Labor Unions: Financial, Beck and Compliance Audits

Whether it’s requested or required, labor unions will likely find themselves in an audit process.

But, these audits can be more than simply compliance measures. Officers and management can use these audits to obtain feedback on internal financial reporting and other operational processes. Then, they can use this information to improve their organization’s effectiveness.

Below is a summary of the three main types of audits that labor unions are likely to encounter:

1. Financial audits: These are generally stipulated in a labor union’s constitution, bylaws, or other governing documents, requested by the officers, or required by a financial institution. Labor unions will engage an independent accounting firm to perform an audit in accordance with generally accepted auditing standards and to issue an opinion on the union’s financial statements.
2. Beck audits: Also performed by an independent accounting firm, these are required in circumstances where a labor union, in the private sector, has non-union members questioning the calculation of the agency fee they are required to pay.
3. Compliance audits: These are required if the labor union has been selected by the Office of Labor-Management Standards (OLMS) to undergo such an examination. However, labor unions may also choose to do their own “mock” compliance audit, for internal purposes only, to test the organization’s preparedness in the event it is selected for a compliance audit.

Regardless of the reason triggering a financial audit, it can benefit a labor union in many ways. Financial audits have the following functions:

1. Provide readers with a reliable picture of the labor union’s assets, obligations, and activities (income and expenses), so that officers and other users can have confidence in the information they use to make decisions.
2. Provide readers with key information to monitor the solvency of the labor union and its ability to serve the interests of members.
3. Include considerations of the union compliance with governing documents (e.g., Constitution) and regulations (e.g., LMRDA, CSRA), so that any potential non-compliant activities can be discussed and remedial actions can be taken timely, as necessary.
4. Allow the union to represent to the OLMS during the LM filing process that financial records were subject to an audit (Form LM-2, question 12).
5. Provide other benefits such as insight into the effectiveness of financial reporting processes and access to resources valuable to the union as it grows and adapts to the changing organized labor environment.
6. Promote the credibility and reputation of the labor union to the government, members, peers and opposition because it improves the quality of the LM reporting (which is public information) and demonstrates a commitment to engage in activities appropriate with the labor union’s purpose.

Beck audits came about as a result of Communication Workers of America v Beck, 487 U.S. 735 (1988). Nonmember employees (in the private sector) who are subject to union security but object to the expenditure of their agency fees for activities other than collective bargaining, contract administration, or grievance adjustment can only be compelled to pay that portion of the agency fee necessary to the union’s performance of “the duties of an exclusive representative of employees in dealing with the employer on labor-management issues.” The National Labor Relations Board has ruled that the compilation of chargeable and nonchargeable expenses must be audited, citing the “basic considerations of fairness” standard per the Supreme Court. While it is the nonmember employee’s burden to raise the objection, it is the union’s burden of proving the calculation. Potential objectors are entitled to sufficient information to gauge the propriety of the fee. But the Union need only provide major categories of expenses verified by an independent auditor; it does not need to be an exhaustive, detailed listing of expenditures.

And finally, OLMS performs compliance audits of selected labor unions every year. Audits of local unions and intermediate bodies are conducted under the Compliance Audit Program (“CAP”); audits of national or international unions are conducted under the International Compliance Audit Program (“I-CAP”). These audits are intended to investigate potential violations and provide compliance assistance.

Closing letters issued by the OLMS are public record and describe, as applicable, findings over a labor union’s reporting, recordkeeping and internal controls. Some examples of findings reported in closing letters are as follows:

• Adequate documentation for reimbursed expenses and credit card expenses was not retained.
• Itemized receipts were not required as support for credit card charges.
• There was inadequate bonding of officers and employees.
• Disbursements were reported on an incorrect line on the Form LM-2.
• The Form LM-2 did not include all receipts.
• Amended bylaws and/or Constitution was not filed.
• Form LM-3 form was not signed by the treasurer and president.

For more information on compliance audits such as selection, pre- and post-audit processes and other miscellaneous questions, review the FAQ site of the OLMS.

All of these audits have significant implications and demand a great deal of employees’ time so you should invest your resources wisely by partnering with a firm that is:

• Reputable with satisfactory, recent peer review results
• Familiar with the intricacies of the labor union industry
• Knowledgeable about OLMS, LMRDA, and CSRA operational and filing requirements
• Independent (free of any conflicts of interest)

Depending on the size and needs of your organization, you may find it valuable to select a firm that also provides other non-audit resources such as software implementation support, cybersecurity expertise, operational training, etc. Choosing the best firm to partner with you and your organization yields numerous benefits, both those listed above and many others!
Author: Ashleigh Hall | [email protected]