prohibited between the parties defined above for any known contract under consideration during the Code of Silence period. Also, candidates who have filed for election to the Board of Education are subject to these limitations after the date on which the candidate has filed for office. HISD will review historical Campaign Finance reports to identify campaign contributions for the applicable period and hold newly elected board members accountable as existing board members during the Code of Silence period. HISDs Office of Inspector General and the E-Rate compliance officer monitor board member campaign finance reports as a way to ensure compliance with the policy. Our review of these reports showed that individuals with contracted entities did give campaign contributions to board members periodically, however, Procurement file information on this aspect was not sufficient to determine actual compliance with campaign contributions during the Code of Silence period. We recommend that steps be taken to provide expanded discussion and training on existing conflict of interest and related procurement policies affecting board members to board members on at least an annual basis. This involves a specific expanded workshop devoted to these policies annually to ensure that board members have a better understanding of policy requirements.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 2 Existing board policies on conflict of interest and related procurement policies affecting board members are quite stringent and make compliance for board members very difficult. As a result, HISD staff spends quite a bit of time in monitoring these policy requirements. We recommend that steps be taken to simplify these policies, including internal staff policies related to monitoring and activities of procurement evaluation staff. We recommend that at minimum, policies include the following: Board members should disclose any financial relationships, including governance responsibilities that exist with vendors. Evaluate the need for policies that exclude vendor work at HISD related to financial relationships, including governance responsibilities board members may have with vendors. Board members should abstain from contract votes for those vendors where there are disclosed financial relationships or governance responsibilities. Policy should include provisions prohibiting board member involvement in anything other than votes on contract awards. Board members having an interest in a vendor should communicate with only the superintendent on it and should not be involved in vendor discussions with HISD staff or be involved with vendor meetings with staff. The board packet on contract awards should include documented staff evaluation committee recommendations and any differences between board recommended contracts and staff committee evaluations should be included in the board packet.

Finding 3 HISD does not currently require board members to disclose travel, food, lodging, or entertainment accepted as a guest by contractors or lobbyists. It has established a $50 threshold for reporting, but only for gifts. Per discussions with HISD staff and board members, some board members have travelled to other countries or states with potential or current vendors. These trips are not currently required to be disclosed. The team notes that HISD board members cannot accept any gifts other than de minimus trinkets from E-Rate vendors, per the HISD Agreement with the federal government. To ensure transparency and accountability, we recommend that HISD board members document all travel, lodging, or entertainment received by board members.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 4 HISD has not required disclosure of conflicts of loyalty involving board members making decisions (including discussion and voting) for organizations for which they are also officers or board members. This does not comply with IRS recommendations or like districts reviewed. The HISD needs to ensure that it requires board members to disclose relationships with all agencies, including non-profit vendors, grantees, or organizations with which the HISD is considering a financial relationship. Board members with relationships must disclose the relationship and recues themselves from discussion and voting on the matter. If the Board determines the matter to be in the best interest of the HISD, such relationships should not result in the vendors being disqualified. Finding 5 HISD has conflicting requirements related to board members voting on contracts with vendors making campaign contributions. Unless it is an ERate vendor, board members do not have to disclose and recues themselves from decisions involving donors to their campaigns. Other districts set dollar thresholds and time limits. For example, Los Angeles Unified School District board members can vote on a contract with a vendor who made a campaign contribution to them under certain circumstances. First, board members cannot receive or solicit campaign contributions of more than $250 from parties or other financially interested persons during the procurement and for three months after its conclusion (from initiation of the competitive bidding process to three months after). Board members must disqualify themselves from participating in the discussion and vote if they have received contributions of more than $250 during the prior 12 months from a party or person who is financially interested in the outcome of the proceeding. We recommend HISD adopt consistent procedures to allow board members to vote on contracts with vendors who have made campaign contributions. HISD should consider keeping the E-Rate policy, but also adopting a policy that requires board members to disclose and recues them if they have accepted more than $250 in campaign contributions per year from vendors or their agents. Other agencies reviewed by the team have considered prohibiting any campaign contributions from vendors during the time of competitive bidding and up to three months after the contract has been finalized. Finding 6 HISD does not require staff to announce publicly sole source contracts online. To increase transparency and accountability, we recommend that HISD require HISD staff to publish notice of the HISDs intent to award sole source contracts for at least a given period (two weeks) prior to board review and approval of the contract.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 7 HISD does not have policies or procedures that provide for sanctions for vendors who have tried to obtain board influence over contracts. Other like districts reviewed place the burden for compliance, in part, on the vendors. For example, Miami Dade specifies that if the Trustee fails to disclose and recues him or herself from voting on a contract, the vendor will be disbarred from contracting with the school district for 24 months. We recommend that HISD include sanctions for vendors to ensure vendors understand the seriousness of violating conflict of interest requirements, and have an incentive to ensure they and board members are reporting and disclosing possible conflicts. Finding 8 HISD lacks defined procedures related to vendors contacting board members and employees. Other districts reviewed by the team have set up specific requirements defining how and when vendors can contact board members and staff. These terms ensure that the districts and vendors are operating under maximum accountability and transparency. For example, Miami Dade school district defines lobbying as including oral or written communication, direct or indirect, with the School Board for the purpose of doing business with the school district. This also includes attempts by vendors to obtain the good will of a school board member, committee member, or employee (such as by donating time or goods to schools or parent-teacher organizations). Miami Dade requires vendors to register as lobbyists and comply with state/federal lobbying provisions as well as district policy regarding communications. Failure to register results in suspension of the firm/lobbyist for 90 days (first violation); one year (second violation); and two years (third violation). Other districts have prohibited vendors from talking to school personnel in the buildings at any time unless they have obtained permission from the school superintendent. Additionally, some have limited communications with the boards to being required to be in writing and addresses to all board members (for example prohibiting marketing luncheons). Many districts allow unsolicited proposals, but require vendors to follow rules related to the submissions. Additionally, prior to entering into contracts, these districts require competitive bidding to occur. We recommend that HISD establish guidelines for board members, staff, and vendors to follow that define when and how allowable contact may be made, including presentation of unsolicited proposals.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Procurement compliance issues Finding 9 HISD procurement activities are decentralized and subject to different levels of control within the organization. Some procurement is handled at schools, some through Finance, Construction and Facility Services, as well as through the Procurement office. As a result, there are inconsistencies in procurement handling and especially procurement file documentation. Had this documentation been available for selected contracts, it is likely that perceptions about board influences on contract awards could have been explained by HISD senior or Procurement staff on an immediate basis. The detailed compliance review noted the following items. This review indicated the inconsistencies in processes that need to be addressed by HISD Procurement. 1. Grounds Maintenance Services Project #10-12-06: Nine vendors were selected for oral presentations. These vendors are as follows: Houston Grotech Services SRB Landscaping Von Yonder Landscaping GCA Services Group, Inc. Maldonado Nursery Silversand Services Groundstar Landscape Management Southwest Wholesale Green Works Land Care.

One vendor, Groundstar Landscape Management, declined the oral presentation. There is lack of documentation indicating how the nine vendors above were placed on the short list. We found a ranking of all 19 vendors for both the South and North Regions. Per our review of the procurement file, we found that one vendors score, Von Younger Landscaping, did not fall in the top nine vendors. In fact, Von Younger Landscaping ranked

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process 15th for the North Region and 17th for the South Region. In addition, there were two vendors that scored in the top 9 for both the North and South regions but were not invited for oral presentations. These vendors were Central Landscape and Five Woods LLC. The evaluations used, subsequent to establishing the short list, were accurate and documentation existed to show the rationale for awarding Southwest Wholesale and Houston Grotech Services for the South and North Regions, respectively. This RFP also requested pricing for Irrigation and Landscaping services. Per Procurement staff, this portion of the RFP was evaluated based on price only and was a separate evaluation from the North and South Region evaluations. Per an email from the end user to Procurement staff, the landscaping and irrigation services were to be determined by price. This was also confirmed by Procurement staff during a phone conversation on February 20, 2012. We noted that Five Woods, LLC was awarded Landscaping and Irrigation Services Only. The district negotiated prices with this vendor based on email evidence. However, as mentioned above, this particular vendor was not on the short list. Furthermore, per our review of all final prices for irrigation and landscape services, there was another vendor that offered a better price than Five Woods, LLC. If there were reasons for awarding Five Woods LLC for this portion of the RFP, we were unable to locate documentation for this decision. This was also discussed with Procurement staff on February 20, 2012 2. Sole Source (7/1/2010-9/16/2011) Little Green Apples, Inc .is a sole source vendor. The sole source affidavit was maintained on file. There were two instances where campuses used a direct pay form instead of a purchase order. The Accounts Payable department informed the end user that district policies were not followed. We also noted there are two vendor numbers (74133 and 61627) for this vendor, with a difference in zip codes. 3. Sole Source (7/1/2010-9/16/2011) Space Center Houston is considered a sole vendor Campuses take their students to Space Center Houston on field trips throughout the year. Documentation was not provided to us that indicated the District had made the decision to consider this vendor a sole source vendor. It should also be noted that the checklist (Consultant Bid/No-Bid confirmation) to document the method of procurement was not utilized. 4. Sole Source (7/1/2010-9/16/2011) The procurement method utilized is not documented for Community Education Partners, Inc. This vendor has been used for many years. The District considers this a sole source because it is the only vendor that can house 1,200 students for Disciplinary Alternative Education Program (DAEP). The District was able to provide sole source affidavits for other sole source vendors. There are inconsistencies in the manner sole source vendor determinations are documented. 5. Supplemental Painting Services Project # 10-12-01 We noted that one vendor did not submit financial statements as required by the RFP. Yet, this vendor was awarded a contract.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process 6. Per our inquiries, vendor number 29986 is used for one-time payments. There were 2,347 name variations for this vendor number. However, we noted that some vendor names were duplicated. For example, if the payee was a district campus, one vendor name included the word school while the other name did not. There were a total of 113 vendors duplicated. Total amount paid under vendor number 29986 is $378,287. 7. During our request for information, we requested amounts paid to specific vendors under specific projects. This information cannot be extracted from SAP. The District does have the ability to run such an analysis by utilizing its Business Intelligence System. 8. The Request for Qualification (RFQ) for delinquent tax collection services (Project #08-10-10) was selected as part of our supplemental control sample. Linebarger, Goggan, Blair, and Sampson, LLP were selected in 2008. Perdue, Brandon, Fielder, Collins and Mott, LLP also submitted an RFQ. Linebarger scored 364 points (average of 91) and Perdue scored a total of 333 points (average of 83.25). It should be noted that the evaluation forms were not signed by each of the evaluation team members. In addition, a tabulation summary was not prepared providing the final score for each firm. We also noted that one of the evaluation committee members gave Linebarger more points than possible for a specific evaluation criterion. For example, 15 points was given when only 5 points were possible. In adding up the points, only 5 points were incorporated. This was also the case for another criterion. The error does not change the final score. It should also be noted that during the January 13, 2011 meeting, the Board approved the renewal of Linebargers contract for a three-year period. The original RFQ called for renewals in one-year increments. The effective date of the contract reviewed was December 16, 2009 and included an expiration date of March 31, 2010. The contract specifically stated that the contract would be renewed for another year (April 1, 2010 through March 31, 2011) and for two additional one-year periods. As such, during the January 13, 2011 board meeting, the board approved to extend Linebargers contract for a three-year period instead. 9. HISD does not maintain a formal list of authorized school or departmental approvers for professional services, contractors, or consultants. The lack of a formal listing of authorized approvers within departments or schools can result in the approval and payment of unwarranted expenses. 10. The Chief Financial Officer (CFO) determines if a purchase requires a bid or is a sole source for professional services, contractors, or consultants. For the Short Form, the CFO does not sign indicating her approval of her written instructions. This lack of formal documentation can result in the approval of expenses that do not comply with HISD and federal procurement policies. 11. A vendor performance evaluation is not completed after the completion of the contract. Although a supplier scorecard that is accessible to the community is available on the HISD website, this is not promoted by the district and is not readily used. 12. Project # 10-07-13 Minor General Contracted Services Under $25,000 - The Procurement Department does not maintain a formal training program for its Procurement staff. In addition, during our walk through of the Minor General Construction Projects under $25,000 it was noted

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process that signed contracts were not executed up to a year and a half following the board approval and execution of the work associated with this Request for Proposal. Discussions with the Procurement staff assigned to the Minor General Construction Projects indicate that she did not execute the contracts because she did not know how to create the contract specs. In addition, we noted 165 pricing typographical errors within pricing summary Excel spreadsheet that was used to calculate and compare vendors to determine the vendor offering the best price. In addition we noted 12 pricing typographical errors including an error where one (1) vendor noted a price of $0.28 per square foot for Type IV Interior, Wood stained and varnished Apply Barrier Coat with its Request for Proposal, however the Procurement staff entered $28.00 per square foot for Type IV- Interior, Wood stained and varnished Apply Barrier Coat within the pricing summary Excel Worksheet for Maintenance Painting Services Contract. In addition, we noted no indication that the procurement files of the Minor General Construction Projects under $25,000 and the Maintenance Painting Services Contract had been reviewed by a Procurement Manager. The lack of procedures to detect and correct typographical errors within vendor best value analysis can result in errors that result in a higher priced vendor being selected with higher overall cost to the district. In addition, the failure to monitor and detect missed steps within the procurement process can result in non-compliance, as well as, lawsuit exposure to the district. 13. HISD Procurement Department does not have written procedures in place to ensure all required steps are performed when procuring a contract. The lack of written procedures in place to ensure completion of all required steps may result in non-compliance with federal, state, and board policies. 14. Members of an evaluation team selected to review the Request for Proposals (RFP) are not required to document the rationale related to the factors they assign on the evaluation score card. This can result in human bias. 15. Although the Procurement Department retains access to a Business Intelligence System, which allows the Department to monitor spending by vendor by contract this software is not routinely used to monitor vendor payments in relation to awarded contracts. This lack of monitoring results in difficulty in determining board approved limits on work to awarded vendors. 16. Project 10-07-13 Minor General Contracted Services Under $25,000 - We reviewed the Minor General Construction Projects under $25,000 file on November 16, 2011. When we returned on January 26, 2012 several documents that were included within the file during our initial visit were no longer present in the file. The missing documents included Confidentiality Agreements for the Evaluation Team and the 10-07-13 Minor General Contracting Services Evaluation Matrix Analysis on January 26, 2012 had different values from what was presented during our initial visit on November 16, 2011. Discussion with the Procurement staff indicates that the file was reviewed by several parties including the general public prior to our second review on January 26, 2012. Per the Procurement staff, this could result in misplaced documents.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process During the procurement process for the Job Order Contract Supplemental (Project #10-01-05) and the Minor General Contracting Services Project < $25,000 (Project #10-07-13), we noted that the vendors selected for contract by the evaluation committee was not the same as the vendors who appeared on the board agenda for approval and who were selected. JOC During the Job Order Contract Supplemental (Project #10-01-05) evaluation process, the evaluation team selected KBR and RHJ-JOC. However, the following vendors were submitted for approval by the Board on Board Agenda Item G-12: a. b. c. d. e. KBR Fort Bend Mechanical Gil Ramirez Group Horizon Group Reytec/ CBIC

In addition, it was noted that four (4) of the five (5) vendors selected did not participate in the oral presentations due to not being short listed by the evaluation team due to higher priced coefficients. The four that did not participate due to not being short-listed were Fort Bend Mechanical, Gil Ramirez Group, Horizon Group, and Reytec/ CBIC. Review of e-mails indicated that the Chief Financial Officer and the former Chief Business Operations Officer participated in the drafting of board agenda Item that was submitted for approval. Minor General Contracting Services < $25,000 (Project 10-07-13) Five (5) vendors were initially selected by the evaluation committee for contract awards for the Minor General Contracting Services < $25,000. The vendors initially selected include Healthy Resources Enterprise, Inc. International Leading Technologies, Inc., Pat F. Corte DBA Corte Enterprises, BD&W Construction Company, and DKC Enterprises. These vendors were approved by the Board on November 11, 2010. During reviews of e-mails and discussions with the Procurement staff assigned to the contract, it was noted that the initial Board Item dated October 14, 2010 included an error on the part of Procurement personnel where several vendors that were not selected by the evaluation committee were included on the board agenda for contract approval. Vendors that were not selected included Hallmark Capital Group, LLC, Sparks Construction, and Westco Ventures, LLC. Discussions with the assigned Procurement staff indicate that representatives from Sparks Construction and Westco Ventures, LLC called the Procurement staff when the Board Item dated November 11, 2010 was released inquiring as to why they were not included on the revised Board Item. At this time, the Procurement staff notified the representatives that this was a typographical error on the part of Procurement personnel and the vendors should not have been included on the initial list. When they Procurement staff and members of Procurement Management refused to add the vendors the vendors contacted various members of the Board notifying them of the inconsistency. Per review of e-mails and discussion with the assigned Procurement staff, this resulted in board members contacting the Chief Financial Officer to arrange meetings with Procurement Management to discuss why the vendors name had been included on the Board Agenda and then had been crossed out. The Chief Procurement Officer, the assigned Procurement Manager, and the assigned Procurement staff met with representatives of

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Sparks Construction and Westco Ventures LLC on November 17, 2010 and on November 22, 2010 the vendors were given a Best and Final Offer (BAFO) by the Procurement Manager indicating that if the vendor accepted the terms noted in the BAFO, the vendors would be added to the award. On January 13, 2011 Hallmark Capital Group, LLC, Sparks Construction, and Westco Ventures, LLC were added to the Board Item and were awarded contracts for Minor General Contracting Services for Projects less than $25,000. E-mails supporting correspondences associated with the addition of the three (3) vendors were not included in the procurement file, nor was documentation maintained in the file regarding the rationale for the best and final offer and the rational to add additional vendors. Discussions with senior staff indicated that initiatives had begun in the late fall of 2011 to provide for consistencies in procurement documentation, especially in staff evaluation and file documentation related to actual contract recommendations to the board. We recommend that these initiatives continue. We also recommend that Procurement be involved on all purchases in some manner, even those that are being handled in other functional areas. The key here is to make certain that there is a bridge between the procurement files and evaluation committee recommendations in procurement file documentation and board information submitted for contract award vote. Without this type of documentation on file, the public is left to speculate on contract awards and board influence.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 10 HISD lacks procedures or policies to allow it to determine if there is a benefit of interest rather than a conflict. This is especially the case when board members are working specifically within their district. We recommend that HISD implement procedures to investigate whether the transaction represents a conflict of interest or a Benefit of interest. Transactions found to be in the best interest of HISD should be allowed to proceed. However, HISD should require an external opinion of these transactions (for example, requesting a review from the OIG or Attorney) rather than relying on Procurement staffs determination of whether this is a beneficial transaction. Common safeguards should be as follows: Establish a conflict of interest policy all board members sign, that requires disclosure of membership on the boards of other organizations. Publish the information on the rostesr of board members to encourage others to turn such relationships into benefits for the organization and to understand where conflicts can occur. Establish disclosure as a normal practice. If major purchases are involved, obtain competitive written bids to ensure prices and products are comparable if a board member stands to benefit from the decision.

We recommend that board members communicate the extent of this type of assistance from existing vendors to the superintendent and that Procurement evaluate exposing these services to market competition. This will also alleviate the perceptions associated with board member influence on certain contracts. The key here is for the board members to hand over procurement issues to HISD staff on all purchases, including donated services to ensure that services or contributions of this type are really the best value for HISD.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 11 In analyzing the vendor lists provided for the period under audit, we noted several vendors that had two or more vendor numbers. Below is the detail of our analysis:
VENDOR NAME CITY OF HOUSTON TAX REINVESTMENT CITY OF HOUSTON UNIVERSITY OF HOUSTON COLLEGE BOARD THE COURT YARD BY MARRIOTT FAST SIGNS HOLIDAY INN JASONS DELI AT AND T CHICKFILA EMBASSY SUITES HAMPTON INN HERFF JONES INC HOMEWOOD SUITES RICE UNIVERSITY BAYLOR COLLEGE OF MEDICINE HOLIDAY INN EXPRESS HOLIDAY INN EXPRESS AND SUITES HOUSTON COMMUNITY COLLEGE LA QUINTA INN SCHOLASTIC INC UNIVERSITY OF HOUSTON DOWNTOWN UNIVERSITY OF TEXAS AT AUSTIN VENDOR NO. VARIATIONS 15 9 9 7 7 7 7 7 6 6 6 6 6 6 6 5 5 5 5 5 5 5 5

We recommend Procurement review vendor listings and pure duplicate vendors be removed from the list. Some of the vendors require more than one record and some of the pure duplicates have been marked inactive in the system.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Finding 12 HISD has no consistent process for evaluating continuing vendors at least annually. This process is performed in like districts reviewed and assists in continuing assurances that HISD continues to receive the best value based on comprehensive vendor performance. We recommend that HISD institute a process in Procurement whereby continuing vendors are evaluated on performance at least annually. Finding 13 HISD lacks appropriate information and controls related to contract change orders. Currently, staff is not required to present contract amendments and change orders to the Board for review and approval. We recommend that HISD adopt policies requiring staff to present change orders or contract amendments to the Board for ratification, and for preapproval if the amendments exceed set thresholds (such as 10 percent of the original contract amount or $50,000, whichever is higher). The HISD board should also consider requiring an independent cost and price analysis to accompany staff requests for changes to contracts. These could be performed by the OIG or Procurement staff, but should not be performed by the staff or departments requesting the amendment (should have some independence). The analyses should be done to ensure that the value to the district provided by the contract amendment or change order is still more beneficial than re-bidding the contract or requiring new competitive bidding for the additional work.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process

Appendix Government Auditing Standards report information

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process

Null Lairson, P.C. conducted the performance audit in accordance with the standards for performance audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on the audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Our findings and recommendations are included in the first part of this report. To fulfill our objectives, we performed audit steps given the requested general and specific scope requirements of the audit request as detailed below: General Scope Requirements Determined whether the HISDs procurement procedures are adequate such that the likelihood of vendor influence is excluded. This portion of the review included, but not limited to, a review of interactions between board members, staff, vendors, and vendor representatives related to selected contract awards. Determined whether the committee evaluation process is adequate such that the points assigned to each component of the evaluation matrix is not unduly influenced by any one committee member. Reviewed and determined the adequacy of, the HISDs policy regarding the receipt of campaign contributions during a quiet period. Reviewed whether such policies should or should not be expanded to extend to specified periods immediately preceding or following a quiet period. Reviewed existing board policies, state laws, and best practices, which relate to vote abstentions and/or disclosures, based upon personal or business affiliations, and determine the adequacy of board policies related thereto. Reviewed the adequacy of the HISDs policies and procedures related to board approval of contract awards, including: o o Contract awards, which require prior board approval under current policy. Contract awards, which require subsequent board ratification.

Reviewed the processes and internal controls related to requests for board authorizations to negotiate and execute contracts.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process Specific Requirements Selected for review a sample of contract awards. Contract awards selected included a sample selected from contracts requiring prior board approval, contracts requiring subsequent board ratification, and contracts which require no board action. We selected five (5) contract awards for review based on specific selections made by the Board Audit Committee. We selected an additional ten (10) contract awards based on interviews and review of various records. We also selected three additional contract awards as part of our audit control process and audit planning process during our evaluation of controls over HISDs procurement process. For each of the contract awards selected, in addition to the above General Requirements where applicable, we determined whether the contract award was made in accordance with district policies and state procurement laws. The sample selected for our audit purposes included procurement awards made in accordance with the various methods provided under section 44.031 of the Texas Education Agency Code, and sections 2254 and 2267 of the Government Code, where and if applicable, for any sample selections included for awards made before or after September 1, 2011, and other relevant Education and Government Code sections as applicable, and included awards made through an RFP or RFQ process, professional services awards which are exempt from a competitive bidding process and awards which fall below the monetary threshold for board approval.

In accordance with Government Auditing Standards, we have also issued a report dated March 29, 2012, on our consideration of HISDs internal control over the contract recommendation awards process and compliance with laws, regulations, and the provisions of contracts, grant agreements and other matters with which could have a material impact on HISD as required by Government Auditing Standards. The purpose of that report is to describe the scope of our testing of internal control over the contract recommendation awards process and compliance and the results of that testing, and not to provide an opinion on internal control over the process and compliance. This report is intended solely for the information and use of HISDs Board Audit Committee, the Board of Education, management, and others within the entity and is not intended to be and should not be used by anyone other than these specified parties.

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Houston Independent School District Performance audit related to Houston ISDs contract recommendation awards process REPORT ON INTERNAL CONTROL OVER PROCUREMENT AND ON COMPLIANCE AND OTHER MATTERS BASED ON A PERFORMANCE AUDIT OF CONTRACT RECOMMENDATION AWARDS PROCESS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Null Lairson, P.C. has completed a performance audit of the Houston Independent School Districts (HISD) contract recommendation awards process (the process) for the period from July 1, 2010 through September 16, 2011. We conducted our audit in accordance with the standards applicable in a performance audit contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Procurement In planning and performing our audit, we considered HISDs internal control over the process as a basis for designing our performance audit procedures for the purpose of meeting our audit objectives, but not for the purpose of expressing an opinion on the effectiveness of HISDs internal control over the contract award process. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct noncompliance on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that material noncompliance will not be prevented, or detected and correct on a timely basis. Our consideration of internal control over the process was for the limited purposes described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over the process that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over the process reporting that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over the process, described in the first section of this report as significant deficiencies and are listed as findings in Board Policy and Procurement Process areas in the main body of the report. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Compliance and Other Matters As part of obtaining reasonable assurance about whether HISDs contract recommendation awards process is in compliance with policies and statutory requirements, we performed tests based on the scope of this engagement, of compliance with the provision of applicable laws regulations, contracts, agreements and grants. However, providing an opinion on overall compliance, and accordingly, we do not express such an opinion. The results of our tests did disclose instances of potential noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in as findings in Board Policy and Procurement Process areas in the main body of the report. HISDs response to the findings identified in our audit will be prepared and submitted under separate cover. We will not audit HISDs response and, accordingly, we will express no opinion on it. This report is intended solely for the information and use of HISDs Board Audit Committee, the Board of Education, management, and others within the entity and is not intended to be and should not be used by anyone other than these specified parties. Null Lairson, P.C. 28