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.








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          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 








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            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 








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            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