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History of the organization and functions of the Office of the Auditor General of the State of California

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History of the organization and functions of the Office of the Auditor General of the State of California

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Content HISTORY OF THE ORGANIZATION AND FUNCTIONS OF THE OFFICE OF THE AUDITOR GENERAL OF THE STATE OF CALIFORNIA A Thesis Presented to the Faculty of the School of Public Administration The University of Southern California In Partial Fulfillment of the Requirements for the Degree Master of Science in Public Administration by Gasparino Jose* de Sant*Ana February 1963 UMI Number: EP64718 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Disssrtaiiert: F N a b lis W n g UMI EP64718 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code luesf ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 This thesis, w ritte n by Gfasparino Jose^ de Sant*Ana / ; ; ; ' under the direction o f the undersigned Guidance Com m itte, and approved by a ll its members, has been presented to and accepted by the F a cu lty of the School of P u b lic A d m in istra tio n in p a rtia l f u l fillm e n t o f the requirements fo r the degree of M A STER OF SCIENCE IN PU B LIC A D M IN IS T R A T IO N Date.......... Guidance Com mittee: Chainnan TABLE OF CONTENTS CHAPTER PAGE I. GENERAL ASPECTS OF THE STUDY . . .......... 1 The Problem............................. 2 Statement of the Purpose of the Study . . 2 Importance of the Study................ 2 Scope of the Study..................... 3 Research Methods and Source of Data ... 4 Definitions of Terms........... 5 Auditor General and Legislative Analyst . 6 Examination of Financial Statements ... 8 Generally Accepted Auditing Standards . . 8 Pre-Audit............................. 12 Post-Audit . ......................... 12 Internal Audit......................... 13 Comprehensive Auditing................. 13 Internal Control . ................... 13 Accounting Principles................. 14 Review of the Literature........... 19 Organization of the Remainder of the Thesis................................. 23 CHAPTER iii PAGE II. MAIN BACKGROUND ASPECTS AND INITIAL DEVELOPMENT OF THE PROBLEM............ 26 The General Accounting Office ........ 29 The Joint Legislative Budget Committee and the Legislative Auditor’s Function .... 37 Settlement of the Basis for the Creation the Office of the Auditor General . . of 45 III. THE SURVEY UNDERTAKEN BY PRICE WATERHOUSE AND COMPANY .......................... 64 The Central Financial Control Organization . 65 Functions of the State Controller . . 68 Functions of the Department of Finance 70 Functions of the State Treasurer . . . 72 Auditing in State .................. 73 Deficiencies of the Financial Control Organization ....................... 75 Recommendations to the Joint Legislative Budget Committee ................... 81 Principal Recommendations .......... 81 Secondary Recommendations.......... 83 IV CHAPTER PAGE Reasons Given for Suggested Abolishment of the Office of the State Controller . 84 Reasons Supporting the Suggestion to Abolish the Office of the State Treasurer................... • • • . 90 Recommended Reorganization of the Department of Finance................ 93 Alternative Recommendations............ 96 The Proposed Auditor’s Office ............ 99 Characteristics of the Proposed Auditor’s Office ................... 99 Duties and Functions of the Proposed Auditor’s Office ..................... 101 Title Suggested for the Auditor.......... 103 Position of the Office of the Auditor General................................104 IV. CREATION AND ORGANIZATION OF THE OFFICE OF THE AUDITOR GENERAL........................107 Creation of the Office of the Auditor General............... 108 V CHAPTER PAGE First Action Taken Upon the Report of the Survey • • ........................108 Approval of the Bill No. 1540 112 The Joint Legislative Audit Committee . . 114 The Auditor General ................ 115 Organization of the Office of the Auditor General............................. .. 116 Organization of the Joint Legislative Audit Committee.................. . . 116 Initial Activities of the Ccmmittee . . . 117 Audit Policy Adopted......... 118 Selection of the Auditor General...... 123 Selection of the Deputy Auditor General . 126 Organization of the Office of the Auditor General....................128 Functions . ............................130 V. ACTIVITIES OF THE OFFICE OF THE AUDITOR GENERAL................................133 Study of the Internal Control System . . . 134 First Assignment— Study of the Processing Procedures....................... 138 VI CHAPTER PAGE Audit Reports............................140 Reports with Qualified Opinions ........ 143 Reports with Disclaimed Opinions ..... 145 Example of Unfeasible Audit.............. 147 Co-ordination of Auditing................148 Volume of Work D o n e ......................152 Working Time in Hours......... 152 Cost of the Auditing W o r k ................154 VI. CONCLUSION....................................159 BIBLIOGRAPHY................................... . 182 LIST OF TABLES TABLE PAGE I. Reports Issued in Four Years............... 153 II. Reports Issued by Function in Four Years . . . 155 III. Hours of Work by Function in Five Years ... 156 IV. Expenditures in Five Years...............158 CHAPTER I GENERAL ASPECTS OF THE STUDY This history of the organization and functions of the Office of the Auditor General of the State of California is a study which presents the implications, in terms of the needs of the organization of the State, that led the State Legislature to the decision to create and operate that office as an effective tool to exert inde pendent control over functions of the Executive Branch. This chapter, xdiich gives an idea of the contents of the present study, has been divided into four parts which state the purpose, importance and scope of the present thesis, gives definitions of some terms subject to different interpretations, briefly indicates the litera ture which provided data for the study, and finally, presents the organization of the remainder of the thesis. I. THE PROBLM Statement of the Purpose of the Study It was the purpose of this study (1) to relate the history of the organization and functions of the Office of the Auditor General of the State of California, (2) to show the place of the Office of the Auditor General in the organization of the State of California, (3) to show the internal structure of the Office of the Auditor General, and (4) to describe the work done by the Office. Importance of the Study The importance of the study can be better appraised if consideration is given to two important features derived directly from the creation and operation of the Office of the Auditor General: one deals with the politi cal aspects of the relationship between the Legislature and the Executive, and the other lies in the structure of the administration itself. The first implication is that which comes from the decision of the Legislature to establish and operate a technical organization of its own for the specific purpose of examining and reporting annually upon the financial statements prepared by the Executive Branch. The existence of a new, specialized agency having the power to examine the financial situation of any or all agencies of the Executive Branch and to report the find ings directly to the Legislature was necessarily another kind of power which certainly influenced administrators* behavior in some respects. The other implication lies in the structural administrative changes resulting from the creation and operation of the new organism giving rise to a new situation. These features have not been specifically studied beyond official publications of the Legislature and Executive of the State of California. So it is hoped that the present study will furnish data for later students who will wish to make a complete study of similar problems in other states and territories. Scone of the Study The subject of the present study deals mainly with the period from the creation of the office of the Auditor General, 1955, to the end of the year 1960. However, in order to give a more complete picture of the problem as a whole, its background is also reviewed to the extent necessary for the understanding of the circumstances tdiich finally led to the creation of the office. Research Methods and Source of Data Outside the area of official publications, practi cally nothing has been written about the Office of the Auditor General. The only existing serious work done out side the sphere of the Legislature is the report of the survey finished in 1954 by Price Waterhouse and Company.^ That survey was prepared for the Joint Legislative Budget Committee and it brought out data that decisively influenc- ed the Legislature to create and operate the Office of the Auditor General. Therefore, a great deal of data for the study had to be taken from the Price Waterhouse and Price Waterhouse and Company, "Accounting and Auditing for the State of California" (report of a survey for the Joint Legislative Budget Committee, 1954). (Mimeographed. ) Company report. Data for the study of the organization and func tions of the Office of the Auditor General was gathered mainly from official documents, principally from those originated from the Office of the Auditor General itself. Additional information was gathered from people directly involved in the creation and operation of the Office of the Auditor General. Both the literature available and data obtained from people directly related to the Office were examined, analyzed, and the findings were finally aligned in its sequence. II. DEFINITIONS OF TERMS The terminology used in the present study is a common one. However, some terms require special attention as they appear to have slightly different meanings for different people. These terms are here divided into two groups; in the first group the difference between Auditor General and Legislative Analyst is established; in the other group there are some terms that are often used in the work performed by the Office of the Auditor General and have their meaning established or accepted by the Auditor General. Auditor General and Legislative Analyst The report prepared by Price Waterhouse and Company for the Joint Legislative Budget Committee states that the area of activity proposed for the Auditor General requires training and talent differing in an important degree from that of the Legislative Analyst. The latter should be primarily a governmental financial consultant and analyst, an expert in administrative research. The Auditor General must be a trained public accountant-auditor fully familiar with accounting and auditing techniques. In his comments on scope of auditing for Joint Legislative Audit Committee dated October 24, 1955,^ A. Alan Post— interpreting another statement of the Price Waterhouse and Company— says that the Auditor General would be concerned with problems of efficiency and economy or adequacy in respect to the auditing and accounting functions of government and with the form of statements which emanate therefrom. ^A. Alan Post, Comments on Scope of Auditing for Joint Legislative Audit Committee (Sacramento; California State Printing Office, October 24, 1955). In these areas the Legislative Analyst should transpose audit findings of the Auditor General into budget recom mendations affecting those various state agencies which are responsible for the audit, accounting, and financial control functions. In all other operations of state government, the Legislative Analyst should be responsible for budget and performance review and evaluation. Finally, Mr. Post states that the emphasis of Price Waterhouse and Company upon an audit process \diich reviews the techniques and reporting statements of the performance of the executive as such performance is reflected in management, organization, and legislative reference studied by the Legislative Analysts. At this point, one more fact should be added. In 1941, a concurrent resolution of the Legislature created the Joint Legislative Budget Committee and the Legislative Auditor for the purpose of providing the Legislature with its own independent source of fiscal and research informa tion. The title of this office was changed in 1957 to Legislative Analyst. On the other hand, in 1955, the State Legislature established the Joint Legislative Audit Committee and the Office of the Auditor General. 8 Examination of Financial Statements The term, "examination of financial statements," is used by the office of the Auditor General to mean a critical analysis of the underlying internal controls and accounting records of an operating entity of sufficient scope to warrant the expression of an opinion as to the propriety of the financial statements prepared from those records.^ To examine the financial statements of funds of the State of California, the Office of the Auditor General must audit the accounting records of the operating agencies where the financial transactions originate as well as the control accounts maintained by the State Controller. Generally Accented Auditing Standards The term, "generally accepted auditing standards," is used by the Office of the Auditor General to mean the broad standards specified by the American Institute of Certified Public Accountants and widely adopted and adhered to by firms of certified public accountants as William H. Merrifield, First Report of the Joint Legislative Audit Committee (Sacramento: California State Printing Office, 1958), p. 24. follows:^ General standards. The examination is to be per formed by a person having adequate technical training and proficiency as an auditor. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. Due professional care is to be exercised in the performance of the examination and preparation of the report. Standards of field work. The work shall be planned adequately and assistants, if any, are to be supervised properly. There is to be a proper study and evaluation of the existing internal control as a basis for reliance thereon, and for the determination of the resultant extent of the tests to \diich auditing procedures are to be restricted. 10 Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination. Reporting standards. The report shall state Aether the financial statements are presented in accord ance with generally accepted principles of accounting, which, in the opinion of the Auditor General, are those principles involved in recording, accounting transactions which have been generally considered to be most useful in presenting fairly the financial position and results of an operation entity. The report shall state whether such principles have been consistently observed in the current period in relation to the preceding period. Informative disclosures in the financial state ments are to be regarded as reasonably adequate unless otherwise stated in the report. The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, dr an assertion to the effect that an opinion 11 cannot be expressed. When an over-all opinion cannot be expressed, the reasons should be stated. In all cases idiere an auditor’s name is associated with financial statements, the report should contain a clear-cut indica tion of the character of the auditor’s examination, if any, and the degree of responsibility he is taking. Auditing. A term used to determine: (1) that the agency is carrying out those activities or programs authorized by the Legislature and is conducting them efficiently and in the manner authorized; (2) that expen ditures are made only in the furtherance of authorized activities and in accordance with the requirements of applicable laws and regulations; (3) that the agency collects and accounts properly for all revenues and re ceipts arising from its activities ; (4) that the assets of the agency or in its custody are adequately safeguarded and controlled and utilized efficiently; and (5) that reports by the agencies to the Governor, Legislature, or central control agencies disclose fully the nature and scope of activities conducted and provide a proper basis for evaluating the operation carried on by the agency. 12 Pre-Audit Is a term applied to a checking or verification process made before the financial transaction is completed. It is usually associated with cash disbursement and con stitutes the checking or rechecking of supporting documents as the last step prior to preparation of warrants in pay ment of invoices or payrolls. Po^t-Audit Is the term applied to review or examination of financial transactions after they have been completed. It usually comprises a fairly comprehensive examination of the operations of an agency or fund and embraces all or most of those attributes which have been associated with the term "auditing" as defined above by the General Accounting Office. The prefix "post" hinders rather than helps the description. The very nature of the examination presupposes that much of the work will be done after a transaction has been completed but much of it, the major share, can be and is done before the end of the period which the examination is to cover# 13 Internal Audit Is a term applied to an examination within an organization or unit performed by its own personnel and covering designated or over-all functions* Its common purpose is to ascertain that prescribed procedures are being effectively followed and that cash and securities are properly accounted for. Comprehensive Auditing Is a term used in Federal circles to indicate the procedures embraced in auditing. Its detailed meaning is given in Chapter II, in the discussion of the Federal Accounting Office. Internal Control Comprises the plan of organization and all of the coordinate methods and measures adopted within the govern, ment to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed manager, ial policies. The characteristics of internal control are: (1) a plan of organization which provides appro 14 priate segregation of functional responsibilities, (2) a system of authorization and record procedures adequate to provide reasonable accounting control over assets, liabilities, revenues and expenses, (3) sound practices to be followed in the performance of duties and functions ' I ' of each of the departments and agencies, and (4) a degree of quality of personnel commensurate with responsibilities I ^ Accounting Principles The fourteen accounting principles recommended by f ' I the National Committee on Governmental Accounting are as - , 1 follows, slightly amended to apply to governmental 5 organizations in general. 1. A governmental accounting system must make : 1 . it possible: (a) to show that legal provisions have been f ■ complied with; and (b) to reflect the financial condition and financial operations of the government. ■ s 2. If legal and sound accounting provisions conflict, legal provisions must take precedence. It is, ^Ibid., p. 26. 15 however, the finance officer’s duty to seek changes in the law which will make such law in harmony with sound accounting principles. 3. The general accounting system should be on a double-entry basis with a general ledger in which all financial transactions are recorded in detail or in summary. Additional subsidiary records should be kept idiere necessary. 4. Every governmental organization should estab lish the funds called for either by law or by sound financial administration. It should be recognized, how ever, that funds introduce an el®aent of inflexibility in the financial system. Accordingly, consistent with legal provisions and requirements of sound financial adminis tration, as few funds as possible should be established. I 5. Depending on the legal and financial require ments mentioned immediately above, the following types of funds are recognized: a. General b. Speçial revenue c. Working capital d. Special assessment 16 e. Bond f. Sinking g. Trust and agency h. Utility or other enterprise. This classification of funds to the extent required should be followed in the budget document and in the governmental organization’s reports. 6. A complete balancing group of accounts should be established for eàch fund. This group should include all of the accounts necessary to set forth the financial condition and financial operations of the fund and to reflect compliance with legal provisions. 7. A clear segregation should be made between the accounts relating to current assets and liabilities and those relating to fixed assets and liabilities. With the exception of working capital, utility or other enterprise or trust funds, fixed assets should be carried in the same funds with the current assets but should be set up in a self-balancing group of accounts known as the general fixed asset group of accounts. Similarly, except in special assessment and utility funds, long term liabilities should not be carried with the current liabilities of any 17 ftînd but should be shown in a separate s e If -balancing group of accounts forming part of the general bonded debt and Interest group of accounts. 8* The fixed asset accounts should be maintained on the basis of "'original cost, or the estimated cost if the original cost is not available or in the case of gifts, the appraisal value at the time received. 9. Depreciation on general governmental fixed assets should not be computed unless cash for replacements can legally be set aside. Depreciation on such assets may be computed for unit cost purpose even if cash for replacements cannot legally be set aside provided these depreciation charges are used for memorandum purposes only and are not reflected in the accounts. 10. The accounting system should provide for budgetary control for both revenues and expenditures, and the financial statements should reflect, among other things, budgetary information. 11. The use of an accrual basis in accounting for revenues and expenditures is recommended to the extent applicable. Revenues, partially offset by provisions for estimated losses, should be taken into consideration Wien 18 earned, even though not received in cash. Expenditures should be recorded as soon as liabilities are incurred. 12. Revenues should be classified by fund and source; and expenditures by fund, function, department, activity, character, and by main classes of objects, in accordance with standard classifications. 13. Cost accounting systems should be established wherever costs can be measured. Each cost accounting system should provide for the recording of all of the elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job. Although depreciation on general governmental fixed assets may be omitted in the general accounts and reports, it should be considered in determining unit cost if a cost accounting system is used. 14. A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports. In regard to the generally accepted accounting principles, the Office of the Auditor General has taken the position that the principle numbered seven above is not necessarily applicable to state governments, but the 19 accounting principles are both to the State of California ' f . and to other state governments. The criterià used by the d - , • i ' ■ Office of the Auditor General have been the principles of ; ' V" ' ' ■ ■ : ^ ; , . ■ the National Committee on Governmental Accounting set ' ■ ' ■ ■ ■ " , . . ‘ forth above, together with other principles applicable to both governmental and private organizations. III. REVIEW OF THE LITERATURE The survey of the literature about the organiza tion and functions of the Office of the Auditor General reveals that it has not been studied by other than - officials of the State of California, and very few even of these have done so. The survey of the background of the Office of the Auditor General indicates that the idea of its creation was bom in 1936 %dien the Legislature of the State of California began consideration of the advisability of creating the means whereby it could be informed independ ently as to whether the Executive Branch of the State of California was carrying out the intent of enacted legislation relating to expenditures and taxation. In that year, the California Conference on Government and 20 Taxation-Interim Committee of Twenty-five was organized and retained a consulting firm to conduct a study of the existing government structure. Included in the consult ing firm's recoittmendations was the creation of an office whereby independent audits could be made of the activities of the Executive Branch of the State Government by an auditor appointed by, and responsible to, the Legislature. As a result of this and few other studies carried out by some committees of the Legislature, bills to establish such an office were presented to each regular session of the Legislature from 1937 through 1953, but all of then either failed of enactment or were not approved by the Governor. In 1954, the Joint Legislative Budget Committee contracted the services of the firm of Price Waterhouse and Company to carry on a survey of accounting and audit ing for the State of California. The report prepared by that firm was the first really serious study ever made as a basis for the creation of the Office of the Auditor General. Indeed, it gave the Legislature strong support to defend the idea of the creation of the office, because it made clear that an independent audit function was the 21 best device the Legislature could have to inform itself about four basic administrative aspects: (1) the effi ciency of the conduct of activities by the Executive Branch, (2) the adequacy of the machinery for collection of revenues, (3) the integrity of the system of utilizing and safeguarding assets, and (4) the propriety of the expenditure of funds appropriated by the Legislature. In connection with the report of the firm of Price Waterhouse and Company were the reports prepared by the Senate Interim Committee on Government Organization in 1953 and 1955 which were in agreement with the basic recommendations of the report of Price Waterhouse and Company. Those three reports, especially the one of the Price Waterhouse and Company, were the documents which made possible the enactment into law of Senate Bill No. 1540 vhich created both the Joint Legislative Audit Committee and the Office of the Auditor General in 1955. However, the office itself was to be organized by the Legislative Audit Committee, so the first sign of its existence is perceived in May 1956 when the first Auditor General was sworn in. Data on the first activities under 22 taken by the Joint Legislative Audit Committee and the Office of the Auditor General are shown in the reports prepared by both organizations. The first publication which summarized those activities, published on December 31, 1958, was the "First Report of the Joint Legislative Audit Committee;" in October 1955, however, the Legisla tive Analyst, Mr. A. Alan Post, wrote a statement, "Comments on Scope of Auditing for Joint Legislative Audit Committee," in'vdiich he analyzes and compares both the law which created that committee and the Office of the Auditor General and the Price Waterhouse and Company report. The background of the office's organization itself has to be studied from October 1956 when the Joint Legislative Audit Committee decided to adopt the recommen dations of the Legislative Analyst's statement on audit policy. The second step was the selection of the Auditor General and the recruitment of the staff for the Office of the Auditor General. Consequently, these first events, which constitute the first steps for the organization of the office, had to be studied in the reports issued by the Joint Legislative Audit Committee. 23 After the Office of the Auditor General was established and started operating, its activities and functions were studied in the reports issued by that office. IV. ORGANIZATION OF THE REMAINDER OF THE THESIS Chapter II presents the principal background aspects and initial development of the issues related to the creation and organization of the Office of the Auditor General, It discusses some aspects of the creation and operation of the General Accounting Office of the federal government which was later taken as an example by state legislatures in creating their own auditing offices. The Joint Legislative Budget Committee and the Legislative Auditor's function are also discussed in order to show the prevailing situation regarding control of the Ebcecutive's financial operations by the California Legislature. Chapter II closes with a study of the creation of the Office of the Auditor General which gives a picture of the main issues encountered in the achieve ment of that objective. 24 Chapter III is dedicated to an analysis of the survey undertaken by the firm of public accountants. Price Waterhouse and Company, for the California Legisla ture. It discusses the financial organization of California Government in 1954 and presents conclusions and suggestions which finally served as basis for the creation of the Office of the Auditor General. Chapter IV comprises two parts: the first one deals with steps taken by the Legislature to create the Office of the Auditor General in consequence of the find ings and recommendations contained in the report presented by the firm of Price Waterhouse and Company. The second part of Chapter IV discusses the organization settlement of the office itself and other closely related matters. Chapter V discusses the activities of the Office of the Auditor General from its organization to the end of the year of 1960. It also describes the types of reports issued, the coordination plan adopted for audit ing, and finally presents statistical data concerning the volume of work done by the office, time spent, and cost of its operation. Chapter VI contains the conclusion of the present thesis CHAPTER II MAIN BACKGROUND ASPECTS AND INITIAL DEVELOPMENT OF TOE PROBLEM The present chaptet is devoted to the examination of three areas %hich constitute the immediate background and the initial development of the Office of the Auditor General« The first part deals with the creation and opera tion of the federal General Accounting Office# This is included partly for historical reasons. The creation of the General Accounting Office is in itself of the most importance, however, because it represents the formal recognition of the need for the Congress to have an independent office to examine the financial activities of the Executive and report pertinent findings directly to the Congress. It was one opening of the road, the important example given by the central government which would certainly be followed by state governments. A brief reference to the main changes in the operation of that Office is also desirable in order to 27 show that its general policy was a pattern for the organ ization and operation of the Office of the Auditor General of the State of California, The second part of the chapter deals with the situation prevailing in the decade before the creation of the Joint Legislative Budget Committee and the Legislative Auditor's function and points out the circumstances in which that legislative action took place. Finally, the role of the Committee and duties of the Legislative Auditor are indicated. This second part is discussed because the initial intent of the California Legislature was to create an audit bureau and an audit committee as was stated by Assembly Bill 1129 passed by the Legislature and vetoed by the Governor,^ In 1957, the title Legislative Auditor was changed for Legislative Analyst. In order to avoid confusion, the title Legislative Analyst will be used throughout \dien referring to the office that now has this title. Price Waterhouse and Company, "Accounting and Auditing for the State of California" (report of a survey for the Joint Legislative Budget Committee, 1954), Section One, p. A-44, (Mimeographed.) 28 If it is seen in a broad context, the creation of the Joint Legislative Budget Committee and the Legislative Analyst function can be considered the first development of the organization of the Office of the Auditor General, since the organization of an auditing service was the initial intent of the Legislature. However, the separation of the two subjects under different titles seined desirable because instead of creating an auditing service, the Legislature finally created service devoted mainly to review and analysis of proposed budgets, in spite of the denomination as auditor. On the other hand, the Legisla tive Analyst and the Joint Legislative Budget Committee played important roles in achieving the Legislature's objective. The last part of the chapter is dedicated to review of the significant issues which finally led to the settlement of the basis for the organization of the Office of the Auditor General. 29 I, THE GENERAL ACCOUNTING OFFICE The wisdom of reviewing, evaluating, and controlling public expenditures was recognized by the founding fathers during the Revolutionary War since auditors were appointed in the Treasury under a Superintendent of Finance. In fact, in 1789, the First Congress established the Treasury Department and within it provided for a Comptroller and an Auditor to be the chief accounting officers of the Government. Their primary function was to provide for the Constitutional safeguard of the national purse to the effect that "no money shall be drawn from the Treasury but in consequence of appropriations made by law."^ This situation prevailed from 1789 until 1921 when that activity, which was vested in the Executive Branch during that period, was transferred to the Legislative Branch. In fact, in 1921, the Federal Government recogniz ed the importance of Congress informing itself as to the ^Accounting and Auditing Developments in the United States. a report published by the General Account ing Office (Washington, D.C.: Government Printing Office, 1957), p. 3. 30 activities of the Executive Branch by independent means when it decided to establish the General Accounting Office. Among other duties, it was to audit and report directly to the Congress on the financial functioning of the various agencies operated by the Executive Branch. Since the scope of the present work is not to discuss the General Accounting Office, it would not be proper to attempt a deep analysis of the subject. For the purpose of this work, it is enough to summarize those basic aspects as they were viewed by representatives of the General Accounting Office vdio were requested by Senator McClellan, chairman of the Committee on Government Operations, to compile and present information on the status and activities of that agency for inclusion in the report Financial Management in the Federal Government. ^ In regard to the creation of the General Accounting Office, it also seems sufficient to summarize here the information ^Financial Management in the Federal Government. 87th Congress, 1st Session, Senate, Document No. 11. A Report Prepared by the Staff of the Committee on Government Operations, Ü. S. Senate (Washington, B.C.: Government Printing Office, 1961). 31 stated in that report. The act that created the General Accounting Office— Budget and Accounting Act of 1921, Part I, Title Ill-.as amended through the 86th Congress, indicates that several important changes in the financial management of the Federal Government were undertaken. One of those changes was the establishment of the Federal Accounting Office under the administrative direction of a Comptroller General, responsible only to the Congress, thus providing for an independent audit of the financial statements and transactions of the Government by the General Accounting Office with reports submitted directly to the Congress. A modem view of the General Accounting Office, according to the statements made at the request of Senator McClellan, shows that the Office: (1) is responsible for prescribing the accounting principles, standards, and related requirements to be observed throughout the Government, (2) cooperates with the executive agencies in the development of their accounting systems, and (3) reviews the accounting systems of the executive agencies from time to time and reports thereon. In the Comptroller General is vested the authority to approve the accounting 32 systmas of the executive agencies, and, to the extent he deems necessary, the Comptroller General has the power to prescribe the forms, systems, and procedures for adminis trative appropriation and fund accounting in the several departments and establishments. The Comptroller General also has other functions which affect accounting and budgeting practices throughout the Government, including settlement of claims by and against the United States, settlement of the accounts of accountable officers, and audit of the financial transactions of each executive, legislative, and judicial agency. The audit function of the General Accounting Office, which is integrated with the accounting function, has recently been modernized. Prior to 1948, the audit responsibilities of the Office were discharged by a desk audit of financial documents forwarded to the Office by the agencies. Interest centered on the legality of receipt and expenditure transactions. Such audit practice / only incidentally was conducive to an analysis of the effectiveness and economy of the management of the agencies. However, the Government Corporations Control Act 33 of 1945, idilch assigned to the General Accounting Office the responsibility for making audits at the site of opera tions of government corporations according to the princi ples and standards applicable to commercial corporate transactions, made it possible for the Office to compare the two kinds of audits— desk audits and audits at the site— and reach the conclusion that the audits at the site were much more effective than the previous ones. In consequence, the General Accounting Office expanded com prehensive audits at the site of operations of other agencies to replace the desk audit of documents, as authorized by the Budget and Accounting Procedures Act of 1950. These new procedures have been progressively extended throughout the Government and the results have been: (1) more complete and useful audit services for the Congress and agency management; (2) substantial reductions in the personnel of the Office; (3) substantial reduction in the delay of processing of accounting documents without any reduction of congressional control and surveillance, and, finally, (4) an increase in the assistance given to agencies in the improvement of their financial controls and reporting. 34 In respect to audits of the government corporations the examination of documents undertaken by the General Accounting Office must be sufficient to meet requirements set down by the Congress such as:^ 1. Audit financial statements and such comments and information as deemed necessary to keep the Congress informed of the operations and financial condition of the corporations, together with pertinent recommendations of the Comptroller General. 2. Disclosure of any program, expenditure, or other financial transaction or undertaking observed in the course of the audit which, in the opinion of the Comptroller, has been carried on or made without authority of law. 3. Disclosure of any capital impairment. 4. Recommendations as to the return to the Treasury of such government capital or the payment of such dividends by the corporation as, in the judgment of the Comptroller General, should be accomplished. ^Accounting and Auditing Developments in the United States, on. cit.. p. 8. 35 The general objectives of the comprehensive audit are to determine whether:^ !• The agency is carrying out only those activi ties or progrmas authorized by the Congress and is conduct ing them efficiently and in the manner authorized. Where appropriate, the Office determines whether the authorized programs effectively continue to serve their original purpose. 2. Expenditures are made only in furtherance of authorized activities and in accordance with the require ments of applicable laws and regulations, including decisions of the Comptroller General. 3. The agency collects and accounts properly for all revenues and receipts arising from its activities. 4. The assets of the agency or those in its custody are adequately safeguarded and controlled and utilized in an efficient manner. 5. Reports by the agency to the Congress and to the central control agencies, such as the Bureau of the ^Ibld.. p. 10. 36 Budget, Treasury Department, and General Services Administration, disclose fully the nature and scope of the activities conducted and provide a proper basis for evaluating the agency's operations. Another very important part of the audits carried on by the General Accounting Office is the reporting phase. Reports normally include financial statements, and opinions of these statements or disclaimers ^en such opinions cannot be given. Opinions are also given on the status of appropriated funds and on balances of other accounts, such as property, accounts receivable, and accounts payable, and as to the legality of certain activities of financial transactions. In some cases, reports are issued to agency management involving matters such as strengthening of controls, including internal audits, correction of weaknesses in accounting or report ing procedures, and improvement in the utilization of resources.and personnel. The relevance of the reports can be measured in terms of economy and efficiency as a result of their findings and recommendations. This fact has been con sidered and stressed in the "Audit Reports of Government 37 Corporations and Agencies'* and in the "Review of Audit Reports of the Comptroller General." These Senate Reports reviewed the General Accounting Office findings and cited the action taken which brought concrete results expressed in millions of dollars of savings for the national purse. II. THE JOINT LEGISLATIVE BUDGET COMMITTEE AND THE LEGISIATÎVE AUDITOR'S FUNCTION In May of 1956, the California State Printing Office put out a 500-copy edition of a work prepared by 7 A. Alan Post, Legislative Analyst of the State of California. This publication is a well organized sequence of reliable data #iich gives a picture of the prevailing situation regarding financial control by the California Legislature during the period immediately before the ^"Audit Reports of Government Corporations and Agencies," 83rd Congress, Senate Report 861 and "Review of the Audit Reports of the Comptroller General," 84th Congress, Senate Report 1572 (Washington, D.C.: Govern, ment Printing Office, 1957), p. 13. Alan Post, The Function of the Legislative Auditor (Sacramento: California State Printing Office, 1956). 38 creation of the Office of the Auditor General of the State of California. In describing that situation, Mr. Post points out the main difficulties met by the Legislature in coping with the increasing State activities in the 1930*s, the creation of the Joint Legislative Budget Committee, and its activities. In the 30*s, ^ile the Governor could count on large and trained budget and audit staffs to support the formulation of governmental programs and his request before the Legislature, the Legislative Branch did not have staff support to carry out its function of reviewing executive proposals or to evaluate by its own means the cost of proprosed legislation. On the other hand, some difficulties prevailed in regard to appraising the effectiveness with xdiich the Executive was carrying out legislation. Therefore, the need to create a technical organ in the Legislative Branch to overcome those weaknesses and to provide the Legislature with an effective tool to cope with the increasing complexities and size of the State Government was strongly felt by the legislators. 39 Action could not be posponed if their attempt to exert efficient control upon the Executive was not to collapse. In brief, this was the prevailing situation which led the Legislative Branch in 1941, to approve Assembly Bill No. 1129 providing for an independent fiscal post audit of all governmental^encies by an office directly responsible to the Legislature. However, the Department of Finance of the Executive recommended and Governor Olson vetoed, this legislative attempt to establish its own research and advisory staff in financial matters. How ever, the Legislative Branch had decided to keep trying to establish its own organizational support to examine the financial activities of the Executive Branch. Following this line, in 1941, the Legislature decided to create the Joint Legislative Budget Committee by a Joint Rule of both houses. The Committee was kept in existence by yearly reaffirmation of the Joint Rule for a period of ten years. The Joint Legislative Budget Committee was first organized on October 4, 1941, and the first Legislative Auditor, Rolland A. Vandergrift, was hired four days later and served until his death in 1949. 40 Five Senators and five Assemblymen formed the Committee: the Senate members were the President pro tempore and four members appointed by the Cœamittee on Rules, and the other members were the Assembly Speaker and four Ass^blymen appointed by him. Later, an amendment was passed allowing the Speaker to appoint another member to take his place on the Committee. Subsequently, the number of members was increased to seven Senators and seven Assemblymen. The Committee itself was given author ity to select its own chairman and vice chairman, to appoint the Legislative Auditor, to prescribe his duties, and to provide all other means to make it possible for the Committee to accomplish its functions. The Legislative Auditor serves as secretary of the Committee, and a variable number of clerks and technical personnel are employed. A statutory basis for the Joint Legislative Budget Cousait tee and the Legislative Auditor became reality only in 1951 Æen the Governor signed Chapter 1667, Statutes of 1951, \diich established that the duties and functions of both the Committee and the Auditor shall be defined in 41 o the Joint Rules of the Senate and the Assembly. Chapter 1667, Statutes of 1951, provides that the Joint Legislative Budget Committee shall ascertain facts and make recommendations to the Legislature and to the houses thereof concerning the State Budget, the revenues and expenditures of the State, the organizations and functions, of the State, its departments, subdivisions, and agencies, and such other matters as may be provided for in the Joint Rules of the Senate and Assembly.^ Among the duties prescribed to the Legislative Analyst in the Joint Rules, the more important are these five; 1. To ascertain facts and make recommendations concerning the State * s Budget, revenues, expenditures, and organization. 2. To assist the Senate Finance Committee and the Assembly Ways and Means Committee in considering the Budget and all bills carrying express or implied appro priations and all legislation affecting state departments P- 1. ^md., p. 2. 42 and their efficiency, and to appear before and assist any other legislative committee upon instruction by the Joint Legislative Budget Committee. 3* To provide all legislative committees and members of the legislature with information obtained under the direction of the Joint Legislative Budget Committee. 4. To receive working papers and reports from all interim consaittees Wiich have completed their work. 5. To maintain a record of all work performed by the Legislative Analyst under the direction of the Joint Legislative Budget Committee, and to keep and make available all documents and data submitted to him by any Senate, Assembly, or Joint Committee. However, the Joint Legislative Budget Committee has further defined the duties of the Legislative Auditor: 1. To attend and report on meetings of the State Allocations Board and its actions regarding money to local agencies # 43 2. To prepare cost estimates on all proposed appropriation bills, expressed or implied. 3. Upon request of the chairmen, respectively, of the Senate and Assembly Revenue and Taxation Committees, to provide an analysis of any or all bills referred to those committees. 4. To report any instance in which he believes the administration is failing to carry out the expressed intent of the Legislature. 5. To call to the Committee’s attention each proposed new service contained in the proposed Budget or any appropriation bill. 6. To point out to the Committee and the Legislature each ±t&a in the proposed Budget which has been denied previously by the Legislature. 7. To propose statutory changes to effect operational economies or more effective administration. 8. To recommend areas and methods for research studies to be undertaken by the administration, the Joint Legislature Budget Committee, or any other legislative committee. 44 9. To prepare, following each session of the Legislature, a summary showing the effect of the final legislative program on the financial condition of the State. The duties set forth for the Legislative Auditor Indicate the prevailing preoccupation directed toward financial issues. Besides, the Auditor was provided with duties related to organization, management, and research. In fact, among his responsibilities there were some such as to provide all legislative committees and Members of the Legislature with information obtained under the formal direction of the Joint Legislative Budget Committee, mainly on fiscal aspects or as supplementation of other staff efforts. This is a brief picture covering the principal aspects involving the Joint Legislative Budget Committee and the function of the Legislative Auditor, from their creation in 1941 until the creation of the Joint Legisla tive Audit Committee and the Office of the Auditor ^^Ibid.. pp. 2-3. 45 General, in 1955. Notwithstanding the title adopted— Legislative Auditor— the functions performed by him consisted largely of review and analysis of proposed budgets and past performances for the primary purpose of aiding the Legislature in considering budget and revenue plans. That is, his functions consisted largely of research and advisory services relative to legislation and administra tion* Auditing techniques were employed only to a limited extent. In fact, the title Legislative Auditor was changed in 1957 to Legislative Analyst. III. SETTLEMENT OF THE BASIS FOR TOE CREATION OF THE OFFICE OF THE AUDITOR GENERAL The creation of the General Accounting Office in 1921 to perform, among other duties, the functions of auditing executive agencies and reporting directly to the Congress their financial situation was a clear recognition of the importance to the Congress of informing itself as to the activities of the Executive by independent means. This fact established the example to be followed later on by state legislatures. 46 Since then, there has been an increasing awareness in the state legislatures of their right and duty to inform themselves about four key financial issues: 1. The efficiency of the conduct of activities by executive branches of state governments. 2. The adequacy of the machinery for collection of revenues. 3. The integrity of the system of utilizing and safeguarding assets. 4. The propriety of the expenditure of funds appropriated by the legislatures. By the end of the year of 1960, twenty states had created an independent audit function in the legislative branch or had transferred the auditing responsibilities from the executive to the legislature, thus making possiblq the centralization of operating responsibilities under the governor as the general manager and also making possible independent auditing and reporting directly to the legislature as the board of directors. Such an independ ent audit compares with those performed by independent firms of public accountants for boards of directors in private industry. 47 The Legislature of the State of California was not an exception; in 1936 it began consideration of the advisability of creating the means whereby it could be informed independently as to whether the Executive was carrying out the intent of enacted legislation relating to expenditures and taxation. In fact, in 1936, the California Conference on Government and Taxation-Interim Committee of Twenty-five was organized and retained a consulting firm to conduct a survey of the governmental organization. Among the recommendations made by the consulting firm was the creation of an office whereby independent audits would be made of the activities of the Executive by an auditor appointed by, and directly responsible to, the Legislature From 1937 through 1953, the California Legislature attempted in each regular session to establish such an office, but attempts always either failed of enactment 12 or were not approved by the Governor. 12 William H. Merrifield, First Report of the Joint Legislative Audit Committee (Sacramento: Califor nia Printing Office, 1958), p. 7. 48 When, on June 10, 1941, Governor Olson vetoed Assembly Bill No. 1129 passed by the 1941 Legislature and designed to create a legislative audit bureau and an audit committee for the Legislature, the objections presented by the Governor stated that the enactment of the bill would divest the Department of Finance of auditing func tions necessary in the study of budget request of various agencies and would deprive the Department of Finance of the means of supervising the State’s activities. The establishment of the office of the Legislative Analyst, as it has been indicated before, was a device found by the Legislature to meet, in part, the objectives of the bill vetoed by Governor Olson. In regard to the ostensible objections raised by the Executive Branch to the attempts made by the Legisla ture to create its own review organism, it must be said that there was not clash of opinion. The department of Finance, the State Controller, and the Legislature accepted the desirability of having an auditor appointed by, and responsible to, the Legislature.^^ There was ^^Frice Waterhouse and Company, on. cit.. p. A-45. 49 general agreement that this should be done. However, the main difficulty reaained in that the bills proposed by the Legislature did not adequately define functions of the new office or the intended segregation of duties; the Executive feared that, in the way change was proposed, it would be deprived of its internal auditing processes necessary for supervision and control. Fundamentally, this was the basic difficulty encountered in the attempts made by the Legislature between 1937 and 1953. For instance. Assembly Bill No. 2416, introduced by Assemblyman Lipscomb and passed by the Legislature in 1953, presented a reasonable design of the functions of the auditor but failed to discuss the auditing functions that would remain with the Department of Finance or with the State Controller. The State Controller’s opposition was based on fear that the proposed legislation might deprive the Executive of the functions and powers it needed to perform its duties. His objections were intermingled with suggestions for a realignment of- accounting and auditing functions within the executive branch ; in the specific case of his office, his proposal was to enlarge its 50 functions to include much of the auditing then done by the Department of Finance. On the other hand, he proposed that a legislative auditor or independent public accountants could confine their deaminations to central control accounts maintained by the State Controller* The Department of Finance objected that the pro posed legislation would deprive the Department of its own necessary auditing functions. On the other hand, opposi tion was also offered to any expansion of the functions of the State Controller. At this point, it was quite clear to the Legisla ture that the fulfillment of its objectives was dependent upon a serious study carried out by experts. Arrangements which would achieve the Legislature's desire and, at the same time, grant the Executive Branch the necessary means to exert effective control over its agencies required careful study. ^^Letter from State Controller Kirkwood to Assemblyman Waters, dated April 8, 1953, relating to a statement by Assemblyman Lipscomb; Memorandum prepared by the State Controller's staff> which accompanied that letter; Memorandum from the State Controller Kuchel dated December 8, 1950, to the Senate Committee on Governmental Reorganization. 51 The sign of firm determination to settle things once and for all was the Senate Concurrent Resolution No. 90 adopted in the Senate on June 4, 1953, and in the Assembly four days later.This resolution made additional funds available to the Joint Legislative Budget Committee for the purpose of making a study of the post audit function of the State of California. The Senate Concurrent Resolution No. 90 states: 1. It has long been recognized that California State Government has been deficient in that it has lacked a post-audit #iich is independent of the administration. 2. Reorganization studies of California State Government have pointed out the need for establishing a method of reporting to the Legislature upon the adequacy of existing accounting and auditing procedures. 3. An adequate solution to this problem has been made impossible of achievement because of an inability to determine the proper relationship \diich should exist between the administrative responsibility for audit and ^^A. Alan Post, "Summary Statement of Chief Recommendations Contained in Report of Price Waterhouse and Company to Joint Legislative Budget Committee." Report, prepared for use of the Committee, December 3, 1954, p. 1. 52 the scope of the audit to be provided to the Legislature. 4. An examination and testing of the adequacy of the existing accounting and auditing procedures should provide a sound basis for determining the extent of the audit which should be provided to the Legislature and as to whether it should be on a permanent basis. 5. The Joint Legislative Budget Committee would provide the most suitable means for the employment of public accountants to make an examination of existing procedures and a review of the basis upon which the Legislature should receive a regular post-audit report on the administration. 6. Therefore, be it resolved by the Senate of the State of California, the Assembly thereof concurring, that in addition to any money heretofore made available to it, the sum of sixty thousand dollars or so much there of as may be necessary is hereby appropriated from the contingent Funds of the Senate and of the Assembly for the payment of any and all expenses incurred by the Joint Legislative Budget Committee or its members pursuant to and under authority of the provisions of Joint Rule No. 37 to be expended equally from the Contingent Funds of the 53 Senate and of the Assembly for the purpose of such a study. In connection with that resolution, a second step was taken: On September 14, 1953, the Legislative Analyst prepared a progress reportwhich set up the framework for the study recommended by the concurrent resolution as a basis for discussion with professional accountants regarding the scope of any examination to be made. The Legislative Analyst's report recommended that a report should be made to the Joint Legislative Budget Committee for submission to the Legislature to include: 1. A complete set of financial statements for all states funds including balance sheets, analyses of changes in unappropriated surplus, statements of revenues, statements of expenditures compared with appropriations, and statements of general fixed assets and bonded debt. Such a set of statements had never been prepared for the State of California as a #iole. Alan Post,TostrAudit-Study— Progress Report" (a report dated September 14, 1953, for internal use of the Legislative Budget Committee). (Mimeographed.) 54 2. An opinion of the adequacy of the State financial statements as to form and content without assuming any responsibility for the correctness of the figures, for the sole purpose that this report should be used as an example of the type of report vdnich might be made in years to come. 3. A review and evaluation of all accounting and auditing activities of the State, with comments and recommendations for change where indicated. Regarding item 3 above, the report indicates a bulky set of specific subjects which the proposed study should include but should not be limited to, such as accounting and control activities in some agencies, property accounting in the State Gpvemment as a whole, feasibility of complete accrual accounting for all state activities, accounting systems design, function and proper location of a unit specializing in this_jwark.----- Another point indicated was in regard to needed changes in existing law in the interest of better or more simplified accounting procedures. Finally, the progress report of the Legislative Auditor made three references to auditing which the study 55 should include but not be limited to: 1. Particular reference to quality and scope of recommendations contained in the audit reports, showing whether important facts disclosed by audit had been omitted from the reports or whether pertinent recommenda tions which could have been made had been omitted. (It should be noted that post-auditing was then being done by the Division of Audits of the Department of Finance, the State Controller, and the operationg agencies.) 2. Possibility of eliminating duplication in audits of local political subdivisions receiving state subventions where annual audits of school districts by public accounts under state supervision are mandatory, at the same time that annual audits of county records by auditors selected by grand juries are mandatory and audits are being made by the State Controller of local political subdivisions counties and school_diatricts-4^or^ertain " purposes. 3. Proper distribution of post-audit activity as between that \diich should be responsible to the Legisla ture and that responsible to the administration, including discussion of the objectives of a post-audit of govern- 56 mental operations such as those carried out by the State of California. It is stated in a second report,also prepared by the Legislative Analyst, that the California Society of Certified Public Accountants was invited to send its Committee on Cooperation with the State Government for discussion of the subject of the previous report with the staff of the Legislative Budget Committee, on two different occasions. The report, Wiich is a summary of the discussions held, points out the suggestions and opinions of the Committee on Cooperation with State Government, and makes recommendations to the Legislative Budget Committee. The Committee suggested that, in view of the limited funds available for the study, the central fiscal agencies (Department of Finance, the Controller and the Treasury), those agencies which have_subsi:antial-intemal— ^^Ibid.. pp. 2-3. Alan Post, Progress Report to the Legislative Budget Committee (a report dated November 6, 1953, for internal use of the Legislative Budget Committee). (Mimeographed. ) 57 post-audit programs of their own (Department of Public Works, Department of Motor Vehicles and the Department of Employment), and other agencies which the Legislative Analyst considered in position to be helpful, should be requested to prepare and have data available for review and analysis by outside auditors, who would also under take tests of those data to verify the validity of the agency reports. The desirability of bringing in the outside accountants as soon as possible was also pointed out so that they miÿit participate in that part of the program. Another point offered by the conmiittee of the Society was that a consolidated audit report covering the activities of all state agencies, such as the Division of Audits of the Department of Finance had proposed to pre pare for the first time for the year ended June 30, 1953, would be a particularly worthwhile project and that an analysis and review of such a report would be an important part of the final report to the Joint Legislative Budget Committee. In consequence of those suggestions offered by the committee of the Society, the Legislative Analyst 58 directed letters to those agencies urging thma to make possible the accomplishment of the recommendations. The second part of the report contains recommenda tions addressed to the Legislative Budget Committee lAich is summarized herein. A firm or group of firms of certi fied public accountants with a large staff, national reputation, and with offices in California, should be engaged to perform the work as soon as possible. It was also suggested that the most satisfactory way in idiich to proceed with negotiations would be for the Legislative Analyst to direct a letter to the Committee on Cooperation with State Government of the Society of Certified Public Accountants setting forth the requirements and asking for their suggestions as to whom to contact and how to proceed. The Chairman of the Legislative Budget Committee should be authorized to enter into a contract with the firm to be recommended by the comittee of the—Sjodety^— The-^^an-- was that one firm should be contracted, leaving up to it the decision about enrolling other firms in the work to be done. The Legislative Analyst offered also the specifica tions for the engagement: 59 1. In general, the scope of the engagement should be to review and evaluate the extent and nature of the accounting and fiscal control procedures of the State, to determine the kind of post-audit program of the State's own operations which would appear appropriate in view of these procedures, and to recommend procedures, and to recommend who should handle the post-auditing and whoi should be responsible. 2. The form and content of the report as well as the nature and extent of the work to be performed should be the complete responsibility of the contractor. 3. A report should be submitted by the contractor not later than December 1, 1954* 4. The Legislative Analyst and his staff were available for consultation at all times as the work progressed. 5. The fee could not exceed sixty thousand_______ dollars. 6. Finally, there was no need for the engagement to concern itself with the post-audit of taxpayers* records performed by the tax agencies or the auditing for purposes of business regulation being done by such 60 agencies as the Division of Banking, the Department of Insurance or the Division of Corporations. As was said before, the Senate Concurrent Resolution No. 90 was the first decisive step taken toward the creation of the Office of the Auditor General. In consequence of this decision, two other important steps were undertaken; one was the post-audit study of September 14, and the other was the re-post-audit study of Nov^ber 6, both in 1953. The first provided the means and the other two supplied the fundamental orientation to be followed by these idio were going to carry on the survey. The fourth decisive step was the approval of the recommendations made by the Legislative Analyst in his second report. This decision led to the settlement of the contract with the firm recommended by the Committee on Cooperation with State Government of the Society of Certified Public Accountants— Price Waterhouse and Company. To conclude this chapter, a reference is made to the basic aspects of the fifth important step, that is, the contract signed between the Joint Legislative Budget Committee and Price Waterhouse and Company, dated March 61 24, 1954, for survey of the State's accounting and audit ing procedures. The, basic aspects of the contract were as follows 1. The survey will be conducted along lines and by methods which the contractor considers appropriate in the circumstances. It will be directed primarily toward the determination of the nature and scope of the post audit activity most appropriate to the needs of the State of California and the proper location of this function within the framework of the government structure. 2. At the conclusion of the survey, the contrac tor will prepare a report to the Joint Legislative Budget Committee, to be delivered not later than DecCTaber 1954, setting forth, among other things, recommendations as to ^ o should carry out the post-auditing function of the State and to \diom such official should be directly responsible. The report will also give other general____ comments and recommendations which the contractor may have, particularly as to certain supplementary matters in 19 Price Waterhouse and Company, cit.. p. G7. 62 the Legislative Analyst's report of September 14, 1953, insofar as such comments and recommendations can be developed during the course of the main survey. 3. The report will include (possibly in summary form) a complete set of financial statements of the State of California for the year ended June 30, 1953, which will be prepared by the Division of Audits of the Department of Finance. While no opinion will be expressed on the figures appearing in the statements because the contractor will not have made an examination thereof, the contractor will express an opinion as to their form and content, together with such recommendations for improvement as appear appropriate. 4. The survey will not concern itself with the examinations made by state auditors of the various tax agencies or with the auditing for purposes of regulation being done by such agencies as the Division of Banking, Department of Insurance or the Division of Corporations. Otherwise, no limitations as to scope will be placed on the contractor, although the principal emphasis of the survey will be on the post-audit functions as related to the so-called control agencies. 63 In the next chapter, the survey carried on by the contractor will be examined as to its principal implica tions directly related to the creation of the Office of the Auditor General. CHAPTER III THE SURVEY UNDERTAKEN BY PRICE WATERHOUSE AND COMPANY On November 30, 1954, the firm of Price Waterhouse and Company presented to the Joint Legislative Budget Committee the three-volume report of the survey contracted on March 24* The report was the result of a serious study covering the key aspects of the financial control situa tion of the State* The analysis of this situation led the group of people in charge of that task to make some recommendations which they believed should be adopted in order to correct the deficiencies found in the financial control system* This chapter, which deals with those findings and recommendations, has been divided into four parts. The first part shows how the division of authority and responsibility was placed within the financial control system, and indicates the functions of the State Control ler, Department of Finance, and State Treasurer* 65 The second part is devoted to pointing out the . . deficiencies encountered in the financial control organ ization indicating that while the Governor had means to control the State*s financial activities, the Legislature did not have effective means to check the financial activities of the Executive. Part three points out the recommendations made to the Joint Legislative Budget Committee and the reasons supporting the recommendations. Finally, part four is devoted to specific sugges tions and recommendations regarding the proposed Office of the Auditor General and deals with the basic character, istics the office should have, its duties, functions, title, and the position the office should have within the Legislature. I. THE CENTRAL FINANCIAL CONTROL ORGANIZATION In 1954, the financial control system of the State of California was placed upon both the Legislative and the Executive Branches; (1) the former had the Joint Legislative Budget Committee \diich counted on the staff 66 of analysts headed by the Legislative Analyst for the main purpose of review and analysis of proposed budgets and past performances; (2) the Executive had management and fiscal controls centered In the Governor, State Controller, State Treasurer, Board of Equalization, Department of Finance and the Franchise Tax Board formed by the State Controller, Chairman of the Board of Equali zation and Director of Finance. As the State Controller and the State Treasurer are elective positions, they are not under the Governor's control. In its report. Price Waterhouse and Company stressed the fact that the State lacked a principal office upon which fiscal responsibility could be placed and which was in position to report authoritatively and fully upon the State's financial transactions. This was because treasury, accounting and auditing activities were highly segregated. The division of authority and responsibility for accounting, auditing and related fiscal matters was spread over five major areas of activities. 1. Centralized or decentralized accounting systems were maintained by each of the major departments 67 or agencies; except for the State Controller*s Office, systems and procedures were prescribed by the Department of Finance. Some of those organs had internal audit staffs * 2. The Department of Finance was the principal budgetary and accounting control agency of the Governor, and it generally supervised the accounting for all departments and agencies, excluding the State Controller. It was also in charge of auditing each department annually, of preparing the annual budget proposal, and of acting as a general service department. 3. The State Controller's Office had the follow ing duties: (a) maintainance of the central control accounts of the State according to fund and appropriations, (b) acting as disbursing office, (c) to publish an annual report on the State's operations, (d) and to perform a wide variety of miscellaneous accounting and auditing functions. 4. The State Treasurer's Office served as the chief custodian of the State's cash and securities and serviced the State's bonded debt. 68 5. Regarding auditing, the State was served in this way: (a) the State Controller was in charge of checking (pre-auditing) the expenditures prior to disburse ment of cash, and also of auditing some local government records; (b) auditing of the State's activities was per formed by the Audits Division of the Department of Finance, which examines all departments or agencies annually. Functions of the State Controller Specifically, the State Controller functions, as settled in 1954, were distributed as follows 1. Maintenance of appropriation and fund control accounts. 2. Maintenance of miscellaneous accounts such as: receivables from school districts for construction loans, receivables from counties— costs of county inmates in State institutions, operations of Division of Highways, investment in securities, bonded debt of State, guarantee ^Frice Waterhouse and Company, Accounting and Auditing for the State of California (report of a survey for the Joint Legislative Budget Committee, 1954). (Mimeographed. ) 69 deposits with Department of Motor Vehicles, tax deeded properties, including rentals, unclaimed properties in State's custody, and cash deposits in trust with Treasurer. 3. Acting as chief disbursing officer for State: claims for services, materials, supplies, et cetera. 4. Act as disbursing office for: pensions to State's retired employees, pensions to retired teachers, financial assistance to veterans and aid to local governments # 5. Apportioning of revenues to local governments : horse racing revenues, federal land grazing fees, fuel taxes not refunded, federal forest reserve fees, motor vehicle license fees and revenues of Highway Users Tax Fund. 6. Collecting five taxes; assessment and collection of one. 7. Reporting on cash and security accounts. 8. Auditing of subventions and loans, records of public administrators, municipal and justice courts, and inheritance and gift tax returns. 70 9. Compiling and publishing annual reports of local governments. 10. Advising local government on budgeting, reporting and tax collecting. 11. Appointing inheritance tax appraisers. 12. Managing tax deeded properties. 13. Administering abandoned and unclaimed properties. Functions of the Department of Finance^ Specifically, the Department of Finance functions, as settled in 1954, were the following: 1. Regarding accounting controls, it prescribes accounting and budgeting procedures; audits all operating departments and fiscal control agencies ; reviews all legislation; reviews reports of all agencies; and allocates general administrative costs to special fund agencies. 2. In regard to budgetary and expenditure con trols, it formulates the State's program; reviews annual budget requests; prepares Governor's annual budget; ^Ibid.. Section One, pp. C-l/C-6. 71 publishes budget and performance data; approves appropria tion augmentations; approves budget change requests; controls some specific costs of departments ; approves all contracts except minor ones; and approves lease agreements. 3. As to miscellaneous financial duties, it participates in the investment of State's funds; adminis ters allocations of funds to local governments; supervises finances of state fairs ; and manages surplus properties of State. 4. As to general services, it supervises and accounts for the operation of central stores warehouses, printing plant, communication equipment repair shops, office building and central vehicle pool. 5. Regarding other general services, it adminis ters for several commissions and boards; serves as State’s purchasing agent; surveys organization and procedures of agencies; acts as freight traffic manager; supervises use of motor vehicles; and administers insurance program. 6. As to miscellaneous activities, it coordinates agricultural activities of State's institutions and approves and publishes all notices. 72 Functions of the State Treasurer^ The functions of the State Treasurer comprised four categories in 1954: 1. Receipt, deposit and disbursement of State moneys. 2. Investment of the State's funds, with consent and advr^\e of others for the most part. 3. Safekeeping of securities of the State, pledged collateral and personal property held in trust. 4. Servicing the bonded debt of the State. Regarding accounting, the duties of the Treasurer relate to the maintainance of the following accounts: 1. Accounts relating to all State funds: cash, safekeeping, and State bonds. The cash accounts reflect the Treasurer's position as to the receipt, safekeeping and disbursing of State moneys. The safekeeping accounts reflect the Treasurer's position in relation to receipt, safekeeping and release of securities and other personal property held for others. ^Ibid.. Section One, pp. D-l/D-5. 73 2. Accounts recording the costs of operation of the office. In addition to the functions of the three offices, the State Controller, Director of Finance, and State Treasurer are members of several boards and commissions which hold periodical meetings and of others which did not. Auditing in State Regarding auditing itself, that which was performed in 1954 and for many years before with respect to the activities of the State of California, and the order in xdiich it generally took place, can be summarized in four distinct steps: 1. The first step in regard to processes within a department and relative to its own operations was the verification by one person of routines performed initially by another; this checking task was referred to as the ”pre-auditing” step. "Internal auditing” was another step dealing with review and tests of internal accounting controls to determine that prescribed procedures were being followed and confirmation of existence of cash, securities and other properties. 74 2. In the State Controller's office, the follow ing activities were regarded as ”pre-auditing:" (a) examination of requests by operating departments for pay ment of payrolls and bills for services, equipment and materials and supplies ; and (b) examination of supporting documents and ascertaining that appropriations have been made and that funds are available for payment. The examination of records of certain local governments by the office of the State Controller was regarded as "post auditing." 3. The Audits Division of the Department of Finance performed annual examination of each operating department and each fiscal control agency. This task was called "post-audit," which was an external appraisal of performance and custodianship, compliance with rules and regulations and validity of reporting by the departments and agencies. 4. As has been indicated, the Legislative Analyst employed auditing techniques only to a limited extent and the objectives were not similar to those of the Audits Division. The function of the Legislative Analyst was mainly reviewing and analyzing proposed budgets and past 75 performances for the Joint Legislative Budget Committee, primarily to aid the Legislature in considering budget and revenue plans. II. DEFICIENCIES OF THE FINANCIAL CONTROL ORGANIZATION A report submitted to the Legislature in March 1951,^ among other things stated that far from being care fully organized and built upon a sound foundation designed for growth and expansion, the State's financial structure was a patchwork of expediencies. Responsibilities and authority had been given to, or assumed by, various officers and agencies over the years. Fiscal duties seemed to follow no plan but had to be discovered by careful inquiries. The accounting system of the State was like a body without a head. A uniform system had been installed in the various departments and agencies to meet most tests of a good system and financial reports at the department level were timely, complete and useful, but the system ended at the department level. ^California Assembly Interim Committee on Govern ment Reorganization, Report on Governmental Reorganization ( Sacramento; California State Printing Office, 1951). 76 Regarding the placing of responsibility for the deficiencies in the fiscal organization, that report stated that responsibility for the chaotic condition was difficult to place because the Constitution created the office of the Controller but did not define its duties; the Legislature had further confused the issue by giving the Controller and Department of Finance similar and conflicting authority. The report continued that conver sations were then taking place between the Controller's office and the Department of Finance with a view to coordinating the Controller's central accounts with the departmental accounts so that complete financial state ments could be prepared by the Controller. Finally, the report said that even if they reached a working agreement, the basic confusion or responsibility and the division of authority would still remain. In spite of the opinion expressed in that report of March 1951, the expressed duties and powers prescribed by the Constitution of 1849, and of 1879 as amended, seem clear: 1. The Governor is vested with the supreme executive power of the State, and is responsible for 77 transacting all executive business, execution of laws, and reporting to the Legislature at every session the condition of the State. 2. The State Controller has his expressed duties and powers relatively limited, that is, he is charged with drawing the warrants necessary to withdraw money from the treasury, receiving claims that are filed against the State, serving on designated boards, and performing miscellaneous duties of relatively unimportant nature, 3. The duties of the State Treasurer are not expressed by the Constitution except those relating to bonds issued by the State.^ In searching for the principal causes of these deficiencies, the group working for Price Waterhouse and Company concluded that one of the fundamental difficulties was the inherent powers conferred by the State Constitu tion to the Governor, State Controller, and State Treasurer. With the passing of time, responsibility and authority became increasingly diffused within the ^Price Waterhouse and Company, o j g . . cit., Section One, pp. 10-A/ll-A. 78 Executive Branch. In fact, as the State's activities increased, the Governor needed to have adequate accounting and financial reporting, if he was to be held responsible for the conduct of the State's affairs. This situation was recognized, but implementation of correction was haphazard and piecemeal, making responsibility and authority increasingly diffused within the Executive. On its own or the Governor's behalf, the Legisla ture contributed aggravation of the state of diffusion by trying to meet the requirements through enactment of legislation, from time to time, prescribing duties and powers augmenting or restricting financial and accounting powers of the fiscal offices without circumventing the Constitution. In this way, the State Controller, State Treasurer, and the Department of Finance have been given or have assumed a wide variety of tasks and authority, some of which are interdependent, some conflicting.^ The Price Waterhouse Company group believed that such a situation was the natural result of the interplay of three forces: (1) the desire to perpetuate the division of Id., p. 12, 79 authority and the seemingly attendant systems of internal check and balance, (2) the differing political aspirations of the holders of the offices, and (3) the reluctance to face the need for clarifying or modifying the State Constitution. An analysis of the forementioned duties performed by the State Controller and the Department of Finance discloses the following conditions inconsistent with good management : 1. Fiscal control and accounting responsibilities were shared by elective offices in the Executive: the Governor and his appointees, and the State Controller. 2. There was no central accounting office to supervise accounting and internal auditing procedures and to report upon the whole State's operations. 3. In consequence of those two deficiencies, comprehensive and informative reports were not prepared on the State's operations as a whole or its assets and liabilities. Reports which were published were incomplete and frequently contained figures that could not be readily reconciled. 80 4. A variety of duties not compatible with the proper duties of either a chief accounting or auditing office were assigned to the State Controller's Office. 5. Some procedures resulted in unnecessary duplication. Therefore, the Price Waterhouse Company report was not baseless when its authors stated that they could not commend the State's fiscal organization when it was regarded as an integrated working unit. Finally, the previous disclosure of the auditing performed indicates that independent auditing was practi cally missing. Except in a very small degree, all of the auditing was performed within the Executive Branch, practically none was done by personnel attached to the Legislature, and none was done by public accounting firms independent of the State, except for the University of California and the Department of Veterans Affairs whose activities were annually examined by independent certified public accountants. Therefore, in regard to auditing, the position of the State of California could be summed up thus; 1. Within the Executive Branch, internal auditing procedures were provided as means to assure the Governor 81 and his departmental directors that financial transactions had been reliably recorded and properly reported with respect to the operations for which they are responsible. 2é No similar procedures were made available to the Legislative Branch to provide it with independent auditing* 3. With but few exceptions, examinations were not being made by public accountants for the purpose of reporting either to the chief executive, the Legislature or the electorate. III. RECOMMENDATIONS TO THE JOINT LEGISLATIVE BUDGET COMMITTEE In reporting their recommendations to the Joint Legislative Budget Committee, the Price Waterhouse Company group divided them into two groups: principal recommenda tions and secondary or supplemental recommendations. Principal Recommendations The principal recommendations may be summarized as follows: 82 1. Creation of an office of an auditor appointed by and responsible to the Legislature. Such office should have the following duties: (a) to examine annually the financial statements prepared by the Executive Branch; (b) to report annually to the Legislature upon those financial statements; (c) to perform such other related assignments as may be requested by the Legislature. Regarding the authority to be conferred upon the office, it should be confined to examining and reporting and should carry no administrative powers. Furthermore, the activities pro posed for such an office should not be construed as diminishing the need for adequate internal or self audit ing within the Executive Branch. 2. The constitutionally elective office of the State Controller should be abolished and the activities of that office should be distributed to appropriate departments (chiefly the Department of Finance) under the direction of the Governor. 3. All management of finances, budgeting, and accounting for and reporting of financial transactions should be coordinated within one department under the direction of the Governor. 83 4. The Department of Finance should (a) retain the functions it then performed, (b) be assigned the accounting and fiscal control functions performed by the State Controller, and (c) be divested of unrelated general service functions which should be transferred to other departments or one to be created for such purpose. Secondary Recommendations The secondary or supplemental recommendations may be summarized as follows; 1* The constitutional office of the State Treasurer should be abolished and the activities of that office should be transferred to the Department of Finance. 2. Further study should be made with the objective of decreasing substantially the number of funds for which the State has to account. 3. Additional recognition should be accorded to the principle that management be charged with full responsibility and given the authority and means to dis charge it; this principle should be extended to the major departments, providing each of such departments with its own accounting, internal auditing and budgeting organize- 84 tions sufficient to account for its program and measure its effectiveness. 4. The preparation of warrants by a central agency, with the attendant "pre-audit" (as performed by the State Controller) should be substantially curtailed or eliminated. The major departments should be given the authority to issue warrants on the treasury"; a central agéncy could continue to act for the minor operating agencies. Reasons Given for Suggested Abolishment of the Office of the State Controller Hie first Constitution of the State of California, which was adbpted'in 1849, provided for the election of a Chief Magistrate who shall be styled the Governor of the State in which the supreme power of the State shall be V . y ' vested. The Constitution also provided for the election of an Attorney General, a Surveyor? General, a Secretary of State, a.Treasurer, and a Controller. However, it did not define the duties of either the Treasurer or the Controller.^ ^Ibid., p. A-15. 85 The first session of the Legislature held from December 15, 1849, to April 22, 1850, prescribed certain duties for the Controller. The Constitution was amended in 1879; in Article XV, Section 22, it was provided that no money shall be drawn from the Treasury but in conse quence of appropriation made by law, and upon warrants duly drawn thereon by the Controller.^ Article XIII, Section 9 of the amendment of 1884, created the Board of Equalization and named the Controller as an ex-officio member. The Amendment of 1889 created a Reapportionment Commission and the State Controller was named a member of it. By subsequent amendments, he was named a member of the State Highway Finance Board and the State Personnel From time to time, additional duties were prescrib ed or designed to the Controller by statute. Among them were those stated in the Government Code: (a) the Con troller shall superintend the fiscal concerns of the State, shall audit all claims against the State, and may audit the disbursement of any state money, for correctness. ^Ibid.. pp. 15-A/16-A. legality, and for sufficient provisions of law for payment (Section 12410); (b) the Controller shall keep and state all accounts in which the State is interested and keep a separate account under the head of each specific appro priation, showing at all times the unexpended balance of the appropriation (Section 12412) Continuing the examination regarding the office of the State Controller, the Price Waterhouse group stressed that it was increasingly clear that the proper distinction was not made between "auditing" and "account ing" and that sufficient recognition was not accorded to the changes that have taken place during the past one hundred years in government operations, concept of fiscal management, and advancement of accounting and auditing techniques. The primary purpose of the office of State Controller was visualized by the delegates to the Constitutional Convention as being to control in the sense of auditing, confirming or verifying the authenticity and propriety of transactions. ^Ibld.. pp. 16-A/17-A. 87 But today it is an accepted concept that auditing in its fundamental sense cannot be regarded as accounting and should be combined with it only in the form of an internal activity designed to assure the accountant of steps intermediate to his final accounting product. The validity of the audit depends upon the independence of review. In the early days of the California State, govern mental activities were few and simple and easy to record and report; then auditing was the primary purpose and task of the Controller. However, nowadays, conditions are different; governmental activities are enormous and much more surveillance and evaluation are necessary. All activities concerning analysis of cost, revenue and expenditure estimates, accounting, and reporting procedures must compound a system to fit a variety of operations, and all must be placed in the jurisdiction of the Executive However, auditing of the performance must be placed in independent hands and performed as a critical examination and appraisal by one doing none of the basic record keep ing and his findings should be reported to the electorate or its appropriate representatives. It is likely that the 88 State Controller's office was conceived to perform such a role in the administration, but the possibility is not excluded that it was established to serve as the chief financial control and reporting center. However, the Price Waterhouse group concluded that the office has be come unable, with its present authority, to serve either purpose well. This is demonstrated by the fact that the Controller does not perform any of the following functions which are usually regarded as essential to offices per forming either of the two forementioned roles; 1. To prescribe accounting systems and procedures. 2. To maintain or supervise all of the accounts with which the State is concerned. 3. To appraise actual performances, except in a limited sense. 4. To exercise effective and timely control over the State's commitments and encumbrances* 5. To publish financial information in time and in form sufficient to meet the needs of the administration. As a principal auditing office, it does not perform the following functions: 89 1. To examine or critically appraise the internal accounting controls and procedures of the State's operating agencies, 2. To examine many of the underlying records and support necessary to an understanding of an agency's operations. 3. To analyze the revenues and expenditures of an agency for comparison with estimates and allotments on which the budget was based. 4. To audit the office of State Treasurer. Nearly all of the above functions are performed by the Department of Finance, which was formally organized in 1921. Apart from the "pre-audit" and disbursing functions, the office of the State Controller performs a wide variety of miscellaneous necessary tasks all of which are inappropriately placed. In brief, these were the reasons presented by the Price Waterhouse and Company group to support its recommendation that the office of the State Controller should be abolished. In 1954, the Office comprised about five hundred employees in nine operating departments and the annual operating cost of the Office approximated 90 $3,200,000. In fact, in the past, several proposals were made by legislative committees to abolish the office of the State Controller, including some in reports of studies made in other states. Reasons Supporting the Suggestion to Abolish the Office of the State Treasurer The Constitution of 1849 created the office of the State Treasurer as a member of the Executive Branch to be elected for the same period as the Governor. His specific duties were prescribed by subsequent amendments and the general ones were set forth by the first Legislature held from DecŒiber 15, 1849, to April 22, 1850, and by subse quent Legislatures, without noticeable deviation from the pattern established by the first Legislature. The fundamental reason given by Price Waterhouse and Company to support the recommendation to abolish the office of the State Treasurer was that it serves no useful purpose to have those executive functions lodged in an elective office not under the Governor's jurisdiction. ^^Ibid., Section One, p. 14. 91 Also, the following disadvantages are attributable to the separation: 1. The Treasurer's principal function is receiving depositing and disbursing moneys. These functions are important, however, regarding safeguards and controls; they are not prescribed, supervised or ascertained by the Treasurer. He has no means of checking the exactness of the revenues cleared to him by the collecting agencies. The selection of banks in which he deposits the receipts depends upon consent of the Director of Finance and the State Controller. The Treasurer has no means of indepen dently knowing whether the warrants prepared and signed by the State Controller are for a valid purpose or that due appropriation previously was made for the disbursement. Nor does he know, in most instances, at the moment he makes the disbursement whether or not the unexpended balance in the corresponding fund is sufficient to meet the disbursement. Controls of these operations rest mainly with the Controller, Department of Finance, and the originating agencies. The Treasurer does not know the amount of money he has on hand and in the bank, nor the checks that he has issued which have not been payed. 92 Unless advised, he does not know what warrants are out standing and ^at claims are in process. Assigning these functions to an elective office does not add significant safeguards; they could be more effectively performed in a separate division of the Department of Finance. 2. Another function of the Treasurer is to invest the State's funds. But for the most part, this function is a shared responsibility. Deposits of funds in interest- bearing bank accounts is governed by statute and the selection of banks is made with consent of others. The major investment in securities for which the Treasurer is solely responsible relates to the Surplus Investment Fund \diich investment is restricted to federal securities with short-term maturity or redemption provisions. The balance of the Surplus Investment Fund, on June 30, 1953, was $184,600,000 of which $76,200.00 was invested in 11 securities. 3, Safekeeping of securities of the State, pledged collateral and personal property held in trust is another ^^Ibid.. Section One, p. A-49. 93 function of the Treasurer which is simply a custodial function although it requires servicing to obtain interest revenues; no special safeguards or advantages are derived from an elective office. In fact, the abolishment of the office of the State Treasurer was recommended in 1951, in the first partial report of the State Assembly Interim Committee on Governmental Reorganization, which discussed the place of a state treasury in a state's organization.^^ In 1954, the Treasurer's office had about forty employees and its annual operating costs approximated $370,000 including $18,500 reapportioned as the cost of services to other agencies. Recommended Reorganization of the Department of Finance In consequence of the principal recommendations (3) and (4), a new organization for the Department of Finance was suggested to put this agency in a position to ^^Ibld.. Section One, p. A-50. ^^Ibid.. Section One, p. D-1. 94 coordinate, under the direction of the Governor, all man agement of finances, budgeting, and the accounting for and reporting of financial transactions of the State. Accordingly, the Department of Finance should (1) be assigned the accounting and fiscal control functions performed by the State Controller, (2) retain similar functions it then performed, and (3) be divested of unrelated general service functions, which should be transferred to other departments or one to be organized for such purpose. According to the proposed reorganization, the Department should have five divisions: Accounting, Budgeting, Treasury, Methods and Procedures, and General. The Accounting Division should be in charge of Accounts and Internal Audits : 1. For Accounts a. Control of appropriations, funds, and property. b. Disbursements of payrolls, retirement rolls, and Veterans aid. c. Reports in general. d. Operations of the Department 95 2. Internal Audits a. State departments. b. State fairs. c. Public administration d. Municipal and justice courts e. Subventions and loans. The Budget Division should control: 1. State a. Analysis of compilation, presentation, and control. b. Research. c. Management analysis. 2. Local governments: advisory role. The Division of Methods and Procedures should be concerned with: 1. Accounting : prescribing systems and forms. 2. Services: analyzing department methods and aid installation of cost controls. The Treasury Division should be concerned with custodial and investments ; the General Division should be in charge of: 96 1. Boards. 2. Reports on State and local governments. 3. Insurance. 4. State fairs. 5. Publications. The Director of Finance sole duty should be the administration of his Department; therefore, he should not have direct administrative powers over general services and other departments, and should not be on boards and commissions other than those directly related to the primary functions of his department. This recommendation's main purpose was to relieve the Department of its general service functions. Alternative Recommendations As both groups of recommendations would require modification of the State Constitution to put them into force, the group from Price Waterhouse and Company was requested to present some alternative recommendations. In fact, strong objections were expected against the idea that both offices— State Controller and State Treasurer— should be abolished. Attempts had been made 97 before and failed. There were members of the Legislature who wanted them to continue; the Controller and Treasurer wanting to keep their positions, and they found support in those of the electorate who believed that loss of safe guards would be the natural result of abolishment of those two offices. It would be a difficult task to convince the opponents that the transfer of duty to control the Executive's activities to an auditor appointed by and responsible to the Legislative would add to instead of detract from the safeguards. In its report. Price Waterhouse made it clear that the four following alternative courses were presented with considerable reluctance and reservation, as they should not be considered as acceptable substitutes to the recommendations offered for solution of the problem 1. The office of the State Treasurer could be continued performing substantially all of its functions but certain improvements should be made in its operations. The office of the State Controller could be continued but its activities should be reduced to those functions of an ^4%bid.. Section One, pp. A-23/A-27. 98 accounting and auditing nature; the remainder of the activities (miscellaneous tasks) should be transferred mainly to the Department of Finance. The chief function of the Controller would be disbursing upon accredited claims; the office would offer a post of last checking immediately prior to the disbursement of money. Such arrangement would reduce duplication and remove the principal deficiencies in the then prevailing assignment of responsibility and authority. (It should be noted that such an alternative suggestion would require constitutional amendment. ) 2. The second alternative course suggested that both State Controller and State Treasurer would continue as in alternative (1) with the State Controller having the **pre-audit" of claims Wiich then obtained; the office would keep operating as it had before except for the miscellaneous activities it performed. (It was believed that alternative (2) would involve the least question of constitueiona1 change.) 3. The third alternative proposed to leave both offices as they were with such modifications or revisions as would customarily be made in due course to effect 99 improvements and eliminate duplications. 4. Hie last alternative recommendation was that both offices would continue as under alternative (3) but the State Controller would be given sufficient staff and the necessary authority to perform audits of operating departments and agencies. However, each of the four alternative courses assumed the existence of an auditor responsible to the Legislature. IV. THE PROPOSED AUDITOR'S OFFICE Characteristics of the Proposed Auditor's Office It was suggested that the proposed office of the auditor should have the following main characteristics: 1. The auditor should be appointed by and serve at the pleasure of the Legislature or a committee thereof. 2. The auditor should be assisted and counseled by a committee specially formed or by a subcommittee of the Joint Legislative Budget Committee, in order to pro vide him with the best means of obtaining early considera tion of remedial and other recommendations which might 100 arise from the auditor's findings. 3. The auditor and his staff should be exempt from civil service rules and regulations. His salary should be fixed by the Legislature or his committee and should not be less than that of the chief accounting official of the State or the State Controller if that office is retained. He should select his own staff. 4. The auditor should have the following qualifications: (a) should be licensed to practice in the State of California as a certified public accountant or as a public accountant ; (b) should have not less than ten years experience in auditing and accounting or a combina tion of the two for either government or private industry; (c) should have a significant part of such experience in supervision of a staff of several accountant-auditors ; and (d) should have the general qualifications normally associated with a competent independent public accountant whose practice has been in the field of auditing and accounting, as distinguished from other specialized fields. 101 Duties and Functions of the Proposed Auditor's Office The following duties and functions were suggested for the office of the auditor: 1. The auditor should have the primary duty, and necessary authority, to examine and report annually upon the financial statements of the State, which should be furnished to him by the principal accounting offices of the State. 2. The auditor should not be required to examine annually the statements and accounts of each department and agency; the scope of the work and the selection of the agencies should be left to the discretion of the auditor and his counseling committee. 3. The auditor should make such other examinations or investigations as he believes desirable and those he is directed to perform by the committee only, or the Legislature acting through it. Requests for his services by others should be addressed to and approved by his committee. ^ 102 4. The auditor's authority should be confined to examining and reporting objectively and independently. 5. The auditor's reports should include comments, recommendations and suggestions as he desires but he should have no power to enforce them nor should he other wise influence or direct executive or legislative actions. The reports should be addressed to and furnished to the Legislature or the committee; copies should be distributed only at the direction of these two bodies but it would be desirable to furnish copies to the Governor and his chief fiscal officer. 6. In carrying on his auditing function, the auditor should limit his activities to verifying that: (a) the Executive branch is carrying out only the activities and programs authorized by the Legislature and is doing so effectively and efficiently; (b) that expendi tures are made and revenues are collected in accordance with laws and regulations; (c) that the assets of the State are safeguarded and utilized properly; and (d) that the reports and financial statements prepared by the Executive disclose all material information necessary to a proper evaluation of the State's activities. 103 Title Suggested for the Auditor Consideration was given to a few titles such as "State Auditor," "Auditor," "Legislative Auditor," and "Auditor General." The recommendation was that the title "Auditor General" would serve the purpose best for the following reasons: 1. In other states the office of the State Controller is described as the office of the State Auditor, regardless of the fact that auditing may be his least important duty. Therefore, for many people both terms have become fully interchangeable. 2. The title "Auditor General" would indicate the top level of auditing making possible the distinction from those commonly regarded as "auditors," such as those who examine taxpayers* records, and from other levels of auditing such as the one performed by the Department of Finance or those inside other agencies. 3. The title "Legislative Auditor" would be con fused with the then existing title of the head of the office w&ich, within the Joint Legislative Budget Committee, is primarily concerned with budgetary analysis. 104 (In fact, it was suggested that this title should be changed to '^Legislative Fiscal Advisor," or consultant, to set forth title and functions more properly. As it was indicated before, the title of the Legislative Auditor was changed in 1957 to Legislative Analyst.) Position of the Office of the Auditor General Continuing its comments and recommendations regarding the Office of the Auditor General, the Price Waterhouse people had to study the relationship between the proposed office and the office of the Legislative Analyst, that is, the distinction between the offices had to be clearly stated, in order to avoid conflict and duplication of work to be performed by them. It was stated previously that the primary task of the office of the Legislative Analyst was to conduct a continuous research and fact-finding progr^ on the State's operations with particular emphasis on the Governor's budget, appropriation bills and reorganization proposals, to provide critical analysis of financial programs and proposed state services, and to serve the members of the Legislature and its committees as a research and reference organization. On the other hand, the proposed Office of the Auditor General should have distinct tasks and both offices should maintain a free exchange of information mainly for the purpose of avoiding duplication of activity. Funda mentally the distinction was viewed this way: while the Auditor General should carry on a program of audit process whidi reviews the techniques and reporting statements of the Executive, the Legislative Analyst role was to carry on a program of reviewing the executive performance as reflected in management and organization and also to provide legislative reference. Regarding the committee with which the Office of the Auditor General should be associated, it was suggested that the committee should be formed by a relatively small number of the Assembly and Senate, having knowledge to consider the general scope of the audit program and to evaluate the recommendations and suggestions made by the Auditor General. The committee's role should be restricted to consideration of auditing, accounting and financial reporting. Therefore, areas such as policy or budget 106 should he left out of the committeerole. But the committee, on the other hand, should not be precluded from review and comment on foims of organization, funds, or legislation having a direct relation with accounting and financial reporting. CHAPTER IV CREATION AND ORGANIZATION OF THE OFFICE OF THE AUDITOR GENERAL This chapter is divided into two parts. The first relates the steps taken within the Legislature after the report prepared by Price Waterhouse and Company was deli vered to the Joint Legislative Budget Committee. The report was analyzed and sunanarized by the Legislative Analyst and submitted to the Committee. In consequence of this. Bill No, 1540 was approved by the Senate, Assembly and Governor establishing the Joint Legislative Audit Committee within which the Office of the Auditor General was created. The remainder of the first part points out the main implications of that bill regarding these two legislative organs. The second part deals with the organization of the Office of the Auditor General, It relates the initial actions taken by the Joint Legislative Audit Committee to settle the foundations of the auditing system: adoption of an audit policy and selection and recruitment of the 108 two top audit officials who later undertook the task of organizing the Office of the Auditor General. The chapter is closed with a presentation of the functional structure of the new office. I. CREATION OF THE OFFICE OF THE AUDITOR GENERAL First Action Taken Upon the Report of the Survey On November 30, 1954, the report prepared by Price Waterhouse and Company was addressed to the Honorable Ben Hulse, Chairman, and Members of the Joint Legislative Budget Committee* On December 3 of that year, Mr. Post, the Legislative Analyst, presented that Committee a summary^ of the report * s main recommendations. Mr* Post’s report can be divided into three parts. The first is a brief introduction in which the Price Waterhouse report is identified as a 254-page document J L A. Alan Post, Summary Statement of Chief Recommen dations Contained in Report of Price Waterhouse and Company to Joint Legislative Budget Committee (a report dated December 3, 1954 ; for internal use). (Mimeographed. ) 109 which includes numerous suggestions for improvements in the fiscal procedures of the various state agencies and an illustrative set of comprehensive financial statements covering the operations of the State for the fiscal year ended June 30, 1953, all this as the result of the engage ment of that firm to review the principal auditing functions within the State and suggest the scope and location of future "post-auditing." The second part contains the basic recommendations Wiich have been indicated in the last chapter and identi fied there as principal and secondary recommendations. The last part of Hr. Post’s report is dedicated to the alignment in an objective and synthetical manner of the paramount comments made by Price Waterhouse and Company 2 to support its recommendations. 1. Almost all of the State auditing was performed within the Executive Branch. ^In fact, some of those comments have already been mentioned; however, in order to give an accurate picture of the last part of the report, it seems advisable to reproduce here such comments as they were reviewed and aligned by Mr. Post. 110 2. There was no independent examining and report ing upon the activities of the Executive. 3. The Legislature, Department of Finance, and State Controller seemed to agree that an auditor appointed by and responsible to the Legislature was desirable. 4. In spite of the fact that there were qualified firms of public accountants to audit the State’s account, it could be most economically served by an Auditor General and a permanent staff hired by the Legislature. 5. A staff of thirty to forty could perform the functions of the Office of the Auditor General without additional expenditure, since a realignment of functions could reduce the staff of the Audits Division of the Department of Finance from one hundred and twenty to thirty or forty. 6. The Auditor General should be appointed by and serve at the pleasure of the Legislature or a committee thereof at a salary not less than that of the chief accounting official of the State, or the State Controller (if that office was to be retained) and should hire and fix the salaries of his staff--a staff to be exempt from civil service. Ill 7. Auditing could not be considered out of context with the subject of accounting controls and procedures since accounting controls and procedures were most import ant to determine the scope of an audit program, and also the effectiveness of accounting controls and procedures, to an important degree, depended on the soundness of the assignments of responsibility and authority. 8. Three conditions inconsistent with good management were encountered in the State: a. Fiscal control and accounting responsibil ities were divided between elective offices— the Governor and his appointees and the State Controller. b. Absence of a central accounting office to supervise internal auditing procedures and report upon the State’s operations as a whole. c. In consequence of (a) and (b), comprehen sive and informative reports were not prepared on the State’s operations as a whole or its assets and liabilities (those reports which were published were not 112 complete and frequently contained figures that could not be readily reconciled). 9. The proposed solution was to abolish the office of the State Controller and centralize all responsibility for budgeting and the accounting for and reporting of financial transactions in one department responsible to the Governor, and to abolish the office of the State Treasurer for the same reason. 10. The abolishment of these two offices was believed likely to enhance rather than reduce safeguards by fixing instead of diffusing responsibility. In his report, the Legislative Analyst did not express his opinion regarding the recommendations nor the opportunity to put them into effect. The sole puirpose of his report was to present the Committee the basic idea of the survey and to lead to its detailed examination by the Committee’s members. Annroval of the Bill No. 1540 Senators Hugh P. Donnelly and Luther E. Gibson were the authors of Bill No. 1540 idiich was approved by the Assembly on June 8 and Senate on June 17, 1955, and 113 o by the Governor on July 6, 1955. The Joint Legislative Audit Committee and the Office of the Auditor General were finally established by Bill No. 1540 in general conformity with a fundamental recommendation of the report of Price Waterhouse and Company regarding the need for internal auditing within the Executive Branch and independent auditing for the Legislature, which, on the other hand, was in general conformity with the recommendations of the Senate Interim Committee on Government Organization contained in its reports to the Legislature in 1953 and 1955. Bill No. 1540 essentially recognized two points of paramount importance : (1) the Executive needs special and periodic audits of the agencies and their accounting and reporting systems by means of internal auditing, and (2) independent auditing is needed also by the Legislative to assure sound fiscal and administrative policy, under the responsibility of the Office of the Auditor General placed under the direction of the Joint Legislative Audit Connaît tee. ^California Government Code. Chapter 4, Part 2, Division 2, Title 2. 114 The Joint Legislative Audit Committee The act fixes the following provisions regarding the Committee: 1. It consists of three Assemblymen and three Senators, the former appointed by the Speaker of the Ass^bly and the last by the Senate Committee on Rules, as stated by the Joint Rules of the Senate and Assembly. 2. It has continuing existence and may meet and act during sessions, recess, and interim period of sessions of the Legislature at any place in the State. 3* Its duties and responsibilities are: (a) to appoint the Auditor General and a deputy; (b) to determine the policy of the Auditor; (c) to ascertain facts; (d) to review reports; (e) to take action regarding the reports; and (f) to make recommendations to the Legislature regard ing the State, its revenues and expenditures, its departments, subdivisions, and agencies. 4. It is authorized to establish its policy regarding its own proceedings. 115 5. It is authorized to form subcommittees from its members and assign them studies, investigations, and hearings regarding matters of its responsibility. 6. It has the powers and authority provided by the Joint Rule 36 to adopt rules regarding its procedure, hire necessary personnel, subpoena witnesses and records, request from any organ of the State Government or of the political subdivision of or in the State information or records the Committee deams necessary to achieve its role. The Auditor General Bill 1540 states that the office of the Auditor General is permanently located in Sacramento and that the Auditor is authorized to establish offices in any place of the State if he so decides to carry on the work. He is also authorized to examine all books, accounts, and other records and property of any organ of the State, as well as accounting procedures and internal auditing performance, #iich may become necessary to disclose all material facts for the use of both Legislative and Executive to establish and maintain sound fiscal and administrative policy. It is the Auditor’s duty: (1) to examine annually 116 the financial statements prepared by the ^ecutive and to report apnually to the Legislature as to the adequacy of these financial statements in conformity with generally accepted accounting principles applied on a basis consist, ent with that of the preceding fiscal year, and (2) to make special audits and investigations of any agency as denned necessary by the Legislature or any of its committees. II. ORGANIZATION OF THE OFFICE OF THE AUDITOR GENERAL Organization of the Joint Legislative Audit Committee^ The first meeting of the Committee was held on October 7, 1955, and its first members were (1) Assembly men Frank G. Bonelli, Thomas W. Caldecott, and Caspar W. Weinberger, and (2) Senators Arthur H. Breed, Junior, Hugh P. Donnelly, and J. Howard Williams* Assemblyman Caldecott was elected chairman and served from the first William H. Merrifield, First Report of the Joint Legislative Audit Committee (Sacramento: California Printing Office, 1958), p. 11. 117 meeting until October 29, 1957, \ghen he resigned and was replaced by Assemblyman Weinberger %dio served until January 3, 1959, idien his term expired* Initial Activities of the Committee At the first meeting, the Committee requested A. Alan Post, Legislative Analyst, to prepare a statment on audit policy to be presented to the next meeting on October 24, 1955, and adopted the following rules ; 1* The Committee *s officers were the Chairman, Vice Chairman, and an Auditor General to be appointed by the Committee to serve as Secretary* 2. Two assemblymen and two senators constitute a quorum whose affirmative vote is required for any committee action. 3. The Chairman is authorized to organize sub committees and specify their duties, and to determine time and place of meetings. 4. The Vice Chairman presides over meetings in the absence of the Chairman and acts as Chairman in case of vacancy or when delegated by the Chairman. 118 5. Prior to the adjournment of each general session, the Committee reorganizes and elects new officers who hold office until their successors are elected and qualified. 6. The counsel for the Committee is the Legislative Counsel. 7. The Secretary’s function is to keep a complete record of the activities of the Committee. Audit Policy Adopted At the second meeting, the Committee adopted the audit policy from a statement prepared by the Legislative Analyst,^ which is a long and important document regarding the policy to be adopted by the Office of the Auditor General. A brief summary of the main points raised by Mr. Post follows. Since the auditing to be performed by the Office of the Auditor General will depend largely upon the nature and scope of the internal auditing performed by the ^A. Alan Post, Comments on Scone of Auditing for Joint Legislative Audit Committee (Sacramento; California Printing Office, October 24, 1955), pp. 3-5. 119 agencies and the Department of Finance, and upon the degree of cooperation between the three auditing levels, the proper extent of the independent auditing is difficult to describe. The matter has to be judged in terms of the most reliable judgement available, that is, the opinion contained in the report of Price Waterhouse and Company. A comparison of the duties recommended for the Office of the Auditor General (Chapter XI), with pertinent statements in the law, indicates that there is no basic difference between them, as can be seen from the following Sections of Chapter 1699/1955: Section 10500, The Legislature, also, recognizes the necessity of an independent audit, in addition to the audit conducted within the executive branch of State Government, for the use of both the Executive and Legislative Branches of the State Government in establishing a sound fiscal and administrative policy for the Government of the State. . . . It is also the desire of the Legislature to create the Office of the Auditor General, vhose primary duties shall be to examine and report annually upon the financial statements prepared by the Executive Branch of the State and to perform such other related assignments as may be requested by the Legislature. Sections 10501. The Joint Legislative Audit Committee is hereby created. The Committee shall determine the policies of the Auditor General, ascer tain facts, review reports and take action thereon, and make reports and recommendations to the 120 Legislature and to the Houses thereof concerning the state audit, the revenues and expenditures of the State, its departments, sub-divisions, and agencies Tdiether created by the Constitution or otherwise, and such other matters as may be provided for in the Joint Rules of the Senate and Assembly.^ The Auditor General occupies the highest auditing position since he has the duty to "examine and report annually upon the financial statements prepared by the Executive Branch of the State" and consequently it is his responsibility to take all the steps he thinks necessary to check the correctness of those statements. This implies review of the procedures used by internal auditors and, in some circumstances, also a review of their actual performance on the job as well as some examination of original records. Three relationships are also discussed: the Department of Finance auditing. Legislative Analyst, and the State Controller. In previous bills, attempts were made to transfer the entire audit function from the Executive to the Legislature. However, the Price Waterhouse report made ^California Government Code, on. cit., Chapter 4. 121 it clear that "... the principal auditing should be performed within the Executive Branch and reviewed by the proposed auditor for the Legislature." Another significant statement was, "the auditor should be an agent of the Legislature. ..." These statements are in conformity with the last part of Section 10500, ^ich says; The authority of the office, i.e. Auditor General, under the direction of the Joint Legislative Audit Committee is confined to examining and reporting and is in no way to interfere with adequate internal audit to be conducted by the Executive Branch of the Government.^ The term "confined to examining and reporting" which "is in no way to interfere with adequate internal audit to be conducted by the Executive Branch of the Government" means that the Auditor is to confine his audit ing work primarily to a review of the adequacy and thoroughness of the executive internal audit as it appears in statements, controls, checks of working papers, and other related procedures, and a reporting to the Legislature. The relationship to the Legislative Analyst was also given careful consideration in the Price Waterhouse ^Ibid. 122 report as has been indicated before. In fact, Mr. Post, interpreting those points of view, concluded that the area of concern of the Auditor General should be that related to problems of efficiency and economy or adequacy or inadequacy in respect to the auditing and accounting functions of government and with the form of the state ments which emanate therefrom. On the other hand, the Legislative Analyst should transpose audit findings of the Auditor General into budget recommendations affecting the agencies responsible for auditing, accounting, and financial control activities; in the other state opera tions, the Legislative Analyst should be responsible for review and evaluation of budget and performance. In other words, the Legislative Analyst should be in charge of the review of executive performance as reflected in management and organization studies. The Auditor General should be in charge of the audit process of reviewing the techniques and reporting statements of the Executive. The relationship between the Auditor General and the State Controller’s office is also a problem. Since this office is audited by the Department of Finance and the Auditor General has the duty to review the audit 123 procedures of all state agencies, he, logically, has responsibility for reviewing the auditing procedures of the office of the State Controller, including those relating to post-auditing of expenditures by local govern ments, of state subventions or loans which are performed by this office. These are, in brief, the views xidiich constitute the audit policy recommended by Mr. Post and approved by the Joint Legislative Audit Committee. Selection of the Auditor General After the second meeting held on October 24, the Committee had two more meetings in 1955, and five in 1956. However, only in the meeting held on May 17, 1956, the Committee began facing the most important step to provide for its effective existence. In fact, at that meeting, the Committee authorized the Chairman: ... to do all things and take all actions which are necessary to furnish the Committee with a staff, office space, supplies, facilities, and equipment needed to carry out its responsibilities. %errifield, op,, cit.. p. 12. 124 This statement clearly indicates that until that date the Committee had not yet begun to play its role, although seven months had elapsed since its first meeting. In his report of October 24, 1955, the Legislative Analyst^ included recommendations for the selection of the Auditor General; the opportunity should be widely publicized among professional organizations stating (1) salary, (2) responsibilities of the function, (3) qualifi cations, (4) the fact that the function, while not civil service, was nonpartisan and technical in nature, (5) the fact that reasonable continuity in office was expected, and (6) that vacation, sick leave, and retirement provi sions were according to California law. A news release was sent ot the following publica tions; California Certified Public Accountant. The Journal of Accountancy. The Controller, and Municipal Finance. The American Institute of Certified Public Accountants sent the news release to presidents, executive secretaries, editors of state societies of certified public accountants, and o Post, Comments on Scope of Auditing for Joint Legislative Audit Committee, op. cit.. pp. 11-16. 125 many other related individuals and organizations. The minimum qualifications set forth by the act for the selection of the Auditor General are: (1) to have a valid certificate issued by the State Board of Account ancy to practice as a certified public accountant or a public accountant, (2) to have seven years of experience in governmental accounting in an executive position involving responsibility for directing the work of an auditing staff of not less than twenty accountants, (3) or to have a combination of experience which, in the opinion of the Committee, is the equivalent of those requirements stated in (2). Of the twenty-eight applications received from twelve states, five were selected for oral interview, two from California and one of each from Kansas, Illinois, and Wisconsin. The information gathered in the oral interviews conducted in San Francisco on December 20, 1955, and in Sacramento on January 20, 1956, and from the inquiries made by the Legislative Analyst was reported by him to the Committee which, after a review of the information received voted unanimously on February 15, 1956, to select 126 William H. Herrifield for the position.He, at that time, was associated with the firm of certified public accountants— Peat, Marwick, Mitchell and Company— of Chicago; earlier he held other important positions in auditing, and had been affiliated with Price Waterhouse and Company. At the meeting held on May 17, 1956, the Committee Chairman was authorized to take effective action to recruit the staff for the Office of the Auditor General, At that session, Mr. Merrifield was sworn in as Auditor General of the State of California. Selection of the Penutv Auditor General Upon the request of the Chairman of the Committee, the Department of Finance, in a memorandum dated October 7, 1955, submitted to the Committee several suggestions regarding organization and budget for the Committee. In this document, it was suggested that the Deputy Auditor General, \dio, according to law, was to be appointed by the 10 Merrifield, pp. cit.. p. 12. 127 Committee, should assist in the direction and administra tion of the Office of the Auditor General. However, in his recommandations of October 24, the Legislative Analyst^ suggested that the Deputy would be more useful by func tioning chiefly as a working supervisor rather than as a line assistant, with authority to act in the absence of the Auditor General. This was the prevailing point of view maintained by the Committee. Following these lines, the Committee selected John W# Sho^naker, who assumed his position on June 18, 1956, and who was then a certified public accountant with twenty years* experience in public accounting with well- known firms of certified public accountants. Most of his experience was in auditing supervision, including audits of governmental bodies, and in report editing and staff recruiting. After this action, the Committee had filled a gap and from then on it had two technical people capable of proceeding with the organization of the Office of the ^^Post, Conanents on Scone of Auditing for Joint Legislative Audit Committee, on. cit.. p. 12. 128 Auditor General. Organization of the Office of the Auditor General In consequence of the powers given the Committee ’ s Chairman at the meeting of May 17, two complementary steps began: provision of the material facilities and recruit ment of the staff. Thus, 5,400 square feet were allocated by the State Capitol Committee in the north wing of the fourth floor of the State Capitol and designated as Room 430, and identified as the Offices of the Joint Legislative Audit Committee and the Auditor General. These were r®nodelled and equipped with money provided by the Assembly Rules Committee from the Assembly Contingent Fund. Still following recommendations of the Legislative Analyst (memorandum of October 24, 1955), the Committee decided to employ the audit staff gradually, the high level positions first and later the staff of junior accountants— after an over-all appraisal of the audit program had been made. At the meeting of October 26, 1956, the Committee 129 tentatively approved a staff of three audit managers, twelve senior accountants, and twelve semi-senior account ants. This was in conformity with the recommendations of Price Waterhouse and Company that the staff should be from thirty to forty auditors. The minimum requirmnents set forth by the Committee for the audit staff were: (1) Bachelor's degree with major in accounting, (2) at least at the higher level, a certified public accountant *s certificate, (3) progres sive, diversified experience with a firm of independent certified public accountants, (4) ability to work with others on a professional plane, (5) a high degree of personal integrity, and (6) an unusual amount of curiosity, industry, perseverance, and resourcefulness. The staff was exempt from civil service as permitted by the Joint Rules of the Senate and the Assembly. The recruitment of the audit staff began in 1956 and by the end of 1960, they totaled twenty-five. Fourteen were certified public accountants: four served as audit managers and ten as senior accountants. Of the remaining eleven, three were semi-senior accountants and ei^t served as junior accountants. 130 Functions Administrative functions are directed mainly by the Deputy Auditor General and to a small extent by the Auditor General himself. The auditing function is performed by junior accountants, semi-senior accountants, senior accountants, audit managers, the Deputy, and the Auditor General. Junior accountants— recruited among college graduates who have majored in accounting— work under the close direction of either senior or seai-senior accountants on audit assignments. After a junior accountant has had about two years experience, he is usually ready to assume more responsibility and take charge of some of the smaller audit assignments under the limited supervision of a senior accountant or an audit manager. He is then classified as a semi-senior accountant. A senior accountant is expected to have four years experience, to assume thé full in-charge responsibility of larger audit assignments and be able to direct the work of one or more assistants. By this time, he is also expected to have passed the examination for the certificate of 131 Certified Public Accountant. An audit manager directs several jobs in process at the same time, each in charge of a senior or semi senior accountant. Prom time to time, as the audit work progresses in the field, he visits the agency being audited and reviews the working papers completed and in progress and discusses audit problems with the men on the job. Therefore, he is in a position to make judicious review of the audit report submitted and make revisions which in his judgement may be necessary. After the audit manager completes his review, all reports are reviewed by the Deputy Auditor General %dio covers such matters as appropriateness and materiality of comments, agreement with accounting principles or other matters discussed, brevity of report without loss of clarity, and determines that there has been no failure to disclose any material facts. The Auditor General makes the final review of the report draft mainly to determine if he is in accord with the statements made in the report, so he can sign it, and to determine whether the report is written so the average reader will understand it. 132 After the reports are duplicated, copies are first sent to the members of the Joint Legislative Audit Committee and about one week later, other copies are sent to the agency audited, other ccmmittees of the Legislature that are interested in the subject matter, and control agencies such as the State Controller and the Director of Finance. The agencies audited are requested to comment on any recommendations made in the reports. Reports are pre sented periodically before the Joint Legislative Audit Committee in formal hearings in %Aich the agencies audited and other departments have an opportunity to give testi mony. The Committee may approve or disapprove of the recommendations made but it rarely opposes recommendations and the agencies generally act upon them. CHAPTER V ACTIVITIES OF THE OFFICE OF THE AUDITOR GENERAL The remainder of the year 1956 was consumed mainly in the settlement of the physical facilities of the Office of the Auditor General, selection and recruitment of personnel, and initiation of an over-all analysis of the systaa of internal control in state agencies to determine how much reliance could be placed on their reports. The review of the internal control system was the logical first step in order to provide the Office the necessary knowledge of the actual situation. In fact, as a result of this study and recommendations made by the Auditor General, the Joint Legislative Audit Committee approved its program of activities to begin with audits of selected funds and agencies for the fiscal year ended June 30, 1957. This chapter is dedicated to reviewing briefly the nature and volume of the work done by the Office from 1957 to 1960. It starts with a picture of the review of the 134 internal control system. Following this, comments are made on the first specific task given the Office by the Committee to study the claim processing procedures. The following part deals with the types of reports issued by the Office and gives examples of reports with qualified opinions and disclaimed opinions, and a case of an unfeas. ible audit. Subsequently, comments are made on action taken by the Office and the Audits Division to coordinate their audits in an attempt to achieve better results in examining all agencies’ operations. The final part of this chapter shows how much work has been done, how much time has been spent, and how much money the Office cost. Study of the Internal Control System In its meeting of October 26, 1956, the Joint Legislative Audit Committee recommended that the Auditor General review the State Internal Control System for the following purpose; First, it enables him to formulate an opinion as to the reliance he may place on the system to the end that, by adjusting his audit procedures accord ingly, he may express an opinion as to the fairness 135 of managanent * s financial stataaents; and, secondly, %diere the review indicates apparent weaknesses, recommendations for possible corrective measures may be conveyed to management.^ The plan of review was settled in Novaaber and Decanber of 1956 and carried out continuously, but the bulk of the work was done in 1957 and 1958. It covered state agencies in more than one hundred and fifty locations throughout the State. Questionnaires covering sixteen areas of activities and comprising 282 questions were filled out by employees engaged in the recording of trans actions or in other activities related to internal control. The deficiencies disclosed by the answers were reviewed by the supervisory staff of the agencies involved and by the supervisory staff of the Audits Division of the Department of Finance in order to reach a common understanding of the deficiencies in the agencies in general. The bulk of the deficiencies disclosed was due to failure to apply procedures prescribed by the State Administrative Manual, published by the Department of Internal Control. Special Report by the Committee on Auditing Procedure of the American Institute of Accountants, November, 1948 (New York; American Institute of Accountants, 1949). 138 system of internal control which includes: a. A plan of organization with appropriate segregation of functional responsibilities. b. An adequate system of authorization and record procedures. c. Sound practices in performance of duties. d. Quality of personnel commensurate with responsibilities. 2. The study of internal control systems requires an awareness of the internal control standards that apply to a variety of transactions. 3. The appraisal of a system of internal control requires accurate information on a great variety of details that can be obtained only by careful inquiry into the t L separate operations that comprise a control procedure. First Assignment— Study of the Processing Procedures The first specific assignment given the Auditor General was to study the claim processing procedures con cerning all disbursements except payroll in the State Controller's office, and in representative agencies. This 136 Finance. Minor weaknesses were discussed and settled dur ing the reviews with agencies’ staffs ; the more significant ones were presented and discussed in twenty-seven reports, which were addressed to the agencies Involved stating corrective recommendations. Through December 31, 1958, the replies received from agencies indicated that there was prompt concurrence with about 75 per cent of the recommendations made by the Auditor General. Other agencies agreed to make further studies and take action accordingly. In several cases, the review of the internal con trol disclosed deficiencies in accounting methods and procedures and recommendations were made to the Division of Organization and Cost Control of the Department of Finance to study and correct the deficiencies* The importance of the review of the internal con trol system was that the Auditor General became familiar with weaknesses and so aware of how, when, and where to devote special attention when carrying on the audits. On the other hand, as a result of the review made and the recommendations submitted, personnel involved in control activities strengthened their surveillance to increase 137 safeguards. In spite of the fact that the plan of organi zation as a whole is important for internal control purposes, the Auditor General limited his consideration to the segregation of duties at the lower levels of the State Government* He considered segregation of duties the essence of an effective internal control system, one to be organized in such a way that persons who are responsible for the custody of the assets and conduct of the operations have no participation in the keeping of, and no access to, the records which provide accounting control over the assets and the operations. The review of the control system used by agencies of the California State was discussed by Mr* Merrifield before the National Legislative Conference, in 1960. He emphasized three points :^ 1. To have internal control requires the interest and cooperation of management. A system must be planned to include the essential characteristics of a satisfactory ^William H. Merrifield, "Techniques of Internal Control Surveys and Evaluation of Internal Controls," a paper delivered to the National Legislative Conference, August 30, September 1 and 2, I960. 139 study was requested originally by the Senate Finance Committee which based its demand on information of the Legislative Analyst that the State Controller was perform ing much unnecessary work in his Bureau of Claim Audits and on a previous study of the Department of Finance \diich had suggested reduction of staff from forty-eight to twenty-four positions. This study^ included tests in all departments and the report, presented to the Committee on February 28, 1957 , made three main recommendations which were based on propositions that the procedures prescribed by the Depart ment of Finance for the Processing of claims provided an adequate system of internal control over expenditures, and as a consequence, the checking performed by the Controll er's Bureau of Claim Audits was an unnecessary duplication The Department of Finance agreed with this conclusion and estimated that the consequent annual savings were around $250,000. Those three main recommendations stated that: %illiam H. Merrifield, First Report of the Joint Legislative Audit Committee (Sacramento: California Printing Office, 1958), p. 18. 1. The final approval of claims prior to payment should be given by chief administrative officers of the agencies. 2. The State Controller should be relieved of liability regarding warrants drawn in reliance upon certification of claim schedules by authorized employees of agencies. 3. The examination of such claims by the State Controller should be limited to determine that: (a) corresponding appropriations were available, (b) they were properly certified, and (c) sufficient unexpended balances were available. The Audit Committee transmitted the report to the Finance Committee recommending appropriate action and requesting instruction to introduce adequate legislation. In the 1957 Session, Assemblyman Caldecott introduced bills xdiich were referred to the Assembly Ways and Means Committee, vhich did not vote thmn out. Audit Reports ^ In general, the reports Issued by the Auditor General follow a presettled pattern. Few variations are 141 used in specific situations. The more complex reports contain representations regarding the scope and findings; findings are expressed in the form of an opinion concerning the fairness with which the financial statements present the financial position of the fund or agency as of the end of the period audited and the results of operations, for the period. When an opinion is not expressed, the reason for the omission is given. In addition to scope and opinion, some complex reports contain historical data on the funds or agencies audited, comments on operation, and significant balance sheet items, and comments on internal control findings and on other relevant matters. The standard scope and opinion paragraphs of each report are drawn according to the recommendation of the American Institute of Vertified Public Accountants; We have examined the balance sheet of a fund of the State of California as of June 30, 19— , and the related statement of revenues, expenditures, and unappropriated surplus for the year then ended. Our examination was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying balance sheet and statuent of revenues, expenditures, and 142 . unappropriatred surplus present fairly the financial position of a fund of the State of California as of June 30, 19— , and the results of its operations for the year then ended in confomity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.^ However, these two paragraphs have been modified in some audit reports when a qualified opinion or denial of opinion was required because: (1) generally accepted accounting principles had not been followed in recording transactions of the fund, (2) limitation of scope did not oermit issuance of unqualified opinion, or (3) adequate Informative disclosure of material items had not been made in the financial statement. The Joint Legislative Audit Committee transmits the reports to the agencies audited and ask their comments on the Auditor General’s recommendations* The auditor is then directed to follow up corrective action taken by agencies, or to make additional audits to determine the extent of corrective action taken when the case is more important * However, the more serious deficiencies reported are presented in hearings before the Committee. ‘ ^Ibld.. p. 24. 143 Special cases involving qualified opinions, dis claimed opinions, and unfeasibility of audits will be presented next* Reports with Qualified Opinions The following situations reported by the Auditor General are elucidative of the qualified opinion report; 1* In the case of the "Report on Examination of Surplus Money Investment Fund, Office of the State Treasurer,"^ the opinion was qualified because no system atic amortization of discount or premium over the term of ownership of the securities was recorded on the books of the fund. Discounts on securities purchased had been taken into income and securities and were carried at par, and the principal of the fund was distributed as income to the participating funds. 5 "Report on Examination of Surplus Money Invest ment Fund, Office of the State Treasurer, for the Year Ended June 30, 1957," prepared by the Office of the Auditor General, June 5, 1958. (Mimeographed.) 144 2. In the case of the "Report on Examination of Real Estate Fund,"^ opinion was qualified as to the con sistency of application of generally accepted accounting principles. In 1956, legislation was enacted placing renewal of license fees on a four-year basis. This change caused substantial distortion in the relationship between revenues and expenditures for that fiscal year. 3. In the case of the "Report on Examination of 7 Board of Pilot Commissioners’ Special Fund," opinion was qualified because of a limitation on the verification of the recorded revenues of the fund vÉiich are based on pilotage fees received by the pilots and reported by the San Francisco Bar Pilots Association #iich is owned and operated by licensed pilots. ^"Report on Examination of Real Estate Fund, for the Year Ended June 30, 1957," prepared by the Office of the Auditor General and issued in mimeograph form on August 15, 1958. '"Report on Examination of Board of Pilot Commissioners* Special Fund for the Year Ended June 30, 1957," prepared by the Office of the Auditor General and issued in mimeograph form on September 19, 1958. 145 Reports with Disclaimed Opinions Three cases are elucidative of reports with dis claimed opinions : 1. In the case of the "Report on Examination of State Printing Pund,"^ an opinion on the fairness of the financial statements was disclaimed because; (a) the scope of examination did not include tests of physical inventory quantities or observance of physical count of inventory at the beginning and end of the year, (b) generally accepted principles of accounting were not observed or consistently applied in some cases, and (c) financial statements did not give informative disclosure* Charges for services were made at prices in excess of cost and earnings of $3,700,000 were accumulated and used to aument capital of the fund without legislative approval. "Report on Examination of State Printing Fund for the Year Ended June 30, 1957," prepared by the Office of the Auditor General and issued in mimeograph form on April 3, 1958. 146 2. In the case of the "Shorthand Reporters * Fund,"^ the financial statements did not present fairly the financial position of the fund and the results of operations because $10,380 of collections were recorded as deferred income instead of revenue. 3. In the case of the "Report on Examination of 10 the California Olympic Commission," the financial stateaents did not present fairly the financial position of the fund for that period because: (a) work in progress totaling $968,000 had been omitted from the balance sheet, (b) encumbrances of $3,600,000 had been shown in the financial statements as expenditures and as accounts payable, and (c) accounts receivable totaling $333,000 had been omitted from the balance sheet and a like amount of reimbursanents had been excluded from statements of expenditures. ^"Shorthand Reporters’ Fund for the Year Ended June 30, 1957," prepared by the Office of the Auditor General and issued in mimeograph form on June 16, 1958. ^^"Report on Examination of the California Olympic Commission from September 7, 1955 to June 30, 1958,*' prepared by the Office of the Auditor General and issued in mimeograph form on November 12, 1958. 147 Example of Unfeasible Audit An example of impossible audit faced by the Office of the Auditor General is given in the "Report on Special Investigation of the Accounting Procedures and Records of 11 the Department of Water Resources" (seventy-one pages), and submitted to the Audit Committee at its meeting of September 22, 1958. Several audit procedures were applied during several weeks before it was concluded that an audit of the Department was unfeasible. However, the examination done indicated the nature of some of the deficiencies in the accounting records. The Auditor General recommended that the Department of Finance study the problem and provide corrective means. In fact, at the meeting of the Audit Committee of October 24 and December 5, 1958, the Department of Finance people presented reports about the progress made in the ^^"Report on Special Investigation of the Account ing Procedures and Records of the Department of Water Resources for the Year Ended June 30, 1958," prepared by the Office of the Auditor General and issued in mimeo graph form on August 20, 1958. 148 new accounting system being designed for the Department of Water Resources to be put in effect in the near future* Meanwhile, the Auditor General was instructed to keep in touch with setting up of the new system* In fact, the assistance provided by the Department of Finance made possible the Auditor General’s audit of the Department of Water Resources. On Dec^ber 30, 1960, a forty-two page study was issued, i.e., "Report on Examination of the Department of Water Resources, for the year ended June 30, 1959." Co-ordination of Auditing In 1958, it became clear to both the Auditor General and the Chief of the Audits Division that a plan to co-ordinate their offices * activities was indispensable to secure timely audit coverage that would permit the Audits Division to comply with the requirements of their operations and to allow the Office of the Auditor General to make timely reports to the Legislature. So, on October 6, 1958, in a meeting of those two officials and their top staff, a special committee of four audit officials was appointed. This smaller group was to formulate a general 149 plan under which these objectives could be achieved and specifically to draw a plan for the two audit agencies for the year ending June 30, 1959, to give audit coverage and to permit the Office of the Auditor General to express an opinion about the financial statements pf the General Fund of the State of California as of that date. On October 15, the committee presented their plan in a letter addressed to both office heads, which was discussed in a joint meeting held on November 3. The following policy was adopted; 1. Instead of making quarterly examinations, the Audits Division should adopt a June 30 ending date for audits with few exceptions. 2. The Audits Division should examine one half of the agencies* records as of June 30, 1959, and the other half as of June 30, 1960 (law requires it to examine each agency at least once every two years). 3. The Auditor General should select for examina tion on June 30, 1959, agencies not scheduled for examina tion by the Audits Division in the same year. He should be able to cover at least one half of the agencies not examined by the Audits Division, that is, one fourth of 150 the total agencies each year. So, about three-fourth of all agencies should be covered every year by both offices and the Offices of the Auditor General should cover all agencies once each four years and whenever possible, agencies should be examined more frequently according to the needs. 4. The Audits Division should attempt to complete its first task by November 30, 1959, and notify the Auditor General of its findings. 5. The Auditor General should review those find ings for the purpose of determining the adequacy of the auditing done by the Audits Division and the adequacy of the financial statements of the agencies. 6. The Auditor General should review the State Controller’s Annual Report and the financial statements included in the Governor’s budget; he should compare also agencies* statements for the year with the Controller’s report and the budget. The basic advantages offered by the plan can be summarized as follows; (1) duplication of auditing was avoided by the two agencies; (2) each agency would not be audited twice for the same transactions; (3) a minimum of 151 interference should occur in the Audits Division auditing; (4) the Auditor General could have a basis for review of agencies’ activities not examined in a particular year; and (5) with the staffs available, the widest audit coverage was possible providing timely reporting of audit findings and possibility of completion of a large percent age of audits before the end of the fiscal year. The adoption of the coordination plan made it possible for the Office of the Auditor General to finish the audits for the year ended June 30, 1958 in the begin ning of 1959; then, the audit staff could start interim work on audits for the year ended June 30, 1959, concen trating on agencies supported by the General Fund to give the Auditor General elements for an opinion on their financial statements. Other improvements brought up by plan were in that the Audit Committee was able to strengthen its control by: (1) continued reviews of the findings and recommendations of the Auditor General as to improvements in internal control and other accounting processes, (2) being in posi tion to make recommendations for statutory changes designed to avoid conflict with generally accepted accounting 152 principles, (3) recommendation of elimination of unnecessary expenditure of funds resulting from cumbersome organization and procedures, and (4) calling the attention of Other committees and agencies to possible economies and improvements as shown by the audit findings* Volume of Work Done On December 31, 1960, besides several special assignments requested by legislative organs, nineteen reports were being prepared in the Office of the Auditor General on studies done in that year* In spite of the fact that the office began its operations in the second half of 1956, the first reports started coming out only in 1957. Table I shows how the Office of the Auditor General conducted its activities in relation to the areas of governmental activities examined. Working Time in Hours In four and one-half years, activities in the Office of the Auditor General have consumed over 180,000 hours of work, according to data gathered from the afore mentioned biennial reports of the Audit Committee, on REPORTS TABLE I ISSUED IN FOUR YEARS 153 Year Reports Pages Statements Appendixes 1957 10 139 12 3 1958 65 688 232 14 1959 36 654 224 5 1960 41 610 138 43 Totals 172 2291 606 65 Source: Reports of the Joint Legislative Audit Committee issued December 31, 1958, and December 31, I960, 154 assignments classified by functions and shown on the following pages (Tables II and III). Cost of the Auditing Work As it was mentioned before, funds for the operation of both Joint Legislative Audit Committee and Office of the Auditor General are alloted from the Assembly Contingent Fund and the Senate Contingent Fund in equal amounts. The statement of their expenditures, for each year ended December 31, are indicated in Table IV according to data from the first and second Reports of the Joint Legislative Audit Committee, issued December 31, 1958 and 1960. 155 TABLE II REPORTS ISSUED BY FUNCTION IN FOUR YEARS Function 1957 1958 1959 1960 Legislative 1 2 1 3 Judicial mm m m 1 m m Executive mm mm «a» 1 General Administration mm 1 4 mm Agriculture mm 1 1 mm Corrections 2 2 5 9 Education mm 4 10 6 Employment m m 1 «aa Fiscal Affairs 1 8 8 5 Highway Patrol mm 1 — - Industrial Relations mm 2 - Justice 1 — «a» 1 Mental Hygiene 1 1 2 4 Motor Vehicles mm 1 2 mm Natural Resources 2 1 12 2 Public Utilities «a» 1 1 «a» Public Works 1 4 4 10 Regulation and Licensing 35 «a» Social Welfare mm «a» 2 «aa* Veterans Affairs 1 1 mm Mi s ce 1 laneous * - — 2 • • Totals 10 65 56 41 Source: Data gathered from the reports issued by the Joint Legislative Audit Committee on December 31, 1958, and December 31, 1960. M M M o vO MT CJv vO vO 1 00 CA 1 Ov r- I 1-4 4t 1 1-4 CA OV ^ 00 00 CA tA O CA t lA Ov O CM I tA CM 1-4 1-4 00 CM O lA rs. r 1 Mf CO o\ o 1 1 tA CM 1-4 « CM CA 1-4 m G \ VO tA s § •H 4 j I r>.cocoONr>«.0<fiAiA rH r*^ C M € J V I r>. 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MtcAOtAr^Of-.r'- 0 0 P W A CMCMCAr-i-M-cTuAr*- C A O N v OCAi H O üAt -4 cM I ' ^ 0 0 1 - 4 0 \ 0 % m m m • V x - \ 1 - 4 C M C A C A t - 4 V O C A 1 0 , 0 1 (0 o 0 v O B co On • r i V O C M t - 4 C M 0 0 C M v O O O 0 0 C O 1 - 4 4 4 UA 1 C A C A r - * 0 0 t r > • i 4 0 O n 1 r-4 1 - 4 C A 1 - 4 1 - 4 MO O r4 • * C O r 4 O Mf P C A Xw/ * 4 O M M 04 © M © 40 M M g M Q ) O M © S P A H 8 ^ p p p © M 4 nd 00 © UA P ON © 1 - 4 XI 0 0 4 4 0 © t - 4 • r t 0 0 C A C O 0 © P < 0 P © Ü © . 0 C O -|4 C l g < 0 ( 0 O M co O c o $ 4 A O 0) * 1 4 i H © < 0 0 4 3 0 V 4 C d W 0 © O 0 i-4O44tOCd<dM40 44 p - O O C O 1 - 4 ^ 44 44 O O p 0 *i4 .F4dcdTi0t-4<0 E - i 0 O 4 J 4 3 ( % < 0 O O < D 0 O Ü ü * 3 ' H Ç O q ) C O © 0 ^ 1 - 4 4 4 0 1 - 4 © 0 0 Ü ü 0 t - 4 q j 1 - 4 P p c i $ 4 Î 4 * i 4 «ri 1 - 4 q i V i < D P O 0 r H 0 *i4 <0 o y 4 4 4 4 4 3 4 3 00044 c o B 0^00000) -H B :s;îzîCMf4iO£îco>S O O CM CA 1 -4 CA o r4 r-- 0 0 A- 1 vO •©* LA LA 1 CM ON 1 -4 vO 00 <t 1 -4 iH F- 1 -4 ON CM 00 r- ON tA Mi" 0 0 CA CA LA lA O o o vO Mf CM ON 1 -4 -d* v£> LA VO 1 -4 VO CM CM <o- CM O 0 0 fM CM ON 00 CM CM CM -d- UA VO lA 00 CM r- CA VO F— ON 1 - 4 CM 1 -4 LA 1 -4 1 -4 LA CM 0 0 CM CM 8 CO < ON CA CM iH ON Mf r-s 1 -4 lA 0 0 O r - 4 1^ tA 0 0 r- CA O ON ON M ON I * > P & t 1 -4 (A O LA rH CM LA M O 1 -4 CM CM CM m M •CO m CO < CA 1 -4 CA CA ON ON H s V0 O vO v£> CA O vO 5 *A r- 00 CM rH VO UA ON 1 -4 ON UA iH CM ON ê LA ■co m § © U 0 P © O P © © © © Ü © 0 •H 0 U © > © 0 © U CL P 0 © X •H © © m 1 A 0 44 0 co M © 0 0 CL © © 44 © X •i 4 1 -4 •H 44 m U © iP •H 0 > A •H 1 -4 © g, R 0 © u 0 O cr* CO H CO o m 158 CM vû CA r4 rH 5 A CM CO 44 g I CO CO IP 00 t -4 r4 00 CM <o- o a vO vO CM CO CO O N m ON CM a ( J N lA CM CM C3N VO lA ON lA -CO CO ON p Pk CHAPTER VI CONCLUSION % e present chapter is a summary of the former chapters. It reviews briefly the whole study stressing the main issues involved in the history of the organization and functions of the Office of the Auditor General. For convenience of presentation, this chapter summarizes a sequence of important events which coincide with the previously established purpose of the study: important points of the history of the organization and functions of the Office of the Auditor General, placement of the office in the organization of the Legislature, the internal structure of the office, and comments on the work done by the office till the end of the year of 1960. Distant and near events which paved the way for the creation of the Office of the Auditor General were discussed previously. The first of these events was the provision for a Comptroller and an Auditor to be the chief accounting officer of the Federal Government. That decision was taken by the First Congress in 1789 when it 160 established the Treasury Department and within it created those functions with the primary duty to provide for the Constitutional safeguard of the national purse to the effect that "no money shall be drawn from the Treasury but in consequence of appropriations made by the law." The auditing function remained in the Executive Branch until 1921 i&dien it was transferred to the Legisla tive. In fact, the General Accounting Office was then established to perform, among other activities, the one of auditing and reporting directly to the Congress on the financial functioning of the various agencies operated by the Executive Branch. Through the years, the General Accounting Office proved to be an effective administrative tool. Before its creation, the Congress established the appropriations but had no means of its own of controlling the financial activities of the Executive Branch; it had to rely on the Branch’s own statements. Therefore, the existence of the General Accounting Office has closed such a gap, providing the Legislature with means of its own to exert direct control upon the expenditure of the money appropriated by law. Thus, through their representatives in the Congress, 161 taxpayers have been given the power to watch the Executive Branch financial activities to make sure that it allocates the money appropriated according to their will, stated in the law. The fact remains that the General Accounting Office is, in itself, of the utmost importance because it represents the concretization of the recognition on the part of the Executive Branch of the need for the Congress to have an independent office of its own, having the power to examine the financial activities of the Executive Branch and reporting pertinent findings directly to the Congress. Such recognition is the historical background #iich has provided support for the establishment of audit ing agencies at the state level for Legislature’s own use in examining Executive’s financial activities. In the State of California, since the early 30s, the Legislative Branch realized that an auditing office of its own was necessary to help the Legislature to carry on its functions more effectively. However, the first attempt made by the Legislature to have the financial organization of the state surveyed and analyzed occurred only in 1936. By that time, the California Conference on 162 Government and Taxation-Interim Committee of Twenty-five was organized and retained a consulting firm to conduct a survey of the governmental organization. Among the recommendations made by the consulting firm was the crea tion of an office whereby independent audits would be made of the activities of the Executive Branch by an auditor appointed by and directly responsible to the Legislature. From 1937 through 1953, the California Legislature attempted, in each regular session, to establish such an office, but attempts either failed of enactment or were not approved by the Governor. The main fact behind those failures was that the Legislature was trying to promote governmental reorganiza tion in such a way that the Executive Branch feared it would be deprived of its own auditing services vhich the Governor considered indispensable to carry on the Executive Branch’s responsibilities. The Legislature was acting as though it had realized that only one auditing service was necessary and that it should be placed within the Legislature. On the other hand, the Governor main tained that the Executive Branch could not manage properly its financial activities without an auditing service of 163 its own. Had Legislature proposed to establish its own auditing office without interfering with the Executive Branch auditing services, the Governor would not have had any strong objection besides the one regarding overlapping of functions and increase of expenditures. In 1941, the Governor vetoed Assembly Bill No. 1129 providing for an independent fiscal post-audit of all government agencies by an office directly responsible to the Legislature because— as he stated— the enactment of such a bill would divest the Executive Branch of auditing functions and deprive it of the means necessary for its performance. In 1941, reacting against the Governor’s veto, the Assembly and Senate approved a Joint Rule creating the Joint Legislative Budget Committee, \diich was kept in existence by yearly reaffirmation of the Joint Rule for a period of ten years. Within the committee was created the function of the Legislative Auditor ; this nomenclature was changed to Legislative Analyst in 1957. Only in 1951 was a statutory basis for the Joint Legislative Budget Committee and the Legislative Analyst provided. The main function of the Legislative Analyst was to provide the 164 Committee with factual information regarding the State’s Budget, revenues, expenditures, and organization, and to make pertinent recommendations. In spite of the title, Legislative Auditor, previously adopted, its functions consisted largely of research and advisory services con cerning legislation and administration. Auditing tech niques were employed only to a limited extent. So the title. Legislative Analyst, would have been a more precise denomination from the very beginning* In 1953, a concurrent resolution was approved by both houses making funds available for the purpose of undertaking a study of the post-audit function of the State of California. The Legislative Analyst was given the task of preparing a framework for such a study, T&ich later on served as basis for the contract made with the firm recommended by the Committee on Cooperation with State Government of the Society of Certified Public Accountants: Price Waterhouse and Company. On November 30, 1954, Price Waterhouse and Company presented to the Joint Legislative Budget Committee the three-volume report of the survey contracted on March 24. 165 Among other things, the report discussed the organization of the financial control systea, stressing authority and division of responsibility within it. The functions of the State Controller, Department of Finance, and State Treasurer were analyzed to show the responsibil ity of each one in the system as a whole. The deficiencies of the financial control organization were indicated and its implications were discussed, to stress the fact that while the Governor had means to control the State’s financial operations, the Legislature did not have effec tive means of its own to check the Executive Branch’s financial operations. Finally, recommendations were made regarding the structure of the financial control system as a whole. Among these recommendations was one suggest ing the establishment of an auditing office, to be headed by an Auditor General, to serve at the pleasure of the Legislature. Recommendations were also made with respect to the powers of the Auditor General and to his position relative to the Legislature. At the time that Price Waterhouse and Company surveyed the financial control system of the State of California, the Legislature had only one organ by means 166 ■ s of ^ich it could play its part in the system. This organ was the Joint Legislative Budget Committee whose power was practically limited to review an analysis of proposed budgets and past performances. To carry on its functions, the Committee had at its service a group of analysts headed by the Legislative Analyst ^ose main function was to provide the Committee with all the technical informa tion necessary for the Committee’s effective performance. On the other hand, to play its part in the financial con trol system, the Executive had management and fiscal control concentrated in the Governor, State Controller, State Treasurer, Board of Equalization, Department of Finance, and the Franchise Tax Board formed by the State Controller, Chairman of the Board of Equalization, and Director of Finance. (Since, however, the Controller and Treasurer were elective positions, the Governor had no control oVer them.) the State lacked a main office in \diich fiscal responsibility could be placed and which was in a position to report authoritatively and fully upon the State's financial transactions, because treasury, accounting, and auditing-were highly segregated. Authority and responsi- 167 bility for accounting, auditing and fiscal matters were spread over five major areas. Inherent powers conferred by the State Constitution upon the Governor, State Controller, and State Treasurer were one of the fundamental difficulties responsible for the main deficiencies of the financial control system. As the State*s activities increased, the Governor needed more comprehensive means to cope with the Executive’s respon sibilities. The Legislature tried to meet the require ments of the Executive, from time to time, by prescribing duties and powers augmenting or restricting financial and accounting powers of the fiscal offices without circumvent ing the Constitution. In this way, the State Controller, State Treasurer, and the Department of Finance were given or assumed a wide variety of tasks and authority, some of which were interdependent and some conflicting. As to the auditing activities, the position of the State of California could be summed up as; (1) internal auditing procedures were provided within the Executive Branch as means to assure the Governor and his departmental directors that financial transactions had been reliably recorded and properly reported with respect to the 168 operations of their responsibilities; (2) no similar procedures were made available to the Legislature to pro vide it with independent auditing; and (3) with but few exceptions, examinations were not being made by public accountants for the purpose of reporting either to the chief executive, the Legislature or the electorate. In order to overcome those deficiencies, the Price Waterhouse report made several recommendations to the Joint Legislative Budget Committee #iich, if approved in total, would imply a complete reorganization of the State’s financial control systan involving constitutional amendment. However, as it was predicted that such a reorganization would be difficult to be approved, the recommendations were grouped to indicate only those changes which should be done to accomplish a certain amount of reorganization. The fundamental recommendation was the establish ment of an office of an auditor appointed by and respon sible to the Legislature to; (1) examine annually the financial statements prepared by the Executive, (2) report annually to the Legislature upon those financial state ments, and (3) perform such other related assignments as 169 may be requested by the Legislature. As corollary to the basic recommendation, the Office of the State Controller should be abolished, the Department of Finance should have its functions altered according to the new needs, and all management of finances, budgeting, and accounting for and reporting of financial transactions should be coordinated within one department under the direction of the Governor. It was recommended also that the auditor should be assisted and counseled by a committee specially formed to provide him with the best means of obtaining early consideration of remedial and other recommendations which might arise from auditor’s findings. Such committee should have knowledge to consider the general scope of the audit program and to evaluate the recommendations made by the auditor. The committee’s role should be restricted to consideration of auditing, accounting, and financial reporting but it should not be precluded from review and comment on forms of organization, funds, or legislation having a direct relation with accounting and financial reporting. 170 The report of Price Waterhouse and Company was delivered to the Joint Legislative Budget Committee on November 30, 1954, and forwarded to the Legislative Analyst to prepare its summary \^ich was shortly returned to the Committee. The Governor signed, seven months later. Bill No* 1540, approved by the Legislature one month before, ^diich created the Joint Legislative Audit Committee and the Office of the Auditor General. Therefore, about twenty years had passed since the Legislature first started proclaiming its need for an independent auditing office. Essentially, Bill No. 1540 recognized two points of paramount importance: (1) the Executive Branch needs special and periodic audits of the agencies and their accounting and reporting systems by means of internal auditing and (2) independent auditing is needed also by the Legislative Branch to assure sound fiscal and administrative policy, under the responsibility of the Office of the Auditor General, placed under the direction of the Joint Legislative Audit Committee. The Committee was given a broad range of power to make possible effective auditing of the State’s agencies, to appoint the Auditor General and a deputy, to determine 171 the policy of the Auditor, to ascertain facts, to review reports, to take action regarding the reports, and to make recommendations to the Legislature related to the State, its revenues and expenditures, its departments, sub divisions, and agencies. The Office of the Auditor General was permanently located in Sacramento but the Auditor is authorized to establish offices anywhere in the State whenever he deems it necessary to carry on his duties. He also was given the power to examine all books, accounts, and other records and property of any organ of the State, as well as account ing procedures and internal auditing performance, which he considers necessary to disclose all material facts for the use of both Legislative and Executive Branches to establish and maintain sound fiscal and administrative policy. It is the Auditor’s duty: (1) to examine annually the financial statenents prepared by the Executive Branch and to report annually to the Legislature as to the adequacy of these financial statements in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding fiscal year. 172 and (2) to make special audits and investigations of any agency deemed necessary by the Legislature or any of its committees. The audit policy adopted by the Committee for the Auditor was based on the statement that it was the Audi tor’s responsibility to take all the steps he thinks necessary to examine and report annually upon the financial statements prepared by the Executive Branch to check the correctness of such statements. This implies review of the procedures used by internal auditors and, to a certain extent, also a review of their actual performance on the job as well as some examination of original records. Careful consideration was given to the relation ship between the Office of the Auditor General and the Department of Finance, the State Controller, and the Legislative Analyst. The Auditor General was given the power to review all the auditing performed by the govern ment agencies, but the responsibility for the principal auditing itself was placed within the Executive Branch. This was the fundamental orientation established to guide the relationship between the Legislature and the Executive Branch as far as auditing is concerned. As to the 173 relationship within the Legislature itself, that is, between the Office of the Auditor General and the Legisla tive Analyst, it was established that the Legislative Analyst was responsible for reviewing the performance of the Executive Branch as reflected in management and organ ization. On the other hand, the Auditor General was given the responsibility for the auditing process of reviewing the techniques and reporting statements of the Executive Branch. In October of 1955, the Joint Legislative Audit Committee began acting to select the Auditor General but the selection was done only in February of 1956. In June 1956, the Deputy Auditor General was selected. The organization of the Office of the Auditor General was initiated after the Auditor General was selected. The recruitment of the audit staff started in 1956, after the selection of the Auditor General. Between the second half of 1956 and the end of 1960, several staff members were hired and some of them separated. By the end of 1960, the audit staff totaled twenty-five account ants; fourteen of them were certified public accountants, four of them serving as audit managers and ten as senior 174 accountants. Of the remaining eleven, three served as semi-senior and eight as junior accountants. The administrative functions of the Office were settled in this way: (1) the Deputy Auditor General directs and coordinates the activities performed in the Office; (2) each audit manager directs several jobs in process at the same time, visits agencies being audited and reviews working papers; and (3) each senior or semi senior accountant undertakes auditing activities and supervises junior accountants. The final review of a report is done by both the Deputy and the Auditor. The former covers such matters as appropriateness and materiality of comments, agreement with accounting principles, brevity of the report without loss of clarity, and disclosure of material facts. The Auditor finally reviews the report mainly to determine if he is in accord with the statements made and whether it is written in a way that the average reader can understand it. Before the present chapter is concluded, the work done by the Office of the Auditor General will be reviewed briefly. One of the Auditor’s first task was the study 175 of the internal control systan, planned by the end of 1956 and carried out during the next two years. This work disclosed numerous deficiencies, most of them caused by failure to apply prescribed procedures. Minor defi ciencies were discussed and corrected in direct contact with agency staffs. The more significant ones were dis cussed in reports addressed to the agencies involved and contained also the corrective recommendations. About 75 per cent of those recommendations had prompt concurrence; the remaining required later studies and accomodations on the part of the agencies. As the work was being performed, it became clear that a coordination plan was indispensable to guide the auditing done by the Auditor General and the Audits Division of the Department of Finance. By the end of 1958, such a plan was concluded; working duplication was avoided, and interference was reduced to a minimum, the Auditor could engage in reviewing agencies not examined recently by the Audits Division, and a better use of the resources available to provide larger and more effective results. 176 It is recalled that in 1956, no auditing work was performed as that was the year of planning and settlement of the Office whose cost for that period was $59,569.00. The first auditing reports put out by the Office started coming out in 1957. In the four-year period from 1957 to 1960, the Office prepared 172 reports and sixty-five appendices containing 606 statements. The total cost of the Office for this four-year period was $1,052,813.00* This concludes the present study. As it was stated in Chapter I, the purpose of this study was (1) to relate the history of the organization and functions of the Office of the Auditor General, (2) to show its place in the organization of the California Legislature, (3) to show its internal structure, and (4) to describe the work \ done by the Office until the end of the year of 1960. The appraisal of the importance of the new organ of the California Legislature was not proposed in the purpose of the present study because this can only be achieved by means of an expert analysis and evaluation of the work done in the Office of the Auditor General. Analysis and evaluation of that work are in themselves complex and long enough to constitute a field for another 177 study which can be undertaken perhaps by a student of accounting with special interest in auditing. Such appraisal will require, first of all, expert analysis of all reports issued by the Office of the Auditor General in a given period of time. The data gathered as a result of such analysis will provide the raw material for the evaluation of the importance of the Office* These are the reasons why evaluation was excluded from the purpose of the study. This limitation, however, does not prevent the author from expressing his opinion regarding some points which he believes that fit the closing of this chapter. The review of the internal control system finally demonstrated that the financial operation conducted by the California Government had a number of weak points, sane of them old and some newer ones. The old weaknesses persisted and the newer ones were added through the years. This indicates that the system lacked protective devices* As a result of the review done by the Auditor General, all the weak points were identified and corrective measures were recommended and adopted by the agencies involved* Other agencies, aware of such weaknesses and 178 their possible consequences, were in a position to take action to prevent them from being introduced in their operation* However, it has not been appraised how much ham those weaknesses did and would have done to the administration if they had been allowed to last longer. Another comment is that the review of an internal control system is the initial step of an audit program, but it is also a continuous process. As audits of the various agencies are made, opportunity is created to observe and verify how much the changes made have worked to improve controls, thus making it possible for the auditor to make adjustments in his previous recommenda tions whenever they are required in the interest of safeguard. This has been done by the Auditor General since 1957, thus strengthening considerably the wdiole financial control system of the California Government. In regard to the auditing activities in them selves, the existence of the Office of the Auditor General contributed greatly to broaden the audit coverage provided by the Audits Division of the Department of Finance and was a decisive factor in creating a situation of permanent alertness among officials responsible for the control of 179 the financial operations carried on in their agencies* This has considerably strengthened general surveillance which, on the other hand, has been another factor of paramount iiqportance in blocking improper allocation of money and in making disclosure of defalcations certain* The Audits Division directly profited from the activities of the Office of the Auditor General not only because of the help given to the audit service in general, but also because those activities shook the rout ini sm in which auditing was irmersed, bringing dynamism and awareness to it. It is indicated in Chapter V that in the Report on Special Investigation of the Accounting Procedures and Records of the Department of Water Resources, for the year ended June 30, 1958, issued August 20, 1958, and sutmitted to the Audit Committee at its meeting of Septem ber 22, 1958, the Auditor General stated that several audit procedures were applied during several weeks before it was concluded that an audit of that department was unfeasible. Only after the Department of Finance, following recommendations of the Auditor General, studied the situation and provided corrective means was it possible for the Auditor General to audit the Department 180 of Water Resources. This example is a clear indication that the audit service performed within Executive Branch lacked effectiveness. However, this is no longer possible because all the government agencies* heads know that their financial operations will be checked also by a specialized agency of the Legislative Branch. This is the state of awareness now prevailing which is also, perhaps, the greatest benefit brought to the California administration by the existence of the Office of the Auditor General. From the political point of view, the establish ment of the Office of the Auditor General was the final settlement to end a long struggle between the Legislative and the Executive Branches, \diich brought the Legislature a feeling of security represented by the assurance that the people’s representatives had acquired an effective means to watch the Executive Branch’s managoaent of the people’s money and to see that the revenues are allocated in the conformity with the people’s will stated in the law. The Office of the Auditor General has armed the California Legislature with the technical apparatus deemed necessary to check the Executive’s financial operations and to report independently, directly pointing out find 181 ings and making recommendations. Therefore, the creation and operation of the Office of the Auditor General is the factor which estab lished the balance of power between the Legislative and Executive Branches as far as the control of the Executive’s financial operations is concerned. Finally, the Office of the Auditor General represents also a factor of social tranquility because it is the instrument used by the California taxpayers, through their elected representatives in the Legislature, to watch and check the financial transactions performed by the Executive Branch. BIBLIOGRAPHY BIBLIOGRAPHY A. PRIMARY SOURCES Accounting and Auditing Developments in the United States. A report published by United States General Account ing Office. Washington, U.C.: Government Printing Office, 1957. "Audit Reports of Government Corporations and Agencies." 83rd Congress, Senate Report 861. Washington, U.C.: Government Printing Office, 1957. California Assembly Interim Committee on Government Reorganization. Report on Governmental Reorganization. Sacramento: California State Printing Office, 1951. California Government Code. Sacramento: California State Printing Office, n.d. Financial Management in the Federal Government. 87th Congress, 1st Session, Senate, Document No. 11. A Report Prepared by the Staff of the Committee on Government Operations, U. S. Senate. Washington, U.C.! Government Printing Office, 1961. Internal Control. Special Report by the Committee on Auditing Procedure of the American Institute of Accountants, November, 1948. New York: American Institute of Accountants, 1949. Merrifield, William H. First Report of the Joint Legisla tive Audit Committee. Sacramento: California State Printing Office, 1958, "Techniques of Internal Control Surveys and Evaluations of Internal Controls." A paper delivered to the National Legislative Conference, August 30, September 1 and 2, 1960. 184 Post, A. Alan. Comments on Scone of Auditing for Joint Legislative Audit Committee. Sacramento : California State Printing Office, October 24, 1935. _______. "Post-Audit Study— Progress Report." A report for internal use of the Legislative Budget Committee, September 14, 1953. (Mimeographed.) . "Progress Report to the Legislative Budget Committee." A report for internal use of the Legislative Budget Committee, November 6, 1953. . "Summary Statement of Chief Recommendations Contained in Report of Price Waterhouse and Ccmqjany to Joint Legislative Budget Committee." Report prepated for use of the Committee, December 3, 1954. (Mimeographed. ) . The Function of the Legislative Auditor. Sacramento; California State Printing Office, 1956. Price Waterhouse and Company. "Accounting and Auditing for the State of California." Report of a survey for the Joint Legislative Budget Committee, 1954. (Mimeographed. ) "Report on Examination of Board of Pilot Commissioners’ Special Fund for the Year Ended June 30, 1957." Prepared by the Office of the Auditor General, September 19, 1958. (Mimeographed.) "Report on Examination of Real Estate Fund, for the Year Ended June 30, 1957." Prepared by the Office of the Auditor General, August 15, 1958. (Mimeographed.) "Report on Examination of State Printing Fund for the Year Ended June 30, 1957." Prepared by the Office of the Auditor General, April 3, 1958. (Mimeographed.) "Report on Examination of Surplus Money Investment Fund, Office of the State Treasurer, for the Year Ended June 30, 1957." Prepared by the Office of the Auditor General, June 3, 1958. (Mimeographed.) 185 "Report on Examination of the California Olympic Commission from September 7, 1955, to June 30, 1958." Prepared by the Office of the Auditor General, November 12, 195 8. (Mimeographed.) "Report on Special Investigation of the Accounting Proce dures and Records of the Department of Water Resources for the Year Ended June 30, 1958." Prepared by the Office of the Auditor General, August 20, 1958. (Mimeogrphed. ) "Review of the Audit Reports of the Comptroller General." 84th Congress, Senate Report 1572. Washington, D.C.: Government Printing Office, 1957. "Shorthand Reporters* Fund for the Year Ended June 30, 1957." Prepared by the Office of the Auditor General, June 16, 1958. (Mimeographed.) B. REPORTS PREPARED BY OFFICE OF THE AUDITOR GENERAL, STATE OF CALIFORNIA 1. Legislative. Judicial, and Executive "Report on Study of Claim Processing Procedures in Office of State Controller and in Selected State Agencies." Prepared for the Senate Finance Committee, February 20, 1957. 33 pp. "Accounting Records and Procedures for the Assembly of the State of California." Prepared for the Assembly Rules Committee, February 4, 1958. (In two parts.) "Financial Statements for San Francisco Bay Area Facilities as of June 30, 1957." Prepared for the Senate Interim Committee on Bay Area Problems, September 5, 1958. 33 statements. 186 "Division of Beaches and Parks of the Department of Natural Resources, Property Acquisitions for the Period from July 1, 1945 to June 30, 1958." Prepared for the Beaches and Parks Subcommittee of the Assembly Committee on Conservation, Planning, and Public Works, November 20, 1958* 9 pp. "Report on Examination of Legislators* Retirement Fund, Year Ended June 30, 1957," February 11, 1959. 8 pp. "Report on Examination of Judges’ Retirement Fund, Year Ended June 30, 1958," August 31, 1959. 11 pp. "Joint Progress Report by the Department of Finance and the Office of the Auditor General on an Examination of Receipts and Expenditurs of the California Olympic Commission (a State agency) and the Organizing Committee, VIII Olympic Winter Games, Squaw Valley, California, U.S.A., 1960, Incorporated (a nonprofit California corporation)." (Printed in Assembly Journal. February 29, 1960.) Prepared in compliance with Senate Bill 1, 1960 First Extraordinary Session. 5 pp. "Report on Review of Governor’s proposals for state government reorganization, and their effect on various funds of the State" (July 14, 1960). 6 pp. "Report on Relocation of Facilities in the Vicinity of the Proposed Oroville Dam and Reservoir." Prepared for the Assembly Interim Committee on Water, November 21, 1960. 33 pp. "Report on Examination of the California Olympic Commission and Organizing Committee, VIII Olympic Winter Games, Squaw Valley, California, U.S.A., 1960, Incorporated, for the Period from September 7, 1955 through October 31, 1960." Prepared by Department of Finance and Office of the Auditor General, December 30, 1960. 32 pp. 187 2. General Administration "Report on Review of the System of Internal Control, Secretary of State," February 25, 1958. 5 pp. "Report on Examination of the Office of the Secretary of State, Year Ended June 30, 1958," June 17, 1959. 10 pp. "Report on Examination of State Employees* Retirement Fund, Year Ended June 30, 1957," February 26, 1959. 23 pp. "Report on Examination of Old Age and Survivors* Insurance Revolving Fund, State Employees* Retirement System, Year Ended June 30, 1957," February 27, 1959. 6 pp. "Report on Examination of State Employees* Retirement System, General Fund, Year Ended June 30, 1957," March 3, 1959. 5 pp. 3. Corrections a. Department of Corrections "Report on Review of the System of Internal Control in the Correctional Industries Revolving Fund,” December 4, 1957. 12 pp. "Report on Review of the System of Internal Control, Department of Corrections," April 18, 1958. 12 pp. "Report on Examination of Correctional Industries Revolving Fund, Year Ended December 31, 1957,** May 27, 1959. 20 pp. "Report on Examination of the Department of Corrections, Departmental Administration, Year Ended June 30, 1959," May 3, 1960. 13 pp. 188 b. Penal Institutions "Report on Examination of California Institution for Women, Year Ended June 30, 1959," Deconber 30, 1959# 9 pp. Report on Examination of State Prison at San Quentin, Year Ended June 30, 1959," February 29, I960. 10 pp. "Report on Examination of State Prison at Folsom, Year Ended June 30, 1960," November 10, 1960. 7 pp. "Report on Examination of Deuel Vocational Institution, Year Ended June 30, 1960," December 2, 1960. 4 pp. "Report on Examination of Correctional Training Facility, Year Ended June 30, 1960," December 9, 1960. 9 pp. "Report on Examination of California Institution for Men, Year Ended June 30, 1960," December 13, 1960. 7 pp. c* Department of the Youth Authority "Report on Review of the System of Internal Control, Department of Youth Authority," February 25, 1958. 9 pp. "Report on Examination of Department of the Youth Authority^ Departmental Administration, Year Ended June 30, 1958," June 30, 1959. 6 pp. d. Correctional Schools "Report on Examination of Fricot Ranch School for Boys, Year Ended June 30, 1958," July 1, 1959. 8 pp. "Report on Examination of Preston School of Industry, Year Ended June 30, 1958," July 2, 1959. 8 pp. 189 "Report on Examination of Ventura School for Girls, Year Ended June 30, 1958," July 8, 1959. 7 pp. "Report on Examination of Fred C. Nelles School for Boys, Year Ended June 30, 1959," April 15, 1960. 8 pp. "Report on Examination of Paso Robles School for Boys, Year Ended June 30, 1959," April 21, 1960. 9 pp. "Report on Examination of Los Guilucos School for Girls, Year Ended June 30, 1959," April 26, 1960. 7 pp. 4. Education a. Department of Education "Report on Review of the System of Internal Control in the Division of Departmental Administration, Department of Education," August 13, 1958. 7 pp. "Report on Examination of Department of Education— Depart mental Headquarters, Year Ended June 30, 1958," May 29, 1959. 3 pp. "Report on Examination of Surplus Educational Property Revolving Fund, Year Ended June 30, 1958," February 2, 1959. 8 pp. "Report on Examination of State School Fund, Year Ended June 30, 1958," July 30, 1959. 7 pp. "Report on Examination of State School Fund, Year Ended June 30, 1959," July 7, 1960. 12 pp. b. State Colleges and Technical Schools "Report on Review of the System of Internal Control in the Division of State Colleges and Teacher Education," August 8, 1958. 18 pp. 190 "Report on Examination of Sacramento State College, Year Ended June 30, 1957," Decanber 18, 1958. 9 pp. "Report on Examination of Fresno State College, Year Ended June 30, 1958," February 16, 1959. 11 pp. "Report on Examination of San Jose State College, Year Ended June 30, 1958," February 18, 1959. 10 pp. "Report on Examination of Chico State College, Year Ended June 30, 1958," February 20, 1959. 10 pp. "Report on Examination of San Francisco State College, Year Ended June 30, 1958," April 29, 1959. 16 pp. "Report on Examination of San Diego State College, Year / Ended June 30, 1959," December 30, 1959. 10 pp. "Report on Examination of Humboldt State College, Year Ended June 30, 1959," February 10, 1960. 10 pp. "Report on Examination of Long Beach State College, Year Ended June 30, 1959," February 11, 1960. 10 pp. "Report on Examination of California Maritime Academy, Year Ended June 30, 1960," November 1, 1960. 6 pp. c. Miscellaneous "Report on Review of the System of Internal Control in the Division of Special Schools and Services," August 11, 1958. 16 pp. "Report on Examination of California Industries for the Blind Manufacturing Fund, Year Ended June 30, 1958," May 29, 1959. 3 pp. "Report on Examination of Oakland Orientation Center for the Blind, Year Ended June 30, 1958," October 27, 1959. 5 pp. 191 "Report Oïl Examination of Accounting Records and Procedure^ State Teachers’ Retirement System," January 25, 1960, 38 pp. "Report on Examination of State Teachers* Retirement System— General Fund, Year Ended June 30, 1958," July 18, 1960. 7 pp. 5. Fiscal Affairs a. State Controller "Report on l^amination of Unclaimed Property Fund, Year Ended June 30, 1958," March 24, 1959. 9 pp. "Report on Examination of Special Deposit Fund, Year Ended June 30, 1958," Decenber 30, 1959. 5 pp. "Report on Examination of School Land Fund, Year Ended June 30, 1959," October 13, 1960. 11 pp. "Report on Review of the Annual Report of the State Con troller, Year Ended June 30, 1959," November 3, 1960. 26 pp. "Report on Examination of State Construction Program Fund, Year Ended June 30, 1959," December 30, 1960. 5 pp. b. Board of Equalization "Report on Review of the System of Internal Control, State Board of Equalization," December 2, 1957. 22 pp. "Report on Misuse of State-owned Automobiles, Board of Equalization," January 28, 1960. 7 pp. 192 "Report on Examination of the State Board of Equalization, Year Ended June 30, 1960," December 30, 1960. 89 pp. c. Department of Finance "Report on Review of the System of Internal Control in the Administrative Division of the Department of Finance,*^ March 11, 1958. 12 pp. "Report on Review of the System of Internal Control in the State bands Division of the Department of Finance," March 7, 1958. 7 pp. "Report on Examination of the State Lands Act Fund, Year Ended June 30, 1958," September 22, 1959. 2 pp. "Report on Examination of State Printing Fund, Year Ended June 30, 1957," April 3, 1958. 31 pp. "Report on Examination of Purchasing Revolving Fund, Year Ended June 30, 1957," September 24, 1958. 14 pp. "Report on Examination of Investment Fund, Year Ended June 30, 1958," April 22, 1959. 10 pp. "Report on Examination of Sixth District Agricultural Association Fund, Year Ended June 30, 1958,*’ Septmiber 3, 1959. 6 pp. "Report on Examination of the State Fair Fund, Year Ended June 30, 1958," January 30, 1959. 3 pp. "Report on Examination of Fair and Exposition Fund, Year Ended June 30, 1958," May 6, 1959. 9 pp. "Report on the operation of the Fair and Exposition Fund under statutes amended by the 1959 Legislature, and information on the operations of district, county, and special fairs for the calendar year 1958," November 30, 1959. 7 pp. 193 Franchise Tax Board "Report on Review of the System of Internal Control in the Franchise Tax Board," January 27, 1958. 14 pp. ''Report on Examination of the Franchise Tax Board, Year Ended June 30, 1958," July 1, 1960. 24 pp. e. State Treasurer "Report on Review of the System of Internal Control, Office of the State Treasurer," June 5, 1958. 16 pp. "Report on Examination of Surplus Money Investment Fund, Year Ended June 30, 1957," June 5, 1958. 9 pp. "Report on Review of the System of Internal Control, Department of Mental Hygiene," December 3, 1957. 47 pp. "Supplementary Report on Review of System of Internal Control, Department of Mental Hygiene," February 13, 1958. 18 pp. "Report on Examination of Metropolitan State Hospital, Year Ended June 30, 1958," April 10, 1959. 15 pp. "Report on Examination of Stockton State Hospital, Year Ended June 30, 1958," April 14, 1959. 23 pp. "Report on Examination of Atascadero State Hospital, Year Ended June 30, 1959," May 11, 1960. 11 pp. 194 Report on Examination of Porterville State Hospital, Year Ended June 30, 1959," July 11, 1960. 6 pp. "Report on Examination on DeWitt State Hospital, Year Ended June 30, 1959," July 13, 1960. 18 pp. "Report on Examination of Guardianship Section, Department of Mental Hygiene, Year Ended June 30, 1959," October 25, 1960. 13 pp. 7. Motor Vehicles "Report on Review of the System of Internal Control, Department of Motor Vehicles," January 15, 1958. 6 pp. "Report on Examination of Motor Vehicle Fund, Year Ended June 30, 1957," February 4, 1959. 40 pp. "Report on Examination of Motor Vehicle License Fee Fund, Year Ended June 30, 1957," February 4, 1959. 8 pp. 8. Natural Resources a. Department of Fish and Game "Report on Review of the System of Internal Control, Department of Fish and Game," December 3, 1957. 11 pp. "Report on Examination of Fish and Game Preservation Fund, Year Ended June 30, 1958," June 23, 1959. 10 pp. "Report on Exmaination of Wildlife Restoration Fund, Year Ended June 30, 1958," June 26, 1959. 6 pp. 195 b. Department of Natural Resources "Report on Review of the System of Internal Control, Department of Natural Resources," December 10, 1957. 9 pp. "Report on Examination of the Department of Natural Resources, Division of Administration, General Fund, Year Ended June 30, 1957," May 8, 1959. 5 pp. "Report on Examination of State Park Contingent Fund, Year Ended June 30, 1957," June 30, 1959. 5 pp. "Report on Examination of Division of Beaches and Parks— State Park Maintenance Fund, State Park Fund, State Beach Fund, Year Ended June 30, 1957," June 30, 1959. 10 pp. "Report on Examination of the Division of Mines, General Fund, Year Ended June 30, 1957," May 5, 1959. 5 pp. "Report on Examination of Petroleum and Gas Fund, Year Ended June 30, 1957," June 30, 1959. 5 pp. "Report on Examination of Soil Conservation Development Fund, Year Ended June 30, 1957," March 18, 1959. 10 pp. "Report on Examination of the Division of Soil Conserva tion, General Fund, Year Ended June 30, 1957," May 5, 1959. 4 pp. "Report on Examination of the California Olympic Commission Period from September 7, 1955, through June 30, 1958," November 12, 1958. 12 pp. "Report on Examination of State Water Pollution Control Fund, Year Ended June 30, 1957," March 11, 1959. 8 pp. 196 "Report on Examination of the Water Pollution Control Board, General Fund, Year Ended June 30, 1957," Hay 4, 1959. 5 pp. "Report on Examination of the Recreation Commission, Year Ended June 30, 1959," June 23, I960, 4 pp. "Report on Examination of California Public Outdoor Recreation Planning Committee, Year Ended June 30, 1959," June 23, 1960. 5 pp. 9. Public Works a. Department of Public Works— Division of Architecture "Report on Examination of Architecture Revolving Fund, Year Ended June 30, 1957," December 12, 1958. 53 pp. "Report on Examination of Architecture Public Building Fund, Year Ended June 30, 1957," March 26, 1959. 15 pp. II Report on Examination of Division of Architecture, General Fund, Year Ended June 30, 1957," April 17, 1959. 10 pp. b. Department of Public Works— Division of Highways "Report on Review of System of Internal Control in the Division of Highways," February 12, 1958. 19 pp. "Report on Review of Contract Procedures, Part I, Division of Highways," December 1, 1959. 43 pp. 197 "Report on Review of Contract Procedures, Part II, Division of Highways," December 16, 1959# 36 pp. "Report on Review of Contract Procedures, Part III, Division of Highways," January 23, 1960. 23 pp. "Report on Review of Contract Procedures, Supplement to Part III, Division of Hi#iways," February 2, 1960. 12 pp. "Report on Review of Contract Procedures, Second Supple ment to Part III, Division of Highways," March 24, 1960. 31 pp. "Report on Review of Contract Procedures, Part IV, Division of Highways," January 20, 1960. 27 pp. "Report on Review of Contract Procedures, Part V, Division of Highways," July 8, 1960. 12 pp. "Report on Review of Contractors* Claims on Highway Con struction Contracts, Division of Highways," January 23, 1960. 24 pp. "Report on Review of Unbalanced Bidding on Highway Con struction Contracts, Division of Highways," Decenber 29, 1959. 5 pp. "Report on Misuse of State-owned Automobiles, Division of Highways," January 26, 1960. 6 pp. "Report on Payroll and Expense Reporting Practices, Division of Highways, Los Angeles Rights-of-Way Section," January 29, 1960. 9 pp. "Report on Letter Dated June 20, 1960, From Associated General Contractors of America, Division of High ways," August 18, 1960. 7 pp. 198 c. San Francisco Port Authority "Report on Review of the System of Internal Control, San Francisco Port Authority," May 6, 1958. 11 pp. d. Department of Water Resources "Report on Special Investigation of the Accounting Pro cedures and Records of the Department of Water Resources for the Year Ended June 30, 1958," August 20, 1958. 71 pp. 'Report on Examination of the Department of Water Resources, Year Ended June 30, 1959," December 30 I960. 42 pp. 10. Regulation and Licensing a. Department of Investment "Report on Examination of State Banking Fund, Year Ended June 30, 1957," June 9, 1958. 8 pp. "Report on Examination of Insurance Fund, Year Ended June 30, 1957," June 10, 1958. 12 pp. "Report on Examination of Real Estate Education and Research Fund, July 3, 1956, throu^ June 30, 1957," August 18, 1958. 2 pp. "Report on Examination of Savings and Loan Inspection Fund, Year Ended June 30, 1957," February 17, 1958. 11 pp. 199 b. Board of Pilot Commissioners 'Report on Examination of Board of Pilot Commissioners* Special Fund, Year Ended June 30, 1957," September 19, 1958. 6 pp. c. Department of Professional and Vocational Standards "Report on Review of the System of Internal Control, Department of Professional and Vocational Standards," February 20, 1958. 12 pp. "Report on Examination of Division of Administrative Pro cedure of the Department of Professional and Voca tional Standards, Year Ended June 30, 1957,** October 15, 1958. 6 pp. "Reports on examinations of funds of the Department of Professional and Vocational Standards for the Year Ended June 30, 1957:" Professional and Vocational Standards Fund, August 14, 1958. 11 pp. Accountancy Fund, August 4, 1958. 7 pp. Architectural Examiners Fund, June 18, 1958. 6 pp. Athletic Commission Fund, September 10, 1958. 7 pp. Barber Examiners* Fund, July 31, 1958. 7 pp. Cemetery Fund, June 19, 1958. 6 pp. State Board of Chiropractic Examiners* Fund, July 21, 1958. 7 pp. 200 Professional Engineer’s Fund, July 31, 1958. 7 pp. Contractors License Fund, June 11, 1958. 8 pp. Board of Cosmetology’s Contingent Fund, June 17, 1958. 8 pp. State Dentistry Fund, June 30, 1958. 7 pp. Dry Cleaners* Fund, July 30, 1958. 8 pp. Funeral Directors and Eabalmers Fund, July 29, 1958. 7 pp. Bureau of Furniture and Bedding Inspection Fund, September 18, 1958. 8 pp. Board of Landscape Architects Fund, June 16, 1958. 6 pp. Contingent Fund of the Board of Medical Examiners, October 8, 1958. 10 pp. Physical Therapy Fund, June 19, 1958. 6 pp. Board of Nurse Examiners Fund, June 19, 1958. 8 pp. State Optometry Fund, June 27, 1958. 6 pp. Pharmacy Board Contingent Fund, July 8, 1958. 7 pp. Private Investigators and Adjusters Fund, June 18, 1958. 7 pp. Shorthand Reporters Fund, June 16, 1958. 7 pp. Registered Social Workers* Fund, June 20, 1958. 6 pp. Structural Pest Control Fund, April 7, 1958. 6 pp. Veterinary Medicine Contingent Fund, July 29, 1958. 7 pp. 201 Vocational Nurse Examiners Fund, June 19, 1958. 7 pp. Yacht and Ship Brokers Fund, July 10, 1958. 6 pp. 11. Miscellaneous "Report on Review of the System of Internal Control, Department of Justice," December 6, 1957. 10 pp. "Report on Review of the System of Internal Control, Public Utilities Commission," January 3, 1958. 9 pp. "Report on Review of System of Internal Control, State Compensation Insurance Fund," January 8, 1958. 11 pp. "Report on Review of the System of Internal Control, Department of California Highway Patrol," January 15, 1958. 8 pp. "Report on Review of System of Internal Control, Department of Industrial Relations," January 17, 1958. 9 pp. "Report on Review of the System of Internal Control, Department of Agriculture," February 7, 1958. 10 pp. "Report on Review of the System of Internal Control, Department of Veterans Affairs," February 19, 1958. 8 pp. "Report on Study of Accounting for State Capital Outlay Projects," March 9, 1959. 16 pp. "Report on Examination of the Department of Veterans Affairs, Year Ended June 30, 1958," March 31, 1959. 39 pp. "Report on Review of Auditing of Subventions to Local Governments in California," May 13, 1959. 70 pp. 202 "Report on Examination of Public Utilities Commission, Year Ended June 30, 1958," May 20, 1959. 12 pp. "Report on Examination of Department of Sucial Welfare, Year Ended June 30, 1958," August 21, 1959. 4 pp. "Report on Examination of Citizens* Advisory Committee on Aging, Year Ended June 30, 1958," September 1, 1959. 3 pp. "Report on Examination of Department of Agriculture, Year Ended June 30, 1958," September 10, 1959. 9 pp. "Report on Examination of the Department of Justice, Year Ended June 30, 1959," October 21, 1960. 14 pp. -t7nlversity~of “Southern~Calif“ orniir

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Asset Metadata

Creator Sant' Ana, Gasparino José de (author)

Core Title History of the organization and functions of the Office of the Auditor General of the State of California

School School of Public Administration

Degree Master of Science

Degree Program Public Administration

Degree Conferral Date 1963-02

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag OAI-PMH Harvest,Social Sciences

Format application/pdf (imt)

Language English

Contributor Digitized by ProQuest (provenance)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c39-122022

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Legacy Identifier EP64718.pdf

Dmrecord 122022

Document Type Thesis

Format application/pdf (imt)

Rights Sant'Ana, Gasparino Jose de

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Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA