The Audit Team’s approach to a “line-by-line” audit is one of synthesis of the work performed by the audit and control entities named below and through our verification and validation of their inputs in the context of an acquisition model. That is, we have reviewed and validated the accuracy and completeness of the state’s existing entities, systems, and structures from the Budget, Financial and Performance perspectives. Moreover, we have preliminarily assessed the extent and deployment of the state’s existing auditing resources. We have focused on opportunities for improved coordination and the use of existing and updated resources to ensure the state’s control framework promotes effective operations. California deserves no less.
The State Controller’s Office (SCO) maintains the official accounting records, recording all receipts and expenditures of funds as approved in the budget and produces the Consolidated Annual Financial Report (CAFR). This document represents the rolled-up results of state operations in accordance with generally accepted accounting principles, and is the subject matter for the Bureau of State Audits (BSA) annual Single Audit report, that is the audit of the state’s consolidated books. SCO’s financial reporting structure accurately tracks state revenues and expenditures on a cash basis (that is, amounts deposited and checks drawn) throughout the year and adjusts at year-end for accruals in accordance with generally accepted accounting principles (GAAP). The amounts reported are accurate to the extent that the systems that develop them and the reported transactions that support them are in turn accurate. On a widescale basis, BSA’s auditors assigned to the Single Audit spend their time assessing the underlying validity of the CAFR. They conclude as to the report’s material accuracy and report internal control findings that might affect the accuracy of the statements. BSA has presented an unqualified (clean) opinion on the state’s financial statements for all years since and including 1998–1999 with extra notations in the June 30, 1999 report regarding Year 2000 issues, in the June 30, 2001 report regarding energy contracts and lawsuits, and in the June 30, 2003 report regarding the exclusion of the State Compensation Insurance Fund from the overall audit. How reliable is BSA’s work? BSA received a clean opinion on its Peer Review—performed by the National State Auditors Association and reported on October 2, 2002 (a peer review is required every three years). The adequacy of the financial systems and their outputs, and the report on them by independent auditors represent further evidence for the “line-by-line” audit.
The next component of the “line-by-line” comes from the answers to the following: Are all revenues that should be received actually received, and are expenditures going for their intended purposes? The revenue side of the equation is addressed by the state’s collection entities: the Franchise Tax Board, Board of Equalization, Departments of Motor Vehicles and Insurance, and other fee and tax agencies. Their efforts are recorded with SCO and monitored by their internal fiscal staff as well as by DOF’s revenue unit. The expenditure question requires another caveat before it can be addressed in the audit context: complete and accurate assessments of expenditures can only be made if the intended purposes have been clearly stated and measurement systems and data are available. So, to determine the effectiveness and efficiency of expenditures and the completeness of estimated/expected revenues, a performance measurement structure is necessary. This report discusses that structure and its future application.
The final piece of the “line-by-line” audit is the assessment of program necessity and effectiveness. This function rests in part with the state’s umbrella of auditors, evaluators, examiners and investigators. On a day-to-day basis, the 2,000+ (other than FTB and BOE tax auditors) auditor community, representing 56 different state entities, provides its input on state operations continuing effectiveness through program and service provider monitoring and oversight. Their efforts are documented by the reports and recommendations they make, and by the corrective actions that follow. Concurrent to this audit, CPR is presenting its report. Through its issue papers, CPR’s functional and cross-cutting teams have performed just the kind of assessments referenced above. The work of these 250+ team members constitutes the detail subject of the current “line-by-line” audit; that is, it questions whether the programs discussed in the individual issue papers have a continuing basis for existence, are provided the appropriate level of resources and are monitored and assessed recurrently for performance as defined by the enabling legislation, regulation, or directives.
With all these components operating in unison, the state would be reasonably assured that its operations met its objectives and that its resources were applied appropriately. However, we believe that in spite of the best intended efforts of the parts, the whole is not coordinated and the results are not effective. The structural weaknesses and deficiencies reported in the media and by various observers have given rise to the notion and expectation that a one-time “line-by-line” audit may cure the state’s ills. But we reject that notion and propose that only through continuing efforts and regular assessments, evaluations, review and audit can the state achieve its objectives effectively and efficiently.