BILL ANALYSIS Ó
AB 2613
Page 1
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