Sunday, February 27, 2011

Contracting Scandal and Fraud Rocks Seattle School District

The Seattle School District is embroiled in a damaging contracting scandal involving allegations of fraud in the management and award of contracts surrounding its program designed to promote the use of minority and women owned businesses.  

Superintendent May Be Fired:  The crisis, which became public last week with the publication of a special investigative audit by the Washington State Auditor's Office, has put the jobs of school superintendent Maria Goodloe-Johnson and other high ranking officials, at risk.

Fraud:  At the center of the scandal is a former district employee, Silas Potter, Jr., who resigned in June 2010, when he deposited a $35,000 check made out to the District into a private company he had established with the same name as the District program he managed (Regional Small Business Development Program).

Questionable Payments by District:  The audit found that, through the District's small business program that Potter managed, the District paid:
  • $1,519,965.34 for services with a questionable public purpose
  • $280,005.25 for services it did not receive and for services that benefitted a private company.
How Did the District Produce Results?  While the District produced statistics over the years about the high percentage of minority and women owned businesses utilized on construction projects, many wondered how the District could obtain such results given the requirements of Washington state law requiring award of contracts to the low bidder.  

District Lobbied for State Law Change:  One tool the District apparently took advantage of was a change in state law that the District lobbied for.  In 2007, the Legislature approved changes to the Small Works Roster program (RCW 39.04.155) permitting public agencies to essentially restrict competition on projects less than $35,000 (Limited Public Works process) to businesses with gross annual revenues under $1 million.  The District also apparently produced results through questionable awards of contracts to businesses who did not perform legitimate services.

Warning Signs Ignored by District:  In 2009, the District received a report from a private consultant hired by the District to investigate Potter's management of the Small Works  Roster program.  The report from the Sutor Group resulted in the District stripping Potter of his responsibilities for awarding construction contracts and resulted in a reorganization within the District, but it still left Potter able to award consultant (personal service) contracts, which he continued to do, many to friends and associates.  According to the State Auditor's Office report, many of these contracts did not result in work actually being performed, but the entities were nevertheless still paid.

Organizational Conflict of Interest: While it is clear that Potter was not sufficiently supervised, it is also clear that the District set the stage for the scandal by creating an organizational structure with an inherent conflict of interest that did not segregate the functions of small business development from procurement and contracting.  Potter was authorized to not only encourage the development and use of small businesses, but to actually award those contracts to them, thus making his program look successful.  Without checks and balances in place to ensure that procurement laws are followed, there are no guarantees that programmatic objectives will not override regulatory requirements.

More Information:  The Seattle Times and State Auditor's Office have conducted significant investigations and written extensively on the scandal.  The following are some of the many good resources available for more information:
Lessons Learned: 
  • Checks and balances and internal controls in public contracting are critical.
  • Supervision of employees, especially those involved in contracting decisions, is critical.
  • Public agencies should have clearly documented procurement and contracting procedures that should be followed.
  • Public agencies should carefully and regularly evaluate the management of their contracting program, looking for areas of exposure and risk.
  • Public agencies should institute procedures to enable employees to report inappropriate activities.
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC

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