BILL ANALYSIS Ó AB 1345 Page 1 Date of Hearing: January 11, 2012 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT Cameron Smyth, Chair AB 1345 (Lara) - As Amended: January 4, 2012 SUBJECT : Local government: audits. SUMMARY : Expands the State Controller's oversight over local government auditing practices. Specifically, this bill : 1)Defines "local agency," for purposes of the requirement that the Controller receive every audit report prepared for any local agency in compliance with the federal Single Audit Act of 1984, to mean any city, county, any district, and any community redevelopment agency required to furnish financial reports as specified. 2)Requires audit reports to be submitted to the Controller within nine months after the end of the period audited, or pursuant to applicable federal or state law. 3)Requires audit reports to comply with the Government Auditing Standards issued by the Comptroller General of the United States. 4)Authorizes the Controller to appoint a qualified certified public accountant (CPA) or public accountant (PA) to complete an audit report and to obtain required information if a local agency does not submit the audit report by the established due date. 5)Provides that costs incurred by the Controller, including a contract with, or the employment of a CPA or PA in completing an audit report shall be borne by the local agency and shall be a charge against any unencumbered funds of the local agency. 6)Requires the Controller to refer a case to the California Board of Accountancy (Board) if the Controller finds through a quality control review of audit working papers of the audit report made pursuant to the provisions of this bill that the audit was conducted in a manner that constitutes unprofessional conduct, as defined, or there were multiple and repeated failures to disclose noncompliant acts. AB 1345 Page 2 7)Requires an audit for any local agency, including those submitted to the Controller pursuant to the bill's provisions, to be made by a CPA or PA licensed by, and in good standing with, the Board. 8)Declares, beginning with the 2012-13 fiscal year (FY), that a local agency shall not employ a public accounting firm to provide audit services to a local agency if the lead audit partner or coordinating audit partner having primary responsibility for the audit, or the audit partner responsible for reviewing the audit, has performed audit services for that local agency each of the six previous years. 9)Allows, if the Controller finds that another eligible public accounting firm is not available to perform the audit, the Controller to waive the requirement contained in 8) above. EXISTING LAW : 1)Requires any nonfederal entity, defined as states, local governments, or nonprofit organizations, that expends $500,000 or more in federal money to prepare an annual audit that meets certain specifications and transmit that audit to specified federal agencies. 2)Requires the Controller to receive every audit report prepared by any local public agency pursuant to the Single Audit Act and to review those reports for compliance with federal law before forwarding them to the designated state agency. 3)Requires annual audits of local educational agencies (LEAs), and requires those audit reports to be filed with the applicable county superintendent of schools, the Department of Education, and the Controller. FISCAL EFFECT : Unknown COMMENTS : 1)This bill adds a number of provisions that stipulate standards and increase oversight of local agency audits. First, the bill requires that all audits comply with federal government auditing standards and must be performed by a Board-licensed CPA or PA. Second, the bill requires that audit reports for AB 1345 Page 3 local agencies be submitted to the Controller within nine months after the end of the period audited or pursuant to applicable federal or state law. Third, if the audit report is not received by that due date, the bill gives the Controller the authority to appoint a qualified CPA or PA to complete the report and obtain the necessary information. Costs incurred by the Controller to appoint a CPA or PA are to be incurred by the local agency. Fourth, the bill requires the Controller to refer cases to the Board, if the Controller finds through a quality control review of the audit working papers of the audit report that the audit was conducted in a manner that constitutes unprofessional conduct, or that there were multiple and repeated failures to disclose noncompliant acts. Lastly, the bill prohibits, starting in FY 2012-13, a local agency from employing a public accounting firm if the lead audit partner or coordinating audit partner has performed audit services for that local agency for each of the six previous fiscal years. Provisions in the bill allow the Controller to waive the requirement if the Controller finds that another eligible public accounting firm is not available to perform the audit. 2)This bill is a result of the exposure of unethical and illegal financial practices by numerous officials in the City of Bell, which came to light in 2010. The city's independent auditor failed to report abuses such as excessive salaries, illegal loans, and questionable fees. In a series of audits of Bell's finances, the Controller found that the independent auditor failed to comply with 13 of 17 fieldwork auditing standards and reported no significant deficiencies in any of the city's funds. 3)According to the author's office, "the current statutory approach to protect taxpayers from waste, fraud and abusive practices by local governments is not working as illustrated by the Controller's Office audit findings in the Cities of Bell and Montebello and the County of Modoc where millions of state, federal, and local dollars were misspent over several years." Additionally, the author's office says that the "current oversight system of 58 counties, 482 cities, and nearly 5,000 special districts lacks the authority and resources to identify and investigate the types of issues that were found in Bell and Modoc." 4)A similar bill, AB 229 (Lara) was heard by this Committee on AB 1345 Page 4 April 27, 2011, and passed on an 8-0 vote. That bill was amended in the Senate to deal with a different subject. While this bill is similar to AB 229, it is much narrower in scope. 5)Support arguments: The State Controller's Office, the sponsor of the bill, writes that this bill will "help provide the independent oversight needed to protect public funds and restore the public's confidence in the fiscal integrity of our cities, counties, and other local government agencies." The Controller's office believes that the provisions of the bill will strengthen the independent audit process and provide a safeguard to protect taxpayers from waste, fraud and abuse. Opposition arguments: The Committee may wish to consider whether the requirement in the bill to rotate audit partners every six years may place a heavier burden on those local agencies in more isolated, rural communities because there may be limited options for audit firms available to those agencies. The bill allows the Controller the flexibility to waive this requirement, but only if the Controller finds that another eligible firm is not available, leaving some ambiguity as to how the Controller makes this finding. REGISTERED SUPPORT / OPPOSITION : Support State Controller John Chiang ÝSPONSOR] Opposition None on file Analysis Prepared by : Debbie Michel / L. GOV. / (916) 319-3958