130701 ESD Overseas Audit

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New York State O ce of the State ComptrollerThomas P. DiNapoli

Division of State Government Accountability

Report 2012-S-7 June 2013

Oversight of Interna onal O ces

Empire State Development


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Division of State Government Accountability 1

Execu ve SummaryPurposeTo determine if Empire State Development (ESD) monitors the e ec veness of its interna onalo ces and manages payments to foreign representa ves to ensure they are made only for

authorized contract purposes. Our audit scope period was April 1, 2010 through October 17,2012.

BackgroundESDs Interna onal Division is responsible for promo ng interna onal trade and investmentini a ves to improve global compe veness for New York State companies. The Interna onalDivision helps businesses increase exports and expand visibility of their business in the globalmarketplace; and develops and maintains a network of partners worldwide to a ract foreigndirect investment and create jobs for New Yorkers. This is accomplished through contracts withforeign representa ves who assist businesses in these ac vi es. Between April 1, 2010 and

March 31, 2012 ESD paid its foreign representa ves $2.7 million to manage ten interna onalo ces. ESD has recently scaled back its interna onal presence and closed o ces in Australia,Brazil, Chile, China, Mexico and Turkey. ESD s ll has foreign representa ves opera ng in Canada,Israel, South Africa and the United Kingdom.

Key Findings ESD does not have an appropriate performance monitoring system in place to evaluate foreign

representa ves ac vi es against contract requirements. Instead, performance repor ng andmonitoring e orts appeared to be informal and ad-hoc at best throughout most of the auditperiod. Lack of more rigorous performance monitoring may have contributed to poor resultsfrom certain interna onal o ces. ESD has recently implemented a new system called the ClientResource Management System to assist in the monitoring of these contracts.

ESD has made signi cant improvements in managing payments to foreign representa ves andcorrec ng de ciencies found in a 2011 OSC review of payments. These improvements includerequiring adequate documenta on, such as bank statements and vendor invoices, to supportthe expenses claimed by the foreign representa ves.

Key Recommenda ons Monitor interna onal o ce contracts to ensure that interna onal o ces are mee ng contract

requirements and are opera ng to bene t New York companies and New York State economy. Ensure that foreign representa ves are only reimbursed for actual and necessary expenses

incurred in the opera on of interna onal o ces.

Other Related Audits / Reports of InterestEmpire State Development Corpora on: Personal and Miscellaneous Services Contracts (2009-S-62)Empire State Development Corpora on: Funding Commitments for Economic Development Projects (2008-S-162)
http://osc.state.ny.us/audits/allaudits/093010/09s62.pdfhttp://osc.state.ny.us/audits/allaudits/093010/09s62.pdfhttp://osc.state.ny.us/audits/allaudits/093010/08s162.pdfhttp://osc.state.ny.us/audits/allaudits/093010/08s162.pdfhttp://osc.state.ny.us/audits/allaudits/093010/08s162.pdfhttp://osc.state.ny.us/audits/allaudits/093010/08s162.pdfhttp://osc.state.ny.us/audits/allaudits/093010/09s62.pdfhttp://osc.state.ny.us/audits/allaudits/093010/09s62.pdf


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State of New YorkO ce of the State Comptroller


June 28, 2013

Kenneth AdamsPresident & CEO of Empire State Development andCommissioner of the Department of Economic Development633 Third AvenueNew York, NY 10017

Dear Commissioner Adams:

The O ce of the State Comptroller is commi ed to helping State agencies, public authori esand local government agencies manage government resources e ciently and e ec vely and, byso doing, providing accountability for tax dollars spent to support government opera ons. TheComptroller oversees the scal a airs of State agencies, public authori es and local governmentagencies, as well as their compliance with relevant statutes and their observance of good businessprac ces. This scal oversight is accomplished, in part, through our audits, which iden fyopportuni es for improving opera ons. Audits can also iden fy strategies for reducing costs andstrengthening controls that are intended to safeguard assets.

Following is a report of our audit of the Empire State Development en tled Oversight of Interna onal O ces . This audit was performed according to the State Comptrollers authorityunder Ar cle X, Sec on 5 of the State Cons tu on and Sec on 6278 (3) of McKinneys New YorkState Unconsolidated Laws.

This audits results and recommenda ons are resources for you to use in e ec vely managingyour opera ons and in mee ng the expecta ons of taxpayers. If you have any ques ons aboutthis report, please feel free to contact us.

Respec ully submi ed,

O ce of the State Comptroller Division of State Government Accountability


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State Government Accountability Contact Informa on:Audit Director: John BuycePhone: (518) 474-3271Email: [email protected]:

O ce of the State ComptrollerDivision of State Government Accountability110 State Street, 11th FloorAlbany, NY 12236

This report is also available on our website at: www.osc.state.ny.us

Table of ContentsBackground 4

Audit Findings and Recommenda ons 5

ESD Management Needs to Improve Monitoring of ForeignRepresenta ves 5

Improved Controls Over Payments to Foreign Representa ves 7

Recommenda ons 7

Audit Scope and Methodology 8

Authority 8

Repor ng Requirements 9Contributors to This Report 10

Agency Comments 11
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BackgroundUnder the States Economic Development Law, Empire State Development (ESD) is charged withencouraging and developing commerce with foreign countries by promo ng interna onal tradeand investment ini a ves to improve global compe veness for New York State companies. Tocarry out this responsibility, ESDs Interna onal Division contracts with foreign representa veswho operate foreign o ces to provide services that assist New York State businesses to developor expand export sales; and to a ract foreign direct investments to create jobs in New York. Thebroad goals of ESDs interna onal presence are to:

help New York State companies increase exports and expand visibility of their business inthe global marketplace;

develop and maintain a network of partners worldwide to a ract foreign direct investmentand create jobs for New Yorkers; and

simplify the process of interna onal trade from New York State.

Foreign o ces assist businesses in nding sales agents and distributors to enter or expand theirsales in foreign markets and provide guidance on issues ranging from market viability to local lawsand related product adapta on, modi ca on or compliance. In addi on, foreign representa vesare required to administer trade events and develop investment targets. These e orts generallyfocus on ve New York industry clusters:

Clean Technology Educa on Financial Services Informa on and Nanotechnology

Life Sciences and Biotechnology

ESD also contracts with the Council of Great Lakes Governors; a partnership of the governorsof the eight Great Lakes States that facilitates economic growth in the Great Lakes region. Thepartnership has global interest in mul ple foreign countries, but currently is only promo ng andfacilita ng trade opportuni es in South Africa.

In 2011, OSCs Bureau of State Expenditures examined payments made by ESD to several of itsforeign representa ves. That review made recommenda ons to address de ciencies in ESDspayment processes and the quality of the documenta on retained by ESD in support of thepayments, which raised ques ons about whether the expenses were necessary and appropriate.

Between April 1, 2010 and March 31, 2012, ESD paid $2.7 million to seven foreign representa vesfor costs associated with opera ng ten interna onal o ces. Due to budget constraints andeconomic condi ons, ESD has more recently scaled back its interna onal presence and closedo ces in Mexico, Turkey and China; along with three o ces in Australia, Brazil and Chile that hadbeen operated through the Council of Great Lakes Governors. ESD s ll has foreign representa vesopera ng in the United Kingdom, Canada, Israel and South Africa.


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Audit Findings and Recommenda onsOur audit found adequate documenta on available to support payments made to ESDs foreignrepresenta ves, indica ng that signi cant improvements have been made to address the scalde ciencies iden ed by our Bureau of State Expenditures earlier review in 2011. However, ESDsInterna onal Division s ll needs to con nue to improve its monitoring of foreign representa vesac vi es to ensure they are mee ng established contract performance standards and contribu ngposi vely to New York States economy.

ESD Management Needs to Improve Monitoring of ForeignRepresenta ves

ESD does not have an appropriate performance monitoring system in place to evaluate foreignrepresenta ves ac vi es against contract requirements. Instead, performance repor ng andmonitoring e orts appeared to be informal and ad-hoc at best throughout most of the auditperiod. Although ESD provided us with some informa on about speci c interna onal tradeand investment successes, the informa on only spanned the most recent year. Furthermore,the informa on included data on performance standards that were inconsistent with contractrequirements and appeared to have been created in response to our audit and other requests forinforma on. More speci cally:

When asked to provide support for monitoring e orts, Interna onal Division o cialsdirected us to their Trade and Foreign Direct Investment Report Card (FDI Report Card),which consists of a spreadsheet lis ng out the interna onal o ces, their expectedcontract performance measures (such as projected export sales) and their actual trade

and investment results. However, our analysis found the spreadsheet only included datafor the 2010-2011 scal year and the expected results did not coincide with performancemeasures speci ed in the corresponding contracts. Even with these limita ons, it wasclear that some o ces did not meet expected results, while others had very li le resultsrecorded at all. For example, the Toronto o ce had projected export sales of $1.2 million,but only reported $175,000 in actual export sales. At the same me, the Turkey o cereported no export sales whatsoever. The wide dispari es call into ques on whether theFDI Report Card had actually been used to monitor foreign representa ves performanceor for any related decision making.

We also asked ESD to provide any internal management reports that had been created todocument monitoring e orts, but were informed that such reports were discon nued in

late 2007 at the request of management and replaced by the FDI Report Card. Another document supplied to us outlining the Interna onal Divisions 2011

accomplishments appears to have been created speci cally for our audit and, similar tothe FDI Report Card, only includes major successes for a one-year period. Our review foundthat a former execu ve manager, who was responsible for oversight of the Interna onalDivision at the me our audit began, contacted the interna onal o ces at about the same

me ESD was no ed of our audit. These contacts resulted in some of the interna onalo ces spontaneously self-repor ng their recent accomplishments. We view this as an


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indica on that the Interna onal Division did not have performance informa on readilyavailable for its own use and was not ac vely monitoring their foreign representa vesperformance.

We found the lack of monitoring extends not only to individual foreign o ces, but to en re

programs as well. For example, ESDs Export Marke ng Assistance Service is a program that helpsNew York State businesses nd foreign sales agents and distributors. As part of this program,foreign representa ves provide market-speci c local intelligence and iden fy the best possiblepar es to represent businesses sales interests. We found that businesses applying for thisservice were not being ac vely tracked, with program applica ons spread across several of ESDsregional o ces. Division management had no system in place to monitor program ac vity, totrack outcomes experienced by businesses that used this program, or even to inquire whether ornot these rms were successful in mee ng their expor ng goals.

Formal monitoring systems are an important means for management to acquire performance dataon a regular basis, which can then be compared with contract requirements. Management canuse this informa on to iden fy contractors who are mee ng or exceeding contract requirements,as well as those that are not. Performance measurement also creates an opportunity formanagement to provide addi onal monitoring, support and outreach during the life of thecontract, thereby allowing programs the greatest likelihood of achieving their desired results andincreasing economic ac vity in the State.

Performance data can also be useful to provide addi onal assurance when making contractpayments, awarding future contracts and iden fying interna onal markets to exit or enter.However, during our audit, Division o cials were unable to provide us with any up-front analysesor other documented basis for selec ng the interna onal markets that they entered. This posespar cular concern because, during the course of our audit period, the Division had to close severalinterna onal o ces due to scal constraints. According to Division o cials, these decisions werebased on scal impact, not performance.

Had ESD been armed with comprehensive analyses of each markets poten al, along withappropriate data acquired by monitoring contractor performance against those expecta ons,we believe o cials would have been in a much be er posi on to iden fy the o ces that hadstrong interna onal markets as well as strong contractor performance. This type of performancemonitoring would have helped ESD objec vely determine which o ces had the greatest likelihoodof contribu ng posi vely to New York States economy.

ESDs lack of performance informa on da ng back more than one year can be traced, at leastin part, to a lack of consistent management approach over me. In discussions with ESD sta ,we learned that various former execu ve managers had di erent approaches and requirements.Some wanted detailed monthly repor ng of Division ac vi es, while others did not. Thesechanging prac ces have led to inconsistency within the Division and mostly informal monitoringof foreign representa ves ac vi es.

ESD o cials agree that improvements and greater consistency are needed, both in monitoring


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its contracts with foreign representa ves and in tracking performance. To this end, ESD hasrecently begun implemen ng a new Client Resource Management System (CRMS) designed toassist in data collec on and repor ng on interna onal trade and investment a rac on ac vi es.Data should include tracking of actual export sales and investment amounts associated witheach foreign representa ve. Although we did not test the capabili es of the CRMS, on its face it

appears to be a more comprehensive tool which, if fully u lized, should enable management tomore e ec vely monitor and track the performances of foreign representa ves.

Improved Controls Over Payments to Foreign Representa ves

ESD has improved the controls over payments to foreign representa ves as a result of our Bureauof State Expenditures review completed in early 2011. That review found various de ciencies in

scal oversight, including payments made with li le or no suppor ng documenta on to show thepurpose of claimed expenses or proof that they were actually incurred. Payment requests wereo en not supported by invoices or cancelled checks proving that vendors were paid for goods andservices, and some of the invoices that were available had been submi ed in foreign languagesand reimbursed without transla on. Similarly, there was some mes no documenta on assuringthat foreign representa ves had actually paid their local employees for claimed payroll costs.

Our current review found that ESD has made signi cant improvements when processing paymentsto foreign representa ves. Recent payments contained more documenta on to support theexpenses claimed, including bank statements showing that foreign representa ves paid vendors,actual invoices from the vendors and signed a davits for salaries paid for those countries thatcannot provide bank statements.

There were s ll some vouchers, par cularly from Turkey and Israel, which included vendor

invoices submi ed in their na ve languages. ESD o cials explained that, for these countries,it is di cult for the businesses to produce invoices in English. In each case, ESD had requiredthe foreign representa ves to itemize the expenses in English and convert the amounts to U.S.dollars. ESDs nance o ce sta used this informa on to match amounts with invoices and, insome cases, would reach out to other ESD sta who were able to translate the invoices.

Con nued compliance with these strengthened controls should provide ESD management withreasonable assurance that they are paying for actual expenses incurred, which are related toac vi es authorized by the contracts with its foreign representa ves.

Recommenda ons1. Monitor the performance of foreign representa ves to ensure that interna onal o ces are

mee ng contract requirements and are opera ng to the bene t of New York companies andeconomy.

2. Ensure that foreign representa ves are only reimbursed for actual and necessary expensesincurred in the opera on of interna onal o ces.


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Audit Scope and MethodologyWe audited whether Empire State Development monitors the e ec veness of its interna onalo ces and manages payments to foreign representa ves to ensure they are made only forauthorized contract purposes. Our audit scope included the period April 1, 2010 through October17, 2012.

To accomplish our audit objec ves, we interviewed ESD Interna onal Division and Financeo cials. We reviewed: relevant State laws and regula ons; ESD policies and procedures;organiza onal charts; and documenta on provided by Interna onal Division o cials suppor ngtheir monitoring e orts.

In addi on, we reviewed a judgmental sample of 18 vouchers paid between April 1, 2010 andMarch 31, 2012. Our sample included large payments made to six foreign representa ves aroundthe me of the Bureau of State Expenditures review and payments made a er for comparison;

and represented nine interna onal o ces including Canada, United Kingdom, Israel, Turkey,China, Australia, Brazil, Chili and South Africa.

We conducted our performance audit in accordance with generally accepted government audi ngstandards. Those standards require that we plan and perform the audit to obtain su cient,appropriate evidence to provide a reasonable basis for our ndings and conclusions based onour audit objec ves. We believe that the evidence obtained provides a reasonable basis for our

ndings and conclusions based on our audit objec ves.

In addi on to being the State Auditor, the Comptroller performs certain other cons tu onally andstatutorily mandated du es as the chief scal o cer of New York State. These include opera ng

the States accoun ng system; preparing the States nancial statements; and approving Statecontracts, refunds, and other payments. In addi on, the Comptroller appoints members tocertain boards, commissions and public authori es, some of whom have minority vo ng rights.These du es may be considered management func ons for purposes of evalua ng organiza onalindependence under generally accepted government audi ng standards. In our opinion, thesefunc ons do not a ect our ability to conduct independent audits of program performance.

AuthorityThis audit was performed according to the State Comptrollers authority under Ar cle X, Sec on5 of the State Cons tu on and Sec on 6278 (3) of McKinneys New York State UnconsolidatedLaws.


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Andrew A. SanFilippo, Execu ve Deputy Comptroller518-474-4593, asan [email protected]

Elliot Pagliaccio, Deputy Comptroller518-473-3596, [email protected]

Jerry Barber, Assistant Comptroller518-473-0334, [email protected]

Vision

A team of accountability experts respected for providing informa on that decision makers value.

Mission

To improve government opera ons by conduc ng independent audits, reviews and evalua onsof New York State and New York City taxpayer nanced programs.

Contributors to This ReportJohn Buyce , Audit Director

Walter Irving , Audit ManagerBob Mainello , Audit SupervisorSco Heid , Examiner-in-Charge

Michele Krill , Sta Examiner
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Agency Comments


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Documents

130701 ESD Overseas Audit