Treasuring for Dummies

So you blew off the last orchestra meeting of the season, deciding instead to take the cute new cellist out to lunch. You returned to find yourself elected orchestra committee treasurer. Or perhaps you’ve just woken from a short coma (the cellist having accidentally pushed you under a bus after that unfortunate misunderstanding after lunch) and found yourself elected secretary-treasurer of your Local.
You could go off and have a good cry on the cellist’s shoulder, assuming he/she is still talking to you. You could return to the hospital and inquire about being put into a medically-induced coma for the next two years. Or you could buckle down and learn about your new job.
There are lots of serious mistakes that a union officer, or an orchestra committee member, can make. A screw-up by a union officer can provoke an unnecessary strike, can get union members fired, and can get the union sued for big bucks. But screwing around with the union’s money can get a union officer sent to jail. It’s happened to a few AFM local officers. And, while it hasn’t yet happened to an orchestra committee treasurer, it sure could. This is serious stuff, and you need to get it right.
The job of a union, or orchestra committee, treasurer is to operate (and, if necessary, design) a financial system so that
1) decision-makers have the necessary information to make informed decisions about finances;
2) members can see how their money is being spent; and
3) the union or orchestra committee is protected against theft.
While the reporting requirements for unions and for orchestra musician associations may be different (depending on how, or whether, your association is chartered), the fundamental principles are the same. For simplicity’s sake, we’ll talk about the requirements for a union system. When orchestra musician associations ought to be run differently in a specific area, that will be noted.
What does a good union financial system look like?
Labor unions under US law are required to make annual reports to both the Internal Revenue Service (as non-profits incorporated under Section 501c.5 of the Internal Revenue Code) and the Office of Labor-Management Standards (OLMS), a division of the US Department of Labor (DOL). While the required reports are quite different, the underlying purpose of the reports is the same – public disclosure of the union’s financial structure. The OLMS is by far the more intrusive of the two agencies, so their requirements should be where a union financial system begins. You should assume that your internal orchestra fund is subject to audit by the OLMS – legally, it probably is.
A good financial system for a union should produce three things. It should produce accurate information for those who make decisions about where the money comes from and how it is spent. It should be transparent, so that the members can see where their dues money goes. And it should protect the union against theft and other forms of loss.
Fortunately, these three requirements work together. A system that provides accurate information for decision-makers will also provide accurate information for the members. Documentation that informs an interested member just what expense a particular check was written to pay will also provide documentation to identify fraud. A transparent financial system guards against inaccuracies.
Boxes for numbers
The basis of any accounting system is the chart of accounts. A chart of accounts is the list of categories into which you place assets (cash, money in checking, CDs, etc), liabilities (loans and other money you owe), income and expenses. A chart of accounts can be quite simple. But, as unions and orchestra committees are non-profit organizations, it is good practice to use the Unified Chart of Accounts developed for non-profits. Most locals, and no orchestra committee, will not use more than a fraction of the accounts and sub-accounts in the UCOA. But it’s good discipline to have to fit all income and expenditures into a standard and codified system, and it will make filling out the LM and 990 much easier at year end.
Computers and accounting
Accounting programs of varying complexity are available for all major computer platforms. Intuit’s Quicken and QuickBooks are probably the most-used by both individuals and small organizations. Either will support the UCOA or a subset therein. Quickbooks has a much deeper set of features than does Quicken. But it requires more training or experience to use those features, and it’s significantly more expensive. (On the other hand, you can import the UCOA directly into QuickBooks, which will save you a fair amount of time.) Whichever program you use, make sure you back up the data and store the backups in a couple of different places. While it will be possible to reconstruct those data files if you have maintained sufficiently good documentation of income and expenses, it’s a royal pain and waste of time.
What the road to compliance hell is paved with
A shockingly high proportion of alleged financial improprieties in unions (including the AFM and its locals) involve credit cards, even though, in most unions, surprisingly little money is spent using those cards. The conclusion is obvious: don’t have union (or committee) credit cards. It’s just too easy to spend union money on personal expenses with a union credit card, and equally easy to get sloppy on documentation. Both are red flags to the government and your members.
Unfortunately, credit cards are not only convenient but are almost essential for paying certain kinds of expenses (travel, web purchases, hotel bills, dinners and take-out pizzas for committee meetings, and the like.) The best solution to this problem from the union’s point of view is to make all such purchases on an officer’s, or employee’s, personal card, and have the individual submit documentation in order to be reimbursed.
This can be hard on the individual, of course, especially if that person is already carrying a balance or gets behind in their payments. The union can ameliorate this hardship by repaying expenses promptly – ideally, when they are incurred (or as soon as expenses are submitted) rather than after the actual event. Airline tickets, for example, can be submitted, and paid for, immediately after the purchase, rather than waiting for the actual flights.
If there really is a sufficient volume of expenses to justify a union credit card, however, treat the card as if it was radioactive. Limit access to it to one or two people, use it only when necessary (which will mean mostly online and not in person), and document all transactions thoroughly and promptly. Remember that, in the event of an audit, those transactions will be viewed with very skeptical scrutiny. Get online access to the account so that you can monitor it in real time (or least more often than once a month when the statement comes in the mail). Pay the monthly bill in full and on time; if you can’t, you need to raise your dues or spend less money. Neither your members nor the DOL will approve of spending dues money on interest payments and late fees.
Cash accounting versus accrual
To over-simplify, an accounting system can be based either on cash accounting or on the so-called “accrual” basis. Conceptually, the difference is simple: cash-based accounting records income and expenses when the money comes in or goes out. Accrual accounting records income and expenses when they actually happen, regardless of when the money actually changes hands.
If, for example, you record a payment to your attorney when you make it, you’re doing cash accounting. If you record it when the service is rendered, and pay it later, you’re doing accrual.
The different between the two becomes important for both ongoing and year-end reporting. Cash accounting, while simple, risks presenting inaccurate information. If you do a year-end report that neglects to mention that the entire treasury is owed to your PR consultant, for example, you have not provided next season’s orchestra committee with the information they need to suggest an appropriate level of orchestra committee dues. On the other hand, it’s more complex to record the expense when it’s incurred and then again when it’s paid; and often the precise amount of the expense is not known when it’s incurred.
The OLMS and the IRS have different requirements for their annual reports. The OLMS virtually mandates cash-based reporting – which doesn’t mean that you can’t do accrual accounting internally, of course. The IRS likes organizations to stay consistent from year to year. If your union has been doing their 990 on a cash basis for lo these many years, you will need to continue to do so unless you inform the IRS you will be doing otherwise. And, of course, making comparisons between 990s done on a cash basis and those done on the accrual basis will be harder.
Depreciation
Depreciation is an accounting fiction that recognizes an important fact. Physical assets (such as computers and furniture) generally lose value as they age and/or are used. So most accounting systems let you depreciate the purchase price of that equipment over a period of time. For example, instead of recording the entire purchase value of a computer as an expense incurred in the year it was bought, depreciation lets you record 25% of its value as an expense for the year it was purchased, as well as 25% per year for the next three years. (Those are typical figures; others are possible in certain circumstances.)
Depreciation can provide a significantly more accurate picture of an organization’s finances, especially one that regularly makes large investments in equipment. For orchestra committees and small locals, though, it’s not usually worth the trouble.
The rules about reporting and depreciating the purchase or ownership of real property (land, offices, houses – and why does your local own a house anyway?) are quite different. But if your local has enough money to own an office, then they should be paying an accountant to do this stuff.
Documentation
Documentation of all income and expenses is absolutely mandatory. Let me repeat that: documentation of all income and expenses is absolutely mandatory. When the Office of Labor Management Standards compliance folks come calling, belt and suspenders isn’t going to seem like nearly enough redundancy in your documentation system.
The difficulty in documenting cash transactions is reason enough to avoid using cash except to receive small payments from individuals when absolutely necessary. If you do have to do that, give them a receipt and keep (and promptly file) a copy. If you don’t do that, and there’s ever any question that the money was received by you on behalf of the union, it will be assumed by the Federal government that you simply pocketed the cash. Bad things will then happen to you.
There are companies that make receipt books for unions; the receipts are individually pre-numbered and have carbon copies attached. My Local uses such a receipt book for all receipts: cash, check, credit card, or direct deposit. The receipt books are the foundation of our documentation for all our income of any kind and for any purpose.
However, such books are expensive. For most orchestra committees, they are probably overkill, depending of course on how likely your sleep is to be disrupted by anxiety about such things. But, if you choose not to go that route, find an alternative, at least for cash receipts – and use it religiously.
For cash expenditures, the documentation problem is simpler. Don’t ever make cash expenditures out of the committee cash box. Ever. The best explanation you can make to the OLMS compliance folks about the absence of documentation for cash expenditures is that you have an iron-clad policy (preferably set by your committee or your members in a recorded vote) that cash expenditures are verboten.
Checks are good documentation in that they provide a written record of both the recipient and the amount of expenditures. But it’s important, if using checks, to make sure that either you get the cancelled checks back from the bank (and keep them, of course) or that the bank sends you another form of hard copy (such as photocopies or scans of front and back). Even with that, however, checks should be photocopied when written, and the photocopies promptly filed away. If you need to buy a cheap multi-function printer to do so, get the committee (or the union) to buy one for that purpose. It’s worth it.
Attached to those photocopies should be documentation for the expense. If, for example, the check is to reimburse travel expenses, copies of receipts should be attached, as well as evidence of why there was travel in the first place (such as notice of the time and place of a conference, as well as a record of approval for the expense by the relevant governing body, such as the orchestra committee or the Local executive board).
If the check is written to pay a bill, the bill should be attached to the photocopy. Checks written to cover credit card bills (which, as noted above, aren’t a great idea in the first place) should also have the documentation attached for the individual expenditures listed on the credit card bill, unless you have a separate folder for the credit card account. Even then, think braces and suspenders and attach some documentation to the photocopied check. It’ll force you to look at the transactions one more time, if nothing else.
Internal controls
This is an area that DOL auditors will spend considerable time and energy analyzing. They operate on the entirely correct theory that no money should be spent, or be able to be spent, without proper authorization. The “should” part requires proof that the proper procedure in the bylaws was followed for authorizing the expenditure. This can be (and usually is) provided in the minutes of an executive board or orchestra committee meeting, i.e., “the board authorized the expenditure of up to $500 for the committee chair to attend a meeting called by the AFM president for date XX (preferably in the future).” And don’t forget to attach a copy of the invitation to the check written to the committee chair to cover his/her expenses.
It is considered good practice for the authorizing body to see evidence of how money was spent after the fact as well. This can be done by providing them with a regular expense report in detail: a simple print-out of the check register will serve, but make sure to attach a copy to the minutes showing that the board or committee approved (or at least saw) the report.
While such measures will discover unauthorized expenditures eventually, the DOL also likes to see mechanisms in place to positively prevent anything that looks like officers or employees spending money on whatever they choose without authorization, especially when such spending is personal in nature (a polite way of describing theft). The simplest mechanism to prevent – or at least discourage – such unauthorized spending is to require two signatures on every check (obviously no such speed bump is feasible with credit cards or cash, which are yet more reasons to avoid their use). The DOL does not like to see circumventions of a two-signature policy, such as pre-signing checks or the use of a signature stamp. You shouldn’t like it either. And you shouldn’t depend on your bank catching violations of a two-signature requirement; they won’t.
But, in real life, it is occasionally necessary for one signatory to pre-sign a few checks. What if one of your two signatories is at a summer festival for 6 weeks and you’ve got a bill you really need to pay? Just remember that it’s not good practice and that the DOL/OLMS folks will raise many eyebrows if they see it happening, and most especially if they see it happening a lot. And they will ask you if it does happen. Don’t lie to them; bad things can happen to you as a consequence of that as well.
Filing with the Feds
As I indicated above, unions are required to file two separate forms with the Federal government: a Form 990 with the IRS and some version of the LM form with the OLMS. Apparently neither agency is aware of the existence of the other one, so the forms are different in most every respect.
The filing requirements on orchestra committees that maintain internal funds are very murky (at least to this non-lawyer). I am aware of no orchestra committee that files either report. For the purposes of labor law and the AFM bylaws, orchestra committees are merely arms of the Local, which suggests that they don’t maintain separate funds, but rather simply maintain separate bank accounts full of money the Local is legally required to control and report.
Orchestra committees have no interest in allowing the Local to control their internal funds. Locals have no interest in accounting for internal funds they exercise no practical control over. But that doesn’t mean the funds don’t exist and the Feds won’t get pissy if they ever find out about them. This is an issue you should explore with your Local and with legal counsel. You certainly should file no reports with anyone without having those discussions first.
If, at some point in the future, you are advised by counsel that you need to file such reports, you’re far better off by paying a professional to prepare the reports for you, and making sure that the reports are filed on time. Any residual respect you might have for the DOL will be lost once you wrestle with the absurdities of the LM report, and – quite seriously – such lack of respect can be dangerous to how carefully you approach the whole topic of money. Just because what the DOL wants you to report, and how they want it reported, is absurd doesn’t mean that they can’t nail you for not doing it their way.
Conclusions
I hope I’ve scared you into taking this stuff seriously. It is serious stuff. But it’s not hard to do it right. Most important, in terms of compliance and staying out of legal trouble, are documentation and compliance. Neither needs to be elaborate. The sooner such systems are put into place during a new treasurer’s term of office, the easier it is to do so. This is one area where prevention is orders of magnitude easier than treatment. Do it right upfront and you’ll sleep much better. Explaining that you screwed up your colleagues money, while unlikely to result in serious legal consequences for you if it really was only a documentation error, will be really embarrassing for you,
It’s easy to get this stuff right, and bad if you don’t. Get it right.