Table of Contents
An Audit Report on Management Controls at
Texas Correctional Industries
November 1997

Key Points of Report
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Focus Efforts on Achieving Specific Results . . . . . . . . . . . . . . . . . . . . 5
TCI Has Not Structured Its Planning Process to Meet Its
Statutory Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Information on TCI’s Effectiveness Is Unavailable and
Additional Measures Are Needed to Report on Financial
Performance and Guide Internal Operations . . . . . . . . . . . . . . . . . . . . . . . . . 8
Decisions to Enter Into New Endeavors Have Not Been
Well Informed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Implementation of the Industrial Operations Information
System Is Late, and the System Does Not Yet Meet
TCI’s Information Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
TCI’s Policies and Procedures Do Not Ensure That
All Factories Implement Good Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Develop Useful, Reliable Information to Monitor
Factory Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
TCI’s Cost Accounting System Does Not Adequately Allocate
Costs to Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Factory Financial Statements Are Inaccurate . . . . . . . . . . . . . . . . . . . . . . . . 24
TCI’s Funding Is Not Linked to Production and Is Not
Structured to Facilitate Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Operational Reviews Provide Limited Information
on Factory Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Table of Contents, concluded
Available Information Should Be Used to Improve
Product Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Enhance Controls Over TCI Resources . . . . . . . . . . . . . . . . . . . . . . . 36
TCI Does Not Have Adequate Information or Controls
to Protect and Track Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Credit Should Not Be Extended to Customers
With Past-Due Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Employee Sales Risk Negative Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Controls Over Fixed Assets Appear to be Adequate,
But Documentation of Maintenance Should be Improved . . . . . . . . . . . . . . 44

Letter From Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Appendices

1 - Objective, Scope, and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 - Profile of Texas Correctional Industries . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 - Results of Other States’ Reviews of Their Prison
Industry Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 - Detailed Findings on TCI’s Cost Accounting System . . . . . . . . . . . . . . . . .
4.1- The Effect of Using Revised Overhead on Factory
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 - Detailed Analysis of TCI’s Financial Statements . . . . . . . . . . . . . . . . . . . .
6 - Customer Satisfaction Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.1 - Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2 - Survey Instrument Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49
53
56
58
63
65
69
69
71

Key Points of Report
An Audit Report on Management Controls at
Texas Correctional Industries
November 1997
Overall Conclusion
Neither the Texas Department of Criminal Justice (Department) nor the Board of Criminal Justice has
required Texas Correctional Industries (TCI) to demonstrate results or to implement sound controls over
operations. As a result, TCI has not implemented sufficient management controls to accomplish its
statutory objectives. In addition, TCI has not developed accurate cost or management information to
assess factory efficiency, make informed decisions about product prices, or determine factories’ profits
or losses.
In fiscal year 1996, TCI operated 44 factories that produced uniforms, mattresses, and other items for
Department inmates and guards as well as furniture, license plates, and jail steel for external
governmental entities. Reported internal and external sales for the fiscal year totaled almost $96 million.

Key Facts and Findings
C

TCI has not ensured that the 8,000 inmates who work in its factories receive effective vocational
training or that factory operations contribute to recovering the cost of incarceration. These goals
are encompassed in TCI’s five legislative mandates.

C

TCI has not effectively controlled its operations or developed information to assess the degree to
which it has contributed to recovering the cost of confining inmates:
-

TCI does not use many of the financial indicators commonly used by manufacturing
concerns to assess the efficiency of factories’ day-to-day operations and has not developed
substitute indicators. Implementation of TCI’s new information system is more than one year
behind schedule. Without this system, TCI management does not readily have access to
information which would facilitate production planning, sales forecasting, or other routine
management decisions.

-

TCI’s cost accounting system does not effectively track costs or allocate overhead to
inventory. Therefore, TCI does not have reliable information to make decisions about pricing
or to determine which factories are profitable.

-

Controls over TCI’s $24.2 million worth of inventory cannot ensure that the raw materials,
consumables, and other items purchased for production purposes are adequately protected
from theft or loss.

Contact: Charles R. Hrncir, CPA, Audit Manager, (512) 479-4700

Lawrence F. Alwin, CPA
This audit was conducted in accordance with Government Code, Section 321.033.

Executive Summary
Having neither controls nor information in
these key areas significantly increases the risk
that TCI assets could be misappropriated
without detection or that TCI operations will
not produce desired results. While
implementation of sound management controls
cannot eliminate these risks, good controls can
reduce the opportunities for fraud, waste, and
abuse to occur and can provide an early
warning system for identifying potential
problems.

TCI Has Not Effectively Managed
Factory Operations or Results
Texas Correctional Industries (TCI) has not
implemented sufficient management controls
to ensure that inmates are provided with
effective vocational training or that operations
contribute to recovering the cost of confining
inmates. Specifically:








NOVEMBER 1997

TCI has not clarified its purpose or
used strategic planning to accomplish
all of its statutory objectives. In
addition, operational plans have not
been used to ensure the successful
implementation of new industries and
product lines or to design and
implement TCI’s new information
system.
TCI does not have information to
assess the results of its operations. TCI
does not measure its success in
providing job training or other
outcomes. In addition, TCI does not
use many of the financial indicators
commonly used by manufacturing
concerns to assess the efficiency of
factories’ day-to-day operations and
has not developed substitute
indicators.
Much of the information TCI prepares
or collects is not accurate. TCI’s cost
accounting system does not effectively
track costs. Therefore, TCI cannot
make informed decisions about pricing
and does not have good information
about factories’ profits or losses.

TCI Operates in a Challenging Environment
Numerous factors affect how TCI operates and
manages its factories. TCI cannot directly control
these factors, but each can affect TCI’s ability to
provide inmates with effective vocational training
or reduce the cost of their incarceration:
-

TCI does not control which inmates are
assigned to work in its factories or even how
long assigned inmates will remain working in a
given factory. Wardens and Unit Classification
Officers make these decisions based on a
variety of factors (which do not always include
TCI’s needs or goals).

-

When units are “locked-down” for security
reasons, factory operations must be
suspended. Lock-downs occur whenever there
are inmate riots or other security risks.

-

TCI does not pay inmates and can provide
limited incentives to encourage inmate
productivity.

-

TCI relies on the General Services Commission
and on the Texas Department of Criminal
Justice’s Purchasing Department to procure
raw materials to meet its production schedules.
Problems in these areas have led to delays in
fulfilling orders and in temporary closures of
production lines and factories.

Controls are not sufficient to safeguard
assets from waste or loss. Inventory is
subject to theft or loss and cash has not
been managed to ensure customers pay for
goods and services delivered.

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Executive Summary
Inmate Distribution - August 29, 1996
(working and non-working)
Of the 92,292 inmates in Department prisons on August 28, 1996, 8,034 or 8.7 percent of
the total were assigned to Texas Correctional Industries. Unassigned inmates include
among others: those in administrative segregation (8,209), in transit (2,674), or who had a
medical exemptions (2,802). Of the inmates assigned to work, almost 12 percent worked
for TCI.
Total Unassigned (17,534)

Unit support (16,654)
Education (876)
Agriculture (2,277)

Total Students (6,867)
Health Services (197)
Laundry (6,318)

Line force (18,787)

Food Service (11,222)
Maintenance (2,748)
Facilities (778)
Industry (8,034)
Source: Texas Department of Criminal Justice Executive Services

Recent publicity associated with past contracts
and the resulting changes in TCI’s division
management have presented TCI with
opportunities to implement the controls
needed to ensure that program results are
achieved, good information is available for
decision-making, assets are protected, and
laws are complied with. In recent months, TCI
has begun to strengthen its system of
management controls. These efforts include:

At the end of fiscal year 1996, 44 factories
reported on operations for the year. These
factories produced “necessity items” (such as
inmate clothing, bedding, and shoes) for the
Texas Department of Criminal Justice
(Department) as well as items for sale to state
and local governmental units. Outside sales
included items such as license plates and
inspection stickers for the Texas Department
of Transportation, modular and wooden office
furniture, and other items.



Ongoing communication with the General
Services Commission to ensure TCI has
the opportunity to bid on sales to eligible
customers as well as to ensure TCI’s
purchases are received on time and fulfill
factory requirements



Initial research to identify barriers to
consolidating TCI funding sources and to
develop feasible courses of actions to
overcome these barriers

For fiscal year 1996, TCI reported its outside
sales at approximately $50 million and its
sales to the Department at an additional $46
million. (See Section 2-B for discussion of the
accuracy of these estimates.) Department
records for the last working day in fiscal year
1996 indicate that on that day, 8,034 of the
Department’s 92,292 inmates worked in a TCI
factory.



Closer monitoring of receivables and
improved collection efforts



Development of more accurate
information about factory overhead
through the identification of some actual
prior year costs



Providing division mangers with regular
access to budget status reports



Communication with regional
classification groups and unit wardens to
share information on how inmate

TCI is a service organization within the
Department, but TCI has historically operated
independently and with little oversight from
the Department’s executive management or
the Board of Criminal Justice. This lack of

PAGE 2

attention and accountability has allowed TCI
to operate without sound management
controls. In addition, because TCI was not
challenged to provide accurate, timely
information about factory operations,
development of processes to produce this
information was not a priority.

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Executive Summary
assignment and other factors affect TCI
factory operations.


Attempts to assess product
competitiveness through “product audits”

Appendix 3 presents the results of prison
industry audits conducted by other states. The
problems encountered by TCI in managing its
operations and planning for results are similar
to problems in other states.

Summary of Management's
Responses
Management concurs with the report’s
recommendations. Plans to implement
corrective action have been developed and
some improvements to TCI’s system of
management controls are already underway.

NOVEMBER 1997

The cover letter that accompanied
management’s responses can be found on page
46. The actual responses follow the
appropriate recommendations.

Summary of Objective and Scope
Objective
Our audit objective was to examine and
evaluate TCI’s management controls systems
to identify both strengths and opportunities for
improvement.

Scope
The scope of this audit included consideration
of TCI’s overall management control systems:
policy management, information management,
resource management, and performance
management.

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Section 1:

Focus Efforts on Achieving Specific Results
TCI has not effectively used strategic planning or other mechanisms to ensure that it
meets all of its mandated objectives. TCI does not gather the information needed to
assess its overall performance and does not measure its success in job training. It also
does not use many of the financial indicators commonly used in manufacturing and has
not developed substitute indicators with which to monitor efficiency and effectiveness.
In addition, sound operational plans have not been developed to ensure the successful
implementation of new industries or product lines or to design and implement TCI’s
new information system. This increases the risk that TCI will not accomplish its goals,
or will enter into industries which are neither profitable nor useful in providing
vocational training.

Section 1-A:

TCI Has Not Structured Its Planning Process to Meet Its Statutory
Objectives
TCI’s Statutory Objectives
Government Code Section 497.022 lists five
purposes of the Prison Made Goods Act and
TCI:




Provide adequate, regular, and suitable
employment for the vocational training
and rehabilitation of inmates, consistent
with proper penal purposes.
Use the labor of inmates for selfmaintenance.



Reimburse the State for expenses caused
by the crimes of inmates and the cost of
their confinement.



Provide for the requisition and
disbursement of institutional division
articles and products through established
state authorities to eliminate the possibility
of private profits from the distribution of
those articles and products.



Provide materials, products, or articles for
sale to or for the use of the State or a
political subdivision of the State.

NOVEMBER 1997

TCI has neither planned nor monitored its activities to
ensure that all of its statutory requirements have been
met. Clear objectives have not been set to assist
management in setting operational priorities. This lack
of clarity is evident with respect to the overarching
purpose of TCI and with respect to the way it conducts
its strategic planning.
TCI has not managed its operations in a way that
ensures all of its statutory objectives are
accomplished. TCI’s enabling legislation includes

five specific objectives that fall into two general
categories: providing vocational training and recovering
some of the cost of incarcerating inmates. Historically,
TCI has not considered itself to be a vocational
treatment program, but rather a work program that
provides goods and services to customers and teaches
inmates a “work ethic.” As such, TCI has not developed
strategies to fulfill the full scope of its mandated
purpose.
Providing training and reducing costs can be
contradictory goals. Some industries that are the most
profitable may not result in job training or skills that an
inmate can use upon release. Therefore, without clearly
articulating program purposes and designing measurable
objectives to address them, TCI will be unable to plan

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its future course or demonstrate that it successfully provides vocational training or
reduces costs.
TCI has not implemented its strategic planning function in a way that facilitates
comprehensive planning and program evaluation. TCI’s most recent strategic

plan is almost three years old (it is dated June 30, 1994), and it does not set forth clear
objectives for program operations related to meeting the Texas Department of Criminal
Justice’s (Department) stated goals or to meeting TCI’s mandated objectives. For
example, the plan’s first strategy is to “complete Strategic Management Plans and
operate the entire Industrial Division using operational strategic planning by January
10, 1995” instead of stating what TCI aims to accomplish with its program.
TCI management has recently begun “quarterly divisional review meetings” and
considers these meetings strategic planning meetings. However, these meetings do not
emphasize long-range strategic directions and include only short-term detailed
problem-solving. At the three recent meetings we attended, there was no discussion of
long-range goals for the division of TCI under review or for TCI as a whole. For
instance, discussions we observed concerned how to increase sales or what should be
done with unused assets.
TCI policy No. 09.06.001 (dated July 31, 1995) requires each TCI division and
industrial facility to have a Strategic Management Plan. These plans are to include
goals and actions plans to accomplish division-wide goals. This policy has never been
enforced, and, according to TCI management, has been discontinued. Alternative
mechanisms to implement division goals have not been developed.
The Department, too, has historically not used TCI as a program to provide
measurable improvements in inmates’ job skills or produce other outcomes.

The Department’s Institutional Division strategic plan includes one objective and two
strategies related to TCI. Of the measures under these objectives and strategies, only
the following five pertain to TCI performance:






Percentage change in number of inmates turned out to work in Correctional
Industries Programs compared to fiscal year 1994
Number of factories operated
Number of inmates assigned to the Correctional Industries Program
Clothing articles produced
Necessity items produced

There are no measures related to TCI’s impact on job readiness skills or on the cost of
incarceration, and therefore, no means to hold TCI formally accountable for results in
these areas.
The Department has recently begun to investigate different options for how it can best
provide vocational education and reduce recidivism. Part of this planning process
includes refocusing TCI’s role within the Department. However, according to
Department management, significant changes cannot be made until the Department is
better able to track offenders through programs. The Department is currently

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“re-engineering” its information systems and is expecting to complete this process
around the year 2000.

Recommendations:


Prioritize the goals in TCI’s enabling legislation and develop strategies to
fulfill all facets of TCI’s statutory objectives (in alignment with established
priorities). This will require input from the Board of Criminal Justice, the
Prison Industry Advisory Board, Department executive management, and
others.



Consider developing a separate TCI job training program within TCI. Such a
program would include admission criteria, a screening program to identify
inmates most likely to benefit from job training, and a plan for program
evaluation. This may involve restructuring certain factories so that only
screened inmates receive certain jobs and implementing agreements with the
Unit Classification Committee that would allow inmates admitted to the
program to remain in the program unless there was an identifiable security
concern. The remainder of the TCI factories could operate to meet TCI’s other
statutory objectives.



Review the strategic planning process to ensure that the various TCI plans
derive logically from the overall Department strategic plan. The Department’s
strategic plan would have to be amended to address the function of TCI as job
training, a mechanism for Department self-maintenance, or some combination
of both.

Management’s Responses:

NOVEMBER 1997



Agree to implement recommendation with modifications. TCI's enabling
legislation does not establish prioritized goals, with one objective receives
priority over another. Additionally, the recent legislative session increased
the number of statutory objectives for TCI. TCI will seek advice on the
development of strategies and the newly mandated statutory objectives from
the Support Operations Committee TBCJ at the November 20, 1997 meeting.
TCI will prepare a report on the outcome of the meeting to the State Auditor.



Agree to implement recommendation. TCI is presently developing a job
training program in conjunction with Windham School System. This project,
the "Computer Recycling/Refurbishing Program" will be presented to the
Support Operations Committee on November 20, 1997 for consideration. TCI
will also develop an action plan to increase implementation of existing TDCJ
on-the-job training programs that are currently in use in our factories. TCI
will create an action team, which will include representatives from the
Classification Division and the Security Division, for input and development
of an action plan. The action plan will include the development of TCI policies
and procedures to address admissions criteria, a screening program to

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identify inmates most likely to benefit from job training and a plan for
program evaluation.


Agree to implement recommendation. This recommendation will be addressed
in conjunction with Section 1-A. (1).

Section 1-B:

Information on TCI’s Effectiveness Is Unavailable and Additional
Measures Are Needed to Report on Financial Performance and
Guide Internal Operations
Data from Re-Engineering Could Help TCI
Measure Its Effectiveness
The Department is currently developing an
automated system to enable it to track
offender data more efficiently. Planned in
this effort is the ability to “count and
categorize offenders by location, status,
classification” and to “track offenders’
progress through multiple Department
programs.” TCI will need this type of
information in order to assess its
effectiveness.



TCI does not track post-release employment for TCI
inmates or other outcome indicators and lacks an
effective system for measuring its financial performance.
TCI considers the profit/loss statements it prepares for
each of its factories as indicators of success, but these
financial statements do not portray program outcomes.
Moreover, the methodology underlying these statements
is questionable (see Section 2-B). As a result, reliable
financial data is not available to support decision making
at the program level, and division and factory managers
cannot be held accountable for the profit or losses of
their operations.

Outcome data is unavailable. TCI does not track program outcomes. We

attempted to gather data on TCI inmates’ post-release employment to develop
initial data on TCI’s success in providing vocational education. However,
because neither TCI nor the Department had information on which inmates
had consistently worked in TCI factories, we could not compile this
information or select a sample for testing.
Once basic data (such as lists of inmates who have worked in TCI factories for
more than six months) is available, TCI will have to work with other
Department divisions and groups to ensure inmates are assigned to units and
factories based on job training needs. TCI has no control over which inmates
are assigned to work in factories, and job training requirements are not the
Department’s first priority in making inmate assignments to units. In addition,
inmates sometimes are pulled from their factory jobs or moved to other jobs.
TCI is currently working toward agreements with regional classification
groups to ensure that, for highly technical jobs, TCI can count on a core group
of inmates not being arbitrarily reassigned.


Financial performance data is also largely unavailable. Throughout TCI,

we observed few mechanisms or standard reports containing ratios commonly
used in manufacturing concerns. A recent internal audit report cited several
standard ratios from Dunn and Bradstreet as benchmarks for assessing TCI

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performance (such as invoice date to payment date, average collection periods,
accounts payable to sales, and sales to inventory). TCI managers objected to
the application of such industry benchmarks to their operations. While we
agree that the specific benchmarked levels may not be appropriate to prison
factories, adoption of such indicators would allow for monitoring of factories
relative to each other, similar operations in other states, and over time.
TCI is currently implementing a new information system that was to have
made this type of data available to all users. However, when we asked for
some of this data, it took TCI staff more than two months to provide us with
reports on receivables and customers. In addition, TCI staff had not realized
that the new system included a number of “bugs” because the data had not
been previously requested or used.

Recommendations:


Determine some meaningful, easily measurable output measures for TCI to use
as immediate, interim indicators of success.



Develop outcome measures to gauge progress in meeting goals. Present
information problems may prevent TCI from obtaining data on recidivism or
effectiveness of training efforts, and will require that output measures or proxy
measures (such as jobs held after release or length of time a job is held) be
used on an interim basis until re-engineering is complete and other outcome
measures can be developed.



TCI should establish a comprehensive monitoring system to focus attention on
potential problem areas, identify factories which may have developed
exemplary processes, and as a means of gauging factory performance. Routine
review and analysis of account balances and their relationships with each other
should yield useful information. Some financial and performance indicators
that management might find useful include:
-

NOVEMBER 1997

Units produced by each factory
Cost per unit produced
Budgeted revenues and expenditures compared to actual revenues and
expenditures and expected levels of production
Aged receivables (by division, factory, and customer)
Outstanding payables (by division, factory, and vendor)
Prompt payment discounts received or lost
Number of days to fill orders (by division and product)
Sales per inmate or per factory staff
Re-orders or returns (by division, factory, and product)
Inventory turnover
Days sales in inventory

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-

Amount and causes of impairments and variations by factory and
division
Historical information on vendor performance

-

Management’s Responses:


Agree to implement recommendation. TCI will set up an action team and
develop an action plan to implement this recommendation.



Agree to implement recommendation. This recommendation will be developed
in conjunction with recommendation 1-B. (1).



Agree to implement recommendation. TCI will form an action team to develop
the comprehensive monitoring system.

Section 1-C:

Decisions to Enter Into New Endeavors Have Not Been Well
Informed
TCI has entered into new industries without having obtained enough information to
analyze whether these commitments were good business decisions. In addition, the
criteria for approving and implementing a proposed new industry are too vague to
ensure that the process is not free from outsiders’ influence.
The policy for approving new industries needs clarification. In 1996, the Board

of Criminal Justice implemented a policy requiring that it approve all new industries.
Since that time, five new “industries” have been approved. However, there is no
consistency in what is brought to the Board for approval.
Some proposals are taken to the Board even though there is minimal expenditure
required. For example, at the September 1996 Board meeting, the Board approved the
Clements canvas shoe factory. There was to be minimal expense associated with this
factory, because the machine to make canvas shoes had been purchased four years
earlier and no changes needed to be made to the existing factory to use the new
machine. The other four new industries that the Board approved at the November 1996
meeting were proposed to cost from $850,000 (for the building and equipment at one
unit) to $2.8 million (for the building only at another unit).
On the other hand, some decisions that appear to be for new products, or which appear
to commit TCI to a long-term course of action, have not been brought before the
Board. For example, the decision to purchase two looms to start production of elastic
at the Hughes garment factory was not taken to the Board for approval. Approval was
obtained from TCI and Department management.
Changes in statutory responsibilities of the Prison Industry Advisory Board may affect
how TCI makes decisions related to new industries. House Bill 819, passed by the 75th

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Legislature, will require the Prison Industry Advisory Board to advise the Texas Board
of Criminal Justice on “all aspects of prison industry operations,” and to report to the
76th Legislature on the nature of its recommendations their implementation.

Using Break-Even Analysis for Decision-Making
Before deciding to begin a new endeavor, TCI should
consider whether it can make an item for less than its
purchase price. One way to do this is through breakeven analysis. If TCI can cover its costs for less than the
purchase price, then it may be a good option.
For example, at the October 1996 meeting of the Texas
Board of Criminal Justice, it was stated that canvas
shoes could be purchased for $3.25 to $3.31 per pair.
Using this information and information in the business
plan on fixed costs and production estimates, it looks as
if it would be less expensive to purchase the shoes than
to make them:
Price per pair to purchase:
Estimated cost of raw materials
(according to the cost analysis
used for the Board meeting) :
Amount available to cover fixed costs:

$3.31

$2.91
$0.40

Estimated annual fixed costs (from business plan):
$430,000
Pairs required to produce to break even:
$430,000 ÷ $0.40 = 1,075,000 pairs
However, according to the business plan, “the new shoe
factory would be capable of providing 120,000 pairs of
canvas deck shoes per shift annually.” Therefore, even
if the factory ran 3 shifts per day, it would only be able
to produce 360,000 pairs each year—no where close to
the million pairs needed to break even.

NOVEMBER 1997

Analysis of new endeavors has not
provided enough information for good
decisions. New industries are approved

for TCI following internal discussion, and
the development of a business plan that, in
theory, outlines the costs and benefits of
the new industry. This business plan is
implemented after it is approved by the
director of TCI and the Department’s
administration.
Although TCI reports that these business
plans are the basis for its decisions, it
appears that some decisions related to new
industries have been made in other ways.
For example, TCI is currently proposing 5
new factories. We have seen a business
plan for only one of these. As of June 25,
1997, almost $1.2 million has been spent
on these five factories, including almost
$300,000 on two factory sites for factories
whose industry is still “to be determined.”
The business plans appear to have been
compiled hastily and have minimal value
as a decision-making tool. We reviewed
six business plans for factories which were
later implemented and found that:



Business plans did not consider the number of dollars it would take to produce
a given number of units. The business plans that we reviewed listed either
expected sales (in dollars) or required number of units if production. (Four of
the six listed anticipated sales in dollars, and the other two listed number of
units to be produced but no costs associated with those sales.) Without a good
estimate of how much it will cost to produce a given number of units, it is
difficult to determine the production level at which an endeavor will break
even.



For those plans that included estimates of sales, profits were estimated at 25
percent of sales without analysis to support that assumption. Dollars of sales
were generally based on the current amount of sales of that item purchased on

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state contract in a recent year. How many units those sales figures represented
and TCI’s ability to produce that number were not included in the plan.

PAGE 12



Payback calculations assumed that sales would equal the current amount of
sales on state contract in the first year of full production, and would increase
each year thereafter. The amount of the increase appears to have been
developed by formula—sometimes at 10 percent per year, and other times at 5
percent for the second year and 3 percent for the third year. No data assessing
the ability of TCI to do this was included.



Business plans did not include estimates of the cost of the raw materials.
Projected expenditures consisted solely of capital expenditures and operating
expenses. As a result, it is difficult for users of the business plans to perform
analysis on their own.



Contingencies were not considered. Business plans did not consider the
effects of reduced production during lock-downs, training periods for staff or
inmates, equipment failures, or other reasonably anticipated contingencies.
Several of the plans that we reviewed were for items that would be needed as
new prison units opened, but they did not consider the effects on sales or
production if the units opened sooner or later than planned. In addition,
changes in anticipated profits due to changes in the costs of raw materials were
not considered. Sensitivity analysis, a “what-if” technique for reviewing how
results will change if the underlying assumptions change, would have been
useful in developing expectations for the business plans.



Operating costs listed in the business plans were frequently repeats of
estimates used in prior plans. For example, in five of the six business plans we
reviewed, equipment leases were estimated at $1,320 per year regardless of the
type of business.



Business plans were not reviewed for arithmetic accuracy. In all six of the
plans that we reviewed, the operating expenses listed in the summary section
of the business plan did not equal the sum of the operating expenses listed in
the detail section of the plan.



Business plans did not include an estimate of the effects of the proposed
business on other TCI industries. For example, the business plan for a new
soap manufacturing plant did not include any consideration of the effects this
plant would have on the sales and production levels of the soap plant that
already existed.



The process for developing business plans has not been improved through the
comparison of the plans’ assumptions and actual results. For example, even
though many of the plans we reviewed were old, there is no history to support
the assumption of a 25 percent profit. In the cost analyses, there is a 25
percent contingency added to outside sales, but the business plans add this
profit even for departmental sales. In addition, history suggests that it would be

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optimistic to assume a net profit on sales of 5 percent. (The financial
statements are not reliable or accurate, as discussed in Section 2-B. However,
according to these statements, TCI’s net profit for fiscal year 1995 was 4.3
percent, and for fiscal year 1996 it was 3.08 percent.)
TCI has begun to make improvements to this process, and has shown a
willingness to continue improvements. After discussing some of the concerns that

we had with TCI staff, we were provided with a new business plan for our review and
comment. The new business plan included some discussion of production capabilities
and constraints, and sales based on historical operations. Sales to different customers
represented different profit margins, instead of using the 25 percent estimate that used
to be in all plans. When we provided comments the response suggested that many of
the issues we had raised had been considered, but not included in the business plan.

Recommendations:


Develop specific criteria and processes for implementation of new businesses.
In addition to clarifying the relative costs and benefits of a proposed endeavor,
these criteria could reduce the risk that the process could be subject to
inappropriate outside influence. Once criteria are developed, TCI might want
to consider having the Prison Industry Advisory Board review the plans to
ensure that the plans meet all criteria.



The Board of Criminal Justice should clarify when TCI can make decisions
related to new businesses or products and when these decisions should be
approved by the Board. The Board’s policy should clearly define what a new
business or a new product is and should establish a cost above which new
products or industries need Board approval.



Include adequate information in the business plans to facilitate meaningful
analysis. Such information should include the estimated costs of producing a
specific number of units of product, broken down into variable and fixed costs;
the required sales price to recover fixed costs in a reasonable amount of time;
contingencies that can be reasonably estimated and their effects on anticipated
production and sales; and the effects of the proposed endeavor on other TCI
industries. Analysis of best case, worst case, and other likely scenarios,
including the effects of each on sales, number of units produced, expenses, and
profits would add valuable information for decision making. We have
provided TCI with a pamphlet from the Small Business Administration on the
development of business plans. Other resources are widely available.

Management’s Responses:


NOVEMBER 1997

Agree to implement recommendation with modification. TCI will establish an
action team to develop a policy and procedure to achieve the implementation

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of this recommendation. The policy and procedure will to be evaluated by the
Support Operations Committee of the Texas Board of Criminal Justice.


Agree with recommendation. TCI will establish an action team to draft a
TBCJ policy.



Agree to implement recommendation. TCI will establish an action team to
evaluate existing policy to determine modifications needed to achieve
recommendation.

Section 1-D:

Implementation of the Industrial Operations Information System Is
Late, and the System Does Not Yet Meet TCI’s Information Needs
The Industrial Operations Information System (IOIS) could improve TCI financial and
operational management, but implementation of the system may take longer and cost
more than is currently anticipated. IOIS was scheduled for completion in mid 1996. As
of July 1997, the system was not yet close to completion and no firm implementation
schedule had been set. The original $2.4 million budget is essentially expended but
only one of the five promised implementation phases has been completed. As a result,
IOIS does not yet provide division and factory management with the information
needed to monitor operations.
Background on the Industrial Operations
Information System
In 1992, TCI contracted for a study to determine
the feasibility of implementing an automated
industrial operations system. In 1994, TDCJ issued a
request for proposals (RFP) for this system. Three
proposals were submitted. The winning proposal,
submitted by IBM in June 1994, called for IBM
AS/400 running business/manufacturing software
from the J.D. Edwards Company. The proposal
included application modules for customer order
processing, master scheduling and material
requirements planning, bill of material processing,
inventory management, job costing, accounts
receivable, purchasing, accounts payable,
general ledger, bar code data collection, and
maintenance management.

To date, only one implementation phase has
been completed. The original plan called for

five implementation phases:


Sales Order/Accounts Receivable
Processing



Purchasing/Accounts Payable Processing



Manufacturing Purchasing and Inventory
Processing



Manufacturing Work Order Processing



Material Requirements Planning

Besides e-mail (which was already available on the Department network), only the
sales order/accounts receivable module has been implemented. This module notifies
factories of outside sales orders, notifies TCI headquarters of factory shipments, and
generates sales invoices to customers.

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Implementation of IOIS is late, and there is currently no firm completion date:


Sales order/accounts receivables was originally scheduled to be implemented
in December 1995. Instead it “went live” for external sales in May 1996 and,
at the time of our audit, three factories were still not on the system. It does not
yet accommodate departmental sales/invoicing.



Manufacturing purchasing and inventory processing was originally scheduled
for implementation in March 1996. As of June 1997, TCI had not completed
the input of inventory data. This data is the first step to implementing this
module.



Purchasing/accounts payable processing was originally scheduled for June
1996 and is not yet complete. A deadline for completing Purchasing/Accounts
Payable Processing was set for the end of the fiscal year 1997.



The pilot site for full implementation, the Ellis Unit woodshop, was scheduled
to be fully operational starting in September 1996, but it is not yet operational.

Because of continued delays and changes in project time frames, the project manager
no longer attaches dates for implementation of the different modules at each factory.
Instead, he lists only the relative order of implementation.
Delays in implementation have required modification of the scope of the
project and have increased the project’s cost. Modules for Maintenance

Management and Capacity Requirements Planning have been deferred, and Bar
Coding has been dropped completely. Not meeting original deadlines required TCI to
extend its contracts with its project manager and programmer. These extensions cost an
additional $74,000.
We attribute TCI’s implementation difficulties to the following factors:

NOVEMBER 1997



Inadequate planning and performance specifications for the system - While the
RFP specified various interface and hardware configurations, it did not fully
describe the management and operational information the system would
provide. In addition, the RFP was not based on a thorough understanding of
factory operations. The RFP called for automation of data from incomplete
manual systems, without first examining and improving those manual systems.



Noninvolvement of decision makers and stakeholders in development of the
system - Despite the need to transfer data to and from Department information
systems for purchasing and financial reporting, development of TCI’s system
has occurred in relative isolation from the Department as a whole. TCI
managers have not been active in specifying the financial information they
expect from the system, and minimal input has been solicited from the factory
managers and accountants who stand the most to gain from the system’s
implementation.

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The system’s status, capabilities, and long-term benefits have not been
adequately communicated to factory personnel. We heard numerous, diverse
complaints about the system during our factory visits and in interviews with
factory accountants. For example:
-

Only 10 of the 44 factories’ accountants reported that they had an
adequate understanding of the new system’s capabilities.

-

Few of the factory personnel we interviewed were aware that bar
coding had been dropped from the contract.

-

Inventory data returned to a factory by TCI headquarters had lost
essential information on costs as well as manufacturer names needed
to tell one item from another. Instead, screws of all types and sizes
were listed simply as “screws.”

-

Because the system does not allow for insertion of additional written
comments, it would not allow a factory to accommodate the
customer’s terms for a particular order.

-

The system does not accommodate differences between internal and
external customers; for example, though one order was departmental
(internal price = $15), the pick-slip showed the external price ($20).

Not all of the factories surveyed have yet received training on the system. Of
the 33 factories that had, one factory’s staff received training over the phone
and two others had received training only on the system’s e-mail capabilities.
One plant manager told us that the e-mail training he had received included
wrong instructions for how to log onto the system.


Overreliance on contracted project manager - The original contract called for
TCI to designate an internal project manager, and in 1995 the Department’s
Data Services Division recommended assigning an ongoing system
administrator. However, TCI contracted for an external project manager
instead.
The initial selection of the contracted project manager appears to have been
conducted at less than arm’s-length. The project manager was also the author
of the original feasibility study. In addition, had it not been for a discount for
early signing, a different vendor would have been the low bidder. The project
manager’s contract has since been renewed, noncompetitively, as an
information systems vendor.
Because TCI has relied on the contracted project manager, TCI employees lack
his detailed knowledge about the system. As a result, TCI will be dependent
on nonemployees until knowledge of the system can be transferred to its staff.

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In addition, the contracted project manager lacks understanding of other
Department initiatives. The Department has for some time been moving
toward implementing a new purchasing system (ADPICS), which is
compatible with the Department accounting system and will be required for all
Department purchases. Almost one year after ADPICS was piloted, the TCI
implementation team appeared to be unaware that the new system was being
implemented and that the TCI system would need to be compatible with it.
Had the project manager been from the Department’s Data Services Division,
this would more likely have been planned for in advance.


Use of the existing Department network rather than simple dial-up for data
exchange - Where the original feasibility study recommended simple dial-up as
a means of transferring data from factories to TCI, the RFP contained a
requirement that the system use the existing Department network. This
imposed extensive cabling and other requirements.

Recommendations:


NOVEMBER 1997

Establish an internal project manager from the Department’s Data Services
Division or from TCI to complete knowledge transfer. This would decrease
TCI’s reliance on contracted assistance and help to ensure that TCI data
management is consistent with overall Department policies, standards, and
financial practices. Many of the weaknesses we have observed are
organizational in nature—relating to the isolation of the system’s development
from the Department as a whole, TCI management, and factory-level
personnel. The project manager’s primary objective should be to ensure the
timely and successful completion of the project through constant interaction
with these parties.
-

Immediately involve senior and middle management in establishing
expected system outputs. This will help to ensure that IOIS serves
managerial as well as operational purposes. We encountered
significant difficulties and delays in obtaining standard data, such as
customer lists and receivables reports, from IOIS. That such reports
were not readily available suggests that TCI management has not
defined and communicated its informational needs and expectations to
the IOIS implementation team.

-

Designate an implementation “owner” at each site, preferably the plant
accountant. This will ensure that the system is appropriately tailored
to meet the diverse needs of each TCI operation. Factory-level
managers and accountants should become partners in the
implementation effort; they also should be explicit in defining their
information needs. Thus far, the system has not significantly reduced
their workload.

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Establish and document appropriate system- and factory-level controls
regarding access, authorizations, separation of duties, and physical security.
The system’s current fluid state did not allow for such a review during this
project. The factory roll out process provides TCI with the opportunity to
compare and assess factory-level controls, and to standardize and improve
them.

Management’s Responses:


Agree to implement recommendation. TCI has selected an internal project
manager. Further, TCI will immediately set about involving senior managers
to establish expected system outputs and develop an action plan.



Agree to implement recommendation. TCI will establish an action team. The
action team will develop the policy and procedures needed to implement the
recommendation.

Section 1-E:

TCI’s Policies and Procedures Do Not Ensure That All Factories
Implement Good Processes
TCI does not have a way to ensure that good processes for managing production and
assets are implemented in all factories. In our visits to factories, we saw areas in which
some factories had developed exemplary systems for tracking inventory and monitoring
production, and others where similar systems could have been implemented had they
been shared.


Production Planning - Some but not all factories consider planned changes in

products to be implemented in the next cycle when considering adjustments to
reorder points for raw materials. Three factories do not calculate reorder
points. Some factories trace back-order amounts and even report those
amounts to TCI headquarters.


Inventory Management - Some but not all factories include in their

calculations of the reorder points what the vendors’ minimum order quantities
are. TCI has not provided factories with procedures for developing these
reorder points. Other areas in which we saw variations include:


Nature, timing, and extent of spot checks of raw materials inventories
and small tools
Adjustments to inventory records (discussed in Section 2-A)
The degree of segregation of duties among staff and inmates
Physical security of inventory

Management of Scrap and Salvage - Some factories track their scrap

materials and check with other factories to see if any will be useful. Others do

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not track scrap, and one even left potentially useful items exposed to the
weather.


Security in the Factories - Some factories control small sharp tools better

than others. At one factory, tools were not being accounted for prior to
releasing the inmates for lunch or at the end of the day. In addition, razor
blades were observed lying on the floor during the tour of this factory.


Quality Assurance - Processes for ensuring the quality of products varied.

Some factories had no formal checks or procedures. Others had developed
systems that allowed them to pinpoint patterns in defective work to a specific
machine or even inmate. One factory had its quality review staff report to
different supervisors than did the production staff. When production staff are
responsible for quality review, they are less likely to report potential problems
as this could reduce their productivity measures.
TCI has not developed policies or other mechanisms to ensure best practices are known
or shared. In addition, TCI had few policies related to appropriate accounting
procedures at the factory level and did not provide adequate instruction for the
preparation of factory monthly reports. These reports are the basis for TCI’s factory
financial statements.

Recommendation:
Develop policies and procedures that would allow new employees to understand the
minimum expectations for management of assets and resources. In addition, TCI
should develop mechanisms whereby factories could share their best practices and
people in similar roles in different plants could address common problems.

Management’s Response:
Agree to implement recommendation. TCI will immediately begin semi-annual
meetings with all Plant Managers and expand the usage of the TCI quarterly
newsletter to accomplish the recommendation. TCI will also establish an action team
to develop policies and procedures aimed at providing new employees an orientation
period and at developing a component for the Quality Training curriculum to address
minimum expectations for management of assets and resources.

Section 2:

Develop Useful, Reliable Information to Monitor Factory Financial
Position
Available information on factory and division financial performance is not useful or
accurate. TCI prepares monthly statements of profit and loss, but these statements are
produced by a cost accounting system that does not adequately allocate costs to

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products. The resulting financial statements are used both internally and externally,
but they are not reliable or accurate.
Other information available to monitor factory operations is also not useful.
Specifically:


TCI’s funding is not linked to expected production and is split among three
funding sources, which makes it difficult to assess overall financial
performance.



The operational reviews that TCI performs are not structured to ensure that
significant weaknesses in factory controls are detected or corrected.



TCI has not used available information to improve product quality.

The lack of sound information at TCI prevents management and other users from
knowing how much it costs to produce items, whether factories are making or losing
money, and the degree to which results are achieved. Unreliable cost information
hinders management’s ability to make decisions about factory efficiency, product
prices, product lines, and other production issues.

Cost Accounting Information is Necessary to Make
Sound Operational Decisions
Cost Accounting
Information Required

Kinds of Decisions
1.
2.
3.
4.
5.

Pricing a product
Discontinuing a product
Making or buying
component parts
Expanding production
of an existing product
Taking special orders at
less than regular prices

1.
2.
3.
4.
5.

Costs of producing the
product
Costs saved
Costs of making the
part
Additional costs due to
expansion
Additional costs of the
special order.

Section 2-A:

TCI’s Cost Accounting System
Does Not Adequately
Allocate Costs to Products
TCI’s cost accounting system does not
adequately allocate costs of production
to individual products. TCI’s system
includes the cost analyses done at the
factory level, its systems for tracking
inventories, the calculation of
overhead allocation rates, and the
assignment of overhead to individual
factories.

Source: Managerial Accounting by C. Engler, p. 184

We found weaknesses in each of these components. (Appendix 4 provides detailed
information about TCI’s cost accounting system.) The weaknesses in TCI’s system
prevent TCI from accurately tracking its costs and making good decisions about pricing
products, valuing inventory, and other operational issues.


Cost analyses are not complete or accurate. Factories calculate the cost

to produce individual products through “cost analyses.” (Cost analyses are
prepared for items sold through the General Services Commission catalog and

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for some custom-made items.) These cost analyses are submitted to TCI
headquarters for consideration in the price-setting process. Therefore,
inaccurate costs in the costs analyses could affect TCI’s ability to make good
decisions about reasonable product prices.
The following weaknesses in this process result in inaccurate cost analyses,
and therefore, inaccurate data on which to base pricing decisions:



-

Raw material costs used are not always the most current costs.

-

Labor hours used in cost analyses are estimated, and industry
standards or time studies are not used to verify the reasonableness of
these estimates.

-

All costs are not included.

-

Overhead rates are sometimes intentionally changed, even when better
estimates of overhead costs are known. As a result, some factories’
cost analyses resulted in costs that were less than TCI knew them to
be, and TCI lost information about what the different costs were of
producing items at different factories.

TCI’s method of allocating overhead to products has not ensured that
these costs are covered. Overhead includes those costs incurred in the

production process which are not easily identifiable in the final product. TCI
considers supervisory salaries and benefits; purchase, maintenance, and
depreciation of equipment; supplies; small tools; utilities; travel; and the
administrative expenses associated with TCI headquarters to be components of
factory overhead. For fiscal year 1996, factory overhead totaled $29 million
for all factories combined. Factory overhead must be allocated to products so
that finished products include all costs associated with producing goods.
TCI provides each factory with an overhead allocation rate at the beginning of
each fiscal year. However, TCI’s estimates are not always accurate, and there
is no adjustment to ensure that all of the costs are eventually assigned to
products. We determined that for one factory only 3.5 percent of the overhead
it was charged was recovered through its sales prices.


Assignment of overhead to individual factories’ financial statements
has not been based on actual cost or adjusted to reflect actual costs.

Without accurate information about the costs of overhead at each plant, TCI
cannot know whether or not a factory is profitable. In addition, it cannot make
decisions on how to price its products, or whether to expand or discontinue a
line of products.
Through fiscal year 1996, the total amount of factory overhead attributed to
each factory was based on estimates from 1992. Each factory was provided
with the overhead amounts that would be attributed to it on its financial

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statements, and this amount was never adjusted to reflect actual expenses. As
a result:
-

There are no incentives for factories to control these costs.

-

Changes in overhead expenses are not carried through to the profit and
loss statements.

-

Factory financial statements are not accurate or meaningful.

For example, the amount of the supplies attributed to one plant remained
constant throughout fiscal years 1994, 1995, and 1996 even though its sales
and its purchases of raw materials decreased significantly during that period.

Figure 1
Selected Items From the Year-End Financial Statements for
Coffield Metal Fabrication Plant

Item

Fiscal Year
1994

Supplies
expense

Fiscal Year
1995

Fiscal Year
1996

$134,423

$134,423

$134,423

Cost of Raw
Materials

$2,006,360

$798,151

$807,607

Total Sales

$4,291,602

$1,417,979

$1,958,397

Supplies as
a percentage
of sales

3.13%

9.48%

6.86%

TCI has recently identified some of the
actual fiscal year 1996 expenses for
components of factory overhead,
including salaries and cash
expenditures. The actual amounts
identified by TCI account for
approximately two thirds of the total
factory overhead. We used these
revised figures to recalculate factories’
fiscal year 1996 profits or losses. For
nine factories, using actual overhead
changed their “bottom line” profit or
loss significantly (that is, their profit
turned into a loss or their loss turned
into a profit).

The effects of using these revised overhead amounts on the fiscal year 1996
factory financial statements are presented in Appendix 4-1.


Adjustments to inventory amounts are not consistent. Inventory amounts

on factory financial statements are adjusted to reflect raw materials damaged
during production and to reflect differences, or variations, between inventory
records and actual inventory counts. However, factories make these
adjustments according to their own criteria. Therefore, factories’ inventory
amounts are not consistently presented on the financial statements, and
factories’ gross profit or loss is subject to manipulation.


TCI’s methodology for pricing its products does not ensure that costs
are covered. Factories recommend prices based on their cost analyses, but

TCI generally sets prices for catalog items at 10 percent less than competitors’
prices. As a result, there is no guarantee that the prices charged cover the costs

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of production, either on an individual product basis or as a whole for the
product line. In fact, we found cost analyses which show factories’ production
costs to be higher than the current price set for these items.
Prices are developed for non-catalog items in different ways at different
factories. One factory we visited maintained detailed historic data and used it
for pricing custom jobs specifically to ensure that costs were covered. (This
factory did not use the overhead allocation rates required by TCI.) Other
factories developed quotes for custom jobs based on analyses similar to a cost
analysis. Still others used price lists which had been in effect for years. These
factories did not have documentation to support how the prices on these price
lists were calculated.

Recommendations:

NOVEMBER 1997



Cost analyses should include all costs incurred in production and should reflect
the most recent prices paid for raw materials and TCI’s best estimate of
overhead associated with production. If labor hours are used to allocate
overhead to the product, TCI should use realistic estimates of hours. TCI may
find it useful to take advantage of published industry standards and time
studies for these estimates.



All overhead should be allocated to the individual products in the manner best
suited to that industry to ensure that the costs of the product are assigned either
to sales or to inventory. Inmate hours do not need to be the basis for allocating
overhead at all factories. Instead, TCI headquarters should provide each
factory with a reasonable estimate of how much total overhead will be incurred
over the year, and the factory should then allocate it to products in whatever
way seems to be most reasonable for that industry. TCI should provide
guidance on how to allocate overhead to products (using such bases as inmate
hours, machine usage, or standard direct hours). Each factory’s methodology
would need to be approved and reviewed by either the division director or by
someone else at TCI, to ensure that if applied, estimated overhead would be
fairly allocated.



Actual costs should be included on a monthly basis in the financial statements
for each of the factories. Estimates needed for timely decision-making should
be updated as soon as actual expenses are known. Over the course of the year,
TCI should compare overhead allocated to products with overhead actually
incurred. Adjustments should be made for overhead over- or under-allocated.



Criteria for when to make adjustments to inventory records should be
developed to ensure consistency and fairness in reporting inventory amounts.



Policies should be developed to ensure consistency in adjustments to inventory
amounts.

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TCI should use cost information to determine prices and to make decisions on
whether or not it is cheaper to make or to buy some items. In addition, if
similar items are produced by different factories at different costs, TCI should
use the information on these cost differences to make decisions related to
equipment replacement, inmate supervision, and production scheduling to
maximize financial and other results for TCI as a whole.

Management’s Responses:


Agree to implement recommendation. TCI will establish an action team to
research and evaluate different methodologies for implementing the
recommendation. Once research and evaluation have been completed, the
action team will develop policies and procedures for implementation.



Agree to implement recommendation. TCI will select action team members to
develop criteria for allocating overhead. Additionally, policies and
procedures will be developed to address the issues in the recommendation.



Agree to implement recommendation. TCI will establish an action team to
develop the policies and procedures needed to implement this
recommendation.



Agree with recommendation. TCI will establish an action team composed of
Division and Plant Managers who will develop policies and procedures based
on the JDE system.



Agree to implement recommendation. TCI will establish an action team
composed of Division and Plant Managers who will develop policies and
procedures based on the JDE system. This recommendation will be
conjunction with 2-A. (4).



Agree to implement recommendation with modification. TCI has a statutory
obligation to provide offenders with on-the-job training. In order to comply
with statutory obligation, it may be necessary to have offenders produce items
that may be purchased at a lesser price. TCI will develop an action team
which includes representatives from Financial Operations and Fixed Assets.
The action team will research and evaluate different cost allocation
methodologies.

Section 2-B:

Factory Financial Statements Are Inaccurate
TCI’s financial statements do not recognize costs or revenues appropriately, and, as a
result, management does not have sound information about amounts of sales, costs of
goods manufactured or sold, or whether a factory is making or losing money.
Moreover, TCI’s financial reporting practices may disguise Department subsidies to

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other agencies. Inaccuracies in the financial statements are magnified by the
inaccuracies in TCI’s cost system.
As is common in manufacturing enterprises, TCI prepares two basic financial
statements for each of its factories:



The Manufacturing Statement includes the direct and indirect costs for goods
produced during a given period.
The Income Statement compares sales with the cost of those sales and includes
a “bottom line” profit or loss.

TCI’s financial statements are used both internally and externally as indicators of
divisional and factory success. Some TCI managers use these financial statements to
make decisions on how to change factory operations, improve the financial status of
individual factories, and evaluate plant managers’ performance. However, other TCI
managers reported that they do not use these financial statements because they know
them to be unreliable.
These financial statements are distributed to external users, including Department
management, legislative entities, and others. These users may not be aware of the
assumptions used in preparing the financial statements or the resulting limitations and
inaccuracies in the statements. Therefore, these users may inappropriately rely on
TCI’s financial statements.
Appendix 5 provides detailed information on the inaccuracies in TCI’s financial
statements. These include:


The Cost of Goods Manufactured figure on the Manufacturing
Statement is not accurate. Cost of Goods Manufactured is calculated by

adding the Cost of Raw Materials to the allocated overhead for the period.1
The Cost of Goods Manufactured is the “bottom line” on a manufacturing
statement, and is necessary for calculating net profit or loss on the income
statement.
TCI’s financial statements do not include accurate figures for either the Cost of
Raw Materials or for overhead:
-

TCI’s method for calculating the Cost of Raw Materials can result in
significant understated costs which, in turn, can understate the Cost of
Goods Manufactured and overstate gross profits.

1

Typically, a manufacturing statement also includes the costs for direct labor. However, at TCI,
inmates are not paid for their labor, and supervision of inmates is considered to be overhead.
Therefore, there are no direct labor costs included.

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-

As discussed in Section 2-A of this report, overhead amounts are
based on estimates. These estimates are not compared to actual
overhead expenses.

Because neither the Cost of Raw Materials nor the allocated overhead is
accurate, the Cost of Goods Manufactured cannot be accurate. This means that
the Income Statement’s Cost of Good Sold will not be accurate, and the
reported net profit or loss will also be inaccurate.


The Departmental Sales figure on the Income Statement is not
accurate. TCI includes inter-factory transfers as departmental sales. Also, the

calculation of Net Departmental Sales includes adjustments that make the
figure inaccurate. These conditions misstate departmental sales and affect
TCI’s calculation of net profit or loss on the Income Statement.


TCI’s financial reporting practices may disguise Department subsidies
to other agencies. TCI reduces factory losses by the amount of profits that

TCI attributes to sales to the Department. In this way, TCI applies
departmental profits to defray the losses TCI incurred in preparing goods for
other agencies. Ten of TCI’s 44 factories defrayed losses on outside sales by
adding back the profit made on departmental sales, for a recorded total of $2.1
million. However, because the financial statements are inaccurate, we cannot
determine the true amount of losses that Department has absorbed from outside
sales.

Recommendations:


Sales of necessity items to the Department should be recorded as sales
(perhaps less a discount to eliminate the profit), but transfers of one factory’s
finished goods to another factory’s raw materials should be recorded as interfactory transfers. Only sales of finished goods to someone outside TCI should
be recorded as sales.



The Cost of Raw Materials should be computed according to standard
accounting procedures (Beginning Inventory plus Purchases less Ending
Inventory). The resulting amount should be used in the calculation of the Cost
of Goods Manufactured. If there is a difference between the Cost of Raw
Materials computed according to standard cost accounting procedures and
those reflected by accruing information from factory work orders, the
difference should be reconciled.



Once TCI has recomputed the amount of the costs associated with
Departmental Sales it should:
-

PAGE 26

Consider raising prices on the products that incurred a loss on
departmental sales.

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-



Recompute the amount by which the Department is subsidizing sales
to other agencies. The Department should only subsidize other
agencies to the extent that some identifiable benefit is obtained. For
example, it may be a strategic decision to sell some products for less
than cost if an identifiable pool of inmates has received job training
through a program to reduce recidivism.

The Department may want to consider hiring a Certified Public Accountant,
either on staff or as a contract employee, to help TCI address some of these
issues. While there is no requirement that TCI produce financial statements in
accordance with Generally Accepted Accounting Principles (GAAP), GAAP
does address some of these issues and GAAP treatment might prove useful to
TCI.

Management’s Responses:


Agree to implement recommendation. TCI will appoint an action team to
address method to achieve the implementation of this recommendation. The
action team will develop an action plan.



Agree to implement recommendation. TCI will have an action team review the
process and develop policies and procedures to implement this
recommendation.



Agree to implement recommendation. TCI will establish an action team to
research and evaluate the different type of factories, programs and products
and how to best implement this recommendation. The action team will
formulate policies and procedures that are needed.



Agree to implement recommendation. TCI will work with Financial
Operations and Contract Purchasing to develop a Request for Proposal (RFP)
to hire a CPA on retainer.

Section 2-C:

TCI’s Funding Is Not Linked to Production and Is Not Structured to
Facilitate Monitoring
TCI funding for sales to the Department is not tied to production. These “departmental
sales” are funded from a strategy different from the strategy used to fund “outside

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TCI’s Funding Structure
TCI receives funding from three of the
Department’s strategies:


Goods sold to “outsiders” are accounted for
through a revolving fund, which is expected
to be self-supporting, and which is included in
the Department’s appropriation as Strategy
C.2.1 “On-the-job Training.” The General
Appropriations Act estimated fiscal year 1997
revolving fund receipts at $63.5 million.



Goods produced for the Department’s use
are accounted for through Strategy C.1.2
“Institution Goods/Service.” In fiscal year
1997, this strategy includes the $18.6 million
allocated to TCI, as well as an additional $290
million that is used for Agriculture, Food
Service, and others.



Goods produced for the Department’s State
Jail Division are treated like “outside sales” but
are funded through the Department’s
Strategy C.4.1 “State Jail Facilities.” Of the
$224 million appropriated to this strategy for
fiscal year 1997, TCI was budgeted $1.9
million.



sales” (sales to other state and local government
units). This makes it difficult to monitor
individual factory budgets, and impossible to
monitor overall TCI financial performance
through the Uniform Statewide Accounting
System (USAS).


Funding for Departmental Sales is not
tied to production. TCI is responsible

for producing goods (such as clothing,
bedding, and shoes) used in prison units
by inmates and security. TCI receives a
lump-sum allocation from the
Department to cover those items. This
money, $18.6 million in fiscal year 1997,
is made available to TCI, but is not tied
to the specific production of identifiable
items. This allocation was based on
TCI’s estimate of what it would cost to
produce necessity items for the
Department.
However, TCI is not obligated to produce
specific numbers of units. As a result, if
the Department’s need is less than
projected, it will overpay for items and
the funds allocated to TCI will subsidize
sales to other agencies.

The budget status reports that TCI provides to its divisions and factories
mirror the separate funding streams, and budgeting occurs from three
separate strategies. As a result, TCI budget status reports do not provide

meaningful information with which to monitor factory budgets. Budget
information is not consolidated for each factory and does not necessarily
reflect only actual expenditures or obligations.
-

PAGE 28

Budget reports present information only by factory and by funding
source. TCI management obtains budget status reports from the
Department’s financial accounting system (Lonestars). Separate
reports are generated for each factory and for each factory’s funding
source. Therefore, if a factory receives appropriated, state jail, and
revolving funds, there are three separate budget reports related to that
factory that must be reviewed to determine how revenues and
expenditures align with budgeted amounts. TCI does not consolidate
these reports into a single spreadsheet to facilitate analysis and
monitoring. In fact, until June 1997, budget status reports were
available to TCI’s five division managers only on a quarterly basis and
were not available to plant managers. Without timely information

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organized in a useful format, TCI cannot adequately monitor factory
financial status.
-

Budget reports often include “pre-encumbrances” which can overstate
the expenditure side of the budget report. Pre-encumbrances are
entered into Lonestars for the amount of blanket purchase orders
awarded by the Department. These amounts usually far exceed the
actual amounts TCI expects to spend and does spend against the
blanket purchase order. This overstates the expenses reported on the
budget monitoring report and clouds the true financial picture of a
factory’s expenses. In fact, toward the end of the third quarter of the
fiscal year, TCI’s chief accountant has to ask each factory how much
money will not be spent by the end of the fiscal year so that he can
reallocate available funds to other factories.

In addition, TCI allocates its appropriations among its factories based on
historical budget amounts. The allocated amount is not analyzed to ensure that
the dollars are truly needed to meet planned goals and projected activity levels.
For example, the fiscal year 1997 factory budgets were the same as the fiscal
year 1996 budgets even though many factories significantly overspent or
underspent their 1996 budgets.


TCI’s financial position cannot be tracked through USAS. USAS tracks

revenues and expenditures by strategy and fund. Therefore, the revolving
fund’s activity, including vendor and object of expense, can be tracked from
the state level. This is not true of TCI’s other appropriated funds, because the
strategies which track these funds include so many other items.
While USAS can currently track revolving fund activity, the financial picture
viewed is inaccurate. TCI has not used the revolving fund solely for external
sales activity. For example, according to TCI management and Department
management, approximately $900,000 of salaries for the Department’s
Transportation and Warehouse drivers are paid for from TCI’s revolving fund.
Other TCI employees who work solely at factories that make goods for the
Department’s internal use are also paid from the revolving fund. These types
of transactions prevent users from having accurate information to match
external sales revenue against external sales expenses and determine the
financial position of the revolving fund.

Recommendations:


NOVEMBER 1997

The Department should allocate funds for “necessity items” to TCI based on
an agreement to provide specific numbers of individual items over the course
of the year and based on a specific price list. As items are produced, the
Department could transfer the agreed-upon money to the revolving fund.
(Alternatively, to alleviate cash flow problems for TCI, the Department may
want to prepay for some of these items, and as the items are produced and

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shipped to the units, the Department’s prepayment would be appropriately
debited.) Adjustments to the number of items to be produced could be made
periodically.
In 1991, TCI management agreed to a Department internal audit
recommendation to consolidate general revenue funding into the industrial
revolving fund. This recommendation was repeated in 1994 by the Office of
the Comptroller of Public Accounts. Implementing this recommendation
would allow TCI to operate strictly from the revolving fund, making it easier to
track operations from a statewide level. In addition, because only one funding
stream would be involved, there would be no need for separate budget reports
for appropriated and revolving funds, and it would be easier to track budgets
within TCI.


Budget status reports should mirror the actual expenditures and obligations as
closely as possible. As a result, we recommend that the pre-encumbrances not
be included in the reports made available to factories.



Funds from all sources should be allocated to the different factories based on
what they are likely to need for the period. Prior year actual numbers should
be considered in the development of subsequent year’s budgets.

Management’s Responses:


Agree to implement recommendation. TCI initiated action on this
recommendation due to the same recommendation appearing in the TDCJ
Internal Audit. The action plan calls for an implementation date of September
1, 1998.



Agree with recommendation. TCI will not include pre-encumbrances in
reports made available to factories.



Agree to implement recommendation. TCI will perform budget exercises
involving division and factory level management. These exercises will occur
annually and quarterly, to assure that all funds are properly allocated.
Detailed summaries of expenditures by FY, quarter and month will be made
available to division and factory level management staff.

Section 2-D:

Operational Reviews Provide Limited Information on Factory
Performance
TCI’s reviews of factory operations are not structured to ensure that significant
problems are detected and corrected. TCI division managers conduct biennial
operational reviews of each factory within their divisions. These reviews are intended

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to evaluate factory administration, including inventory, security, maintenance, safety
and health, production, and environment. However, these reviews:


Are not scheduled or expanded based on risk factors associated with each
factory



Are not structured to ensure that the most important areas are thoroughly
reviewed



Do not include a formal mechanism to ensure that identified problems are
addressed

As a result, weaknesses in factory operations and controls have not been detected or
corrected.
Reviews are not scheduled based on known risk. Two of the factories where we

found the most significant problems had not had an operational review since the fall of
1995. One of these had been identified by TCI staff as a factory that consistently had
problems managing its inventory. Even so, there was no attempt to review that factory
more frequently than scheduled.
Reviews are not structured to ensure that problems are identified. The reviews

are conducted according to a checklist that does not include criteria or procedures. For
example, the review will ask whether fixed assets are properly accounted for, but does
not provide criteria (such as “all tested items had an inventory tag that traced back to
the central accounting fixed asset list”) or procedures (such as “obtain a fixed asset list,
select a sample of 10 items from the floor and make sure that they are all where the list
says that the should be.”) to ensure consistency among reviewers, sufficiency of
coverage, or accuracy of conclusions. In addition, there were areas that we identified
as high-risk areas that were not included in the reviews, such as the cost analysis
process and the pricing of custom orders and employee sales. As a result, the
operational reviews are not good mechanisms to monitor factory compliance with
policies or the sufficiency of controls.
For example, two of the factories we visited had operational reviews within the past six
months. TCI’s operational reviews did not identify most of the significant problems
that we noted in our reviews. At one of these factories, the operational review had
noted that the monthly reports were both late and “insufficient.” Our review found that
variations and impairments were not adequately explained or supported and that there
were significant amounts of obsolete inventory. At another factory, the operational
review noted that there were not enough inmates assigned to the factory, and that there
was an outstanding work request. Our review of this factory noted numerous problems
with inventory records, obsolete inventory, and unaddressed customer complaints.
There is no process to ensure that identified problems are addressed. For

example, a 1991 internal audit report recommended that one factory dispose of
obsolete materials. These items were still in inventory as of our review in June 1997.
In addition, an operational review dated February 25, 1997, noted that the plant

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warehouse did not have doors. A work request had been submitted in December 1993,
but the request was still open at the time of TCI’s review.

Recommendation:
The Operational Review Process should be evaluated and enhanced with procedures to
ensure that significant weaknesses are discovered and addressed. Specifically:


The reviewers should be independent of the division, plant, and unit. This
could be done by having division managers or assistant managers from one
division review factories in another division.



Develop criteria and procedures to ensure that divisional reviews are more
likely to identify significant problems.



Use risk assessment to determine the nature, timing, and extent of monitoring.



Provide instruction on how to test factory performance for items currently
included in the review. Reviewers should receive training on how to conduct
the reviews, what “red flags” to look for, and how to write an effective report
of their findings.



In addition to the areas currently reviewed, expand the operational reviews to
include review of:
-



Pricing of custom orders
Cost analysis processes

The results of these reviews should be used in evaluating plant managers.

Management’s Response:
Agree to implement recommendation. TCI will develop an internal compliance
review. TCI will submit a decision memorandum for the establishment and funding of
staff to perform compliance reviews.

Section 2-E:

Available Information Should Be Used to Improve Product Quality
Customer complaints are the primary mechanism that TCI uses for ensuring quality of
its products. However, TCI does not know about all the complaints received by the
factories, does not ensure that all complaints are addressed, and has not used available
information to improve product quality. While TCI has a quality assurance program,
this program is still primarily a training program. Plans for future phases will include
more emphasis on developing processes for ensuring product quality.

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Customer input is not used to improve business processes. TCI

headquarters receives some customer complaints, but some go only to the
factories. In addition, TCI’s tracking mechanism does not ensure that all
complaints are resolved:


Not all complaints are monitored by TCI. Two of the six factories we
visited received complaints directly. TCI does not receive information
concerning the complaints for these factories. TCI Industry Policy No.
9.03.002 states that incoming complaints may be received through
various channels, but all complaints must be directed to and routed
through TCI’s Customer Service Department. However, the two
factories that we reviewed neither forwarded information to TCI nor
maintained sufficient documentation of these complaints to determine
whether they were satisfactorily resolved.



TCI’s tracking of customer complaints has not ensured that all
complaints are resolved. TCI lists customer complaints received at
headquarters in a customer complaint log, and forwards information
on these complaints to the factory for resolution. However, TCI has
not ensured that factories resolve these complaints. As of May 30,
1997, the log for fiscal year 1997 included 994 customer complaints,
of which 380 did not reflect resolution. Some of these unresolved
complaints were from September 1996, the start of the fiscal year. In
addition, one complaint from March 1997 was listed as resolved, but
was not.
Four of the six factories we visited had received complaints referred
from TCI headquarters. Two did not ensure that complaints were
resolved in a timely manner, or that they complied with TCI policy. If
TCI policy were followed, there would be written justification if a
complaint were not resolved within 22 working days. However:
-

At one factory, 4 of 13 complaints had not been resolved.
Three were over one month old, and the other was four
months old. One complaint concerning a warped product also
noted that the product received by the customer had another
agency’s state property tag attached.

-

At another factory, 2 of 14 complaints had not been resolved.
One was 3 months old and the other was almost 8 months old.

None of these complaints included written justification explaining why
they were still unresolved.



TCI has not used available information to improve product quality.

Neither customer complaints nor other data is used to ensure that action is
taken to improve production process:

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Customer complaints are not analyzed to identify trends related to
factory processes, and TCI does not make changes to business
processes to prevent future complaints. Although TCI tallies the
number of complaints it receives and reports the number attributed to
customer error, damaged merchandise, shipping errors, incorrect
manufacture, or “miscellaneous,” it does not track or address the
underlying causes of these complaints. Detailed information with
which to analyze complaints’ causes is available from the Customer
Complaint Forms, and TCI policy instructs factory management to use
customer complaints to identify problems with products. Preventive
action is to be documented and kept on file at the factory.
However, our review of factory documentation suggests that
preventive or corrective action had not been taken, since the same
complaints were made by different customers at different times. In one
case, the customer complained that TCI’s replacement for a defective
product included the same defect as the original.





Several years ago, TCI conducted a customer survey, but the results
were never formally analyzed. Surveys and pre-delivery questionnaires
were sent to customers along with the delivery ticket for outside sales
products. TCI never analyzed the results of this survey, although the
response rate was reportedly high enough to provide reliable results.

TCI does not have an effective Quality Assurance Program to ensure
factories develop efficient and effective processes.

TCI has begun to implement a division-wide quality assurance program.
However, the program has focused only on providing training to TCI staff on
what quality is and on teaching various interactive skills for problem-solving.
The quality assurance program is not designed to review the quality of
products at factories or to develop procedures for factories to improve the
quality of their products. Actual day-to-day quality control is the responsibility
of individual plant managers.
Thirty-four of 38 factories we surveyed reported attending TCI’s quality
assurance training within the last two years. Of these 38 factories, 29 (or 76
percent) report having made changes to their processes as a result of the
training. Specific changes cited include adding check points throughout the
production process to more vague changes such as “more motivation.”
TCI policy requires that each factory develop a set of quality standards and
manufacturing instructions for each product. However, only 27 of 44 factories
(or 61 percent) reported having any documented quality control standards.
Factories are to document production techniques for ensuring product quality,
adherence to standards, and promptly addressing causes of problems. We did
not test the extent to which factory procedures complied with TCI’s
requirements.

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Although the Quality Assurance Program does not focus on product quality,
there are other mechanisms available that some plant managers are using to
share best practices and to overcome common problems. For example, the
Garment Division has monthly Quality Team meetings at which
representatives from each Garment Division factory discuss issues such as
customer complaints, production problems, new products and reporting
mechanisms, and the results of division-specific training.



Difficulties in obtaining customer lists hampered our efforts in surveying
customers. However, the results of our customer surveys could still be useful

in improving business processes. As mentioned previously, TCI does not have
accurate information about who its customers are. While we were eventually
able to obtain customer lists from the Department’s central accounting system,
these lists did not include sufficient data to group customers by products
purchased, type of customer (such as a state agency or school district), or other
useful groupings. Therefore, we used our judgement to select a sample of
customers to survey.
We sent 186 customers surveys about their satisfaction with TCI’s quality,
delivery, and service; about their impressions of trends in TCI service; and
about specific past purchases from TCI. Eighty-three customers (or 44.6
percent of those surveyed) responded to our surveys. Although not statistically
valid, our survey yielded information which TCI could use to identify strengths
and potential problem areas.
Appendix 6 presents the survey instrument we used and more detailed survey
responses.

Recommendations:

NOVEMBER 1997



TCI should use customer input to evaluate and enhance business operations.
The underlying causes of the complaints should be tracked. Trends can be used
as a tool to monitor and correct problems at the factories.



TCI’s Industry Policy for the customer complaint process should be enforced
to ensure compliance at all levels. Plant Managers should be accountable for
the timely and satisfactory resolution of customer complaints.



TCI’s customer data should be reviewed and verified for accuracy and
completeness. This could be accomplished by sending an information form to
the customer with his or her invoice, calling the customers, or verifying
information when customers call in to place an order.



TCI should develop and implement policies and procedures that would address
customer satisfaction at the “front-end” of the business process rather than
after a complaint is filed. One way to do that would be through the use and
analysis of customer surveys.

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Division management should monitor and evaluate the effectiveness of the
production and quality processes. Measures should be developed and tracked
to allow management to evaluate the effectiveness of the Quality Assurance
Program. Alternative mechanisms to enhance the quality of TCI products (such
as division quality teams or the specific training of inmates) should be used to
supplement the training provided by the Quality Assurance Program.

Management’s Responses:


Agree with recommendation. TCI will establish an action team to review
existing policy and revise as needed.



Agree to implement recommendation. TCI will establish an action team to
review existing policy and revise as needed.



Agree to implement recommendation. TCI will establish an action team to
review customer data and develop the policies and procedures needed to
implement this recommendation.



Agree to implement recommendation. TCI will establish a study group to
prepare a decision memorandum for the staffing of a customer service group.



Agree to implement recommendation. TCI will utilize compliance review team
to be established by recommendation 2-D. (1) for the implementation of this
recommendation.

Section 3:

Enhance Controls Over TCI Resources
TCI does not have sufficient controls to protect inventories, to ensure that customers
with overdue receivables are not granted additional credit, or to ensure that sales to
employee are conducted at arm’s length. The lack of sound information about
inventories and receivables increases the risk that these assets could be
misappropriated.

Section 3-A:

TCI Does Not Have Adequate Information or Controls to Protect
and Track Inventory
TCI has not ensured that all factories have sufficient controls or information to protect
and track inventory. Neither TCI headquarters nor factories have accurate information
about the inventory quantities that should be on hand. Factories typically do not
research or resolve differences between actual and book inventories but instead simply
adjust their inventory records to match the results of periodic inventory counts. In
addition, TCI’s method of reporting of inventory variances is misleading. Inaccurate

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information about inventories affects TCI’s calculation of costs of goods and increases
the risk that inventory items could be lost or stolen without detection.
TCI expects factory managers to develop and maintain sound controls over their raw
materials, consumables, and finished goods inventories. Together, these inventories
totaled $24.2 million at the end of fiscal year 1996. Total net inventory variations
reported by all factories for fiscal year 1996 were negative $873,865 (that is, inventory
shortages exceeded inventory overages by $873,865).
Weaknesses in TCI’s inventory management include:


Not all factories have accurate or useful information to make decisions
related to inventories. Factories do not consistently record variations

between inventory records and actual inventory on hand (via inventory counts)
or attempt to identify causes of variations. In addition, factories report
variances as a “net” figure by combining inventory shortages with inventory
overages. This reporting practice masks significant losses of individual
inventory items and also prevents management from identifying problems in
accounting controls or warehouse reporting procedures.
We found numerous variations between factories’ inventory records and
actual, physical inventory in our factory visits. Variations were significant at
three of the six factories we visited:
-

At one factory, 22 of the 24 items we tested had differences between
the amount of inventory on hand and the amount of inventory in the
accounting records. The total amount of variations from the inventory
records (both over and under) amounted to $66,426. This represents a
216 percent difference between the actual and recorded amounts.
This plant was already using TCI’s new information system for its
inventory tracking. Therefore, we question whether problems related
to the accuracy of inventory information will be fully addressed by the
implementation of a new system.

NOVEMBER 1997

-

At another factory, 11 of the 24 raw material items and 16 of the 26
finished good items tested had discrepancies. Raw material variances
totaled $2,929 or 8 percent of tested inventories. Finished goods
variances totaled $3,278 or 15 percent of tested inventories.

-

Another factory had 149 pages of variations resulting from the
physical inventory conducted at the end of the fiscal year. Total
variations (both over and under) amounted to $214,233.

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The variations we found could not be accounted for even after searching
through factories’ unrecorded purchases or uses of inventory.2
TCI’s variations result from different factors:
-

Some factories lack physical controls to protect inventories from theft,
misuse, or the elements. Two of the six factories we visited did not
have adequate storage facilities to protect inventories. For example, at
one plant, an estimated 8 percent ($24,000) of the $300,000 of lumber
and plywood stored in an outside storage facility was damaged and
unusable. The open-aired storage facility has dirt floors, no walls,
leaks in the roof, and cannot be locked. At another plant,
approximately $186,000 of raw materials was not secure enough to
prevent small animals from getting into the storage area and soiling
some of the materials. The storage area was located inside a warehouse
with fencing surrounding the materials, but the warehouse did not
have doors.

-

Many plants lacked proper segregation of duties. The lack of
segregation of duties compromises the plants’ ability to safeguard
inventory. The plants operate with a limited number of TCI
employees, but compensating controls have not been implemented.
22 of 38 plants surveyed (58 percent) did not have adequate
segregation of duties or compensating controls over their inventory
management process. The Plant Accountant and Warehouse
Supervisor at some plants are involved in the purchasing, receipt,
adjustments, and spot counting of inventory and the invoicing of
orders.

-

Some factories are not properly accounting for materials issued for
production. TCI policy No. 9.13.008 requires factories complete a
standard form whenever inventory is issued from the warehouse for
production. Each form must identify the work order for which the
inventory items are to be used and are to be turned into the plant’s
office daily to allow timely posting of inventory use to the inventory
records. However, some factories pulled items from stock without
identifying the work order the inventory was to be use for or without
providing the documentation needed to update the inventory records.
As a result, the inventory records overstated the inventory on hand,
and factory staff could not track inventory usage to work orders.

2

Thirty-three of TCI’s 44 factories use a manual system to track inventories. In these manual
systems, inventory quantities for each raw material, consumable, or finished good are recorded on
a “stock card” that must be updated every time new inventory is purchased or is used in
production. This process can be time-consuming, and, as a result, inventory records are not always
up-to-date.

PAGE 38

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

-

Some factories do not adequately test inventory on hand. TCI policy
No. 9.13.010 requires all plants to conduct monthly inventory spot
checks so that all items are counted at least once during the fiscal year.
Several of the plants we visited were not conducting these spot-checks
as often as required or often enough to provide relevant information
about inventory on-hand. One plant we visited had not conducted a
physical inventory of some raw materials received from another plant.
Instead, it used the balances from the transferring plant as its
beginning balances.

-

TCI headquarters does not provide sufficient oversight of factories’
inventory management. The operational reviews conducted by TCI
management did not document the weaknesses that we found at the
plants we visited. TCI does not analyze or perform reasonableness
tests for inventory. The plants’ monthly reports contain the necessary
information, but no one performs these comparisons.

TCI does not have a policy for the reconciliation of discrepancies between
inventory records and actual counts. As a result, factories did not consistently
adjust inventory records to match counts. For example, one factory tested 37
inventory items and found discrepancies between the counts and the records in
5 of these. However, the records for only one of the items were adjusted to
match the physical count. This item was not the item that showed the greatest
variation or had the greatest value.


Some factories do not have good methods to determine when to order
additional raw materials. Each plant is responsible for monitoring its stock

levels and establishing reorder points. However, most plants have not
established or just recently established minimum and maximum order points
for inventory items. Even when reorder points have been established, some
plants do not use them to monitor inventory due to delays in manual posting to
stock cards. At one plant, the staff members “eye” inventory levels to
determine if an item is low and should be reordered. This increases the
opportunity for inventory to be overstocked or out of stock. Out of stock on
some inventory items could lead to downtime and loss of customer orders, and
overstocking can result in obsolete inventory.


The lack of an effective management system to accurately track and
monitor inventory has led to large quantities and dollar amounts of
obsolete inventory on the books. The obsolete inventory must eventually

be written off or sold through auction or bid. This can result in a large loss for
some plants. Some of the plant managers were aware of these figures, while
others had no idea what amount of obsolete inventory they were maintaining.
For example:
-

NOVEMBER 1997

Three years ago one factory sold off its obsolete inventory.
Nonetheless, an estimated $274,247 of the $537,454 (51 percent)

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 39

of current parts inventory at this plant was deemed to be obsolete.
Most of this amount consisted of small value parts less of than $100.
-

Another plant had approximately $29,000 of inventory that had no
activity within the last year. Included in this amount was old fabric
and twenty-year-old buttons. A 1991 Department internal audit report
recommended that the plant dispose of the fabric.

Obsolete inventory takes up space that could be used for other needed
inventory items. It also requires staff time to count, track, and monitor the
inventory. TCI policy No. 9.01.009 on sale of scrap and salvage materials
explains the State Purchasing and General Services Commission’s process and
forms. However, the policy does not provide guidelines to plant managers as
to when obsolete inventory should be disposed of or the proper TCI procedures
for disposal. The lack of these procedures can result in the accumulation of
obsolete inventory.

Recommendations:

PAGE 40



Division management should review inventory storage facilities at all plants to
identify needed repairs or improvements. If resources are unavailable to
address deficiencies immediately, inventories should be moved to a more
secure location.



Each plant should ensure adequate segregation of duties among personnel
responsible for accounting, purchasing, record keeping, and custody of stock.
Posting to inventory records and reconciliation of inventory should also be
performed by different personnel.



TCI should develop procedures for the reconciliation of discrepancies between
inventory records and actual counts. These procedures should include
guidelines on what is to be considered a variation, and criteria for adjusting
records. Variations should be reported as inventory shortages and inventory
overages. In addition, the procedures should detail how physical counts and
spot counts are to be conducted. Management should be held accountable for
inventory variances.



Policies and procedures should be developed and implemented for obsolete
inventory. These policies and procedures should include guidance on how to
dispose of inventory. Plants should be required to track and monitor obsolete
inventory separately. Consideration should be given to recouping some of the
cost of obsolete items through a mark-up on some products’ prices.

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Management’s Responses:


Agree to implement recommendation. TCI will continue to utilize existing
TDCJ policy and procedures. TCI will develop an internal policy and
procedure to address repair and construction issues that are not addressed
within twelve months of reporting under TDCJ policy and procedures.



Agree to implement recommendation. TCI will utilize compliance review team
to be established by recommendation 2-D. (1) for the implementation of
compensating controls.



Agree to implement recommendation. TCI will establish an action team to
develop policies and procedures to implement recommendation.



Agree to implement recommendation. TCI will appoint an action team to
develop policies and procedures on the disposal of inventory.

Section 3-B:

Credit Should Not be Extended to Customers With Past-Due
Balances
TCI has failed to establish written procedures that specifically address the initial
extension of credit or the collection of past-due amounts. As a result, TCI has
continued to ship goods to customers with outstanding past-due balances. For
example, as of June 1, 1997:


One customer had $13,150 in receivables outstanding 120 days or more.
These receivables resulted from orders shipped in June and July 1996.
Nevertheless, TCI shipped $26,737 worth of goods to the customer in May
1997.



Another customer had $41,255 of receivables 120 days past due resulting from
orders shipped in January 1997. These outstanding balances did not prevent
TCI from shipping another $19,101 of goods in May 1997.

In February 1997, the Department’s Internal Audit Department found that TCI’s
revolving fund had $3.5 million in accounts receivables over 90 days past due (or 41
percent of the total $8.5 million due). As of June 1, 1997, receivables outstanding
beyond 90 days had been reduced to $2.3 million (or 34 percent of the total $6.6
million due). However, while the percentage of past-due receivables has been reduced,
TCI has not taken sufficient measures to prevent future collection problems.

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 41

Figure 2 shows the number of customers and dollar amount of receivables past due 120
or more days (as of June 1, 1997).
Figure 2
Number of
Customers

Amount of Receivables

120+ Days Past Due

182

$1,978,586

Total Receivables

619

$6,643,903

TCI drafted a policy to document and improve collection efforts. This policy was
effective August 15, 1997, and includes specific guidelines and time frames for
invoicing and collection. The draft policy requires that if payment has not been
received within 90 days, TCI will send a collection letter stating that TCI will not
continue to do business with the customer until all overdue payments have been
received. However, the policy does not include procedures for identifying or rejecting
orders from customers with delinquent accounts.
Problems in collecting receivables have affected TCI’s ability to pay its outstanding
liabilities. According to the Department’s internal audit report, TCI had $1.9 million
in outstanding payables as of February 1997. Of this amount, $1.56 million had not
been paid within 30 days as required by statute and was therefore overdue. TCI does
not have a written policy for determining which vendors to pay first. As a result,
certain vendors might receive preferential treatment.

Recommendations:


TCI should implement its draft policy on collection of accounts receivables.
This policy should be revised to include procedures for identifying or rejecting
orders from customers with delinquent accounts.



TCI should develop a policy to address the monitoring and payment of
outstanding revolving fund payables. Criteria for setting priorities for payment
should be included in the policy.

Management’s Responses:

PAGE 42



Agree to implement recommendation with modifications. TCI will implement
policy 09.13.000 as planned. However, rather than amend the policy, TCI
will include this as part of the customer data review (recommendation 2-E.
{3}) or develop a policy which addresses this issue independently.



Agree to implement recommendation. TCI will develop a policy as
recommended.

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Section 3-C:

Employee Sales Risk Negative Publicity
Although sales to employees do not account for a large percentage of TCI’s sales, the
risk that employees may take advantage of their position has not been sufficiently
managed by TCI’s policy on employee sales or by its implementation. TCI’s policy on
sales to employees does not adequately ensure that these sales are conducted at arm’s
length. The policy does not clearly define who is eligible to make purchases, or what
specific products are to be excluded from employee sales. In addition, TCI has not
consistently implemented its policy related to employee sales. Specifically:


TCI policy requires that “sales will be priced at actual raw material used, plus
factory overhead.” However, many of the sales we reviewed did not include
sufficient documentation to determine the basis for pricing. Only 17 of 28
sales files contained a cost analysis, price list, or invoice worksheet to support
the price charged.



TCI policy states that “when payment is received, the goods can be picked up.”
However, TCI does not always require payment before employees receive their
goods. For example, TCI’s accounts receivable aging report (as of June 1,
1997) includes 227 employee sales totaling $14,240 for which no payment had
been received. Had TCI required payment before delivery, these outstanding
receivables would not exist.



TCI policy relates to sales of TCI goods to “members of the Legislature and
Texas Department of Criminal Justice employees for personal use.” However,
employee sales at one garment factory were primarily to The University of
Texas Medical Branch at Galveston medical staff, who are not Department
employees and who do not appear eligible to purchase products from TCI. In
addition, some sales were for items that suggest business rather than personal
use, such as sequential house numbers and a sign listing fishing rules and catch
limits.



Policy specifically excludes from employee sales “body work or paint jobs on
cars or trucks or equipment.” However, there were three employee sales at one
factory for this kind of work.



TCI policy states that “the completed form with all approvals . . . will be
received at the factory before production begins.” However, we found that 8
of 51 sales files did not include the required authorization.

Recommendations:


NOVEMBER 1997

Specific policies and procedures should be developed and instituted that
delineate who is considered an employee for the purpose of employee sales,
what constitutes personal use, and what specific products are permitted and/or
prohibited.

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 43



Develop a standard process for calculating the price of goods sold to
employees, ensuring that all costs such as raw materials, labor, and overhead
are included. This will provide some consistency of pricing between employee
sales for the same or similar items.



Develop procedures that ensure that every employee sale has the appropriate
documentation, and that products are paid for prior to, or at the time of,
delivery.

Management’s Responses:


Agree to implement recommendation. TCI has drafted a policy and procedure
to address this recommendation. The policy and procedure are presently
being reviewed by TDCJ's Legal Division.



Agree to implement recommendation. TCI has drafted a policy and procedure
to address this recommendation. The policy and procedure are presently
being reviewed by TDCJ's Legal Division.



Agree to implement recommendation. TCI has drafted a policy and procedure
to address this recommendation. The policy and procedure are presently
being reviewed by TDCJ's Legal Division.

Section 3-D:

Controls Over Fixed Assets Appear to Be Adequate, But
Documentation of Maintenance Should Be Improved
TCI’s controls over fixed assets provide reasonable assurance that assets are
safeguarded and properly accounted for. While fixed assets are monitored centrally by
Department headquarters accounting, the unit property manager and the factory
manager are responsible for the items physically located in their areas. Policy requires
an annual inventory, which is based on a list provided by Department headquarters. In
addition, a new factory manager has 90 days to conduct a complete fixed asset
inventory or accept responsibility for those items assigned to the factory. We tested
fixed assets and equipment maintenance records at a sample of factories.
We were able to locate all items tested at the factories we visited except for those
indicated as being deleted through transfer or obsolescence. In addition, each factory
had conducted an annual inventory as required by policy.
We also reviewed equipment maintenance procedures at six factories. Two factories
lacked sufficient documentation of their equipment maintenance activities. Although
there was evidence that some maintenance was being performed, the lack of
documentation prevents the factory managers from having the information needed to
make decisions about when to replace or repair equipment. Also, it prevents managers
from knowing if all needed maintenance has been performed. At one factory we

PAGE 44

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

visited, one piece of equipment required an estimated $30,000 in repairs after being
damaged by fire. Had preventative maintenance been performed on one of its safety
systems, the damage would not have been so extensive.

Recommendation:
TCI operational reviews should include testing of maintenance records.

Management’s Response:
Agree to implement recommendation. TCI will utilize compliance review team to be
established by recommendation 2-D. (1) for the implementation of this
recommendation.

NOVEMBER 1997

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TEXAS CORRECTIONAL INDUSTRIES

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AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Letter From Management

TEXAS DEPARTMENT OF CRIMINAL JUSTICE

P.O. Box 99 • Huntsville, Texas 77342-0099

Wayne Scott
Executive Director

October 20, 1997

Julie Ivie
Project Manager
State Auditor's Office
P. O. Box 12067
Austin, Texas 78711-2067
RE: Audit Report on Management Controls at TCI
Dear Ms. Ivie:
Enclosed are TCI's management responses to the forty-one recommendations contained in the final draft
version of the Audit Report on Management Controls at TCI. TCI is taking steps to implement all of the
recommendations. However, some sections in some of the recommendations contained conflicts with statutory
obligations, or with other recommendations, and will be implemented with modifications.
I have been informed by Mr. John Benestante, Assistant Director for Industry, that you have agreed to provide
advice and input to the action teams that will be working toward the implementation of these recommendations.
Mr. Benestante has set an aggressive schedule to achieve implementation of the recommendations within
eighteen months and your assistance will aid in achieving this goal.
In order to implement several of the recommendations, appropriated funds will need to be secured to provide
staff and cover implementation costs. TDCJ may, or may not, be able to secure funds for this project. As TCI
progresses with the implementation of the recommendations, Mr. Benestante will regularly forward updated
status reports.
Your assistance is greatly appreciated.
Sincerely,

Art Mosley
John Benestante
Raymond Pyeatt
Sharon Keilin

NOVEMBER 1997

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AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Appendix 1:

Objective, Scope, and Methodology
Objective
Our audit objective was to examine and evaluate TCI’s management control systems to
identify both strengths and opportunities for improvement. We evaluated these control
systems to determine whether they provide reasonable assurance that TCI’s objectives
will be met. Our audit evaluated the control systems in place for the fiscal year ended
August 31, 1997.
Management controls are the policies, procedures, and processes used to carry out an
organization’s objectives. They should provide reasonable assurance that:





Goals are met.
Assets are safeguarded and efficiently used.
Reliable data are reported.
Laws and regulations are complied with.

Management controls, no matter how well designed and operated, can only provide
reasonable assurance that objectives will be achieved. Human error, circumvention by
collusion, and management override can reduce the effectiveness of the established
controls. However, monitoring established controls can assist in detecting and
correcting weaknesses in a timely manner.

Scope
The scope of this audit included consideration of TCI’s overall management control
systems: policy management, information management, resource management, and
performance management.
Consideration of TCI’s policy management system included review and testing of:







Processes used to create, monitor, and adjust TCI plans
Documents related to the development of strategic, operating, and work plans
Requests to the Texas Department of Criminal Justice (Department) for
appropriated funds and operating budgets
Processes, controls, and reports used to plan, create, administer, control,
monitor, report on, and adjust TCI budgets
Relationships between the Department’s strategic plan and TCI’s strategic plan
Processes used to develop, document, review, and revise policies and
procedures

Consideration of TCI’s information management system included review and testing of
controls related to the Industrial Operating Information System as well as TCI’s
manual information systems, including:

NOVEMBER 1997

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TEXAS CORRECTIONAL INDUSTRIES

PAGE 49






Plans for system implementation and selection of the project manager
Processes used to identify, collect, classify, evaluate, maintain, and update
information
Existing management reports
The availability, timeliness, accuracy, and communication of information
needed to support TCI’s mission, goals, and objectives

Consideration of TCI’s resource management system included review of the processes
for:




Ensuring that inventories, fixed assets, and equipment are adequately
safeguarded
Managing cash (accounts payable and accounts receivable)
Procuring goods needed for production

Consideration of TCI’s performance management system included review of the
processes for:



Ensuring quality products and services
Capturing, reporting, and evaluating actual performance

Methodology
Information collected to accomplish our objectives included the following:


Interviews with personnel at TCI; Department executive management,
Transportation and Warehouse, Purchasing and Leases; and members of the
Board of Criminal Justice.



Documentary evidence such as:
-

-

PAGE 50

Minutes of the Board of Criminal Justice and the Prison Industry
Advisory Board
Department and TCI plans, goals, budgets, memoranda, policies, and
procedures
TCI-generated data on sales activity, overhead, costs of goods sold,
and production levels
Inventory data and count sheets from spot checks and the annual
physical count of raw materials, finished goods, small tools, and
consumable inventories
Customer complaints
Cost analyses and supporting documents
TCI product and services catalogs
Employee and inmate accident reports
Employee personnel files, job descriptions, and postings

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997



Newspaper articles and reports relating to TCI and other states’ prison industry
programs



Prior audits conducted by the Texas Department of Criminal Justice’s Internal
Audit Department and the Texas Performance Review

Procedures and tests conducted:












Direct observation of physical security controls over inventories at six factories
and one warehouse
Direct observation of the condition, layout, and types of plant, property, and
equipment under stewardship of TCI at six factories and one warehouse
Phone surveys or interviews of all factory accountants about quality control
procedures, inventory management, the Industrial Operations Information
System, fixed asset management, pricing, and general financial management
Review of six business plans and comparison of information in these plans to
similar information presented to the Board of Criminal Justice
Review and comparison of TCI’s strategic plan and the Department’s strategic
plan
Comparison of factory budgets to actual expense information
Survey of past TCI customers about their satisfaction with TCI products and
services
Analysis of overhead recovered through pricing
Comparison of actual overhead to estimated overhead
Verification of complaint resolution

Analysis techniques used:





Control reviews
Trend analysis
Ratio analysis
Data comparison

Criteria used:





State Auditor’s Office Accountability Project Methodology general and
specific criteria
General Government Code Title 10
1996 General Appropriations Act
Department and TCI plans, policies, and procedures

Other Information
Fieldwork was conducted from February 1, 1997, to August 15, 1997. The audit was
conducted in accordance with applicable professional standards, including:



NOVEMBER 1997

Generally Accepted Government Auditing Standards
Generally Accepted Auditing Standards

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 51

There were no significant instances of noncompliance with these standards.
The audit work was performed by the following members of the State Auditor’s staff:











PAGE 52

Julie L. Ivie, CIA (Project Manager)
Linda C. Buford, CPA
Rachel Cohen, CPA
William D. Hurley, CPA
Kimberlee N. McDonald
Sandra L. Queen
M. Betsy Schwing, CPA
John W. Swinton, MPA
Charles R. Hrncir, CPA (Audit Manager)
Craig D. Kinton, CPA (Audit Director)

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Appendix 2:

Profile of Texas Correctional Industries
Mission and Objectives
The Industrial Division of the Texas Department of Criminal Justice (Department)
began operation in 1963 with the passage of Senate Bill No. 338 which authorized the
Department to sell prison-made goods to all tax-supported agencies and political
subdivisions thereof. Today the Industrial Division is known as Texas Correctional
Industries (TCI).
Government Code Section 497.022 establishes five purposes for TCI:


Provide adequate, regular, and suitable employment for the vocational training
and rehabilitation of inmates, consistent with proper penal purposes.



Use the labor of inmates for self-maintenance.



Reimburse the State for expenses caused by the crimes of inmates and the cost
of their confinement.



Provide for the requisition and disbursement of institutional division articles
and products through established state authorities to eliminate the possibility of
private profits from the distribution of those articles and products.



Provide materials, products, or articles for sale to or for the use of the State or
a political subdivision of the State.

Operations
TCI operated 44 factories during fiscal year 1996. These factories are divided into five
divisions (by category of goods produced):

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 53

Figure 3
Sales
(in millions)2

Division

No. of
Factories

Products

Primary
Customer

TDCJ1 Staff

Number of
Inmates
Employed

Fiscal
Year
1995

Fiscal
Year
1996

Garment

11

Yarn, inmate
clothing,
towels, officer
uniforms

TDCJ

126

2,752

$38.5

$29.6

Graphics

10

License plates,
validation
stickers,
plastics,
corrugated
cardboard,
forms, data
entry, GIS

TXDOT3
TDCJ
Cities
Schools

108

1,820

20.8

22.3

Manufacturing

9

Soap, shoes,
school bus
repair,
mattresses,
pillows,
recapped tires

TDCJ
MHMR4
Schools

75

1,187

20.8

15.9

Metal

7

Highway signs,
security and jail
steel, dump
truck beds

TDCJ
TXDOT
Counties

98

977

18.9

16.5

Wood

7

Furniture,
custom
furniture,
refinished
furniture

TDCJ
State
Cities
Counties

67

1,039

13.8

9.3

TOTAL

44

474

7,775

$112.8

$93.6

1

TDCJ = Texas Department of Criminal Justice
Reported by TCI
3
TXDOT = Texas Department of Transportation
4
MHMR = Texas Department of Mental Health and Mental Retardation
2

All products sold by TCI are required to meet specifications developed by and through
the General Services Commission. State agencies are required to purchase goods and
services they need from TCI (if TCI produces the item) unless the General Services
Commission determines that TCI’s product does not meet the needs of the agency.

PAGE 54

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Funding
TCI operates from Industrial Revolving Funds and from legislative appropriated funds.
Appropriated funds are to be used for expenditures related to the manufacture of items
used within the Department. This includes expenditures such as buildings, equipment,
raw materials, supplies, repairs, utilities, and supervisory salaries that go into products
consumed by Department inmates. In fiscal year 1997, TCI received $20.5 million in
appropriated funds.
The Industrial Revolving Fund is to be used for expenditures attendant to goods and
service items sold to other tax-supported entities. The resources of the Industrial
Revolving Fund “revolve”—that is, revenue from sales is returned to the fund to pay
for the raw materials, supervisory salaries, etc. needed to produce more goods for sales
to other governmental entities. For fiscal year 1997, the Department estimated
revolving fund receipts at $63.5 million.

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 55

Appendix 3:

Results of Other States’ Reviews of Their Prison Industry Programs
As part of the 1996 National State Auditors Association’s joint audit of corrections
industries programs, 13 states conducted fieldwork and issued reports on their prison
industry programs. Many of the results found in other states mirror those we found in
Texas. The results of these 13 states’ audits are summarized below.

LEGEND:
+
Tested and found acceptable
Tested and found unacceptable
?
Tested but there was insufficient information to determine acceptability
Blanks indicate that the area was not tested by that state’s audit.

Figure 4
CA

DE

MO

NJ

NY

Program is self -sufficient

-

-

+

-

-

Program reduces cost to
taxpayers

-

-

+

+

-

?

Program maximizes inmate
employment while
incarcerated

-

-

-

Program maximizes the
employability of inmates when
released

-

Program has conflicting
program goals

+

Program effectively uses
strategic planning

-

-

-

-

Market restrictions do not inhibit
program efficiency

-

-

-

-

-

Program has developed
partnerships with the private
sector
Program has an adequate
inmate selection process

-

Program has a job placement
mechanism for released
inmates

-

PAGE 56

-

FL

MD

-

-

-

-

-

-

+

+

+

-

+

+

+

+

+

OR

RI

+

VA
-

?

-

-

-

-

-

+

+

+

+

-

-

-

-

-

+

-

PA

+

-

-

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Figure 4 (concluded)
CA

DE

FL

Program matches inmate
employment opportunities with
the labor market

-

?

+

Program accurately tracks
product costs

-

Program includes sound sales
and marketing efforts

-

MD

MO

-

-

Program includes sufficient
controls over inventory

-

-

-

+

NOVEMBER 1997

-

-

-

-

-

MD MO NJ NY -

OR

PA

RI

VA

?

-

-

Program delivers products in a
timely fashion

NY

-

Program includes a good
quality assurance mechanism

CA - California
DE - Delaware
FL - Florida

NJ

Maryland
Missouri
New Jersey
New York

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

-

-

-

-

-

-

-

-

-

OR PA RI VA -

Oregon
Pennsylvania
Rhode Island
Virginia

PAGE 57

Appendix 4:

Detailed Findings on TCI’s Cost Accounting System
Section 2-A provided an overview of the weaknesses in TCI’s cost accounting system.
This appendix provides detailed information on these weaknesses.
TCI’s cost accounting system does not adequately allocate costs to products. We found
weaknesses in each component of TCI’s cost accounting system:


Cost analyses are not complete or accurate. Factories calculate the cost

to produce individual products through “cost analyses.” These cost analyses
are submitted to TCI headquarters for consideration in the price-setting
process. Therefore, inaccurate costs in the costs analyses could affect TCI’s
ability to make good decisions about reasonable product prices.
To determine the cost of products (and prepare a product cost analysis), factory
management calculates:
-

The amount of each raw material used in the product
The historical cost of those raw materials
The number of inmate labor hours it takes to produce the product

The estimated number of inmate labor hours is multiplied by the overhead
allocation rate calculated by TCI headquarters. Raw material costs and
overhead costs are then summed to determine the product’s “cost.” For
products typically sold to customers other than the Department, factories
sometimes add a profit or contingency amount to the basic product cost.
The following weaknesses in this process result in inaccurate cost analyses,
and therefore, inaccurate data on which to base pricing decisions:

PAGE 58

-

Raw material costs are not always up-to-date. At one factory we
visited, raw material cost figures used in some cost analyses were up to
nine years old. As a result, the cost analysis understated the current
raw material cost for that product.

-

Labor hours are estimated, and industry standards or time studies are
not used to verify the reasonableness of these estimates. Currently,
factories determine how many hours of inmate labor go in to making
each item, and this number of hours, multiplied by the overhead
allocation rate, is included in each cost analysis. Typically, TCI’s
estimates are done once a job is set up, and do not include slow times,
when it takes more inmate hours to produce the goods. Even in cases
where there are published industry standards for time estimates, these
standards are not used. For example, one factory that does routine
repair work on vehicles does not use the standards developed by
Chilton’s for vehicle repair.

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997



-

All costs are not included. Cost analyses do not consider the costs
associated with maintaining an inventory of frequently used parts. As
a result, when a part is no longer used, the factory must absorb the cost
of the obsolete inventory. In private sector manufacturing entities,
there is frequently an “obsolescence factor” added on to the cost of
materials to help absorb these costs.

-

Overhead rates are sometimes intentionally changed, even when better
estimates of overhead costs are known. TCI headquarters calculated
the overhead rate for one garment factory at $5.46 per inmate labor
hour. However, TCI management decided to have all garment
factories use the same overhead rate in an effort to make costs appear
comparable among all garment factories. Therefore, the factory was
told to use $2.88 per inmate hour (the average overhead application
rate for garment division factories) in its cost analyses. As a result, the
factory’s cost analyses resulted in costs that were less than TCI knew
them to be, and TCI lost information about what the different costs
were of producing items at different factories.

TCI’s method of allocating overhead to products has not ensured that
these costs are covered. Overhead includes those costs incurred in the

production process which are not easily identifiable in the final product. For
example, equipment maintenance costs and the salaries of supervisors are
typically considered to be overhead. Factory overhead must be allocated to
products so that inventory valuations include all costs associated with
producing goods.
TCI provides each factory with an overhead allocation rate at the beginning of
each fiscal year. This rate is to be used in the factory’s cost analyses and is
developed by dividing the amount of overhead charged to the factories by the
number of direct labor inmate hours in the prior year. As long as no major
changes are anticipated, this method should effectively assign overhead costs
to products. However, the number of inmate hours per unit of production is
not always accurately estimated, and there is no adjustment to ensure that all of
the costs are eventually assigned to products.
For example, at one factory, we reviewed the overhead allocated to three
products that comprised over 95 percent of the number of all units produced
and over 98 percent of the sales of the factory for 1996. This factory recovered
only $31,361.15 (3.5 percent) of the overhead it was charged with through its
sales prices for these items. (See Figure 5.) Revised expense estimates for the
year suggest that actual overhead incurred by this factory were even higher
than the overhead allocated to it. If the factory had been charged for its actual
salaries and expenditures, there would have been even more overhead not
recovered.

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 59

Figure 5
Clements Shoe Factory Overhead Covered by Sales
Fiscal Year 1996

Number
Produced

Item
Steel Toe Shoes

Price Per Unit

Sales price

Overhead
Per Unit in
Cost Analysis

Overhead
Included in
Prices
Charged

186,532

$16.00

$2,984,512.00

$0.04

$7,461.28

Non-Steel Toe Shoes

93,252

$15.00

1,398,780.00

$0.04

3,730.08

Officer Belts

12,847

$7.50

96,352.50

$1.57

20,169.79

Total, selected items

$4,479,644.50

$31,361.15

According to the fiscal year 1996 financial statements, this factory incurred $915,652.60 in overhead expenses.
Because the factory received only $31,361 for overhead, over $884,000 was not recovered in the prices for
these items.

This factory used the allocation rate calculated by TCI headquarters, and
applied it as instructed. The factory requested and received permission to
charge a price slightly higher than the costs reflected on the cost analysis.
However, because neither the factory nor TCI tracked the allocation of
overhead, no one recognized that the established prices were not sufficient to
cover costs. We calculate that, if the overhead attributed to the factory were to
be recovered through the prices of these products, the prices would need to be
increased by over 25 percent.
The factory raised its prices in fiscal year 1997 based on a new cost analysis
and revised overhead allocation rates provided by TCI. The new prices, for
example, allocated $5.61 per pair of shoes to overhead instead of $0.04.
However, we found that overhead is still under-allocated to production, but not
by as much. For April 1997, $83,307 was allocated to overhead through
prices, and $115,319 was attributed to overhead by TCI. That is, 73 percent of
the allocated overhead is being recouped through the prices for a typical
month.


Assignment of overhead to the individual factories has not been based
on actual cost or adjusted to reflect actual costs. Through fiscal year

1996, the total amount of factory overhead attributed to each factory was based
on estimates from 1992. Each factory was provided with the overhead
amounts that would be attributed to it on its financial statements, and this
amount was never adjusted to reflect actual expenses. As a result:
-

PAGE 60

There are no incentives for factories to control these costs.
Changes in overhead expenses are not carried through to the profit and
loss statements.
Factory financial statements are not accurate or meaningful.

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Figure 6
Selected Items From the Year-End Financial Statements for
Coffield Metal Fabrication Plant
Fiscal Year
Item

1994

Supplies expense
Cost of Raw Materials
Total Sales
Supplies as a
percentage of sales

$

134,423

1995
$

134,423

1996
$

134,423

2,006,360

798,151

807,607

$ 4,291,602

$ 1,417,979

$ 1,958,397

3.13%

9.48%

6.86%

For example, the amount of the
supplies attributed to one plant
remained constant throughout fiscal
years 1994, 1995, and 1996, even
though its sales and its purchases of
raw materials decreased significantly
during that period. (See Figure 6.)
TCI has recently identified actual
fiscal year 1996 expenses for the
salaries and cash expenditures
included in factory overhead.

Although it is still necessary to rely on estimates for allocation of
approximately $9.5 million (32 percent of the total overhead), using the
revised figures to describe the actual salary and cash expenditures provides
better information about factory financial performance.
Using these figures, but relying on TCI’s original allocations for depreciation,
utilities, and the amount allocated to each factory to cover TCI headquarters
expense, we calculated the amount of overhead that was over- or underallocated on the factories’ fiscal year 1996 financial statements. Our review
found that for many factories, the over- or under-allocation of overhead was
significant. For 9 of the 44 factories, correcting the amount of salaries and
other cash expenditures recorded in the overhead made the difference between
an overall profit or an overall loss for the year. The effects of using these
revised overhead amounts on the fiscal year 1996 factory financial statements
is presented in Appendix 4-1.
Without accurate information about the costs of overhead at each plant, TCI
cannot know whether or not a factory is profitable. In addition, it cannot make
decisions on how to price its products, or whether to expand or discontinue a
line of products.


Adjustments to inventory amounts are not consistent. Inventory amounts

on factory financial statements are adjusted to reflect raw materials damaged
during production and to reflect differences, or variations, between inventory
records and actual inventory counts. However, factories make these
adjustments according to their own criteria. Therefore, factories’ inventory
amounts are not consistently presented on the financial statements, and
factories’ gross profit or loss is subject to manipulation.


TCI’s methodology for pricing its products does not ensure that costs
are covered. Factories recommend prices based on their cost analyses, but

TCI generally sets prices for catalog items at 10 percent less than competitors’

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 61

prices. As a result, there is no guarantee that the prices charged cover the costs
of production, either on an individual product basis or as a whole for the
product line.
Prices are developed for non-catalog items in different ways at different
factories. One factory we visited maintained detailed historic data and used it
for pricing custom jobs specifically to ensure that costs were covered. (This
factory did not use the overhead allocation rates required by TCI.) Other
factories developed quotes for custom jobs based on analyses similar to a cost
analysis. Still others used price lists which had been in effect for years. These
factories did not have documentation to support how these prices were
calculated.
Recommendations for improvements and management’s response to these
recommendations are included in Section 2-A.

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AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

NOVEMBER 1997

Appendix 4-1:

The Effect of Using Revised Overhead on Factory Gross Profit
Figure 7
Overhead
Revised
Charged on Fiscal Year
Fiscal Year
1996
1996
Overhead
Statements (See Note 1)

Unit Name

Overhead Over
(Under) Charged
For Factory

Overhead
Over (Under)
Charged For
Division

Gross Profit
(Loss) Per
Fiscal Year
1996
Statements

Gross Profit
(Loss) Using
Revised
Overhead
(See Note 2)

Garment

Eastham

$558,821

$459,000

$99,821

($11,740)

$88,081

Division

Ellis I

$271,630

$346,828

($75,198)

$36,175

($39,023)

Estelle (Ellis II)

$1,220,304

$1,128,586

$91,718

($2,103,996)

($2,012,278)

Hightower

$408,683

$406,286

$2,397

$46,585

$48,982

Hilltop

$495,006

$500,272

($5,266)

$40,935

$35,669

Hughes

$920,878

$851,287

$69,591

$70,167

$139,758

Huntsville

$1,010,150

$1,052,307

($42,157)

$295,097

$252,940

Jester III

$194,072

$179,266

$14,806

$97,952

$112,758

McConnell

$533,995

$461,444

$72,551

($12,858)

$59,693

Robertson

$679,462

$658,317

$21,145

$10,200

$31,345

Wallace

$355,326

$172,100

$183,226

$88,261

$271,487

sub-total

$432,634

Graphics

Coffield

$611,514

$850,019

($238,505)

$391,814

$153,309

Division

Ferguson

$556,017

$593,275

($37,258)

($251,387)

($288,645)

Hobby

$815,020

$914,082

($99,062)

$65,880

($33,182)

Mountain View

$435,416

$354,024

$81,392

$27,084

$108,476

Powledge (Beto II)

$560,379

$762,301

($201,922)

$75,043

($126,879)

Torres

$797,065

$761,522

$35,543

($96,735)

($61,192)

Wynne Tag

$834,109

$765,701

$68,408

$2,269,817

$2,338,225

Wynne RCF

$1,134,728

$1,304,788

($170,060)

($18,188)

($188,248)

Wynne Sticker

$522,937

$707,416

($184,479)

$1,016,711

$832,232

Wynne Box & Sign

$314,466

$335,739

($21,273)

$230,716

$209,443

sub-total

($767,216)

Manu-

Central

$673,934

$733,203

($59,269)

$910,663

$851,394

facturing

Clements

$915,653

$1,372,754

($457,101)

$25,534

($431,567)

Division

Darrington

$319,890

$289,866

$30,024

($62,655)

($32,631)

Ellis I

$679,175

$695,071

($15,896)

($5,910)

($21,806)

Ferguson

$222,473

$204,515

$17,958

$179,190

$197,148

Jordan

$359,627

$399,218

($39,591)

$298,725

$259,134

Roach

$611,703

$444,470

$167,233

($53,627)

$113,606

Smith

$353,935

$335,572

$18,363

($6,881)

$11,482

Wynne

$336,014

$318,008

$18,006

$158,575

$176,581

sub-total

($320,272)

Metal

Beto I

$685,870

$645,486

$40,384

$1,659,231

$1,699,615

Division

Boyd

$962,585

$789,648

$172,937

($508,238)

($335,301)

$1,322,687

$956,559

$366,128

($198,393)

$167,735

Coffield
Luther (Pack II)

$1,097,056

$759,291

$337,765

($419,576)

($81,811)

Michael

$1,081,345

$850,339

$231,006

($637,413)

($406,407)

Powledge (Beto II)

$802,217

$793,799

$8,418

($163,584)

($155,166)

Stiles

$966,137

$788,646

$177,491

($282,930)

($105,439)

sub-total

$1,334,129
Please see Notes on next page

NOVEMBER 1997

AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
TEXAS CORRECTIONAL INDUSTRIES

PAGE 63

Figure 7 (concluded)

Unit Name

Overhead
Charged on
Fiscal Year
1996
Statements

Revised
Fiscal Year
1996
Overhead
(See Note 1)

Overhead Over
Overhead
(Under) Charged Over (Under)
For Factory
Charged For
Division

Gross Profit
(Loss) Per
Fiscal Year
1996
Statements

Gross Profit
(Loss) Using
Revised
Overhead
(See Note 2)

Wood

Briscoe

$758,606

$730,173

$28,433

($310,051)

Division

Daniel

$844,087

$854,001

($9,914)

$314,364

$304,450

Ellis I

$755,988

$713,227

$42,761

($368,585)

($325,824)

Jester III

$197,535

$146,709

$50,826

($104,367)

($53,541)

Lewis

$912,139

$922,285

($10,146)

$34,346

$24,200

Ramsey I

$879,033

$726,017

$153,016

($207,502)

($54,486)

Stevenson
Modular

$550,611

$662,183

($111,572)

($210,274)

($321,846)

$0

$78,584

($78,584)

Terrell
sub-total

Note 1:

$64,820

($281,618)

$0

($78,584)

$2,308,175

$3,052,271

As described in the text of this report, the revised overhead amounts are still not actually "correct." Actual
amounts have been used to replace allocated amounts for cash expenditures, including salaries. Allocated
amounts are still included unchanged from the original financial statements for utilities, depreciation, loss
on disposal of assets, and the overhead component allocated to the factories to cover TCI headquarters.

Note 2:

Although these revised profits and losses may be more accurate than those on the financial statements,
they are still not correct. We have not determined whether (1) the right amount ($9.5 million) was charged
to the factories for depreciation, utilities, losses on asset disposal, and expenses for TCI's headquarters,
and (2) whether, if $9.5 million was the right total, whether the amount allocated to each factory was
reasonable. The differences in the allocation method could make a significant difference. For example,
when the allocations are distributed among the factories in proportion to their sales, Stiles Metal shows a
profit of $240,000 instead of a loss of $283,000 loss. (If we assume that the allocations were right, then
Stiles should have shown an $105,000 loss for the year.)

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AN AUDIT REPORT ON THE MANAGEMENT CONTROLS AT
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NOVEMBER 1997

Appendix 5:

Detailed Analysis of TCI’s Financial Statements
Section 2-B provided an overview of the errors in TCI’s financial statements. This
appendix provides detailed information on these errors.
TCI’s factory financial statements are inaccurate. TCI’s financial statements do not
recognize costs or revenues appropriately, and, as a result, management does not have
sound information about amounts of sales, costs of goods manufactured or sold, or
whether a factory is making or losing money. Moreover, TCI’s financial reporting
practices may disguise Department subsidies to other agencies. Inaccuracies in the
financial statements are magnified by the inaccuracies in TCI’s cost system.
Specific problems with TCI’s financial statements include:


The Cost of Goods Manufactured figure on the Manufacturing
Statement is not accurate. Cost of Goods Manufactured is calculated by

adding the Cost of Raw Materials to the allocated overhead for the period.3
The Cost of Goods Manufactured is the “bottom line” on a manufacturing
statement, and is necessary for calculating net profit or loss on the income
statement.
-

Generally, manufacturing concerns calculate the Cost of Raw
Materials by adding purchases made during the period to the
beginning inventory, and then subtracting ending inventory. While
TCI presents this information in its financial statements, the resulting
Cost of Raw Materials is not the figure used in determining the Cost of
Goods Manufactured or in the rest of the financial statements. Instead,
a different figure is used, which, according to TCI staff, comes from
individual factory work orders.
In the summary statements for fiscal year 1996, the difference between
the Cost of Goods Manufactured computed by the different methods
amounted to $57,000. At individual factories, the differences can be
more significant. For example, at the Lewis Wood Plant, the
difference in the two figures was over $224,000. The figure used in
the Income Statement was the lower figure, resulting in a probable
$224,000 overstatement of the factory’s net profit. Had the Cost of
Raw Materials used the standard method, the factory would have
shown a loss of over $190,000 instead of showing a $34,000 profit.

3

Typically, a manufacturing statement also includes the costs for direct labor. However, at TCI,
inmates are not paid for their labor, and supervision of inmates is considered to be overhead.
Therefore, there are no direct labor costs included.

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-

As discussed in Section 1-B of this report, overhead amounts are not
accurate. From fiscal year 1993 to fiscal year 1996, overhead
allocation amounts were based on expenses from 1992. For example,
a TCI factory that reduced personnel costs but maintained the same
level of sales would not show an increase in net income.
Because neither the Cost of Raw Materials nor the allocated overhead
is accurate, the Cost of Goods Manufactured can not be accurate. This
means that in the Income Statement, the Cost of Goods Sold will not
be accurate, and the net profit or loss will also be inaccurate.



The Departmental Sales figure on the Income Statement is not
accurate. Departmental sales include interfactory transfers and are adjusted

to eliminate “profit.” However, the profit is a plug figure and is neither
accurate nor consistent with other parts of the income statement. Inaccurate
sales information affects TCI’s calculation of net profit or loss on the Income
Statement.
-

Interfactory transfers are treated as Departmental Sales, overstating
both sales and Cost of Goods Sold. On the Income the Statement,
Departmental Sales are comprised of both sales to Texas Department
of Criminal Justice of items such as inmate clothing and mattresses
and of interfactory transfers (such as shipments of material woven at
one factory to be made into clothing for inmates at another).
Recording both types of sales as the same, without eliminating
interfactory transfers, overstates sales and the related Cost of Goods
Sold. For three factories whose sales are almost exclusively
interfactory transfers (Estelle Weaving, Huntsville Textile Mill, and
Jordan Shoes), approximately $12 million in sales was counted twice
on the income statement. Other factories’ interfactory transfers are not
included in this figure. If they were included, the amount double
counted would be greater.4

-

Net Departmental Sales is inaccurate. TCI does not calculate its Net
Departmental Sales by subtracting a known profit from actual sales.
Instead, the sum of Cost of Raw Materials used for departmental sales
and the factory overhead attributed to departmental sales is considered
to be the Net Departmental Sales. See Figure 8 for an example of this
calculation. The difference between this figure and the factoryreported Departmental Sales is computed and reported as the “profit”
or “loss” associated with these departmental sales. Figure 9 shows
how the data from the Manufacturing Statement is brought forward to
the Income Statement.

4

If the amount of the Cost of Goods Sold were accurate, the amount of gross profit would not be
affected by combining transfers with sales. It would simply look as if the profits recorded related
to a larger number of sales.

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Figure 8
Jordan Blind/Sewing
Data from Manufacturing Statement
Fiscal Year 1996

Cost of Raw Materials

Outside Sales

Departmental Sales

$

$

Factory Overhead
Cost of Goods
Manufactured

8,792

1,554,919

2,022

$

10,814

357,605
$

1,912,524*

*to Net Departmental Sales on Income Statement

Figure 9
Jordan Blind/Sewing Income Statement
Fiscal Year 1996
Sales:
Outside

$

16,396

Net Departmental Sales

$

1,912,524

Net Sales

$

1,928,920

Departmental

$ 2,298,728

Less Departmental Profit

$ (386,204)

Less Cost of Goods Sold

$ (1,630,195)

Gross Profit

$

298,725

Neither the Net Departmental Sales
figure nor the departmental profit/loss
figure that TCI uses in its Income
Statements is accurate. As explained
above, TCI’s calculation of Net
Departmental Sales includes
departmental overhead. Departmental
overhead is calculated based on each
factory’s ratio for departmental use of
raw materials, and since overhead is
inaccurate, its allocation in the
calculation of net departmental sales
makes this figure inaccurate as well.

TCI’s calculation of departmental profit is
also incorrect. If the calculation were correct,
after Departmental Sales were reduced by
the amount of departmental profit, then the
only profit reported on the income statement
should result from outside sales. However,
when we reviewed statements from factories
with very few outside sales, we found that
the profit component was not accurately
stated.
For example, as Figure 9 shows, the Jordan
Blind and Sewing (Jordan) plant reported its
departmental profit as $386,204, and its Net
Departmental Sales as approximately $1.9
million for fiscal year 1996.

(This accounts for all but about $16,000 of Jordan’s sales for the year.) Cost
of goods sold (for departmental and outside sales) was recorded at only $1.6
million, resulting in a gross profit of $298,725. However, it is impossible to
have earned almost $300,000 in profit from only $16,000 in outside sales.
Therefore, TCI’s method for determining departmental profit and Net
Departmental Sales results in misstatements.
Because Departmental Sales is not accurate, the final determination of gross
profit will also be inaccurate. Gross profit is calculated by subtracting Cost of
Goods Sold from the total (Departmental and outside) sales.

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PAGE 67



TCI’s financial reporting practices may disguise Texas Department of
Criminal Justice subsidies to other agencies. TCI reduces its overall

factory losses by the amount of the departmental profits that had been recorded
earlier. If a factory shows a net loss for the period, but the factory had
indicated some profit for the departmental sales, then TCI reduces the loss by
the amount of the profit on departmental sales. In this way, TCI applies
departmental profits to defray the losses TCI incurred in preparing goods for
other agencies. For example, at Estelle Textile, after Departmental Profits had
been removed from the sales figures, there was a $2.1 million net loss on the
outside sales of $10,200. This figure was reduced to $304,000 when the
departmental profit was applied to these outside sales. This adjustment may
permit Texas Department of Criminal Justice to absorb losses incurred on sales
to outsiders.
Ten of TCI’s 44 factories defrayed losses on outside sales by adding back the
profit made on departmental sales, for a recorded total of $2.1 million.
However, because the financial statements are inaccurate, we can not
determine the true amount of losses that the Texas Department of Criminal
Justice has absorbed from outside sales.
Recommendations for improving these financial statements and management’s
response are included in Section 2-B.

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NOVEMBER 1997

Appendix 6:

Customer Satisfaction Survey
Appendix 6.1:

Results
To determine how satisfied customers are with TCI’s products, we developed a
questionnaire and mailed it to a sample of TCI’s customers. As discussed in Section
1-B, because TCI did not have good information about its customers, we could not
select a statistically random sample. Our sample was judgmentally selected and
included:





A mix of large and small customers
Customers who bought goods from TCI in prior years but not the current year
Customers who had expressed concerns with TCI products
Customers who formally complimented TCI on the quality of their products.

Of the customers surveyed, 83 responded. The questions asked and a summary of
responses received to each question in Section 1 of our survey are provided below.
Responses to Section 2 and Section 3 of our survey were inconsistent and could not be
aggregated.
Figure 10
Survey Question
1. TCI treats me as an
important customer.

Agree
Strongly

Agree

Disagree

Disagree
Strongly

Very
Very
Important Unimportant
Important
Unimportant

26

49

6

0

38

34

1

0

2.

It is easy to place an
order with TCI.

22

48

9

0

39

34

0

0

3.

TCI can rush my orders
when I find it necessary.

9

35

22

5

35

28

1

1

4. TCI is courteous and
knowledgeable when I
inquire about the status
of my order.

27

45

7

2

31

40

0

1

5. TCI products are
delivered within a
reasonable time.

13

40

21

5

39

29

1

1

6. TCI delivers my order
when promised.

13

42

17

8

40

30

1

1

7. TCI products/services
are defect free.

8

38

28

5

38

30

1

1

8. TCI provides high
quality products and/or
services.

13

49

12

3

39

30

0

1

NOVEMBER 1997

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Figure 10 (concluded)
Survey Question

Agree
Strongly

Agree

Disagree

Disagree
Strongly

9. I frequently have to
return TCI items that are
defective or shipped in
error.

3

18

44

14

22

37

8

1

10. It is easy to return TCI
items that are
defective or shipped in
error.

8

51

9

0

25

33

4

0

11. TCI products and
services are
competitively priced.

20

55

5

0

43

26

2

0

12. My invoices are
accurate.

18

54

4

0

31

39

1

0

13. My invoices are easy to
understand.

18

53

4

0

31

39

1

0

14. TCI informs me about
delays in my order.

13

40

22

5

37

31

2

0

15. TCI discusses custom
orders with me prior to
production.

14

37

9

4

30

25

4

0

16. Custom orders are
produced according
to my specifications.

16

50

2

1

40

20

1

0

17. My complaints are
resolved satisfactorily.

18

47

7

0

48

18

1

0

18. My complaints are
resolved in a timely
manner.

17

36

17

0

42

22

1

0

PAGE 70

Very
Very
Important Unimportant
Important
Unimportant

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NOVEMBER 1997

Appendix 6.2:

Survey Instrument Used
Section 1 - Satisfaction With TCI’s Quality, Delivery, and Service
Figure 11
Please check the box that best describes your level of agreement
with the following statements as they relate to your experience with
TCI.
Agree
Strongly
1.

TCI treats me as an
important
customer.

2.

It is easy to place
an order with TCI.

3.

TCI can rush my
orders when I find
it necessary.

4.

TCI is courteous
and
knowledgeable
when I inquire
about the status of
my order.

5.

TCI products are
delivered within a
reasonable time.

6.

TCI delivers my
order when
promised.

7.

TCI
products/services
are defect free.

8.

TCI provides high
quality products
and/or services.

9.

I frequently have
to return TCI items
that are defective
or shipped in error.

Agree

Disagree

Disagree
Strongly

Please check the box that best describes the importance
of each of the following statements as they relate to your
business.
Very
Important

Important

Unimportant

Very
Unimportant

10. It is easy to return
TCI items that are
defective or
shipped in error.
11. TCI products and
services are
competitively
priced.
12. My invoices are
accurate.

NOVEMBER 1997

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TEXAS CORRECTIONAL INDUSTRIES

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Figure 11 (concluded)
Please check the box that best describes your level of agreement
with the following statements as they relate to your experience with
TCI.
Agree
Strongly

Agree

Disagree

Disagree
Strongly

Please check the box that best describes the importance
of each of the following statements as they relate to your
business.
Very
Important

Important

Unimportant

Very
Unimportant

13. My invoices are
easy to
understand.
14. TCI informs me
about delays in my
order.
15. TCI discusses
custom orders with
me prior to
production.
16. Custom orders are
produced
according to my
specifications.
17. My complaints are
resolved
satisfactorily.
18. My complaints are
resolved in a timely
manner.

Section 2 - Trends and Overall Impression
1. As a purchaser of TCI products and services, rank in order of satisfaction (1 for most satisfied to
4 for least satisfied).
( ) Delivery Time
( ) Price

( ) Quality
( ) Customer Service

2. As a purchaser of TCI products and services, rank in order of importance (1 for most important
to 4 for least important).
( ) Delivery Time
( ) Price

( ) Quality
( ) Customer Service

3. From the following methods for ordering products and services, rank in order of usage
(1 for most used) .
( ) Mail or fax catalog form
( ) Telephone
( ) Mail or fax order form ( ) Other

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NOVEMBER 1997

For items 4 through 9, check the most accurate response.

4. Please rate your overall satisfaction with
TCI.
1.
2.
3.
4.

Extremely satisfied
Satisfied
Dissatisfied
Extremely dissatisfied

5. How do you rate TCI’s overall
performance relative to other suppliers?
11.
2.
3.
4.

Better than other suppliers
Same as other suppliers
Worse than other suppliers
Don’t know

6. Over the last three years, TCI delivery
times have:
1.
2.
3.
4.

Improved
Remained the same
Become worse
Don’t know

8. Over the last three years, TCI customer
service has:
1
2
3
4.

Improved
Remained the same
Become worse
Don’t know

9. Over the last three years, TCI has:
1 Become a lower-price alternative to
1.
other suppliers
2. Remained a lower-price alternative to
other suppliers
3. Become an equal-price alternative to
other suppliers
4. Remained an equal-price alternative to
other suppliers
5. Become a higher-price alternative to
other suppliers
6. Remained a higher-price alternative to
other suppliers
7. Don’t know

7. Over the last three years, TCI product
quality has:
1.
2.
3.
4.

Improved
Remained the same
Become worse
Don’t know

NOVEMBER 1997

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PAGE 73

Section 3 - Detail Purchase Information
1. What products/services do you routinely purchase from TCI?

2. Approximately how many separate orders did you place with TCI during 1996?

3. Please provide the following if this information is readily available to you for each of your last three
orders (use additional sheets if you have other purchases you wish to include):

Information

Order #1

Order #2

Order #3

Product/Service
Number of
Units:



Ordered . . . . . . . . . . . . .



Received . . . . . . . . . . . .



Damaged . . . . . . . . . . . .



Returned . . . . . . . . . . . . .

Promised delivery time (Days)
Actual delivery time (Days)
Was product delivered to correct
location?
If installed by Texas Correctional Industries,
was installation satisfactory?
If bids
received
from other
vendors,
what was:



Price/Bid Offered? . . . .



Delivery Time Offered?



Vendor’s Name



Phone Number? . . . . . .

......

Did the quality of TCI products exceed,
meet or fail your expectations?

Name of Business/Agency
Your name

Your title

Phone

Additional comments:

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NOVEMBER 1997