BILL ANALYSIS �
Bill No: AB
229
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Bill Analysis
AB 229 Author: Lara
As Amended: June 21, 2011
Hearing Date: June 28, 2011
Consultant: Paul Donahue
SUBJECT : Controller; Audits
SUMMARY : Expands the Controller's regulatory power over
local government auditing practices.
Existing law :
1) Requires any state, local government, or nonprofit
organization that spends $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 federal
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.
This bill :
AB 229 (Lara) continued
Page 2
1) Requires all audit reports prepared pursuant to the
federal Single Audit Act to be submitted to the Controller
within 9 months of the end of the period audited, or in
accordance with applicable state or federal law.
2) Authorizes the Controller to appoint a qualified
certified public accountant (CPA) to complete an audit
report if the local agency does not submit the audit within
the required timeframe, with associated costs to be borne
by the local agency.
3) Requires the audit to comply with the Government
Auditing Standards issued by the Comptroller General of the
United States.
4) Requires the audits to be made by a CPA who is licensed
by the California Board of Accountancy, and requires a
local agency to select accountants from a directory of
accountants published by the Controller.
5) Requires the Controller to use specific criteria to
determine which CPAs that will be included in the
directory.
6) Requires the Controller to develop a plan to review and
report on the annual financial audit reports of local
agencies, and to review and monitor the annual financial
reports of local agencies, including certain reports
prepared by independent auditors, according to specified
criteria.
7) Requires the Controller, in consultation with specified
entities, to propose and adopt the content of an audit
guide.
8) Requires the Controller to report to the Legislature by
January 31 of each year the results of the Controller's
oversight activity. (The reporting requirement would be
repealed on December 31, 2015.)
9) Authorizes the Controller to perform quality control
reviews of audit working papers of the annual financial
reports of local agencies to determine whether the audits
meet certain criteria.
10) Provides that if the Controller makes specified
findings, the Controller shall refer the case to the
AB 229 (Lara) continued
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California Board of Accountancy and take provisional
disciplinary actions as the case is pending.
COMMENTS :
1) Rationale : According to the author's office, "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." 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."
"Not only are tax funds at risk, but the state and federal
pass-through funds, for which the state is liable, can also
be misspent. A failure to conduct the public's business
with honesty and efficiency leads to financial
mismanagement affecting the expenditure of state and
federal funds. Unfortunately, these trends are only
discovered when the local government is in danger of
defaulting on private debt - an outcome that can have a
catastrophic impact on local services and negatively affect
the state's own credit rating."
2) Expansion of Controller's responsibilities : 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 229 broadens the categories of local entities whose
audits are subject to review by the Controller, including
cities, counties, special districts and redevelopment
agencies that expend any amount of money.
This bill adds provisions that 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 currently maintains a similar list
AB 229 (Lara) continued
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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, and annual review
of audits for compliance.
3) The audit guide : The bill directs the Controller, in
consultation with the Department of Finance,
representatives of the League of California Cities and the
California State Association of Counties to "propose the
content of, and adopt an audit guide."
Although the League of Cities would be a designated
participant in the development of the audit guide, it has
nevertheless raised a concern about the extent to which the
guide would be mandatory for use by the auditors hired by
local agencies.
The Controller has developed audit guidelines for school
districts and redevelopment agencies, and states that the
Controller's office (SCO) has seen a definite improvement
in the quality of school district audits since adoption of
the guidelines.
Given that the bill expands the oversight and supervisory
power over local agencies, it would seem reasonable that
the guidelines should serve as a useful guide rather than
become another requirement with which strict compliance is
necessary. Committee staff is informed that the
Controller/sponsor of AB 229 may be willing to accept
amendment in this regard.
AB 229 (Lara) continued
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The Committee or the author may wish to adopt an amendment
clarifying that the audit guide is advisory in nature.
4) Access by Controller to confidential information :
AB 229 specifies provisions that a local agency must
include in its contracts with auditors. Among the
requirements is a provision that gives the Controller
access to the auditor's "working papers." Although this
appears reasonable, the provision may need to be harmonized
with existing law governing the release of this
confidential information by in-house local agency auditors.
Existing law specifies that personal papers and
correspondence of any person providing assistance to the
auditor, who requests that the papers be kept confidential,
shall not be released to the public, nor shall incomplete
reports or auditor work product materials, and the like.
(Gov. Code � 26908.5)
The Committee may wish to consider the appropriateness of
an amendment that precludes release of these materials and
papers to the Controller's audit compliance review staff
without a reasonable suspicion that the auditor did not
perform the audit in accordance with auditing standards.
5) Controller program costs : The local agencies that would
be made subject to increased oversight by the Controller
under AB 229 have asked for amendments specifying that the
local entities are not responsible to pay for the
additional costs incurred by the Controller in implementing
the provisions of this bill.
The cost issue pertains primarily to SEC. 3 of the bill,
pursuant to which the Controller may charge a local agency
for any cost that SCO incurs by hiring a CPA to do an audit
if the local agency fails to submit the audit report
required by AB 229.
Perhaps this issue could be resolved with an amendment
requiring the SCO to provide written notice of its intent
to hire its own auditor unless the local agency submits the
overdue audit within 30 days.
6) Related legislation :
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AB 187 (Lara, 2011) expands the State Auditor's high-risk
government agency audit program to include local
governments at high risk for waste, fraud, abuse, or
mismanagement. The bill broadens the Auditor's authority to
investigate local government finances to prevent misuse of
taxpayer funds. (On calendar today in this Committee)
SUPPORT:
State Controller John Chiang (sponsor)
OPPOSE:
None on file
FISCAL COMMITTEE: Senate Appropriations Committee
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