BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |SB 481 |Hearing | 4/15/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Hueso |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |4/8/15 |Fiscal: |NYes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- LOCAL AGENCIES' INTERNAL AUDITS Prohibits local agency employees who work on internal audits from reporting to, or being directly overseen by, a local agency's general counsel. Background and Existing Law Local government employees who conduct audits or audit activities of their respective local government must conduct their work under the general and specified standards prescribed by the Institute of Internal Auditors or the Government Auditing Standards issued by the Comptroller General of the United States. State law enumerates the following general standards for local governments' internal audits and audit activities: Auditors should be independent of the activities they audit. Audits should be performed with proficiency and due professional care. The scope of the audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities. Audit work should include planning the audit, examining SB 481 (Hueso) 4/8/15 Page 2 of ? and evaluating information, communicating results, and following up. The chief auditor should properly manage the auditing department. These internal audit standards do not limit the rights or obligations of auditors to conduct audits and audit activities in accordance with other laws and regulations that may apply to a particular entity. The California Public Records Act (CPRA) requires public records to be open to inspection during office hours and gives every person a right to inspect public records, with specific exceptions. One exception to the CPRA's disclosure requirements applies to records that are subject to the "attorney client privilege," which allows communications between a public agency and its lawyers to be kept confidential. Generally, the final reports of local agencies' internal audits are public records that are open to inspection pursuant to the CPRA. However, advocates for government transparency and accountability worry that local officials sometimes invoke attorney-client privilege to avoid publicly releasing potentially embarrassing or controversial internal audit reports. They want legislators to prohibit local agencies' organizational structures from making internal audit employees answerable to an agency's general counsel. Proposed Law Senate Bill 481 prohibits the general counsel of a city, county, city and county, or district, or the general counsels' employees, from having direct oversight over city, county, city and county, or district employees who conduct audits or audits activities of the respective agency. SB 481 prohibits all city, county, city and county, or district employees who conduct audits or audit activities of those respective agencies from being required to report to the general counsel or any employees of the general counsel. SB 481 (Hueso) 4/8/15 Page 3 of ? State Revenue Impact No estimate. Comments 1. Purpose of the bill . Audits provide essential accountability and transparency over government programs. Given their importance, the public's ability to access these reports is paramount. Currently, there are two sets of professional auditing standards that employees who perform audits must choose from. One standard, known as the yellow book, is published by the US Government Accountability Office. The other standard, known as the red book, is published by the Institute of Internal Auditors. Statute authorizes internal auditors to follow either standard. However, both standards fail to preserve complete transparency of internal audit reports. Some local governments are reporting their internal auditors' reports to their General Counsel. By doing so, those reports are being classified as attorney-client privileged communications, which limits public disclosure of the audit reports. Neither the red book nor the yellow book prohibits this practice. SB 481 augments the auditing standards that apply to local governments' internal audits to prevent local officials from using the attorney-client privilege to conceal audit information from members of the public. 2. No exceptions ? The public has a fundamental right to scrutinize information about the manner in which governments conduct the people's business. Clearly, public officials should not be allowed to invoke the attorney-client privilege opportunistically to prevent the release of information that officials simply don't want the public to know. However, by prohibiting any local government internal audit activities from being conducted under the auspices of a general counsel, SB 481 may prevent local governments from performing internal audits that may justifiably be privileged communications. For example, should a local agency be prevented from having its general counsel's office conduct an internal audit of personnel policies and practices to determine whether they expose the agency to potential legal liabilities? The Committee may wish to consider amending SB 481 to specify definitions or criteria that SB 481 (Hueso) 4/8/15 Page 4 of ? distinguish between legitimate and illegitimate applications of the attorney-client privilege to internal audits. Support and Opposition (4/9/15) Support : El Centro Chamber of Commerce & Visitor's Bureau; Imperial County; San Diego City Auditor Eduardo Luna. Opposition : Unknown. -- END --