Capitol Beat Municipal Accounting

May 01, 2011

Legislation Impacting City Auditors in the Works

By Bruce C. Allen & Jeannie Tindel
A number of legislative proposals are being advanced that could hold serious ramifications for municipal auditors in California. The proposals are a result of the issues related to the cities of Bell and Vernon, Modoc County and general dissatisfaction with California redevelopment agencies.

California’s Controller is sponsoring five legislative bills, and the Bureau of State Audits also has legislation in the works. The most immediate concern to the profession is AB 229 (Lara), which would increase the state Controller’s oversight of the independent auditors.

As introduced, AB 229 would have required audit firm rotation every five years. This position is based on a belief by some Controller representatives that having a new firm every five years would provide a new approach for the audit and a therefore a more robust audit. The benefits of audit firm rotation is not supported by numerous studies or the experiences of other major countries. CalCPA objected to this requirement and the Controller agreed to replace the audit firm rotation requirement with audit partner rotation every six years.

AB 229 also would require all local government audit reports be filed with the Controller’s office. Currently only those entities covered by the federal single audit act are required to file with the Controller.

Audit guides for all local government entities would be developed under AB 229. This may be an effective solution to improving the quality of local government audits. State and local representatives, in consultation with representatives of CalCPA, would develop the audit guide for each entity. It’s anticipated that the audit guide would identify those compliance items that would be included in any audit of that entity (e.g., joint powers authorities, redevelopment districts, special districts, cities and counties).

While compliance parameters could be helpful, it should be noted that the redevelopment audit guide that is being used in California was adopted in 1998 and does not include any statutory changes enacted by the California Legislature since then. As with any guide, a major issue would be the regular updating and release of the audit guide far enough in advance for auditors to price the audit so it accurately reflects the time required to measure existing and any new compliance items.

AB 229 would also authorize the Controller to perform audit work paper reviews of audit firms. It’s anticipated this would be similar to what is already done for the work papers of local education agency auditors. Firms failing this work paper review could then be referred to the California Board of Accountancy for potential disciplinary action and simultaneously removed by the Controller from the list of Controller-approved auditors, pending the outcome of the CBA’s investigation.

CalCPA is pushing to have this authority removed from the bill arguing that the CBA is the agency responsible for regulating the CPA profession in California and the Controller’s office should not be managing a list of approved audit firms.

CalCPA has been meeting with the Legislature and the Controller’s office to work on compromise language and the Controller has been amendable to several amendments.

More Legislation
The Controller’s other bills are AB 253 (Smyth), SB 186 (Kehoe), SB 449 (Pavley) and AB 276 (Alejo).

AB 253 prescribes uniform city accounting procedures. SB 186 would grant the Controller the ability to conduct audits or investigations of any local government. SB 449 would authorize the Controller to conduct preliminary reviews of any local agency facing a fiscal crisis and create a multidisciplinary fiscal “SWAT team” to provide expertise with fiscal advice, management assistance and auditing skills to local agencies. AB 276 would increase fines for local government entities that fail to file timely financial reports with the Controller.

The Bureau of State Audits is sponsoring AB 187 (Lara), which would allow the State Auditor to audit high-risk, local governments.

It’s unclear how the Controller is expected to staff and fund the increased oversight activities that this expansion of duties and requirements will create. There are already a number of vacancies in the Controller’s office, which has been hard hit by the California budget deficit and saw its budget substantially reduced last year.

CalCPA will continue working with all parties to ensure that whatever is adopted is both workable and addresses real problems with local government financing and reporting.
Bruce C. Allen is CalCPA’s director of government relations. Jeannie Tindel is CalCPA’s director of legislation.

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