BILL ANALYSIS Ó
AB 2613
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CONCURRENCE IN SENATE AMENDMENTS
AB
2613 (Achadjian)
As Amended June 21, 2016
Majority vote
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|ASSEMBLY: |78-0 |(May 5, 2016) |SENATE: |39-0 |(August 1, 2016) |
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Original Committee Reference: L. GOV.
SUMMARY: Authorizes a special district, subject to specified
conditions, to replace a required annual audit with an annual
financial compilation or an agreed-upon procedures engagement.
The Senate amendments:
1)Authorize 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 an agreed-upon procedures engagement, if
specified conditions in existing law for a financial review
are met.
2)Require the special district to pay for any costs incurred by
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the county auditor in performing an agreed-upon procedures
engagement. Require those costs to be charged against any
unencumbered funds of the district available for that purpose.
3)Authorize 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 an agreed-upon procedures engagement, done in accordance
with appropriate professional standards, as determined by the
county auditor, if the conditions in existing law for a
financial review are met.
4)Delete the authority for a special district to replace an
annual audit with an annual review of the internal control
procedures of the special district.
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.
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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,
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
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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.
AS PASSED BY THE ASSEMBLY, this bill:
1)Authorized a special district until January 1, 2027, by annual
unanimous request of the governing board of the special
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)Prohibited 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
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must comply with an annual audit.
3)Required 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.
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
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
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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 options 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
and with the unanimous approval of the county board of
supervisors, to replace the required annual audit with an
annual financial compilation 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
for up to five consecutive years at which point they would
need to return to an annual audit. Senate amendments also
expand the options under existing law for a special district
to replace an annual audit with an agreed-upon procedures
engagement, in the same manner as established for a financial
review. This bill is sponsored by the California Special
Districts Association.
3)Author's Statement. According to the author, "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)Financial Oversight. There are key differences between an
audit, financial review, agreed-upon procedure engagement, 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
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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. Agreed-upon procedures engagement allow an auditor and
the client to agree on specific audit procedures or specific
aspects of the agency to review, but stops short of performing
all the procedures required in a full audit. 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)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
districts. 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."
6)Arguments in Opposition. None on file.
Analysis Prepared by:
Misa Lennox / L. GOV. / (916) 319-3958 FN:
0003571
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