BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 490|
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THIRD READING
Bill No: SB 490
Author: Beall (D) and Huff (R), et al.
Amended: 4/23/15
Vote: 21
SENATE HUMAN SERVICES COMMITTEE: 5-0, 4/21/15
AYES: McGuire, Berryhill, Hancock, Liu, Nguyen
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/4/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SUBJECT: Regional centers: audits
SOURCE: ResCoalition
DIGEST: This bill raises 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 requires 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.
ANALYSIS:
Existing law:
1)Establishes that the Department of Developmental Services
(DDS) contracts with private non-profit regional centers to
provide fixed points of contact in the community for persons
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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. (Welfare and
Institutions Code (WIC) 4620)
2)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 $250,000 but less than $500,000, as
defined, the entity shall obtain an independent audit or
independent review report of its financial statements for
the period.
b) When the amount received from the regional center or
regional centers during the entity's fiscal year is equal
to or more than $500,000, the entity shall obtain an
independent audit of its financial statements for the
period.
3)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))
4)Requires regional centers to take appropriate action, up to
termination of vendorization, for lack of adequate resolution
of issues. (WIC 4652.5. (c))
5)Requires regional centers to notify DDS of all qualified
opinions or reports noting significant issues that impact
regional center services within 30 days after receipt, with a
plan for resolution of issues. (WIC 4652.5. (d))
6)Specifies that an independent review of financial statements
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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))
7)Specifies the elements that an independent review report shall
cover, as defined. (WIC 4652.5. (f))
8)Prohibits DDS from considering requests for rate adjustments
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))
9)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 $2 million or more, as specified, to obtain an
annual financial audit, as defined, and requires the audit
statements to be available for public inspection no later than
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nine months after the close of the fiscal year to which the
statements relate, as defined. (Government Code (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 independent
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 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 unmodified opinion or an unqualified opinion with
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additional communication, 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.
Background
The Lanterman Act. The Lanterman Developmental Disabilities
Services Act , established an entitlement to services and
support s 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
years, 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 21 local,
nonprofit regional centers. About 74 percent of consumers live
in the home of a parent or guardian, according to DDS 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 Web site, "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."
Bureau of State Audits (BSA) report. In August 2010, the BSA
released a report concluding that regional centers were not
appropriately monitoring expenditures of vendors and that the
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centers themselves did not always document how rates are set,
why certain vendors are selected, or how contracts are procured
resulting in "the appearance of favoritism or fiscal
irresponsibility." 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 DDS 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 one 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 DDS description of
the proposal.
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
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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:
1)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.
2) Qualified opinion - A company's financial records have not
been maintained in accordance with GAAS but no
misrepresentations are identified.
3)Adverse opinion - Issued 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.
4)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.
Comments
DDS reports that it has no way to track cost savings from
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efficiencies in business practices resulting from the audits and
therefore no way to measure actual savings from enactment of the
audits. The Association of Regional Center Agencies (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. About 90
audits have been reported to DDS with problems.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
According to the Senate Appropriations Committee, this bill is
not likely to result in significant cost increases for regional
center services. The existing audit requirement does not
examine vendor billing records to determine whether a vendor is
appropriately billing a regional center for authorized services.
Rather, the audit requirement was intended to improve vendor
financial record keeping, generally. The Budget Act of 2011
assumed that better financial record keeping would reduce
billing by vendors to regional centers, yielding savings. (The
Budget assumed a 1% reduction in costs, which equaled about $22
million from the General Fund.) Because the auditors are not
looking at the appropriateness of the services provided, staff
does not believe that the audit requirement is likely to
generate significant savings. Therefore, relaxing the audit
requirement is not likely to increase costs to purchase services
by the regional centers.
SUPPORT: (Verified5/5/15)
ResCoalition (source)
Association of Regional Center Agencies
Arc and United Cerebral Palsy California Collaboration
California Disability Services Association
Cerebral Palsy Center for the Bay Area
Community Residential Care Association of California
The Alliance
Trinity Change, Inc.
None received
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OPPOSITION: (Verified5/5/15)
None received
ARGUMENTS IN SUPPORT: 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 that
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.
Prepared by:Mareva Brown / HUMAN S. / (916) 651-1524
5/6/15 17:02:28
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