Jim Anderson

Scope of notice for amending bylaws

10 posts in this topic

Our organization’s bylaws committee presented a proposed amendment to one of our bylaws at a meeting where notice of the proposed amendment was given to all members 10 days prior to the meeting and following a meeting at which the proposed amendment was read in accordance with our bylaws. The bylaw in question directs the Board of Trustees to have the organization’s financial records audited at the end of each fiscal year. The proposed amendment’s intent was to reduce cost impact for review of our financial records, firstly by eliminating the need to hire an outside CPA to “audit” our records (supported by Washington State law for non-profit corporations) and require instead an “examination” of our records which would not require the services of a CPA. Secondly, the proposed amendment would change this review from yearly to once every two years.

Excerpt from our bylaws concerning amendments to the bylaws:

These Bylaws may be amended by a two-thirds (2/3) vote of the voting eligible Members present at any regular meeting after such amendments have been read at a previous meeting and a copy sent to each member household in writing via US Postal Service or electronic mailing at least ten (10) days prior to the meeting at which said amendments shall be considered.

During the presentation of the proposed amendment, a motion was made to amend the amendment changing the word “examination” to “review” and changing the word “biennial” to “even numbered”. This amendment to the proposed amendment (main motion) was approved and subsequently, the amended proposed amendment was approved by the membership.

Original language:

Section 6.            The Board of Trustees shall direct an audit of the Clubs financial records at the end of each fiscal year.

Proposed language in the notice:

Section 6.            The Board of Trustees shall direct an audit examination of the Clubs financial records at the end of each biennial fiscal year.

Amendment to proposed amendment at the meeting which notice was given:

Section 6.            The Board of Trustees shall direct an audit an examination a review of the Clubs financial records at as of the end of each even numbered fiscal year.

Questions:

  1. Since the term “review” in accounting language still requires an organization to involve a CPA, would the amendment to the amendment constitute a condition beyond the scope of notice?

  2. As the motion to amend the noticed amendment was adopted and if considered beyond the scope of notice, what are the implications of its passage and subsequent passage of the amended main motion?

  3. What remedies exist in parliamentary law?

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The amendment (which was adopted) to the proposed bylaw amendment (which was adopted as amended) appears to make a lesser change than the one for which notice was given, and seems to me to have been in order.

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Just to be sure of what I feel are the intended meanings for the points I made in my original post above:

Original language (just prior to the notice being sent to members):

Section 6.            The Board of Trustees shall direct an audit of the Clubs financial records at the end of each fiscal year.

(My understanding here is the GAAP (Generally Accepted Accounting Practices) definition of "audit" would require employing a Certified Public Accountant)

Proposed language in the notice (original proposed amendment language sent in the notice):

Section 6.            The Board of Trustees shall direct an audit examination of the Clubs financial records at the end of each biennial fiscal year.

(The intent for the original amended language "examination" was to reduce costs for the organization associated with "audit" and since "examination" is not defined in GAAP pronouncements, there would be no requirement to hire a CPA to perform the "examination" of financial records thereby reducing costs)

Amendment to proposed amendment at the meeting which notice was given and that which was adopted by the membership:

Section 6.            The Board of Trustees shall direct an audit an examination a review of the Clubs financial records at as of the end of each even numbered fiscal year.

(My understanding here is the GAAP definition of "review" still requires use of a CPA and therefore would seem to me to be an increase in the "scope of notice")

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20 minutes ago, Jim Anderson said:

Just to be sure of what I feel are the intended meanings for the points I made in my original post above:

Original language (just prior to the notice being sent to members):

Section 6.            The Board of Trustees shall direct an audit of the Clubs financial records at the end of each fiscal year.

(My understanding here is the GAAP (Generally Accepted Accounting Practices) definition of "audit" would require employing a Certified Public Accountant)

Proposed language in the notice (original proposed amendment language sent in the notice):

Section 6.            The Board of Trustees shall direct an audit examination of the Clubs financial records at the end of each biennial fiscal year.

(The intent for the original amended language "examination" was to reduce costs for the organization associated with "audit" and since "examination" is not defined in GAAP pronouncements, there would be no requirement to hire a CPA to perform the "examination" of financial records thereby reducing costs)

Amendment to proposed amendment at the meeting which notice was given and that which was adopted by the membership:

Section 6.            The Board of Trustees shall direct an audit an examination a review of the Clubs financial records at as of the end of each even numbered fiscal year.

(My understanding here is the GAAP definition of "review" still requires use of a CPA and therefore would seem to me to be an increase in the "scope of notice")

I disagree with your contention that under the current bylaws the annual audit must be performed by CPA.  Perhaps there is a statutory requirement for having to use a CPA, but without such a requirement I believe it is up to your organization to determine how and by whom the audit will be conducted.

Nothing in the standard dictionary definition of "audit" requires the use of a CPA. Audits might commonly be performed by CPAs, but I don't believe there is a requirement for that unless a statute in your state requires it.

Edited to add:  Nothing on pages 477-481 of RONR regarding the Treasurer's report and the auditing of his report indicates that the audit must be performed by a CPA.  In fact, much of the language on those pages indicates that the audit might be performed by a committee comprised of other members of the society.  You might also look at the sample bylaws provision on page 587 of RONR regarding an auditing committee.

Edited by Richard Brown
Added last paragraph

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1 hour ago, Richard Brown said:

I disagree with your contention that under the current bylaws the annual audit must be performed by CPA.  Perhaps there is a statutory requirement for having to use a CPA, but without such a requirement I believe it is up to your organization to determine how and by whom the audit will be conducted.

Nothing in the standard dictionary definition of "audit" requires the use of a CPA. Audits might commonly be performed by CPAs, but I don't believe there is a requirement for that unless a statute in your state requires it.

Edited to add:  Nothing on pages 477-481 of RONR regarding the Treasurer's report and the auditing of his report indicates that the audit must be performed by a CPA.  In fact, much of the language on those pages indicates that the audit might be performed by a committee comprised of other members of the society.  You might also look at the sample bylaws provision on page 587 of RONR regarding an auditing committee.

But if we assume Mr. Anderson's understanding of the effect of the proposed changes to be correct, it seems obvious that the proposed amendment (which was adopted) to the proposed bylaw amendment (which was adopted as amended) makes a lesser change in the previously existing bylaw provision than the one for which notice was given, and therefore was entirely in order.

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39 minutes ago, Daniel H. Honemann said:

But if we assume Mr. Anderson's understanding of the effect of the proposed changes to be correct, it seems obvious that the proposed amendment (which was adopted) to the proposed bylaw amendment (which was adopted as amended) makes a lesser change in the previously existing bylaw provision than the one for which notice was given, and therefore was entirely in order.

I'm not sure of the difference between a "review" and an "examination", but I think I agree, at least if a "review"  means what Mr. Anderson says it means and if the society agrees.  I don't yet accept that we (or this society) must use the GAAP definitions.  (Generally Accepted Accounting Principles).  I think this society can interpret its own bylaws and determine for itself what kind of "audit" (or review) must be conducted and who shall conduct it.    It seems to me, without looking up definitions, that a review is perhaps less comprehensive than an examination, and an examination is less comprehensive than an audit.   If that is the case, the  newest amendment might be outside the scope of notice, since a "review" is even less thorough than an "examination".  They went from "audit" to "review", but the notice was to go from "audit" to "examination".  It may be that the change from "examination" to "review", made a greater change than the proposed change in the notice.  I also note that Mr. Anderson himself says there is no GAAP definition of "examination", so I don't see how we can say with certainty that a "review" is more or less comprehensive than an "examination".    I frankly think that the two terms are so close in meaning as to be insignificant for bylaw amendment and notice purposes unless the intent was to stay completely within  GAAP guidelines and definitions. 

But, I do agree that IF we are to use Mr. Anderson's understanding of the terms (and if the society agrees with his definition since it's the society's understanding that will control), then the newest amendment is a lesser change than the one noticed and would therefore be in order.   Apparently the society agreed (if it was aware of the GAAP definitions) since it adopted the newest amendment.  I'm actually not sure that the membership knew of the GAAP meaning of "review" at the time the amendment was adopted. I hope Mr. Anderson will let us know.  I have a hunch the membership might have been thinking it was going to a still less comprehensive examination  of the treasurer's records.  Nonetheless, it is the underlying premise that the GAAP definitions must be controlling here that is giving me problems. 

Question:  Why are "we" (or this society) having to use the GAAP definitions and interpretations?  Has the society actually adopted them, like it adopts a parliamentary authority?  Does some law require it?

Second question:  Doesn't this society have the authority to determine for itself, with the current bylaws, what type of audit it will conduct, how thorough it will be and who will conduct it?   And can't the society do the same with this "review"?

Third question:  Couldn't the matter of how and by whom the audit is to be conducted be established by a motion or by a standing rule or special rule of order?

I just don't see the need for a bylaws change at all, unless the society just wants to go from an annual audit (or examination or review or whatever) to a biennial audit.  Changing from an annual audit (or whatever) to a biennial audit (or whatever) would require a bylaws amendment.   I see no need to use a CPA with either the original or the new bylaws wording.  RONR seems not to require it, either.   And I don't think the new language requiring a "review" requires the use of a CPA unless there is a controlling statute somewhere dictating otherwise.

Note:  I do understand that the amendment has been adopted even though some of my comments may indicate it is a proposed amendment.  I see no need to have done anything in the way of bylaw amendments because I think their objective could have been achieved without amending the bylaws.  That's the point I was trying to make in my post above.

 

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Well, I don't think Mr. Anderson is asking us for advice concerning the meaning of the terms "audit", "review", and "examination" as used in these particular bylaw provisions, since I'm sure he understands that we have no way of knowing this based solely upon what he has posted. As a matter of fact, I doubt that we will be able to provide any meaningful advice concerning this question no matter how much additional information he provides, and I think he knows this.

I think he is asking us if, based upon what he says is the meaning of those terms in these particular bylaw provisions, wouldn't the amendment to the amendment have been out of order because it constitutes, as he puts it, "a condition beyond the scope of notice." I think the answer to this question is clearly "no", and I'm afraid that the question is based upon a misunderstanding of what is said in RONR (11th ed.), on page 595, lines 3-31, concerning proposing an amendment to a proposed bylaw amendment which increases the modification of the article or provision to be amended beyond that proposed in the notice that was given. I suspect that if Mr. Anderson reads this paragraph once again, he will have no trouble understanding why the answer to question 1 in his initial post is "no".

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I want to thank you both for your very thoughtful replies to my questions. The two most recent replies pose questions that will take me a little time to develop meaningful answers to so please stay tuned for additional information in the near future.

I will say that in my investigations into Washington State laws (Chapter 24.03 RCW WASHINGTON NONPROFIT CORPORATION ACT), I do not find any requirements or mandates for auditing of financial records for an organization incorporated under this statute (which we are). There is a "Quick Reference Guide" for board service in organizations such as ours that has been prepared by the Washington State Secretary of State and Washington State Attorney General containing guidelines under "Duty of Care" for accurate record keeping and examination of financial records. Although the information compiled in this document are termed "guidelines", it fairly closely mirrors RONR Chapter XV; §48 relating to Treasurer reporting, neither of which require employing the services of a professional, licensed CPA to examine our financial records.

My inclusion of GAAP definitions for the terms cited were only an attempt to clarify differences in definition of the terms. GAAP from what I've been able to determine contain three terms regarding financial records examination, "Audit" (highest level); "Review" (next highest) and "Compilation" (lowest). Although GAAP does not seem to define the term "examination", I believe it would be similar to "compilation" or perhaps even a lower level to that.

Richard's hunch is for the most part correct as to the membership thinking the amended term "review" to be less restrictive however I need to inquire of the member raising the amendment, what was that members understanding of the term was and was the intent to somehow, meant to actually require the organization to employ the use of a CPA. Again, I do believe the membership present at the meeting in general felt the amended language was less restrictive and perhaps much the same (just different). In preliminary answer to your questions:

Question #1: We have a Board member who has a claimed CPA background who asked for the original amendment proposal (changing "audit" to "examination"). With his reported background, he felt we must change the wording to avoid penalty of law. I don't believe he understands there seems to be no such law. Our organization has adopted nothing requiring the use of GAAP rules. Our bylaws are silent on the subject other than the section requiring (formally an audit) a review with no other description or rule as to how this is to be performed. Our bylaws do rule RONR applies where state law or our bylaws are silent. I've attempted to relate these points to this (and other) board member to no avail. More work to be done!

Question #2: Since no state statute seems to exist, we do have that authority (in my opinion). The experience to date would indicate, the original amendment should have included "what type of audit it will conduct, how thorough it will be and who will conduct it" and this may well be the next step or at least prepare a "special rule of order" to accommodate the "what-how-who" points which would also seem to answer Question #3.

Further, I also agree with Richard in that in retrospect, I should have offered a better debate on the subject of amending the bylaw to begin with or at least somehow should have been more convincing.

As to Daniel's thoughts, I have re-read RONR (11th ed.), on page 595, lines 3-31 and I believe I do have a better understanding and since there again seems to be no state law requiring our organization to hire a CPA for financial record examination (audit, review or whatever) and since RONR does speak on the subject and agrees with guidelines presented by our Secretary of State and Attorney General for organizations such as ours, we should have presented an amendment with more in-depth rules on the "what-how-who" of our financial reviews (audits, examinations or whatever).

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I wonder if you are grasping the parliamentary rule here. Let's assume your definitions are correct:

  1. Audit — most expensive and requires a CPA.
  2. Review — less expensive but still requires a CPA.
  3. Examination (compilation) — least expensive and no CPA required.

The proposed amendment was to move from #1 to #3. The amendment to the amendment was to move from #1 to #2, which is a smaller jump and thus within scope of the notice. The fact that #2 is more expensive than #3 is irrelevant because the status quo is #1.

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36 minutes ago, Guest Who's Coming to Dinner said:

I wonder if you are grasping the parliamentary rule here. Let's assume your definitions are correct:

  1. Audit — most expensive and requires a CPA.
  2. Review — less expensive but still requires a CPA.
  3. Examination (compilation) — least expensive and no CPA required.

The proposed amendment was to move from #1 to #3. The amendment to the amendment was to move from #1 to #2, which is a smaller jump and thus within scope of the notice. The fact that #2 is more expensive than #3 is irrelevant because the status quo is #1.

And more to the point of the OQ, if the above are correct assumptions, then having given notice of a change from 1 to 3 would imply that an amendment changing instead to 2 would remain within the scope of notice and would be in order.

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