BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2613 |Hearing |6/15/16 |
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|Author: |Achadjian |Tax Levy: |No |
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|Version: |6/8/16 |Fiscal: |No |
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|Consultant|Favorini-Csorba |
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County auditor: audits: special districts
Authorizes certain special districts to replace a required
annual audit with a financial compilation or agreed-upon
procedures engagement.
Background
California has roughly 3,300 special districts that provide
specific, focused service within their boundaries. About
two-thirds of these districts are independent and have their own
elected governing boards; one-third are "dependent" special
districts that are governed by either a city council or county
board of supervisors.
County auditors must annually audit each special district's
accounts and records. The county auditor can contract with a
certified public accountant or public accountant for this work.
In either case, the audit must meet the State Controller's
standards and conform to generally accepted auditing standards.
If the State Controller audits a district's financial statement
to satisfy federal audit requirements, the district is exempt
from the requirement for an annual audit. The special district
pays for the audit.
Annual audits can be costly. To reduce the burden on smaller
special districts, the Legislature has authorized several
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alternatives to the annual audit. By unanimous request of the
special district's governing board and with the unanimous
approval of the county board of supervisors, a district may
replace the annual audit with: (1) a biennial audit; (2) a
five-year audit if the district's annual budget doesn't exceed
an amount set by the county supervisors; or (3) an audit at a
specified interval, as designated by the county auditor, not to
exceed five years.
Special districts that both process their financial transactions
through the county's financial system and have annual revenues
below $150,000 may also avail themselves of another option. In
2008, the Legislature authorized these districts to replace the
annual audit with a financial review upon unanimous request of
the special district's governing board and with the unanimous
approval of the county board of supervisors (AB 2510, La Malfa,
2008). If the governing board of the district is the county
board of supervisors, the district may replace the annual audit
with a financial review upon unanimous approval of the board.
Types of Financial Oversight. Auditors perform a variety of
financial oversight services that differ in the scope, activity,
and assurance of financial stability provided, including:
Audit. 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, tests accounting
records by examining source documents, and performs other
procedures to obtain reasonable assurance about whether the
financial statements are free from misstatement, error, or
fraud.
Financial Review. When performing a financial review,
an auditor issues a formal report that includes a
conclusion as to whether he or she is aware of any material
modifications that should be made to the financial
statements in order for them to meet the accounting
principles and practices generally used in an industry. The
auditor does not perform any audit procedures, such as
assessing fraud risk. Thus, a financial review provides
less assurance than an audit.
AB 2613 (Achadjian) 6/8/16 Page 3
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Agreed-upon Procedures Engagement (AUP). Auditors may
also enter into an AUP, where the auditor and the client
agree upon specific audit procedures to perform or specific
aspects of the agency to review, but stops short of
performing all of the procedures required in a full audit.
An AUP provides more assurance than a financial review
because it can include additional analyses and tests, but
less assurance than a full audit.
Financial Compilation. The objective of a financial
compilation is to present the financial information in a
standardized format. A financial compilation provides no
assurance regarding the financial statements because the
auditor is not required to verify the accuracy or
completeness of the information provided, or express an
audit opinion or a review conclusion. Furthermore, unlike
other financial oversight services, an auditor is not
required to be independent, although any lack of
independence must be disclosed.
Some special districts continue to find the audit requirements
in law to be burdensome and have been unable to utilize the
financial review options available to them. They want the
Legislature to provide additional alternatives to the annual
audit requirements.
Proposed Law
Assembly Bill 2613 authorizes, until January 1, 2027, additional
alternatives to the annual audit for special districts that both
process their financial transactions through the county's
financial system and have annual revenues below $150,000, as
follows:
Upon unanimous request of the governing board of the
special district and with unanimous approval of the board
of supervisors, the district may replace the annual audit
with an agreed-upon procedures engagement.
Upon annual unanimous request of the governing board of
the special district and with annual unanimous approval of
the board of supervisors, the district may replace the
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annual audit with an annual financial compilation performed
by the county auditor.
However, AB 2613 prohibits a special district from replacing the
audit with a financial compilation for more than five
consecutive years, at which time the district must undergo an
annual audit.
AB 2613 requires the special district to pay for any costs
incurred by the county auditor in performing a financial
compilation and evaluation of the internal control procedures.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Rigorous fiscal oversight reassures
taxpayers that public officials spend their money wisely. But
tough auditing standards are expensive. Formal annual audits
can cost more than 30% of small special districts' revenues.
When districts spend scarce revenues on annual audits, they
divert funds from the services that their constituents want. AB
2613 provides small special districts with additional options to
replace the annual audit, including an AUP that provides more
assurance than the financial review under current law. AB 2613
will reduce costs and make additional funds available to provide
services while maintaining necessary transparency and
accountability.
2. Accountability . Accurate financial data is necessary to hold
special districts accountable. This information is used by the
State Controller and others in compiling annual reports and
exercising oversight of these bodies. For example, last year
the Legislature required local governments to submit audited
financial data, if available, to the State Controller in order
to improve the accuracy of financial information available to
the public (AB 341, Achadjian, 2015). AB 2613 could
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inadvertently reduce the availability of accurate, verified data
based on audits. In addition, special districts have reported
difficulty in utilizing the less costly financial review option
currently allowed by state law because boards of supervisors are
unwilling to authorize the less rigorous financial oversight
provided by a financial review. Does allowing a financial
compilation provide enough relief, if any, to special districts
to justify the potential increase in incorrect or fraudulent
financial data? The Committee may wish to consider amending AB
2613 to restrict its provisions to authorizing only an AUP.
3. Accountability, redux . Special districts vary widely in size
and annual budgets. Smaller special districts may be more
accountable than larger districts because residents of the
district may have greater access to the board of directors or
may be able to more easily attend district meetings. On the
other hand, small districts can be less well known or visible to
residents, may lack a public website, and may have difficulties
holding competitive elections for board seats. Smaller
districts may also be less efficient because they lack the
ability to take advantage of economies of scale. AB 2613
provides additional options for the smallest districts to
replace the annual audit. If a special district's size prevents
it from performing basic financial analyses such as audits or
financial reviews, it may not be large enough to provide truly
accountable and efficient service. Other entities, such as
general-purpose governments or larger districts, may be better
suited to providing these services.
4. Technical amendment . Amendments to AB 2613 on June 8th, 2016
deleted several references to "a review of the internal control
procedures" and added an agreed-upon procedures engagement.
However, one reference to "an evaluation of internal control
procedures" remains on page 4, lines 2 and 3. The Committee may
wish to consider amending to replace this phrase with "an
agreed-upon procedures engagement" to ensure that the bill is
consistent.
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Floor: 78-0
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Support and
Opposition (6/9/16)
Support : California Special Districts Association (sponsor);
Alpine Village-Sequoia Crest Community Services District;
Association of California Healthcare Districts; Association of
California Water Agencies; California Fire Chiefs Association;
Carmel Valley Recreation and Park District; Fire Districts
Association of California; McKinleyville Community Services
District; Pasadena Glen Community Services District; Pliocene
Ridge Community Services District; Plumas Eureak Community
Services District; Resource Conservation District of the Santa
Monica Mountains; Sausalito-Marin City Sanitary District;
Spreckels Community Services District; Spreckels Memorial
District.
Opposition : Unknown.
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