BILL ANALYSIS �
AB 229
Page 1
Date of Hearing: April 12, 2011
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 229 (Lara) - As Amended: March 30, 2011
SUBJECT : Controller: audits.
SUMMARY : Expands the Controller's oversight over local
government auditing practices. Specifically, this bill :
1)Requires the Controller to receive every annual financial
audit report prepared for any local agency, as specified,
including reports prepared in compliance with the federal
Single Audit Act of 1984 and required under any law to be
submitted to any state agency, and, after ascertaining its
compliance with that federal act, to transmit the report to
the designated state agency.
2)Requires an audit for any local agency submitted to the
Controller pursuant to the above requirement to comply with
the Government Auditing Standards issued by the Comptroller
General of the United States.
3)Requires an audit for any local agency submitted to the
Controller pursuant to the above requirement to be made by a
certified public accountant (CPA), licensed by the California
Board of Accountancy (Board), and selected by the local
agency, as applicable, from a directory of CPAs deemed by the
Controller as qualified to conduct audits of local agencies
which shall be published by the Controller not later than
December 31 of each year.
4)Requires, in determining which CPAs shall be included in the
directory, the Controller to use the following criteria:
a) The CPAs or public accountants (PAs) shall be in good
standing as certified by the Board; and,
b) The CPAs or PAs, as a result of a quality control review
conducted by the Controller pursuant to this bill, shall
not have been found to have conducted an audit in a manner
constituting noncompliance with auditing standards and
reporting requirements of this bill, as specified. The
AB 229
Page 2
Controller shall establish an appeals process for CPAs or
PAs who are removed from the directory but not referred to
the Board pursuant to this bill.
5)Provides that, commencing with the 2011-12 fiscal year, it
shall be unlawful for a public accounting firm to provide
audit services to a local agency if the lead audit partner, or
coordinating audit partner, having primary responsibility for
the audit, or the audit partner responsible for reviewing the
audit, has performed audit services for that local agency in
each of the six previous fiscal years. The Controller may
waive this requirement if he or she finds that no otherwise
eligible auditor is available to perform the audit.
6)Requires the governing board of each local agency to include
all of the following in its contracts for audits:
a) A provision to withhold 10% of the audit fee until the
Controller certifies that the audit report conforms to this
bill's reporting provisions, as specified;
b) A provision to withhold 50% 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 this bill, as specified. 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
this bill's reporting provisions, as specified. 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 this bill, as specified; and,
c) A provision that will provide the Controller access to
audit working papers.
7)Requires the Controller to develop a plan to review and report
on financial and compliance audits of local agencies. The
Controller, in consultation with the Department of Finance,
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, and adopt, an audit guide.
AB 229
Page 3
8)Requires audit reports to be submitted to the Controller
within nine months after the end of the period audited, or in
accordance with applicable federal law.
9)Allows the Controller, if the audit reports required by this
bill and current law have not been submitted on or before the
due date established by this bill, to appoint a qualified CPA
to complete the report and to obtain the information required.
Any cost incurred by the Controller in doing so shall be
borne by the local agency and shall be a charge against any
unencumbered funds of the local agency.
10)Requires the Controller on an annual basis to review and
monitor the audit reports performed by independent auditors.
The Controller shall determine whether the audit reports
conform with the reporting provisions of government auditing
standards and the audit guide and shall notify each local
agency, and the auditor of each local agency regarding each
determination.
11)Requires the independent auditor to 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 agency audits if the auditor does not correct his or
her audit report within 30 days of the Controller's
notification.
12)Allows an independent auditor or audit firm having a portion
of an audit fee withheld pursuant to this bill to file an
appeal in writing with the Board within 30 days of written
notification that the Controller refuses to certify an audit
report as conforming to this bill's reporting provisions.
13)Requires the Board to complete an investigation of the appeal
within 90 days of the filing of the appeal and, on the basis
of the investigation, do one of the following:
a) Order the Controller to provide notification that the
audit report conforms to the bill's reporting provisions.
In this case, the Controller shall notify the contracting
local agency, which shall then release the portion of the
audit fee being withheld; or,
b) Schedule the appeal for a hearing, in which case the
final action on the appeal shall be completed by the Board
AB 229
Page 4
within one year from the date of the filing of the appeal.
14)Requires the Controller to report to the Legislature by
January 31 of each year the results of the Controller's
oversight activity, including the results of the Controller's
quality control reviews, in conformance with current law
governing reports to the Legislature.
15)Allows the Controller to perform quality control reviews of
audit working papers to determine whether audits are performed
in conformity with government audit standards and the local
agency audit guide. The Controller shall communicate the
results of his or her reviews to the Department of Finance,
the independent auditor, and the local agency for which the
audit was performed, and shall review his or her findings with
the independent auditor.
16)Requires the Controller, prior to the performance of any
quality control reviews, to 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.
17)Provides that the Controller is responsible for selecting
audits for review based on criteria, including, but not
limited to, disciplinary actions by the Board, 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 agencies
performed annually by the independent auditor, the independent
auditor's experience in performing audits of local agencies,
the complexity of state and federal programs administered by
the local agencies, and requests or leads from other sources.
18)Requires the Controller to refer the case to the Board if the
quality control review indicates that the audit was conducted
in a manner that may constitute unprofessional conduct or
repeated failure to disclose noncompliant acts, as specified.
If the Board 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
agency for a period of three years, in addition to any other
penalties that the Board may impose. In any matter that is
AB 229
Page 5
referred to the Board, the Controller may suspend the
independent auditor from performing any local agency 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 Board prohibits the independent auditor from performing
audits of local agencies. The Controller must not suspend an
independent auditor for more than three years.
19)Makes legislative findings and declarations.
EXISTING LAW
1)Under federal law, the Single Audit Act of 1984, requires any
nonfederal entity, defined as states, local governments, or
nonprofit organizations, that expends $500,000 or more in
federal money to prepare an annual audit that meets certain
specifications and transmit that audit to specified federal
agencies.
2)Requires the Controller to receive every audit report prepared
by any local public agency pursuant to the Single Audit Act
and to review those reports for compliance with federal law
before forwarding them to the designated state agency.
3)Requires annual audits of local educational agencies, and
requires audit reports to be filed with the applicable county
superintendent of schools, the Department of Education, and
the Controller. Among other requirements, audits must comply
fully with the Government Auditing Standards issued by the
Comptroller General of the United States, and must be made by
a CPA or a PA licensed by the Board and selected by the local
educational agency from a directory of CPAs and PAs deemed by
the Controller as qualified to conduct audits of local
educational agencies.
4)Regulates and licensed the practice of accountancy under the
Board within the Department of Consumer Affairs.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "The
AB 229
Page 6
current statutory approach to protect taxpayers from waste,
fraud and abusive practices by local governments is not working
as illustrated by the Controller's Office audit findings in the
City of Bell and the County of Modoc where millions of state,
federal and local dollars were misspent over several years?The
current oversight system of the 58 counties, 482 cities and
nearly 5,000 special districts lacks the authority and resources
to identify and investigate the types of issues that were found
in Bell and Modoc. Not only are local tax funds at risk but the
state and federal pass through funds (which the state is liable
for) can also be misspent (in Bell over $710,000 in state and
federal pass through funds were misspent)."
Background . Long-standing concerns about local government
fiscal accountability came to dramatic light last year with the
exposure of unethical and illegal financial practices by
numerous officials in the City of Bell. Despite serious and
pervasive control deficiencies in the city's administrative and
internal accounting systems, the city's independent auditor
failed to report abuses such as excessive salaries, illegal
loans, and questionable special fees.
In a series of follow-up audits of the City of Bell's finances,
the Controller found that the independent auditor failed to
comply with 13 of 17 fieldwork auditing standards and reported
no significant deficiencies in any of the city's funds.
Current law requires local governments subject to federal single
audit requirements to send their annual audit reports to the
Controller for review and certification for compliance with
specified auditing standards. This only includes local agencies
that expend more than $500,000 in federal funds. This bill
broadens the categories of local entities whose audits must be
reviewed by the Controller to include cities, counties, special
districts and redevelopment agencies that expend less than
$500,000 in federal monies, as well as state funds.
This bill also adds a number of provisions that stipulate
standards and increase oversight of local agency audits. All
audits must comply with federal government auditing standards
and must be performed by a Board-licensed CPA or PA that has
been selected by the local agency from a Controller-approved
list of qualified CPAs. The Controller maintains a similar list
for school district audits, checking with the Board to ensure a
licensee is in good standing before placing him or her on the
AB 229
Page 7
list, a process that takes about a week to complete.
This bill also requires audit partner rotation every six years,
and requires audit contracts to include provisions for
withholding portions of the audit fee until the Controller
certifies the audit, or if the audit report fails to meet
specified reporting requirements. Audit contracts must also
allow the Controller to access audit working papers, which the
Controller may review for quality control.
The bill provides a process for referring cases to the Board if
a quality control review indicates unprofessional conduct or
failure to report noncomplilant acts, and allows the Controller
to suspend an auditor from performing audits until the Board
makes a determination. The Controller may also prohibit an
auditor from performing audits for three years if the Board
finds the audit was conducted in an unprofessional manner.
The Controller must adopt an audit guide, annually review audits
for compliance, and notify the local agency and its auditor of
the findings. The Controller must also report annually to the
Legislature on his or her oversight activities.
Support . Controller John Chiang writes, "AB 229 will allow my
office to review the work quality of more independent auditing
firms that contract with local governments. Modeled on the same
oversight process currently in place for independent audits of
school districts, the Controller's Office will develop and issue
audit guidelines for use by independent auditors of cities and
counties, and establish a list of acceptable independent
auditors for local government audits?I strongly believe this
legislation will help provide the independent oversight needed
to protect public funds and to restore the public's confidence
in the fiscal integrity of our cities, counties and other local
government agencies."
Opposition . The California Board of Accountancy is concerned
with the bill's provisions requiring the Controller to create a
directory of CPAs who are qualified to conduct local agency
audits, allowing the Controller to suspend a CPA from performing
local agency audits before the Board has held any kind of
administrative hearing, and allowing the Controller to impose an
additional three-year suspension on a CPA who has already been
disciplined by the Board.
AB 229
Page 8
Related legislation .
AB 162 (Smyth) of 2011, requires that, if an audit of a local
agency reveals certain financial irregularities, the findings be
sent separately to the Controller immediately after the audit
has been concluded. This bill requires the Controller to
prepare and transmit a report on those findings, and the
Controller's recommendations, to the Assembly Committee on Local
Government and the Senate Committee on Local Government. This
bill is pending in Assembly Local Government Committee.
AB 253 (Smyth) of 2011, requires the Controller to prescribe
uniform accounting and reporting procedures to cities. This
bill is pending in Assembly Local Government Committee.
AB 276 (Alejo) of 2011, requires joint powers agencies to
furnish to the Controller a report of all the financial
transactions of the agency during the next preceding fiscal year
within 90 days of the close of each fiscal year, and raises
forfeiture amounts for local agencies that fail to make these
reports, as specified. This bill is pending in Assembly Local
Government Committee.
SB 186 (Kehoe) of 2011, expands the Controller's authority to
perform discretionary audits of local agencies to ensure
compliance with local ordinances and state law. This bill is
pending in Senate Appropriations Committee.
SB 449 (Pavley) of 2011, authorizes the Controller to conduct a
preliminary review to determine the existence of a local agency
financial problem, and perform an audit upon completion of that
review, subject to specified criteria. This bill is pending in
Senate Appropriations Committee.
Double referred . This bill is double-referred to the Assembly
Local Government Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang (sponsor)
Opposition
AB 229
Page 9
California Board of Accountancy (CBA)
Analysis Prepared by : Angela Mapp / B.,P. & C.P. / (916)
319-3301