BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1345| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 1345 Author: Lara (D) Amended: 6/6/12 in Senate Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 8-0, 6/13/12 AYES: Wolk, Dutton, DeSaulnier, Fuller, Hernandez, Kehoe, La Malfa, Liu SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : 74-0, 1/26/12 - See last page for vote SUBJECT : Local government: audits SOURCE : State Controller John Chiang DIGEST : This bill imposes additional requirements on audits of local governments. This bill requires an audit for any local agency to be made by a certified public accountant or public accountant, licensed by, and in good standing with, the California Board of Accountancy. ANALYSIS : The federal Single Audit Act of 1984 requires that state and local public agencies, which receive federal funds from a variety of sources, perform a single, jurisdiction-wide specific audit. The objective is to save time and expense on the part of the state and local entities, while giving the federal agencies involved a more consistent source of information. CONTINUED AB 1345 Page 2 State law requires the State Controller to receive audit reports prepared by any local public agency in compliance with the federal Single Audit Act of 1984. After the Controller receives these reports, he or she must ascertain the report's compliance with the federal act and transmit the report to the appropriate state agency (AB 4334 (Waters), Chapter 861, Statutes of 1988). State law prohibits a public accounting firm from providing audit services to a local educational 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 educational agency in each of the six previous fiscal years. An appeals panel can waive this requirement if the panel finds that no otherwise eligible auditor is available to perform the audit (AB 2834 (Migden), Chapter 1128, Statutes of 2002). This bill requires an audit for any local agency to be made by a certified public accountant or public accountant, licensed by, and in good standing with, the California Board of Accountancy. Beginning in the 2013-14 fiscal year, this bill prohibits a local agency from employing a public accounting firm to provide audit services to the 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 for six consecutive fiscal years. The Controller can waive this requirement if he or she finds that another eligible public accounting firm is not available to perform the audit. This bill specifies that, for the purposes of calculating the six consecutive fiscal years, the local agency must not take into account any time that a public accounting firm was employed by that local agency prior to the 2013-14 fiscal year. This bill requires that audit reports prepared in compliance with the federal Single Audit Act for any city, county or special district, as defined by state law, must: CONTINUED AB 1345 Page 3 Be submitted to the State Controller within nine months after the end of the period audited or pursuant to applicable federal or state law. Comply with the Government Auditing Standards issued by the Comptroller General of the United States. If a local agency does not submit an audit report to the Controller by the specified due date, this bill allows the Controller to appoint a qualified certified public accountant or public accountant to complete the report and to obtain the information required. This bill requires the Controller to notify a local agency of its failure to submit the audit report and give the local agency a reasonable amount of time to submit the report before appointing a certified public accountant or public accountant. The Controller's costs, including a contract with, or the employment of, the certified public accountant or public accountant, in completing the audit must be borne by the local agency and must be a charge against any unencumbered funds of the local agency. This bill requires the Controller to refer any matters of unprofessional conduct, as defined in state law, and multiple and repeated failures to disclose noncompliant acts to the California Board of Accountancy. Comments The City of Bell's independent auditor failed to report financial 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. These failures suggest a lack of proper checks and balances in the local government audit process. To ensure that local governments' independent auditors remain independent, this bill requires local governments to comply with the same audit partner rotation requirements that the 2002 Migden bill applied to school districts. The bill also enacts reforms, including: Requiring local governments' audits to conform to CONTINUED AB 1345 Page 4 recognized government standards and procedures. Establishing deadlines by which local agencies must submit audits to the Controller for review. This bill strengthens local governments' independent audit processes and provides safeguards to protect taxpayers against local agencies' misusing public funds. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 6/26/12) State Controller John Chiang American Federation of State, County, and Municipal Employees California Board of Accountancy ASSEMBLY FLOOR : 74-0, 1/26/12 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Conway, Cook, Dickinson, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove, Hagman, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Davis, Donnelly, Gorell, Halderman, Harkey, Smyth AGB:do 6/26/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED AB 1345 Page 5 CONTINUED