Chapter 3. Financial And Compliance Audits of California Education Code >> Division 1. >> Title 1. >> Part 9. >> Chapter 3.

It is the intent of the Legislature in enacting this chapter to promote accountability over public educational funding by establishing a new program to review and report on financial and compliance audits of school districts and the offices of county superintendents of schools. It is further the intent of the Legislature that the Controller shall have the primary responsibility for implementing and overseeing the program.

(a) As used in this chapter, "financial and compliance audit" shall be consistent with the definition provided in the "Standards for Audits of Governmental Organizations, Programs, Activities, and Functions" promulgated by the Comptroller General of the United States. Financial and compliance audits conducted under this chapter shall fulfill federal single audit requirements.
  (b) As used in this chapter, "compliance audit" means an audit that ascertains and verifies whether or not funds provided through apportionment, contract, or grant, either federal or state, have been properly disbursed and expended as required by law or regulation or both and includes the verification of each of the following:
  (1) Expenditure of funds in accordance with the local control and accountability plan adopted pursuant to Article 4.5 (commencing with Section 52060) of Chapter 6.1 of Part 28 of Division 4 of Title 2.
  (2) The reporting requirements for the sufficiency of textbooks or instructional materials, or both, as defined in Section 60119.
  (3) Teacher misassignments pursuant to Section 44258.9.
  (4) The accuracy of information reported on the School Accountability Report Card required by Section 33126. The requirements set forth in paragraphs (2) and (3) and this paragraph shall be added to the audit guide requirements pursuant to subdivision (b) of Section 14502.1.

(a) The Controller, in consultation with the Department of Finance and the State Department of Education, shall develop a plan to review and report on financial and compliance audits. The plan shall commence with the 2003-04 fiscal year for audits of school districts, other local educational agencies, and the offices of county superintendents of schools. The Controller, in consultation with the Department of Finance, the State Department of Education, and representatives of the California School Boards Association, the California Association of School Business Officials, the California County Superintendents Educational Service Association, the California Teachers Association, the California Society of Certified Public Accountants, shall recommend the statements and other information to be included in the audit reports filed with the state, and shall propose the content of an audit guide to carry out the purposes of this chapter. A supplement to the audit guide may be suggested in the audit year, following the above process, to address issues resulting from new legislation in that year that changes the conditions of apportionment. The proposed content of the audit guide and any supplement to the audit guide shall be submitted by the Controller to the Education Audits Appeal Panel for review and possible amendment.
  (b) The audit guide and any supplement shall be adopted by the Education Audits Appeal Panel pursuant to the rulemaking procedures of the Administrative Procedure Act as set forth in Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code. It is the intent of the Legislature that, for the 2003-04 fiscal year, the audit guide be adopted by July 1 of the fiscal year to be audited. A supplemental audit guide may be adopted to address legislative changes to the conditions of apportionment. It is the intent of the Legislature that supplements be adopted before March 1 of the audit year. Commencing with the 2004-05 fiscal year, and each fiscal year thereafter, the audit guide shall be adopted by July 1 of the fiscal year to be audited. A supplemental audit guide may be adopted to address legislative changes to the conditions of apportionment. The supplements shall be adopted before March 1 of the audit year. To meet these goals and to ensure the accuracy of the audit guide, the process for adopting emergency regulations set forth in Section 11346.1 of the Government Code may be followed to adopt the audit guide and supplemental audit guide. It is the intent of the Legislature that once the audit guide has been adopted for a fiscal year, as well as any supplement for that year, thereafter only suggested changes to the audit guide and any additional supplements need be adopted pursuant to the rulemaking procedures of the Administrative Procedure Act. The audit guide and any supplement shall be issued in booklet form and may be made available by any means deemed appropriate. The Controller and consultants in the development of the suggested audit guide and any supplement shall work cooperatively on a timeline that will allow the Education Audits Appeal Panel to meet the July 1 and March 1 issuance dates. Consistent with current practices for development of the audit guide before the 2003-04 fiscal year, the Controller shall provide for the adoption of procedures and timetables for the development of the suggested audit guide, any supplement, and the format for additions, deletions, and revisions.
  (c) For the audit of school districts or county offices of education electing to take formal action pursuant to Sections 22714 and 44929, the audit guide content proposed by the Controller shall include, but not be limited to, the following:
  (1) The number and type of positions vacated.
  (2) The age and service credit of the retirees receiving the additional service credit provided by Sections 22714 and 44929.
  (3) A comparison of the salary and benefits of each retiree receiving the additional service credit with the salary and benefits of the replacement employee, if any.
  (4) The resulting retirement cost, including interest, if any, and postretirement health care benefits costs, incurred by the employer.
  (d) The Controller shall annually prepare a cost analysis, based on the information included in the audit reports for the prior fiscal year, to determine the net savings or costs resulting from formal actions taken by school districts and county offices of education pursuant to Sections 22714 and 44929, and shall report the results of the cost analysis to the Governor and the Legislature by April 1 of each year.
  (e) All costs incurred by the Controller to implement subdivision (c) shall be absorbed by the Controller.
  (f) On or before January 1, 2015, the Controller, in consultation with the State Allocation Board, the Department of Finance, and the State Department of Education, shall submit content to the Education Audits Appeal Panel to be included in the audit guide, Standards and Procedures for Audits of California K-12 Local Educational Agencies beginning in the 2015-16 fiscal year, that is related to the financial and performance audits required for school facility projects, as described in Section 15286.

(a) Financial and compliance audits shall be performed in accordance with General Accounting Office standards for financial and compliance audits. The audit guide prepared by the Controller shall be used in the performance of these audits until an audit guide is adopted by the Education Audits Appeal Panel pursuant to Section 14502.1. When an audit guide is adopted by that panel, the adopted audit guide shall be used in the performance of these audits. Every audit report shall specifically and separately address each of the state program compliance requirements included in the audit guide, stating whether or not the district is in compliance with those requirements. For each state program compliance requirement included in the audit guide, every audit report shall further state that the suggested audit procedures included in the audit guide for that requirement were followed in the making of the audit, if that is the case, or, if not, what other procedures were followed. If a local education agency is not in compliance with a requirement that is a condition of eligibility for the receipt of state funds, the audit report shall include a statement of the number of units of average daily attendance, if any, that were inappropriately reported for apportionment.
  (b) An independent auditor shall not engage in financial or compliance audits unless, within three years of commencing the first of the audits, and every successive three years thereafter, the auditor completes a quality control review in accordance with General Accounting Office standards. The time period between commencement of the first audit, or completion of a quality control review, and completion of a subsequent quality control review shall be calculated from the first day of the month following commencement of the audit or completion of the quality control review. Notwithstanding this subdivision, independent auditors may continue to perform any financial and compliance audits until January 1, 1994.

To determine the practicability and effectiveness of the audits and audit guide, the Controller shall, on an annual basis, review and monitor the audit reports performed by independent auditors. The Controller shall determine whether audit reports are in conformance with reporting provisions of subdivision (a) of Section 14503 and shall notify each local education agency, office of the responsible county superintendent of schools, the Superintendent of Public Instruction, the Department of Finance, and the auditor regarding each determination. The local education agency or the county superintendent of schools contracting for the financial and compliance audit shall include a statement that will provide the Controller access to audit working papers.

(a) The Controller may perform quality control reviews of audit working papers to determine whether audits are performed in conformity with subdivision (a) of Section 14503. The Department of Finance may refer an independent auditor of a school district to the Controller for a review pursuant to this section if the Department of Finance finds that an audit of a school district was conducted in a manner that may constitute noncompliance with subdivision (a) of Section 14503. The Controller shall communicate the results of his or her reviews to the Department of Finance, the independent auditor, and the school district or office of the county superintendent of schools for which the audit was performed, and shall review his or her findings with the independent auditor.
  (b) Prior to the performance of any quality control reviews, the Controller shall develop and publish guidelines and standards for those reviews. Pursuant to the development of those guidelines and standards, the Controller shall provide opportunity for public comment.
  (c) (1) The Controller shall conduct a quality control review of the audit working papers of the independent auditor who performed the audits for a local education agency for the prior three fiscal years if any of the following circumstances exists:
  (A) The local education agency has received an emergency apportionment pursuant to Article 2 (commencing with Section 41320) or Article 2.5 (commencing with Section 41325) of Chapter 3 of Part 24.
  (B) The budget of the local education agency is disapproved or the local education agency has received a negative certification on any budget or interim financial report, as defined in Section 42131, during the current or preceding fiscal year.
  (C) The responsible county superintendent of schools has otherwise determined that a lack of going concern exists for a local education agency pursuant to Section 42127.6.
  (2) If the quality control review of the Controller indicates that the audit was conducted in a manner that may constitute unprofessional conduct as defined pursuant to Section 5100 of the Business and Professions Code, including, but not limited to, gross negligence resulting in a material misstatement in the audit, the Controller shall refer the case to the California Board of Accountancy. If the California Board of Accountancy finds that the independent auditor conducted an audit in an unprofessional manner, the independent auditor is prohibited from performing any audit of a local education agency for a period of three years, in addition to any other penalties that the California Board of Accountancy may impose.
  (d) In any matter that is referred to the California Board of Accountancy under subparagraph (A) of paragraph (1) of subdivision (c), the Controller may suspend the independent auditor from performing any local education agency audits pending final disposition of the matter by the California Board of Accountancy if the Controller gives the independent auditor notice and an opportunity to respond to that suspension. The independent auditor shall be given credit for any period of suspension if the California Board of Accountancy prohibits the independent auditor from performing audits of the local education agency under subdivision (c). In no event may the Controller suspend an independent auditor under this subdivision for a period of longer than three years.
  (e) The county superintendent of schools or the county board of education may refer an independent auditor of a local education agency to the California Board of Accountancy for action pursuant to subdivision (c) if an audit of a local education agency was conducted in a manner that may constitute unprofessional conduct as defined by Section 5100 of the Business and Professions Code, including, but not limited to, gross negligence resulting in a material misstatement in the audit.

The governing board of each school district and each office of the county superintendent of schools shall include the following two provisions in their contracts for audits:
  (a) A provision to withhold 10 percent of the audit fee until the Controller certifies that the audit report conforms to the reporting provisions of subdivision (a) of Section 14503.
  (b) A provision to withhold 50 percent of the audit fee for any subsequent year of a multiyear contract if the prior year's audit report was not certified as conforming to reporting provisions of subdivision (a) of Section 14503. This provision shall include a statement that a multiyear contract will be null and void if a firm or individual is declared ineligible pursuant to subdivision (c) of Section 41020.5. The amount withheld is not payable unless payment is ordered by the California Board of Accountancy or the audit report for that subsequent year is certified by the Controller as conforming to reporting provisions of subdivision (a) of Section 14503.
  (c) Within 30 days from the date of receipt of written notification that the Controller refuses to certify an audit report as conforming to reporting provisions of subdivision (a) of Section 14503, an auditor or audit firm having a portion of an audit fee withheld pursuant to these provisions may file an appeal in writing with the California Board of Accountancy. The board shall complete an investigation of the appeal within 90 days of the filing date and, on the basis of the investigation, do either of the following:
  (1) Order the Controller to provide notification that the audit report conforms to reporting provisions of subdivision (a) of Section 14503.
  (2) Schedule the appeal for a hearing, in which case the final action on the appeal shall be completed by the board within one year from the date of filing the appeal.
  (d) If the board orders the Controller to provide notification that the audit report conforms to reporting provisions of subdivision (a) of Section 14503, the Controller shall notify the contracting school district which shall then release the portion of the audit fee being withheld in accordance with this section.

The Controller shall conduct any additional audits which are necessary to carry out his or her duties and responsibilities under this code and the Government Code. Nothing in this chapter shall be construed to authorize any local educational agency, or any subcontractor or subrecipient, to constrain, in any manner, the Controller from carrying out any additional audits. However, to the extent that the required financial and compliance audits provide the Controller with the information necessary to carry out his or her responsibilities, the Controller shall plan additional audits as appropriate to avoid any unnecessary duplication of audit efforts. In performing these additional audits, the Controller shall, to the extent deemed appropriate under the circumstances, build upon the work performed during the required financial and compliance audit. The Controller shall not bill the school district or the county superintendent of schools for the costs of these additional audits.

The Controller shall report to the State Department of Education by June 30 of each year in order to apprise the department of school districts and offices of county superintendents of schools which are not in compliance with the applicable statutes and regulations. The Controller's report shall categorize audit exception by types and shall identify the reasons for the exceptions. The reasons may be the legislative intent or language is unclear or the administrative requirement is not feasible. The Controller shall make recommendations as to what action should be taken by the department. Before issuing the report, the Controller shall allow the school district or the county superintendent of schools specified in the report a reasonable period of time to review and comment on the section of the report affecting them.

The Controller shall submit a report to the Legislature on or before June 30 of each year regarding any recommendations made to the State Department of Education under Section 14507.