Opinion ID: 746746
Heading Depth: 2
Heading Rank: 2

Heading: Who Counts as an Independent Auditor?

Text: 17 The question remains of what suffices to satisfy the requirement of an independent auditor under the NLRA--what qualifications and what degree of independence the auditor must have. The Board and the Unions argue that we should not reach these issues, as they were not properly raised below. As to the question of what form of professional certification or license is required, the Board concedes that the General Counsel argued both before it and before the ALJ that verification by an independent auditor meant verification by an independent accounting firm, and that Ferriso argued before the Board that it meant verification by a certified public accountant, i.e., a CPA. NLRB Brief at 5-6. This issue was therefore adequately raised. 18 As to the meaning of independent, it is appropriate to reach this question in order to correct an error in the methodology the Board applied in California Saw. Although California Saw rejected the independent auditor formula, it did require some form of verification of a union's financial data. In the absence of any counterindications from us, the Board might choose to draw on the methodology it applied in California Saw for analyzing unions' data-verification arrangements in giving content to the independent auditor standard on remand. Some discussion of the reasoning of California Saw is therefore necessary. 3 19 California Saw found that Beck was satisfied by an arrangement under which the international union was audited by outside CPAs, but the audits of the district and local unions were conducted by employees of the international union who were not CPAs. The Board found that because the auditors had accounting training, had served as Local or District treasurers, and applied an audit protocol developed by the union with an outside consultant, the General Counsel has not demonstrated that the verification of expenses tasks at issue here are beyond the skills of the [union] auditors. California Saw, 320 N.L.R.B. at 241. As to auditor independence, the Board found that the union took significant steps to assure objectivity because auditors were not permitted to audit affiliates for which they currently or formerly worked or of which they were members. Id. 320 N.L.R.B. at 241-42. The Board also observed that there had been no allegations that audits had been performed in a less than honest, unbiased, or objective manner, and that the international union had an independent interest in obtaining objective audits of the books of its affiliates. Id. 320 N.L.R.B. at 242. 20 The Board's methodology contained two errors. First, it imposed very little scrutiny on the verification arrangement before it, finding it sufficient that the audit had not been demonstrated to be beyond the skills of the auditors, and that the union had taken significant steps towards assuring objectivity. Second, and more seriously, it made no reference to the accepted norms of the accounting profession in analyzing the expertise and independence of the auditors. Federal and state authorities and professional associations have devoted considerable effort to developing standards of independence and professionalism for audits of businesses, employee benefit plans, and the like; potential objectors to agency fees should not be required to rely on an audit that does not meet the prevailing standards for audits of other comparable entities. 4 21 The Court emphasized in Hudson that absolute precision in the calculation of agency fees cannot be expected or required, Hudson, 475 U.S. at 307 n. 18, 106 S.Ct. at 1076 n. 18 (quoting Abood, 431 U.S. at 239-40, n. 40, 97 S.Ct. at 1801-02, n. 40). Similarly, an audit under the NLRA need only conform to the prevailing norms for an adequate audit. See Gwirtz v. Ohio Education Ass'n, 887 F.2d 678, 680-82 (6th Cir.1989) (approving use of an adequate auditing standard that falls short of the highest level of audit service available); see also Abrams, 59 F.3d at 1381 (approving a procedure under which union employees keep records of their time for only one week out of thirteen). The nature of an adequate audit may vary depending on the size and complexity of the auditing task, as this may affect the types of entities with which the union may appropriately be compared. The following is a summary of some of the relevant norms that we have identified, and of their likely implications, to guide the Board's decision on remand. 22
23 The American Institute of Certified Public Accountants (AICPA) has promulgated a wide range of standards of accounting and auditing practice. This includes a set of ten Generally Accepted Auditing Standards, the second of which addresses independence. See Codification of Statements on Auditing Standards, Statement on Auditing Standards No. 1, § 150 at 21 (AICPA 1995) (hereinafter Auditing Standards ). AICPA's official interpretation of this standard requires that the auditor be in public practice (as distinct from being in private practice), and states in part: 24 It is of utmost importance to the profession that the general public maintain confidence in the independence of independent auditors. Public confidence would be impaired by evidence that independence was actually lacking, and it might also be impaired by the existence of circumstances which reasonable people might believe likely to influence independence. To be independent, the auditor must be intellectually honest; to be recognized as independent, he must be free from any obligation to or interest in the client, its management, or its owners.... Independent auditors should not only be independent in fact; they should avoid situations that might lead outsiders to doubt their independence. 25 Auditing Standards, Statement on Auditing Standards No. 1, § 220 at 31. 5 The Securities and Exchange Commission has also adopted a regulation setting forth the necessary qualifications of an accountant issuing a report on the financial statement of a publicly traded company. That regulation's independence requirement bars an accountant from auditing a firm or its affiliates if that firm has employed him or anyone else from his office during the period covered by his report. 17 C.F.R. § 210.2-01 (1996). Based on these authorities, we think that it is unlikely that an arrangement like that at issue in California Saw would be consistent with the ordinary norms for the independence of an audit. 26
27 The most prevalent category of professional qualification in the accounting profession is a license to practice as a certified public accountant, or CPA. Some states have additional categories of accounting practitioners, such as public accountants or registered accountants, who are not certified but who are otherwise licensed to offer certain types of services to the general public. D. Edward Martin, Attorney's Handbook of Accounting, Auditing and Financial Reporting § 1.01 at 1-4 (1996). Federal law permits audits of employee benefit plans and publicly traded firms to be performed either by certified public accountants or by licensed public accountants. 6 Audits of unions should in general conform to a similar standard. 28 Ferriso asserts that Hudson should be read to require that all audits be performed by CPAs. Hudson did say, in discussing whether the contributions of nonmembers must be escrowed in full while a challenge to an agency fee is pending, that [i]f, for example, the original disclosure by the Union had included a certified public accountant's verified breakdown of expenditures, including some categories that no dissenter could reasonably challenge, there would be no reason to escrow fees in these categories. 475 U.S. at 310, 106 S.Ct. at 1077. The context makes clear, however, that this reference to a certified public accountant was intended as an example, and that it is the term independent auditor that governs. 7 III. CONCLUSION 29 For the foregoing reasons, we grant Ferriso's petition for review, and remand this cause to the NLRB for further proceedings consistent with this opinion. On remand, the NLRB shall order that the Unions provide Ferriso with an independent audit of their financial data, and that the independence and qualifications of the auditors conform to prevailing norms for audits of comparable entities. 30 So ordered.