Existing law requires a county auditor to make or contract with a certified public accountant or public accountant to make an annual audit of the accounts and records of every special district within the county for which an audit is not otherwise provided, as specified. Existing law authorizes a special district to replace this annual audit with a financial review, or, until January 1, 2027, an agreed-upon procedures engagement or an annual financial compilation of the special district, if specified conditions are met, including that the special districts annual revenues do not exceed $150,000. Until January 1, 2027, upon receipt of the financial review, agreed-upon procedures engagement, or financial compilation, existing law authorizes a county auditor to appoint a certified public accountant or a public accountant to conduct an audit of the special district, as specified. Existing law prohibits a special district from replacing the annual audit requirement with an annual financial compilation for more than 5 consecutive years, after which existing law requires the special district to use specified procedures.

This bill would extend the January 1, 2027, repeal date referenced above to January 1, 2037, and would increase the revenue cap described above to $250,000. After replacing the annual audit requirement with an annual financial compilation for 5 years, the bill would authorize a special district with annual revenues of less than $50,000 to replace the annual audit with a financial review, as described above.

Existing law requires a county auditor to make or contract with a certified public accountant or public accountant to make an annual audit of the accounts and records of every special district within the county for which an audit is not otherwise provided, as specified. Existing law authorizes a special district to replace this annual audit with a financial review, or, until January 1, 2027, an agreed-upon procedures engagement or an annual financial compilation of the special district, if specified conditions are met, including that the special districts annual revenues do not exceed $150,000. Until January 1, 2027, upon receipt of the financial review, agreed-upon procedures engagement, or financial compilation, existing law authorizes a county auditor to appoint a certified public accountant or a public accountant to conduct an audit of the special district, as specified. Existing law prohibits a special district from replacing the annual audit requirement with an annual financial compilation for more than 5 consecutive years, after which existing law requires the special district to use specified procedures.

This bill would extend the January 1, 2027, repeal date referenced above to January 1, 2037, and would increase the revenue cap described above to $250,000. After replacing the annual audit requirement with an annual financial compilation for 5 years, the bill would authorize a special district with annual revenues of less than $50,000 to replace the annual audit with a financial review, as described above.

Existing law requires a county auditor to make or contract with a certified public accountant or public accountant to make an annual audit of the accounts and records of every special district within the county for which an audit is not otherwise provided, as specified. Existing law authorizes a special district to replace this annual audit with a financial review, or, until January 1, 2027, an agreed-upon procedures engagement or an annual financial compilation of the special district, if specified conditions are met, including that the special districts annual revenues do not exceed $150,000. Until January 1, 2027, upon receipt of the financial review, agreed-upon procedures engagement, or financial compilation, existing law authorizes a county auditor to appoint a certified public accountant or a public accountant to conduct an audit of the special district, as specified. Existing law prohibits a special district from replacing the annual audit requirement with an annual financial compilation for more than 5 consecutive years, after which existing law requires the special district to use specified procedures.

This bill would remove extend the January 1, 2027, repeal date referenced above, above to January 1, 2037, and would increase the revenue cap described above to $250,000. After replacing the annual audit requirement with an annual financial compilation for 5 years, the bill would authorize a special district with annual revenues of less than $50,000 to replace the annual audit with a financial review, as described above.

Existing law requires a county auditor to make or contract with a certified public accountant or public accountant to make an annual audit of the accounts and records of every special district within the county for which an audit is not otherwise provided, as specified. Existing law authorizes a special district to replace this annual audit with a financial review, or, until January 1, 2027, an agreed-upon procedures engagement or an annual financial compilation of the special district, if specified conditions are met, including that the special districts annual revenues do not exceed $150,000. Until January 1, 2027, upon receipt of the financial review, agreed-upon procedures engagement, or financial compilation, existing law authorizes a county auditor to appoint a certified public accountant or a public accountant to conduct an audit of the special district, as specified.

This bill would remove the January 1, 2027, repeal date referenced above, and would increase the revenue cap described above to $250,000.

 UNFINISHED BUSINESS  

Bill No: SB 992

Author: Niello (R)

Amended: 6/23/26

Vote: 21

SENATE LOCAL GOVERNMENT COMMITTEE: 7-0, 4/29/26

AYES: Durazo, Choi, Arreguín, Ashby, Cervantes, Laird, Seyarto

SENATE FLOOR: 38-0, 5/26/26

AYES: Allen, Alvarado-Gil, Archuleta, Arreguín, Ashby, Becker, Blakespear, Cabaldon, Caballero, Cervantes, Choi, Cortese, Durazo, Grayson, Grove, Hurtado, Jones, Laird, Limón, McGuire, McNerney, Menjivar, Niello, Ochoa Bogh, Padilla, Pérez, Reyes, Richardson, Rubio, Seyarto, Smallwood-Cuevas, Stern, Strickland, Umberg, Valladares, Wahab, Weber Pierson, Wiener

NO VOTE RECORDED: Dahle, Gonzalez

ASSEMBLY FLOOR: 71-0, 8/6/26 (Consent) - See last page for vote

SUBJECT: County auditors: special districts: annual audit exceptions

SOURCE: California Special Districts Association
State Association of County Auditors

DIGEST:

This bill increases the annual revenue threshold for special districts to substitute alternative financial oversight mechanisms for an annual audit and makes other changes.

Assembly Amendments

authorizes a special district with annual revenues of less than $50,000 to replace the annual audit with a financial review or agreed-upon procedures engagement and extends the sunset to January 1, 2037.

ANALYSIS:

Existing law:

1. Requires county auditors to annually audit each special district’s accounts and records.
2. Requires special districts to pay for the annual audit.
3. Authorizes a special district, by unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, to replace the annual audit with:
   1. A biennial audit;
   2. A five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or
   3. An audit at a specified interval, as designated by the county auditor, not to exceed five years.
4. Authorizes a special district that processes their financial transactions through the county’s financial system and has annual revenues below $150,000 to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors.
5. Authorizes, until January 1, 2027, additional alternatives to the annual audit for special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000, as follows:
   1. Upon unanimous request of the governing board of the special district and with unanimous approval of the board of supervisors, the district may replace the annual audit with an agreed-upon procedures engagement (AUP).
   2. Upon annual unanimous request of the governing board of the special district and with annual unanimous approval of the board of supervisors, the district may replace the annual audit with an annual financial compilation performed by the county auditor.
6. Prohibits a special district from replacing the audit with a financial compilation for more than five consecutive years, at which time the district must undergo an annual audit.
7. Requires the special district to pay for any costs incurred by the county auditor in performing a financial compilation or an AUP.
8. Authorizes a county auditor, upon receipt of the financial review, AUP, or financial compilation, to appoint an accountant to conduct an audit of the special district, with proper notice to the governing board of the special district and board of supervisors.

This bill:

1. Increases the annual revenue threshold to $250,000;
   
2. Allows a special district with annual revenues of less than $50,000 not replace an annual audit with an annual financial compilation for more than five consecutive years, after which the special district must comply with an audit or financial review or an agreed-upon procedure engagement;
   
3. Extends the sunset to January 1, 2037.

Background

Annual audits can be costly. To reduce the burden on smaller special districts, the Legislature has authorized several alternatives to the annual audit. By unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, a district may replace the annual audit with: (1) a biennial audit; (2) a five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or (3) an audit at a specified interval, as designated by the county auditor, not to exceed five years.

Types of Financial Oversight. Auditors perform a variety of financial oversight services that differ in the scope, activity, and assurance of financial stability, including:

• Audit. An audit is the highest level of financial oversight that a local agency can provide. Its purpose is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. The auditor evaluates the internal control system, tests accounting records by examining source documents, and performs other procedures to obtain reasonable assurance about whether the financial statements are free from misstatement, error, or fraud.
• Agreed-upon Procedures Engagement (AUP). Auditors may also enter into an AUP, where the auditor and the client agree upon specific audit procedures to perform or specific aspects of the agency to review, but stops short of performing all of the procedures required in a full audit. An AUP provides less assurance than a full audit but includes some analyses to assure financial stability.
• Financial Review. When performing a financial review, an auditor issues a formal report that includes a conclusion as to whether he or she is aware of any material modifications that should be made to the financial statements for them to meet the accounting principles and practices generally used in an industry. The auditor does not perform any audit procedures, such as assessing fraud risk. Thus, a financial review provides less assurance than an audit and AUP.
• Financial Compilation. The objective of a financial compilation is to present the financial information in a standardized format. A financial compilation provides no assurance regarding the financial statements because the auditor is not required to verify the accuracy or completeness of the information provided, or express an audit opinion or a review conclusion. Furthermore, unlike other financial oversight services, an auditor is not required to be independent, although any lack of independence must be disclosed.

Special districts and audits. To reduce the financial burden of audits on special districts, the Legislature authorized alternative financial oversight options. Special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000 may use these alternatives. In 2008, the Legislature authorized these districts to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors (AB 2510, La Malfa, 2008). If the governing board of the district is the county board of supervisors, the district may replace the annual audit with a financial review upon unanimous approval of the board. In 2016, the Legislature expanded the alternatives to include an AUP or an annual financial compilation (AB 2613, Achadjian). It limited the use of annual financial compilations to five consecutive years, after which the district must complete a full annual audit. The authority for special districts to use these alternative financial oversight methods in lieu of an audit sunsets January 1, 2027.

Comments

According to the author, “SB 992 (Niello) makes permanent an existing law that authorizes a cost-effective procedure of engagement in lieu of an audit so long as the allowance is not granted for more than five years in row. The proposal also modestly increases the threshold to qualify from $150,000 to $250,000 to account for inflationary pressures since the threshold was put in place a decade ago. These small changes save critical, limited dollars allowing for a larger share of funding to be directed towards front line services while keeping fiscal guardrails in place.”

Oversight. Accurate financial data is necessary to hold special districts accountable. The State Controller and others use this information to compile annual reports and oversee these bodies. The requirement that all local governments conduct an audit serves this purpose. However, the Legislature recognized that audits can burden smaller special districts and therefore authorized alternative options to meet financial oversight and included a sunset to monitor for potential issues. This bill repeals that sunset. Supporters of the measure argue that the alternatives have worked without significant problems over the past ten years and contend that these alternatives allow small districts to direct limited resources towards services for residents. This bill raises questions about whether the Legislature has had enough time to evaluate whether these alternatives maintain transparency and accountability.

Raising the bar. Ten years ago, the Legislature allowed special districts to use three alternatives in lieu of an audit. According to the California Special Districts Association (CSDA), 552 special districts qualified under the $150,000 threshold in 2016. This bill increases the threshold by $100,000, to $250,000. Adjusted for inflation using Consumer Price Index, the original threshold would be approximately $215,000. The new threshold slightly exceeds a pure inflationary adjustment, but only 525 districts would qualify at this higher level, because some local agency revenues have grown faster.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 8/7/26)

California Special Districts Association (Co-Source)
State Association of County Auditors (Co-Source)
California Association of Recreation & Park Districts
California Central Valley Flood Control Association
California Policy Center

OPPOSITION: (Verified 8/7/26)

None received

ASSEMBLY FLOOR: 71-0, 8/6/26

AYES: Aguiar-Curry, Ahrens, Alanis, Alvarez, Arambula, Ávila Farías, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Caloza, Carrillo, Chen, Connolly, Davies, DeMaio, Dixon, Elhawary, Ellis, Gabriel, Garcia, Gipson, Jeff Gonzalez, Mark González, Hadwick, Haney, Harabedian, Hart, Hoover, Irwin, Jackson, Johnson, Kalra, Krell, Lackey, Lee, Lowenthal, Macedo, McKinnor, Muratsuchi, Nguyen, Ortega, Pacheco, Papan, Patel, Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Ransom, Celeste Rodriguez, Michelle Rodriguez, Rogers, Schultz, Sharp-Collins, Solache, Soria, Stefani, Ta, Tangipa, Wallis, Ward, Wicks, Wilson, Zbur, Rivas

NO VOTE RECORDED: Addis, Castillo, Flora, Fong, Blanca Rubio, Sanchez, Schiavo, Valencia

Prepared by: Itzel Vargas / L. GOV. / (916) 651-4119

8/7/26 13:41:54

**** END ****

Date of Hearing: July 1, 2026

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Juan Carrillo, Chair

SBPCA Bill Id:SB 992

Author:(Niello) – As Amended Ver:June 23, 2026

SENATE VOTE: 38-0

SUBJECT: County auditors: special districts: annual audit exceptions.

SUMMARY: Increases the annual revenue threshold for a special district to replace an annual audit with alternative financial oversight mechanisms. Specifically, this bill:

1. Allows a special district with annual revenues of no more than $250,000, instead of $150,000, to replace its required annual audit with a financial review, an agreed-upon procedures engagement (AUP), or an annual financial compilation.
2. Specifies that a special district with annual revenues of less than $50,000 shall not replace an annual audit with an annual financial compilation of the special district for more than five consecutive years, after which the special district shall either comply with the annual audit requirement or replace the annual audit with a financial review or an AUP.
3. Extends the repeal date on the authority to use alternative financial oversight procedures instead of an annual audit from January 1, 2027, to January 1, 2037.
4. Makes a conforming change.

FISCAL EFFECT: None.

COMMENTS:

1. Bill Summary. This bill increases the annual revenue threshold from $150,000 to $250,000 for a special district to replace an annual audit with alternative financial oversight mechanisms. Additionally, after replacing the annual audit requirement with a financial compilation for 5 years, this bill would require a special district with annual revenues of less than $50,000 to replace the annual audit with a financial review or an AUP. Lastly, this bill extends the repeal date on the authority to use alternative financial oversight procedures instead of an annual audit from January 1, 2027, to January 1, 2037. The California Special Districts Association and the State Association of County Auditors are the sponsors of this bill.
2. Author’s Statement. According to the Author, “SB 992 (Niello) makes permanent an existing law that authorizes a cost-effective procedure of engagement in lieu of an audit so long that the allowance is not granted for more than five years in a row. The proposal also modestly increases the threshold to qualify from $150,000 to $250,000 to account for inflationary pressures since the threshold was put in place a decade ago. These small changes save critical, limited dollars allowing for a larger share of funding to be directed towards front line services while keeping fiscal guardrails in place.”
3. Special Districts and Audits. California has roughly 3,300 special districts that provide specific, focused service within their boundaries. About two-thirds of these districts are independent and have their own elected governing boards; one-third are “dependent” special districts that are governed by either a city council or county board of supervisors.

County auditors must annually audit each special district’s accounts and records. The county auditor can contract with a certified public accountant or public accountant for this work. In either case, the audit must meet the State Controller’s standards and conform to generally accepted auditing standards. If the State Controller audits a district’s financial statement to satisfy federal audit requirements, the district is exempt from the requirement for an annual audit. The special district pays for the audit.

Annual audits can be costly. To reduce the burden on smaller special districts, the Legislature has authorized several alternatives to the annual audit. By unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, a district may replace the annual audit with: (1) a biennial audit; (2) a five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or (3) an audit at a specified interval, as designated by the county auditor, not to exceed five years.

To reduce the financial burden of audits on special districts, the Legislature authorized alternative financial oversight options. Special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000 may use these alternatives. In 2008, the Legislature authorized these districts to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors [AB 2510 (La Malfa), Chapter 244, Statutes of 2008]. If the governing board of the district is the county board of supervisors, the district may replace the annual audit with a financial review upon unanimous approval of the board.

In 2016, the Legislature expanded the alternatives to include an AUP or an annual financial compilation [AB 2613 (Achadjian), Chapter 164, Statutes of 2016]. It limited the use of annual financial compilations to five consecutive years, after which the district must complete a full annual audit. The authority for special districts to use these alternative financial oversight methods in lieu of an audit sunsets January 1, 2027.

1. Types of Financial Oversight. Auditors perform a variety of financial oversight services that differ in the scope, activity, and assurance of financial stability, including:
   1. Audits. An audit is the highest level of financial oversight that a local agency can provide. Its purpose is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. The auditor evaluates the internal control system, tests accounting records by examining source documents, and performs other procedures to obtain reasonable assurance about whether the financial statements are free from misstatement, error, or fraud.
      
   2. AUP. Auditors may also enter into an AUP, where the auditor and the client agree upon specific audit procedures to perform or specific aspects of the agency to review, but stops short of performing all of the procedures required in a full audit. An AUP provides less assurance than a full audit but includes some analyses to assure financial stability.
      
   3. Financial Review. When performing a financial review, an auditor issues a formal report that includes a conclusion as to whether they are aware of any material modifications that should be made to the financial statements for them to meet the accounting principles and practices generally used in an industry. The auditor does not perform any audit procedures, such as assessing fraud risk. Thus, a financial review provides less assurance than an audit and AUP.
      
   4. Financial Compilation. The objective of a financial compilation is to present the financial information in a standardized format. A financial compilation provides no assurance regarding the financial statements because the auditor is not required to verify the accuracy or completeness of the information provided or express an audit opinion or a review conclusion. Furthermore, unlike other financial oversight services, an auditor is not required to be independent, although any lack of independence must be disclosed.
2. Arguments in Support. According to the California Special Districts Association, one of the sponsors of this bill, “In 2015, CSDA sponsored legislation, Assembly Bill 2613 (Achadjian), that provided relief to special districts with relatively small district budgets. That bill authorized special districts with annual revenues not in excess of $150,000 to utilize an annual financial compilation report or an agreed-upon procedures engagement in lieu of a traditional annual audit, subject to various conditions and controls. Districts had reported difficulty not only in paying for traditional audits – which could consume a significant percentage of the district’s budget – but also in procuring the services of an auditor to perform an audit in the first place. The alternatives granted by AB 2613 meant that these smaller districts were able to provide the public with insight into district finances and maintain transparency without having to sacrifice a significant percentage of the district’s budget. AB 2613 also included a 10-year sunset on the provision that added the agreed-upon procedures engagement as a means to satisfy the annual audit requirement.

“SB 992 would preserve the agreed-upon procedures engagement alternative beyond its current January 1, 2027, expiration date by eliminating the associated sunset, maintaining district access to that alternative indefinitely.

“Additionally, SB 992 would increase, from $150,000 to $250,000, the threshold for qualification to utilize an annual financial compilation report or an agreed-upon procedures engagement in lieu of a traditional annual audit. This adjustment captures approximately the same number of special districts as when AB 2613 was signed into law. In fact, the number of independent special districts that would qualify under this adjusted threshold would be slightly fewer than the number that originally qualified in 2015 – based on the most recent data available from the State Controller’s Office, approximately 525 districts would potentially qualify to use these alternatives, versus the approximately 552 districts that qualified when AB 2613 was first enacted. These changes ensure that these alternatives remain available and open to special districts and reflect the changing fiscal environment.”

1. Arguments in Opposition. None on file.

REGISTERED SUPPORT / OPPOSITION:

Support

California Special Districts Association [SPONSOR]

State Association of County Auditors [SPONSOR]

California Association of Recreation & Park Districts

California Central Valley Flood Control Association

California Policy Center

Opposition

None on file

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958

 THIRD READING  

Bill No: SB 992

Author: Niello (R)

Introduced: 2/5/26

Vote: 21

SENATE LOCAL GOVERNMENT COMMITTEE: 7-0, 4/29/26

AYES: Durazo, Choi, Arreguín, Ashby, Cervantes, Laird, Seyarto

SUBJECT: County auditors: special districts: annual audit exceptions

SOURCE: California Special Districts Association (Co-Source)
State Association of County Auditors (Co-Source)

DIGEST:

This bill increases the annual revenue threshold for special districts to substitute alternative financial oversight mechanisms for an annual audit and makes other changes.

ANALYSIS:

Existing law:

1. Requires county auditors to annually audit each special district’s accounts and records.
2. Requires special districts to pay for the annual audit.
3. Authorizes a special district, by unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, to replace the annual audit with:
   1. A biennial audit;
   2. A five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or
   3. An audit at a specified interval, as designated by the county auditor, not to exceed five years.
4. Authorizes a special district that processes their financial transactions through the county’s financial system and has annual revenues below $150,000 to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors.
5. Authorizes, until January 1, 2027, additional alternatives to the annual audit for special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000, as follows:
   1. Upon unanimous request of the governing board of the special district and with unanimous approval of the board of supervisors, the district may replace the annual audit with an agreed-upon procedures engagement (AUP).
   2. Upon annual unanimous request of the governing board of the special district and with annual unanimous approval of the board of supervisors, the district may replace the annual audit with an annual financial compilation performed by the county auditor.
6. Prohibits a special district from replacing the audit with a financial compilation for more than five consecutive years, at which time the district must undergo an annual audit.
7. Requires the special district to pay for any costs incurred by the county auditor in performing a financial compilation or an AUP.
8. Authorizes a county auditor, upon receipt of the financial review, AUP, or financial compilation, to appoint an accountant to conduct an audit of the special district, with proper notice to the governing board of the special district and board of supervisors.

This bill:

1. Increases the annual revenue threshold to $250,000.
2. Removes the January 1, 2027 sunset date.

Background

Annual audits can be costly. To reduce the burden on smaller special districts, the Legislature has authorized several alternatives to the annual audit. By unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, a district may replace the annual audit with: (1) a biennial audit; (2) a five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or (3) an audit at a specified interval, as designated by the county auditor, not to exceed five years.

Types of Financial Oversight. Auditors perform a variety of financial oversight services that differ in the scope, activity, and assurance of financial stability, including:

• Audit. An audit is the highest level of financial oversight that a local agency can provide. Its purpose is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. The auditor evaluates the internal control system, tests accounting records by examining source documents, and performs other procedures to obtain reasonable assurance about whether the financial statements are free from misstatement, error, or fraud.
• Agreed-upon Procedures Engagement (AUP). Auditors may also enter into an AUP, where the auditor and the client agree upon specific audit procedures to perform or specific aspects of the agency to review, but stops short of performing all of the procedures required in a full audit. An AUP provides less assurance than a full audit but includes some analyses to assure financial stability.
• Financial Review. When performing a financial review, an auditor issues a formal report that includes a conclusion as to whether he or she is aware of any material modifications that should be made to the financial statements for them to meet the accounting principles and practices generally used in an industry. The auditor does not perform any audit procedures, such as assessing fraud risk. Thus, a financial review provides less assurance than an audit and AUP.
• Financial Compilation. The objective of a financial compilation is to present the financial information in a standardized format. A financial compilation provides no assurance regarding the financial statements because the auditor is not required to verify the accuracy or completeness of the information provided, or express an audit opinion or a review conclusion. Furthermore, unlike other financial oversight services, an auditor is not required to be independent, although any lack of independence must be disclosed.

Special districts and audits. To reduce the financial burden of audits on special districts, the Legislature authorized alternative financial oversight options. Special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000 may use these alternatives. In 2008, the Legislature authorized these districts to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors (AB 2510, La Malfa, 2008). If the governing board of the district is the county board of supervisors, the district may replace the annual audit with a financial review upon unanimous approval of the board.

In 2016, the Legislature expanded the alternatives to include an AUP or an annual financial compilation (AB 2613, Achadjian). It limited the use of annual financial compilations to five consecutive years, after which the district must complete a full annual audit. The authority for special districts to use these alternative financial oversight methods in lieu of an audit sunsets January 1, 2027.

Comments

According to the author, “SB 992 (Niello) makes permanent an existing law that authorizes a cost-effective procedure of engagement in lieu of an audit so long as the allowance is not granted for more than five years in row. The proposal also modestly increases the threshold to qualify from $150,000 to $250,000 to account for inflationary pressures since the threshold was put in place a decade ago. These small changes save critical, limited dollars allowing for a larger share of funding to be directed towards front line services while keeping fiscal guardrails in place.”

Oversight. Accurate financial data is necessary to hold special districts accountable. The State Controller and others use this information to compile annual reports and oversee these bodies. The requirement that all local governments conduct an audit serves this purpose. However, the Legislature recognized that audits can burden smaller special districts and therefore authorized alternative options to meet financial oversight and included a sunset to monitor for potential issues. This bill repeals that sunset. Supporters of the measure argue that the alternatives have worked without significant problems over the past ten years and contend that these alternatives allow small districts to direct limited resources towards services for residents. This bill raises questions about whether the Legislature has had enough time to evaluate whether these alternatives maintain transparency and accountability.

Raising the bar. Ten years ago, the Legislature allowed special districts to use three alternatives in lieu of an audit. According to the California Special Districts Association (CSDA), 552 special districts qualified under the $150,000 threshold in 2016. This bill increases the threshold by $100,000, to $250,000. Adjusted for inflation using Consumer Price Index, the original threshold would be approximately $215,000. The new threshold slightly exceeds a pure inflationary adjustment, but only 525 districts would qualify at this higher level, because some local agency revenues have grown faster.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 4/29/26)

California Special Districts Association (Co-Source)
State Association of County Auditors (Co-Source)
California Association of Recreation & Park Districts
California Policy Center

OPPOSITION: (Verified 4/29/26)

None received

Prepared by: Itzel Vargas / L. GOV. / (916) 651-4119

5/1/26 13:12:59

**** END ****

SENATE COMMITTEE ON LOCAL GOVERNMENT

Senator María Elena Durazo, Chair

2025 - 2026 Regular

County auditors: special districts: annual audit exceptions

Increases the annual revenue threshold for special districts to substitute alternative financial oversight mechanisms for an annual audit and makes other changes.

Background

California has roughly 3,300 special districts that provide specific, focused service within their boundaries. About two-thirds of these districts are independent and have their own elected governing boards; one-third are “dependent” special districts that are governed by either a city council or county board of supervisors.

County auditors must annually audit each special district’s accounts and records. The county auditor can contract with a certified public accountant or public accountant for this work. In either case, the audit must meet the State Controller’s standards and conform to generally accepted auditing standards. If the State Controller audits a district’s financial statement to satisfy federal audit requirements, the district is exempt from the requirement for an annual audit. The special district pays for the audit.

Annual audits can be costly. To reduce the burden on smaller special districts, the Legislature has authorized several alternatives to the annual audit. By unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, a district may replace the annual audit with: (1) a biennial audit; (2) a five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or (3) an audit at a specified interval, as designated by the county auditor, not to exceed five years.

Types of Financial Oversight. Auditors perform a variety of financial oversight services that differ in the scope, activity, and assurance of financial stability, including:

• Audit. An audit is the highest level of financial oversight that a local agency can provide. Its purpose is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. The auditor evaluates the internal control system, tests accounting records by examining source documents, and performs other procedures to obtain reasonable assurance about whether the financial statements are free from misstatement, error, or fraud.
• Agreed-upon Procedures Engagement (AUP). Auditors may also enter into an AUP, where the auditor and the client agree upon specific audit procedures to perform or specific aspects of the agency to review, but stops short of performing all of the procedures required in a full audit. An AUP provides less assurance than a full audit but includes some analyses to assure financial stability.
• Financial Review. When performing a financial review, an auditor issues a formal report that includes a conclusion as to whether he or she is aware of any material modifications that should be made to the financial statements for them to meet the accounting principles and practices generally used in an industry. The auditor does not perform any audit procedures, such as assessing fraud risk. Thus, a financial review provides less assurance than an audit and AUP.
• Financial Compilation. The objective of a financial compilation is to present the financial information in a standardized format. A financial compilation provides no assurance regarding the financial statements because the auditor is not required to verify the accuracy or completeness of the information provided, or express an audit opinion or a review conclusion. Furthermore, unlike other financial oversight services, an auditor is not required to be independent, although any lack of independence must be disclosed.

Special districts and audits. To reduce the financial burden of audits on special districts, the Legislature authorized alternative financial oversight options. Special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000 may use these alternatives. In 2008, the Legislature authorized these districts to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors (AB 2510, La Malfa, 2008). If the governing board of the district is the county board of supervisors, the district may replace the annual audit with a financial review upon unanimous approval of the board.

In 2016, the Legislature expanded the alternatives to include an AUP or an annual financial compilation (AB 2613, Achadjian). It limited the use of annual financial compilations to five consecutive years, after which the district must complete a full annual audit. The authority for special districts to use these alternative financial oversight methods in lieu of an audit sunsets January 1, 2027.

The California Special Districts Association and State Association of County Auditors report that the authority to perform an AUP, financial review, or financial compilation in lieu of an audit has helped special districts save money over the last decade. They want to make the authority permanent and increase the threshold.

Proposed Law

Senate Bill 992 increases the annual revenue threshold for special districts that can substitute a financial review, agreed-upon procedures engagement, or financial compilation for a full annual audit from $150,000 to $250,000 and repeals the January 1, 2027, sunset date on the authority to use those alternative oversight procedures.

Comments

1. Purpose of the bill. According to the author, “SB 992 (Niello) makes permanent an existing law that authorizes a cost-effective procedure of engagement in lieu of an audit so long as the allowance is not granted for more than five years in row. The proposal also modestly increases the threshold to qualify from $150,000 to $250,000 to account for inflationary pressures since the threshold was put in place a decade ago. These small changes save critical, limited dollars allowing for a larger share of funding to be directed towards front line services while keeping fiscal guardrails in place.”

2. Oversight. Accurate financial data is necessary to hold special districts accountable. The State Controller and others use this information to compile annual reports and oversee these bodies. The requirement that all local governments conduct an audit serves this purpose. However, the Legislature recognized that audits can burden smaller special districts and therefore authorized alternative options to meet financial oversight and included a sunset to monitor for potential issues. SB 992 repeals that sunset. Supporters of the measure argue that the alternatives have worked without significant problems over the past ten years and contend that these alternatives allow small districts to direct limited resources towards services for residents. SB 992 raises questions about whether the Legislature has had enough time to evaluate whether these alternatives maintain transparency and accountability.

3. Raising the bar. Ten years ago, the Legislature allowed special districts to use three alternatives in lieu of an audit. According to the California Special Districts Association (CSDA), 552 special districts qualified under the $150,000 threshold in 2016. SB 992 increases the threshold by $100,000, to $250,000. Adjusted for inflation using Consumer Price Index, the original threshold would be approximately $215,000. The new threshold slightly exceeds a pure inflationary adjustment, but only 525 districts would qualify at this higher level, because some local agency revenues have grown faster.

Support and Opposition

(4/24/26)

Support: California Special Districts Association (Co-Sponsor)
State Association of County Auditors (Co-Sponsor)
California Association of Recreation & Park Districts
California Policy Center

Opposition: None Submitted

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SENATE COMMITTEE ON LOCAL GOVERNMENT

Senator María Elena Durazo, Chair

2025 - 2026 Regular

County auditors: special districts: annual audit exceptions

Increases the annual revenue threshold for special districts to substitute alternative financial oversight mechanisms for an annual audit and removes the sunset on their ability to make that substitution.

Background

California has roughly 3,300 special districts that provide specific, focused service within their boundaries. About two-thirds of these districts are independent and have their own elected governing boards; one-third are “dependent” special districts that are governed by either a city council or county board of supervisors.

County auditors must annually audit each special district’s accounts and records. The county auditor can contract with a certified public accountant or public accountant for this work. In either case, the audit must meet the State Controller’s standards and conform to generally accepted auditing standards. If the State Controller audits a district’s financial statement to satisfy federal audit requirements, the district is exempt from the requirement for an annual audit. The special district pays for the audit.

Annual audits can be costly. To reduce the burden on smaller special districts, the Legislature has authorized several alternatives to the annual audit. By unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors, a district may replace the annual audit with: (1) a biennial audit; (2) a five-year audit if the district’s annual budget doesn’t exceed an amount set by the county supervisors; or (3) an audit at a specified interval, as designated by the county auditor, not to exceed five years.

Types of Financial Oversight. Auditors perform a variety of financial oversight services that differ in the scope, activity, and assurance of financial stability provided, including:

• Audit. An audit is the highest level of financial oversight that a local agency can provide. Its purpose is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. The auditor evaluates the internal control system, tests accounting records by examining source documents, and performs other procedures to obtain reasonable assurance about whether the financial statements are free from misstatement, error, or fraud.
• Agreed-upon Procedures Engagement (AUP). Auditors may also enter into an AUP, where the auditor and the client agree upon specific audit procedures to perform or specific aspects of the agency to review, but stops short of performing all of the procedures required in a full audit. An AUP provides less assurance than a full audit but includes some analyses to assure financial stability.
• Financial Review. When performing a financial review, an auditor issues a formal report that includes a conclusion as to whether he or she is aware of any material modifications that should be made to the financial statements for them to meet the accounting principles and practices generally used in an industry. The auditor does not perform any audit procedures, such as assessing fraud risk. Thus, a financial review provides less assurance than an audit and AUP.
• Financial Compilation. The objective of a financial compilation is to present the financial information in a standardized format. A financial compilation provides no assurance regarding the financial statements because the auditor is not required to verify the accuracy or completeness of the information provided, or express an audit opinion or a review conclusion. Furthermore, unlike other financial oversight services, an auditor is not required to be independent, although any lack of independence must be disclosed.

Special districts and audits. To reduce the financial burden of audits on special districts, the Legislature authorized alternative financial oversight options. Special districts that both process their financial transactions through the county’s financial system and have annual revenues below $150,000 may use these alternatives. In 2008, the Legislature authorized these districts to replace the annual audit with a financial review upon unanimous request of the special district’s governing board and with the unanimous approval of the county board of supervisors (AB 2510, La Malfa, 2008). If the governing board of the district is the county board of supervisors, the district may replace the annual audit with a financial review upon unanimous approval of the board.

In 2016, the Legislature expanded the alternatives to include an AUP or an annual financial compilation (AB 2613, Achadjian). It limited the use of annual financial compilations to five consecutive years, after which the district must complete a full annual audit. The authority for special districts to use these alternative financial oversight methods in lieu of an audit sunsets January 1, 2027.

The California Special Districts Association and State Association of County Auditors report that the authority to perform an AUP, financial review, or financial compilation in lieu of an audit has helped special districts save money over the last decade. They want to make the authority permanent and increase the threshold.

Proposed Law

Senate Bill 992 increases the annual revenue threshold for special districts that can substitute a financial review, agreed-upon procedures engagement, or financial compilation for a full annual audit from $150,000 to $250,000 and repeals the January 1, 2027, sunset date on the authority to use those alternative oversight procedures.

Comments

1. Purpose of the bill. According to the author, “SB 992 (Niello) makes permanent an existing law that authorizes a cost-effective procedure of engagement in lieu of an audit so long that the allowance is not granted for more than five years in row. The proposal also modestly increases the threshold to qualify from $150,000 to $250,000 to account for inflationary pressures since the threshold was put in place a decade ago. These small changes save critical, limited dollars allowing for a larger share of funding to be directed towards front line services while keeping fiscal guardrails in place.”

2. Oversight. Accurate financial data is necessary to hold special districts accountable. The State Controller and others use this information to compile annual reports and oversee these bodies. The requirement that all local governments conduct an audit serves this purpose. However, the Legislature recognized that audits can burden smaller special districts and therefore authorized alternative options to meet financial oversight and included a sunset to monitor for potential issues. SB 992 repeals that sunset. Supporters of the measure argue that the alternatives have worked without significant problems over the past ten years and contend that these alternatives allow small districts to direct limited resources towards services for residents. The Committee may wish to consider whether removing the sunset would limit the Legislature’s ability to continue evaluating whether these alternatives maintain transparency and accountability.

3. Raising the bar. Ten years ago, the Legislature allowed special districts to use three alternatives in lieu of an audit. According to the California Special Districts Association (CSDA), 552 special districts qualified under the $150,000 threshold in 2016. SB 992 increases the threshold by $100,000, to $250,000. Adjusted for inflation using Consumer Price Index the threshold would be approximately $215,000. The new threshold slightly exceeds a pure inflationary adjustment, but only 525 districts would qualify at this higher level, because some local agency revenues have grown faster. The Committee may wish to consider whether the threshold established by SB 992 is consistent with the intent to alleviate the burden of an audit on smaller local agencies.

Support and Opposition

(3/13/2026)

Support: California Special Districts Association (Co-Sponsor)
State Association of County Auditors (Co-Sponsor)

Opposition: None Submitted

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