Audits of collective bargaining.

FOR OVER A CENTURY-AND-A-HALF, collective bargaining has been an essential element in the industrial relation systems of many countries. Through these direct negotiations, unions, employers, and government determine wages and other conditions of employment. An important outcome of this process

Although audits of collective bargaining may not have been widely performed, there is no a priori reason for exempting activities in this area from review. In fact, auditing can make substantial contributions toward enhancing the efficiency and effectiveness of the collective bargaining process.

Industrial relations have a direct impact on an operation's financial results, and most of the provisions in any labor contract have dollar-denominated consequences. Because many collective bargaining outcomes carry cost implications, both direct and indirect effects have an impact on an organization's financial position and operating performance.

Audits of an industrial relations function are similar to those conducted in other administrative areas; and the two basic questions that apply to the audit evaluation of any administrative control system will be the same: Is the system producing timely and reliable information? And is the system as complete as possible within cost/benefit constraints? In addition, some consideration should be given to determining whether or not the management of the industrial relations function is achieving its stated objectives by "structuring its activities to comply with all laws, regulations, contracts, agreements, and policies that are applicable."(1)

* Collective Bargaining

The collective bargaining process involves three stages: information collection, strategy formulation, and contract acceptance. Most of the quantitative data used in each stage is drawn from accounting records, so that financial audits are quite relevant. While audits of other areas of industrial relations are also important, proper costing of contract provisions should be essential to all labor negotiations.

There is not too much that an internal auditor can do about the bargaining structure itself except to ensure that it is adequately documented and that all factors affecting the negotiations have been identified. However, attention can be given to assessing the efficiency, effectiveness, economy, and efficacy of the major collective bargaining functions.

Information Collection

In collective bargaining, only the negotiation process is more important than the preparations that must be made for it. In fact, the success of collective bargaining is directly proportional to the thoroughness of the preparations.(2)

Management must accumulate sufficient information to support its own position and to prepare responses to the union position. For example, wage and fringe benefit proposals advanced by management or union negotiators, analyses of corporate financial performance to determine the ability to pay, and wage settlements in competitive organizations are all essential financial data for collective bargaining.

Normally, management begins its preparation for collective bargaining by a review of contract provisions and an analysis of contract administration problems. Meetings may be held with plant managers, foremen, and supervisors to solicit suggestions and to gather information about troublesome or ambiguous contract clauses.

At this stage, management's primary objective is to collect internal and external data on wages rates, fringe benefits, productivity measures, cost of living indices, and other background factors. This data is needed to formulate a bargaining strategy and to develop a reasonable economic package for the employees. Therefore, these are the major items that should be audited during the information collection process.

In the area of base wages, special attention may be warranted for wage incentive plans, piecework, and termination pay. Consideration of premium pay should include compensated time and shift differentials as well as normal overtime and double overtime premiums. Sick leave, coffee and lunch breaks, and worker relocation expenses may be unexpectedly costly fringe benefits that are regularly overlooked.

Today, employer pension contributions are a material expense for almost all firms. The normal medical benefits are group health insurance, hospitalization insurance, and dental benefit plans; but, occasionally, vision plans may also be contractually provided.

The manner in which compensation packages are costed is relatively well developed, and the costing process is usually performed by industrial relations staff for the purpose of conducting the negotiations. There are situations, however, where the use of quantitative data will be minimal, such as with non-labor-intensive industries, a low percentage of unionized employees, or an industry-wide bargaining structure.(3) Here, the concern is that the costing system for labor contracts is so elaborate as to be uneconomical.

Occasionally, management opts for in-depth research on important subject areas with past compliance problems, such as cost of living allowances, insurance benefits, and pension plan provisions. An analysis of past grievances filed and arbitration awards can also uncover many contract administration problems. In addition, the company may want to monitor all expected union demands, including their potential impact on the company.

Compliance testing of administrative procedure is appropriate in the area of information collection. In particular, the methods used to cost management proposals and union demands should be reviewed for appropriateness. These include the use of ineffective methodologies for costing wage proposals, the calculations of the company's ability to pay, and inadequate consideration of all economic factors in making strike- or lockout-related decisions. Many companies also use cost calculations which are past- rather than future-oriented. Moreover, the analytical techniques used may consider only the direct ramifications of contract changes and not their effect on profits.(4)

All preliminary findings and initial recommendations are eventually organized by subject areas in a report submitted to top management. Employers who bring extensive accounting information to the bargaining table and allow union negotiators reasonable access to it are likely to have smoother labor negotiations.(5) Before disclosure to the union, any financial data should be verified and audited for compliance with all legal requirements.

Strategy Formulation

Generally, the first step in developing a bargaining strategy is to organize a management negotiation team with its supporting committees. The company negotiation team is usually led by a high-ranking corporate executive or by the chief industrial relations officer. The various subcommittees are most often organized by bargaining issues: base wages, premium pay, health insurance, pension plans, fringe benefits, working conditions, outside services, and increased productivity.

After the negotiation team is organized, management bargaining objectives and subject area strategies are formulated. This process can cause intense intra-organizational rivalries that may distort the final strategies.

After deciding upon specific wage and benefit targets and a set of objectives on noneconomic issues, management prepares proposals for changes in contract language and develops a general wage and benefit package that will serve as management's initial bargaining position. At about the same time, supportive statistics and other data are prepared to back up this position.

The amenability of this process to operational auditing efforts will depend upon (a) the nature of bargainable items; (b) the overall nature of bargaining environment; and (c) the uncertainty of cause and effect of bargainable items.(6) In any event, the costing of new proposals put forth by either management or the union can certainly be audited. Industrial relations practitioners regularly stress the importance of costing contract settlements.(7) The internal auditor can further provide an impartial review of any studies made of new issues arising from the negotiation process.

A bargaining book may be prepared for the company negotiations team. Basically, this book contains all or part of the relevant information gathered by management prior to formal bargaining with the union representatives. Clearly, the internal auditor should assess a bargaining book in terms of early identification of problems and improved communication of management's bargaining positions.

Bargaining books may be prepared in many different formats. In its simplest form, the book may include only a list of union demands and company counterproposals. A more elaborate bargaining book may show the historical development of each contract clause, together with detailed outlines of union proposals and management's positions. An administrative audit of bargaining books can confirm compliance with corporate forms' control procedures.

Later, arrangements will also be made for negotiation meetings. These include finding and furnishing the negotiating room as well as providing service facilities. Before the real bargaining starts, it is not unusual to have pre-negotiation sessions for management and the union to exchange initial proposals. The auditor's review of the cost and functionality of these meeting arrangements is useful.

Contract Acceptance

After receiving the union's proposal, management usually studies it in detail. The cost implications of all items proposed by the union are calculated. Sometimes management may discover that new subject areas need to be studied, or that existing issues need to be reanalyzed. New bargaining strategies and counterproposals to union demands may emerge as a result of this additional study. All of these require proactive auditing.

Once formal bargaining commences, old and new proposals are exchanged and discussed by both union and management representatives. It is at this time that "attitudinal structuring," "distributive bargaining," and "integrative bargaining" occur. If there is no impasse, formal negotiations end with a collective agreement that is then made ready for ratification.

When a compromise cannot be reached, an external agent or agency may be asked to help settle the dispute. The settlement can be voluntary (conciliation or mediation) or compulsory (binding arbitration). In either case, management should be prepared to present convincing arguments for its proposals; the earlier work of the auditor could be critical in this regard.

A far less desirable approach to impasse resolution is a work stoppage, either in the form of a strike or lockout. Before management takes a strike or forces a lockout, a cost/benefit analysis is in order. Management should be able to rely on its auditors to verify the accuracy and completeness of all quantifiable strike costs. If a work stoppage is imminent, management has to prepare for it to minimize potential losses.

Auditors regularly involved with industrial relations should familiarize themselves with the methodology for doing a cost/benefit analysis of a potential strike or lockout. They also should be forewarned that "there appears to be no common understanding of what labor disruption costs are, or how these costs should be measured or reported."(8) Nonetheless, an auditor may be asked, during a work stoppage, to do the rather difficult analysis of available options for getting both sides back to the bargaining table and for achieving an acceptable settlement.

The contract acceptance process itself can be the genesis for some provisions that will be susceptible only to "postoperative" auditing reviews. Changes may be made on the fly in labor classifications, experience ratings, and supporting crafts recognition. Serious attention should also be given to alterations in major fringe benefits, such as vested pension plan rights or lump sum payments for unused sick leave and vacation pay. Profit-sharing plans or employee thrift plans may be instituted. Lastly, management and union positions can rapidly switch on matters such as third shift perquisites, idle time, make-work, and overlapping shifts.

* Contract Administration

A collective bargaining agreement signed by union and management signifies the beginning of the contract administration process. This includes, among other things, the interpretation and enforcement of the contract until it expires. Contract administration thus covers all aspects of the day-to-day implementation of the provisions contained in the labor agreement.

Audits of contract administration practices have a proven record of success in reducing expenses and recovering costs. For the most part, the principal issues covered during contract negotiations are also the ones that have been most actively audited after contract acceptance. Administrative, compliance, and operational audits have all been effectively used with day-to-day industrial relations functions.

The major auditing concern in contract administration is whether there are adequate controls in place for monitoring actual compliance. Payroll controls are especially susceptible to evasion. Record-keeping abuses include falsified time cards, improper or missing approval of time sheets, time clock punching scams, and other violations of timekeeping policies. Payroll calculations are also susceptible to corruption, especially with new hires, overtime, and terminations.

Audits for regulatory compliance may be required with payroll funding, payroll withholding, and FICA overpayments. Sometimes severe penalties can be avoided through careful monitoring of Equal Employment Opportunities Act compliance, government labor compliance reviews, OSHA reporting of recordable injuries, or EPA safety violations. Actual savings for indirect labor might be realized by ensuring that the proper amounts are being taken for items like Targeted Job Tax Credit or discounts on Workers' Compensation insurance.

Problems with employee fringe benefits can be particularly acute with retirement plans and medical insurance. The auditor should be alert for false payments because of medical claims by terminated employees, vision and dental benefits paid for non-employees, wire transfers to overseas pensioners, and pension plan payments to the deceased. Sometimes there are savings to be realized through consolidation of pension assets or matching contributions to employee savings plans. Audits for regulatory compliance may be needed with health insurance coordination and retirement fund assets. Financial auditing has become increasingly concerned with the proper recording of estimated liabilities for unemployment insurance, self-insured Workers' Compensation insurance, and accumulated sick time.

When eating facilities are available, company cafeteria controls and dining hall utilization may deserve scrutiny. The same holds true with employee-sale stores, sale of seconds to employees, and employer-provided small tools.

Lastly, productivity awareness should be actively promoted through employee education and training.

Specific concern should be given to all nonproductive delay time and non-worked hours. Productivity can often be increased through the use of outside janitorial services and temporary personnel contracts; however, both of these are areas notable for fraud and defalcation.

* Summary

Audits are justified when the decision processes under review affect material dollar amounts, are complex in nature, involve upper-level management, must meet regulatory requirements, and need extensive documentation. All of these conditions are present in the industrial relations area. Given an adequate understanding of its operations and processes, there is no compelling reason for exempting the corporate industrial relations function from such useful constructive criticism.

While there are no specific guides for conducting an audit of industrial relations, auditors can rely on their intuition and business judgment to fashion an appropriate audit which fully encompasses familiarization, survey, program development, and reporting. Given an adequate understanding of the collective bargaining process, auditors have much to offer in ensuring that these labor negotiations proceed in compliance with an organization's administrative controls.

1 James R. Crockett, "A General Model for Compliance Auditing," Internal Auditor, February 1989, p. 21.

2 Max S. Wortman and C. Wilson Randle, Collective Bargaining: Principles and Practices (Boston: Houghton Mifflin, 1966), p. 145.

3 John R. Palmer, The Use of Accounting Information in Labor Negotiations (New York: National Association of Accountants, 1977), p. 30.

4 Michael H. Granof, "Financial Evaluation of Labor Contracts," Management Accounting, July 1973, pp. 38-39.

5 Ibid., p. 38; but see also Joel H. Amernic, "Accounting Disclosure and Industrial Relations: A Review Article," British Accounting Review, v. 20, 1988, pp. 148-154.

6 Joel H. Amernic, "The Roles of Accounting in Collective Bargaining," Accounting, Organizations and Society, Vol. 10, No. 2 (1985), p. 234.

7 Felix Quinet, Collective Bargaining in the Canadian Context (Don Mills, Ontario: CCH Canadian, 1974), pp. 48-63; and Wayne F. Cascio, Costing Human Resources (New York: Van Nostrand Reinhold, 1982), pp. 99-118.

8 Jeffrey Gandz, Suzanne DuMont, and Robert J. Lord, "Counting the Costs of Strikes," CA Magazine, April 1980, pp. 32-39.

EXHIBIT

THE FRAMEWORK OF COLLECTIVE BARGAINING

INFORMATION COLLECTION

Cost out wage and fringe befit proposals.

Calculate the firm's ability to pay.

Develop statistics from comparative wage settlements.

Collect productivity measures and cost of living indices.

Conduct in-depth research on past compliance problems.

STRATEGY FORMULATION

Set specific wage and benefit proposals.

Quantify the impact of non-economic issues.

Select statistical data to be used during negotiations.

Assemble quantitative data for bargaining book.

Evaluate costs of anticipated union proposals.

CONTRACT ACCEPTANCE

Make detailed studies of union demands.

Cost out management's counterproposals.

Present financial and economic data during deliberations by the negotiators.

Do cost/benefit analysis dispute resolution process.

Herbert L. Jensen, PhD, CIA, CPA, CMA, is a research fellow in the Graduate School of Management at the University of California, Riverside.

Roger Y.W. Tang, PhD, CIA, CMA, is Upjohn Chair of Business Administration in the Haworth College of Business at Western Michigan University in Kalamazoo, Michigan.