Counties Can Hire Private CPA Firms for Annual Audits

The Court of Appeals of Minnesota in Otto v. Wright County, et al. interpreted the State Government Finance Omnibus Bill, and determined that counties could hire private CPA firms to conduct the required annual audits, but the State Auditor still retains substantial authority over the conduct of those audits. 

In May 2015, the Minnesota Legislature passed the State Government Finance Omnibus Bill. Chapter 77 included provisions, codified at Minn. Stat. § 6.481 (the county audit statute), requiring counties to undergo annual audits and authorizing counties to choose whether to have the Office of State Auditor ("OSA") or a private CPA firm perform the audits. Following the passage of the statute, OSA sent out three-year contracts.

Citing the new county audit statute, respondents, Wright County, Becker County, and Ramsey County, refused to commit to a three-year contract. Wright and Becker Counties notified their intent to hire private CPA firms but allowed the OSA to conduct their audits; however, Ramsey County did not state an intent to hire a private CPA firm but declined to sign a three-year contract.

In February 2016, the appellant/cross-respondent, Rebecca Otto (Minnesota State Auditor), commenced a declaratory-judgment action against respondents, alleging that (1) Minn. Stat. § 6.481 violated the Minnesota Constitution by removing a core function from her office; and (2) that the underlying session law was adopted in violation of the Single Subject Clause of the Minnesota Constitution. The state auditor moved for summary judgment, and the district court granted it in part and denied it in part, ruling that (1) auditing counties is a core function of the OSA but that the county audit statute permissibly modifies that function; and (2) that chapter 77 did not violate the Single Subject Clause because the various topics of the session law are connected by the common thread of state government operations. The district court further denied the counties' motions to dismiss on Judicial grounds.

The state auditor appealed, and the counties filed notices of related appeals - Ramsey County as to the district court's denial of its motion to dismiss on Judicial, and Wright and Becker Counties as to the district court's determination that auditing counties is a core function of the OSA.

First, the Court of Appeals of Minnesota addressed whether the county audit statute violated article III of the Minnesota Constitution by removing core functions from the state auditor. According to Article III, no person or persons belonging to or constituting the legislative, executive, or judicial departments shall exercise any of the powers properly belonging to another; and although the duties and salaries of the executive officers shall be prescribed by law, it does not specify the duties of most executive officers.

While the respondents argued the district court erred by determining that auditing counties is a core function of the state auditor, the appellant challenged the district court's conclusion that the county audit statute merely modified, but did not transfer, that core function.

The Court of Appeals held that auditing counties is a core function of the state auditor, citing Mattson v. Kiedrowskiin its reasoning. The court determined that, at the time of the adoption and ratification of the Minnesota Constitution, the terms "state auditor" and "controller," as evidenced by the constitutions and statutes of that period, were commonly understood to connote a supervising officer of revenue whose duties were to audit all claims against the state.

Even though the counties argued that the creation of a public examiner position, responsible for conducting county audits between 1878 and 1973, indicated that performing audits was not a core function, the Court of Appeals held that the transfer of duties over that period of time did not pass constitutional muster. It determined that the Constitutional framers intended auditing to be a core function of the state auditor.

Furthermore, the Court of Appeals held that the county audit statute permissibly modified, rather than transferred, the state auditor's core functions. In its reasoning, the court first compared the current statute, Minn. Stat. § 6.481 (2016), to the prior statute, Minn. Stat. § 6.48 (2014). As noted by the court, both statutes provided that "all the powers and duties conferred and imposed upon the state auditor shall be exercised and performed by the state auditor in respect to the offices, institutions, public property, and improvements of [the] several counties of the state."

Both statutes required the state auditor to "prescribe and install systems of accounts and financial reports that shall be uniform, so far as practicable, for the same class of offices." The county audit statute, however, effectuated two changes: (1) counties were now required to undergo annual audits; and (2) they could choose to have the audit performed by the OSA or a private CPA firm. The county audit statute, however, retained language authorizing the records relating to the receipt and disbursement of the public funds and the custody of the public funds and other property.

The Court of Appeals concluded that although counties have the option of enlisting the state auditor or a private CPA firm to perform the audits, the statute did not disturb the state auditor's ultimate authority as the state's general accountant. The state auditor remained authorized to visit counties, without notice, for the purpose of examining their records; to require additional information from CPA firms conducting county audits; and to make additional examinations as she determines to be in the public interest.

Although the state auditor may be precluded from initially performing required annual audits based on county preference, she retained substantial authority over the conduct of those audits, including the authority to perform auditing functions that she determines to be in the public interest.

The Court of Appeals of Minnesota also addressed whether the Minnesota Legislature violated the Single Subject Clause of the Minnesota Constitution by including the county audit statute in chapter 77. The Single Subject Clause provides that "no law shall embrace more than one subject." According to Johnson v. Harrison, all matters should be so connected with or related to each other, either logically or in popular understanding, as to be parts of, or germane to, one general subject.

In Blanch v. Suburban Hennepin Reg'l Park District, the Supreme Court of Minnesota upheld a law authorizing a county park district to acquire land that was passed as part of an omnibus appropriations bill directed to the organization and operation of state government. In that case, the court supplied a "mere filament" test for determining whether a law violates the Single Subject Clause. B

By contrast, the Supreme Court of Minnesota in Associated Builders held while a prevailing-wage amendment, requiring school districts to pay the prevailing wage in connection with large construction or remodeling projects, may have a tax impact by affecting construction costs, clearly that was not its purpose and nowhere is consideration of tax relief mentioned in its very short text. The court further concluded that to construe an amendment requiring prevailing wages, that lack any express limitation to public funding as related to the subject of financing and operation of state and local government, would push the "mere filament" to a "mere figment". The court held that the filament test was satisfied in this case. The county audit statute formalized the shared county-and-state responsibility for conducting county audits that has been in effect for more than a decade.

Third, the Court of Appeals addressed whether the district court erred in denying Ramsey County's motion to dismiss on Judicial grounds. Ramsey County argued there was no judicial controversy between it and the state auditor because it has not yet decided whether it will choose to use a private CPA firm to conduct its future audits.

According to Minn. Stat. §§ 555.01-.16 (2016), an interested person may have his or her rights declared under a statute or other writing. The district court, however, does not have jurisdiction over a declaratory judgment proceeding unless there is a judicial controversy. A judicial controversy exists if the claim (1) involves definite and concrete assertions of right that emanate from a legal source; (2) involves a genuine conflict in tangible interests between parties with adverse interests, and (3) is capable of specific resolution by judgment rather than presenting hypothetical facts that would form an advisory opinion. Because Ramsey County asserted rights emanating from the county audit statute that conflicted directly with the state auditor's assertion of rights emanating from the Minnesota Constitution, the Court of Appeals affirmed the district court's ruling.

Ramsey County further asserted its dispute with the state auditor was not ripe because it had not yet determined whether it would elect a private audit and thus that any potential injury to the state auditor was hypothetical. The Court of Appeals held, however, that under the Minnesota Declaratory Judgments Act, a ripe, judicial controversy existed.

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