BILL ANALYSIS �
AB 1345
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Date of Hearing: January 11, 2012
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 1345 (Lara) - As Amended: January 4, 2012
SUBJECT : Local government: audits.
SUMMARY : Expands the State Controller's oversight over local
government auditing practices. Specifically, this bill :
1)Defines "local agency," for purposes of the requirement that
the Controller receive every audit report prepared for any
local agency in compliance with the federal Single Audit Act
of 1984, to mean any city, county, any district, and any
community redevelopment agency required to furnish financial
reports as specified.
2)Requires audit reports to be submitted to the Controller
within nine months after the end of the period audited, or
pursuant to applicable federal or state law.
3)Requires audit reports to comply with the Government Auditing
Standards issued by the Comptroller General of the United
States.
4)Authorizes the Controller to appoint a qualified certified
public accountant (CPA) or public accountant (PA) to complete
an audit report and to obtain required information if a local
agency does not submit the audit report by the established due
date.
5)Provides that costs incurred by the Controller, including a
contract with, or the employment of a CPA or PA in completing
an audit report shall be borne by the local agency and shall
be a charge against any unencumbered funds of the local
agency.
6)Requires the Controller to refer a case to the California
Board of Accountancy (Board) if the Controller finds through a
quality control review of audit working papers of the audit
report made pursuant to the provisions of this bill that the
audit was conducted in a manner that constitutes
unprofessional conduct, as defined, or there were multiple and
repeated failures to disclose noncompliant acts.
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7)Requires an audit for any local agency, including those
submitted to the Controller pursuant to the bill's provisions,
to be made by a CPA or PA licensed by, and in good standing
with, the Board.
8)Declares, beginning with the 2012-13 fiscal year (FY), that a
local agency shall not employ 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 each of the six previous years.
9)Allows, if the Controller finds that another eligible public
accounting firm is not available to perform the audit, the
Controller to waive the requirement contained in 8) above.
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.
FISCAL EFFECT : Unknown
COMMENTS :
1)This bill adds a number of provisions that stipulate standards
and increase oversight of local agency audits. First, the
bill requires that all audits comply with federal government
auditing standards and must be performed by a Board-licensed
CPA or PA. Second, the bill requires that audit reports for
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local agencies be submitted to the Controller within nine
months after the end of the period audited or pursuant to
applicable federal or state law. Third, if the audit report
is not received by that due date, the bill gives the
Controller the authority to appoint a qualified CPA or PA to
complete the report and obtain the necessary information.
Costs incurred by the Controller to appoint a CPA or PA are to
be incurred by the local agency. Fourth, the bill requires
the Controller to refer cases to the Board, if the Controller
finds through a quality control review of the audit working
papers of the audit report that the audit was conducted in a
manner that constitutes unprofessional conduct, or that there
were multiple and repeated failures to disclose noncompliant
acts. Lastly, the bill prohibits, starting in FY 2012-13, a
local agency from employing a public accounting firm if the
lead audit partner or coordinating audit partner has performed
audit services for that local agency for each of the six
previous fiscal years. Provisions in the bill allow the
Controller to waive the requirement if the Controller finds
that another eligible public accounting firm is not available
to perform the audit.
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
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 Cities of
Bell and Montebello 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)A similar bill, AB 229 (Lara) was heard by this Committee on
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April 27, 2011, and passed on an 8-0 vote. That bill was
amended in the Senate to deal with a different subject. While
this bill is similar to AB 229, it is much narrower in scope.
5)Support arguments: The State Controller's Office, the sponsor
of the bill, writes that this bill will "help provide the
independent oversight needed to protect public funds and
restore the public's confidence in the fiscal integrity of our
cities, counties, and other local government agencies." The
Controller's office believes that the provisions of the bill
will strengthen the independent audit process and provide a
safeguard to protect taxpayers from waste, fraud and abuse.
Opposition arguments: The Committee may wish to consider
whether the requirement in the bill to rotate audit partners
every six years may place a heavier burden on those local
agencies in more isolated, rural communities because there may
be limited options for audit firms available to those
agencies. The bill allows the Controller the flexibility to
waive this requirement, but only if the Controller finds that
another eligible firm is not available, leaving some ambiguity
as to how the Controller makes this finding.
REGISTERED SUPPORT / OPPOSITION :
Support
State Controller John Chiang �SPONSOR]
Opposition
None on file
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958