BILL ANALYSIS �
AB 229
Page 1
ASSEMBLY THIRD READING
AB 229 (Lara)
As Amended April 14, 2011
Majority vote
BUSINESS & PROFESSIONS 9-0 LOCAL GOVERNMENT
8-0
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|Ayes:|Hayashi, Bill Berryhill, |Ayes:|Smyth, Alejo, Bradford, |
| |Allen, Butler, Eng, | |Campos, Davis, Hueso, |
| |Hagman, Hill, Ma, Smyth | |Knight, Norby |
| | | | |
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APPROPRIATIONS 17-0
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|Ayes:|Fuentes, Harkey, | | |
| |Blumenfield, Bradford, | | |
| |Charles Calderon, Campos, | | |
| |Davis, Donnelly, Gatto, | | |
| |Hall, Hill, Lara, | | |
| |Mitchell, Nielsen, Norby, | | |
| |Solorio, Wagner | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Expands the State Controller's (Controller) 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 and 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.
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3)Requires, the Controller to use specified criteria in determining
which CPAs shall be included in the directory, and requires CPAs
to be removed from the directory under specified circumstances.
4)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.
5)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.
6)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.
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7)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.
8)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, with costs to
be borne by the local agency.
9)Requires the Controller to annually review and monitor audit
reports performed by independent auditors, determine whether audit
reports conform with reporting provisions of government auditing
standards and the audit guide, and notify each local agency and
the auditor of each local agency regarding each determination.
10)Requires independent auditors to correct audit reports within 30
days of notification of any deficiency. The Controller may
suspend independent auditors from performing any local agency
audits if auditors do not correct audit report within 30 days of
notification.
11)Provides an appeals process, as specified, when an independent
auditor or audit firm has a portion of an audit fee withheld
pursuant to this bill.
12)Requires the Controller to report to the Legislature by January
31 of each year the results of the Controller's oversight
activity.
13)Allows the Controller to perform quality control reviews of audit
working papers to determine if audits conform to government audit
standards and the local agency audit guide. The Controller must
communicate review results to the Department of Finance, the
independent auditor and the local agency, and must review findings
with the independent auditor.
14)Requires the Controller, before performing any quality control
reviews, to develop and publish guidelines and standards for those
reviews, as specified. The Controller must select audits for
review based on specified criteria.
15)Requires the Controller to refer a case to the Board if the
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Controller finds that an audit is conducted in a manner that
constitutes unprofessional conduct, or that there were multiple
and repeated failures to disclose noncompliant acts. In that
instance, the independent auditor shall be prohibited from
performing an audit of a local agency until the Board resolves the
matter. 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 penalties the
Board may impose.
FISCAL EFFECT : According to the Assembly Appropriations Committee,
the State Controller's office estimates the administrative costs to
implement the bill will be approximately $775,000. The program
would have some small startup costs, so the budget is expected to
decline slightly to $750,000 in subsequent years.
COMMENTS : According to the author, "The 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)."
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.
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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.
Analysis Prepared by : Angela Mapp / B.,P. & C.P. / (916) 319-3301
FN: 0001002