BILL ANALYSIS �
AB 1248
Page 1
Date of Hearing: April 24, 2013
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 1248 (Cooley) - As Introduced: February 22, 2013
SUBJECT : Local agencies: internal control guidelines.
SUMMARY : Requires the State Controller to develop internal
control guidelines applicable to local agencies to prevent and
detect fraud, and requires local agencies to comply with the
guidelines beginning January 1, 2016. Specifically, this bill :
1)Requires the Controller, by January 1, 2015, to develop
internal control guidelines applicable to each local agency to
prevent and detect financial errors and fraud.
2)Requires the Controller to develop the internal control
guidelines based on standards adopted by the American
Institute of Certified Public Accountants (AICPA) and with
input from any local agency and organizations representing the
interests of local agencies, including, but not limited to,
the League of California Cities, the California State
Association of Counties, the California Special Districts
Association, and the California State Association of County
Auditors.
3)Requires the Controller to post the completed internal control
guidelines on the Controller's Internet Web site, by January
1, 2015.
4)Requires the Controller to update the internal control
guidelines, as he or she deems necessary, and maintain a
current version on the Internet Web site.
5)Requires local agencies to comply with the internal control
guidelines beginning January 1, 2016.
6)Defines, for purposes of this bill, "local agency" to mean a
city, county, city and county, special district, or any other
local governmental entity, except a school district.
7)Provides that, if the Commission on State Mandates determines
that this bill contains costs mandated by the state,
AB 1248
Page 2
reimbursement to local agencies and school districts for those
costs shall be made pursuant to current law governing
state-mandated local costs.
EXISTING LAW :
1)Requires the Controller to superintend the fiscal concerns of
the state, and to audit all claims against the state. The
Controller may audit the disbursement of any state money, for
correctness, legality, and for sufficient provisions of law
for payment.
2)Requires the Controller to summon county auditors to meet with
the Controller or his or her duly authorized representatives,
at least once each year, in such groups and at such place or
places within the state as may be designated by the Controller
for the purpose of discussion of problems dealing with county
budget procedure, reporting of financial transactions of the
counties, allocation of property tax revenues, including the
Special District Augmentation Fund, and to promote uniformity
of procedure in all matters pertaining to the duties of county
auditors, throughout the state.
3)Requires the Controller to summon county tax collectors and
redemption officers or the authorized representative of any
county tax collector or redemption officer to meet with the
Controller or his duly authorized representatives in such
groups and at such place or places within the state as may be
designated by the Controller for the purpose of discussion of
tax collection, enforcement of taxes, and problems relating
thereto, in order to promote uniformity of procedure in the
collection of taxes on real and personal property throughout
the state.
4)Authorizes the Controller to render service pertinent to
financial, budgetary and taxation problems and procedures for
any county, city, city and county, any other political
subdivision, or any district of the state upon such terms and
conditions as may be agreed upon between the Controller and
the governing body of such county, city, city and county,
other political subdivision or district.
5)Requires the officer of each local agency who has charge of
the financial records to furnish to the Controller a report of
all the financial transactions of the local agency during the
AB 1248
Page 3
next preceding fiscal year.
6)Requires, pursuant to existing federal law under the Single
Audit Act of 1984 (Act), that any nonfederal entity, defined
as states, local governments, or nonprofit organizations, that
accepts $500,000 or more in federal money to prepare an annual
audit that meets certain specifications and transmit that
audit to specified federal agencies.
7)Requires the Controller to receive every audit report prepared
by any local public agency pursuant to the Act and to review
those reports for compliance with federal law before
forwarding them to the designated state agency.
8)Requires the State Auditor to conduct an audit of a state or
local governmental entity that is requested by the Joint
Legislative Audit Committee (JLAC), to the extent that funding
is available and in accordance with priorities established by
JLAC. Existing law also requires the State Auditor to conduct
specified financial and performance audits directed in
statute.
9)Authorizes the State Auditor to establish a high-risk local
government agency audit program to identify, audit, and issue
reports on any local government agency, including any city,
county, or special district, or any publicly created entity
that the State 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
10)Requires annual audits of local educational agencies, and
requires audit reports to be filed with the applicable county
superintendent of schools, the Department of Education, and
the Controller. Among other requirements, audits must comply
fully with the Government Auditing Standards issued by the
Comptroller General of the United States, and must be made by
a certified public accountant (CPA) or a public accountant
(PA) licensed by the Board of Accountancy and selected by the
local educational agency from a directory of CPAs and PAs
deemed by the Controller as qualified to conduct audits of
local educational agencies.
FISCAL EFFECT : Unknown
COMMENTS :
AB 1248
Page 4
1)This bill requires the State Controller to develop internal
control guidelines to prevent and detect financial errors and
fraud based on standards adopted by the AICPA and with input
from any local agency and organizations representing the
interests of local agencies. The bill requires local agencies
- which include cities, counties, special districts, or any
other local governmental entity - to comply with the internal
control guidelines beginning January 1, 2016. School
districts are exempt from the bill. This bill is sponsored by
State Controller John Chiang.
2)According to the author's office, "Although the economic
recession has been especially difficult for local governments,
leading to economic failures and bankruptcies across the
state, results of audits conducted by the State Controller
show that not all of these failures were due to the economic
downturn.
"The State Controller found that in addition to economic and
demographic factors, lack of internal controls - or checks and
balances - at the local government level allowed for fiscal
and administrative errors and mismanagement. While the poor
economy created difficulties for these local governments, the
seeds of financial problems had already taken root because of
the lack of proper internal controls."
3)Long-standing concerns about local government fiscal
accountability came to dramatic light in 2011 with the
exposure of unethical and illegal financial practices by
numerous officials in the City of Bell. Despite serious and
pervasive control deficiencies in the city's administrative
and internal accounting systems, the city's independent
auditor failed to report abuses such as excessive salaries,
illegal loans, and questionable special fees.
In a series of follow-up audits of the City 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.
More recently, the Controller found a number of deficiencies
in his "Hercules Administrative and Internal Accounting
Controls Review Report" issued in September 2012, which
AB 1248
Page 5
states:
"We found the City of Hercules' administrative and internal
accounting control deficiencies to be serious and
pervasive; in effect, non-existent. We noted there was no
oversight by the City Council over the city's financial and
operational activities. From January 1, 2007, through
December 31, 2010, the City Council adopted 40 ordinances,
679 city resolutions, and 360 Redevelopment Agency
resolutions. With the exception of one city ordinance,
every ordinance, city resolution, and RDA resolution was
adopted unanimously. In essence, the City Council approved
all requests submitted by the former City Manager. The
former City Manager was given broad authority to enter into
contracts and authorized disbursements for the city and the
RDA. In addition, the city often ignored its competitive
bid policy and had inadequate conflict of interest and
nepotism policies. As a result, the potential for waste,
abuse, and misappropriation of public funds is very high.
"As part of our review, we made an assessment of various
aspects of the city's internal control components and
elements in accordance with standards adopted by the
American Institute of Certified Public Accountants. Of the
74 elements evaluated pertaining to internal control
components, we found only seven (9%) where controls were
considered to be adequate."
4)The AICPA sets ethical standards for the accounting profession
and national auditing standards for audits of private
companies, nonprofit organizations, and federal, state and
local governments.
The AICPA publishes an Audit and Accounting Manual, which
provides guidance for internal controls, audit documentation
guidelines, and illustrative reports for confirmation letters,
engagement and representation letters, and auditor's reports.
It also publishes a number of practice aids, including one
titled, "Documenting and Testing Compliance and Internal
Control Over Compliance in a Single Audit," which is designed
to assist auditors in better understanding their
responsibilities for internal control over compliance,
compliance testing, and documenting such procedures.
5)A number of related bills have been introduced in recent
AB 1248
Page 6
years:
SB 186 (Kehoe and DeSaulnier, 2012) would have expanded the
Controller's authority to perform discretionary audits of
local agencies to ensure compliance with local ordinances and
state law. This bill passed this Committee on a 9-0 vote on
June 27, 2012, but subsequently died in the Assembly
Appropriations Committee.
AB 162 (Smyth, 2011) would have required that, if an audit of
a local agency reveals certain financial irregularities, the
findings be sent separately to the Controller immediately
after the audit has been concluded. AB 162 also would have
required the Controller to prepare and transmit a report on
those findings and the Controller's recommendations to the
Assembly Committee on Local Government and the Senate
Committee on Local Government. This bill was referred to this
Committee but was never heard.
AB 187 (Lara), Chapter 451, Statutes of 2011, authorizes the
State Auditor to establish a high-risk local government agency
audit program to identify, audit, and issue reports on any
local government agency, including any city, county, or
special district, or any publicly created entity that the
State 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.
AB 229 (Lara, 2011) would have expanded the Controller's
oversight of local governmental agencies to those that expend
less than $500,000 in federal funds, and would have stipulated
standards for the performance of local government audits.
This bill passed this Committee on an 8-0 vote on April 27,
2011, but was subsequently amended to address an unrelated
subject.
AB 253 (Smyth, 2011) would have established the Committee on
City Accounting Procedures, specified the membership of the
Committee, and required the State Controller, in consultation
with the Committee, to prescribe uniform accounting and
reporting procedures for cities. This bill passed this
Committee on a 9-0 vote on April 27, 2011, but subsequently
died in the Senate Governance and Finance Committee.
AB 1248
Page 7
SB 449 (Pavley, 2011) would have authorized the State
Controller to review the finances of cities, counties, special
districts, and redevelopment agencies, and would have allowed
the Controller to convene a local agency financial review
committee to provide assistance to local agencies that seek
help in averting or managing a financial problem. This bill
failed in this Committee on a 1-2 vote on June 29, 2011.
6)This bill is keyed a state mandate, which means the state
could be required to reimburse local agencies for implementing
the bill's provisions if the Commission on State Mandates
determines that the bill contains costs mandated by the state.
7)Support arguments : CalTax states that "it is critically
important that government spends the people's money well.
Unfortunately, where public finances are concerned,
policymakers too often brush over issues of efficiency and
effectiveness when making appropriations. This bill would
change this by improving internal controls and ensuring that
budget practices avoid fraud and financial errors."
Opposition arguments : None
REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang [SPONSOR]
CalTax
Opposition
None on file
Analysis Prepared by : Angela Mapp / L. GOV. / (916) 319-3958