An Auditor's Guide to Commodity Codes

As procurement of goods and services is transitioning from a vendor-based approach to a commodity-based approach, auditors will have to also change their audit procedures.

Texas school districts encounter numerous challenges, particularly those stemming from regulatory requirements. Among these, state and federal regulations concerning procurement are significant. School districts are required to procure goods and services by commodity, meaning they must purchase based on specific categories or types of products. Examples of these commodity categories include office supplies, equipment, technology, and professional services.

The Texas Education Agency (TEA), in Section 5.11.1 of the Financial Accountability System Resource Guide (FASRG) Module 5, Purchasing, states, that districts should have the “ability to track purchases within the district’s finance system, either by vendor (not suggested) or by a pre-determined set of categories or commodity codes (suggested).” Additionally, the FASRG states that “A school district may choose to create its own list or use other established, recognized commodity codes. These may be shared by other school districts, the district’s finance system vendor, or other entities such as the National Institute of Governmental Purchasing (NIGP). The district should adopt the one that best fits their needs.” Evidently, TEA allows some flexibility when it comes to establishing the actual commodity codes; however, it’s expected that all districts track the purchases of goods and services by utilizing commodity codes.

In the past, most school districts would procure for goods and services by vendor or by purchase. As time progresses, districts are transitioning to using commodity codes. School districts may be at different stages in this transition. Some districts may still be in the planning stages while others might be fully transitioned. Once the transition has been made and purchases of goods or services are tracked by commodity codes, the district is required to procure for these goods and services by commodity code. Below are several key steps and pointers that will prove to be helpful in procuring for goods and services by commodity code:

  • Commodity Classification: Identify and categorize the district’s purchasing needs into distinct commodities or product groups based on similarities in characteristics, usage, or suppliers. Create a commodity list that reflects the district's procurement requirements. Remember that TEA allows some flexibility in how detailed the commodity codes should be. It is imperative that districts determine what level of commodity codes work for your district and ensure that your procurement policy align with federal and state compliance requirements.
  • Supplier/Vendor Identification: Research and identify potential suppliers and vendors that specialize in providing the commodities needed by the district. Develop a supplier database or list for each commodity category to facilitate vendor selection and sourcing.
  • Procurement: Issue Request for Proposals (RFP) or Request for Quotes (RFQ) for the procurement of commodities, outlining the specifications, requirements, and terms for each category. Invite suppliers to submit proposals or bids to compete for supplying the commodities.
  • Evaluation and Selection: Evaluate proposals based on criteria such as price, quality, delivery terms, service levels, and vendor capabilities. Select suppliers that offer the best value and meet the district's procurement objectives for each commodity category.
  • Negotiation: Negotiate contracts with selected suppliers/vendors to establish terms and conditions, pricing agreements, delivery schedules, and performance expectations for the supply of commodities. Ensure that contracts align with the district's procurement policies and compliance requirements.
  • Management: Monitor and manage the procurement of commodities by tracking supplier performance, monitoring contract compliance, resolving issues or disputes, and optimizing purchasing processes for each commodity category. Implement inventory management practices to control stock levels and ensure timely availability of goods.

As procurement of goods and services is transitioning from a vendor-based approach to a commodity-based approach, auditors will have to also change their audit procedures. The district should be able to demonstrate to the auditor that it has taken the proper and reasonable steps to establish commodity codes and that there was proper procurement of goods and services by commodity during the fiscal year under audit. Procurement by commodity enables districts to enhance efficiency, reduce costs, and enhance transparency in their purchasing activities. No matter where your district stands in the transition to commodity codes, keep in mind that your auditor is a valuable resource. While your auditor cannot make management decisions, they can offer guidance throughout this process.

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