They're back ...: audit rotation and other issues re-emerge.

• Author: Allen, Bruce C.
• Position: Government relations

SB 393 (Ortiz), as proposed, would impose additional requirements on CPAs who perform audits of special districts and would expand controller oversight of those firms that perform audits of special districts including:

* Auditor or audit firm rotation every six years.

* Testing of transactions considered high risk for abuse.

* Quality reviews by the state controller's office.

* Authority for the controller to unilaterally suspend firms from auditing special districts for up to three years in addition to any disciplinary proceedings imposed by the California Board of Accountancy.

Ambiguous Provisions

CalCPA has reviewed the bill and found that several provisions are ambiguous and carry the risk of increasing audit costs and decreasing CPA interest in providing audit services to special districts. Additionally, other provisions are in direct conflict with the Government Accountability Office's standards and recommendations regarding peer review.

For example, SB 383 contains provisions for mandatory auditor or audit firm rotation every six years. The GAO does not require or recommend rotating audit firms or audit partners of government entities.

The bill also contains language that requires the testing of "transactions considered high risk for abuse" every two years. These transactions are not clearly defined, which could lead to confusion and unintended consequences during the regulatory process. Further, there is no mention of materiality with regard to these transactions.

Under SB 393, a CPA firm would not be allowed to audit a special district unless, within the last three years, it has had a quality control review conducted by the state controller. Firms already are required under GAO standards to have a peer review performed. If, for any reason, the controller's staff is unable to perform a timely review, they could unilaterally bar an otherwise qualified firm from performing a special district audit.

Too Much Concentrated Power?

The controller also is given authority to unilaterally suspend firms from auditing special districts for a period of three years in addition to whatever sanction, if any, the CBA may apply. The CBA has regulatory authority over the CPA profession in California and is in a position to apply a full spectrum of discipline for unprofessional conduct through its adjudicatory process. This process allows for a full impartial investigation and due process for the accused. No such provisions apply to the authority...