January 29, 1982

Mr. Gordon K. Milbrandt 
Auditor General 
Department of Legislative Audit 
435 South Chapelle 
Pierre, South Dakota 57501

Official Opinion No. 82-3

Contract for Audit Services with Private Accountants

Dear Mr. Milbrandt:

You have requested an official opinion from this office in regard to the following factual situation:

FACTS: 

The Department of Legislative Audit performs audits of state agencies.  In some instances, the Department has approved private accountants to perform audits of state agencies or selected activities therein.  The federal government, in some instances, requires state agencies to obtain audit services.

Based on the above facts, you have asked the following questions:

QUESTIONS: 

1.  May an individual state agency contract with an accounting firm to provide audit services? 

2.  Must a state agency first request approval of the Auditor General to contract with an accounting firm to provide audit services? 

3.  Does the answer to Question No. 2 change if an audit is required by the federal government?

IN RE QUESTION NO. 1:

SDCL 4-11-7 provides for audits by private accountants.  That section states, in part, that: 

Nothing contained in this chapter shall prevent a public corporation, as defined in §  5-18-1, from employing a private accountant to examine and audit the books and accounts thereof or of any of its officers whenever the governing body or authorized official thereof believes that the public interest requires it, provided such employment is first approved by the auditor-general within his guidelines . . .  The auditor-general may, in his discretion, accept such audit in lieu of an examination otherwise required to be made by him.

In SDCL 5-18-1(1), 'Public corporation' is defined as 'the state and all counties, cities, towns, public school corporations and all officers, boards or commissions empowered by law to enter into contracts for the construction of public improvements.'

The very essence of your question is whether a state agency is a public corporation for the purposes of SDCL 4-11-7.

In Official Opinion 80-26, dealing with interest charges on delinquent Department of Legislative Audit billings to state agencies, it was my opinion that, for the purposes of SDCL 4-11-18, the term 'public corporation' did not include state government and its agencies.  Under the most basic rules of statutory construction, the definition of the term 'public corporation' found  in SDCL 4-11-18 also applies to that same term in other sections of the same chapter of the South Dakota Codified Laws.  Therefore, at the time Official Opinion 80-26 was written, state agencies were probably not considered 'public corporations' as that term is used in SDCL 4-11-7, and did not need Auditor General approval before employing private accounting firms to audit their books.

Since Official Opinion 80-26 was written, however, the 1981 Legislature amended SDCL 4-11-7, so as to define 'public corporation' as that term is defined in SDCL 5-18-1.  The state government and its agencies clearly fall under the term 'public corporation' as that term is defined by SDCL 5-18-1. Therefore, state agencies fall under the ambit of SDCL 4-11-7.  Thus, it is my opinion that the answer to your first question is YES, a state agency may contract with an accounting firm to provide audit services, so long as the requirements of SDCL 4-11-7 have been met.

IN RE QUESTION NO. 2:

Based on my answer to Question No. 1, it is my opinion, that the answer to your second question is YES, a state agency must first request approval of the Auditor General to contract with an accounting firm to provide audit services.

IN RE QUESTION NO. 3:

Federal funding in state agencies is generally dealt with in SDCL 4-8B.  Specifically, SDCL 4-8B-11 states that: 

All expenditures of federal grant funds by state agencies shall be recorded, accounted for, reported and audited in a manner similar to the general funds of the state.  The provisions of this section shall not be construed as a requirement for state agencies accounting for federal grant funds in a manner accepted by the state auditor-general to alter the state agencies' methods of administering and accounting for the expenditures of such federal grant funds.

This statute creates no different auditing procedure for state agencies receiving federal grant funds from those procedures found in SDCL 4-11. Federal grant funds are to be audited in a manner similar to the general funds of the State. Therefore, it is my opinion that the answer to your question is NO, the answer to Question No. 2 does not change if an audit is required by the federal government.

Respectfully submitted,

Mark V. Meierhenry
Attorney General