BILL ANALYSIS Ó AB 2613 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 2613 (Achadjian) As Amended June 21, 2016 Majority vote -------------------------------------------------------------------- |ASSEMBLY: |78-0 |(May 5, 2016) |SENATE: |39-0 |(August 1, 2016) | | | | | | | | | | | | | | | -------------------------------------------------------------------- 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 AB 2613 Page 2 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. AB 2613 Page 3 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 AB 2613 Page 4 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 AB 2613 Page 5 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 AB 2613 Page 6 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 AB 2613 Page 7 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 AB 2613 Page 8