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Association legal audit.

Guidelines on what to examine.

With all the new laws that have been passed in the last couple of years--and more likely to come with the new administration--now is a good time to do a legal audit of your association operations.

The most valuable result of an association legal audit is that it gives the organization a chance to look at the big picture, providing an opportunity to address issues that have emerged since the last audit (if there was one), discard policies and procedures that deal with dead or dormant issues, and harmonize forms of doing business so that the association does not trip over inconsistencies or contradictions.

A complete legal audit reviews not only the association's written documents--like personnel manuals and board resolutions--but also its unwritten policies and procedures. Oral traditions and custom, habit, or practice, even if not in writing, can create liability as certainly as written documents can.

Here is a brief summary of the major areas a legal audit should look at.

1. Corporate documents. Review the association's articles of incorporation, bylaws, board resolutions, board books, and minutes. Has the identity of the registered agent changed, for example? Has current practice been consistent with the bylaws? Have the association's bylaws been amended so many times that instead of presenting a logical, workable set of rules, they have become an unruly patchwork of ad hoc responses to the whims of boards long gone? Has the association moved? If so, does it still make sense to maintain as a legal domicile the place the association came from, or should it dissolve and reincorporate in its new home?

An audit of corporate documents will also certainly verify that the association has a notice of its tax-exempt determination letter on file from the Internal Revenue Service.

Don't overlook required state documents: for example, a copy of the state's certificate of incorporation; license to do business; registration as a foreign corporation (if incorporated in another jurisdiction); and tax-exemption letters and other documents.

2. Real estate papers. Every once in a while, pull up for review documents that have long time lines. For example, a 10-year lease may provide for painting every 3 years or may require notice of intent to quit or renew 18 months out or longer. Are you due for a paint job? Are any notices due from the association to the landlord or from the landlord to the association?

Don't overlook subleases and contracts for storage space. If the association owns its building, periodically review service contracts (for example, with maintenance people). Verify that the association has a current and correct certificate of occupancy and is complying with zoning, building, and fire code requirements.

3. Insurance policies. One extremely important area for an association legal audit is the association's insurance policies. Some of the fundamental issues to be reviewed are these:

* What types of insurance policies does the association currently carry (e.g., general liability, officers and directors, libel and slander, automobile)?

* Is there a risk that is not insured that should be (e.g., convention cancellation, certification programs), or is the association paying for insurance that it does not need?

* Are the limits of coverage adequate?

* Are recent developments covered (e.g., new publications, subsidiaries, and foundations)?

4. Tax forms. It is surprising how many associations, for whatever reason, fail to file information returns (such as the 990) required by the Internal Revenue Service. If this comes to the attention of IRS, the association can be liable for thousands of dollars in fines.

In what sort of activities is the association engaged? If any involve unrelated business income, you have additional forms to file with IRS. The association, in the course of its audit, should also assure itself that its accountants are filling out forms and calculating taxes correctly. Sometimes, if an accounting firm is not particularly expert in nonprofits, it may simply use the rules or methods it is familiar with from its for-profit practice, to the disadvantage of the nonprofit association.

5. Personnel forms. Certainly a major part of any association's operations--and a major source of potential liability--is its personnel policies and procedures. You should pay particular attention to this aspect of the audit. Prime targets for review are application forms (with the new Americans With Disabilities Act, these may have to be rewritten), job descriptions (again, very important under the ADA), and personnel manuals. Legally sufficient sexual harassment policies are also essential.

Within the personnel area, an extremely important dimension is compliance with the Fair Labor Standards Act, particularly as it applies to the correct classification of employees as exempt (and therefore not eligible for overtime) or nonexempt (and therefore entitled to overtime for hours worked in excess of 40 per week). Many unaware associations are misclassifying nonexempt employees as exempt, only to discover their error after being audited by the Wage and Hour Administration and fined thousands of dollars in unpaid overtime compensation claims.

6. Other regulatory matters. More generally, there are a host of workplace statutes and regulations, on both the federal and state level, that associations as employers must comply with, and any audit should examine these points. Examples are Occupational Safety and Health Act requirements to comply with; executive orders or affirmative action plan forms to file if the association is a federal grantee; and workers' compensation, unemployment insurance, or posting requirements such as notice of nondiscrimination.

7. External operations. A legal audit should also include review of documents, procedures, and policies pertaining to external operations. For example, if the association endorses any services or products, review the agreements. Note the scope of such activities: Although it is unlikely, if an association becomes heavily involved in providing services and benefits, it risks losing its tax-exempt status. There have been rare cases in which IRS determined that so much of an association's income and effort was devoted to insurance programs that it was not carrying out its tax-exempt purposes.

Certainly, review documents pertaining to standards setting, certification, and enforcement of discipline and ethics codes to ensure that they are within legal tolerances. So too policies for admitting, expelling, and disciplining members.

8. Membership services. The lifeblood of any association is its membership services, so you won't want to overlook this aspect in your legal audit. Materials to review include application forms, dues forms (for example, does the dues form contain the mandatory IRS notice concerning deductibility of dues?), brochures, programs, advertisements for association-sponsored or endorsed products (insurance, affinity cards, leasing, and equipment deals), and membership publications.

Within member services, hotel and convention activities are obviously vital. Therefore, a legal audit should include review of all the hotel, convention, exhibitor, and decorator contracts; try to identify common, recurring issues that could be addressed with standard clauses (e.g., indemnification and cancellation clauses).

As the foregoing suggests, an association legal audit may entail a days- or weeks-long project, akin to an annual financial audit. You may need to enlist the expertise of various types of professionals: insurance experts, accountants, lawyers, and health and safety experts--to complete the job.

Legal Audit Checklist

Review the following areas and documents in your legal audit:

* articles of incorporation (including amendments), bylaws (including procedures for admission, discipline, and expulsion of members, and codes of ethics or standards of conduct);

* association minutes (board, committee, and membership meetings for at least the past year, with particular attention to resolutions with continuing binding effects);

* contracts (primarily ongoing, long term);

* financial records (auditors' reports, bank statements for the past year);

* insurance policies;

* leases for buildings, space, storage, and cars;

* legal documents (e.g., antitrust policy, consent decrees, and procedures for standards, certification, and testing);

* licenses (certificate of occupancy, to collect taxes, registration as a foreign corporation, or to conduct employment services);

* personnel policies and employee benefits (e.g., personnel manual, job descriptions, and pension plans);

* registrations of copyrights and trademarks; and

* tax returns (Forms 990 and 990-T, Internal Revenue Service determination letter, state exemption letter, and sales, property, and other tax exemptions).

George D. Webster is general counsel to ASAE and a partner in Webster, Chamberlain & Bean, a Washington, D.C., law firm.
COPYRIGHT 1993 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related article
Author:Webster, George D.
Publication:Association Management
Date:Feb 1, 1993
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