BILL ANALYSIS                                                                                                                                                                                                    



          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 ?