BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 481                           |Hearing    | 4/15/15 |
          |          |                                 |Date:      |         |
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          |Author:   |Hueso                            |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |4/8/15                           |Fiscal:    |NYes     |
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          |Consultant|Weinberger                                            |
          |:         |                                                      |
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                            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  







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               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.









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           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  








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          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.



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