Last September, Assembly Bill 2613 by Assembly Member Katcho Achadjian was signed into law by Governor Brown. This measure, which CSDA sponsored, will provide small districts with new options to reduce the costs of meeting their statutory financial audit obligations.
Every year, CSDA solicits ideas for potential legislation from our membership, and last year was no different. A proposal was submitted by a group of small special districts from Northern California that were requesting cost relief related to annual audit requirements. After further investigation, CSDA found that some small districts were spending upwards of 30 percent of their annual revenues to have an audit performed every year. While CSDA, and these small districts, see the value in assuring public funds are being managed appropriately, it didn’t make sense to have districts spend 30 percent of their revenues to ensure they’re spending their money in a responsible fashion. As a result, CSDA decided to pursue legislation to assist these small districts.
Existing law requires every special district to have an annual audit, a biennial audit, an audit performed every five years, or for districts with annual revenues of $150,000 or less, they may have a financial review performed instead of an audit (if approved by the local county board of supervisors). While these existing options can provide some financial relief, our districts were reporting that a biennial audit is twice as expensive as an annual audit and an audit performed every five years would be almost five times as expensive. This is because the bulk of audit costs are related to the hourly rate of the CPA performing the audit and a biennial audit takes roughly twice as long to perform.
With this information in hand, CSDA met with the California State Association of County Auditors (SACA) to discuss the issue and review some potential solutions. The county auditors were aware of the cost burdens on our smaller special districts and agreed to assist CSDA in developing a solution. The final language in AB 2613 is a result of the collaboration between SACA and CSDA.
With the auditors’ support, we were able to create two new options, to take effect January 1, 2017, for special districts that will potentially lower the costs related to audit requirements, while maintaining proper financial oversight and accountability. Consistent with existing law governing financial reviews, the new options apply to districts that meet both of the following requirements: 1) all of the special district’s revenues and expenditures are transacted through the county’s financial system, and 2) the special district’s annual revenues do not exceed $150,000.
The first new option will allow districts, with the unanimous request of the governing board of the special district and with unanimous approval of their county board of supervisors, to have an agreed-upon procedures engagement performed in lieu of a full audit. The second new option allows districts, with unanimous request of the governing board of the special district and with unanimous approval of the board of supervisors, to have an annual financial compilation performed in lieu of an audit. However, a district may not have more than five consecutive financial compilations performed without having conducting at least one full one-year audit.
On the spectrum of the level of oversight provided by the various financial statements, which directly corresponds to the costs of having them performed, an audit provides the highest level of financial assurances, followed by a financial review, followed then by a financial compilation, with the agreed-upon procedures engagement falling somewhere between a financial compilation and a full audit, depending on what financial documents a county auditor determines they need to review as part of the agreed-upon procedures.
The new options provided in AB 2613 for smaller districts should result in lowered costs to the districts by reducing the billable hours required to produce the various financial statements, while maintaining proper financial oversight through the required approval by the governing boards and the county boards of supervisors who will be seeking input from county auditors, prior to approving their usage.
Questions about the new audit options provided by AB 2613? Please contact CSDA Legislative Representative Dillon Gibbons at 877.924.2732 or firstname.lastname@example.org.