February 2015 Committee on School Finance Permanent School Fund Item 2
Proposed Amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter B, Texas Education Agency Audit Functions, §109.23, School District Independent Audits and Agreed-Upon Procedures
(Second Reading and Final Adoption)
February 13, 2015
COMMITTEE ON SCHOOL FINANCE/PERMANENT SCHOOL FUND: ACTION
STATE BOARD OF EDUCATION: ACTION
SUMMARY: This item presents the proposed amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter B, Texas Education Agency Audit Functions, §109.23, School District Independent Audits and Agreed-Upon Procedures, for second reading and final adoption. The proposed amendment would address provisions relating to a school district or other educational entity hiring an independent auditor. The proposed amendment would also add and clarify other administrative provisions and make technical edits. No changes are recommended since approved for first reading.
STATUTORY AUTHORITY: Texas Education Code (TEC), §§7.102(c)(32), 44.001, 44.007, and 44.008.
EFFECTIVE DATE: The proposed effective date of the proposed amendment to 19 TAC §109.23 would be 20 days after filing as adopted with the Texas Register in order to implement the latest policy in a timely manner. Under the TEC, §7.102(f), the State Board of Education (SBOE) must approve the rule action at second reading and final adoption by a vote of two-thirds of its members to specify an effective date earlier than the beginning of the 2015-2016 school year.
PREVIOUS BOARD ACTION: The SBOE adopted 19 TAC §109.23 effective September 1, 1996. The rule was last amended effective October 13, 2002. The rule was included in a four-year rule review that was adopted with no changes by the SBOE at its July 2014 meeting. A discussion item regarding the proposed amendment to 19 TAC §109.23 was presented to the Committee on School Finance/Permanent School Fund during its September 2014 meeting. The proposed amendment was approved for first reading and filing authorization at the November 2014 SBOE meeting.
BACKGROUND INFORMATION AND SIGNIFICANT ISSUES: During its July 2014 meeting, the SBOE adopted the four-year review of its rules in 19 TAC Chapter 109, Budgeting, Accounting, and Auditing. During the discussion of that review, an SBOE member asked whether there was a provision requiring school districts to periodically change independent auditors. A Texas Education Agency (TEA) staff member responded that there was no such provision, and the SBOE member requested the staff member to bring a proposed rule to that effect to the September 2014 meeting for discussion. Concurrently, staff members in the TEA offices of Legal Services and School Finance identified a need for a rule to help the TEA ensure that school districts and other educational entities hire independent auditors who are properly qualified to perform their duties. The proposed amendment to 19 TAC §109.23 presented to the Committee on School Finance/Permanent School Fund at its September 2014 meeting for discussion and at its November 2014 meeting for first reading and filing authorization addressed both of these provisions. However, based on public testimony and discussion during its November meeting, the committee made changes to remove from the proposal the requirements for a five-year rotation and request for qualifications process. Attachment II reflects the proposed amendment to 19 TAC §109.23 as amended by the committee and approved by the SBOE during its November 2014 meeting for first reading and filing authorization, as follows.
The proposed amendment would clarify the requirements for a school district or other entity to hire an independent auditor to conduct an audit and give an opinion on the annual financial and compliance report of a school district, governmental charter school, open-enrollment charter school, nonprofit service provider, county education district, or regional education service center. The proposed amendment would also move the auditors' requirements, which are currently dispersed in various sections of the Financial Accountability System Resource Guide(FASRG), into a single location so the requirements are easy to find. The existing provisions in the rule would also be edited for plain language.
New subsection (d) would state that a school district or other entity must hire at its own expense an independent auditor and would set forth the criteria for the independent auditor and the associated certified public accountancy (CPA) firm. New subsection (e) would state that the TEA division responsible for financial compliance may require a district or other entity to select a new audit firm if at any time the division finds a deficiency in a working paper review.
No changes are recommended since approved for first reading.
FISCAL IMPACT: The TEA has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed rule action.
However, there may be economic costs for small businesses and microbusinesses to comply with the proposed rule action. It is estimated that the proposed amendment would affect between 1-100 small businesses and 1-100 microbusinesses (businesses with 20 or fewer employees) for annual membership dues and training fees for auditing firms that are not currently members of the American Institute of Certified Public Accountants (AICPA) Governmental Audit Quality Center (GAQC). Costs would vary depending on the number of certified public accountants (CPAs) in the firm. If a firm has 1-9 CPAs, the annual cost would be $190; for 10-49 CPAs, the annual cost would be $300; for 50-90 CPAs, the annual cost would be $600; for 100-499 CPAs, the annual cost would be $1,800; and for 500-2,999 CPAs, the annual cost would be $6,000. A microbusiness would not be more adversely impacted than a small business.
In accordance with the Texas Government Code, §2006.002, the TEA conducted a regulatory flexibility analysis. The TEA considered the following three alternatives to minimize the adverse impact on small businesses and microbusinesses.
1. The SBOE could decide not to adopt the rule. If the rule were not adopted, then local entities would continue the same process under which they currently operate. However, this alternative does not improve audit quality and, therefore, is not viable.
2. The TEA division responsible for financial compliance could perform more working paper reviews of the audits that school district auditors perform. However, this alternative is not viable because increasing the working paper reviews by the TEA would take away resources and time from other functions of the division.
3. The SBOE could decide not to require the firm to join the AICPA GAQC. This alternative is not viable because not requiring membership in the AICPA GAQC could result in districts hiring less qualified auditing firms.
PUBLIC AND STUDENT BENEFIT: The proposed amendment would strengthen the TEA's ability to ensure that school districts and other entities account for and use their state funding in accordance with generally accepted accounting principles (GAAP) and that their auditors adhere to generally accepted auditing standards (GAAS) and generally accepted government auditing standards (GAGAS), thereby making the best use of funding to benefit students in Texas.
PROCEDURAL AND REPORTING IMPLICATIONS: The proposed amendment would have no new procedural and reporting implications.
LOCALLY MAINTAINED PAPERWORK REQUIREMENTS: The proposed amendment would have no new locally maintained paperwork requirements.
PUBLIC COMMENTS: Following the November 2014 SBOE meeting, notice of the proposed amendment was filed with the Texas Register, initiating the official public comment period. Following is a summary of public comments received at the time this item was prepared. A summary of any additional public comments received regarding the proposal will be provided to the SBOE during the February 2015 meeting.
Comment. The assistant superintendent for finance at Atlanta Independent School District commented that limiting the number of years that a district could retain the same auditor would be costly and is unnecessary. The commenter stated that costs would increase because new auditors have to perform a comprehensive study that continuing auditors do not have to perform at the same level. The commenter added that changing auditors increases the time it takes to perform the audit and could increase costs by as much as 25-30%. The commenter also stated that changing auditors increases demand on school district staff and could cause the district staff to have to work overtime. The commenter noted that AICPA rules of independence and other current rules are sufficient to maintain auditor independence. Additionally, the commenter stated that requiring auditor rotations may increase the chance of a bad audit because first-year audits have a higher percentage of failure.
Agency Response. The agency agrees. The proposal approved by the SBOE at its November 2014 meeting for first reading and filing authorization does not make it mandatory for school districts to rotate auditors.
Comment. The financial services manager at Region 14 Education Service Center commented that districts should rotate auditors every five years. The commenter stated that an auditor may become complacent when retained at a district for too long. The commenter also stated that auditors should not have multiyear contracts with a district and that the local board should review the audit annually for overall satisfaction.
Agency Response. The agency disagrees. The proposal approved by the SBOE at its November 2014 meeting for first reading and filing authorization does not make it mandatory for school districts to rotate auditors due to costs to school districts; however, the board maintained the provision that allows the TEA to require a district to change auditors if deficiencies are found.
ALTERNATIVES: None.
OTHER COMMENTS AND RELATED ISSUES: None.
MOTION TO BE CONSIDERED: The State Board of Education:
By an affirmative vote of two-thirds of the members of the board, approve for second reading and final adoption the proposed amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter B, Texas Education Agency Audit Functions, §109.23, School District Independent Audits and Agreed-Upon Procedures, with an effective date of 20 days after filing as adopted with the Texas Register.
Staff Members Responsible:
Lisa Dawn-Fisher, Associate Commissioner
School Finance / Chief School Finance Officer
David Marx, Director
Financial Compliance
Attachments:
I. Statutory Citations (PDF, 23KB)
II. Text of Proposed Amendment to 19 TAC Chapter 109, Budgeting, Accounting, and Auditing, Subchapter B, Texas Education Agency Audit Functions, §109.23, School District Independent Audits and Agreed-Upon Procedures (PDF, 22KB)