BILL ANALYSIS Ó SB 481 Page 1 SENATE THIRD READING SB 481 (Hueso) As Amended June 18, 2015 Majority vote SENATE VOTE: 29-0 ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Local |9-0 |Maienschein, | | |Government | |Gonzalez, Alejo, | | | | |Chiu, Cooley, Gordon, | | | | |Holden, Linder, | | | | |Waldron | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |14-0 |Gomez, Bigelow, | | | | |Bloom, Bonta, | | | | |Calderon, Chang, | | | | |Eggman, Gallagher, | | | | | | | | | | | | | | |Eduardo Garcia, | | | | |Jones, Quirk, Rendon, | | | | |Weber, Wood | | | | | | | SB 481 Page 2 | | | | | ------------------------------------------------------------------ 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 no reimbursement is required by this act, pursuant to California Constitution Article XIII B, Section 6, 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, or changes the penalty for a crime or infraction, within the meaning of Government Code Section 17556, or changes the definition of a crime within the meaning of California Constitution Article XIII B, Section 6. FISCAL EFFECT: According to the Assembly Appropriations Committee, 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. This bill is sponsored by San Diego City Auditor Eduardo Luna. SB 481 Page 3 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 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 SB 481 Page 4 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 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 SB 481 Page 5 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. 4)California Public Records Act. 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. 5)Policy Considerations. The Legislature 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 Legislature 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 Legislature may wish to consider whether, absent a prevalent statewide SB 481 Page 6 problem, this bill is necessary. b) 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." 6)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, 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." 7)Arguments in Opposition. None on file. SB 481 Page 7 Analysis Prepared by: Angela Mapp / L. GOV. / (916) 319-3958 FN: 0001164