living in a “goldfish bowl”: assessing recent changes in labor organization financial reporting...

LIVING IN A “GOLDFISH BOWL”: ASSESSINGRECENT CHANGES IN LABOR ORGANIZATIONFINANCIAL REPORTING REGIMES IN THE U.S.AND AUSTRALIA

John Lund

Recent changes in laws, regulations and even the reporting format of labor organization annual financialreports in both the US and Australia have received surprisingly little attention, yet they have significantlyincreased the amount of information available both to union members and the public in general, as reports inboth countries are available via government web sites. While such financial reporting laws are exteremely rarein European countries, with the exception of the UK and Ireland, the US and Australian reporting systemshave become among the most detailed in the world. After reviewing these changes in financial reporting andthe availability of these reports, as well as comparing and contrasting the specific reporting requirements of eachcountry, this paper then examines the cost-benefit impact of more detailed financial reporting.

All of these bills are based on what has been called the goldfish bowl theory, theconcept that reporting and public disclosure of union finances and certainaspects of employer finances dealing with labor relations, will either eliminateor tend to discourage the abuses disclosed by the hearings of the Senate selectcommittee. The AFL-CIO firmly believes this theory to be sound (GeorgeMeany, AFL-CIO President, cited in Aaron, 1960, emphasis added).

********A letter is being circulated in the House [U.S. House of Representatives] callingfor two specific actions . . . these two steps are long overdue. It will weaken ouropponents and encourage our allies if we take these steps [including] . . .

Order the Office of Labor-Management Standards to institute changesin the LM-2 union reporting and disclosure form to provide unionmembers with essential information on dues expenditures (Letter fromUS House of Representatives Republican Whip Newt Gingrich toSecretary of Labor Lynn Martin, February 19, 1992, emphasis added)

Introduction

Passage of the Labor-Management Reporting and Disclosure Act(LMRDA) of 1959, the law that then American Federation of Labor–Congress

WorkingUSA: The Journal of Labor and Society · 1089-7011 · Volume 11 · June 2008 · pp. 277–295© 2008 The Author(s)

Journal compilation © 2008 Immanuel Ness and Blackwell Publishing Inc.

Workingusa

The Journal of Labor and Society

of Industrial Organizations President George Meany was testifying about inthe first passage above, requires most U.S. labor organizations to file a detailedannual financial report (unions representing solely employees of state and localgovernments are not required to file this annual report). Once received by theDepartment of Labor, these reports became public information. Any unionmember, employer, lawyer, or citizen could request to inspect or receive copiesof these reports from the U.S. Department of Labor. The LMRDA alsorequires that members be furnished with access to the financial records used toprepare this annual report for “just cause” and they may file suit against theirunion for failure to do so.

Unions in Australia have been filing annual financial returns with the Indus-trial Registrar since at least 1904 under the Commonwealth Conciliation andArbitration Act. Members have been entitled by law to receive these annualreports and to access the underlying financial records from their unions directlyand to petition the Industrial Registrar to obtain access and financial recordswhere they were not provided access.

Although hardly any unions and union advocates will publicly argue againstdisclosure of union financial records and reports to union members, their dis-closure to individuals who are not members of unions is seen as divulginginformation that could aid and abet interests hostile to unions, such as employerslearning about strike fund balances, lobbying expenditures, and even the costs oflegal representation. Unions in North America are required by their constitu-tions and bylaws to provide financial reports and access to financial data to theirmembers; one of the first items on any local union meeting agenda is thefinancial report and approval of expenses.

The arguments in support of increased disclosure turn largely on the“goldfish bowl” theory, that disclosure of information such as officer salaries andpayments will deter union officials from any wrongdoing. In addition, in Aus-tralia, where union registration provides “corporate personality,” unions nowface disclosure responsibilities similar to corporations in terms of publishingannual financial reports. Indeed, employer associations in Australia have thesame financial reporting obligations that trade unions do, and this is also the casein the U.K.

Such financial disclosure laws are relatively uncommon outside of the U.K.and its former colonies. Besides the requirement that U.K. unions file an annualfinancial report called the AR-21, which is publicly available through the Cer-tification Office (http://www.certoffice.org), Ireland is the only other Europeancountry that requires the filing on a publicly available annual report. Whileother African, Asian, and Latin American countries (all coincidentally formerBritish colonies) require the filing of an annual financial report by unions, theonly one that is publicly available is found in New Zealand; annual union andcorporate annual reports are published on a government website (http://www.societies.govt.nz/pls/web/DBSSITEN.Main).

Since the early 2000s, both Australian Commonwealth and U.S. labor orga-nization financial reports are now available online to any member of the public,

278 WORKINGUSA: THE JOURNAL OF LABOR AND SOCIETY

thus obviating the time and expense burden of having to request physical inspec-tion, travel to an Industrial Registrar or Labor Department Office, or to pay forcopies of the requested record. But while accessibility has been greatly facili-tated, at the same time, the amount of detail that must be disclosed has similarlyincreased. The changes referred to by Congressman Gingrich in the secondquote above were published in the waning days of the first Bush administrationbut rescinded in the opening days of the Clinton administration. However, inthe second Bush administration, they were reinstituted with the notice ofrulemaking published in December 2002. Since 2004, unions must now “book”expenses other than per capita tax, payments to officers and employees, andcertain other payments, to five functional activity categories (representationalactivities; political action and lobbying; contributions, gifts, and grants; generaloverhead; or union administration). In addition, the U.S. Department of Labor’sOffice of Labor-Management Standards (OLMS) annual financial report oflabor organization (Form LM-2) filers must now itemize payments to vendors ofUS$5,000 or more within each functional activity category and declare whatpercentage of time officers and employees spend in five functional activitycategories and itemize any receivables or payables of US$5,000 or more thatare 90 days past due. In Australia, the AEC in 2005 required somewhat similaritemization from unions considered to be “associated entities” of politicalparties. The 1996 Workplace Relations Act (WRA) and subsequent rules of theAustralian Industrial Relations Commission (AIRC) Industrial Registry haveadded similarly detailed reporting and disclosure requirements.

The purpose of this article is not to speculate on the political motivationbehind these attempts to increase public scrutiny of labor organization finances.Notwithstanding the Gingrich letter cited above, it is certainly no accident thatall of these changes have occurred under conservative governments who haverepeatedly demonstrated very little sympathy toward the trade union movementin their respective countries. Rather, this article seeks to answer two specificquestions: Do the costs of increased transparency by labor organizations balancewith the benefits to unions, their members and the general public? And if thecosts are not offset by the related benefits, then what should the role of publicpolicy be in either maintaining or achieving a proper balance? With nationalelections and potential regime change imminent in both countries, it is appro-priate to consider here the scope and impact of these policies in order to framethe public debate that is likely to occur in the aftermath of these elections.

Organization of this Article

Recent changes in U.S. and Australian law and regulations governing finan-cial accountability and reporting of labor organizations have largely escapedcomment outside labor unions in both countries. They have generated little, ifany, public debate, which is somewhat surprising, although such a debate mightportray union officials as arguing for less disclosure and transparency (Lund andRoovers 2008). The regulatory and legislative changes in both countries have

279LUND: LABOR ORGANIZATION FINANCIAL REPORTING REGIMES

far-reaching consequences for union officials, unions, their members, and thepublic. The task of this article is to provide an objective context for public debateon increasing transparency by examining recent changes in financial reportsmandated by the AIRC in 2003, Form LM-2 in 2004 and finally the AEC’sAssociated Entities report, required since 2006 of certain labor organizations.This article summarizes the overall impact of these new transparency require-ments on unions in both countries; it concludes by offering several suggestionsfor future public policy and a research agenda.

Annual Financial Returns and Reports in Australia

Introduction

Historically, the Australian industrial relations system has more closelyresembled the Canadian rather than the U.S. system. Whereas the latter has astrong federal system governing the private sector and federal government laborrelations, leaving state and local government coverage to the individual states,the Australian and Canadian system have historically devolved considerablymore power to the provinces (Canada) or states (Australia) to regulate privateand public sector labor relations with a federal system controlling those notspecifically covered at the state or provincial level. However, the passage of the1996 WRA has signaled a shift toward more of a more unitary, U.S.-style model,particularly when it comes to the question of government regulation of unionfinancial management and reporting.

Union structure in Australia is also considerably different from that tradition-ally found in North America. North American unions are organized into prima-rily workplace-based local unions, regionally based intermediate bodies, andnational or international unions as the peak bodies. In Australia, the majority ofbranch (local) unions tend to be organized at the state rather than the workplacelevel, although there are important exceptions (e.g., the National Tertiary Uniontends to organize branches at each university campus; the Community and PublicServices Union has now reorganized from a state-based structure to an industrialstructure, which cuts across state lines). In order for these state branches to utilizethe services of that state’s Industrial Relations Commission, they must registerwith that state and file the necessary financial reports.

Not all states have their own Industrial Relations Commission; the mostnotable example is the heavily industrialized state of Victoria. Here, coverage isunder the federal (more commonly known as Commonwealth) law. In addition,many national unions with coverage in more than one state register under theCommonwealth law, and to make matters even more confusing, some unionshave created a federal branch. These federal branches may be registered at theCommonwealth level and in some cases, at the state level. By the same token,some state branches register at both the state and Commonwealth levels.However, the real confusion occurs when there is a federal branch of the parentunion and a state branch of the same parent union who attempt to operate in the


same state or where these branches seek to amalgamate and the question ofwhich jurisdictional coverage (state or federal) applies (see e.g., Moore v. Doyle,15 FLR 59 Commonwealth Industrial Court 1968) or McJannet, Ex Parte Min-ister for Employment, Training and Industrial Relations of Queensland, 184 CLR 620(High Court of Australia, 1995).

Recent amendments to the 1996 WRA have created a system of transitionalregistration for those unions not already registered at the Commonwealth level.Unions already registered at the state level do not have to register at theCommonwealth level unless they seek coverage under Commonwealth indus-trial relations legislation. If they do, there is a three-year period that began inMarch 2006, during which time those unions not already registered at theCommonwealth level may transitionally register; by March 2009, this process isto be complete. Transitionally registered organizations enjoy the same coverageas those who are already registered, and as registered organizations, must file thefinancial reports described in the following sentence. Unless a branch or otherunion body that seeks coverage under the Commonwealth WRA has specificallyrequested and received an exemption (described below) from the AIRC, it mustregister with the Industrial Registry of the AIRC (Parliament of the Common-wealth of Australia, WORKPLACE RELATIONS AMENDMENT [WORKCHOICES] BILL 2005, explanatory memorandum, Schedule 2, Section 17,page 547).

According to the most recent annual report of the AIRC and IndustrialRegistry ( July 1, 2005–June 30, 2006), there are a total of sixty-seven employerand forty-six employee organizations registered, with an additional twenty-fivetransitionally registered employee organizations (AIRC 2006, 75).

The following describes the financial reporting requirements of the Act asthey presently stand. Schedule 1, Registration and Accountability of Organi-sations of the 1996 WRA, is intended to “ensure that employer and employeeorganizations registered under the Schedule are representative of and accountableto their members,” and to encourage “high standards of accountability of orga-nizations to their members” Chapter 1, Section 5, Schedule 1). Under theparlance of this Schedule, trade unions are “employee associations” and theregistration provisions of this Schedule apply only to “federally registrable”organizations, which are “constitutional corporations or some or all of themembers are federal system employees” (Section 18B). A labor organization(“employee association”) is not federally registrable if its members are coveredeither by the New South Wales Industrial Relations Act of 1996, the Queen-sland Industrial Relations Act of 1999, the Western Australia Industrial Rela-tions Act of 1979, or the South Australia Industrial and Employee RelationsAct of 1994 (Section 18B[4]).

Who Must Report?

Division 2 of Schedule 1 attempts to define “reporting units,” which pertainsto what type of financial reports must be lodged with the AIRC each year. First


of all, a “reporting unit” may be an entire organization or “part of an organiza-tion.” If the organization is not divided into branches, the reporting unit is thewhole of the organization. If, on the other hand, the organization is divided intobranches, each branch will be a “reporting unit unless a certificate issued by theIndustrial registrar” determines that alternative reporting units and proceduresare in place. The designation of a reporting unit or alternate reporting unitsdepends upon the organization making application to the Industrial Registrar(Section 245).

Itemized Reporting of Loans, Grants or Donations of Greater thanUS$1,000 Required

Schedule 1 also requires that unions registered by AIRC must, within90 days after the end of each financial year, lodge a statement showing “therelevant particulars in relation to each loan, grant, or donation of an amountexceed US$1,000 made by the organization during the financial year (Section237[1]).” This statement must be signed by an officer of the registered organi-zation (Section 237[2]) and may be inspected at any registry by a member of thelabor organization.” If the reported transaction is a loan, the filing must include:(1) the amount of the loan; (2) the purpose for which the loan was required; (3)the security given in relation to the loan; and (4) except where the loan was madeto “relieve a member of the organization or a dependant of a member of theorganization from severe financial hardship,” the name and address of eachperson to whom the loan was made and the repayment arrangements must bereported (Section 237[5]).

If the grant or donation is made by the union, the following must bereported: (1) the amount; (2) the purpose; and (3) unless it was made on ahardship basis to a member or member’s dependant—the name and address ofthe grant or donation recipient must be published as well (Section 237[6]).

What Must Be Reported?

In addition to reporting grants, donations, and loans, reporting organiza-tions must prepare at least two annual reports and several other declarations:a “general purpose financial report” (GPFR) and an “operating report.” Theseare described in more detail in the next section.

The GPFR

Section 252 requires that each reporting unit keep such financial records “ascorrectly record and explain the transactions and financial position of the report-ing units” and that will enable it to prepare a GPFR under the terms of Section253 and its records must be maintained in a manner to enable the reportingunit’s accounts to be “conveniently and properly audited.” The records may bekept on a cash or accrual basis, at the reporting unit’s option; if the accrual basis


is selected, membership subscription records may be kept separately on a cashbasis. Financial records must be retained for a period of seven years after thecompletion of the transactions to which they relate.

The GPFR, according to Section 253, must be prepared in accordance withAustralian Accounting Standards, “as soon as practicable after the end of eachfinancial year.” The report must consist of the following: (1) a profit and lossstatement; (2) a balance sheet; (3) cash flows; (4) any other statements requiredby Australian Accounting standards, such as calculation of liabilities generatedby long-service leave; and (5) notes to the financial statements. The IndustrialRegistry has prepared filing guidelines for Section 253, which is described inmore detail in the next section.

The “Operating Report”

In addition to the GPFR, according to Section 254, the reporting unit’scommittee of management must also, as soon as practicable after the end of eachfinancial year, prepare an “operating report,” which must include, besides anyinformation considered by the reporting unit to be relevant or any other pre-scribed information: (1) a review of the unit’s principal activities during the year,the results of those activities, and any significant changes in the nature of thoseactivities; (2) details of any significant changes in the unit’s financial affairs; (3)details of the right of members to resign from the reporting unit; and (4) detailsof any officer or member of the unit who is a trustee of or director of a companythat is a trustee for either a super-annuation entity or an exempt public sectorsuper-annuation scheme.

What Reports Must Be Made Available to Members?

Section 265 provides how the reporting unit will provide copies of the annualreports to its members. The report must be provided to members free of charge.It has several options as to the format of the report: (1) it may provide a full copyconsisting of the auditor’s report, the GPFR, and the operating report, or (2) aconcise report that consists of “a concise financial report drawn up in accordancewith the regulations,” the operating report, and the auditor’s statement. If amember requests a copy of the full report and the auditor’s report, then these mustbe provided by the reporting unit within twenty-eight days of the request beingmade. The full copy may be provided to a general meeting of the members of thereporting unit or it may publish the full or concise report in its journal, providedthat the journal is provided to members free of charge.

Section 266 requires that the full report must be presented to a generalmeeting of the reporting unit within six months after the end of the fiscal year;special provisions are made for general meetings that have different locations.

In addition to providing the report to the members of the union (full orconcise), the union must, within fourteen days after the general meetingrequired by Section 266, lodge either the full or concise report that was provided


to the members and a certificate by the union’s secretary or designated officerthat the documents are true copies of that which was provided to the membersat that meeting.

What Records Must Be Made Available to Members beyond the Annual Reports?

Division 7 pertains to the right of union members to access their reportingunit’s financial records in addition to their right to receive copies of the annualfinancial report. First of all, Section 272(1) provides that a member of thereporting unit or a Registrar may apply directly to the reporting unit for finan-cial information to be made available to them. This application must be inwriting and it should specify the time frame during which the information is tobe made available, but not less than fourteen days after the application isprovided to the reporting unit. The reporting unit “must comply with” suchapplication. The Registrar may make an application on a member’s behalf. TheGPFR or the concise report must all contain a section that advises members ofthe reporting unit of their right to apply to access union financial records.

Under Section 273, the Commission is empowered, upon application froma member of a reporting unit, to order an applicant to inspect financial recordsfor another person, whether a member or not, to inspect these records on theapplicant’s behalf. While there are prohibitions against applications which are“vexatious or without reasonable cause,” the Commission is required to becertain, at a minimum, that the applicant is “acting in good faith and that thereare reasonable grounds” (Section 273[2]).

More Details about the GPFR

The Registration and Accountability of Organizations (RAO) does notprovide registered unions to use a prescribed form, but instead has very detailedrequirements as to what the GPFR must include. A total of seven sections mustbe included: (1) profit and loss statement; (2) balance sheet; (3) statement of cashflows; (4) notes to the GPFR; (5) recovery of wages; (6) committee of manage-ment report; and (7) auditor’s statement. The salient portions of these sevencomponents are briefly described in the next sections.

(1) Profit and Loss Statement. The profit and loss statement must follow Austra-lian Accounting standards. The income side of the report must include, at aminimum, balances in the following accounts: (1) entrance fees or periodicsubscriptions; (2) if the reporting unit is part of another organization, it mustalso report any contributions toward the administration of that reporting unit;(3) any compulsory levies raised from members or appeals for voluntary contri-butions (the amount and a brief description of the purpose of each levy or appealmust also be provided); and (4) donations and grants other than levies or appeals.

The expense side of the report must include balances, at a minimum, of thefollowing accounts: (1) expenses incurred as consideration for employers making


payroll deductions of membership subscriptions; (2) payments to another report-ing unit as contributions towards administrative expenses of that reporting unit;(3) fees and periodic subscriptions to any political party, federation, congress,council, or international body having an interest in industrial matters; (4) com-pulsory levies imposed on the reporting unit including the amount, a briefdescription of the purpose and name of the entity imposing the level; (5) anygrants or donations other than levies; (6) any employee benefits paid to officeholders of the reporting unit; (7) any employee benefits paid to employees of thereporting unit; (8) fees or allowances paid for office holders or employees to attendconferences or meetings on behalf of the reporting unit; (9) legal costs andexpenses related to litigation or other legal matters; (10) expenses other than thosedescribed in (8) incurred in connection of meetings of members of the reportingunit, meetings of councils, committees, panels or other bodies for which thereporting unit was wholly or partially responsible; and (11) any penalties imposedon the reporting unit under the WRA or the RAO. The reporting unit must alsoreport any net surplus or deficit that has been transferred to the general fund.

(2) Balance Sheet. Once again, the rules require the balance sheet be prepared inaccordance with Australian Accounting Standards. At a minimum, receivables orpayables from other reporting units of the parent organization must be itemizedand the name of the other reporting unit and the cost or valuable attributable tothem must be reported. On the liabilities side of the balance sheet, the rulesrequire that the following items be included: (1) payables to employers forconsideration of them making payroll deductions of membership subscriptions;(2) payables in respect of legal costs and other expenses related to litigation orother legal matters; and (3) employee benefits paid to office holders and employ-ees of the reporting unit (these must be itemized separately). Finally, in thestatement of equity, the rules prescribe that the name and balance of each fundoperated in respect of compulsory levies or voluntary contributions collectedfrom the members of the reporting unit must be itemized. Any other funds,including the general fund, must have their balances reported here as well; fundsother than the general fund must be named.

(3) Statement of Cash Flows. At a minimum, where another reporting unit of theparent organization is the source or destination of cash flows, each such trans-action must be separately disclosed, together with the name of the other report-ing unit.

(4) Notes to the Financial Statement. In addition to following Australian Account-ing Standards, the notes to the financial statement must provide information onthe following: (1) if the reporting unit is dependent upon another reporting unitof the same organization for a significant portion of its revenue and this rela-tionship cannot easily be determined from the profit and loss statement, thename and amount of the other reporting unit must be noted; and (2) for eachasset or liability (or each class of asset or liability), the notes must disclose the


date each was acquired, a description and the name of the entity from which itwas acquired.

(5) Recovery of Wages Activity Financial Report. If the reporting unit has attemptedto recover wages and has derived income from this activity, aggregate amountsof recovery by employer must be disclosed, an interest received on the recoveredwages and balances, any deductions from these amounts and other relatedinformation, including the number of workers the recovered wages are pay-able to.

(6) Committee of Management Statement. Another part of the required reportincludes a statement from the Committee of Management of the reporting unitwhich must contain the following declaration regarding the GPFR: (1) thefinancial statements and notes comply with the Australian Accounting Stan-dards; (2) the financial statements and notes comply with the reporting guide-lines of the Industrial Registrar; (3) the financial statements and notes give a trueand fair view of the financial performance, financial position, and cash flows ofthe reporting unit for the financial year to which they relate; (4) there arereasonable grounds to believe that the reporting unit will be able to pay its debtsas and when they become due and payable; and (5) during the financial year towhich the GPFR relates, and since the end of that year meetings of the com-mittee of management were held in accordance with the rules of the organiza-tion, the financial affairs and financial records of the reporting unit have beenmanaged in accordance with the rules of the organization.

The committee of management statement must also be supported by aresolution passed by members of the committee of management of the reportingunit, include the date of passage of the resolution, be signed a designated officer(usually the union secretary), and have the same date as that date the designatedofficer signs the statement.

(7) Auditor’s Statement. An auditor’s statement must also specifically declarewhether or not they find the GPFR is presented fairly in accordance withAustralian Accounting standards, in relation to recovery of wages activity,Australian Accounting Standards, any donations or contributions deducted fromrecovered wages, and any other requirements imposed by the ReportingGuidelines.

Copies of the annual financial reports of all reporting labor and employerassociations may be obtained online from the AIRC website at http://www.airc.gov.au/container.html?http%3A//www.airc.gov.au/organizations/files.html.

Form LM-2: The U.S. Labor Organization Annual Financial Report:The OLMS of the U.S. Department of Labor

The agency of the U.S. government charged with regulating the internalaffairs of most US unions (again, with the exception of unions that solely


represent employees of state and local governments), including financial trans-parency and accountability, is the OLMS of the Department of Labor.Since 1960, the OLMS enforces the LMRDA of 1959, which requires annualfinancial reporting and disclosure by trade unions and labor-managementconsultants, potential conflict of interest disclosure by trade union officers andemployees, as well as regulating the conduct of union elections. OLMS alsoconducts criminal investigations (primarily union funds embezzlement) andinvestigative audits (known as “compliance assistance” or “CAP” audits) ofunions; conducts civil investigations (primarily concerning union officer elec-tions); supervises remedial union officer elections, as required; administersstatutory reporting requirements; and provides for public disclosure of filedreports (see http://www.dol.gov/esa/aboutesa/org/olms/olmsinfo.htm, accessed10/04/2007).

Section 201(b) of the LMRDA, provides “Every labor organization shall fileannually with the Secretary a financial report signed by its president and treasureror corresponding principal officers . . . in such detail as may be necessary accu-rately to disclose its financial condition and operations for its preceding fiscalyear.” According to section 205 of the Act, these reports are publicly available;originally, hard copies had to be requested from the Secretary of Labor; since2001, these reports are available on line at the OLMS website, http://www.dol.gov/esa/regs/compliance/olms/rrlo/lmrda.htm. Unions with US$250,000 ormore in annual receipts must file a more detailed form, the LM-2, electronically.Unions with between US$10,000 and US$250,000 file a much shorter FormLM-3, also a public record, but considerably less detailed. Unions with less thanUS$10,000 in annual receipts will file the LM-4, only two pages in length.

In the U.S., these annual financial reports are signed by both the chiefexecutive and chief financial officer of the trade union, who must certify that theinformation contained in this form is true and accurate; criminal penalties forfalse filings, misrepresentation, destruction of records, and similar violations canresult in a US$10,000 fine or one year of imprisonment (Sections 209 and 210).In the U.S., branch, intermediate-level and national unions must file the annualreport. As Table 1 shows, for the most recent and complete reporting year, 2005,there are 4,737 LM-2 filers (22.4% of all filers) with average total receipts ofnearly US$4 million each; this average is rather misleading as there are relativelyfew unions with annual receipts of more than US$5 million per year and the bulkwith considerably less. The median total annual receipts for all LM-2 filers in

Table 1. Annual Financial Report Filings in the US for 2005 by Filing Status

LM form type Total filings in 2005 % of total filed Average total receipts byLM Form type (in US$)

LM-2 4,737 22.38 3,928,561LM-3 10,388 49.07 62,249LM-4 6,044 28.55 2,666Grand total 21,169

Source: LM-2, -3, and -4 reports for 2005, downloaded from OLMS website.


2005 is US$796,902; nearly 80% of LM-2 filers have annual receipts of less thanUS$2.5 million.

Nearly 50% of all filing labor organizations are LM-3 filers, with averageannual receipts of $62,249 and almost 30% are LM-4 filers, with slightly morethan an average of $2,600 in annual receipts.

Unlike the RAO, these American annual LM reports are not audited finan-cial statements. Lay financial officers, particularly for smaller unions, preparethese LM reports. Larger unions often have outside certified public accountantshired to prepare these reports. Unlike any other country that requires annualunion financial report filing with a government agency, the LM-2 requires allofficer and employee salaries and expenses to be reported. Recent changes inthe LM-2 form now require LM-2 filers to report most expenses by functionalactivity category; there are five such functional activity categories: (1) represen-tational activity (those disbursements associated with contract negotiations, ser-vicing, arbitration, organizing new units, and engaging in decertification andde-authorization elections); (2) political action and lobbying (activities such aslobbying executive and legislative bodies as well as voter registration and gettingout the vote drives); (3) union administration (membership meetings and con-ventions, officer elections, and related expense); (4) general overhead (officemanagement tasks, such as rent, telephones, and supplies; it is regarded as acatchall category); and (5) contributions, gifts, and grants (comprise donations toscholarship funds, charities, or relief funds). Schedules 11 and 12 of the newLM-2 form also require that each officer and employee payments be allocated ona percentage basis among these five functional activity categories.

A second major change with the new LM-2 form is the requirement that anyexpenditure of US$5,000 or more per year to a single vendor in any one of thesefive functional activity categories require the filer to prepare an “ItemizationSheet,” which provides the vendor name, their address, and the total amount.Any single payments of US$5,000 or more to that vendor require additionalitemization on that itemization sheet, showing the date, amount, and purpose ofeach expenditure. Vendors typically itemized are landlords, airlines, law firms,consultants, hotels rented for conventions and meetings, and a host of otheritems (Lund and Roovers 2008).

Lund and Roovers (2008) found that smaller LM-2 filers (less thanUS$1 million in annual receipts) averaged relatively few itemization sheets. ForSchedule 15 (Representation Activities), unions with less than US$500,000 inannual receipts average 0.59 itemization sheets and those with more thanUS$500,000 but less than US$1 million averaged 1.5 itemization sheets. Thispattern held for all the remaining schedules. On the other hand, the largestunions averaged 427 itemization sheets for representation activities alone.

U.S. LM-2 filers must report year-end membership by self-determinedmembership category (e.g., retired members, apprentice members, associatemembers); U.S. unions are not required to report this on the LM-2 formprovided they have filed a political action committee report, which is available tothe public with a federal or state elections commission.


The LMRDA further does not require unions to provide an annual financialreport to its members, audited or otherwise, nor does it require that this reportbe presented to an annual meeting of members. Many individual union consti-tutions do require this, but it is not a matter of law. Therefore, U.S. unionmembers are not entitled to receive, as a matter of law, any financial report fromtheir union; they may of course attend union meetings and participate in thefinancial deliberations, but the main mechanism for financial transparency iseither to request the LM-2 form from their union, to download it from theOLMS website, or to use Section 201(c) (see next paragraph) if they wish toinspect more detailed records.

The lead case on union member access to financial records under theLMRDA Section 201(C) is found in Mallick v. International Brotherhood of Elec-trical Workers, 749 F.2d 771, 117 LRRM 3081 (CA DC 1984). In ordering theInternational Brotherhood of Electrical Workers to provide access to its finan-cial records, the Mallick court relied upon an earlier decision of the NinthCircuit Court of Appeals in construing what constitutes just cause and forces theunion to open its books:

The standard for determining whether there was just cause is necessarilyminimal. Just cause need not be shown beyond a reasonable doubt, nor by a prepon-derance of the evidence. It need not be enough to convince a reasonable man that somewrong has been done; it is enough if a reasonable union member would be put tofurther inquiry. Perhaps it will be that a certain item is disproportionatelyhigh . . . or that an officer contends that he did not incur the claimed expenses. . . Irrespective of the nature of the asserted cause, the test must be whetherreason would require substantiation. (Fruit and Vegetable Packers and Warehouse-men Local 760 v. Morley, 378 F.2d 738 (9th Cir. 1967), emphasis supplied)

The Mallick court did draw some boundaries about what would not meet thejust cause standard. For example, were a member to request financial records forthe sole reason of political opposition to incumbent union officials, “politicalopposition to union officials, unaccompanied by any specific concern with trans-actions summarized on the LM-2 report, does not constitute just cause forrummaging through all the union records.”

Recent Increases in Funding and Staffing at OLMS

Both funding and staffing levels for the OLMS has increased significantlysince fiscal year 2002 (the first full fiscal year of the current administration) whiletwo other Labor Department investigative agencies, the Occupational Safetyand Health Administration (OSHA) Federal Enforcement Program, whichinspects private sector workplaces, and the Wage and Hour Division (WHD),which inspects wage and hour violations in private sector workplaces havedecreased. The number of full-time equivalent positions at the OLMS haveincreased from fiscal year 2002 to 2008 from 260 to 369, a 42 percent increasewhile two other workplace inspection programs within the U.S. Department ofLabor, the WHD and the Federal Enforcement Program of the Occupational


Safety and Health Administration (which inspects private sector workplaces)have seen very modest increases, 9.7 percent and 6.3 percent, respectively. Inbudgetary terms for the same time horizon, OLMS budget grew by almost 86%,while WHD and OSHA’s grew only by 22 percent and 12.9 percent, respec-tively. Adjusting for inflation, this represents a cut for OSHA and WHD with a40 percent increase for OLMS. When expressed in constant 2007 dollars usingthe U.S. Bureau of Labor Statistics Consumer Price Index, the budget forOLMS between 2002 and 2007 has increased 29 percent in real terms, whereasOSHA’s Federal Enforcement and WHD budgets have declined by 8.2 percentand 8.1 percent, respectively.

Associated Entities Filing with the AEC

In June 22, 2006, the AEC rules were amended to require trade unionsaffiliated with political parties to file an “Associated Entities” report with theCommission (http://www.aec.gov.au/Parties_and_Representatives/Political_Disclosures/Annual_Return/trade.htm, accessed 11 June 2007). This report,which covers the July 1 to June 30 period (which is not necessarily the samefinancial year used for the annual return and reports filed with the state orCommonwealth registrar) must be filed by October 20 of each year. Once filed,these reports are available on the Australian Elections Commission (AEC)website at http://fadar.aec.gov.au/arwdefault.asp?submissionid=8. Any unionthat is either a financial member of or has voting rights in a registered politicalparty is required to file an annual report with AEC.

The Associated Entities form requires that unions disclose total receipts,debts, and payments at the by June 30. The instructions are clear that “alltransactions of the associated entity must be reported, even those that are not forthe benefit of the political party.” Itemized reporting of all income and expensesis not required here, but simply the total for the financial year. So far, thisinformation simply duplicates information already available on the annual finan-cial report filed with the AIRC Registry.

In addition, details of any receipts of US$10,000 or greater, debts ofUS$10,000 or greater, and capital contributions from which payments to apolitical party were generated must also be disclosed. The US$10,000 thresholdis indexed each year to the Australian Consumer Price Index. This form requiresthat a cash—not accrual—method be used, so that only transactions completedin the financial year are actually reported; depreciation and valuation adjust-ments are not reported. This provision is particularly problematic since mostAustralian unions use an accruals method in preparing their annual returns,which will require the party preparing the Associated Entities report to preparea reconciliation statement that reconciles the cash to accrual balances. In addi-tion to preparing the annual report, according to AEC, “All relevant records,whether formal or informal, must be retained for a minimum of three years.Receipt books, bank records, receipt registers, source documents and workingpapers must be kept for this period.”


Each of the transactions that exceed the annual threshold is considered a“reportable transaction” and must be itemized. Information to prove providedfor each such reportable transaction includes the full name and address of eachperson or organization, as well as the total value of the transaction. If thetransaction involves a trust or foundation, the names and addresses of thetrustees, along with the name and description of the trust, must be provided. Ifthe case of an unincorporated organization other than a trade union, the nameand address of each member of the executive committee must be disclosed, alongwith the name and address of the organization.

Individual receipts of US$10,000 or more may include donations, giftsor subscriptions, operating revenue, income from investments, or loans. AECdefines gifts broadly to include any transfer or gift of property or services forwhich no payment or an inadequate payment is received. This includes “in-kind”gifts, which “are to be disclosed at their proper value. This is normally thecommercial or sale value of the item or service as evidenced by arms-lengthquotations, comparative advertisements or expert assessment.”

According to the AEC instructions, the following in-kind gifts and con-tributions (i.e., only a partial list) must be disclosed in the annual report: (1)free or discounted services normally charged by the service provider (e.g., legaladvice, accounting or information technology services); (2) free or discounteduse of commercial premises; (3) free use of a motor vehicle; (4) free or dis-counted advertising by a publisher or advertising production services; or(5) free or discounted goods or services such as travel, art work, sportsmemorabilia, or electrical goods for use in raffles or other fund raisingactivities.

Summary and Conclusions

One would be hard-pressed to find other non-governmental agencies oreven corporate entities in either country that have similarly detailed reportingand disclosure requirements. However, posting of annual financial reports ofpublicly traded corporations has been the norm in the U.S. for a number ofyears; these are available through the Securities and Exchange Commission’sEDGAR website. By the same token, countries such as New Zealand (http://www.societies.govt.nz/pls/web/DBSSITEN.Main) require annual financialreports of any registered industrial organization, including businesses andunions to be posted on their website, but their law does not prescribe any specificformat for the disclosure. British unions and employer associations file an AR-21annual financial report that is publicly available on the Certification Officewebsite (http://www.certoffice.org), but this form is by no means as detailed inits disclosure.

What is interesting are the numerous similarities and differences in thefinancial disclosures required by the Australian and U.S. systems. These arehighlighted in the Table 2 below.


Clearly, the Australian laws and regulations provide much more detail interms of a very detailed balance sheet and cash flow analysis than does theLMRDA, but U.S. unions have to provide considerably more detailed informa-tion about income and expenses, including officer and employee salaries andpayments, including a breakdown of them by functional activity reporting. TheAustralian system has no functional activity reporting equivalent, but both coun-tries now require more detailed itemization of certain expenses. The AEC“Associated Entity” rules require very detailed reporting of certain expendituresand the RAO requirements require exceedingly detailed reporting of certaintransactions, such as employer expenses in payroll deduction of dues andrecovery of wages from employers. The AEC itemization threshold is set atUS$10,000, which is indexed annually to changes in the cost of living, whereasthe U.S. system requires itemization if the US$5,000 threshold is exceeded.While neither the AIRC or OLMS reporting systems require the union to selecteither a cash or accrual method of reporting, AEC does require cash accountingwhen most large unions in Australia use accrual, which forces them to do areconciliation, thus incurring additional accounting expenses.

Table 2. Comparison chart of financial reporting requirements, U.S. OLMS versus AIRC and AEC

Item U.S. Australia

Individual officer salaries andreimbursed expenses itemized

Yes (in Schedule 11 of the LM-2) No (only in the aggregate)

Individual employee salaries andreimbursed expenses itemized

Yes (in Schedule 12 of the LM-2) No

Officer and employee paymentsdisaggregated by “functionalactivity reporting”

Yes (in both Schedules 11 and 12of the LM-2)

No

Itemized “other” receipts Yes, in Schedule 14 NoItemize employer expense for

payroll deduction of dues andsubscriptions

No Yes

Itemize all legal and litigationexpenses

Only if US$5,000 or more peryear to a single law firm withina functional activity category

Yes

Itemize all fines and penalties No YesItemize all grant and donation

incomeOnly if US$5,000 or more per

year from a single sourceYes

Itemize all grant and donationexpenses

Only if US$5,000 or more peryear to a single destination

Yes

Itemize details of all loanpayments

Yes Yes

Require annual audit No YesRequire auditor’s statement

attached to annual reportNo Yes

Require attachment of notes tofinancial statement

No Yes

Require a statement of cash flows No YesRequire a statement from the

committee of managementNo Yes

Electronic filing required LM-2 only No, forms are optically scanned


Concluding Remarks

In this article, two fundamental questions are examined: (1) are the benefitsof increased financial transparency and disclosure by labor organizationsmandated by recent regulatory and legislative changes in the U.S. and Australiajustified in light of the increased costs of compliance to unions and governmentand if they are not, then (2) what should the future role of public policy be?

There is little doubt that the recent regulatory and legislative changes intransparency described entail additional cost to labor organizations and to thegovernmental agencies that must compile, monitor, and enforce these reportingrequirements. Unions have had to retain outside IT and financial consultants,upgrade record-keeping systems, hardware, and software to meet ever morestringent and detailed reporting requirements. This cost burden falls dispropor-tionately harder on smaller unions, particularly in the U.S., where the medianLM-2 filer has barely US$800,000 in annual receipts. Several unions havereported that they have had to divert resources that should have gone intoorganizing and servicing into accounting and bookkeeping in order to complywith the new LM-2 form (Lund and Roovers 2008).

Australian unions who use an accrual method who also must file an Associ-ated Entities report with the AEC must expend additional funds to have anaccountant prepare a reconciliation statement. Now, instead of one report,unions may have to file two, and there is considerable overlap between the two.

Because the LM-2 must now be filed electronically, unions must purchasedigital signatures (US$180 for two years) for each officer who must sign theLM-2. In addition, many unions have had to upgrade their computer hardware,software, and even their Internet connections because dial-up modems are notsufficient to handle electronic transmittal of the Form LM-2 (Lund and Roovers2008).

Increased reporting and disclosure requirements also impose additionalcosts on the taxpayer. Several hundred GPFRs, auditor reports, and committeeof management declarations—all of them rather lengthy—must be opticallyscanned and posted onto the AIRC website. The AEC must now process unionassociated entity reports, which it did not do prior to 2006, and will incurprocessing and optical scanning expenses as well.

In the U.S., the OLMS had to develop special electronic filing software.Even though no exact compilation of additional union and governmental costsassociated with increased disclosure and reporting requirements has been pub-lished, it is fairly easy to identify what those costs are.

The benefits of increased transparency and disclosure requirements,however, are virtually impossible to identify, much less quantify. First of all, inneither country is there tracking of union members who visit either website tolook up their union’s financial report. While the total number of hits may berecorded, neither agency records the number of union members who look uptheir own union’s report. So we have no data, before or after the changes inreporting requirements, to demonstrate whether they have increased union


member access to financial records of their union via the government websites.In Australia, under Section 273 of the WRA, Australian union members maypetition the Registrar to compel their union to provide access to financialrecords of the union. In all the years of annual reports reviewed, only ninerequests were reported, and these occurred in the last two years. There are nosimilar data available for the U.S.

But even if data on member access to financial reports available online wereavailable, it would not be sufficient to quantify the benefits of increased disclo-sure, because there would need to be evidence that the financial data obtainedwere actually used (and how they were used) by the union members requestingthe data. Since we do not know who the union members are who are actuallyrequesting the financial data, there is no way we can actually contact them anddiscover whether they are actually using the data and how helpful they are infurthering the stated goals of union democracy and accountability.

To be sure, perhaps there is some currency in the “goldfish bowl” theoryadvanced by George Meany over a half century ago, that the public disclosure ofthis information serves as a deterrent to unlawful and unethical activity. Unionofficers and employees will and should continue to live in a fishbowl. But as amatter of public policy, what role can the public play in identifying and correct-ing potential financial wrongdoing by union officials? They cannot attend unionmeetings, run reform candidates in union elections, or pass resolutions callingfor full accounting. In the end, it is up to the union members themselves to doexactly this and unfortunately, we have no indication to what extent they arerequesting and actually using this information.

Immediately after the passage of the 1959 LMRDA, Professor Aaronobserved that this law [i]s bound to fall short of its goals because most of theintended beneficiaries do not fervently believe in or ceaselessly strive to maintainthe democratic rights which the statute purports to secure for them. Many of theworst situations existing in some unions today are largely the result of member-ship apathy—an unwillingness to participate actively and continuously in thegovernment of their organizations so long as they operate with acceptableefficiency. This indifference is, of course, but a reflection of a similar attitudeevinced by the average citizen toward his own local and national government.Law cannot create a desire for democracy; it can only help those who want to get andmaintain it (Aaron 1960, 906).

Formulating ever more stringent and detailed reporting requirements fortrade unions is not effective public policy; building greater union memberinvolvement in all aspects of the governance of their unions is. Voluntary com-pliance programs that document best practices and financial standards codes area much more effective use of union resources and public funds. More extensivetraining for union financial officers, perhaps even requiring that financial offic-ers and employees pass a certification course would be a tremendous help.Requiring that all U.S. unions must make a copy of the annual financial reportavailable to all members would also help. At least Australian law (as is the casein Britain, Ireland, New Zealand, many Canadian provinces as well as the


Labour Code of Canada and other countries with union registration laws)requires the committee of management certify that members have receivedeither the full or concise report through a choice of methods; that is more thanwhat U.S. law does!

Unlike children who are enthusiastic for ten minutes about a new goldfish onthe family’s kitchen counter and then, distracted elsewhere, forget about it; orwho are inconsolable when their newly rediscovered pet is found floatingmotionless at the top of the bowl one morning, union members must play anactive role in the goldfish’s care and feeding. Making political capital out of realor imagined dysfunctional goldfish, dirty water, or opaque goldfish bowls,calling in the police for alleged animal cruelty or writing journalistic exposesabout imagined cruelty to these cute little carp will not fix the problem either. Itis up to the unions and particularly their members to ensure accountability anddemocracy and it should be public policy to help them do exactly that.

John Lund is a professor at the School for Workers, University of Wisconsin-Extension, where he has taught, researched and consulted about union financialmanagement, labor law, collective bargaining, industrial engineering and othertopics for twenty-three years. Lund would like to thank the University ofWisconsin-Extension for funding his 2007 sabbatical, and acknowledges thegenerous assistance of the Australian Industrial Relations Commission, theIndustrial Registrars of Western Australia and New South Wales, the AustralianCouncil of Trade Unions (ACTU), the U.K. Certification Office, JusticeMichael J. Walton, Vice President of the Industrial Relations Commission ofNew South Wales, as well as many other union and government officials in boththe U.S., U.K., New Zealand and Australia. Address correspondence: JohnLund, School for Workers, University of Wisconsin-Extension, 610 LangdonStreet, Room 422, Madison, WI 53703, USA. Telephone: (+011) 608-262-9847.Fax: (+011) 608-265-2391. E-mail: [email protected].

References

Aaron, B. 1960. The labor-management reporting and disclosure act of 1959. Harvard Law Review 73:851–907.AIRC (Australian Industrial Relations Commission). 2006. Annual Report of the AIRC and the Annual Report

of the Australian Industrial Registrar, 2006.Lund, J., and B. J. Roovers. 2008. Through the looking glass: Does the Labor Department’s new Form LM-2

really deliver greater transparency? Labor Studies Journal. In press (accepted for publication July).Mallick v. International Brotherhood of Electrical Workers, 749 F.2d 771, 117 LRRM 3081 (CA DC, 1984).McJannet, Ex Parte Minister for Employment, Training and Industrial Relations of Queensland, 184 CLR 620

(High Court of Australia, 1995).Moore v. Doyle, 15 FLR 59 (Commonwealth Industrial Court, 1968).Letter from US House of Representatives Republican Whip Newt Gingrich to Secretary of Labor Lynn

Martin, February 19, 1992. Obtained via a Freedom of Information Act request.


living in a “goldfish bowl”: assessing recent changes in labor organization financial reporting...

Documents