One of the responsibilities of a County Financial Auditor is to ensure that special districts complete audits. Recently the Weott CSD struggled with embezzlement by an employee; The Peninsula CSD defaulted on their CalPERS pension obligation which reduced retirement benefits for retirees; many special districts are behind on audits. What have you done and what will you do to make sure that special districts are fiscally responsible?

— humBro

Response

Mychal Evenson

Hi humBro,

You raise a very important accountability issue. Before I get started, I want to thank every special district that completes timely annual audits. Audits are a lot of work and can be a significant distraction from day-to-day operations when staffing is limited.

This is a question that affects every Auditor-Controller in California. I am concerned about special districts’ audits. I plan to use a practical approach that follows a few steps: get the districts’ books in order, complete the current audit, and put accounting systems in place so that the districts have repeatable success. This process is long and filled with potential pitfalls.

The county’s credibility matters in this conversation. Before the county can criticize others, it must meet the standard that it wants to hold others to. It has been eight years since the last time the County of Humboldt submitted financial reports timely (the 2016-17 fiscal year, submitted March 28, 2018). The county must show that it can complete an audit of its own on time before telling others that they need to do the same. I expect that to be the 2025-26 fiscal year audit (due by March 31, 2027). We have made significant progress in cleaning up the backlog, and I expect a successful 2025-26 audit.

It gets complicated from there. Government code gives the Auditor-Controller authority to cause an audit. This is a last resort because it is likely to turn adversarial and unproductive without the explicit cooperation of the special district. Auditor-Controllers lack the accounting data to perform the audit themselves. Any harm gets amplified when the special districts lack the tools and resources to complete the audit. Should the Auditor-Controller compel an audit and the district be unable to complete it, the district would receive a large bill and no value. The goal is to help the districts put systems in place to complete the current and all future audits. Force does not accomplish this goal; effective systems do.

The process begins with relationship building. Many special districts have established their own bank accounts and no longer use the county treasury as the primary depository. This was the result of a breakdown of trust between the special districts and the county. Before we work on their audits, we have to restore this trust and demonstrate to them that the county takes its stewardship of their dollars seriously, that we will meet their needs quickly, and that questions are responded to promptly. I can then work with them to re-establish the county treasury as their primary depository where appropriate.

Many special districts struggle with capacity. Many districts’ fiscal staff are mostly volunteers. These are people faced with complicated government accounting rules, regulations, and procedures, most of whom receive no training and have no formal background in government accounting (or, often, accounting at all). As the trust relationship strengthens, I believe the special districts will feel confident leveraging Auditor-Controller staff’s expertise in government accounting to properly track transactions on behalf of the special districts or at the district in a manner that the special district can implement. The goal is sustainable systems that lead to ongoing compliance, not one-time compliance.

Once the relationship between the districts and the county is repaired and the accounting data is reliable, the next hurdle to overcome is cost. Some special districts have received proposals to complete audits that are a third to half of their total annual revenues. That cost would significantly impact the operations of these districts. There are potential paths forward, but they will need to be assessed case-by-case.

There is no ‘one-size-fits-all’ answer to this problem. There is hard work coming. I will work with the districts to understand their operations, fix any recordkeeping issues, and place repeatable systems into place. This approach is how we put audits into place that protect public resources, strengthen governance, and build confidence in local government for the long-term.

I am happy to talk if you have any follow-up questions or if you’re involved with a special district and would like help becoming compliant with audit requirements.

 

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