BILL ANALYSIS Ó
SB 490
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Date of Hearing: June 30, 2015
ASSEMBLY COMMITTEE ON HUMAN SERVICES
Kansen Chu, Chair
SB
490 (Beall) - As Amended June 18, 2015
SENATE VOTE: 36-0
SUBJECT: Regional centers: audits.
SUMMARY: Increases audit and financial review thresholds for
regional center vendors.
Specifically, this bill:
1)Clarifies that an audit or review of an entity that receives
payment from one or more regional centers, pursuant to
specified requirements, shall pertain to financial statements
relating to payments made by regional centers.
2)Deletes the requirement that an entity that receives between
$250,000 and $500,000 from one or more regional centers in a
fiscal year must obtain an audit or review of its financial
statements and instead triggers the requirement for an
independent audit or independent review report of an entity's
financial statements when the amount received from regional
centers is between $500,000 and $2,000,000 during the entity's
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fiscal year.
3)Accordingly, increases the threshold for dollars received from
a regional center that triggers an entity's requirement to
obtain an independent audit of financial statements from
$500,000 to $2,000,000 during a fiscal year.
4)Adds income from payments for social security benefits to the
list of excluded income types for purposes of the audit
requirement threshold.
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. Requires the regional center to grant the
vendor request if that condition is met.
6)Permits an entity that is required to obtain an independent
audit of its financial statements based on regional center
payments of $2 million or more to apply to the regional center
for an exemption subject to all of the following:
a) If the independent audit for the prior year resulted in
an unmodified opinion or an unmodified opinion with
explanatory language, the regional center shall grant the
entity a two-year exemption; and
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, and the entity and the regional center
shall continue to address issues raised in the independent
audit, regardless of whether the exemption is granted;
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7)Requires a regional center to notify the Department of
Developmental Services (DDS) of any exemption it grants to an
entity that receives a qualified opinion report.
EXISTING LAW:
1)Establishes an entitlement to services for individuals with
developmental disabilities under the Lanterman Developmental
Disabilities Services Act (Lanterman Act). (WIC 4500 et seq.)
2)Grants all individuals with developmental disabilities, among
all other rights and responsibilities established for any
individual by the United States Constitution and laws and the
California Constitution and laws, the right to treatment and
habilitation services and supports in the least restrictive
environment. (WIC 4502)
3)Establishes a system of 21 nonprofit regional centers
throughout the state to identify needs and coordinate services
for eligible individuals with developmental disabilities and
requires DDS to contract with regional centers to provide case
management services and arrange for or purchase services that
meet the needs of individuals with developmental disabilities,
as defined. (WIC 4620 et seq.)
4)Requires the development of an individual program plan (IPP)
for each regional center consumer, which specifies services to
be provided to the consumer, based on his or her
individualized needs determination and preferences, and
defines that planning process as the vehicle to ensure that
services and supports are customized to meet the needs of
consumers who are served by regional centers. (WIC 4512)
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5)Creates a process by which regional centers may "vendorize"
service providers, thereby providing a path to contract for
services with that provider and ensuring maximum flexibility
and availability of appropriate services and support for
persons with developmental disabilities. (WIC 4648)
6)Authorizes regional centers to solicit an individual or agency
through a request for proposals or other means to provide
needed services or supports not presently available, provided
it is necessary to expand the availability of needed services
of good quality. (WIC 4648(e)(1))
7)Requires regional centers to provide the consumer, his or her
parent, legal guardian, or other appropriate authorized
representative, as specified, at least annually, a statement
of services and supports the regional center purchased, for
the purpose of ensuring that the services are delivered. (WIC
4648(h))
8)Authorizes DDS and regional centers to monitor services and
supports purchased for regional center consumers without prior
notice, as specified, and authorizes DDS to conduct fiscal
reviews and audits of service providers' records. (WIC
4648.1(a))
9)Requires that DDS and regional center staff involved in
monitoring or auditing services provided to regional center
consumers be granted access to a provider's grounds,
buildings, service program, and all related records and
documentation, as specified. (WIC 4648.1(b))
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10)Requires that an entity receiving payments from one or more
regional centers contract with an independent accounting
firm for an audit or review of its financial statements
subject to all of the following:
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; and
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. (WIC 4652.5 (a)(1))
11)Excludes certain payment types, as specified, from
consideration and exempts state and local agencies, the UC and
CSU university systems from the audit requirement. (WIC
4652.5(a)(2) and (a)(3))
12)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))
13)Requires regional centers to take appropriate action, which
may entail termination of vendorization, for lack of adequate
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resolution of issues. (WIC 4652.5(c))
14)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 to
include a plan for resolution of issues. (WIC 4652.5 (d))
15)Specifies that an independent 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; and
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))
16)Specifies that the independent review report shall cover, at
a minimum, all of the following:
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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
representations of management;
c) Certification that the review consisted of inquiries
and analytical procedures that are lesser in scope than
those of an audit; and
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))
17)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
for an entity to comply with the audit or review requirements,
as specified. (WIC 4652.5(g))
18)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))
19)Requires a regional center to audit records of service
providers, as specified, to the extent the regional center
determines it is necessary. (California Code of Regulations
Title 17 §50606)
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FISCAL EFFECT: According to the April 23, 2015 Senate
Appropriations Committee analysis, this bill is not likely to
result in significant cost increases for regional center
services.
COMMENTS:
Developmental services: The Lanterman Act (WIC § 4500 et seq.)
guides the provision of services and supports for Californians
with developmental disabilities. Each individual under the Act,
typically referred to as a "consumer," is legally entitled to
treatment and habilitation services and supports in the least
restrictive environment. Lanterman Act services are designed to
enable all individuals served to live more independent and
productive lives in the community.
The term "developmental disability" means a disability that
originates before an individual attains 18 years of age, is
expected to continue indefinitely, and constitutes a substantial
disability for that individual. It includes intellectual
disabilities, cerebral palsy, epilepsy, and autism spectrum
disorder. Other developmental disabilities are those disabling
conditions similar to an intellectual disability that require
treatment (i.e., care and management) similar to that required
by individuals with an intellectual disability.
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Direct responsibility for implementation of the Lanterman Act
service system is shared by DDS and 21 regional centers, which
are private nonprofit entities, established pursuant to the
Lanterman Act, that contract with DDS to carry out many of the
state's responsibilities under the Act. The 21 regional centers
serve 280,000 consumers, providing services such as residential
placements, supported living services, respite care,
transportation, day treatment programs, work support programs,
and various social and therapeutic activities.
Services provided to people with developmental disabilities are
outlined in an IPP, which is developed by the IPP
team-including, among others, the consumer, his or her legally
authorized representative, and one or more regional center
representatives-and is based on the consumer's needs and
choices. The Lanterman Act requires that the IPP promote
community integration and maximize opportunities for each
consumer to develop relationships, be part of community life,
increase control over his or her life, and acquire increasingly
positive roles in the community. The IPP must give the highest
preference to those services and supports that allow minors to
live with their families and adults to live as independently as
possible in the community.
Regional center vendors: Prior to being approved to receive
funding from a regional center for providing services to a
consumer, a service provider must become vendored by the
regional center that oversees the catchment area in which the
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provider is located. This "vendorization" process includes
verifying that the provider is qualified to provide the planned
services and meets all other regulatory standards and
requirements. It is important to note that vendorization makes
a provider eligible to provide services paid for by the regional
center, but does not guarantee the regional center will refer
consumers. Furthermore, there is nothing precluding a vendor
from being vendorized by more than one regional center. There
are over 45,000 vendors that provide services paid for by
regional centers in California.
Audits and reviews: Independent accounting professionals
complete audit reports to review whether financial records have
been maintained in accordance with Generally Acceptable
Accounting Principles (GAAP) and assess the financial status and
stability of a business or company based on its assets and
liabilities. Auditor opinion categories are as follows:
a) An unmodified opinion, which is often called a clean
opinion and is the best possible report category, is issued
when an auditor determines that the financial records are
presented fairly and free of any misrepresentations. An
unmodified opinion also indicates that the financial
records have been maintained in accordance with GAAP. This
type of opinion is sometimes also called an "unqualified"
opinion;
b) A qualified opinion is issued when a company's financial
records have not been maintained in accordance with GAAP
but no misrepresentations are identified. This type of
opinion indicates the reason that the audit report is not
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unqualified;
c) An adverse opinion is issued when an auditor concludes
that the audited financial statements do not adhere to the
GAAP and do not fairly represent the organization's
financial position. An auditor will often work with the
organization to resolve or correct issues so the published
audit can be either qualified or unqualified; and
d) A disclaimer of opinion is provided when an auditor
chooses 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 if
the auditor feels he or she cannot complete an impartial or
independent audit of the organization.
A review report is substantially smaller in scope than a full
audit and does not result in the issuance of an opinion. The
purpose of the review 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 GAAP. 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.
Bureau of State Audits report: The Bureau of State Audits
released a report in August 2010 entitled "Department of
Developmental Services: A More Uniform and Transparent
Procurement and RateSetting Process Would Improve the
CostEffectiveness of Regional Centers. The report concluded
that regional centers were not appropriately monitoring
expenditures of vendors and that they did not always document
why certain vendors are selected, how rates are set, or how
contracts are procured. This raised concerns about favoritism
and fiscal irresponsibility on the part of regional centers and
also fueled conversations within the Legislature about the need
for more vendor expenditure transparency and oversight.
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Regional center vendor audit requirements: SB 74 (Committee on
Budget and Fiscal Review), Chapter 9, Statutes of 2011, a
developmental services trailer bill, required that each regional
center vendor receiving more than $250,000 submit to an
independent audit or independent review report of its financial
statements for the period. It also required vendors receiving
$500,000 or more to obtain an independent audit of financial
statements (they are not able to meet the statutory requirement
with an independent review). These requirements were attached
to estimated savings that would be derived through identifying
and remedying poor billing practices and inappropriate spending
of regional center dollars. The estimated savings projection
was 1% in regional center purchase of services costs, and a DDS
description of the proposal indicated that it would allow the
department to focus its own audits on those vendors with
qualified reports or significant issues raised during the
independent audits. According to the sponsors of this bill,
financial review costs can range from $2,000 to $4,000, while
the cost for impacted vendors to have an audit conducted is
often between $6,000 and $14,000.
Need for this bill: According to the author, the current review
and audit requirements are overly financially burdensome for the
vendors required to obtain them without quite resulting in the
intended results or reaching the estimated savings target
attached to the requirements in SB 74. The author states that
there are a number of ambiguities in SB 74 that this bill seeks
to clarify, including through ensuring that only monies paid by
regional centers to a provider should be subject to an audit or
review.
Under current law, vendors are required to provide copies of
their fiscal review or audit to their vendoring regional center
within 30 days of completion. However, because this requirement
does not indicate a timeline for completion, some vendors avoid
the 30-day submission requirement by not complying with their
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respective audit or review requirements. Recent author's
amendments to this bill seek to ensure the reviews and audits
are occurring and information is being reported to regional
centers by requiring that the information be submitted to
regional centers within nine months of the end of the fiscal
year for the vendor rather than tying the submission date to the
completion date.
Staff comments: Because DDS has no way to track the fiscal
impact of the audit requirement, there is no way to verify
whether its enactment under SB 74 has resulted in the
anticipated amount of cost savings, either through improved
accounting and billing practices or the deterrent effect of
increased scrutiny of financial records. Association of
Regional Center Agencies (ARCA) data show that audit completion
varies throughout the state. An ARCA survey of 18 of the
state's 21 regional centers revealed a 52% independent audit
compliance rate among vendors with 99% of those audits resulting
in unqualified vendor opinions. DDS reports that approximately
90 audits across 10 regional centers have been reported to the
Department for a plan of correction since enactment of the
requirement. It is important to note that the information
gathered during a review is insufficient to establish whether
corrective action might be needed.
There were 2,214 entities required to obtain an independent
review or audit in 2013-14, 1,381 of which received $500,000 or
more from regional centers and were required to meet the higher
audit standard. This bill eliminates the audit and review
requirements for vendors that receive between $250,000 and
$500,000 annually from regional centers, thereby eliminating the
requirement for any information to be gathered for 833 vendors.
Additionally, by raising the audit threshold from $500,000 to $2
million in regional center dollars received, almost 70% of
providers would no longer have to meet their current audit
requirement, which leaves only 410 vendors out of the 1,381
currently required to obtain an independent audit.
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The author of this bill seeks to provide some financial relief
to developmental services providers through eliminating audit
and review requirements for a number of vendors and allowing a
clean audit or review to result in a two-year exemption from the
independent audit or independent review requirement. However,
committee staff believes it will be of utmost importance for the
state to promote transparency and additional oversight of how
dollars are spent within the developmental services system in
the coming years. The committee may wish to revisit the audit
standards in developmental services-related regulations and
statute as conversations about rate-setting and rate
methodologies continue between the Legislature and the
Administration.
PRIOR LEGISLATION:
SB 1259 (Emmerson) 2012, would have authorize two-year
exemptions from audit requirements similar to provisions of this
bill. It died on the Senate Appropriations Suspense File.
SB 74 (Committee on Budget and Fiscal Review) Chapter 9,
Statutes of 2011, established the audit and review requirements,
among other provisions.
DOUBLE REFERRAL . This bill has been double-referred. Should
this bill pass out of this committee, it will be referred to the
Assembly Appropriations Committee.
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REGISTERED SUPPORT / OPPOSITION:
Support
ResCoalition - sponsor
Association of Regional Center Agencies (ARCA)
California Disability Services Association (CDSA)
Cerebral Palsy Center for the Bay Area
Community Residential Care Association of California
Independent Options
State Council on Developmental Disabilities
The Alliance
The Arc and United Cerebral Palsy California Collaboration
Trinity CHANGE
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Opposition
None on file.
Analysis Prepared by:Myesha Jackson / HUM. S. / (916)
319-2089