BILL ANALYSIS Ó
SB 481
Page 1
Date of Hearing: June 17, 2015
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Brian Maienschein, Chair
SB
481 (Hueso) - As Amended April 8, 2015
SENATE VOTE: 29-0
SUBJECT: Local government: auditors: independence.
SUMMARY: Prohibits the general counsel of a local government
from having direct oversight over that local government's
auditors. Specifically, this bill:
1)Prohibits the general counsel of a city, county, city and
county, or district, or the employees of the general counsel
from having direct oversight over the city, county, city and
county, or district employees that conduct audits or that
conduct audit activities of the respective agency.
2)Provides that all city, county, city and county, and district
employees that conduct audits or that conduct audit activities
of those respective agencies shall not be required to report
to the general counsel or any employees of the general
SB 481
Page 2
counsel.
3) Provides that no reimbursement is required by this act,
pursuant to Section 6 of Article XIIIB of the California
Constitution, because the only costs that may be incurred by a
local agency or school district will be incurred because this
act creates a new crime or infraction, eliminates a crime or
infraction,4) or changes the penalty for a crime or
infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIIIB of the California
Constitution.
EXISTING LAW:
1)Requires all city, county, city and county, and district
employees that conduct audits or that conduct audit activities
of those respective agencies to 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, as
appropriate.
2)Enumerates the following general standards for local
governments' internal audits and audit activities:
a) That auditors should be independent of the activities
they audit;
SB 481
Page 3
b) That audits should be performed with proficiency and due
professional care;
c) That 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;
d) That audit work should include planning the audit,
examining and evaluating information, communicating
results, and following up; and,
e) That the chief auditor should properly manage the
auditing department.
3)Provides that nothing in the above provisions is intended to
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, as appropriate.
4)Requires, pursuant to the California Public Records Act
(CPRA), public records to be open to inspection and gives
every person a right to inspect public records, with specific
exceptions.
SB 481
Page 4
5)Creates an exception for records that are subject to the
"attorney client privilege," which allows communications
between a public agency and its lawyers to be kept
confidential.
6)Establishes requirements for internal auditor operations for
state agencies in order to achieve independence and
objectivity, as follows:
a) For any state agency that does not report to a governing
body, the internal auditor operations shall meet all of the
following requirements:
i) The chief internal auditor shall be accountable to
the head or deputy head of the state agency;
ii) The chief internal auditor shall report audit
findings and recommendations made under his or her
jurisdiction to the head or deputy head of the state
agency and to the general counsel to the state agency, if
applicable; and,
iii) The operations shall be organizationally outside the
staff or line management function of the unit under
audit.
SB 481
Page 5
b) For any state agency that is overseen by a governing
body, the internal audit operations shall meet all of the
following requirements:
i) The chief internal auditor shall be accountable to
the audit committee of the governing body;
ii) The chief internal auditor shall report audit
findings and recommendations made under his or her
jurisdiction to the audit committee and the general
counsel to the governing body; and,
iii) The operations shall be organizationally outside the
staff or line management function of the unit under
audit.
FISCAL EFFECT: According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS:
1)Bill Summary. This bill prohibits the general counsel of a
city, county, or district, or his or her employees, from
having direct oversight over those agencies' employees who
conduct audits. The bill also specifies that employees of
those agencies who conduct audits must not be required to
report to the general counsel or any employees of the general
counsel. This bill is sponsored by San Diego City Auditor
SB 481
Page 6
Eduardo Luna.
2)Author's Statement. According to the author, "SB 481 seeks to
ensure transparency of government audit reports and the
independence of internal auditors...This bill is a response to
an existing practice that limits public access to audit
reports. Some organizations require their internal auditors
(to) be supervised by their general counsel. This structure,
which requires an auditor to regularly report to the general
counsel, weakens the independence and transparency of an
auditor's work. Such a structure makes it easier for
organizations to render a report inaccessible to the public.
They can do this by claiming that a particular audit report is
a privileged communication between an attorney and client.
Once something is deemed a client-privileged communication,
the public no longer has access to it.
"Audits provide essential accountability and transparency over
government programs and it is important that the public has
access to them. This bill would address this issue by
prohibiting a general counsel from having direct supervision
over an auditor and ensure the public's access to these audit
reports."
3)Background. Existing law requires city, county and district
auditors to conduct their work under standards prescribed by
the Institute of Internal Auditors or the Government Auditing
Standards issued by the Comptroller General of the United
SB 481
Page 7
States.
The Institute of Internal Auditors (IIA) is an international
professional association that publishes Standards for the
Professional Practice of Internal Auditing, also known as the
Red Book, for use in all types of organizations where internal
auditors are found. The Red Book includes statements of basic
requirements for the professional practice of internal
auditing and for evaluating the effectiveness of its
performance. The requirements are internationally applicable
at organizational and individual levels.
The United States Government Accountability Office (GAO) is an
independent, nonpartisan agency that works for Congress and
investigates how the federal government spends taxpayer
dollars. The head of the GAO is the Comptroller General of
the United States. The GAO publishes Generally Accepted
Government Auditing Standards, also known as the Yellow Book,
which provide a framework for conducting high quality audits
with competence, integrity, objectivity, and independence.
The Yellow Book is for use by auditors of government entities,
entities that receive government awards, and other audit
organizations performing Yellow Book audits.
According to the 2011 revision of the Yellow Book, "Government
auditing is essential in providing accountability to
legislators, oversight bodies, those charged with governance,
and the public. Audits provide an independent, objective,
nonpartisan assessment of the stewardship, performance, or
SB 481
Page 8
cost of government policies, programs, or operations,
depending upon the type and scope of the audit."
The Yellow Book explains that a government audit organization
can be structurally located within or outside the audited
entity. "Audit organizations that are external to the audited
entity and report to third parties are considered to be
external audit organizations. Audit organizations that are
accountable to senior management and those charged with
governance of the audited entity, and do not generally issue
their reports to third parties external to the audited entity,
are considered internal audit organizations."
However, "Some government audit organizations represent a
unique hybrid of external auditing and internal auditing in
their oversight role for the entities they audit. These audit
organizations have external reporting requirements consistent
with the reporting requirements for external auditors while at
the same time being part of their respective agencies. These
audit organizations often have a dual reporting responsibility
to their legislative body as well as to the agency head and
management."
Neither the Red Book nor the Yellow Book prohibits audits from
being reported to a general counsel.
SB 481
Page 9
4)California Public Records Act. The 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.
5)Independence for Auditors. SB 1452 (Speier), Chapter 452,
Statutes of 2006, enacted a number of provisions to update
auditing standards for local and state auditors, and to ensure
the independence of internal auditors for state agencies
specifically. SB 1452 was the result of hearings by the
Senate Select Committee on Government Cost Control, which
found evidence that auditors for the Department of Corrections
and Rehabilitation were pressured to overlook certain
expenditures, or that their findings were dismissed or
eliminated from the Department's final report.
Provisions of SB 1452 protecting internal auditors of state
agencies included the following requirements:
a) For state agencies that don't report to a governing
body:
SB 481
Page 10
i) The chief internal auditor must be accountable to
the head or deputy head of the state agency;
ii) The chief internal auditor must report his or her
audit findings and recommendations to the head or deputy
head of the state agency and to the general counsel to
the state agency, if applicable (emphasis added); and,
iii) The operations must be organizationally outside the
staff or line management function of the unit under
audit.
b) For state agencies that are overseen by a governing
body:
i) The chief internal auditor must be accountable to an
audit committee of the governing body;
ii) The chief internal auditor must report his or her
audit findings and recommendations to the audit committee
and the general counsel to the governing body (emphasis
added); and,
iii) The operations must be organizationally outside the
staff or line management function of the unit under
SB 481
Page 11
audit.
Local agency auditors are not subject to these requirements.
Local agency auditors can be appointed by the local governing
board, or they can be elected. In addition, some local
jurisdictions have independent audit committees.
6)Policy Considerations. The Committee may wish to consider the
following:
a) Prevalence. The author and sponsor have provided two
examples of local agencies where the auditor reports
directly to the agency's general counsel. The Committee
may wish to ask the author or sponsor to provide examples
showing that these reporting relationships have resulted in
curtailed independence for those auditors or where this
reporting relationship led to the denial of a CPRA request
based on attorney-client privilege. The Committee may wish
to consider whether, absent a prevalent statewide problem,
this bill is necessary.
b) Reporting to General Counsel. Current law requires
internal auditors of state agencies to report their
findings and recommendations to their general counsels.
This bill prohibits local agency auditors from reporting to
their general counsels. This language is intended to
address two stated concerns: maintaining independence for
local auditors, and ensuring transparency of local public
records (in this case, audits or audit information). This
SB 481
Page 12
bill's language could create confusion regarding whether it
applies to the submission of reports to a general counsel
or whether it applies to a reporting relationship with a
general counsel. The Committee may wish to consider
striking this language or clarifying the language to
specify a reporting relationship between audit staff and
general counsel.
c) Attorney-Client Privilege. The Senate Governance and
Finance Committee, in its analysis of this bill, noted the
following: "?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 distinguish between legitimate and illegitimate
applications of the attorney-client privilege to internal
audits."
7)Arguments in Support. City of San Diego City Auditor Eduardo
Luna, sponsor of this measure, writes, "Audits provide
essential accountability and transparency over government
programs. Given its importance, the public's ability to
access these reports are paramount. However, certain
practices limit the public's access to these audit reports.
One such practice is the transmittal of internal audit reports
to the organization's General Counsel. When
reports are issued to the General Counsel, those reports are
then classified as attorney-client privileged communications,
SB 481
Page 13
thereby limiting public disclosure. SB 481 is a good
government bill and will ensure the public has access to the
audit reports by prohibiting employees who perform audits from
reporting organizationally to the General Counsel."
8)Arguments in Opposition. None on file.
REGISTERED SUPPORT / OPPOSITION:
Support
City of San Diego City Auditor Eduardo Luna [SPONSOR]
City of Berkeley City Auditor Ann-Marie Hogan
City of Calexico
City of El Centro City Manager Ruben A. Duran
El Centro Chamber of Commerce and Visitors Bureau
Imperial County Board of Supervisors
SB 481
Page 14
Opposition
None on file
Analysis Prepared by:Angela Mapp / L. GOV. / (916)
319-3958