By: Wade Williams, President PAC Outsourcing LLC
Background:
At a recent seminar I conducted for new PAC managers, I was asked if PAC audits were necessary. It’s an important question and while my immediate answer to it was a resounding “yes,” this is an issue many PACs grapple with, so some elaboration is in order.
PAC Audit Patterns:
Certain organizations, like CPA firms and law firms, will make the decision automatically that their PACs will be audited. Many regulated entities, such as public utilities and financial institutions, also require audits as a campaign law violation could have serious consequences. Labor organizations also audit their political accounts on a regular schedule.
On the other hand, few corporations require periodic audits or compliance reviews of their PAC activities. I participated in a project sponsored by the Institute of Internal Auditors and was very surprised by the data that indicated PAC audits were a low priority in terms of corporate risk assessment. We know that just a handful of our corporate clients require audits. On the other hand, and unfortunately there aren’t statistics to back up my comments, I suspect a higher percentage of audits are performed for trade and professional association PACs. Associations by their nature are more likely to be sensitive to member concern about financial matters and include PAC activities as part of their stewardship obligations to the members. Of course if you’ve selected outsourcing for PAC compliance and reporting, the onus is on your service provider to keep things straight. However, the question remains why some form of external review of PAC activity isn’t performed with regularity on a larger universe of PACs.
Guidance and Direction Are Muted:
The Federal Election Commission (FEC) does not have a stated position on a requirement for PAC audits. We have seen during Alternative Dispute Resolution (ADR), as part of the settlement of an action against a PAC and/or its Treasurer, a requirement that PAC personnel undergo training in PAC compliance, but rarely is there anything with regard to subjecting the PAC to a regular schedule of audits. We know the FEC audit branch has limited capacity to conduct routine audits and essentially directs its attention to serious situations that require the regulator to become involved when the circumstances dictate.
The American Institute of CPAs’ political action committee is audited annually, but the AICPA has taken no official position with respect to PAC audits generally. At the same time, consideration is being given to developing a “practice guide” that would complement the AICPA Campaign Treasurer’s Handbook and, with respect to establishing and managing political financial accounts and it’s possible the issue will be addressed at that time.
While the National Association of Business PACs (NABPAC) doesn’t have a formal policy position as to a PAC audit requirement, when asked, NABPAC confirms that conducting routine reviews or audits of PAC receipts and disbursements certainly is a good business practice that warrants consideration.
Caleb Burns, a member of the Wiley Rein Election Law Practice Group, adds: “In light of recent cases of PAC fund embezzlements, audits are strongly recommended.”
The Consequences Are Substantial:
A few years ago, we were stunned to learn about the massive fraud that was committed against the Lockheed Martin Corporation Corp. PAC. The more recently reported multi-million dollar embezzlement by a longtime political consultant in California decimated the political accounts of dozens of state officials and several prominent Members of Congress. And Congressional PACs are not immune to this problem. Several Members of Congress as sponsors of Leadership PACs have been victimized through internal fraud and embezzlement.
With more than 4000 federal PACs, and another several thousand state PACs, recording in excess of 2 billion dollars in the last cycle, it may be time to give the matter more concrete attention. And when these failures occur, it’s more than someone taking people’s personal money; it’s the reputational loss to the individuals and sponsoring organizations that exacerbates the problem.
What’s in it for me?
So you decide (or are told) that your PAC is going to be audited. Obviously, this raises several important questions, some which may be challenging. What if they discover that a deposit is not accounted for? What do I tell them when I don’t have the backup for a check request? Do I tell them that running the PAC is just one of many things I do and sometimes I don’t always have time to reconcile the monthly bank statements?
The first “audit” I ever experienced had nothing to do with a PAC. As a young Navy officer aboard my first ship, I had recently been assigned the collateral duty of “Postal Officer”. Well, OK, the mail needs to get in and out and that didn’t seem like a big deal and there were some clerks to get the job done. And, yes, we sold some stamps and money orders, but it all looked pretty straightforward to me. Anyway I was really busy trying to qualify as a ship driver and assistant to the ship’s navigator which really consumed most of my time, so this post office thing would just sort of run itself. Almost. A few months passed, and then one day this fellow from some Navy facility showed up and said he was there to audit the postal accounts. Well, two days later and 23 stamps unaccounted for, he departed, and I was certainly glad to see him go. My XO was pretty understanding, but all the same, it was impressed on me that I was responsible for those missing stamps and despite all the other important things I needed to be concerned with, I still had to take responsibility with respect to that collateral assignment. And they collected the two or three dollars for those stamps from my base pay.
Needless to say that experience made quite an impression on me, and I never forgot the lesson I learned. When Deloitte set up its PAC, the decision to have annual audits performed came quickly. After all, a PAC board comprised of seven CPAs was unlikely to see it any other way. I never was concerned that the PAC was being audited, because my team took PAC compliance very seriously in spite of all the activities for which my department was responsible. We made sure that the books were kept up to date and we had a paper trail on all our disbursements. At the end of each audit, I recall we received a nice compliment from the audit partner as part of the report to the PAC Board.
So to the question, What’s in it for me? I believe it can be answered a couple of ways. First, you’ll take your job just a bit more seriously if you know that your work is going to be critiqued by an outsider. You’ll be sure to give it the attention it rightfully deserves. If you’re really doing a first rate job, no doubt the auditor is likely to make note of it to your PAC Board or to whomever the report goes to, and that certainly is a boost to your credibility. We all know PAC managers don’t get the credit they deserve for keeping everything in order, so a good report by an outside reviewer means a lot. It should also give you some peace of mind knowing that there aren’t any holes in your system, or if there was a problem it’s been corrected, and you’re back on course.
So when you are meeting with your PAC Board and the question is posed, should we audit the PAC? You need to be ready with an answer that may even surprise you. Yes, we should have regular reviews because the Board and the PAC contributors deserve to know that the PAC is being properly managed, that the reporting is accurate, and that the funds are all accounted for, and all of that can only happen if the PAC is subjected to regular audits. It’s a win-win for you, your PAC Board and your contributors, and I’d add for the PAC community generally.