REPORT HIGHLIGHTS VENDOR PAYMENT PROGRAM PERFORMANCE AUDIT Release Date: June 29, 2021 State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov Background: Public Act 100-1089, effective August 24, 2018, amended the State Prompt Payment Act to codify the Vendor Payment Program (Program). The Public Act also required the Auditor General to conduct a performance audit of the Program that included a review of the administration of the Program and compliance with requirements applicable to participating vendors, qualified purchasers, qualified accounts receivable, and financial backer disclosures. The audit shall cover the Program's operations for fiscal years 2019 and 2020. The Program was developed so that vendors awaiting payment by the State could assign their receivables and any accompanying prompt payment interest, in exchange for immediately receiving payment for 90 percent of the receivable and ultimately receiving 100 percent. The Department of Central Management Services (CMS) and the Illinois Office of the Comptroller (IOC) administer the Program which, during FY19 and FY20, consisted of five qualified purchasers who purchased over $2.1 billion in receivables. The State paid the five qualified purchasers over $352 million in prompt payment interest penalties during FY19 and FY20. Key Findings: • CMS and the IOC, while having authority to administer the Program, do not have any agreement that details the responsibilities of each agency in administering the Program. • CMS failed to document the application periods for those entities seeking to become qualified purchasers in the Program. The failure led CMS to inform an Illinois-based minority-owned firm that attempted to become a potential qualified purchaser that the application period was closed. However, CMS subsequently approved four other qualified purchasers over the next three months immediately following this communication. • The selection of qualified purchasers for the Program is an important decision that should be guided by sound criteria. While CMS identified criteria for selection, that criteria was not consistently followed. In addition, CMS could not tell us who specifically made the decisions to approve entities seeking to become qualified purchasers and CMS had not maintained documentation to support how qualified purchasers for the Program were selected. Furthermore, from what documentation is available, it appears CMS allowed and facilitated the purchase of receivables by a qualified purchaser that did not have all formalized documentation submitted for selection to the Program. • CMS and the IOC have not enforced Program Terms relative to Deferred Payment Reserve Accounts for the Program. • CMS and the IOC allow qualified purchasers to submit financial backer disclosures after the fact. Disclosures due July 1, 2020, had yet to be published by CMS by March 31, 2021. The IOC published the disclosures on March 31, 2021. Therefore, the public had 639 days of not knowing who was providing financial backing for qualified purchasers participating in the Program. We found that disclosures were not always filed timely and that CMS and the IOC do not know whether the disclosures are accurate. • While the IOC allows State vendors to receive payments electronically, qualified purchasers under the Vendor Payment Program (Program) do not have the same opportunity. Qualified purchasers reported over $7.2 million in payments made under the Program were mailed to a party other than the qualified purchaser. We found payments mailed to: an incorrect qualified purchaser; an incorrect sub-participant; and the vendor as opposed to the qualified purchaser. • CMS and the IOC have not taken the necessary actions to confirm that all qualified purchasers have complied with the monthly reporting requirements for the Program. This has resulted in missing data on the monthly reporting that occurred during FY19 and FY20. Additionally, the guidance on what should be reported is inconsistent with the directives from the State Prompt Payment Act. • CMS allowed qualified purchasers in the Program to submit, for approval and acknowledgment, receivables which were not yet eligible under the State Prompt Payment Act. • CMS and the IOC have allowed qualified purchasers to operate the payment process under the Program in violation of the Program Terms. This can result in one qualified purchaser having a competitive advantage over another if its payment terms are more generous than another qualified purchaser. • CMS and the IOC did not enforce Program Terms when they allowed participating vendors to sell receivables among different qualified purchasers. • The IOC does not have a plan for payment of interest penalties under the Program. This lack of a plan has resulted in delayed payments which has a negative impact on both qualified purchasers and State vendors. In our sample of interest payments during FY19- FY20, payments were made between 0 and 547 days from when the State agencies requested the payments. Key Recommendations: The audit report contains eleven recommendations directed to CMS and the IOC: • CMS and the IOC should determine which activities each agency has responsibility for under the Vendor Payment Program and memorialize those responsibilities in an Intergovernmental Agreement. • CMS should comply with State rules and define an application period when it seeks to add qualified purchasers to the Vendor Payment Program. • CMS should perform the review necessary and document the selection process, including testing of applicant information technology capabilities, for qualified purchasers in the Vendor Payment Program. • CMS and the IOC should enforce the requirement of the maintenance and review of Deferred Payment Reserve Accounts under the Vendor Payment Program. Additionally, the IOC and CMS should make a definite determination as to whether the existing qualified purchasers are exempt from maintaining a Deferred Payment Reserve Account. • CMS and the IOC should clarify when the General Assembly expects financial backer disclosures to be filed for the Vendor Payment Program. Additionally, CMS and the IOC should consider revising the joint administrative rules to codify financial backer disclosures, including when those disclosures need to be filed. Finally, CMS and the IOC should ensure that all qualified purchasers are submitting all required information on the financial backer disclosures, and in a timely manner. • The IOC should take the steps necessary to eliminate sending payments under the Vendor Payment Program to the incorrect entity. Additionally, the IOC should consider having vendors and qualified purchasers contact the IOC when State payments have been misdirected. Finally, the IOC should determine the cost of processing payments on hardcopy warrants for the Program to determine whether it is the most cost effective process. • CMS and the IOC should take the steps necessary to make all monthly reporting criteria be consistent for the Vendor Payment Program. Additionally, CMS and the IOC should confirm that all required information is submitted by the qualified purchasers on the monthly reports. • CMS should enforce the requirements of the State Prompt Payment Act relative to only eligible receivables being included in the assignment agreements submitted by qualified purchasers. If CMS believes the inclusion of receivables less than 90 days old is appropriate it should seek changes to the Act and the Vendor Payment Program Terms. • CMS and the IOC, as the parties responsible for the Vendor Payment Program, should ensure that qualified purchasers operate under the Program Terms relative to the payment process. • CMS and the IOC should follow the Program Terms for the Vendor Payment Program and only allow participating vendors to utilize a single qualified purchaser unless that qualified purchaser has violated terms of the assignment agreement or Program. Additionally, CMS should maintain documentation to support why it approved to allow a participating vendor to utilize more than one qualified purchaser at a time. • The IOC should develop a plan for when interest penalty payments should be made under the Vendor Payment Program. This performance audit was conducted by the staff of the Office of the Auditor General.