BILL ANALYSIS �
AB 229
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Date of Hearing: April 27, 2011
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 229 (Lara) - As Amended: April 14, 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 the audits specified above to comply with the
Government Auditing Standards issued by the Comptroller
General of the United States.
3)Requires these audits to be made by a certified public
accountant (CPA), licensed by the California Board of
Accountancy (Board), and selected by the local agency from a
directory of CPAs maintained by the Controller which will 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. In that
instance, if the CPA or PA had been included in the
directory, the CPA or PA shall be removed from the
directory until such time as the Board makes a
determination on the matter. If the Board suspends, or
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revokes, or prohibits the licensee from performing audits
of local agencies, the CPA or PA shall be excluded from the
directory until such time as he or she is in good standing
with the Board.
5)Prohibits, starting with the 2011-12 fiscal year, 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.
6)Provides that the Controller may waive 5) above if he or she
finds that no otherwise eligible auditor is available to
perform the audit.
7)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
specified reporting provisions;
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 confirming to specified
reporting provisions. 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 provisions of this bill.
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 specified provisions of this bill; and,
c) A provision that will provide the Controller access to
audit working papers.
8)Requires the Controller to develop a plan to review and report
on financial and compliance audits of local agencies, and
requires the Controller, in consultation with the Department
of Finance, and representatives of the League of California
Cities, the California State Association of Counties, the
California State Association of County Auditors, and the
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California Society of Certified Public Accountants, to propose
the content of, and adopt, an audit guide.
9)Requires the audit reports submitted to the Controller to be
submitted within nine months after the end of the period
audited, or in accordance with applicable federal law.
10)Allows the Controller to appoint a qualified CPA to complete
the report and to obtain information required, in the event
that an audit has not been submitted by a local agency to the
Controller on or before the due date.
11)Requires that any cost incurred by the Controller to appoint
a qualified CPA to complete the report shall be borne by the
local agency and shall be a charge against any unencumbered
funds of the local agency.
12)Requires the Controller, on an annual basis, to review and
monitor the audit reports performed by independent auditors,
and requires the Controller to determine whether the audit
reports conform with the reporting provisions of government
auditing standards and the audit guide, and notify each local
agency regarding each determination.
13)Requires the independent auditor to correct his or her audit
report within 30 days of notification of any deficiency.
14)Allows the Controller to 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.
15)Allows an auditor or audit firm having a portion of an audit
fee withheld because the Controller refuses to certify an
audit report, to file an appeal in writing to the Board.
16)Requires the Board to complete an investigation of the appeal
within 90 days, and to do one of the following:
a) Order the Controller to provide notification that the
audit report conforms to the reporting provisions;
i) If the Board orders the Controller to provide
notification that the audit report conforms, the
Controller shall notify the contracting local agency,
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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
within one year from the filing date of the appeal.
17)Requires the Controller to report to the Legislature by
January 31 of each year of the results of the Controller's
oversight activity, including the results of the Controller's
quality control reviews, and repeals this reporting
requirement as of December 31, 2015.
18)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, and requires the Controller to communicate
the results of the reviews to the Department of Finance, the
independent auditor, and the local agency for which the audit
was performed.
19)Requires the Controller to develop and publish guidelines and
standards for reviews, prior to the performance of any quality
control reviews, and requires the Controller to provide an
opportunity for public comment.
20)Requires the Controller to update the guidelines and
standards for any changes in audit standards.
21)Specifies 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 agency
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.
22)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 constitutes unprofessional conduct or
repeated failure to disclose noncompliant acts, and prohibits
the independent auditor from performing an audit of a local
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agency until such time as the Board resolves the matter.
23)Provides that 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 the period during which the independent
auditor is not in good standing with the Board, in addition to
any other penalties that the Board may impose.
24)Makes legislative findings and declarations.
EXISTING LAW :
1)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 (LEAs),
and requires those audit reports to be filed with the
applicable county superintendent of schools, the Department of
Education, and the Controller. Among other requirements, LEA
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 LEA from a directory of CPAs and PAs
deemed by the Controller as qualified to conduct audits of
LEAs.
FISCAL EFFECT : Unknown
COMMENTS :
1)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. AB
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229 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 any amount of money.
This bill 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.
This bill also requires rotation of auditors 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 allow
the Controller to access audit working papers, which the
Controller can review for quality control.
Additionally the bill provides for a process for referring
cases to the Board if a quality control review indicates
unprofessional conduct or failure to report noncompliant acts,
and allows the Controller to suspend an auditor from
performing audits until the Board makes a determination.
The bill also gives other new duties to the Controller,
including the adoption of an audit guide, annual review of
audits for compliance, and notification by the Controller to
the local agency and its auditor of the findings. The
Controller is required to report annually to the Legislature
on oversight activities until December 31, 2015.
2)This bill is a result of the exposure of unethical and illegal
financial practices by numerous officials in the City of Bell,
which came to light in 2010. The city's independent auditor
failed to report abuses such as excessive salaries, illegal
loans, and questionable fees. In a series of audits 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.
3)According to the author's office, "the current statutory
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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."
Additionally, the author's office says that the "current
oversight system of 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."
4)The State Association of County Auditors (Association) has
expressed concerns over several of the bill's provisions.
First, AB 229 imposes a higher standard of auditing standards
than is already prescribed by the auditing profession, which
the Association believes will increase costs to local
agencies. Additionally, the Association argues that there are
several provisions in the bill that seem duplicative of what
is already occurring, and the Association questions the
necessity of those provisions. This includes the creation of
a Controller-approved directory of auditors when the Board
already has oversight of setting standards for obtaining and
retaining licensing for auditors, and the creation of a
secondary review process for quality control when there are
already regulations that provide for peer reviews.
5)This bill was heard by the Committee on Business, Professions
and Consumer Protection, on April 12, 2011 where it passed on
a 9-0 vote.
6)Support arguments: The State Controller's office writes that
this bill is necessary because it will allow their office to
develop and implement a consistent system of oversight of
independent audits of local governments, similar to the one
used for independent audits of school districts. The
provisions of the bill will increase accountability and
transparency of cities and counties throughout the state.
Opposition arguments: The California Board of Accountancy has
concerns about several provisions in this bill because the
bill undercuts some of the authority of the Board's
disciplinary process. Specifically, by allowing the
Controller to suspend an accountant from performing any local
agency audit before the Board has held an administrative
hearing takes away the Board's authority.
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REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang �SPONSOR]
Concerns
State Association of County Auditors
Opposition
CA Board of Accountancy
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958