BILL ANALYSIS Ó SENATE COMMITTEE ON HUMAN SERVICES Senator Mike McGuire, Chair 2015 - 2016 Regular Bill No: SB 1226 Hearing Date: April 12, 2016 ----------------------------------------------------------------- |Author: |Beall | |-----------+-----------------------------------------------------| |Version: |March 28, 2016 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |No | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Debra Cooper | | | | ----------------------------------------------------------------- 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 SB 1226 (Beall) PageB of? 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 SB 1226 (Beall) PageC of? 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 SB 1226 (Beall) PageD of? 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 SB 1226 (Beall) PageE of? 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 SB 1226 (Beall) PageF of? 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 --------------------------- <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 SB 1226 (Beall) PageG of? 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. SB 1226 (Beall) PageH of? 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. SB 1226 (Beall) PageI of? 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. -- END --