BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 2613|
          |Office of Senate Floor Analyses   |                              |
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                                   THIRD READING 


          Bill No:  AB 2613
          Author:   Achadjian (R) 
          Amended:  6/21/16 in Senate
          Vote:     21 

           SENATE GOVERNANCE & FIN. COMMITTEE:  7-0, 6/15/16
           AYES:  Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach,  
            Pavley

           ASSEMBLY FLOOR:  78-0, 5/5/16 - See last page for vote

           SUBJECT:   County auditor:  audits:  special districts


          SOURCE:    California Special Districts Association


          DIGEST:  This bill authorizes certain special districts to  
          replace a required annual audit with a financial compilation or  
          agreed-upon procedures engagement.


          ANALYSIS:  


          Existing law:


          1)Requires county auditors to annually audit each special  
            district's accounts and records.  


          2)Requires special districts to pay for the annual audit.








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          3)Authorizes a special district, by unanimous request of the  
            special district's governing board and with the unanimous  
            approval of the county board of supervisors, to replace the  
            annual audit with: 


             a)   A biennial audit; 


             b)   A five-year audit if the district's annual budget  
               doesn't exceed an amount set by the county supervisors; or 


             c)   An audit at a specified interval, as designated by the  
               county auditor, not to exceed five years.


          4)Authorizes a special district that processes their financial  
            transactions through the county's financial system and has  
            annual revenues below $150,000 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.


          This bill:


          1)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:


             a)   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 (AUP).


             b)   Upon annual unanimous request of the governing board of  
               the special district and with annual unanimous approval of  







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               the board of supervisors, the district may replace the  
               annual audit with an annual financial compilation performed  
               by the county auditor.  


          2)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.  


          3)Requires the special district to pay for any costs incurred by  
            the county auditor in performing a financial compilation or an  
            AUP.


          4)Authorizes a county auditor, upon receipt of the financial  
            review, AUP, or financial compilation, to appoint an  
            accountant to conduct an audit of the special district, with  
            proper notice to the governing board of the special district  
            and board of supervisors.


          Background


          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  







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            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.


           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.


          State law generally requires special districts to be audited  
          annually.  But annual audits can be costly.  To reduce the  
          burden on smaller special districts, the Legislature has  
          authorized several alternatives to the annual audit, including  
          less frequent audits or a financial review instead of an audit.


          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.


          Comments







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          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 and Efficiency.  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 Web site, 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.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:NoLocal:    No


          SUPPORT:   (Verified6/22/16)


          California Special Districts Association (source)
          Alpine Village-Sequoia Crest Community Services District







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          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:   (Verified6/22/16)


          None received




          ASSEMBLY FLOOR:  78-0, 5/5/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,  
            Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,  
            Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,  
            Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier,  
            Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson,  
            Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger  
            Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder,  
            Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,  
            Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,  
            Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago,  
            Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,  
            Wilk, Williams, Wood, Rendon
          NO VOTE RECORDED:  Beth Gaines, Jones-Sawyer

          Prepared by:Anton Favorini-Csorba / GOV. & F. / (916) 651-4119
          6/22/16 15:15:21


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