BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 783 |Hearing |7/15/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Daly |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |6/30/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Lewis | |: | | ----------------------------------------------------------------- County auditor-Controllers Gives responsibility for internal audits, in Orange County, to the independently-elected auditor-controller, rather than the county board of supervisors. Background and Existing Law County auditors serve as the chief accounting officers for counties, allocating property tax revenues and performing audits on county departments, special districts, and joint powers authorities. Counties may also create the office of county controller, who is responsible for the county's bookkeeping and check writing. Absent a designation to the contrary, the office of county controller is held, ex officio, by the county auditor. State law permits counties to consolidate the two offices into the office of the county auditor-controller. Existing law requires county auditor-controllers to perform specified audits, but county boards of supervisors can also request other audits. Most county auditor-controllers are elected officials but county supervisors can convert the position to an appointed one with majority voter approval. The county auditor is appointed in eight counties. General law counties may consolidate the auditor-controller's duties with those of the tax collector and treasurer, within the elective or appointive office of the director of finance. Charter counties have constitutional AB 783 (Daly) 6/30/15 Page 2 of ? authority to assign the auditor-controller's statutory duties to other officers or structures (Article XI, Section 4). Orange County's auditor-controller is elected. The combined auditor-controller office came into being in 1982, when the Board of Supervisors consolidated the formerly independent functions into a single Office of Auditor-Controller. Today, the county's Auditor-Controller is responsible for conducting independent audits of county departments, as well as basic bookkeeping and check writing. In 1994, Orange County became the largest municipality in U.S. history to file for bankruptcy as a result of the mismanagement of county investments. In the wake of the bankruptcy, investigators concluded that county auditors were too close to their colleagues at the county Treasurer-Tax Collector's office, and had failed to oversee the latter's questionable investments. A subsequent Grand Jury report partly blamed the Orange County Board of Supervisors for failing to recognize the fiscal anomalies that led to the calamity, and recommended separating the internal audit function from the Office of the Auditor Controller to give the Board greater oversight over county finances. In response, the Board of Supervisors created an additional internal auditing unit separate from the Auditor-Controller in 1995. This new unit, the Orange County Internal Audit Department, was tasked with performing discretionary audits at the request of the Board of Supervisors. In 1998, the Legislature authorized the Orange County Board of Supervisors to also assign statutorily-required audits to the Internal Audit Department, rather than to the Auditor-Controller (AB 2523, Ackerman, 1998). In 2014, the Legislature repealed this enabling legislation as part of a budget trailer bill (SB 854, Senate Budget and Fiscal Review Committee). Following the repeal of AB 2523, the OC Board of Supervisors is still assigning the county's internal audits to the Internal Audit Department. The Office of the Auditor-Controller and the author of this bill assert that Orange County's dual auditor arrangement established after the county's bankruptcy is no longer necessary, and that having a non-elected auditor chosen and employed by the Board of Supervisors could lead to potential conflicts of interest. They AB 783 (Daly) 6/30/15 Page 3 of ? want the Legislature to change state law to require Orange County to assign its internal audits to the elected Auditor-Controller. Proposed Law Assembly Bill 783 requires, in any county with both an elected auditor-controller and a population exceeding 3,000,000 people, that the auditor-controller, and not the board of supervisors, must examine and audit, or cause to be audited, the financial accounts and records of all officers having responsibility for the care, management, collection, or disbursement of county money; the bill requires this audit to be filed with the board of supervisors. AB 783 further requires, in any county with both an elected auditor-controller and a population exceeding 3,000,000 people, that the authority of the board of supervisors to supervise the official conduct of county officers must not be construed to affect the independent auditing and accounting functions of the auditor-controller and prohibits the board of supervisors from obstructing his or her auditing and accounting functions. This bill requires a county auditor or auditor-controller to be the chief auditor of the county. The bill further grants the auditor or auditor-controller, as part of his or her supervisory powers, the authority to audit, rather than review, departmental and countywide internal controls. AB 783 prohibits a board of supervisors from creating or operating a separate auditing unit outside of the county auditor, except if the separate auditing unit was established before 1981, and would prohibit the board from transferring any auditing unit away from the county auditor. AB 783 also requires, in a county with an elected auditor-controller and a population exceeding 3,000,000, that the county auditor-controller must be the sole county officer with the authority to maintain a whistleblower hotline, as defined. AB 783 requires, in a county with an elected auditor-controller AB 783 (Daly) 6/30/15 Page 4 of ? and a population exceeding 3,000,000 people, that the auditor-controller must conduct a statutorily required audit of a tax collector's records and accounts related to redemption of tax defaulted property. Alternatively, the auditor-controller can retain the services of an independent certified public accountant or licensed public accountant to perform the audit, in accordance with specified standards. State Revenue Impact No estimate. Comments 1. Purpose of the bill. AB 783 originates from a desire to give the Orange County Auditor-Controller the same rights and responsibilities as Auditor-Controllers in California's other 57 counties. While AB 783 applies to any county with a population of 3 million or greater that has an elected auditor-controller, currently only Orange County meets these criteria. Orange County is currently using a makeshift internal audit structure devised as a short-term fix during a time of crisis. Even before it was repealed, AB 2523 only allowed county supervisors to reassign county officers' audit duties for a period of two years, after which the reassignment would have to be reauthorized. Proponents of the bill argue that, 17 years after Orange County's bankruptcy, the county continues to use the same audit structure as Detroit and Stockton, which have since eclipsed Orange County as the nation's largest municipal bankruptcies. Out of California's 20 most populous counties, 15 have elected auditor-controllers, and in 19 of those 20 counties, the internal audit function is assigned to the auditor-controller. By restoring the internal audit function to the elected Auditor-Controller, AB 783 brings Orange County back in line with other counties' accounting practices and eliminates the potential of conflicts of interest inherent to the current structure, in which the Director of the Internal Audit Department relies upon the Board of Supervisors for his or her employment contract rather than being elected by the voters. 2. Appearance of impropriety vs. actual wrongdoing. While the fact that the county Internal Audit Department reports to the Board of Supervisors could result in at least the appearance of AB 783 (Daly) 6/30/15 Page 5 of ? a conflict of interest, it is unclear that the current arrangement has resulted in fraud, failure to comply with the U.S. Government Accountability Office's Government Auditing Standards or the Institute of Internal Auditor's (IIA) professional auditing standards, or any other wrongdoing. Similarly, state law has required county supervisors to conduct periodic audits of county officers' use of public funds since at least 1883. This statutory requirement remains largely unchanged today, codified in Government Code Section 25250. Existing law permits county supervisors to employ an independent certified public accountant (CPA) or licensed public accountant for this purpose. It is unclear whether a change to state law is necessary if the present structure of Orange County's Internal Audit Department does not give rise to an actual conflict of interest, and the Department is in compliance with all applicable auditing standards. 3. The right tool for the job? Discussions about the internal audit responsibilities of the Internal Audit Department and the Office of the Auditor-Controller are ongoing at the local level. Last year, the Auditor-Controller and Internal Audit Department provided the Board of Supervisors with competing position papers on the subject of who should have responsibility over internal audits. Last fall, the Board of Supervisors took up a motion to consolidate the internal audit functions of the Internal Audit Department into the Office of the Auditor-Controller, but that measure failed on a 3-2 vote. Orange County voters approved a charter in 2002. Even if AB 783 is enacted, as a charter county, Orange County's voters have constitutional authority to assign the Auditor-Controller's statutory duties to other officers or structures. State law also allows the Board of Supervisors to convert the Office of the Auditor-Controller to an appointed position. It is unclear why the Legislature should decide a matter that can be addressed by the Orange County Board of Supervisors or Orange County voters. 4. Unintended consequences. AB 783 prohibits a board of supervisors, in a county of 3 million people or more, from obstructing an elected auditor-controller from carrying out his/her auditing and accounting functions. A narrow reading of the bill could unintentionally suggest that county supervisors in a less populous county may in fact obstruct the AB 783 (Daly) 6/30/15 Page 6 of ? auditor-controller from doing his/her job. Furthermore, it is unclear that what exactly constitutes "obstruction" in this context, and whether existing law permits a county board of supervisors to obstruct an elected county auditor-controller in the first place. To avoid unintended consequences and redundancy, the Committee may wish to consider an amendment defining the term "obstruct" and clarifying its application, or deleting the bill's references to "obstruction" altogether. 5. Mandate. Because this bill increases the duties of local officials in a county with an elected auditor-controller and a population of 3 million or greater, the Office of Legislative Counsel has determined that this bill imposes a state-mandated local program. The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. This bill provides that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to Part 7 of Division 4 of Title 2 of the Government Code. 6. New bill, prior votes not relevant . As passed by the Assembly, AB 783 contained provisions amending the Government Code's requirements for the attestation of subpoenas issued by the legislative bodies of cities. The Senate Governance and Finance Committee never heard that version of the bill. The June 30th amendments deleted AB 783's contents and inserted the current language related to county auditor-controllers. Assembly Actions Not relevant to the June 30, 2015 version of the bill. Support and Opposition (7/9/15) Support : Orange County Auditor-Controller Eric H. Woolery, CPA. Opposition : Unknown. -- END -- AB 783 (Daly) 6/30/15 Page 7 of ?