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.
Chapter 3Financial and Compliance Audits
Section § 14500
This law is about making sure schools and county school offices use public funds responsibly. It sets up a program to check financial and compliance audits for these educational entities. The law also gives the Controller the main job of running and supervising this program.
accountability public educational funding financial audits compliance audits school districts county superintendents overseeing program Controller public funds audits program Legislature intent education funding oversight audit review process educational entities implementing audits
Section § 14501
This section defines 'financial and compliance audit' and 'compliance audit' specifically for educational purposes. A financial and compliance audit must meet U.S. government standards and fulfill federal requirements. The compliance audit ensures that funds from federal or state sources are spent according to laws and regulations. It includes checking the proper use of local funding, ensuring textbooks and materials are sufficient, verifying teacher assignments, and confirming the accuracy of school report cards.
(a)CA Education Code § 14501(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)CA Education Code § 14501(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)CA Education Code § 14501(b)(1) Expenditure of funds in accordance with the local control and accountability plan adopted pursuant to Article 4.5 (commencing with Section 52059.5) of Chapter 6.1 of Part 28 of Division 4 of Title 2.
(2)CA Education Code § 14501(b)(2) The reporting requirements for the sufficiency of textbooks or instructional materials, or both, as defined in Section 60119.
(3)CA Education Code § 14501(b)(3) Teacher misassignments pursuant to Section 44258.9.
(4)CA Education Code § 14501(b)(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.
financial and compliance audit federal single audit requirements local control and accountability plan proper fund disbursement expenditure verification sufficiency of textbooks instructional materials verification teacher misassignments School Accountability Report Card audit guide requirements federal or state funds apportionment local control plan compliance Section 52059.5 Section 60119
Section § 14502.1
This law outlines the process for creating, updating, and using an audit guide for assessing the financial and compliance audits of California school districts and related entities. The State Controller, along with several educational and financial organizations, is responsible for developing this guide, which is reviewed and amended by the Education Audit Appeals Panel. The guide should be updated annually and supplemented to address new legislation that affects school funding conditions. The law also mandates detailed reporting on audits related to retirements under specific sections, as well as an annual cost analysis report to the Governor and Legislature. The aim is to ensure transparency and accuracy in school audits and their associated costs.
(a)CA Education Code § 14502.1(a) The Controller, in consultation with the Department of Finance and the department, 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 department, and representatives of the California School Boards Association, the California Association of School Business Officials, the California County Superintendents Educational Services Association, the California Teachers Association, the California Society of Certified Public Accountants, and the County Office Fiscal Crisis and Management Assistance Team, 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 Audit Appeals Panel for review and possible amendment.
(b)CA Education Code § 14502.1(b) The audit guide and any supplement shall be adopted by the Education Audit Appeals 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 Audit Appeals 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)CA Education Code § 14502.1(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)CA Education Code § 14502.1(c)(1) The number and type of positions vacated.
(2)CA Education Code § 14502.1(c)(2) The age and service credit of the retirees receiving the additional service credit provided by Sections 22714 and 44929.
(3)CA Education Code § 14502.1(c)(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)CA Education Code § 14502.1(c)(4) The resulting retirement cost, including interest, if any, and postretirement health care benefits costs, incurred by the employer.
(d)CA Education Code § 14502.1(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)CA Education Code § 14502.1(e) All costs incurred by the Controller to implement subdivision (c) shall be absorbed by the Controller.
(f)CA Education Code § 14502.1(f) On or before January 1, 2015, the Controller, in consultation with the State Allocation Board, the Department of Finance, and the department, shall submit content to the Education Audit Appeals 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.
audit guide financial audits compliance audits school districts County Superintendents Education Audit Appeals Panel California School Boards Association California Teachers Association retirement cost analysis audit year school facility projects Legislative changes apportionment conditions emergency regulations cost analysis report
Section § 14503
This law section outlines the rules for conducting financial and compliance audits on educational programs in California. These audits must follow standards set by the General Accounting Office and use a specific audit guide, initially provided by the Controller, until a new guide is adopted by the Education Audits Appeal Panel. Each audit must address all compliance requirements and procedures stated in the guide. If a school district doesn't meet certain compliance criteria necessary for state funding, this must be highlighted in the audit report along with details such as improperly reported attendance figures. Additionally, auditors need to undergo a quality control review every three years to ensure they are meeting the required standards for conducting these audits.
(a)CA Education Code § 14503(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)CA Education Code § 14503(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.
financial audits compliance audits General Accounting Office standards audit guide Education Audits Appeal Panel state program compliance local education agency eligibility for state funds average daily attendance independent auditor quality control review audit procedures audit report Controller audit requirements
Section § 14504
This law requires the Controller to annually review and monitor audit reports done by independent auditors for local education agencies. The Controller checks if these reports follow specific rules and communicates the results to relevant education and finance officials. Also, schools must allow the Controller access to the auditors' working papers for review.
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.
audit reports independent auditors conformance local education agencies county superintendent Superintendent of Public Instruction Department of Finance audit guide financial audit compliance audit audit working papers annual review reporting provisions
Section § 14504.2
This section details the process and authority of the Controller to review the audits of school districts to ensure compliance with specific standards. It allows the Department of Finance to refer an auditor for review if there's suspicion of noncompliance. Guidelines for these reviews are developed with public input. If specific financial issues like emergency apportionment or disapproved budgets arise, the Controller must review audits from the past three years. If the review finds unprofessional conduct, the case is referred to the California Board of Accountancy, which can enforce penalties, including a ban on conducting future audits. The Controller can also temporarily suspend auditors during investigations, and county superintendents or boards can refer cases of misconduct for further action.
(a)CA Education Code § 14504.2(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)CA Education Code § 14504.2(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)Copy CA Education Code § 14504.2(c)
(1)Copy CA Education Code § 14504.2(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)CA Education Code § 14504.2(c)(1)(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)CA Education Code § 14504.2(c)(1)(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)CA Education Code § 14504.2(c)(1)(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)CA Education Code § 14504.2(c)(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)CA Education Code § 14504.2(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)CA Education Code § 14504.2(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.
quality control reviews audit working papers independent auditor school district audits noncompliance Department of Finance emergency apportionment budget disapproval negative certification going concern California Board of Accountancy unprofessional conduct gross negligence material misstatement audit suspension
Section § 14505
This law requires school districts and county superintendents in California to include specific conditions in their audit contracts. First, they must hold back 10% of the audit fee until the Controller certifies that the audit report meets required standards. Second, for multiyear contracts, they must withhold 50% of the fee for subsequent years if the previous year's report wasn't certified. If an auditing firm is found ineligible, the contract becomes void. If the Controller doesn't certify the report, auditors can appeal to the California Board of Accountancy, which will investigate the appeal within 90 days and either order the Controller to certify the report or schedule a hearing. If the Board orders certification, the withhold fee must be released once notified by the Controller.
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)CA Education Code § 14505(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)CA Education Code § 14505(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)CA Education Code § 14505(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)CA Education Code § 14505(c)(1) Order the Controller to provide notification that the audit report conforms to reporting provisions of subdivision (a) of Section 14503.
(2)CA Education Code § 14505(c)(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)CA Education Code § 14505(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.
audit fee withholding audit report certification Controller certification multiyear contracts California Board of Accountancy audit appeal process investigation of appeal school district audit contracts withheld audit fees contract void for ineligibility audit standards hearing for audit appeal notification by Controller
Section § 14506
This law section says that the Controller can do extra audits on local educational agencies if needed, without being restricted by those agencies. The goal is to avoid unnecessary repeat audits by building on prior work. Importantly, the costs for these extra audits will not be charged to the school districts or county education officials.
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.
additional audits local educational agency Controller financial compliance audit duplication cost-free audits subcontractor constraints Government Code audit planning school district audits county superintendent audits audit responsibilities
Section § 14507
Every year by June 30, the state’s financial overseer, known as the Controller, must inform the State Department of Education about any school districts and county school offices that aren’t following the rules. This report must explain in detail why these places missed the mark, whether it's due to confusing laws or impractical requirements. The Controller will also suggest actions the Department should take. Before finalizing the report, these schools or offices get a chance to review and comment on their specific sections.
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.
Controller's report Department of Education school districts compliance audit exceptions legislative intent administrative requirements report recommendations school district review non-compliance reasons county superintendent comments June 30 deadline annual compliance report education statutes school audit process
Section § 14508
Each year by June 30, the Controller has to give a report to the Legislature about any advice they provided to the State Department of Education as per the previous section.
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.
Controller report recommendations State Department of Education Legislature annual deadline June 30 Section 14507 educational advice Legislative reporting State education policies
Section § 14509
This law says that the funding for mental health services in schools, as outlined in the state budget, must follow state and federal auditing rules. Auditors will check to make sure the money is being used correctly for mental health services related to education. If there are problems found, the schools must fix them or come up with a plan to do so. This review method will continue in future years if recommended by the state Controller.
The funding appropriated in Item 6100-161-0001 of the annual Budget Act for mental health services shall be subject to existing state and federal audit requirements. Audit procedures shall be included in the audit guide to review whether funding for educationally related mental health services pursuant to this item was used by local educational agencies for its intended purposes in the 2016–17 fiscal year. These audit procedures shall be included in future fiscal years if the addition of these procedures is recommended by the Controller pursuant to subdivision (a) of Section 14502.1. If any mental health audit findings are generated through this process, the Superintendent shall ensure that the local educational agency has either corrected or developed a plan of correction for state and
federal mental health funds pursuant to subdivision (m) of Section 41020.
mental health services educational agencies annual Budget Act audit requirements audit procedures Superintendent mental health audit findings fiscal year 2016-17 plan of correction auditing rules state Controller
