Presented by Roger Bulosan, CPA
Director in Charge of Nonprofit Practice
LAUTZE & LAUTZE
CPAs & Financial Advisors
SB 74, Committee on Budget and Fiscal Review
Developmental Disabilities Services
Amends Welfare and Institutions Code
§4652.5
Effective March 24, 2011
WHY WAS THIS LAW
IMPLEMENTED?

To provide more uniformity and consistency
in the administrative practices and services
of Regional Centers throughout the State

To develop best practices for Regional
Center management internally and for
monitoring purchase of services expenses
WHAT DOES IT MEAN TO
VENDORS?

Vendors will be required to obtain either
an independent review or independent
audit of their financial statements by a
CPA

This law has a lower audit threshold for
California nonprofits set at $2 million SB 1262
WHO DOES THIS AFFECT?

Vendors receiving payments from one or
more Regional Centers equal to or more
than $250,000 but less than $500,000
during a financial year are required to
obtain an independent review or audit of
their financial statements in accordance
with U.S. generally accepted accounting
principles - §4652.5(A)
WHO DOES THIS AFFECT?

Vendors receiving payments from one or
more Regional Centers equal to or more
than $500,000 during a financial year
are required to obtain an independent
audit of their financial statements in
accordance
with
U.S.
generally
accepted accounting principles – §4652.5(B)
WHO DOES THIS AFFECT?

All Work Activity Program (WAP) providers
regardless of payment amount received from
the Regional Center – Work Activity Program
services
through
the
Department
of
Rehabilitation include paid work, work
adjustment
and
supportive
rehabilitation
services in a sheltered work shop setting –
§4652.5(A)
THIS LAW DOES NOT APPLY TO:

Payments made using usual and
customary rates, as defined by Title 17 of
the California Code of Regulations §4652.5(B)(2)

State and local governmental agencies, the
University of California or the California
State University - §4652.5(B)(3)
15% ADMINISTRATIVE CAP

Regional
center
contracts
or
agreements with service providers in
which rates are determined through
negotiations between the Regional
Center and the service provider
expressly require that not more than
15% of Regional Center funds be spent
on administrative costs – SB 74
15% ADMINISTRATIVE CAP

Direct service expenditures are those costs
immediately associated with the services to
consumers being offered by the provider

Administrative expenses
service expenditures
are
not
direct
15% ADMINISTRATIVE CAP
Administrative costs include:

Salaries, wages, employee benefits for managerial
personnel whose primary purpose is administrative
management

Salaries, wages, employee benefits of employees who
perform administrative functions

Facility and occupancy costs, directly associated with
administration

Maintenance and repair
15% ADMINISTRATIVE CAP
Administrative costs include:






Data processing and computer support services
Contract and procurement activities
Training directly associated with administrative functions
Travel directly associated with administrative functions
Licenses directly associated with administrative
functions
Taxes
WHEN IS THIS LAW EFFECTIVE?

“For all entities, whether they already
obtained an audit/review or whether this is
the first audit/review, the requirement
applies to the entity’s fiscal year at the time
of the statute’s enactment” – Source: Letter dated
September 16, 2011 from Department of Developmental Services

Vendors with a July through June fiscal
year, the requirement would apply to the
audit/review performed of the July 1, 2010
to June 30, 2011 financial statements
WHEN IS THIS LAW EFFECTIVE?

Vendors with a January through
December
calendar
year,
the
requirement would apply to the
audit/review performed of the January
1, 2011 to December 31, 2011 financial
statements

Department of Developmental Services
recommends that vendors schedule
their audit/review as soon as possible
INDEPENDENT REVIEW
VS.
INDEPENDENT AUDIT
WHAT CAN A VENDOR EXPECT
DURING AN INDEPENDENT REVIEW
OF FINANCIAL STATEMENTS?

The goal is for the CPA to provide negative
assurance that the CPA is “… not aware of
any material modifications that should be
made to the accompanying financial
statements in order for them to be in
conformity with accounting principles
generally accepted in the United States of
America.”
INDEPENDENT REVIEW
The CPA performing the review will ask the
vendor about their accounting practices and
methods

Accrual basis
 Inventory methods
 Bad debt estimates
INDEPENDENT REVIEW
The CPA will ask the vendor their procedures
for recording, classifying and summarizing
accounting transactions

Procedures for revenue recognition
 Purchasing
 Asset classification
INDEPENDENT REVIEW
The CPA will review the vendor’s financial
statements and identify items that appear
unusual

Unexplained account variations
 Account balances that do not equal
supporting schedules or reconciliations
 Account balances that contradict known
facts
INDEPENDENT REVIEW
The CPA will perform analytical procedures
Ask about current and prior year’s financial
statements variations
 Ask about current year’s budget vs. actual
variances
 Calculate ratio analysis
 Compare your results to industry
trends/standards

INDEPENDENT REVIEW
The CPA will ask the vendor if there have
been any Board of Directors meetings related
to

Significant decisions
 Lawsuits
 Budgetary actions and what those actions
were
WHAT CAN A VENDOR EXPECT DURING
AN INDEPENDENT AUDIT OF FINANCIAL
STATEMENTS?

The goal is for the CPA to express an opinion
“… that the financial statements are
presented fairly, in all material respects in
conformity with accounting principles generally
accepted in the United States of America.”
INDEPENDENT AUDIT
As part of the audit, the CPA will inspect
documents and send confirmations

Bank and investment balances
 Vendor’s accounts receivable balances
 Debt with third parties
 Legal matters with attorneys
INDEPENDENT AUDIT
The CPA will review and gain
understanding of your internal controls

an
Gain an understanding of the effectiveness
and efficiency
 Gain an understanding of segregation of
duties
 Reliability of financial reporting
 Compliance with laws and regulations
INDEPENDENT AUDIT
The CPA will evaluate the risk of
financial statement fraud,
misappropriation of assets, and
material errors


Identify scenarios in which theft or
loss could occur
May investigate issues that arise
INDEPENDENT AUDIT
Initial Audits

The CPA will need to perform additional work to
determine that the beginning account balances
(7/1/10 or 1/1/11) not just 6/30/11 or 12/31/11
balances are fairly stated

Can not get an unqualified opinion on activity
statements without testing beginning balances
TYPES OF AUDITOR OPINIONS
AND WHICH ONE YOU WANT
Unqualified – states that in the CPA’s
judgment that the vendor’s financial
statements are fairly stated in all material
respects
 Have all required disclosures and proper
accounting policies
 No scope limitations
 This is the one you want!

TYPES OF AUDITOR
OPINIONS

Qualified – states that in the CPA’s opinion
that the financial statements are not fairly
stated or is limited in scope in some way
TYPES OF AUDITOR
OPINIONS

Adverse – states that the vendor’s
financial statements are misrepresented,
misstated, and do not accurately reflect its
financial position, results of operations, and
cash flows

Disclaimer – states that an audit opinion
cannot be rendered because the limitations
are so great that they can not be overcome
by alternative procedures
MANAGEMENT LETTERS
This is the CPAs requirement to report
internal control weaknesses to those in
charge of governance



Material weaknesses
Significant deficiencies
Constructive comments—do not involve
internal control
REQUIREMENTS FOR BOTH THE
INDEPENDENT REVIEW AND
INDEPENDENT AUDIT

The vendor is required to provide copies of the
independent review report or independent audit
report and accompanying management letter to
the vendoring Regional Center within 30 days of
the completion of the review or audit –
§4652.5(B)(3)(b)
REQUIREMENTS FOR BOTH THE
INDEPENDENT REVIEW AND
INDEPENDENT AUDIT

Regional Centers receiving the review report
or audit report will review the report and
require resolution for issues, if any, identified
in the report that have a direct or indirect
impact on Regional Center services –
Regional Centers will take appropriate action,
including termination of the vendor relationship
for lack of resolution of issues – §4652.5(B)(3)(c)
REQUIREMENTS FOR BOTH THE
INDEPENDENT REVIEW AND
INDEPENDENT AUDIT

Regional Centers will notify DDS of all qualified,
adverse, and disclaimer opinion reports or
reports noting significant issues that directly or
indirectly impact Regional Center services –
§4652.5(B)(3)(d)
THE BASIC FINANCIAL
STATEMENTS

Balance Sheet or Statement of Financial
Position – summarizes an entity’s assets,
liabilities, and shareholders’ equity or net assets
at a specific point in time, typically the end of
the fiscal year
THE BASIC FINANCIAL
STATEMENTS

Income Statement or Statement of Activities
– measures an entity’s operating performance
over a period of time, typically for the fiscal year
THE BASIC FINANCIAL
STATEMENTS

Cash Flow Statement – discloses operating,
financing, and investing cash flow activities over
a period of time, typically for the fiscal year

Statement of Functional Expenses – reports
expenses by their function (programs,
management and general, fundraising) and by
the natural expense (salaries, rent) over a
period of time, typically for the fiscal year
TIPS TO HELP YOU CHOOSE
A CPA FIRM

Education – Check out the firm’s credentials and
look for additional specialized skills that will benefit
you—audit, tax, business consulting

Professional Organizations – Make sure the firm
is a member of American Institute of CPA’s and
California Society of CPA’s

Peer Review – This is a CPA firm auditing a CPA
firm. Choose a firm that undergoes a peer review.
Peer reviews maintain standards, improve
performance and provide credibility
TIPS TO HELP YOU CHOOSE
A CPA FIRM
Send out Requests for Proposals (RFPs)
 List the qualifications you are looking for
 Consider the timing of when the audit or review will be
performed—if you move the work to slower periods,
usually will be done for less cost
 Consider the size of the firm—usually the larger the firm,
the more expensive. Smaller firms usually lack the
expertise to help you with other management issues
 Make sure CPA has satisfied, similar sized clients
TIPS TO HELP YOU CHOOSE
A CPA FIRM
The CPA should:

Excel at serving people
 Be honest with a high level of integrity
 Be well-experienced in the areas that you need
 Be a good communicator, both listening and
speaking
TIPS TO HELP YOU CHOOSE
A CPA FIRM
Websites:

This website will help you find a CPA by various
categories:
http://www.calcpa.org/public/referral/findcpa.aspx

This website will tell you if the CPA is qualified
to perform reviews or audits – go to licensee
look up and look for “A”

http://www.dca.ca.gov/cba/
QUESTIONS?
Roger Bulosan, CPA
LAUTZE & LAUTZE
CPAs & Financial Advisors
rbulosan@lautze.com
(415) 543-6900
www.lautze.com