BILL ANALYSIS                                                                                                                                                                                                    



                                                                    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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