Hohe v. Casey

• Decision Date: 11 December 1989
• Docket Number: Civ. A. No. 88-1348.
• Citation: 727 F. Supp. 163
• Parties: Mary A. HOHE, et al., Plaintiffs, v. Robert P. CASEY, Governor, et al., Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

727 F. Supp. 163

Mary A. HOHE, et al., Plaintiffs, v. Robert P. CASEY, Governor, et al., Defendants.

Civ. A. No. 88-1348.

United States District Court, M.D. Pennsylvania.

December 11, 1989.

Milton L. Chappell, Raymond J. LaJeunesse, Jr. and Glenn M. Taubman, Nat. Right to Work Legal Defense Foundation, Inc., Springfield, Va., and Thomas A. Beckley, John G. Milakovic and Charles O. Beckley, II, Beckley & Madden, Harrisburg, Pa., for plaintiffs.

Thomas York, Deputy Atty. Gen., Harrisburg, Pa., and Joseph S. Sabadish, Deputy Atty. Gen., for Casey, Zazyczny, Greene and Com. of Pa.

Elaine Williams, Kirschner, Walters & Willig, Philadelphia, Pa., and John J. Sullivan, Richard Kirschner and Larry P. Weinberg, Kirschner, Weinberg & Dempsey, Washington, D.C., for Council 13, American Federation of State, County & Mun. Employees.

MEMORANDUM

CALDWELL, District Judge.

I. Introduction

By memorandum and order, dated August 10, 1989, we decided that section 2 of Act No. 84 of 1988, amending the Pennsylvania Administrative Code of 1929, 71 P.S. §§ 51, 732-506 (Purdon 1962 & Purdon Supp.1989), and the collective bargaining agreement executed pursuant thereto, were constitutional for the most part under Chicago Teachers Union v. Hudson, 475 U.S. 292, 106 S.Ct. 1066, 89 L.Ed.2d 232 (1986). Act 84 authorized labor unions representing Commonwealth employees to collect a fair share fee from state workers who were not members of the union for the unions' costs of representing these non-members in collective bargaining. In our memorandum, we noted that the only issue to be resolved was whether, in accordance with Hudson, the major categories of expenses in the August 1988 fair share fee notice had been subjected to "verification by an independent auditor." Hudson, 475 U.S. at 307 n. 18, 106 S.Ct. at 1076 n. 18, 89 L.Ed.2d at 247 n. 18. A hearing was held for that purpose on September 8, 1989, and the parties also entered into a stipulation. They subsequently briefed the issue and the matter is ready for disposition.¹

II. Background

Greater detail on all aspects of this case can be found in our previous memoranda. See 704 F.Supp. 581 (M.D.Pa.1988) (granting plaintiffs a temporary restraining order against collection of the fee); 695 F.Supp. 814 (M.D.Pa.1988) (vacating the restraining order and denying plaintiffs' motion for a preliminary injunction), aff'd, 868 F.2d 69 (3d Cir.1989); 128 F.R.D. 68 (M.D.Pa.1989) (class action certification). For our purposes it is only necessary to note the following.

The August 1988 fair share fee notice was based upon the audits of the basic financial statements of both AFSCME International and AFSCME Council 13 and the Supplementary Financial Information accompanying the financial statements. The audits of the financial statements for AFSCME International, the statements for the fiscal year ending December 31, 1987, and AFSCME Council 13, the statements for the fiscal year ending June 30, 1987, were conducted in accordance with generally accepted auditing standards. The audits of the Supplementary Financial Information, examining the major categories of expenses for the unions, were performed pursuant to Standard Auditing Statement ("SAS") No. 29. The auditor's report accompanying the Supplementary Financial Information for AFSCME International contained the following statement:

The accompanying supplementary financial information, appearing at pages 8 and 9, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the examinations of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements, taken as a whole.

(Joint Exhibit 1).

The auditors issued the same opinion in connection with the Supplementary Financial Information for AFSCME Council 13 (Joint Exhibit 3).

In connection with calculating chargeable and nonchargeable expenses, the auditors prepared Special Reports pursuant to SAS No. 35. The Special Report for AFSCME Council 13 was prepared on July 20, 1988, prior to the issuance of the notice. The Special Report for AFSCME International was prepared after the notice was sent to nonmembers.

Witnesses at the hearing testified to the significance of these accounting procedures. Professor Martin Benis, a certified public accountant, testified on behalf of the unions. He gave a basic overview of the auditing process. The process includes ten generally accepted auditing standards, composed of three major categories: (1) general standards; (2) standards of field work; and (3) standards of reporting. As highlighted by Professor Benis, the first category deals with the technical proficiency of the auditor and the due care to be exercised in performing the audit. The second category seeks to obtain "sufficient competent evidential matter." (N.T. 12). This would be accomplished "through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination." (See "Generally Accepted Auditing Standards," defendants' Exhibit 1). The third category contains standards of reporting dealing with the contents of the auditor's report and whether an opinion can or cannot be expressed regarding the financial statements taken as a whole. (defendants' Exhibit 1). When an auditor states that an audit was performed in accordance with generally accepted auditing standards, he is referring to these standards.

In regard to SAS No. 29, the witness stated that, when the auditor expresses an opinion, the second and third standards of field work apply,² but these standards do not apply when a special report is prepared pursuant to SAS No. 35. Professor Benis explained that, along with the three general standards, only the first standard of field work applied to SAS No. 35. The second and third standards of field work, as already noted, are part of the process of obtaining "sufficient competent evidential matter." The plaintiff's expert, Dr. David F. Hawkins, confirmed this function of the second and third standards with understandably more emphasis upon their role as "search and verification procedures." (N.T. 74).

III. Discussion

We must decide whether the foregoing accounting work on the unions' expenses met the Supreme Court's requirement in Hudson, supra, that the major categories of expenses be subject to "verification by an independent auditor." In doing so, we accept the plaintiffs' definition of this phrase. The verification must be what an accountant would do when undertaking an audit. The accountant must be able to opine that the information supplied is fairly stated in all material respects. It is in this sense that we accept the statement of the Second Circuit in Andrews v. Education Association, 829 F.2d 335, 340 (2d Cir.1987):

Hudson's auditor requirement is only designed to ensure that the usual function of an auditor is fulfilled, that usual function is to insure that the expenditures which the union claims it made for certain expenses were actually made for those expenses.

It is thus apparent that the breakdown of chargeable and non-chargeable expenses found in the Special Reports prepared in accordance with SAS No. 35 were not subjected to verification by an independent auditor as required by Hudson. Only the first standard of field work applies to these Reports and it requires only that the work be adequately planned and assistants be properly supervised. There is no evaluation of the client's internal controls or an investigation which would enable the auditor to render an opinion. It is not surprising then, that the Special Reports issued for the breakdown of the unions' expenses into chargeable and non-chargeable items contain the following language:

We have applied certain agreed-upon procedures to the schedules with respect to the allocation of expenses as between amounts chargeable and non-chargeable to agency fee payers for the relevant fiscal year. Our procedures included the following:

(a) We reviewed the underlying assumptions for reasonableness.

(b) We tested the allocations for mathematical accuracy.

Because the foregoing procedures do not constitute an examination made in accordance with generally accepted auditing standards, we do not express an opinion on any such allocations. However, nothing came to our attention that caused us to believe that the allocations should be adjusted. Had we performed additional procedures, matters might have come to our attention that would have been reported to you.

(Joint Exhibits 3 and 4) (brackets added).

The financial figures for various categories were supplied in three columns. The first column was headed "Total Expenses," the next column "Chargeable Expenses," and the third column "Nonchargeable Expenses." Significantly, the auditors did express an opinion concerning the Total Expenses:

The information appearing under the column headings "total expenses" has been subjected to the auditing procedures applied in the examination of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements, taken as a whole.

(Joint Exhibits 3 and 4).

We are therefore not persuaded by defendants' argument, buttressed by the testimony of the accountant who actually performed the audits, that because the basic financial statements and Supplementary Financial Information were audited, the accuracy of the Special Reports must be accepted. The level of materiality related only to the figures in the total expense column. The auditors refused to express an opinion on any further breakdown of these figures. It is irrelevant that the auditors may have used the "generally accepted auditing principles set forth in SAS 35," (defendants' brief at p. 7), if those principles did not permit the auditors...