Opinion ID: 781700
Heading Depth: 2
Heading Rank: 2

Heading: Whether All Locals Must Provide Audited Statements

Text: 15 At the beginning of each school year, each feepayer teacher represented by a CTA-affiliated local receives a notice on CTA letterhead explaining the purpose of agency fees and the manner in which the unions calculate those fees. Attached to the CTA notice are audited financial statements for the national union and CTA, and some type of financial disclosure for the particular local union representing the recipient teacher's bargaining unit. Under a policy adopted by CTA in 1986, shortly after the Hudson decision, if the local union's total estimated annual revenue from member dues and agency fees is $100,000 or more, then the local union's financial disclosure must be in the form of a financial statement audited by an outside CPA. If the local union's estimated annual revenue is less than $100,000 but at least $50,000, then the financial disclosure can be simply reviewed by an outside CPA or audited by CTA's staff auditors. If the local union's estimated annual revenue is less than $50,000, the policy requires only that the local union provide feepayers access to the local union's check register and cancelled checks and provide copies of two forms, one required by IRS and the other by the California Public Employment Relations Board, signed by union officials under penalty of perjury, summarizing the local union's chargeable and non-chargeable expenditures. 16 The district court held that, under Hudson, each local union, regardless of size, must provide its members with audited financial statements indicating their chargeable and non-chargeable expenditures. The district court relied on our decisions in Prescott v. County of El Dorado, 177 F.3d 1102 (9th Cir.1999), vacated, 528 U.S. 1111, 120 S.Ct. 929, 145 L.Ed.2d 807, reinstated in pertinent part, 204 F.3d 984 (9th Cir.2000). In that case, we held that a state union and its local affiliate were required to provide financial statements that had been subjected to some auditor verifiable methodology in order to provide feepayers a reasonable opportunity to gauge whether the money taken from them is being spent on chargeable expenses. Id. at 1108-09. The district court appears to have interpreted Prescott to require all local unions to provide audited financial statements as part of their Hudson notice to feepayers. 17 In Prescott, however, we noted that accountants can provide three levels of scrutiny of financial documents. Id. at 1106. In the lowest level, compilation, the accountant simply prepares a financial statement, relying on the union's records, without expressing any opinion as to the accuracy or completeness of the statement. Id. (citing Larry P. Bailey, Miller GAAS Guide 14.19-14.20 (1999)). The intermediate level, a review, comes with the accountant's limited expression of assurance, examining records and, in reliance on the representations of the union's financial officers, stating that the accountant is not aware of any material modifications that should be made to the financial statement in order for it to comply with generally accepted accounting principles. Id. at 1107 (citing Bailey at 14.25-14.28). An audit, the highest level of scrutiny, requires the accountant to examine the union's financial recording and control procedures, examine a sample of evidence supporting the amounts listed in the financial statement, confirm inventories, and verify accounts receivable. Id. (citing Bailey at 14.25-14.26, 11.05-11.06). Audits themselves can vary in procedure and extent, and therefore involve varying degrees of certainty. Id. (citing Bailey at 9.05-9.07). 18 In Prescott, we did not hold that a separate verified audit is always required. Id. at 1108. We held some independent verification must be provided: [W]hat is required is a real independent verification of the financial data in question to make sure that expenditures are being made the way the union says they are. Id. at 1107; see also Gwirtz v. Ohio Educ. Ass'n, 887 F.2d 678, 682 (6th Cir.1989) (holding that Hudson does not require union to provide the highest level of audit, but only an independently verified financial statement sufficient to allow feepayers to gauge the propriety of the agency fee); Andrews v. Educ. Ass'n of Cheshire, 829 F.2d 335, 340 (2d Cir.1987) (holding that Hudson requires the auditor, not to verify the proper categorization of expenditures as chargeable or nonchargeable, but merely to ensure that the expenditures which the union claims it made for certain expenses were actually made for those expenses). Insofar as the district court's order requires that the local unions provide more than a threshold level of independent verification that fees are not being used for non-chargeable expenditures, it is in conflict with our holding in Prescott. 19 This is not to say that the practice of the local unions in this case with revenues of less than $50,000 meets the requirements of Prescott and Hudson. The smallest local unions provide their feepayers with financial statements prepared only by union officials, and attested to only by those individuals, albeit under penalty of perjury. No outside individual reviews the accuracy of those financial statements. In addition, the checkbook and canceled checks to which the union provides access are only part of the information required to verify the financial statements; the unions do not provide feepayers access to other financial records, such as bills or inventories. The small local union's practice does not meet the requirement of Hudson and Prescott to provide its feepayers with either the full financial material necessary to verify, or an independently sanctioned verification of, the local union's chargeable and non-chargeable expenditures. 20 The union defendants contend that the smallest local unions should be excused from the independent verification requirement because the cost associated with such verification is disproportionately large when compared to their union's fee revenue. We have already held, however, that union costs do not trump non-members' First Amendment rights. As we stated in Prescott, [e]xcessive cost cannot form the basis for allowing the union or the government to avoid Hudson's requirement that the procedures used by the union to allocate bargaining and administrative costs be carefully tailored to minimize the intrusion on the nonmembers' rights. Prescott, 177 F.3d at 1108 (quoting Andrews, 829 F.2d at 339). However, adequate disclosure under Hudson need not require substantial expense. See Hudson, 475 U.S. at 307 n. 18, 106 S.Ct. 1066. We are confident that smaller unions can devise flexible and creative auditor verifiable methodolog[ies], appropriately tailored to provide their nonmembers with a reasonable opportunity for meaningful verification, without depleting the union coffers. See Prescott, 177 F.3d at 1108-09; Hudson, 475 U.S. at 306-07, 106 S.Ct. 1066. For the smallest affiliates, providing financial reports along with full and fair access to bills, check stubs, canceled checks, account balances, and related materials may be more cost-efficient than an external review; we need not dictate the particular procedure as long as it is sufficiently reliable to ensure that a nonmember can independently verify that the union spent its money where it claimed that it did. The district court did not err in holding that the financial information provided by the DTA was inadequate. It erred only in requiring more than adequate accessible information using an auditor verifiable methodology that could verify DTA's expenditures.