BILL ANALYSIS Ó Bill No: AB 187 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Roderick D. Wright, Chair 2011-2012 Regular Session Staff Analysis AB 187 Author: Lara As Amended: June 22, 2011 Hearing Date: June 28, 2011 Consultant: Art Terzakis SUBJECT State Auditor: high-risk local government audit program DESCRIPTION AB 187 grants the State Auditor the authority to establish a high-risk local agency audit program. Specifically, this measure: 1. Permits the State Auditor to establish a high-risk local government agency audit program to identify, audit, and issue reports on any local government agency that the Auditor identifies as being at high risk for the potential of waste, fraud, abuse, or mismanagement or that has major challenges associated with its economy, efficiency or effectiveness. 2. Allows the State Auditor to consult with the State Controller, Attorney General or other state agencies that have oversight responsibilities over the local entity for purposes of identifying high risk local entities. 3. Stipulates that the State Auditor shall: (a) be responsible for the state costs associated with the high-risk local audit program; (b) conduct the program as funds permit; (c) only conduct the program to the extent that it does not interfere with duties related to mandated audits and audits approved by the Joint Legislative Audit Committee (JLAC). 4. Requires the State Auditor to notify JLAC upon AB 187 (Lara) continued Page 2 identifying a high risk local government and upon starting any audit under this program. Also, requires the State Auditor to provide JLAC, at a public hearing, with annual updates of all audits in progress, and remove a local government agency from the program, if that entity has taken significant corrective measures for deficiencies. 5. Requires the State Auditor to release audit reports at least once every two years for high risk local agencies, including recommendations for improvement. 6. Makes it explicit the Auditor shall only conduct these high-risk local audits to the extent the Legislature appropriates sufficient funds to cover the state cost. EXISTING LAW Senate Bill 37 (Maddy) Chapter 12, Statutes of 1993, (Government Code 8543), created the Bureau of State Audits (BSA) as part of the Executive Branch. To assure its independence, the BSA is free from the control of the Executive and Legislative branches; the Milton Marks "Little Hoover" Commission oversees its administrative operations. The BSA, under the direction of the State Auditor, performs an annual examination (single audit) of the State's general-purpose financial statements as prepared by the State Controller's Office. The federal government, as a condition of receiving federal funds, requires this audit. The single audit also includes a review of major federal programs for compliance with federal laws and regulations, and recommendations to improve the State's financial systems and internal control. The BSA also conducts financial and performance audits as directed by statute, and other government audits requested by the Joint Legislative Audit Committee (JLAC). The BSA has the explicit authority to audit any entity that receives state funds. Consequently, it sometimes audits at the local government level. In addition, the BSA administers the "Reporting of Improper Governmental AB 187 (Lara) continued Page 3 Activities Act," which includes a hotline for anonymous reporting. Existing law authorizes the State Auditor to establish a high-risk government agency audit program for the purpose of identifying, auditing, and issuing reports on any agency of the state that the State Auditor identifies as being at high risk for the potential of waste, fraud, abuse, and mismanagement or that has major challenges associated with its economy, efficiency, or effectiveness BACKGROUND Purpose of AB 187: The author's office points out that currently, the State Auditor's high-risk audit program only applies to state government and does not give the Auditor the authority to include local government high-risk assessments. Yet the State Auditor's general jurisdiction for audit work includes all levels of state and local government. Omitting local governments from the high-risk program could hamper the ability of the State Auditor to provide state-wide oversight and government transparency. The author's office emphasizes that AB 187 is simply intended to increase oversight within all levels of government and allow the State Auditor to identify and examine local governments during the course of the high-risk audit program to determine if there are any areas that are at risk of fraud, waste or mismanagement. Arguments in Opposition: Writing in opposition, the State Association of County Auditors argues that AB 187 does not contain detail or guidelines regarding the criteria for being identified as a "high risk" agency, or how, specifically, to remove this designation. The Association is also concerned that AB 187 does not provide local agencies with an ability to appeal or respond to an impending audit in a public forum prior to the commencement of the audit, or prior to the audit findings being made public. Also writing in opposition, the Friant Water Authority, which operates and maintains the Friant-Kern Canal, states that AB 187 appears to be an overreaction to the City of Bell and similar local government scandals. The Friant Water Authority believes that "AB 187 is unnecessary and is actually duplicative of the grand jury function that is AB 187 (Lara) continued Page 4 already available - and used widely - within local communities throughout the State." The Committee also received correspondence from the League of California Cities (League) and the California State Association of Counties (CSAC) expressing various concerns with AB 187. The League claims that it supports transparency and accountability at all levels of government but believes that AB 187 grants the State Auditor overly broad and potentially costly authority to audit local agencies. The League suggests that audits be authorized when there is evidence of and not the potential for fraud or abuse. Additionally, the League suggests that AB 187 provide objective, clear, reasonable, narrow, and compelling criteria for triggering an audit so that local agencies can clearly identify the specific situations that would lead the state to intervene. CSAC is concerned that AB 187 sets up a process that is new and unfamiliar to most local agencies - which in turn would create uncertainty as to how an agency is identified as a high-risk agency and the extent of the audit activities. CSAC claims that specific criteria for meeting the high-risk category would at least provide local agencies with an understanding of the potential for audit by the State Auditor, especially since the costs of complying with an audit could be substantial. Both the League and CSAC point out that AB 187 is but one of many bills introduced to provide greater state oversight and transparency for local government entities in light of the scandal in the City of Bell and they are concerned that these bills could create overlapping and duplicative oversight authority. PRIOR/RELATED LEGISLATION SB 186 (Kehoe) 2011-12 Session. Would, until January 1, 2017, expand the State Controller's authority to perform audits or investigations of counties, cities, special districts, joint powers agencies, and redevelopment agencies, if the Controller has reason to believe, supported by documentation, that a local government is violating specified financial requirements. The audited AB 187 (Lara) continued Page 5 agencies would be responsible for the cost of the audit. (Pending in Assembly Local Government Committee) SB 449 (Pavley) 2011-12 Session. Would authorizes the State Controller, if sufficient funds are available, to review the finances of cities, counties, special districts, and redevelopment agencies, and provide financial consultant expertise until January 1, 2017. (Pending in Assembly Local Government Committee) AB 229 (Lara) 2011-12 Session. Among other things, would require the Controller to receive every annual financial audit report prepared for any local agency, as specified, including reports prepared in compliance with the federal Single Audit Act of 1984 and required under any law to be submitted to any state agency, and, after ascertaining its compliance with that federal act, to transmit the report to the designated state agency. (Pending in this Committee) SB 1314 (Wyland) 2007-08 Session. Would have transferred audit and evaluation duties within the Department of Finance to the Bureau of State Audits (BSA) and renamed the BSA as the Bureau of State Audits and Evaluations (BSAE) with responsibility for auditing the performance of state programs and managers and for recommending actions to correct any inefficiencies or ineffectiveness that may exist. (Held in this Committee at Author's Request) SB 1452 (Speier) Chapter 452, Statutes of 2006. Updated the auditing standards for state and local agencies and enacted the Omnibus Audit Accountability Act of 2006 which established a process whereby the Legislature would be informed when auditor recommendations are being ignored or not implemented by state agencies. SB 1437 (Speier) Chapter 251, Statutes of 2004. Authorized the State Auditor to establish a high-risk government agency audit program for the purpose of identifying, auditing, and issuing reports on any state agency that the auditor identifies as high risk for the potential of waste, fraud, abuse, and mismanagement, or that has major challenges associated with its economy, efficiency, or effectiveness. SB 37 (Maddy) Chapter 12, Statutes of 1993. Created the Bureau of State Audits under the direction of the Little AB 187 (Lara) continued Page 6 Hoover Commission. Many of the duties and power of the Office of Auditor General were passed to the Bureau of State Audits. This was done in response to the passage of Proposition 140 which had the effect of greatly reducing the size and scope of the Auditor General's office. SUPPORT: As of June 24, 2011: California State Auditor California Taxpayers Association OPPOSE: As of June 24, 2011: Friant Water Authority State Association of County Auditors FISCAL COMMITTEE: Senate Appropriations Committee **********