BILL ANALYSIS                                                                                                                                                                                                    



          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  |
          |          |                                 |Date:      |         |
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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.








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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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