BILL ANALYSIS �
AB 1345
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CONCURRENCE IN SENATE AMENDMENTS
AB 1345 (Lara)
As Amended June 6, 2012
Majority vote
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|ASSEMBLY: |74-0 |(January 26, |SENATE: |37-0 |(August 13, |
| | |2012) | | |2012) |
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Original Committee Reference: L. GOV.
SUMMARY : Expands the State Controller's (Controller) oversight
over local government auditing practices.
The Senate amendments :
1)Require the Controller to first 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 the
Controller appoints a certified public accountant or public
accountant, as specified.
2)Revise language in the bill that requires the Controller to
report matters of unprofessional conduct.
3)Clarify, for purposes of the provisions in the bill that
prohibit a local agency from employing a public accounting
firm, as specified, if that firm has performed audit services
for that local agency for six consecutive fiscal years, that
for the purposes of calculating the six consecutive fiscal
years, the local agency shall not take into account any time
that a public accounting firm was employed by that local
agency prior to the 2013-14 fiscal year (FY).
EXISTING LAW requires:
1)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)The Controller to receive every audit report prepared by any
local public agency pursuant to the Single Audit Act and to
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review those reports for compliance with federal law before
forwarding them to the designated state agency.
3)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.
AS PASSED BY THE ASSEMBLY , this bill:
1)Defined "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)Required 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)Required audit reports to comply with the Government Auditing
Standards issued by the Comptroller General of the United
States.
4)Authorized 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)Provided 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)Required 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)Required 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)Declared, beginning with the 2013-14 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)Allowed, 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.
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS : 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 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. However, the Controller must first
notify the local agency of its failure to submit the audit
report and then must give the local agency a reasonable amount
of time to submit the report, prior to the Controller appointing
a CPA or a PA.
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 any matters of unprofessional conduct and
multiple and repeated failures to disclose noncompliant acts to
the Board. Lastly, the bill prohibits, starting in FY 2013-14,
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 FYs and clarifies that a local agency shall not take
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into account any time that a public accounting firm was employed
by that local agency prior to the 2013-14 FY. 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.
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.
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 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 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."
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 Legislature 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.
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Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958
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