BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 490| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SB 490 Page 2 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 SB 490 Page 3 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 SB 490 Page 4 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 SB 490 Page 5 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 supportsfor 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 SB 490 Page 6 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 SB 490 Page 7 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 SB 490 Page 8 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 SB 490 Page 9 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 **** END **** SB 490 Page 10