The State Auditor’s Office audits public hospital districts on an annual basis to assure that districts are in compliance with auditing standards adopted by the State Auditor’s Office and any mandated federal auditing standards. In addition, the State Auditor’s Office conducts a legal audit to assure that the district is in compliance with applicable laws. Finally, any inappropriate actions of the public hospital district are reported by the State Auditor’s Office to the Attorney General for enforcement, where necessary.

The State Auditor is an elected official who is part of the executive branch of the state government as established by the state constitution which provides that the State Auditor shall be the auditor of all public accounts. The State Auditor has authority to appoint deputies and assistant directors as necessary to carry out the duties of the Office of State Auditor. The State Auditor can also appoint and employ other assistants and personnel necessary to carry out the work of the Office of State Auditor. In addition, the State Auditor has authority to contract with Certified Public Accountants in Washington to carry out duties of auditing state agencies and local governments. The duty of auditing public hospital districts falls to the audit team in the county where the district is located.

In general, the State Auditor is directed by the legislature to audit public accounts, inspect the books of persons charged with overseeing public monies, inform the Attorney General’s Office of the need to take enforcement actions with regard to public funds, provide information to the legislature regarding the financial affairs of the state, and other miscellaneous duties.

In addition, with regard to municipal corporations, the State Auditor is directed to prescribe and install a system of accounting and reporting which is to be uniform for every public account of the same class, such as hospital districts. Reporting for public hospital districts is accomplished through the Department of Health.

The State Auditor is directed to require municipalities to file financial reports with the Division within 150 days after the close of each financial year, as follows:

The reports shall contain accurate statements, in summarized form, of all collections made, or receipt received, by the officers from all sources; all accounts due the public treasury, but not collected; and all expenditures for every purpose, and by what authority authorized; and also: (1) a statement of all costs of ownership and operation, and of all income, of each and every public service industry owned and operated by a local government; (2) a statement of the entire public debt of every local government, to which power has been delegated by the state to create a public debt, showing the purpose for which each item of the debt was created, and the provisions made for the payment thereof; (3) a classified statement of all receipts and expenditures by any public institution; and (4) a statement of all expenditures for labor relations consultants, with identification of each consultant, compensation, and the terms and conditions of each agreement or arrangement; together with such other information as may be required by the State Auditor.

The reports shall be certified as to their correctness by the State Auditor, the State Auditor’s deputies, or other person legally authorized to make such certification.

Their substance shall be published in an annual volume of comparative statistics at the expense of the state as a public document. [RCW 43.09.230]

The State Auditor’s Office is directed by statute [RCW 43.09.260] to perform the following as part of the audit:

• Examine the financial affairs of all local governments at such reasonable, periodic intervals as the State Auditor shall determine.

Examination of the financial affairs of all local governments must be made at least once in every three years. However, the State Auditor is directed to establish a schedule to govern the auditing of taxing districts by class. Public hospital districts are audited annually.

• During each audit, inquire as to the financial condition and resources of the hospital district.

The standards used by the State Auditor are generally-accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States, and Office of Management and Budget Circular A-128, “Audits of State and Local Governments.” However, also see the section below entitled "Governmental Accounting Standards Board Statement No. 34".

• On each examination, the State Auditor’s Office is directed to make such examination and inquiry as to whether the constitution and laws of the state, ordinances and orders of the local government, and the requirements of the State Auditor have been complied with properly.

The State Auditor’s reports indicate that they test the district’s compliance with certain laws and regulations which, if not followed, could have a direct and material impact on the financial statements. The reports also note that their responsibility is to examine, on a test basis, evidence about the district’s compliance with these requirements and to make a reasonable effort to identify any instances of misfeasance, malfeasance, or nonfeasance in office on the part of any public officer or employee, and to report any such instance to the auditing department of the district and to the Attorney General. They also state that their objective is not to provide an overall opinion on compliance with these requirements.

It should also be noted here that is unlawful for a local government to settle a claim arising out of malfeasance, misfeasance or nonfeasance or any action commenced therefore or for any court to enter upon any compromise or settlement of such action without written approval or consent of the Attorney General or State Auditor's Office.

• On each examination, the State Auditor’s Office also is directed to make such examination and inquiry into the methods and accuracy of the accounts and reports of the local government.

In conjunction with an audit, the State Auditor, his or her employees, and every person legally appointed to perform such service may issue subpoenas and compulsory process in order to compel the attendance of witnesses in the production of books and papers.

After each audit, a report of the examination is made and filed in the Office of State Auditor and one copy is sent to the public hospital district. If there are findings of noncompliance with state law, a copy is sent to the Attorney General.

Further Legal Background

Although not specified by statute or regulation, the State Auditor’s Office typically follows the following procedure:

• A letter is written by State Auditor’s Office stating when the audit is to commence and the estimated costs for same.

• The State Auditor commences reviewing the books and records of the district.

• An entrance interview is conducted, whereby the State Auditor’s Office representatives introduce themselves and discuss any unique aspects of the pending audit.

• The auditing work is completed.

• An exit interview is conducted, whereby the representatives present their conclusions along with any audit findings or exit items. A finding is a matter stated in the final report which is not in compliance with applicable laws and regulations. In general, exit items are matters which are not to be of public record but which may be of concern, and are to be reviewed again the following year for compliance.

• A draft of the audit report is presented to the district inviting input and written comments from the district during a limited time period as set in the report.

• The final audit report is prepared, taking into account some or all of the district’s comments with respect to the audit findings.

• The Attorney General’s Office may follow up with regard to any audit findings concerning the district’s intentions of complying with the findings.

Districts should be aware that local governments, which expend three hundred thousand dollars or more in federal awards or assistance in a year, must have an annual “Single Audit” conducted in accordance with the U.S. Office of Management and Budget (OMB) Circular A-133. OMB issued Circular A-133 in response to the requirements enacted by Congress in the Single Audit Act of 1984 and the Single Audit Act Amendments of 1996. Generally speaking, Title XVIII and XIX funds are excluded from the three hundred thousand dollar threshold.

OMB Circular A-133

It is the district’s responsibility to inform the State Auditor’s Office of the need for a Single Audit. It is also the District’s responsibility to ensure that a Schedule of Federal Assistance is prepared. The Childhood Immunization Grant (which usually comes from HHS but is passed through the Department of Health) is considered a vaccine in lieu of cash grant and does need to be reported on the Schedule of Federal Assistance.

District
Responsibility

Single Audit reports must be issued to the Bureau of the Clearinghouse by no later than nine months following the District’s year-end. In other words, for December 31 year-ends, the report must be issued and received by September 30 of the following year. In order for this to happen, the audit needs to be completed within 8 months of year-end to ensure enough time for report processing, mailing etc.

Districts should be aware that the implementation of the Governmental Accounting Standards Board Statement No. 34 (GASB 34) over the next few years will require major changes in the district’s financial reporting requirements. The goal of the Governmental Accounting Standards Board in developing GASB 34 was to make annual reports by governments more comprehensive and easy to use. Districts should verify that any auditor working with the district knows the district must comply with GASB 34 requirements. The requirements of GASB 34 are effective in three phases based on a government’s total annual revenues in the first fiscal year ending after June 15, 1999. Governments (in this case public hospital districts) with total annual revenues (excluding extraordinary items) of $100 million or more (phase 1) should apply GASB 34 to statements beginning after June 15, 2001. Governments with less than 10 million in revenues (phase 2) should apply GASB 34 for periods beginning after June 15, 2002. Governments with less than $10 million in revenues (phase 3) should apply GASB 34 for periods beginning after 2003.

A district that has gone through an audit that results in a finding may choose to take legal action if it strongly disagrees with the finding. Under the Uniform Declaratory Judgments Act, Chapter 7.24 RCW, a public hospital district may petition the Superior Court for a declaratory judgment for a declaration as to whether or not the finding is proper.

Further Legal Background

The declaration may be either affirmative or negative in form and effect. The determination may be for the purposes of resolving issues of fact or issues of law. Pursuant to RCW 7.24.090, an issue of fact may be tried as any other civil action in Superior Court. [See generally State Ex Rel Graham v. Northshore School District, 99 Wn. 2d 232 (1983)]

At least one court has limited the jurisdiction of the State Auditor’s Office with regard to findings and has indicated that the State Auditor should limit its investigations to financial matters, as the State Auditor’s Office is not authorized to act as “a roving investigator to determine whether local communities are in compliance with state law on non-financial matters such as local building codes.” [Graham v. San Juan County, 102 Wn. 2d 311 (1984)] An alternative to bringing a declaratory judgment action is to take a defensive posture and see if the Attorney General’s Office chooses to investigate and enforce the finding, in which case the district may find itself in a position of defending an action such as an injunction.

The State Auditor has authority under RCW 43.09.280 to charge each district for the cost of auditing the district’s accounts. This statute was found to be constitutional and not a violation of Washington State Constitution Article XI Section 12 prohibiting taxing of counties and cities. [Ex Rel Clausen, 65 Wn. 524 (1911)]

If the district fails to pay, the State Auditor may certify the expense to the auditor of the county in which the district is situated, who shall issue a warrant on the County Treasurer, who may reimburse itself out of the tax funds collected by the County Auditor on behalf of the district.

Further Legal Background

Under regulations, a district which disagrees with a bill for services may appeal the bill. Appeals are made by notifying the Chief Examiner of the Division of Municipal Corporations in writing within 14 days after receipt of the bill. The notice must state the district’s reasons for challenging the bill and any pertinent information. The Chief Examiner must respond within 7 days.

Within seven days of the Chief Examiner’s written response, the district may appeal the matter to the Internal Appeals Board. The Internal Appeals Board consists of the Assistant State Auditor and two Deputy State Auditors, neither of whom may have direct responsibility for conducting audits. Within seven days of the appeal, the Internal Appeals Board must issue written findings and mail them to the district. An aggrieved district may further appeal to an External Appeals Board by written notice to the Chief Examiner. [Chapter 48-20 WAC]

The External Appeals Board consists of three officers of local government associations, one selected by the district at the time of its appeal, one selected by the Chief Examiner of Municipal Corporations, and the third to be selected by the other two members. Within ten days after selection, the External Appeals Board shall submit written findings and recommendations to the State Auditor and to the district. Within ten days after receipt of the findings and recommendations of the External Appeals Board, the State Auditor shall issue a final written decision accepting, rejecting, or modifying the recommendation of the Appeals Board. The final decision is to be delivered to the district, which is required to promptly pay the bill. Any further appeals to Superior Court would be subject to the Administrative Procedure Act and the rules of the court having jurisdiction.

The Attorney General is directed by statute to appear for and represent the state, institute and prosecute all actions on behalf of the state, consult and provide legal advice and written opinions on behalf of the state, and enforce the proper application of funds appropriated for the public institutions of the state, among other responsibilities. As such, the Attorney General’s Office provides legal advice as requested by the State Auditor’s Office. [RCW 43.10.030]

In addition, if any report of the State Auditor discloses malfeasance, misfeasance or nonfeasance in office on the part of any public officer or employee, within thirty days from the receipt of a copy of the report, the Attorney General shall institute in the proper county such legal action as is proper and to prosecute the matter to final determination to carry into effect the findings of the audit. In other words, the Attorney General’s Office has an obligation to follow up certain matters and take such legal action as necessary to support the State Auditor’s findings. [RCW 43.09.260]

The Attorney General’s Office may, on occasion, render informal legal advice to public hospital districts; however, formal Attorney General opinions are rendered only on behalf of state agencies and state officials.

In 1989, the Association of Washington Public Hospital Districts began working with the State Auditor’s Office to establish a contract audit program that would allow certified public accounting firms to perform the State Examiner’s function on behalf of the State Auditor’s Office. At that time many public hospital districts were having two separate audits performed, one by a local CPA firm and the second by the State Auditor’s Office. A single audit was considered desirable in order to eliminate the duplication of costs, time and effort.

Further Legal Background

The program that was initiated in 1989 was a voluntary program in which individual districts could choose to participate. Each district that elects into the program may participate in the selection process of the accounting firm for the audit. The State Board of Accountancy compiled a list of qualified audit firms from which the selection may be made. Selection committees consist of members of the district and the State Auditor’s Office who send Requests for Proposals to the accounting firms and select an appropriate firm based on the response.

As an aid in the process, the State Auditor’s Office drafted and published “General Guidelines for CPA Firms Contracting with the Office of State Auditor to Perform Audits of Governmental Entities” dated 6/12/89, which also includes a model contract for the contracting of the State Auditor’s Office with the CPA firm. Selection of the CPA firm is not necessarily based on the lowest price, but service and other factors are considered in selecting the accounting firm. In addition, multiple year contracts are deemed desirable so that the process is not repeated every year.

In addition to the costs of the accounting firm, the State Auditor’s Office adds an overhead fee of 18% to defray the costs of general administration and clerical support. This is considered the costs of the State Auditor’s Office in overseeing the audit. It is anticipated that more and more hospital districts will voluntarily participate in the contract audit program due to the cost and time savings. Conceivably, the State Auditor’s Office could modify the program from a voluntary to a mandatory program should they run short of labor or expertise required to audit public hospital districts.