BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2613


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          Date of Hearing:   April 27, 2016


                       ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT


                           Susan Talamantes Eggman, Chair


          AB 2613  
          (Achadjian) - As Introduced February 19, 2016


          SUBJECT:  County auditor:  audits:  special districts.


          SUMMARY:  Authorizes a special district, subject to specified  
          conditions, to replace a required annual audit with an annual  
          financial compilation and a review of the internal control  
          procedures of the special district.  Specifically, this bill:  


          1)Authorizes a special district, by unanimous request of the  
            governing board of the special district and with unanimous  
            approval of the county board of supervisors, to replace a  
            required annual audit with an annual financial compilation and  
            a review of the internal control procedures of the special  
            district performed by the county auditor in accordance with  
            professional standards, if all of the following conditions are  
            met:


             a)   All of the special district revenues and expenditures  
               are transacted through the county's financial system; 



             b)   The special district's annual revenues do not exceed  
               $150,000; and,








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             c)   The special district pays for any costs incurred by the  
               county auditor in performing the financial compilation and  
               evaluation of the internal control procedures.  



          2)Requires the special district to pay for costs incurred by the  
            county auditor as a charge against any unencumbered funds of  
            the special district available for that purpose.  



          EXISTING LAW:   


          1)Requires a county auditor to either make or contract with a  
            certified public accountant to make an annual audit of the  
            accounts and records of every special purpose district within  
            the county for which an audit by a certified public accountant  
            or public accountant is not otherwise provided.  Requires the  
            minimum requirements of the audit to be prescribed by the  
            Controller and to conform to generally accepted auditing  
            standards.  



          2)Requires the report, where an audit of a special districts  
            accounts and records is made by a certified public accountant,  
            to be filed with the Controller and with the county auditor in  
            which the special district is located within 12 months of the  
            end of the year or years under examination.  



          3)Authorizes a special district, by unanimous request of the  
            governing board of the special district, and unanimous  








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            approval of the board of supervisors, to replace the required  
            annual audit with one of the following:



             a)   A biennial audit covering a two-year period;



             b)   An audit covering a five-year period, if the district's  
               annual budget does not exceed an amount specified by the  
               board of supervisors;
             c)   An audit conducted at specific intervals, as recommended  
               by the county auditor, completed at least once every five  
               years; or,  





             d)   A financial review, if the following conditions are met:



               i)     All of the special district revenues and  
                 expenditures are transacted through the county's  
                 financial system; and,



               ii)    The special district's annual revenues do not exceed  
                 $150,000. 



          4)Authorizes a dependent special district, if the board of  
            supervisors is the governing board 
          of the special district and with unanimous approval, to replace  
            the required annual audit with a financial review done in  








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            accordance with appropriate professional standards as  
            determined by the county auditor, if the conditions in 3), d),  
            above are met.  



          5)States that a special district shall be exempt from the  
            requirements of an annual audit, if the financial statements  
            are audited by the Controller to satisfy federal audit  
            requirements.  


          6)Requires the officer of each local agency, city, county, and  
            district, 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 next preceding fiscal year.  





          7)Requires the California State Controller, on or before January  
            1, 2015, to develop internal control guidelines applicable to  
            each local agency to prevent and detect financial errors and  
            fraud.  


          FISCAL EFFECT:  None


          COMMENTS:  


          1)Background.  Pursuant to existing law, special districts are  
            required to submit an annual Financial Transactions Report, a  
            Compensation Report, and an annual audit to the Controller.   
            County auditors are required to annually audit each special  
            district or contract with a certified public accountant or  
            public accountant for this work.  Existing law requires that  








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            the audit conforms to standards established by the Controller  
            and to generally accepted auditing standards.  Special  
            districts must pay for the annual audit.  Due to the costs of  
            annual audits, AB 2510 (La Malfa), Chapter 244, Statues of  
            2008, expanded the options available to special districts to  
            satisfy the annual audit requirement with less formal  
            financial reviews and less frequent audits.  Proponents of  
            this bill provided several examples of the percentage of an  
            annual budget that is expended to comply with audit  
            requirements in existing law: Tucker Oakes Water District 16%,  
            Allegheny County Water District 10%, Bayshore Sanitary  
            District 8%, Mokelumne Cemetery District 9%, and Beaumont  
            Library District 8%.  


            Due to the changes made by AB 2510, special districts that  
            meet specified conditions have several options to replace the  
            required annual audit.  Upon the unanimous request of a  
            special district's governing board and the unanimous approval  
            of the county board of supervisors, a required annual audit  
            may be replaced by a biennial audit, a five-year audit (if the  
            district's revenues do not exceed a specified amount by the  
            board of supervisors), or an audit conducted at specific  
            intervals, as recommended by the county auditor.   
            Additionally, if a special district's transactions go through  
            the county's financial system and the district's annual  
            revenues are less than $150,000, a special district may  
            replace the required annual audit with a financial review.  


          2)Bill Summary.  This bill provides an additional option for  
            special districts in meeting the annual audit requirement in  
            existing law.  This bill authorizes a special district, by  
            unanimous request of their governing body and with the  
            unanimous approval of the county board of supervisors, to  
            replace the required annual audit with an annual financial  
            compilation and review of the internal control procedures of  
            the district in accordance with professional standards  
            performed by the county auditor, if the district's  








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            transactions go through the county's financial system and the  
            district's annual revenues are less than $150,000.  This bill  
            is sponsored by the California Special Districts Association.   
            


          3)Author's Statement.  According to the author, "AB 2613 will  
            allow special districts to carry out a financial compilation  
            and review of internal control and procedures in lieu of an  
            annual audit when revenues do not exceed $150,000.  This bill  
            will give special districts in good standing the opportunity  
            to utilize a less costly alternative to the regular audit or  
            financial review, while continuing to maintain the proper  
            financial oversight and accountability of these government  
            entities."  


          4)Audit, Financial Review, and Financial Compilation.  There are  
            key differences between an audit, financial review and  
            financial compilation and the scope, activity, and assurance  
            of financial stability provided by each.  An audit is the  
            highest level of financial oversight that can be provided.   
            Its purpose is to provide financial statement users with an  
            opinion by the auditor on whether the financial statements are  
            prepared in accordance with the proper financial reporting  
            framework.  The auditor evaluates the internal control system  
            and obtains reasonable assurance about whether the financial  
            statements are free from misstatement and free from error or  
            fraud.  


            A financial review provides less assurance than an audit  
            because there is only limited assurance that there are no  
            material modifications that should be made to the financial  
            statements for them to be in conformity with the financial  
            reporting framework.  The auditor does not perform any audit  
            procedures in a financial review.  A financial compilation  
            provides less assurance than an audit or financial review  
            because the auditor's report will not express an opinion or  








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            provide any assurance regarding the financial statements.  The  
            objective of a financial compilation is to present the  
            financial information.  


          5)Policy Considerations:  The Committee may wish to consider the  
            following:


             a)   Financial Compilation vs. Financial Review.  The  
               Committee may wish to take into consideration some of the  
               inherent differences between a financial review and a  
               financial compilation.  Current law authorizes specified  
               districts to replace the annual audit with a financial  
               review.  A financial review is second to an audit and still  
               requires an auditor or accountant to perform analytical  
               procedures and inquiries.  A financial compilation requires  
               no analytical procedures and inquiries, and requires the  
               auditor to assist in the presentation of a financial  
               statement.  The Committee may wish to consider if this is  
               an appropriate level of review despite the more limited  
               number of special districts that would be authorized to  
               utilize this option.  


             b)   The Cost of Transparency.  This Committee has seen  
               several bills seeking to increase transparency among local  
               governments.  In particular, following the City of Bell and  
               other local government scandals, several bills have sought  
               to increase the auditing authority of the Controller's  
               Office arguing that the current reporting requirements,  
               including audit requirements in existing law, do not  
               provide sufficient oversight of local governments.   
               Additionally, AB 1248 (Cooley), Chapter 190, Statues of  
               2013, required the Controller to develop internal control  
               guidelines applicable to local governments to assist the  
               local agencies in establishing a system of internal  
               controls to safeguard assets and prevent and detect  
               financial errors and fraud.  The bill did not contain a  








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               requirement that the local governments must adopt the tools  
               developed.  


               The Committee may wish to consider if this bill goes in the  
               wrong direction.  Proponents would argue that this bill  
               only applies to smaller special districts with revenue  
               below $150,000 and that those special districts must  
               receive unanimous approval from the board of supervisors  
               which will provide protection against special districts  
               inappropriately utilizing the alternative to an annual  
               audit that this bill provides.  


          6)Committee Amendments.  The Committee may wish to ask the  
            author to accept the following amendments to ensure that this  
            bill strikes the appropriate balance in the consideration of  
            transparency and the costs of annual audits and the other  
            options under existing law.  


             a)   Sunset Date.  The Committee may wish to ask the author  
               to sunset the bill's provisions in 10 years.  At that  
               point, the Legislature would have the opportunity to review  
               a special district's utilization of the financial  
               compilation options and any cost savings achieved.  


             b)   Up to 5 years.  The Committee may wish to ask the author  
               to limit the provisions of the bill by authorizing a  
               special district to perform an annual financial compilation  
               for up to five consecutive years at which point they would  
               need to return to an annual audit.  


          7)Arguments in Support.  The California Special District  
            Association argues, "For some special districts, the cost of  
            the audits has surpassed 33% of their entire operating budget  
            for the year.  Special districts are authorized under existing  








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            law to utilize a biennial audit, or a financial review if they  
            meet similar thresholds, but even those cost saving  
            alternatives remain too costly for many of the smallest  
            district.  By allowing qualified special districts to submit a  
            financial compilation instead of an audit, district's limited  
            funds can now be directed towards providing intended  
            services."  


          8)Arguments in Opposition.  None on file.


          


































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          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Special Districts Association [SPONSOR]


          Alpine Village-Sequoia Crest Community Services District 


          Association of California Healthcare Districts 


          California Fire Chiefs Association


          Carmel Valley Recreation & Park District


          Fire Districts Association of California


          McKinleyville Community Services District


          Pilocene Ridge Community Services District


          Plumas Eureka Community Services District


          Resource Conservation District of the Santa Monica Mountains








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          Sausalito-Marin City Sanitary District


          Spreckels Community Services District  


          Spreckels Memorial District




          Opposition


          None on file


          Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958