BILL NUMBER: AB 229 INTRODUCED
BILL TEXT
INTRODUCED BY Assembly Member Lara
FEBRUARY 2, 2011
An act to amend Section 12410.5 of, to add Sections 12410.6,
12410.7, and 12410.9 to, and to add and repeal Section 12410.8 of,
the Government Code, relating to audits.
LEGISLATIVE COUNSEL'S DIGEST
AB 229, as introduced, Lara. The Controller: audits.
Existing law requires the Controller to superintend the fiscal
concerns of the state. Existing law requires the Controller to
receive every audit report prepared by any local public agency.
This bill would require the Controller to receive every annual
financial audit report prepared by any local government within 9
months of the audit period or within a longer timeframe authorized by
the Controller. This bill would require an audit conducted pursuant
to this provision to fully comply with the Government Auditing
Standards issued by the Comptroller General of the United States.
This bill would require the audits to be made by a certified public
accountant that is licensed by the California Board of Accountancy
and selected by a local government. The Controller would be required
to use specified criteria to determine those certified public
accountants that are to be included in the directory.
This bill would require the Controller to develop a plan to review
and report the financial and compliance audits of cities, counties,
and special districts. This bill would also require the Controller to
report to the Legislature by January 31 of each year the results of
its oversight activity. The requirement that the Controller report to
the Legislature would be repealed on December 31, 2015.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 12410.5 of the Government Code is amended to
read:
12410.5. (a) The Controller shall receive
every annual financial audit report prepared for any local
public agency government including those
reports prepared in compliance with the federal Single Audit
Act of 1984 (P.L. 98-502; 31 U.S.C. Sec. 7501 et seq.) and required
under any law to be submitted to any state agency, and shall, after
ascertaining its compliance with that federal act, transmit the
report to the designated state agency.
(b) It is the intent of the Legislature to promote accountability
over local government funding by establishing a new program to review
and report on financial and compliance audits of cities, counties,
and special districts. It is further the intent of the Legislature
that the Controller shall have the primary responsibility for
implementing and overseeing the program. Financial audits provide an
independent assessment of, and reasonable assurance about, whether an
entity's reported financial condition, results, and use of resources
are presented fairly in accordance with recognized criteria.
Reporting on financial audits that are performed in accordance with
government auditing standards also includes reports on internal
control, compliance with laws and regulations, and provisions of
contracts and grant agreements as they relate to financial
transactions, systems, and processes. Compliance audits shall be
defined in generally accepted auditing standards as a
program-specific audit or an organization-wide audit or an entity's
compliance with applicable compliance requirements. Financial and
compliance audits conducted under this chapter shall fulfill federal
single audit requirements.
(c) An audit conducted pursuant to this section shall comply fully
with the Government Auditing Standards issued by the Comptroller
General of the United States.
(d) The audits shall be made by a certified public accountant,
licensed by the California Board of Accountancy, and selected by the
local government, as applicable, from a directory of certified public
accountants deemed by the Controller as qualified to conduct audits
of local governments which shall be published by the Controller not
later than December 31 of each year. The certified public accountant
shall possess individual education, examination, and experience
qualifications that have been determined by the board to be
substantially equivalent to the qualifications under Section 5093 of
the Business and Professions Code, and that are in accordance with
subdivision (b) of Section 27 of Article 4 of Division 1 of Title 16
of the California Code of Regulations necessary to perform the full
range of accounting services, including signing attest reports on
attest engagements.
(1) In determining that certified public accountants shall be
included in the directory, the Controller shall use the following
criteria:
(A) The certified public accountants or public accountants, as a
result of a quality control review conducted by the Controller
pursuant to Section 12410.9, shall not have been found to have
conducted an audit in a manner constituting noncompliance with
subdivision (c).
(B) The certified public accountants or public accountants shall
be in good standing as certified by the Board of Accountancy.
(2) It is the intent of the Legislature to ensure that auditors
and audit organizations maintain their independence in appearance and
in fact by rotation of public accounting firms. Beginning with the
2011-12 fiscal year, a local government shall be prohibited from
using the same public accounting firm to perform an annual financial
and compliance audit for more than five consecutive years. The
Controller may waive this requirement if he or she finds that no
qualified auditor is otherwise available to perform the audit.
(e) The governing board of each city, county, and special district
shall include all of the following in their contracts for audits:
(1) A provision to withhold 10 percent of the audit fee until the
Controller certifies that the audit report conforms to the reporting
provisions of subdivision (a) of Section 12410.7.
(2) A provision to withhold 50 percent of the audit fee for any
subsequent year of a multiyear contract if the prior year's audit
report was not certified as conforming to the reporting provisions of
subdivision (a) of Section 12410.7. This provision shall include a
statement that a multiyear contract shall be null and void if a
public accounting firm or independent auditor is declared ineligible
pursuant to subdivision (d) of Section 12410.9. The amount withheld
shall not be payable unless payment is ordered by the board or the
audit report for that subsequent year is certified by the Controller
as conforming to the reporting provisions of subdivision (a) of
Section 12410.7.
(3) A provision that will provide the Controller access to audit
working papers.
SEC. 2. Section 12410.6 is added to the Government Code, to read:
12410.6. (a) The Controller shall develop a plan to review and
report on financial and compliance audits of cities, counties, and
special districts. The Controller, in consultation with the
Department of Finance, the Legislative Analyst's Office, state
agencies, and representatives of the League of California Cities, the
California State Association of County Auditors, and the California
Society of Certified Public Accountants, shall propose the content of
an audit guide.
(b) The audit reports shall be submitted to the Controller in
accordance with Public Law 104-156 within nine months after the end
of the period audited, or within a longer timeframe authorized by the
Controller.
(c) If the audit reports required by subdivision (b) of Section
12410.5 have not been filed by a local government with the Controller'
s office on or before the due date established under subdivision (b),
the Controller's office shall determine the most advantageous method
of obtaining the required audited financial statements.
SEC. 3. Section 12410.7 is added to the Government Code, to read:
12410.7. (a) To determine the practicability and effectiveness of
the audits and audit guide, the Controller on an annual basis shall
review and monitor the audit reports performed by independent
auditors. The Controller shall determine whether the audit reports
conform with the reporting provisions of subdivision (b) of Section
12410.9 and shall notify each local government, and the auditor of
each local government regarding each determination.
(b) The independent auditor shall correct his or her audit report
within 30 days of notification of any deficiency. The Controller may
suspend the independent auditor from performing any local government
audits if the auditor does not correct his or her audit report within
30 days of the Controller's notification.
SEC. 4. Section 12410.8 is added to the Government Code, to read:
12410.8. (a) The Controller shall report to the Legislature by
January 31 of each year the results of its oversight activity,
including the results of its quality control reviews.
(b) A report submitted pursuant to subdivision (a) shall be
submitted in compliance with Section 9795.
(c) Pursuant to Section 10231.5, this section is repealed on
December 31, 2015.
SEC. 5. Section 12410.9 is added to the Government Code, to read:
12410.9. (a) The Controller may perform quality control reviews
of audit working papers to determine whether audits are performed in
conformity with government audit standards and the local government
audit guide. The Controller shall communicate the results of his or
her reviews to the Department of Finance, the independent auditor,
and the local government for which the audit was performed, and shall
review his or her findings with the independent auditor.
(b) Prior to the performance of any quality control reviews, the
Controller shall develop and publish guidelines and standards for
those reviews. Pursuant to the development of those guidelines and
standards for those reviews, the Controller shall provide an
opportunity for public comment. The Controller shall update the
guidelines and standards for any changes in audit standards.
(c) The Controller is responsible for selecting audits for review
based on criteria including, but not limited to, disciplinary actions
by the California Board of Accountancy, results of the Controller's
review and monitoring of the audit reports, the extent of findings in
the audit reports issued by the independent auditor, the number of
audits of local government performed annually by the independent
auditor, the independent auditor's experience in performing audits of
local governments, the complexity of state and federal programs
administered by the local government, and requests or leads from
other sources.
(d) If the quality control review of the Controller indicates that
the audit was conducted in a manner that may constitute
unprofessional conduct as defined pursuant to Section 5100 of the
Business and Professions Code, including, but not limited to, breach
of fiduciary responsibility of any kind, gross negligence, repeated
negligent acts resulting in a material misstatement in the audit or
failure to disclose noncompliant acts, the Controller shall refer the
case to the California Board of Accountancy. If the California Board
of Accountancy finds that the independent auditor conducted an audit
in an unprofessional manner, the Controller may prohibit the
independent auditor from performing any audit of a local government
for a period of three years, in addition to any other penalties that
the California Board of Accountancy may impose. In any matter that is
referred to the California Board of Accountancy, the Controller may
suspend the independent auditor from performing any local government
audit pending final disposition of the matter by notice and an
opportunity to respond to that suspension. The independent auditor
shall be given credit for any period of suspension if the California
Board of Accountancy prohibits the independent auditor from
performing audits of the local education agency under subdivision
(c). In any event, the Controller shall not suspend an independent
auditor under this subdivision for a period of more than three years.