Trustee Audit Guide
A message to trustees
The International Constitution, in its "Bill of Rights for Union Members," and the Financial Standards Code, in Article XI, provide for annual audits of affiliates by independent auditors or by Trustees who are "officers elected for that purpose..." The Trustees are thereby charged with the responsibility to see that an audit of all the funds of the affiliate is performed, either by an independent auditor or the Trustees themselves. It is then their duty to report any findings to the membership and to the Executive Board. The Trustees must also see that the President and chief financial officer complete and file the "Local Union Annual Financial Report" and annual "Surety Bond Report" as required by the International Constitution.
Whether the audit is performed by independent auditors or Trustees, the findings must be reported to the membership and Executive Board. The Audit Report must be attached to the Executive Board and membership meeting minutes of the meeting at which the report was presented. The minutes and attached reports then become a permanent part of the affiliate’s records.
If the audit is performed by an outside independent accountant, such as a CPA, the accountant/CPA is required to make a separate report of compliance with the Financial Standards Code. At the time a CPA is hired, the CPA will issue an "Engagement Letter" to state whether an audit, review or compilation will be performed. The Engagement Letter should specify any other services to be performed and may provide billing rates and an estimate of the cost of services to be provided.
CPA’s will also typically issue a "Management Letter" upon completion of the engagement, in which any internal control problems or other issues that may require remedial action to be taken are noted. Officers/Trustees must obtain copies of the CPA’s Engagement Letter, Management Letter, and Audit Report. Trustees are responsible to determine that these reports are properly presented to the Executive Board and/or membership and that any recommended actions are appropriately addressed.
If the audit is to be performed by the Trustees, the following is a suggested series of steps to aid in the review of the affiliate’s financial activities. If a significant number of transactions are involved, a sampling or testing procedure may be used for all steps described in the following sections. Affiliates with large numbers of transactions should consider the advantages of using a professional accountant or CPA to perform the audit.
Before beginning the audit, the Trustees must obtain the following records:
- Cash Book or Cash Receipts/Disbursements Journal (A manual Cash Book does not need to be maintained by affiliates using automated accounting systems that provide information comparable to that found in the Cash Book.)
- Printouts from automated accounting systems as detailed in Article III, Section 1, A of the Financial Standards Code.
- Bank statements and canceled checks for the year being examined
- Bank reconciliations for the year being examined
- Savings bank books
- Duplicate deposit slips
- Checkbook and check stubs
- Per Capita Tax Reports
- Paid bills
- Officers and employees expense reports
- Payroll records and payroll tax returns
- Minutes of membership and Executive Board meetings
- Monthly financial reports, financial statements and governmental filings
- Records of expenditures from petty cash
- Mortgage and loan agreements
- Lease agreements and any other contracts
- Insurance policies
- Evidence of ownership of investments
- Schedule of other assets owned (e.g., furniture, computer, fax machine, filing cabinets, etc.)
- Local Union Annual Financial Report
- Surety Bond Report and Certificate of Coverage
The Financial Standards Code requires that all money received be deposited directly in an insured bank account, in the name of the affiliate. Deposits should be recorded in the Cash Book, indicating date received, from whom, for what and the number of members for which per capita tax or dues is received. Deposit and date of deposit should be recorded in the checkbook. Duplicate deposit slips and copies of the receipt transmittal documents (e.g., dues deduction rosters, rebate summaries, copies of deposited checks) should be retained.
- Compare amounts listed in Cash Book to duplicate deposit slips and amounts shown on bank statements.
- Review supporting documentation for cash received (e.g., dues deduction lists.)
- See that nature of receipt agrees with entry in the Cash Book.
- See that the Cash Book is properly added.
- See that deposits are properly recorded in the checkbook.
The Financial Standards Code states that union money can be spent only if required by law, by union constitution, to fulfill contractual obligations or as authorized by vote of either the membership or the Executive Board. Disbursements require signatures of two officers or their designees. At the time a check is issued, the date, amount, payee and purpose of the check should be recorded on the check stub and in a Cash Book or Cash Disbursements Journal.
All disbursements should be substantiated by supporting documentation such as bills or invoices, per capita tax reports, employee or officer expense reports, payroll records and lease agreements. The minutes of Executive Board or membership meetings should show authorization for these disbursements as outlined in Article V of the Code.
- Compare each canceled check to the bank statement to see that a canceled check exists for each paid check shown on the bank statement.
- Compare amounts on canceled checks to amounts in the Cash Book and checkbook.
- Compare payee on check to payee listed in Cash Book and checkbook.
- Examine the endorsement to see that it agrees with the payee.
- Examine signatures on checks to see that they are signed by the officers authorized to do so under the local’s constitution.
- Compare the payee and amount on canceled checks to invoices, expense reports, Per Capita Tax Reports, etc.
- Review invoices, expense reports and PCT Reports to see that the check number and dates of payment are properly shown on each document.
- Compare explanations in Cash Book to supporting documentation to see that expenses are properly classified.
- Verify that the Cash Book is properly totaled.
- Verify that the checkbook is properly maintained so as to show the current balance at all times.
All bank statements, canceled checks and voided checks must be retained by the principal financial officer. The canceled checks which are retained with any statement should be kept with that statement regardless of the date or number appearing on the check. The monthly bank reconciliation should be kept with each month’s bank statement.
Canceled checks are required to verify the accuracy of the financial records (e.g., checks recorded in the Cash Book, notations on paid bills). However, some banks and credit unions do not automatically provide canceled checks. If the canceled checks are not available, Trustees must take steps to obtain copies of those checks.
- Review monthly bank reconciliation to see that amounts shown for Cash Receipts and Cash Disbursements agree with totals in Cash Receipts and Cash Disbursements Books, and reconcile any differences.
- Compare cash balance on the financial statement to bank reconciliation balance and to checkbook balance.
- Research any outstanding checks six (6) months or older for possible cancellation or stop payment.
- If applicable, obtain copies of missing checks from the bank or credit union. Compare copies to the entries in the Cash Book.
- Question financial officers to obtain an explanation of any unusual transaction reflected on the bank statement.
- Request explanation and supporting documentation from the bank or credit union for any unusual transaction.
Bank debit or ATM cards
Bank Debit Cards and/or Automated Teller Machine (ATM) Cards may not be used under any circumstances. Review all bank statements for evidence of ATM or Debit Card Transactions.
Savings accounts may be maintained, but only at insured institutions and in the name of the affiliate.
- Review savings bank records to see that all interest is properly recorded.
- Review deposits and withdrawals and compare to amounts shown in the Cash Receipts and Cash Disbursements Books.
- Check to see that the balance in the passbook or bank statement agrees with the balance shown on the financial statement.
- Check to see that the signatures authorizing the withdrawals are the signatures authorized by the affiliate’s constitution.
- Trace all transfers between the savings account and the checking account to see that all such transfers have been properly deposited.
Expense reports and reimbursments
Union Officers and members may be reimbursed for expenses relating to union activities. These expenses must be documented by a report or other itemized list showing payee, amount, nature of expense and applicable invoices or receipts. The expense report or list must be signed when submitted by the individual requesting reimbursement and approved by the appropriate supervisor or officer. The reimbursement must be authorized in the minutes.
- Review the expense reports or submitted lists for a) authorization, b) supporting documentation, c) nature of expense, d) signature of individual submitting request for reimbursement and e) signature of approving authority.
- Compare for compliance with affiliate’s policy for reimbursement of expenses, e.g., per diem, automobile mileage and other limitations and restrictions.
- Compare amount shown on voucher to actual check paid.
- Review the minutes to see that authorization is properly recorded, particularly for conventions, conferences, meetings, etc.
- Verify that each meal or entertainment item reimbursed is supported by a list of the names of the people entertained, their relationship to the union, and the union business discussed.
- Verify that all costs paid directly by the affiliate, (e.g., direct hotel billings, union-owned credit cards) have been properly reported on itemized expense reports.
- Verify that any individual authorized to use a union-owned credit card has provided an itemized expense report accounting for each and every charge made.
Expense advances may be authorized. Advances should subsequently be accounted for by submission of expense reports, invoices and other documentation required for expense reimbursement.
- Review expense advance for authorization and approval in the minutes.
- Check to see that the advance is subsequently accounted for by submission of expense reports with supporting documentation.
- Check to see that any advances in excess of amounts reported on expense reports were returned to the affiliate and deposited into the appropriate bank account.
Accountable versus non-accountable reimbursment plans
The glossary provides an explanation of the difference between accountable and non-accountable plans. Basically, a non-accountable plan does not require the filing of an expense report, but treats all payments to individuals as taxable compensation.
- Obtain copies of minutes authorizing payments to staff, officers or members to determine the intent of the payment - accountable or non-accountable.
- Are expense reports being filed for accountable payments?
- Are wages being reported to the government and relevant payroll taxes being withheld and deposited for non-accountable payments?
Credit card charges
While not recommended by AFSCME, some affiliates provide employees and/or officers with union-owned credit cards that are billed directly to the union. Any individual authorized to make a charge directly to an affiliate credit card must provide an itemized expense report detailing each and every charge made as well as its union purpose.
Credit cards of individuals (employees or officers) are the responsibility of that person. Costs incurred by individuals must be submitted on an expense report for reimbursement to the individual. Under no circumstances should the union make a payment to a credit card company for a card that is owned by an individual.
- Obtain copies of all credit card statements.
- Obtain copies of the meeting minutes at which either the membership or Executive Board approved a union-owned credit card(s), and identifies the individual(s) authorized to use the card(s). Verify that cards were acquired and are being used in compliance with the approvals.
- Obtain copies of any policy or procedure manuals/memos that explain the proper use of the credit card(s).
- Obtain copies of all expense reports that are used to account for credit card transactions. Verify that each charge on the statement is documented on an expense report signed and submitted by the responsible person.
- Determine the policy regarding personal use of the union credit card(s). Identify any personal use and verify that repayment was made to the union.
- Prepare a separate audit report to be presented to the Executive Board that deals specifically with credit card use and the results of this audit.
- Identify all payments made to credit card companies. Trace each payment to the union-owned credit card statements. Are any payments made for unidentified credit cards or credit cards of individuals?
Salaries for employees should be authorized and documented in minutes. Payment of salaries causes the affiliate to be liable for payroll taxes, withholdings and payroll tax returns. Failure to file such reports can result in tax penalties and could subject the financial officers to personal liabilities.
- Examine payroll records to see that payroll is properly recorded showing detail of wages and all deductions.
- Compare amounts shown in Cash Disbursements Book to amounts in payroll record.
- Check salary rates to approvals as shown by membership or Executive Board minutes.
- Check for approval in hiring individuals receiving salaries and wages.
- See that payroll records reflect sick leave, vacation, holidays, etc.
- Examine quarterly and annual payroll records and verify that W-2s have been filed with the IRS for all individuals to whom wages are paid.
Authorized allowances should be documented in minutes and be reported as wages to the recipients.
- Check the rate of allowances paid to officers and employees against approvals as reflected by the minutes.
- Verify that W-2s have been filed with the IRS for all individuals who are paid allowances during the calendar year.
(Note: Allowances must be distinguished from expense advances.)
- Expenses advanced must be accounted for by submission of supporting documentation to the Local Union. Allowances DO NOT require documentation, only approval.
- Allowances are treated as taxable income to the recipient. Reimbursed expenses are not taxable.
Payments for lost time constitute taxable income to the recipient and must be reported. Lost time payments should be supported by authorization, purpose, and basis for amounts paid.
Payments for lost time can be based on the actual salaries lost by an individual, or at a rate that represents an average for all people being paid. Some government agencies consider payment of lost time, where the individual was actually also paid by their employer, to be illegal and could subject the individual to criminal charges.
- Review the affiliate’s requirements for documenting, approving and issuing lost time payments.
- Examine supporting records for approval of payment.
- See that records reflect purpose for which lost time was used.
- Verify that W-2s were filed for all lost time paid.
- Determine how the lost time rate was calculated and verify that individuals were paid at the correct rate.
- Determine if documentation is on file to verify that the individual suffered a loss of income that is being made up by the affiliate as lost time.
Article IX of the Financial Standards Code requires a monthly financial statement be prepared and made available to the membership and the Executive Board. These reports should be attached to the minutes of the meeting at which they are presented and become part of the affiliate’s records.
- Review minutes for indication that monthly financial statements were presented to the membership and Executive Board.
- Compare total receipts and disbursements shown by monthly financial statement to Cash Receipts and Cash Disbursements Books.
- Review one or more months of disbursements to see that authorization exists in the minutes.
All labor unions, including organizations affiliated with AFSCME, are required to file Form 990 or Form 990EZ with the Internal Revenue Service if their gross receipts exceed $25,000. Form 990 is due May 15 or four and one-half months after the end of the local’s fiscal year. Failure to file carries a penalty to the affiliate of $20.00 per day until filed with a maximum penalty of the lesser of $10,000 or 5% of the gross receipts of the affiliate for the year.
Unions that spend money attempting to influence the selection, nomination, election or appointment to any public office at any level of government or any office in a political party must file Form 1120-POL with the Internal Revenue Service if both net investment income and political expenditures exceed $100.00, and if the local has not established a "separate segregated fund."
Also, the U.S. Department of Labor requires annual reports to be filed by unions who are governed by the provisions of the Labor-Management Reporting and Disclosure Act of 1959, As Amended (primarily those who represent private sector members). Form LM-2 must be filed for those qualifying affiliates who have annual receipts in excess of $200,000. LM-3 needs to be filed for qualifying affiliates who have annual receipts less than $200,000. LM-4 needs to be filed for qualifying affiliates who have annual receipts less than $10,000.
Other governmental filings may also be required. Please see the Appendices for additional information on governmental reports.
- Determine that IRS Form 990 has been properly filed with the Internal Revenue Service and, if applicable, that the appropriate Form LM-2, LM-3 or LM-4 has been filed with the U.S. Department of Labor.
- If the examination of records indicates that political contributions have been made, and if a "separate segregated fund" has not been established, determine that IRS Form 1120-POL has been filed and the necessary tax paid.
Local union reporting
The International Constitution requires that all Local Unions file the "Local Union Annual Financial Report" with the International Union each year.
- Check to see that the Local Union Officers have filed the "Local Union Annual Financial Report" for the most recent fiscal year.
- Review the comments made by the International Union and see that any recommended adjustments in record keeping have been made.
- Check to see that the annual Surety Bond Report was completed and forwarded to the International Secretary-Treasurer for the most recent year.
Maintenance of Records
The records listed in this audit guide needed to perform the audit must be maintained for six years. Minutes should be retained indefinitely.
- Check to see that all records of the union are retained in their original form for at least six years as required by the Financial Standards Code.
The Financial Standards Code requires that each year an audit of the affiliate be conducted by Trustees of the affiliate, or by independent auditor(s) not connected with the union. The Code requires that a report be made to the Executive Board and to the membership.
- If the audit is performed by an independent auditor or CPA, check the minutes to see that the report was made to the Executive Board and to the membership.
- Check to see that all recommended adjustments in record keeping have been made.
Report of findings—Trustee audit
If the audit is conducted by the Trustees, they are required by the Financial Standards Code to report their findings to the Executive Board and to the membership.
- The report should be written to show those areas which do not conform to the prescribed standards outlined in the Financial Standards Code.
- The report should be directed to the Executive Board and signed by each of the Trustees.
Review of outside auditor report
If the audit was performed by an outside independent accountant, such as a CPA, then they should make a separate report of compliance with the Financial Standards Code
Obtain copy of the CPA’s "Engagement Letter" -- which specifies the work the CPA was to perform.
Obtain a copy of the Audit Report.
Obtain a copy of the Financial Standards Code Compliance Report.
Obtain a copy of the CPA’s "Management Letter"-- which lists issues that need to be reviewed by the Executive Board.
Determine that reports are properly presented to the Executive Board and/or membership and that any recommended actions are appropriately addressed.