BILL ANALYSIS Ó
SENATE COMMITTEE ON HUMAN SERVICES
Senator Mike McGuire, Chair
2015 - 2016 Regular
Bill No: SB 1226 Hearing Date: April 12,
2016
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|Author: |Beall |
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|Version: |March 28, 2016 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Debra Cooper |
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Subject: Regional centers: audits and reviews
SUMMARY
This bill requires regional centers to submit to the California
Department of Developmental Services (DDS) copies of independent
audit reports for vendors of regional center services. The bill
requires DDS to analyze the reports, as specified, and
biannually report its findings to the Legislature in order to
identify and improve accounting practices and prevent potential
fraud.
ABSTRACT
Existing law:
1) Defines, in California law, a "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
includes intellectual disability, cerebral palsy, epilepsy,
and autism. (WIC 4512)
2) Establishes, in California law, that DDS shall contract
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
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best suited to them throughout their lifetime. (WIC 4620)
3) Requires an entity receiving payments from one or more
regional centers to contract with an independent accounting
firm for an audit or review its financial statements, as
specified. (WIC 4652.5 (a)(1)
4) Exempts state agencies, the UC and CSU university
systems and certain providers, as defined, from the audit
requirement. (WIC 4652.5. (a) (2), et seq.)
5) Requires regional centers to review audits or review
reports and resolve issues identified in the report that
have an impact on regional center services. Requires
regional centers to take appropriate action, up to
terminaton of vendorization, for lack of adequate
resolution of issues. (WIC 4652.5. (c))
6) 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))
Special Session Legislation:
Assembly Bill X2-1 makes a number of changes to the audit
requirements for vendors of regional center services. The
changes in law will take effect 91 days after the end of the
extraordinary session, which is June 9, 2016. Therefore, AB
X2-1 makes the following changes that relate to audits of
vendors of regional center services, effective June 9, 2016:
1) 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 relating to payments made by regional centers
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 five hundred
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thousand dollars ($500,000) but less than two
million dollars ($2,000,000), 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 five hundred thousand dollars
($500,000), 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 two million
dollars ($2,000,000), the entity shall obtain an
independent audit of its financial statements for
the period. (WIC 4652.5 (a) (1))
2) Requires vendors to provide copies of the audit or
review to the vendoring regional center within nine
months of the end of the vendor's fiscal year. (WIC
4652.5. (b))
3) Permits an entity that obtains an 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. (WIC 4652.5. (h) (1))
1) 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 unmodified
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, the regional center shall grant the entity a
two-year exemption. However, the entity and the
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regional center shall continue to address issues
raised in this independent audit, regardless of
whether the exemption is granted. (WIC 4652.5. (h)
(2), et seq.)
2) Requires a regional center to notify DDS annually of any
exemption it grants to an entity, as specified. (WIC
4652.5. (h) (3))
This bill:
1) Requires the vendoring regional center to submit copies
of all independent audit reports to DDS for review.
2) Requires DDS to determine if audit reports are effective
in preventing fraud and improving accounting practices
among vendors, and to report its findings to the
Legislature biannually, as specified.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
>Purpose of the bill
According to the author, the vendor audit requirement,
established through budget trailer bill SB74 in 2011, was
intended to save the state more than $20 million annually
through increased accountability. However, as of March of 2014,
DDS has received fewer than 100 audits of concern and none of
them resulted in any defined 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 and it is unclear if the
audits are achieving the intended result, according to the
author. Reporting the results of the audits is intended to allow
the Legislature to understand if the audits are effective in
reducing fraud and improving accounting practices, the author
states.
The Lanterman Act
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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 290,000 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. According to statewide data from December 2015,
slightly more than half of the regional 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 DDS. Statewide, 75 percent of consumers live in
the home of a parent or guardian.
Vendorization
To be eligible to provide services to a regional center client,
a provider must become a vendor of those services in the
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
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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 Rate-Setting Process Would
Improve the Cost-Effectiveness 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
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 solely 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). These financial thresholds
were recently increased this year in the special session
requiring vendors receiving more than $500,000 but less than $2
million to obtain an independent audit review and vendors
receiving more than $2 million to obtain an independent audit.
These requirements will go into effect June 9, 2016 (ABX2 1,
Chapter 3, Statutes of 2015-16 2nd Extraordinary Session).
The thresholds in 2011 were derived, in part, by a budget
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<1> "Department of Developmental Services: A More Uniform and
Transparent Procurement and Rate-Setting Process Would Improve
the Cost-Effectiveness of Regional Centers," Bureau of State
Audits, Report No. 2009-118, August 2010, pg. 155
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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.
Audit 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
unqualified.
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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.
Related legislation:
ABX2 1 (Thurmond, Chapter 3, Statutes of 2015-16 Second
Extraordinary Session) made adjustments to fiscal audit
requirements for regional center vendors working with the
developmentally disabled. It also clarified what monies were be
analyzed for audits and allowed exemptions to audits and reviews
under specific conditions.
SB 490 (Beall, 2015) readjusted audit threshold and reporting
requirements under SB 74. It made technical amendments to
clarify what monies can be counted toward the threshold and when
audits and financial reviews are submitted to regional centers.
It was held in the Assembly Appropriations Committee.
SB 1259 (Emmerson, 2012) readjusted audit threshold
requirements. 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
The Governor's assumption in proposing the audits in the 2011
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.
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Since that time, the Association of Regional Center Agencies
(ARCA) reports that audit completion varies statewide. On
average, according to a 2015 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.
The adjustment in the financial threshold for audits under ABX2
1 is expected to 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.
POSITIONS
Support:
ResCoalition
Alliance Supporting People with Intellectual and
Developmental Disabilities
Oppose:
None received.
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