Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2002

State of Hawaii

Sir:

Your Committee on Legislative Management, to which was referred S.B. No. 3011, S.D. 2, entitled:

begs leave to report as follows:

The purpose of this bill, as received, is to appropriate funds to enable the Auditor to audit the Department of Education (DOE).

For purposes of the public hearing, your Committee circulated a proposed H.D. 1 version that deletes the contents of the bill and inserts the contents of H.B. No. 1821, H.D. 2, which appropriates funds to the Auditor to conduct financial audits of all state agencies.

The Auditor supported the intent of the proposed H.D. 1 and suggested amendments. The Department of Accounting and General Services (DAGS) and the Department of Budget and Finance opposed this bill. DOE commented on this bill.

Upon further consideration, your Committee has further amended this bill by adopting the Auditor's proposed amendments. Accordingly, your Committee has deleted the contents of the proposed H.D. 1 and inserted provisions to:

1. Allow the Auditor to charge audited entities a reasonable fee for the cost of performing financial audits, including financial statement audits, audits required under federal law, and audits of special funds, revolving funds, or trust funds;
2. Create an Audit Revolving Fund to be administered by the Auditor to collect the moneys received to conduct audits and to pay for CPAs to conduct those audits;
3. Appropriate a one-time appropriation of $575,000 for fiscal year 2002-2003 to be paid into the Audit Revolving Fund;
4. Appropriate $2,200,000 for fiscal year 2002-2003 from the Audit Revolving Fund to carry out the purposes of the Audit Revolving Fund;
5. Appropriate $2,500,000 in general funds for fiscal year 2002-2003 to conduct financial statement audits required by federal law; and
6. Change the effective date to July 1, 2002.

Your Committee finds that there is a problem with the way financial statement audits of state agencies are currently conducted. DAGS selects the certified public accounting (CPA) firm that audits the various departments, offices, and agencies of the State. Thereafter, DAGS is no longer involved with the audits.

The department, office, or agency being audited signs the contract with the selected CPA firm, is billed directly by the CPA firm, pays the CPA firm with moneys that are appropriated to the department, works directly with the staff and management of the CPA firm, and reviews and approves the final report from the CPA firm. This arrangement results in reduced independence between the CPA firm and the client/auditee. This reduced independence has been allowed to go on for too long.

Your Committee believes that the Legislature needs to strengthen its oversight capability by funding the entire responsibility for financial audits through its own oversight entity, the Office of the Auditor. The proposed H.D. 1 will accomplish this shift by recognizing financial audit costs as a legislative expense.

Your Committee has learned that approximately half of the State’s external audit costs are paid from federal, special, and other funds. To prevent any loss of federal funding and to enable the State to continue to charge each fund its rightful audit cost, your Committee has amended this bill to establish a revolving fund in the Office of the Auditor and has authorized the Auditor to expend moneys from the revolving fund.

This is the same model used by several other states. The audits supported by the general fund, currently budgeted in the respective departments, will merely experience a change in expending agency. The net effect is no change in overall expenditures for auditing, except for a one-time appropriation of seed money to the revolving fund to advance the costs of the federally funded audits.

Your Committee finds the transfer to be effectuated by this bill will not reduce the ability of executive departments to rely on the audits as a management tool. Rather, the agencies will no longer have control over the audits, resulting in greater independence and reliability and an increase in the use of audits as a management tool.