BILL ANALYSIS Ó
AB 1248
Page 1
ASSEMBLY THIRD READING
AB 1248 (Cooley)
As Amended May 24, 2013
Majority vote
LOCAL GOVERNMENT 9-0 APPROPRIATIONS 17-0
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|Ayes:|Achadjian, Levine, Alejo, |Ayes:|Gatto, Harkey, Bigelow, |
| |Bradford, Gordon, | |Bocanegra, Bradford, Ian |
| |Melendez, Mullin, | |Calderon, Campos, |
| |Waldron, Stone | |Donnelly, Eggman, Gomez, |
| | | |Hall, Ammiano, Linder, |
| | | |Pan, Quirk, Wagner, Weber |
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SUMMARY : Requires the State Controller (Controller) to develop
internal control guidelines applicable to local agencies to
prevent and detect fraud. 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, to assist a local agency, as defined by this bill, in
establishing a system of internal controls to safeguard assets
and prevent and detect financial errors and fraud.
4)Requires the Controller, with input from the agencies listed
in 2) above, to update the internal control guidelines, as he
or she deems necessary, and maintain a current version on the
Internet Web site.
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5)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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, minor and absorbable costs for the Controller.
COMMENTS : 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, and to post the guidelines on
the Controller's Web site. This bill is sponsored by State
Controller John Chiang.
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."
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
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Report" issued in September 2012, which 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.
A number of related bills have been introduced in recent years:
1)SB 186 (Kehoe and DeSaulnier) of 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 died in the Assembly Appropriations
Committee.
2)AB 162 (Smyth) of 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
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required the Controller to prepare and transmit a report on
those findings and the Controller's recommendations to the
Assembly and Senate Committees on Local Government. This bill
was referred to the Assembly Local Government Committee but
was never heard.
3)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.
4)AB 229 (Lara) of 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 was amended to address an unrelated subject.
5)AB 253 (Smyth) of 2011 would have established the Committee on
City Accounting Procedures, specified the membership of the
Committee, and required the Controller, in consultation with
the Committee, to prescribe uniform accounting and reporting
procedures for cities. This bill died in the Senate
Governance and Finance Committee.
6)SB 449 (Pavley) of 2011 would have authorized the 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 the Assembly Local Government Committee.
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."
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Opposition arguments: None.
Analysis Prepared by : Angela Mapp / L. GOV. / (916) 319-3958
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