H. B. No. 166 As Introduced

As Introduced

127th General Assembly

Regular Session

2007-2008

H. B. No. 166

Representative Schindel

Cosponsors: Representatives Adams, Bubp, Combs, DeWine, Flowers, Gibbs, Seitz, Stebelton, Widener, Zehringer

A BILL

To enact sections 126.40 to 126.43 of the Revised 1
Code to create an Office of Internal Auditing 2
within the Office of Budget and Management, to 3
establish the State Audit Committee, and to 4
prescribe their respective and interrelated 5
functions. 6

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF OHIO:

       Section 1. That sections 126.40, 126.41, 126.42, and 126.43 7
of the Revised Code be enacted to read as follows: 8

       Sec. 126.40. (A) As used in sections 126.40 to 126.43 of the 9
Revised Code, "state agency" means the administrative departments 10
listed in section 121.02 of the Revised Code, the department of 11
taxation, and the bureau of workers' compensation. 12

       (B) The office of internal auditing is hereby created in the 13
office of budget and management to conduct internal audits of 14
state agencies or divisions of state agencies to improve their 15
operations in the areas of risk management, internal controls, and 16
governance. The director of budget and management, with the 17
approval of the governor and approval by a majority vote of the 18
senate, shall appoint for the office of internal auditing a chief 19
internal auditor who meets the qualifications specified in 20
division (C) of this section. The chief internal auditor shall 21
serve at the director's pleasure and be responsible for the 22
administration of the office of internal auditing consistent with 23
sections 126.40 to 126.43 of the Revised Code. 24

       The office of internal auditing shall conduct programs for 25
the internal auditing of state agencies. The programs shall 26
include an annual internal audit plan, approved by the state audit 27
committee, that utilizes risk assessment techniques and identifies 28
the specific audits to be conducted during the year. The programs 29
also shall include periodic audits of each state agency's major 30
systems and controls, including those systems and controls 31
pertaining to accounting, administration, and electronic data 32
processing. Upon the request of the office of internal auditing, 33
each state agency shall provide office employees access to all 34
records and documents necessary for the performance of an internal 35
audit. 36

       (C) The chief internal auditor of the office of internal 37
auditing shall hold at least a bachelor's degree and be one of the 38
following: 39

       (1) A certified internal auditor, a certified government 40
auditing professional, or a certified public accountant, who also 41
has held a PA registration or a CPA certificate authorized by 42
Chapter 4701. of the Revised Code for at least four years and has 43
at least six years of auditing experience; 44

       (2) An auditor who has held a PA registration or a CPA 45
certificate authorized by Chapter 4701. of the Revised Code for at 46
least four years and has at least ten years of auditing 47
experience. 48

       (D) The chief internal auditor, subject to the direction and 49
control of the director of budget and management, may appoint and 50
maintain any staff necessary to carry out the duties assigned by 51
sections 126.40 to 126.43 of the Revised Code to the office of 52
internal auditing or to the chief internal auditor. 53

       Sec. 126.41. (A)(1) There is hereby created the state audit 54
committee, consisting of the following five members: the director 55
of budget and management; two public members appointed by the 56
speaker of the house of representatives; and two public members 57
appointed by the president of the senate. 58

       Each public member of the committee shall serve a three-year 59
term commencing on the first day of August in the appropriate year 60
and ending on the thirty-first day of July in the appropriate 61
year, except for the initial public members. With respect to the 62
initial appointments of the public members, the term of the first 63
public member appointed by the speaker of the house of 64
representatives shall be for a one-year term, the term of the 65
second public member appointed by the speaker of the house of 66
representatives shall be for a three-year term, and the term of 67
the initial public members appointed by the president of the 68
senate shall be for two-year terms. The term for the initial 69
public members shall begin on August 1, 2007. Public members may 70
be reappointed to serve one additional term. 71

       The committee shall include one public member who is a 72
financial expert; one public member who is an active, inactive, or 73
retired certified public accountant; one public member who is 74
familiar with governmental financial accounting; and one public 75
member who is a representative of the public. 76

       Any vacancy on the committee shall be filled in the same 77
manner as provided in this division, and, when applicable, the 78
person appointed to fill a vacancy shall serve the remainder of 79
the predecessor's term. 80

       (2) Members of the committee shall receive reimbursement for 81
actual and necessary expenses incurred in the discharge of their 82
duties. 83

       (3) The director of budget and management shall serve as the 84
committee's chairperson. 85

       (B) The state audit committee shall do all of the following: 86

       (1) Ensure that the internal audits conducted by the office 87
of internal auditing in the office of budget and management 88
conform to the institute of internal auditors' international 89
standards for the professional practice of internal auditing and 90
to the institute of internal auditors' code of ethics; 91

       (2) Review the process used by the office of budget and 92
management to prepare its annual budgetary financial report and 93
the state's comprehensive annual financial report required under 94
division (A)(9) of section 126.21 of the Revised Code; 95

       (3) Review unaudited financial statements submitted to the 96
auditor of state and communicate with external auditors as 97
required by government auditing standards; 98

       (4) Perform the additional functions imposed upon it by 99
section 126.42 of the Revised Code. 100

       (C) As used in this section, "financial expert" means a 101
person who has all of the following: 102

        (1) An understanding of generally accepted accounting 103
principles and financial statements; 104

        (2) The ability to assess the general application of those 105
principles in connection with accounting for estimates, accruals, 106
and reserves; 107

        (3) Experience preparing, auditing, analyzing, or evaluating 108
financial statements presenting accounting issues that generally 109
are of comparable breadth and level of complexity to those likely 110
to be presented by a state agency's financial statements, or 111
experience actively supervising one or more persons engaged in 112
those activities; 113

        (4) An understanding of internal controls and procedures for 114
financial reporting; and 115

        (5) An understanding of audit committee functions. 116

       Sec. 126.42. (A) The state audit committee created by 117
section 126.41 of the Revised Code shall ensure that the office of 118
internal auditing in the office of budget and management has an 119
annual internal audit plan that identifies the internal audits of 120
state agencies or divisions of state agencies scheduled for the 121
next fiscal year. The chief internal auditor of the office of 122
internal auditing shall submit the plan to the state audit 123
committee for approval before the beginning of each fiscal year. 124
The chief internal auditor may submit a revised internal audit 125
plan for approval at any time the director of budget and 126
management believes there is reason to modify the previously 127
submitted plan for a fiscal year. 128

       (B) To determine the state agencies or divisions of state 129
agencies that are to be internally audited, the office of internal 130
auditing, in the formulation of an annual or revised internal 131
audit plan, and the state audit committee, in approving a 132
submitted annual or revised internal audit plan, shall consider 133
the following factors: 134

       (1) The risk for fraud, waste, or abuse of public money 135
within an agency or division; 136

       (2) The length of time since an agency or division was last 137
subject to an internal audit; 138

       (3) The size of an agency or division, and the amount of time 139
and resources necessary to audit it; 140

       (4) Any other factor the state audit committee determines to 141
be relevant. 142

       (C) All internal audits shall be conducted only by employees 143
of the office of internal auditing. 144

       (D) After the conclusion of an internal audit, the chief 145
internal auditor shall submit a preliminary report of the internal 146
audit's findings and recommendations to the state audit committee 147
and to the director of the state agency involved. The state agency 148
or division of the state agency covered by the preliminary report 149
shall be provided an opportunity to respond within thirty days 150
after receipt of the preliminary report. The response shall 151
include a corrective action plan for any recommendations in the 152
preliminary report that are not disputed by the agency or 153
division. Any response received by the office of internal auditing 154
within that thirty-day period shall be included in the office's 155
final report of the internal audit's findings and recommendations. 156
The final report shall be issued by the office of internal 157
auditing within thirty days after the termination of the 158
thirty-day response period. Copies of the final report shall be 159
submitted to the state audit committee, the governor, and the 160
director of the state agency involved. The state audit committee 161
shall determine an appropriate method for making the preliminary 162
and final reports available for public inspection in a timely 163
manner. 164

       Any suspected fraud or other illegal activity discovered by 165
the office of internal auditing during the conduct of an internal 166
audit shall be reported immediately to the state audit committee, 167
the director of the state agency in which the fraud or illegal 168
activity is suspected to have occurred, and the auditor of state. 169

       (E) The chief internal auditor shall prepare an annual report 170
and submit the report to the governor, the president of the 171
senate, the speaker of the house of representatives, and the 172
auditor of state. The office of budget and management shall make 173
the report available to the public by posting it on the office's 174
web site before the first of July of each year. 175

       Sec. 126.43. Any preliminary or final report of an internal 176
audit's findings and recommendations which is produced by the 177
office of internal auditing in the office of budget and management 178
and all work papers of the internal audit are confidential and are 179
not public records under section 149.43 of the Revised Code until 180
the final report of an internal audit's findings and 181
recommendations is submitted to the state audit committee, the 182
governor, and the director of the state agency involved. 183

       Section 2. (A) Not later than six months after the effective 184
date of this act, the Legislative Service Commission shall prepare 185
a report on the existing internal audit structures of each state 186
agency, as defined in section 126.40 of the Revised Code, and 187
identify all state employees who are classified as an internal 188
auditor or with job duties effectively similar to those of an 189
internal auditor. The report shall include information about the 190
total amounts budgeted for internal auditing purposes in each such 191
state agency. 192

       Each such state agency, upon request, shall provide the 193
Legislative Service Commission with the requisite information to 194
complete the portion of the report pertaining to that state 195
agency. 196

       The report shall be submitted to the Governor, the Speaker of 197
the House of Representatives, the President of the Senate, and the 198
Minority Leaders of the Senate and the House of Representatives 199
upon its completion. 200

       (B) Subject to the layoff and displacement provisions of 201
Chapter 124. of the Revised Code, all state agency employees who 202
are classified as internal auditors or whose job duties are 203
effectively similar to those of an internal auditor, as determined 204
by the report described in division (A) of this section, shall be 205
transferred to the Office of Internal Auditing in the Office of 206
Budget and Management on the effective date of this section, and 207
shall retain their positions, compensation, and all associated 208
fringe benefits. 209

Section 1. That sections 126.40, 126.41, 126.42, and 126.43	7
of the Revised Code be enacted to read as follows:	8

Sec. 126.40. (A) As used in sections 126.40 to 126.43 of the	9
Revised Code, "state agency" means the administrative departments	10
listed in section 121.02 of the Revised Code, the department of	11
taxation, and the bureau of workers' compensation.	12

(B) The office of internal auditing is hereby created in the	13
office of budget and management to conduct internal audits of	14
state agencies or divisions of state agencies to improve their	15
operations in the areas of risk management, internal controls, and	16
governance. The director of budget and management, with the	17
approval of the governor and approval by a majority vote of the	18
senate, shall appoint for the office of internal auditing a chief	19
internal auditor who meets the qualifications specified in	20
division (C) of this section. The chief internal auditor shall	21
serve at the director's pleasure and be responsible for the	22
administration of the office of internal auditing consistent with	23
sections 126.40 to 126.43 of the Revised Code.	24

The office of internal auditing shall conduct programs for	25
the internal auditing of state agencies. The programs shall	26
include an annual internal audit plan, approved by the state audit	27
committee, that utilizes risk assessment techniques and identifies	28
the specific audits to be conducted during the year. The programs	29
also shall include periodic audits of each state agency's major	30
systems and controls, including those systems and controls	31
pertaining to accounting, administration, and electronic data	32
processing. Upon the request of the office of internal auditing,	33
each state agency shall provide office employees access to all	34
records and documents necessary for the performance of an internal	35
audit.	36

(C) The chief internal auditor of the office of internal	37
auditing shall hold at least a bachelor's degree and be one of the	38
following:	39

(1) A certified internal auditor, a certified government	40
auditing professional, or a certified public accountant, who also	41
has held a PA registration or a CPA certificate authorized by	42
Chapter 4701. of the Revised Code for at least four years and has	43
at least six years of auditing experience;	44

(2) An auditor who has held a PA registration or a CPA	45
certificate authorized by Chapter 4701. of the Revised Code for at	46
least four years and has at least ten years of auditing	47
experience.	48

(D) The chief internal auditor, subject to the direction and	49
control of the director of budget and management, may appoint and	50
maintain any staff necessary to carry out the duties assigned by	51
sections 126.40 to 126.43 of the Revised Code to the office of	52
internal auditing or to the chief internal auditor.	53

Sec. 126.41. (A)(1) There is hereby created the state audit	54
committee, consisting of the following five members: the director	55
of budget and management; two public members appointed by the	56
speaker of the house of representatives; and two public members	57
appointed by the president of the senate.	58

Each public member of the committee shall serve a three-year	59
term commencing on the first day of August in the appropriate year	60
and ending on the thirty-first day of July in the appropriate	61
year, except for the initial public members. With respect to the	62
initial appointments of the public members, the term of the first	63
public member appointed by the speaker of the house of	64
representatives shall be for a one-year term, the term of the	65
second public member appointed by the speaker of the house of	66
representatives shall be for a three-year term, and the term of	67
the initial public members appointed by the president of the	68
senate shall be for two-year terms. The term for the initial	69
public members shall begin on August 1, 2007. Public members may	70
be reappointed to serve one additional term.	71

The committee shall include one public member who is a	72
financial expert; one public member who is an active, inactive, or	73
retired certified public accountant; one public member who is	74
familiar with governmental financial accounting; and one public	75
member who is a representative of the public.	76

Any vacancy on the committee shall be filled in the same	77
manner as provided in this division, and, when applicable, the	78
person appointed to fill a vacancy shall serve the remainder of	79
the predecessor's term.	80

(2) Members of the committee shall receive reimbursement for	81
actual and necessary expenses incurred in the discharge of their	82
duties.	83

(3) The director of budget and management shall serve as the	84
committee's chairperson.	85

(1) Ensure that the internal audits conducted by the office	87
of internal auditing in the office of budget and management	88
conform to the institute of internal auditors' international	89
standards for the professional practice of internal auditing and	90
to the institute of internal auditors' code of ethics;	91

(2) Review the process used by the office of budget and	92
management to prepare its annual budgetary financial report and	93
the state's comprehensive annual financial report required under	94
division (A)(9) of section 126.21 of the Revised Code;	95

(3) Review unaudited financial statements submitted to the	96
auditor of state and communicate with external auditors as	97
required by government auditing standards;	98

(4) Perform the additional functions imposed upon it by	99
section 126.42 of the Revised Code.	100

(C) As used in this section, "financial expert" means a	101
person who has all of the following:	102

(1) An understanding of generally accepted accounting	103
principles and financial statements;	104

(2) The ability to assess the general application of those	105
principles in connection with accounting for estimates, accruals,	106
and reserves;	107

(3) Experience preparing, auditing, analyzing, or evaluating	108
financial statements presenting accounting issues that generally	109
are of comparable breadth and level of complexity to those likely	110
to be presented by a state agency's financial statements, or	111
experience actively supervising one or more persons engaged in	112
those activities;	113

(4) An understanding of internal controls and procedures for	114
financial reporting; and	115

Sec. 126.42. (A) The state audit committee created by	117
section 126.41 of the Revised Code shall ensure that the office of	118
internal auditing in the office of budget and management has an	119
annual internal audit plan that identifies the internal audits of	120
state agencies or divisions of state agencies scheduled for the	121
next fiscal year. The chief internal auditor of the office of	122
internal auditing shall submit the plan to the state audit	123
committee for approval before the beginning of each fiscal year.	124
The chief internal auditor may submit a revised internal audit	125
plan for approval at any time the director of budget and	126
management believes there is reason to modify the previously	127
submitted plan for a fiscal year.	128

(B) To determine the state agencies or divisions of state	129
agencies that are to be internally audited, the office of internal	130
auditing, in the formulation of an annual or revised internal	131
audit plan, and the state audit committee, in approving a	132
submitted annual or revised internal audit plan, shall consider	133
the following factors:	134

(1) The risk for fraud, waste, or abuse of public money	135
within an agency or division;	136

(2) The length of time since an agency or division was last	137
subject to an internal audit;	138

(3) The size of an agency or division, and the amount of time	139
and resources necessary to audit it;	140

(4) Any other factor the state audit committee determines to	141
be relevant.	142

(C) All internal audits shall be conducted only by employees	143
of the office of internal auditing.	144