BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1226|
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THIRD READING
Bill No: SB 1226
Author: Beall (D) and Huff (R), et al.
Amended: 3/28/16
Vote: 21
SENATE HUMAN SERVICES COMMITTEE: 5-0, 4/12/16
AYES: McGuire, Berryhill, Hancock, Liu, Nguyen
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/27/16
AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
SUBJECT: Regional centers: audits and reviews
SOURCE: ResCoalition
DIGEST: 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. This 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.
ANALYSIS:
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)
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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 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 University of California and
California State 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 termination 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:
ABX2-1 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, ABX2-1 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
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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 $500,000 but less than $2 million, 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 $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 $2 million, 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))
4)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
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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 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.)
5)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.
Background
The Lanterman Developmental Disabilities Services Act
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 21 by local, nonprofit
regional centers.
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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. 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 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. 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 Web site 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
to be provided.
Bureau of State Audits (BSA) report. In August 2010, the BSA
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
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centers established payment rates and selected vendors had 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 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).
Audit completion has varied widely. On average, according to a
2015 survey of 18 regional centers by the Association of
Regional Center Agencies (ARCA), 52 percent of vendors have
completed audits with 99 percent of audits resulting in
favorable 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 thresholds in 2011 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 Department
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description of the proposal.
Thresholds were increased this year in the special session:
Vendors receiving between $500,000 and $2 million must obtain an
audit review and vendors receiving more than $2 million must
obtain an independent audit. These requirements will go into
effect June 9, 2016 (ABX2-1, Thurmond, Chapter 3, Statutes of
2016, Second Extraordinary Session).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.
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:
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 - 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.
3)Adverse opinion - This is issued when an auditor concludes
that the audited financial statements do not fairly represent
the organization's financial position and there are
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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.
Related/Prior Legislation
ABX2-1 (Thurmond, Chapter 3, Statutes of 2016, 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) would have increased audit threshold and
reporting requirements and clarified what monies can be counted
toward the threshold and when audits and financial reviews are
submitted to regional centers. The bill was held in the Assembly
Appropriations Committee.
SB 1259 (Emmerson, 2012) would have increased audit threshold
requirements. The bill died in the Senate Appropriations
Committee.
SB 74 (Committee on Budget and Fiscal Review, Chapter 9,
Statutes of 2011) established the audit requirements.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, ongoing costs
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of $110,000 per year for an additional auditor position at the
DDS to review audit reports and report to the Legislature (70%
General Fund, 30% federal funds).
SUPPORT: (Verified 5/27/16)
ResCoalition (source)
Alliance Supporting People with Intellectual and Developmental
Disabilities
OPPOSITION: (Verified 5/27/16)
None received
ARGUMENTS IN SUPPORT: This bill's sponsor, ResCoalition,
writes that there are ongoing concerns with the vendor audit
process, despite recent reforms made in the Second Extraordinary
Session. This bill "seeks to get the Department of Developmental
Services to assess the effectiveness of the continued mandate
for fiscal audits, considering the department has acknowledged
they have not achieved the intended or desired outcomes."
Prepared by:Mareva Brown / HUMAN S. / (916) 651-1524
5/28/16 16:46:04
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