BILL ANALYSIS Ó
SENATE COMMITTEE ON HUMAN SERVICES
Senator McGuire, Chair
2015 - 2016 Regular
Bill No: SB 490
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|Author: |Beall |
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|Version: |February 26, 2015 |Hearing |April 21, 2015 |
| | |Date: | |
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|Urgency: |No |Fiscal: |No |
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|Consultant|Mareva Brown |
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Subject: Regional centers: audits
SUMMARY
This bill would raise the threshold amount required for a
provider of Regional Center services to obtain an independent
audit from $500,000 to $2 million and the threshold for a lesser
review from $250,000 to $500,000. It also would require a
regional center to grant a two-year exemption to the annual
audit requirement if there were no issues in the audit or review
that impacted regional center services, and makes other changes
to existing audit requirements.
ABSTRACT
Existing law:
1) Defines, in California law, "developmental disability"
as a disability that originates before the age of 18,
continues, or can be expected to continue, indefinitely,
and constitutes a substantial disability. This term also
includes autism. (WIC 4512)
2) Establishes the California Department of Developmental
Services (DDS) as the agency that oversees the state's
developmental centers, and specifies the duties of the
department and developmental center employees (WIC 4400 et
seq.)
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3) Establishes in California law that DDS contracts with
private non-profit regional centers to provide fixed points
of contact in the community for persons with developmental
disabilities and their families, so that these persons may
have access to the services and supports best suited to
them throughout their lifetime. (WIC 4620)
4) Requires that an entity receiving payments from one or
more regional centers shall contract with an independent
accounting firm for an audit or review of its financial
statements subject to all of the following: (WIC 4652.5.
(a) (1))
a. When the amount received from the regional
center or regional centers during the entity's
fiscal year is more than or equal to two hundred
fifty thousand dollars ($250,000) but less than five
hundred thousand dollars ($500,000), the entity
shall obtain an independent audit or independent
review report of its financial statements for the
period. This includes work activity program
providers receiving less than two hundred fifty
thousand dollars ($250,000), as specified.
b. When the amount received from the regional
center or regional centers during the entity's
fiscal year is equal to or more than five hundred
thousand dollars ($500,000), the entity shall obtain
an independent audit of its financial statements for
the period.
5) Exempts state agencies, the UC and CSU university
systems and certain providers, as defined, from the audit
requirement. (4652.5. (a) (2), et seq.)
6) Requires vendors to provide copies of the audit or
review to the vendoring regional center within 30 days of
completion, and requires regional centers to review them
and require resolution of issues identified in the report
that have an impact on regional center services. (WIC
4652.5. (b))
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7) Requires regional centers to take appropriate action, up
to terminaton of vendorization, for lack of adequate
resolution of issues. (WIC 4652.5. (c))
8) Requires regional centers to notify DDS of all qualified
opinion reports or reports noting significant issues that
directly or indirectly impact regional center services
within 30 days after receipt, and requires the notification
include a plan for resolution of issues. (WIC 4652.5. (d))
9) Specifies that an indepent review of financial
statements must be performed by an independent accounting
firm and requires the review to include at a minimum:
a. An inquiry as to the entity's accounting
principles and practices and methods used in applying
them.
b. An inquiry as to the entity's procedures for
recording, classifying, and summarizing transactions
and accumulating information.
c. Analytical procedures designed to identify
relationships or items that appear to be unusual.
d. An inquiry about budgetary actions taken at
meetings of the board of directors or other comparable
meetings.
e. An inquiry about whether the financial
statements have been properly prepared in conformity
with generally accepted accounting principles and
whether any events subsequent to the date of the
financial statements would have a material effect on
the statements under review.
f. Working papers prepared in connection with a
review of financial statements describing the items
covered as well as any unusual items, including their
disposition. (WIC 4652.5. (e))
10) Specifies that the independent review report shall
cover, at a minimum, all of the following:
a. Certification that the review was performed in
accordance with standards established by the American
Institute of Certified Public Accountants.
b. Certification that the statements are the
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representations of management.
c. Certification that the review consisted of
inquiries and analytical procedures that are lesser in
scope than those of an audit.
d. Certification that the accountant is not aware
of any material modifications that need to be made to
the statements for them to be in conformity with
generally accepted accounting principles. (WIC 4652.5.
(f))
11) Prohibits DDS from considering requests for adjustments
to rates by an entity receiving regional center payments
solely to fund either anticipated or unanticipated changes
required to comply with this section, as defined. (WIC
4652.5. (g))
12) Requires every charitable corporation, commercial
fundraiser for charitable purposes, unincorporated
association, and trustee required to file reports with the
Attorney General, as defined, that receives or accrues in
any fiscal year gross revenue of two million dollars
($2,000,000) or more, exclusive of grants from, and
contracts for services with, governmental entities for
which the governmental entity requires an accounting of the
funds received, to obtain an annual financial audit, as
defined, and requires the audited financial statements to
be available for public inspection no later than nine
months after the close of the fiscal year to which the
statements relate, as defined. (GOV 12586(e) (1))
This bill:
1) Adds to the existing requirement that an entity
receiving regional center payments must obtain an audit new
language requiring that the audit or review must relate to
payments made by regional centers.
2) Increases the window for an independent audit or
indepent review from $250,000 to $500,000 to a new window
of $500,000 to $2 million, thereby also deleting the
requirement that vendors receiving less than $500,000
obtain any independent audit or review, as specified.
3) Increases the threshold for a vendor to be required to
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obtain an independent audit of its financial statements
from $500,000 to $2 million.
4) Adds to the list of vendor exemptions any income from
payments for social security benefits.
5) Permits an entity that obtains an independent audit or
independent review based on regional center payments of
between $500,000 and $2 million to request a two-year
exemption if the regional center does not find issues in
the prior year's audit or review that has an impact on
regional center services.
6) Requires the regional center to grant a vendor request
under that circumstance.
7) Permits an entity that is required to obtain an
independent audit of its financial statements based on
regional center payments in excess of $2 million to apply
to the regional center for an exemption subject to all of
the following conditions:
a. If the independent audit for the prior year
resulted in an unqualified opinion or an unqualified
opinion with explanatory language, the regional center
shall grant the entity a two-year exemption.
b. If the independent audit for the prior year
resulted in a qualified opinion and the issues are not
material and pervasive, the regional center shall
grant the entity a two-year exemption. However, the
entity and the regional center shall continue to
address issues raised in this independent audit,
regardless of whether the exemption is granted.
8) Requires a regional center to notify DDS of any
exemption it grants to an entity that receives a qualified
opinion report.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
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BACKGROUND AND DISCUSSION
Purpose of the bill
According to the author, the vendor audit requirement was
intended to save the state more than $20 million annually
through increased accountability, but as of March of 2014, DDS
has received fewer than 100 audits of concern and none of them
resulted in any savings. The cost to perform the financial
reviews and audits are borne solely by the vendors at an average
cost of $10,000 per audit. Additionally, the author states SB
490 clarifies ambiguities in the original bill, including what
monies are subject to an audit. As a result, some accounting
firms are auditing the vendors' entire budget including revenue
that is not from the regional center while others are auditing
only the portion from regional centers. This bill clarifies that
only monies paid by the regional centers are subject to the
audit review.
Finally, the author states, this bill aligns the vendor audit
threshold with that of nonprofit auditing practices elsewhere in
the state. Existing law (GOV 12586(e) (1)), states non-profits
with revenue greater than $2 million dollars shall be subject to
annual fiscal audits. The current threshold creates a lower
trigger (of $500,000) for much more expensive independent audit
rather than a simpler financial review, the author states.
The Lanterman Act
The Lanterman Developmental Disabilities Services Act, passed in
1974, established an entitlement to services and supports for
Californians with developmental disabilities and set up an
extensive system to care for individuals who are living in their
communities. A developmental disability is defined in statute as
one that originates before the age of 18, continues, or can be
expected to continue, indefinitely, and constitutes a
substantial disability. Today, more than 275,000 children and
adults with developmental disabilities are served in
community-based programs and supported by state- and federally
funded services that are coordinated by local, nonprofit
regional centers.
The state's 21 regional centers vary considerably in size and
organization. Statewide, slightly more than half of the regional
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center population is between age 18 and 61 years old; about
two-thirds of all consumers have an intellectual disability,
three in 10 are diagnosed with autism or a related disorder, and
18 percent are identified as having severe behaviors, according
to data reported by the Department of Developmental Services
(DDS). About 74 percent of consumers live in the home of a
parent or guardian, according to DDS statewide data from June
2014.
Vendorization
To be eligible to provide services to a regional center client,
a provider must become a vendor of those services in a specific
regional center's catchment area. According to the DDS website,
"vendorization is the process for identification, selection, and
utilization of service providers based on the qualifications and
other requirements necessary in order to provide the services.
The vendorization process allows regional centers to verify,
prior to the provision of services to consumers, that an
applicant meets all of the requirements and standards specified
in regulations."
In truth, regional centers must vendorize any applicant who
meets all the requirements for the service to be provided. The
DDS website notes that vendorization in no way obligates that
regional center to purchase service from that vendor. Applicants
who pass vendorization requirements are assigned a service code
and unique vendor identification number by the regional center,
which determines the appropriate vendor category for the service
to be provided.
Bureau of State Audits report
In August 2010, the Bureau of State Audits released a report
entitled "Department of Developmental Services: A More Uniform
and Transparent Procurement and RateSetting Process Would
Improve the CostEffectiveness of Regional Centers. Among its
conclusions was that regional centers were not appropriately
monitoring expenditures of vendors and that the centers
themselves did not always document how rates are set, why
certain vendors are selected, or how contracts are procured;
"thus, in some cases, the ways in which regional centers
established payment rates and selected vendors had the
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appearance of favoritism or fiscal irresponsibility."<1> The
audit prompted a Senate Human Services Committee hearing as well
as discussions in the Senate budget subcommittee about the need
for additional oversight of vendor expenditures. While DDS is
tasked with auditing service providers (WIC 4648.1), the
department does not have sufficient resources to conduct audits
on many vendors and typically focuses on those that have been
brought to its attention.
Audit requirements
Faced with dramatic fiscal shortfalls in 2011, and on the heels
of the BSA findings, the Administration and Legislature added a
requirement for vendors receiving more than $250,000 to obtain
either an independent audit or a lesser audit review to ensure
good bookkeeping practices (SB 74 Committee on Budget and Fiscal
Review, Chapter 9, Statutes of 2011).
Thresholds
Vendors receiving more than $500,000 in regional center funding
are required to obtain an independent audit. The thresholds were
derived, in part, by a budget savings estimate that projected
improved accounting procedures and internal controls by vendors
at this level would save about 1 percent in annual purchase of
service costs. The audits were not expected to find significant
amounts of fraud, rather the savings assumed that the audits
would identify poor billing practices, errors in billings and
inappropriate transactions that would otherwise be billed to
regional centers. DDS would be able to focus its audits on those
vendors with qualified reports or significant issues raised,
according to a Department description of the proposal.
Previously, this $500,000 threshold was similar to a federal
requirement that mandated entities receiving federal grants
conduct an annual audit once their funding reached $500,000.
However, as of January 1, 2015, this threshold was increased to
$750,000 (OMB A133 Circular). These "Single Audits" require
comprehensive testing of compliance and internal controls over
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<1> "Department of Developmental Services: A More Uniform and
Transparent Procurement and RateSetting Process Would Improve
the CostEffectiveness of Regional Centers, Bureau of State
Audits, Report No. 2009-118, August 2010, pg. 155
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compliance of federal programs.
California statute governing charitable corporations and
fundraising (GOV 12586(e) (1)) requires any entity that accrues
in any fiscal year gross revenue of $2 million or more exclusive
of grants from, and contracts for services with, governmental
entities for which the governmental entity requires an
accounting of the funds received, to obtain an independent audit
for conformity with generally acceptable accounting principles.
The audit results are required to be made available to the state
and the public no later than nine months after the close of the
fiscal year to which the statements relate, as specified.
Audit and Review findings
An audit report is completed by an independent accounting
professional to appraise the financial status of a business or
company. It considers a company's assets and liabilities, and
reviews whether financial records have been maintained in
accordance with Generally Acceptable Accounting Standards
(GAAS). There are four types of auditor opinions a business can
receive:
a. Unmodified opinion - Often called a clean opinion, and
formerly called an unqualified opinion, this is issued when
an auditor determines that the financial records are
presented fairly and free of any misrepresentations. In
addition, an unmodified opinion indicates that the
financial records have been maintained in accordance with
the GAAS. This is the best possible report.
b. Qualified opinion - In situations when a company's
financial records have not been maintained in accordance
with GAAS but no misrepresentations are identified, an
auditor will issue a qualified opinion, which highlights
the reason that the audit report is not unqualified.
c. Adverse opinion - When an auditor concludes that the
audited financial statements do not fairly represent the
organization's financial position and there are significant
departures from GAAS, an adverse opinion will be issued.
Often, an auditor will advise the organization that there
is a problem and work with them to resolve or correct
issues so the published audit can be either qualified or
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unqualified.
d. Disclaimer of opinion - An auditor also may choose not
to issue an opinion, either due to significant
uncertainties in the appropriateness of the materials,
significant limitations in the scope of the audit or the
auditor feels he or she cannot be impartial or independent
about the business.
An audit review is substantially smaller in scope than a full
audit. Its purpose is to analyze the financial data of a
business and make inquiries of the company's management in order
to express limited assurances that the company is in conformity
with GAAS. No opinions are issued with an audit review. A
Certified Public Accountant will issue either a clean review
report, or will issue no report based on a material modification
that needs to be made.
Related legislation:
SB 1259 (Emmerson, 2012) was substantially similar to this bill.
It was held in the Senate Appropriations Committee.
SB 74 (Committee on Budget and Fiscal Review, Chapter 9,
Statutes of 2011) established the audit requirements.
COMMENTS
This bill is similar to SB 1259 (Emmerson, 2012) which sought to
modify the audit requirements just months after they were
enacted in trailer bill as a cost-savings measure. The
Governor's assumption in proposing the audits in trailer bills
was that the audits would save $39.5 million (total funding) of
which $21.3 million was general fund as part of the mid-year
2011-12 savings. The assumption of cost savings was based on a
belief that poor billing practices, errors in billings and
inappropriate transactions billed to regional centers resulted
in about 1 percent annual losses.
DDS reports that it has no way to track cost savings from
efficiencies in business practices resulting from the audits and
therefore no way to measure actual savings from enactment of the
audits.
Since that time, the Association of Regional Center Agencies
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(ARCA) reports that audit completion varies statewide. On
average, according to an ARCA survey of 18 of 21 regional
centers, 52 percent of vendors have completed audits with 99
percent of audits resulting in unqualified vendor opinions. DDS
reports that approximately 90 audits have been reported to the
Department with problems. The original legislation did not
require regional centers to report to DDS the number of audits
or reviews completed successfully and the Department does not
have any data on overall compliance with the audit requirement,
nor does it know which vendors have passed with clean audits or
reviews.
DDS estimates that increasing the threshold for audit reviews
from $250,000 to $500,000 would eliminate the requirement for 38
percent of providers to conduct an audit review or audit. In
2013-14, 2,214 entities were required to obtain an in-depth
review or audit at the $250,000 threshold; doubling that
threshold would reduce the number to 1,381. Additionally, if the
threshold for audits were raised from $500,000 to $2 million, as
proposed in this bill, it would result in nearly 70 percent of
providers being eliminated from the audit requirement: Only 410
vendors would be required to obtain an independent audit from a
total of 1,381 currently eligible vendors.
As the group of vendors receiving from $250,000 to more than
$500,000 in regional center funding was specifically targeted as
needing better bookkeeping practices in the original legislative
proposal, the author may want to re-consider how to ensure
cost-savings among these vendors as the bill moves forward.
Staff recommends the following amendment:
1. In keeping with changes to generally accepted accounting
standard language, change "unqualified" to "unmodified" and
other standard language changes as follows:
(A) If the independent audit for the prior year resulted in an
unqualified unmodified opinion or an unqualified unmodified
opinion with explanatory language , additional communication the
regional center shall grant the entity a two-year exemption.
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POSITIONS
Support:
ResCoalition (Sponsor)
Association of Regional Center Agencies
The Alliance
Arc and United Cerebral Palsy California Collaboration
California Disability Services Association
Cerebral Palsy Center for the Bay Area
Trinity Change, Inc.
Oppose:
None.
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