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SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Department of Revenue’s Business Reengineering/Integrated Tax
System (BRITS) project pursuant to a November 20, 2002, resolution of the Joint
Legislative Audit Committee. This audit was conducted as part of the sunset
review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq
and is one of a series of four reports on the Department. The other reports
focus on the Audit Division, the Collections Division, and an analysis of the 12
statutory sunset factors.
Background
The Department of Revenue (Department) is responsible for
licensing, processing, and collecting over $9.8 billion in taxes for the State
of Arizona. The Department is heavily dependent on information technology to
perform its functions, but its technology was largely outdated and consisted of
many different stand-alone systems. For example, the Department’s system for
transaction privilege taxes (better known as sales taxes) was built in 1982 and
had reached its technical limits. In addition, numerous stand-alone databases
were developed in isolation, resulting in the need to input taxpayer information
separately and making it difficult for department staff to quickly view all
aspects of a taxpayer’s business with the Department.
In August 2002, the State entered into a contract with
Accenture, a global management consulting firm, to reengineer its core business
processes, organizational structure, and implement an integrated tax
system—BRITS. With BRITS, taxpayer data will be entered in one place, and all
taxpayer information will be available through this one integrated system. The
project is being implemented in three phases. The first phase involved designing
and implementing the main database where all tax processing activities will
occur; developing other components to improve the Department’s processes, such
as tools to help find taxpayers who have not filed their taxes; and converting
transaction privilege and withholding tax data from the Department’s old system
to BRITS. This phase has been implemented since October 2004. The second phase
primarily includes converting corporate income tax data and is currently in
progress. However, according to department management, the expected completion
date has been revised from July 2005 to July 2006 to ensure that sufficient time
is taken to fully define system requirements, complete user testing, and
minimize operational impacts during peak processing times. The final phase
primarily involves converting individual income tax data. According to the
Department, the scope of this phase has not been fully defined at this time;
therefore, a target completion date has not been set. As a part of the BRITS
project, the Department received approximately 1,100 desktop and 60 laptop
computers and, to facilitate field collections, 50 handheld computers. The
contract also includes “additional backfill support,” which appears to be for
hiring temporary employees to help maintain the Department’s productivity during
BRITS’ implementation and for ordering any needed additional technical support
from Accenture staff during implementation. The State’s central procurement
office, Enterprise Procurement Services (EPS), has overall authority for the
contract, but has delegated contract administration responsibility to the
Department.
The contract uses a benefits-sharing funding approach. Under
this approach, Accenture is financing the contract’s up-front costs and will be
paid, with interest, out of increased enforcement revenue the system is expected
to generate. Enforcement revenue is money the Department receives as a result of
its enforcement functions, such as audit, accounts receivable, and collections.
BRITS is supposed to improve these activities, thereby generating three specific
types of enforcement revenue. As provided for by the contract,
the Department uses 85 percent of the additional enforcement revenue to pay
Accenture’s invoices, and retains the other 15 percent. This allocation
continues until the total cost of BRITS, $122.65 million plus an estimated
$9-$13 million in interest, is paid. However, if BRITS has not generated enough
additional enforcement revenue to pay the contract costs by the end of the
contract’s 10-year term, the Department will no longer be liable for the unpaid
costs and will keep 100 percent of the additional enforcement revenue generated
by the system after that time.
Department needs to better manage BRITS project
(see pages 9 through 18)
The Department could do more to ensure that it effectively
manages BRITS implementation and that BRITS will meet its needs. According to
the Department, by January 2004, demographic information for the transaction
privilege (commonly known as sales tax) and withholding tax types had been
converted to BRITS. Information that was converted included taxpayers’ names and
registration numbers, and some accompanying financial information for
transaction privilege tax accounts, such as the amount taxpayers owed to the
State. However, in some cases the data for transaction privilege tax accounts
did not convert correctly. Further, due to BRITS’ implementation problems, the
Department had to manually review and correct its transaction privilege tax
bills before sending them to the taxpayers, in turn causing a backlog of bills
to be mailed. For example, as of June 30, 2004, approximately 6 months after
beginning to process transaction privilege tax returns in BRITS, bills had not
been sent for over 17,000 taxpayer liabilities totaling nearly $45 million.
BRITS’ implementation issues may have been minimized if the
Department had hired an outside advisor as outlined in the BRITS contract. The
BRITS contract contains a clause indicating the Department intended to hire an
oversight advisor who was not affiliated with the project to report on BRITS’
progress, risks, and budget and make advisory recommendations to the director.
Department officials indicated they were not certain why an outside advisor was
not hired, but cost may have been a factor. However, hiring an outside advisor
may have prevented or at least helped identify and mitigate the BRITS
implementation problems. For example, in 2003, Hawaii’s Department of Taxation
hired an outside advisor for approximately $200,000 a year to provide quality
assurance consultant services for its integrated tax system project. A Hawaii
Department of Taxation official who auditors spoke with indicated that using an
outside advisor was helpful and that a benefit of such an advisor is that they
can alert the agency to things that should or should not be occurring on the
project. A BRITS project outside advisor would have been beneficial to the
Department. Interviews with the Department indicated that it did not involve a
sufficient level of the most knowledgeable department staff, such as IT staff
familiar with the previous systems, and the BRITS project has been managed by
four different department project managers since the project began. Even though
the Department is taking steps to more effectively manage the project, it should
still consider hiring an outside advisor to help oversee BRITS’ remaining
phases. To do so, the Department would have to examine possible funding methods
such as allocating monies from its current budget or seeking a separate
appropriation from the Legislature.
Whether or not an outside advisor is hired, the Department
needs to continue improving its project management. The Department has taken
some steps to conform with best practices for IT project management. For
example, for BRITS’ second phase, the Department is involving a greater number
of knowledgeable staff and working with Accenture to define in more detail what
functions the BRITS system must be able to do. Auditors found, however, that the
Department can make additional improvements in a number of areas, ranging from
better planning and training to more thorough testing of whether functions
actually work. For example, one best practice is to have an overall project plan
to help guide the project management. Although Accenture created an overall
project plan to guide its efforts, the Department has not created or followed
any overall plan to guide its own management of the BRITS implementation.
BRITS not generating additional revenue as expected
(see pages 19 through 24)
BRITS has not generated increased revenue as expected,
resulting in negative financial implications for the State. BRITS appears to be
generating two of the three types of enforcement revenue that are
measured—discovery revenue and license compliance baseline revenue. However,
BRITS has not been able to consistently produce the other type of enforcement
revenue, efficiency revenue, primarily because of BRITS’ inability to generate
accurate bills for taxpayers with unpaid tax liabilities. Based on department
information, efficiency revenue has been as much as $27.3 million less than the
Department expected to collect even without BRITS, and was approximately $9.3
million less than expected as of March 2005.1
BRITS’ inability to increase enforcement revenue carries
negative financial implications for the State. Specifically, because contract
payments to Accenture are supposed to be made from increased enforcement
revenue, BRITS’ failure to generate efficiency revenue is hindering the State’s
ability to make payments. Since Accenture charges interest on unpaid contract
costs, this translates to additional interest costs for the State.
The Department and Accenture are taking steps to improve
enforcement revenue. For example, the Department has developed a special team of
department and Accenture staff that is charged with increasing enforcement
revenue by improving existing BRITS discovery programs and creating and
implementing new ones. The Department needs to continue these efforts. The
Department should also continue to include information about low efficiency
revenue in its monthly project status report to the Government Information
Technology Agency, which it only began doing in June 2005 in response to auditor
recommendations.
Department should better ensure
contract changes are appropriate
(see pages 25 through 30)
In an effort to administer the contract under its
indefinite-quantity terms, the Department has made several changes to the
contract that may impact its overall scope. In all, the Department has added
nearly $7 million of additional services to the contract, including $6.4 million
for Accenture to provide offsite data center services. Initially, to keep the
total contract price at $122.65 million, the Department decreased the amount of
monies available for other tasks. In particular, the Department primarily
reduced the amount of monies available for a broadly defined task known as
“additional backfill support,” which appears to be for the hiring of temporary
employees to help maintain the Department’s productivity during BRITS’
implementation and for ordering additional technical support from Accenture.
Although the Department is trying to control the changes’ impact, its method of
doing so may increase the contract’s price or require the Department to forego
products or services.
Considering the contract changes’ potential impact, it is
important that the Department consult department and state contracting
officials. Consulting these procurement experts is especially important for the
BRITS contract because EPS, not the Department, has overall authority for the
contract. However, for the changes the Department has already made,
communication was lacking. For example, one of the Department’s project managers
signed a memorandum from Accenture indicating she agreed that 5 of 534 original
system requirements are not within the contract’s original, overall scope, but
did not discuss the agreement with the Department’s procurement office or EPS.
It is also important for the Department to thoroughly
document contract changes. This will help ensure that changes that affect the
contract’s overall scope are identified and incorporated into the contract.
However, documentation for many contract changes either did not exist or did not
fully explain how the change affected the scope of the tasks involved.
To its credit, the Department has begun taking steps to
improve its communication and documentation of contract changes, and should
continue its efforts. For example, on May 17, 2005, the Department sent a
memorandum to EPS documenting the contract changes that had already been made
and requesting that EPS increase the overall contract price by approximately
$6.4 million, to a new total of approximately $129 million, to include the data
center costs.2
1 As of September 8, 2005, the
Department was in the process of finalizing efficiency revenue calculations for
April through June 2005. However, department officials indicate that, based on
preliminary calculations, they expect to realize enough efficiency revenue from
those months to eliminate the cumulative negative efficiency amount.
2 If EPS increases the contract
price to include the data center as requested by the Department, then the
Department would no longer have to pay for the data center by reducing the
amount of monies available for other contract tasks.
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