2007 California Education Code Article 21. Direct Service Contract Audit Requirements

CA Codes (edc:8448-8450)

8448.  As used in this article:
   (a) "Financial and compliance audit" means a systematic review or
appraisal to determine each of the following:
   (1) Whether the financial statements of an audited organization
fairly present the financial position and the results of financial
operations in accordance with generally accepted accounting
principles.
   (2) Whether the organization has complied with laws and
regulations that may have a material effect upon the financial
statements.
   (b) "Public accountants" means certified public accountants, or
state licensed public accountants.
   (c) "Independent auditors" means public accountants who have no
direct or indirect relationship with the functions or activities
being audited or with the business conducted by any of the officials
or contractors being audited.
   (d) "Generally accepted auditing standards" means the auditing
standards set forth in the financial and compliance element of the
"Government Auditing Standards" issued by the Comptroller General of
the United States and incorporating the audit standards of the
American Institute of Certified Public Accountants.
   (e) "Direct service contract" means any contract with any public
or private entity for child care and development programs, resource
and referral programs, and programs contracting to provide support
services as defined in Section 8208.
   (f) "Nonprofit organization" means an organization described in
Section 501(c)(3) of the Internal Revenue Code of 1954 which is
exempt from taxation under Section 501(a) of that code, or any
nonprofit, scientific, or educational organization qualified under
Section 23701d of the Revenue and Taxation Code.
   (g) Annually, there shall be a single independent financial and
compliance audit of organizations that contract with the state under
a direct service contract.  Any such audit shall include an
evaluation of the accounting and control systems of the direct
service contractor and of the activities by the contractor to comply
with the financial requirements of direct service contracts received
by the contractor from the state agency.  The financial and
compliance requirements to be reviewed during the audit shall be
those developed and published by the State Department of Education in
consultation with the Department of Finance.  Audits carried out
pursuant to this section shall be audits of the contractor rather
than audits of individual contracts or programs.  In the case of any
contractor that receives less than twenty-five thousand dollars
(,000) per year from any state agency, the audit required by this
section shall be conducted biennially, unless there is evidence of
fraud or other violation of state law in connection with the direct
service contract.  The cost of the audit may be included in direct
service contracts.
   The organization receiving funds from the state shall be
responsible for obtaining the required financial and compliance
audits of the organization and any subcontractors, except for direct
service subcontracts and other subcontracts exempt from State
Department of Education review, as agreed to by the Departments of
Finance and General Services.  The audits shall be made by
independent auditors in accordance with generally accepted auditing
standards.  The audit shall be completed by the 15th day of the fifth
month following the end of the contractor's fiscal year.  A copy of
the required audit shall be filed with the State Department of
Education upon its completion.  In the event an audit is not filed,
the State Department of Education shall notify the organization of
the contract violation.  The audit report filed shall be an integral
part of the direct service contract file.
   (h) (1) Nothing in this article limits the authority of the State
Department of Education to make audits of direct service contracts.
However, if independent audits arranged for by direct service
contractors meet generally accepted auditing standards, the State
Department of Education shall rely on those audits and any additional
audit work shall build upon the work already done.
   (2) Nothing in this article precludes the state from conducting,
or contracting for the conduct of, contract performance audits which
are not financial and compliance audits.
   (3) Nothing in this article limits the state's responsibility or
authority to enforce state law or regulations, procedures, or
reporting requirements arising pursuant thereto.
   (4) Nothing in this article limits the responsibility of the State
Department of Education to provide an independent appeal procedure
according to the provisions of the Administrative Procedure Act
(Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of
Title 2) of the Government Code.



8450.  (a) All child development contractors are encouraged to
develop and maintain a reserve within the child development fund,
derived from earned but unexpended funds.  Child development
contractors may retain all earned funds.  For the purpose of this
section, "earned funds" are those for which the required number of
eligible service units have been provided.
   (b) Earned funds may not be expended for any activities proscribed
by Section 8406.7.  Earned but unexpended funds shall remain in the
contractor's reserve account within the child development fund and
shall be expended only by direct service child development programs
that are funded under contract with the department.
   (c) Notwithstanding subdivisions (a) and (b), a contractor may
retain a reserve fund balance for a resource and referral program,
separate from the balance retained pursuant to subdivision (b), not
to exceed 3 percent of the contract amount.  Funds from this reserve
account may be expended only by resource and referral programs that
are funded under contract with the department.
   (d) Notwithstanding subdivisions (a) and (b), a contractor may
retain a reserve fund for alternative payment model and certificate
child care contracts, separate from the reserve fund retained
pursuant to subdivisions (b) and (c).  Funds from this reserve
account may be expended only by alternative payment model and
certificate child care programs that are funded under contract with
the department.  The reserve amount allowed by this section may not
exceed either of the following, whichever is greater:
   (1) Two percent of the sum of the parts of each contract to which
that contractor is a party that is allowed for administration
pursuant to Section 8276.7 and that is allowed for supportive
services pursuant to the provisions of the contract.
   (2) One thousand dollars (,000).
   (e) Each contractor's audit shall identify any funds earned by the
contractor for each contract through the provision of contracted
services in excess of funds expended.
   (f) Any interest earned on reserve funds shall be included in the
fund balance of the reserve.  This reserve fund shall be maintained
in an interest-bearing account.
   (g) Moneys in a contractor's reserve fund may be used only for
expenses that are reasonable and necessary costs as defined in
subdivision (n) of Section 8208.
   (h) Any reserve fund balance in excess of the amount authorized
pursuant to subdivisions (c) and (d) shall be returned to the
department pursuant to procedures established by the department and
reappropriated as second-year funds consistent with Section 8278.
   (i) Upon termination of all child development contracts between a
contractor and the department, all moneys in a contractor's reserve
fund shall be returned to the department pursuant to procedures
established by the department, and reappropriated as second-year
funds consistent with Section 8278.
   (j) Expenditures from, additions to, and balances in, the reserve
fund shall be included in the agency's annual financial statements
and audit.