BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2613


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          ASSEMBLY THIRD READING


          AB  
          2613 (Achadjian)


          As Amended  May 2, 2016


          Majority vote


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          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Local           |9-0  |Eggman, Waldron,      |                    |
          |Government      |     |Alejo, Bonilla, Chiu, |                    |
          |                |     |Cooley,               |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |Beth Gaines, Gordon,  |                    |
          |                |     |Linder                |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
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          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 until January 1, 2027, by annual  
            unanimous request of the governing board of the special  








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            district and with annual 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,


             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)Prohibits a special district from replacing an annual audit  
            with an annual financial compilation and annual review of the  
            internal control procedures pursuant to 1) above, for more  
            than five consecutive years, after which a special district  
            must comply with an annual audit.  


          3)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  








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            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  
            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,








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               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 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  








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            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  
            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 until  
            January 1, 2027, by unanimous request of their governing body  








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            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 transactions go through the county's financial  
            system and the district's annual revenues are less than  
            $150,000.  This bill authorizes a special district to perform  
            an annual financial compilation and review of the internal  
            control procedures for up to five consecutive years at which  
            point they would need to return to an annual audit.  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.  









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


          5)Policy Considerations.  The Legislature 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 Legislature 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.  


          6)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  
            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  








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            services."  




          7)Arguments in Opposition.  None on file.


          Analysis Prepared by:                                             
                          Misa Lennox / L. GOV. / (916) 319-3958  FN:  
          0002842