BILL ANALYSIS �
SENATE HUMAN
SERVICES COMMITTEE
Senator Carol Liu, Chair
BILL NO: SB 1259
S
AUTHOR: Emmerson
B
VERSION: March 29, 2012
HEARING DATE: April 24, 2012
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FISCAL: Yes
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CONSULTANT: Mareva Brown
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SUBJECT
Developmental disabilities: regional centers
SUMMARY
Increases the payment threshold at which vendors of
regional centers must obtain independent audits from
$500,000 to $2 million and eliminates the requirement for
vendors receiving between $250,000 and $500,000 to obtain
an independent fiscal review; sets a deadline for
submitting the audit to a regional center; requires the
Department of Developmental Services to randomly select
vendors that fail to meet independent audit requirements
for a billing audit; provides an opportunity for vendors to
seek a rate adjustment from the department as a result of
costs associated with audit findings.
ABSTRACT
Current law
1) Establishes the Lanterman Developmental
Disabilities Services Act, requiring the Department of
Developmental Services to enter into five-year
contracts with regional centers to provide specified
local services.
Continued---
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2) Requires a vendor under contract with a regional
center that receives payments of more than $500,000
during that entity's fiscal year to obtain an
independent audit by an independent accounting firm
for that annual period.
3) Requires a vendor receiving payments of between
$250,000 and $500,000 during that entity's fiscal year
to obtain either an independent audit or an
independent review report of its financial statements
for that period. This requirement includes work
activity program providers.
4) Requires vendors to provide a copy to the vendoring
regional center within 30 days of completion of the
audit or review.
5) Defines minimum tasks that must be completed within
the independent audit.
6) Requires regional centers to forward to the
Department of Developmental Disabilities information
on all qualified opinion reports or reports noting
significant issues that directly or indirectly impact
regional center services within 30 days of receipt.
This bill
1) Deletes the requirement that regional center
vendors receiving payments of between $250,000 and
$500,000 obtain an independent audit or independent
review of its financial statements annually.
2) Requires that a vendor receiving payments of more
than $2 million during the entity's fiscal year obtain
an independent audit.
3) Requires that the audits be provided to regional
centers within nine months of the end of the entity's
fiscal year for which the audit is required.
4) Deletes the requirement that vendors provide the
audit to regional centers within 30 days of the
completion of the audit.
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5) Adds an implementation date of July 1, 2011.
6) Deletes requirements for conducting an independent
review.
7) Requires that the Department of Developmental
Services randomly select vendors that have failed to
meet independent audit requirements for a billing
audit.
8) Revises the prohibition of the Department of
Developmental Services to consider a request for rate
adjustments resulting from independent audit findings
to a prohibition that the department consider a rate
adjustment "in the course of its normal audits."
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
Purpose of the bill
The requirement for regional center vendors who receive
more than $500,000 in funding to conduct an independent
audit was established in 2011 trailer bill language. The
author states that this bill would make those audit
requirements less onerous for smaller vendors that do not
have a system in place to successfully comply with the
current requirement. Providers have described hardship for
smaller vendors that provide direct services in obtaining
an audit at costs of $10,000 or more per audit. The author
states this is especially difficult for smaller businesses
in light of multiple recent budget cuts to the
developmental services system and a 4.25 percent rate
reduction. The author argues that it is important for funds
to be prioritized for direct service to the population
during the budget crisis.
Regional Centers
Regional Centers are part of a system of care overseen by
the Department of
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Developmental Services (DDS). With a proposed budget of
$4.7 billion for 2012-2013,
DDS is responsible for coordinating care and providing
services for approximately 250,000 people with
developmental disabilities who receive services and
supports to live in their communities, as well as
approximately 1,800 people who reside in developmental
centers. California's 21 regional centers are non-profit
organizations that provide local services and supports to
individuals through contracts with DDS.
Historically, the regional centers have been praised for
providing services that are tailored to local needs and
responsive to individuals in communities, and criticized
for their inconsistency across the state. While DDS sets
some common rates, there are variations in services and
rates across the state. The regional centers, as
nonprofits, also are not subject to the same degree of
public disclosure as state agencies, and have faced
criticism for a lack of transparency in expenditures and
business practices.
Bureau of State Audits
In August 2010, the Bureau of State Audits released a
report entitled "Department of Developmental Services: A
More Uniform and Transparent Procurement and RateSetting
Process Would Improve the CostEffectiveness of Regional
Centers. Among its conclusions was that regional centers
were not appropriately monitoring expenditures of vendors.
The audit prompted a Senate Human Services hearing as well
as discussions in the Senate budget subcommittee about the
need for additional oversight of vendor expenditures.
Key among the examples of fiscal mismanagement in the state
auditor's report was a $950,000 contract between Inland
Regional Center and Southwestern Transportation Company. "
"A regional center procured $950,000 in
services from a transportation provider under a
so-called "negotiated rate' that appears to have been
calculated to incur a specific level of spending
before the end of the fiscal year rather than to
obtain the best value for the consumers the regional
center serves."
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This contract and other irregularities in contracting
prompted DDS to take the unusual step of placing Inland
Regional Center on probation with special contracting
language in January 2011, with requirements for reviewing
contracts, start-up funding and other programs that were
problematic in the audits.
Audit threshold
The current threshold of $500,000 was derived, in part, by
a budget savings estimate that projected improved
accounting procedures and internal controls by vendors at
this level would save about 1 percent in annual purchase of
service costs. Audits are expected to identify poor billing
practices, errors in billings and inappropriate
transactions that would otherwise be billed to regional
centers, allowing the department to focus on vendors with
qualified reports or significant issues raised.
This bill's $2 million audit threshold was chosen to mirror
audit requirements for non-profit organizations (Government
Code section 12586(e)(1), according to the author.
For comparison, recipients of federal grants must conduct
an annual audit once their funding reaches $500,000. (OMB
A133 Circular, Subpart B (a))
Audit and Review findings
The objective of an audit is to provide a reasonable basis
for expressing an opinion regarding the financial
statements taken as a whole. There are five different
auditor opinions:
a. Unqualified opinion: The financial statements
presented are free of material misstatements and are
represented fairly in accordance with the Generally
Accepted Accounting Principles (GAAP). This is
sometimes called a "clean" audit and means the
company's financial condition, position, and
operations are fairly presented in the financial
statements.
b. Unqualified opinion with explanatory language: A
clean audit, but circumstances may require an auditor
to add clarifying language to the report.
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c. Qualified opinion: Issues identified in the audit
which are significant, but not material as to not be
able to issue an opinion of the financial statements.
In this case, auditors find one of two types of
situations which do not comply with Generally Accepted
Accounting Principles, however the rest of the
financial statements are fairly presented. These two
types of situations are:
When one or more areas of the financial
statements do not conform with GAAP (e.g. are
misstated), but do not affect the rest of the
financial statements from being fairly presented
when taken as a whole
The auditor could not audit one or more
areas of the financial statements, and although
they could not be verified, the rest of the
financial statements were audited and they
conform to GAAP.
a. Adverse opinion: The financial statements are
materially misstated and, when considered as a whole,
do not conform with GAAP. In this case, auditors find
that the financial information is materially
incorrect, unreliable, and inaccurate.
b. Disclaimer: No opinion is issued by the auditor due
to very significant limitations, so the auditor cannot
evaluate the fairness of the statements.
The objective of a review is to provide a reasonable basis
for expressing limited assurance that there are no material
modifications that should be made in order for the
statements to be in conformity with generally accepted
accounting principles. No opinions are associated with an
audit review. A Certified Public Accountant will either
issue a clean review report or not issue a report due to
some material modification that needs to be made.
Related legislation
SB 74 (Committee on Budget and Fiscal Review, Chapter 9,
Statutes of 2011) established the audit requirements.
Comments
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Vendors have testified that recent state cuts have strained
their budgets and forced some program closures. The author
states that providing relief for the costly audits would
alleviate fiscal stress on this system. However, given the
recent audit findings of the Bureau of State Audits and the
Department of Developmental Services, and the assumed
budget savings from improved accounting by vendors, raising
the threshold at which vendors must perform an audit to $2
million seems unwise.
An alternative approach could be to allow smaller vendors
to receive a two-year waiver from the independent audit or
review requirements if they receive an unqualified audit or
clean review. Vendors receiving a qualified audit could
receive a one-year waiver from the independent audit
requirement, if no issues were raised about the provision
of regional center services. This would achieve the goal of
requiring vendors to have internal systems of control in
place, allow regional centers to continue to monitor
smaller vendors who don't have them in place, and permit
those vendors who are performing well to earn a grace
period for good performance. In conversations with the
Department of Developmental Services, administrators have
advised staff that permitting vendors with clean audits and
reviews to receive a two-year reprieve should not erode
savings as those savings were tied to improving poor
accounting practices.
Staff recommends the following amendments, which reinstate
current law and add an exemption section:
The people of the State of California do enact as follows:
SECTION 1. Section 4652.5 of the Welfare and Institutions
Code is amended to read:
4652.5. (a) (1) For fiscal years ending on or after July 1,
2011, an entity that receives payments from one or more
regional centers shall contract with an independent
accounting firm to obtain an independent audit or review of
its financial statements subject to all of the following:
(A) When the amount received from the regional center or
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regional centers during the entity's fiscal year is at a
minimum of two hundred fifty thousand dollars ($250,000)
but less than five hundred thousand dollars ($500,000), the
entity shall obtain an independent audit or independent
review report of its financial statements for the period.
Consistent with Subchapter 21 (commencing with Section
5880) of Title 17 of the California Code of Regulations,
this subdivision shall also apply to work activity program
providers receiving less than two hundred fifty thousand
dollars ($250,000).
(B)When the amount received from the regional center or
regional centers during the entity's fiscal year is equal
to or more than five hundred thousand dollars ($500,000),
the entity shall obtain an independent audit of its
financial statements for the period.
(2) This requirement does not apply to payments made using
usual and customary rates, as defined by Title 17 of the
California Code of Regulations, for services provided by
regional centers.
(3) This requirement does not apply to state and local
governmental agencies, the University of California, or the
California State University.
(b) An entity subject to subdivision (a) shall provide
copies of the independent audit or independent review
report required by subdivision (a), and accompanying
management letters, to the vendoring regional center within
nine months of the end of the entity's fiscal year for
which the audit is required.
(c) Regional centers receiving the audit or review reports
required by subdivision (b) shall review and require
resolution by the entity for issues identified in the
report that have an impact on regional center services.
Regional centers shall take appropriate action, up to
termination of vendorization, for lack of adequate
resolution of issues.
(d)Vendors receiving between $250,000 and $1 million may
seek an exemption from the independent audit requirement or
independent review, as defined in sections (A) and (B) of
this code, if any of the following conditions are met:
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1)Vendors receiving an unqualified opinion or unqualified
opinion with explanatory language shall receive a
two-year exemption from the independent audit
requirement.
2)Vendors receiving a qualified opinion may receive a
one-year exemption, as long as the regional center
determines that material issues raised in the audit do
not have an impact on regional center-funded services.
The vendor and regional center shall continue to address
issues raised in the qualified opinion, regardless of
whether an exemption has been granted.
3)Vendors receiving a ranking below a qualified opinion
shall not receive an exemption.
4)Vendors receiving a review for which the regional center
did not find issues, as defined in section (3)(c) shall
receive a two-year exemption from the review requirement.
5)This section shall remain in effect until July 1, 2016.
( d e) Regional centers shall notify the department of all
qualified opinion reports or reports noting significant
issues that directly or indirectly impact regional center
services within 30 days after receipt. Notification shall
include a plan for resolution of issues.
( e f) For purposes of this section, an independent audit of
financial statements shall be performed by an independent
accounting firm and shall cover, at a minimum, all of the
following:
(1) An inquiry as to the entity's accounting principles and
practices and methods used in applying them.
(2) An inquiry as to the entity's procedures for recording,
classifying, and summarizing transactions and accumulating
information.
(3) Analytical procedures designed to identify
relationships or items that appear to be unusual.
(4) An inquiry about budgetary actions taken at meetings of
the board of directors or other comparable meetings.
(5) An inquiry about whether the financial statements have
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been properly prepared in conformity with generally
accepted accounting principles and whether any events
subsequent to the date of the financial statements would
have a material effect on the statements under review.
(6) Working papers prepared in connection with a review of
financial statements describing the items covered as well
as any unusual items, including their disposition.
( f g)For purposes of this section, an independent review
report shall cover, at a minimum, all of the following:
(1)Certification that the review was performed in
accordance with standards established by the American
Institute of Certified Public Accountants.
(2)Certification that the statements are the
representations of management.
(3)Certification that the review consisted of inquiries and
analytical procedures that are lesser in scope than those
of an audit.
(4)Certification that the accountant is not aware of any
material modifications that need to be made to the
statements for them to be in conformity with generally
accepted accounting principles.
(g h ) The department shall, not consider a request for
adjustments to rates submitted in accordance with Title 17
of the California Code of Regulations by an entity
receiving payments from one or more regional centers solely
to fund either anticipated or unanticipated changes
required to comply with this section.
POSITIONS
Support: The Association of Regional Center Agencies
California Disability Services Association
Oppose: None received
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