BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1345 HEARING: 6/13/12
AUTHOR: Lara FISCAL: Yes
VERSION: 6/6/12 TAX LEVY: No
CONSULTANT: Weinberger
LOCAL GOVERNMENTS' AUDITS
Imposes additional requirements on audits of local
governments.
Background and Existing Law
The federal Single Audit Act of 1984 requires that state
and local public agencies, which receive federal funds from
a variety of sources, perform a single, jurisdiction-wide
specific audit. The objective is to save time and expense
on the part of the state and local entities, while giving
the federal agencies involved a more consistent source of
information.
State law requires the State Controller to receive audit
reports prepared by any local public agency in compliance
with the federal Single Audit Act of 1984. After the
Controller receives these reports, he or she must ascertain
the report's compliance with the federal act and transmit
the report to the appropriate state agency (AB 4334,
Waters, 1988).
State law prohibits a public accounting firm from providing
audit services to a local educational 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 educational agency in each of the
six previous fiscal years. An appeals panel can waive this
requirement if the panel finds that no otherwise eligible
auditor is available to perform the audit (AB 2834, Migden,
2002).
The State Controller believes that recent misuses of public
funds in the Cities of Bell and Montebello and the County
of Modoc indicate that the current statutory approach to
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local governments' audits is not working. To provide
additional safeguards against local officials' misuse of
public funds, the Controller wants legislators to
strengthen the state laws that govern local governments'
audits.
Proposed Law
Assembly Bill 1345 requires an audit for any local agency
to be made by a certified public accountant or public
accountant, licensed by, and in good standing with, the
California Board of Accountancy.
Beginning in the 2013-14 fiscal year, AB 1345 prohibits a
local agency from employing a public accounting firm to
provide audit services to the 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 for six consecutive fiscal
years. The Controller can waive this requirement if he or
she finds that another eligible public accounting firm is
not available to perform the audit. The bill specifies
that, for the purposes of calculating the six consecutive
fiscal years, the local agency must not take into account
any time that a public accounting firm was employed by that
local agency prior to the 2013-14 fiscal year.
AB 1345 requires that audit reports prepared in compliance
with the federal Single Audit Act for any city, county or
special district, as defined by state law, must:
Be submitted to the State Controller within nine
months after the end of the period audited or pursuant
to applicable federal or state law, and
Comply with the Government Auditing Standards
issued by the Comptroller General of the United
States.
If a local agency does not submit an audit report to the
Controller by the specified due date, AB 1345 allows the
Controller to appoint a qualified certified public
accountant or public accountant to complete the report and
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to obtain the information required. The bill requires the
Controller to notify a local agency of its failure to
submit the audit report and give the local agency a
reasonable amount of time to submit the report before
appointing a certified public accountant or public
accountant. The Controller's costs, including a contract
with, or the employment of, the certified public accountant
or public accountant, in completing the audit must be borne
by the local agency and must be a charge against any
unencumbered funds of the local agency.
AB 1345 requires the Controller to refer any matters of
unprofessional conduct, as defined in state law, and
multiple and repeated failures to disclose noncompliant
acts to the California Board of Accountancy.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . The City of Bell's independent
auditor failed to report financial 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. These failures
suggest a lack of proper checks and balances in the local
government audit process. To ensure that local
governments' independent auditors remain independent, AB
1345 requires local governments to comply with the same
audit partner rotation requirements that the 2002 Migden
bill applied to school districts. The bill also enacts
common-sense reforms, including:
Requiring local governments' audits to conform to
recognized government standards and procedures, and
Establishing deadlines by which local agencies must
submit audits to the Controller for review.
AB 1345 strengthens local governments' independent audit
processes and provides safeguards to protect taxpayers
against local agencies' misusing public funds.
2. More independent ? AB 1345's requirement that local
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governments must rotate audit partners every six years is
identical to current requirements that apply to school
districts' audit partners. This rotation requirement
responds to the concern that a long-standing business
relationship between a government agency and a particular
audit partner diminishes that audit partner's independence.
Although having a new audit partner periodically review an
agency's books provides some safeguards, it is unclear
whether a six year rotation requirement substantially
reduces the potential for an audit partner to be influenced
by the incentive of continuing to work for a public agency
in future years. Is a local government audit partner who
can audit an agency's books in 12 out of every 13 years
significantly more independent than an auditor under
current law? To ensure auditors' independence, the
Committee may wish to consider amending AB 1345 to require
more frequent rotations of audit partners or require audit
partners to take more than one year off in between
rotations.
3. Burdensome ? The six year rotation requirement may be
burdensome for some small, rural special districts. These
districts often have few auditors available locally and
have difficulty finding other audit firms that are willing
to cover the costs of travelling to less accessible parts
of the state to perform relatively small audits. AB 1345
addresses this concern by allowing the Controller to waive
the rotation requirement if he or she finds that another
eligible firm is not available to perform an audit.
However, this waiver may not provide much relief to small
special districts if the Controller determines that other
firms are available to perform a district's audit, albeit
at significantly higher costs. The Committee may wish to
consider whether the additional independence generated by
the bill's auditor rotation requirement justifies the
higher costs that it may impose on some small rural local
governments.
4. Board of Accountancy's concerns . The California Board
of Accountancy (CBA) is responsible for regulating the
accounting profession for the public interest. It does so
by establishing and maintaining entry standards of
qualification and conduct within the accounting profession,
primarily through its authority to license. CBA, while
supporting AB 1345, also is proposing amendments to address
Board members' concerns with the bill. Specifically, CBA
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suggests amendments to:
Require that only the lead audit partner, and not
the technical audit partner, comply with the bill's
six year rotation requirement.
Prohibit the lead audit partner from resuming work
with a local agency for two years, which is similar to
the federal Securities and Exchange Commission's
rules.
Require a local agency, as part of an audit, to
prepare a payroll schedule that would include all
compensation for elected officials and designated
employees paid from local agency sources.
The Board suggests that requiring only the lead audit
partner to rotate every six years allows the technical
audit partner to act as a repository of institutional
knowledge, providing continuity to audits conducted by
different lead audit partners. The Committee may wish to
consider whether the need to preserve institutional
knowledge outweighs the safeguards and benefits of having a
new technical audit partner work with an agency's financial
data after six years. Requiring audit partners to wait for
more than one fiscal year before resuming work for an
agency is discussed above in Comment 2. The Committee may
wish consider whether requiring a local agency to submit a
payroll schedule may duplicate the State Controller's
current efforts to compile local government compensation
information and could result in significant state costs if
the requirement is found to be a reimbursable mandate.
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Appropriations Committee:17-0
Assembly Floor: 74-0
Support and Opposition (6/7/12)
Support : State Controller John Chiang; American Federation
of State, County, and Municipal Employees; California Board
of Accountancy.
Opposition : Unknown.
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