Draft Final Audit Report of the 

Audit Division on 

John Edwards for President 

January 3, 2007 - March 31, 2008 

Why the Audit 

Was Done 

Federal law requures the 

Commission to audit 

every political committee 

established by a candidate 

who receives public fimds 

for the primary 

campaign.^ llie audit 

determines whether the 

candidate was entitled to 

all of the matchmg funds 

received, whether the 

campaign used the 

matching funds in ^ 

accordance with the law. 

whetiier the candidate l^ ^ 

entitied to ad|lijtion|l 

matching runc^tn-.il 

wheth|f ihc campaiizii 

otherwise complied wiili 

the limiuiiion<. 

prohibitions, mtk. 

disclosure requirciiiciils of 

the election law. 

Future Action 

The Commission may ^ 

initiate an enforcement 

action, at a later time, with 

respect to any of the 

matters discussed m this 

report. 

About the Campaig^^2) 

John Edwards for Presiden^s|^'e principal campaign conunittee 

for John Edwards, a can#|^^j|ar the Democratic Party's 

nomination for the officevof President of the United States. The 

Committee is headiiuartered in Cn'aj^Hill, Nortii Carolina. For 

more informaiion. ^cc the chart on ti^^Miiipaign Organization, 

p.2. 

Fimuicial Activity rp. 

• l(eci*ipts 

o Coniribuiions From Individuals 

o MuichiiuiTuiids Reccived 

o Baiik.Lo.iii 

o OIT>ctN loExpciuliiiircs 

c Other Rctvipl*. 

'i'f»tal Receipts -

• Disbursements 

o Opcrutill!! ] - \penditures 

• u Coniribui^^Refunds 

o I t);iii Repayments and Other 

^Di.sbursements 

Total Disbursements 

$39,643,966 

7,404,083 

8,974,714 

967,088 

129,527 

$57,119,378 

$44,405,156 

3,720,268 

7,383,067 

$55,508,491 

Findings and Recommendations (p. 4) 

• Matching Funds Received m Excess of Entitlement 

(Finding 1) 

• Misstatement of Financial Activity (Finding 2) 

• Failure to Itemize Loan Repayments (Finding 3) 

• Stale-Dated Checks (Finding 4) 

26U.S.C. §9038(a). 
Draft Final Audit Report of the 

Audit Division on 

John Ekiwards for President 

January 3, 2007 - March 31, 2008 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Inventory of Campaign Records 1 

Part II. Overview of Campaign 

Campaign Organization 2 

Overview of Fmancial Activity 3 

Part III. Summaries 

Findings and Recommendations ^ 4 

Summary of Amounts Potentially Owed lo lhe U.S. Treasury 5 

Part IV. Findings and Recommen^tions ^» 

Finding 1. Matching Funds Rccci\ cd in Exces^l' I .iiiitlement 6 

Finding 2. Misstatement of l-lnaiicial .\cii\ity 19 

Finding 3. Failure to Itemize lAran Rcpa\4nciiis 20 

Finding 4. Stale-Daicd Checks ^ 21 

A:.' ^ 
Part I 

Background 

Authority for Audit 

This report is based on an audit of John Edwards for President (JEFP), undertaken by the 

Audit Division of the Federal Election Commission (the Commission) as mandated by 

Section 9038(a) of Titie 26 of tiie United States Code. That section states "After each 

matching payment period, the Conunission shall conduct a thorough examination and 

audit of the qualified campaign expenses of every candidate and his authorized 

committees who received payments under section 903"." .\lso. Section 9039(b) of the 

United States Code and Section 9038.1(a)(2) of the^^rrni-sion's Regulations state tiiat 

the Commission may conduct other examinations ^^^Ld^i^fium time to time as it 

deems necessary. 

Scope of Audit 

This audit examined: 

1. The receipt of excessive contributions and I'^s. 

2. The receipt of contributionsffroiii prohibited source*^. ^ 

3. The receipt of transfers from^Mhcr authorized conHrlittees. 

4. The disclosure of contributions and iransfers recei\ cil. 

5. The disclosure of disbursemcntsl^ilcliis .iiul uhl fjatioii^. 

6. The recordkeeping process and coinpictenc^^ ul ivu-nrd^ 

7. The consistency bciwccii icported tig^c^ .nul b:ink jvcouls. 

8. The accuracx oi ihe Statemem of Net ©iiiNumdrng Cjiiip:iign Obligations. 

9. The campaign's^^mpliancc u ith spending limitations. 

10. Other campaign op^aiiun^ IICCC^NJIV to llio review. 

Ii^ntory (i^^pa ^ Re^^^l^ 

Th^mdit staff rout^^^ondS^s an inventory of campaign records before it begins the 

audit^f^work. JEFP'sfcccirds \vci'c substantially complete and the fieldwork began 

immedia^^). ' 
Part II 

Overview of Campaign 

Campaign Organization 

Important Dates 

• Date of Registration January 5J^ 7 

• Eligibility Period Octob|^^2007 - January 30,2008^ 

• Audit Coverage January, 3, 2()07 - March 31,2008^ 

Headquarters Chapel Hill, ^l^^^arolina 

Bank Information 

• Bank Depositories Three ^ , 

• Bank Accounts 17 Check m!2,2 Investmeni i 

Treasurer 

• Treasurer When Audit Was CoiS^jted ^Julius L. Bombers 

• Treasurer Durirui PcTiiul Covered 1\\ 

Audit 

• ^-

JiiliiiN T.. ChUfibcrs 

Management Information ^ 

• Attended FCC Campaign Finance 1 

Sjg^iiiuir 

^ es 

ccoiiniihg .Illtl I'aid Staff 

Leeordkeeping Tbsks^ 

^ The period during which the candidate was eligible for matching funds began on the date of certification 

of his matching fund eligibility and ended on the date the candidate announced his withdrawal from the 

campaign. See 11 CFR §9033. 

^ Limited reviews of receipts and expenditures were performed after March 31,2(X)8, to detennine whether 

the candidate was eligible to receive additional matching funds. 
Overview of Financial Activity 

(Audited Amounts) 

Cash on hand @ January 3,2007 $0 

o Contributions From Individuals 39,643.966 

o Matching Funds Received 7,404,083'' 

o Bank Loan 8.974,714 

o Offset to Expenditures /: 967,088 

o Other Receipts 129,527 

Total Receipts A "k $57,119,378 

o Operating Expenditures 44,405,156 

o Contribution Refunds A 3,720,268 

o Loan Repayments and Other Disbursement ^ 7„383,067 

TotalDisbursements v 

Cash on hand @ March 31,2008 $ l,M^887 

^ JEFP received an additional $5,478,795 in matching funds after March 31,2008 for a total of 

$12,882,878. This represents 61 percent of the maximum entitiement ($21,025,000) a Presidential 

candidate could have received in the 2008 cycle. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Matching Funds Received in Excess of 

Entitlement 

A review of JEFP's financial activity through Decembei 1. 2008, and estimated wmding 

down costs indicated that it received matchmg fimds ul inoK- ihan $2.1 million in excess 

of the Candidate's entitlement. JEFP's Statement of Nei OiiiNismding Campaign 

Obligations (NOCO) understated its cash-on-ha^ ovcrsUiU'ihi^ccounts payable and 

winding down expenses. The Audit staff rectiinin^nded that JFn^ provide evidence that 

it did not receive matching funds in exces^ ul ilic entitiement. 

In response, Counsel for JEFP (Counsel) M.iicil ili.it tiic pa>roll of Febiii.iry 7. 2008, 

represents a qualified campaign expense that slituiltl be included in the NOCO. Counsel 

also stated JEFP's overall object um in ilic repayiiieiii .of matching fimds. ^ 

The Audit staff has review JEFP's rcNpnnsc and where appropriate made adjustments to 

the NOCO. However, it remains tiic opinion of ihc Audit .siaiT ihat JEFP received 

matching fimds, toi.iliiii! S2.1 .^6,507, ih excess ol' the C'luididaic^ientitlement. (For more 

detail, see p. 6.) ^ . ^ . 

Finding 2. Misstatement of Financial Activity 

A comp.ii i^tiii iif-TEFP'^ rcporictl rinuncial acti^{ to its bank records revealed a material 

mis^iMiciiKMii nl ivporied ca^h-on-hancl in ciilcnd^year 2007 through March 31,2008. 

JEM' iiiitlerstated itsi|Dcccmber 31. 2007, casl^on-hand balance by $585,814 and 

un(UM^i:iii-d its March 31. 2008, cash-on-hand balance by $468,676. 

The Audii >iiWrecommentlcil ihat JF.I-P amend its most recently filed report to correct 

the cash-on-hand balance. 

In response, JEH' maici i.ilK complied with the recommendation. (For more detail, see p. 

19.) 

Finding 3. Failure to Itemize Loan Repasrments 

Durmg audit fieldwork, the Audit staff identified loan repayments, totaling $4,344,469, 

that were not itemized. Although JEFP reported the amounts on the Detail Summary 

Pages and itemized them on Schedule C (Lx)ans) and Schedule C-1 (Loans and Lines of 

Credit From Lending Institutions), it did not itemize them on Schedule B-P (Itemized 

Disbursements). 
The Audit staff recommended that JEFP file amended reports to itemize the loan 

repayments. 

In response, JEFP complied with the recommendation. (For more detail, see p. 20.) 

Finding 4. Stale-Dated Checks 

The Audit staff identified 202 stale-dated checks, totaling $267,529, and recommended 

that JEFP provide evidence that the checks are not outstanding or make a payment to the 

United States Treasury. 

In response, JEFP documented that 83 checks, totaling s I 38.K71, were no longer staledated as they either had cleared the bank or were for aiuninis that were determined to be 

not owed. As a result, the remaining 128 stale-datfui clicc k^. totaling $141,808, require 

repayment to the United States Treasury. (For more detail, sec p. 21.) 

i 

Summary of Amounts Poienticdly Owed to 

the United States Treasury 

• Finding 1 Matchmg Fiind|R«-ci-j> ed in Excess 1 $2,136,507 

IpAltititiciiKMU 

• Finding 4 SiaIc-DaiedChl|r^ 141,808 

'i'olal Due U.S[rTreasury | $ 2,278,315 
Part IV 

Findings and Recommendations 

Finding 1. Matching Funds Received in Excess of 

Entitlement 

Summary 

A review of JEFP's financial activity through December 31^)08, and estimated winding 

down costs indicated that it received matching fimds of rn^^ian $2.1 million in excess 

of the Candidate's entitlement. JEFP's Statement of Nci Oiii standing Campaign 

Obligations (NOCO) understated its cash-on-hand^^clNl:lk•ll its accounts payable and 

windmg down expenses. The Audit staff reconinunCdcd ili.ii .11 \ V provide evidence that 

it did not receive matchmg fimds in excess ol IIK* entitlement. 

In response. Counsel for JEFP (Counsel) siak-il ihat the payroll ofl chraary 7,2008, 

represents a qualified campaign expense thaMumld be iiK-liitled in the^)('0. Counsel 

also stated JEFP's overall objection to the repa>iTiciii ol inaiching fimds. 

The Audit staff has review JEFl'"'. ii*-poiisc :md wheiv agOTopriate made adjustments to 

the NOCO. However, it remain^ ilic opinion of the Au^^^ f that JEFP received 

matching fimds, totaling $2,136,507^!^ excess oi iliv: (Tandmatc's entitlement. 

Legal Standard . 

A. Net Outstanflii^|pampaiKn|Obligation.s. W'iihin 15 days after the candidate's date 

of ineligibility (see definition below), the caiuliil.ite must submit a statement of "net 

outstandiii;: c.iiii|iaign obligalions." Wis statonu-nt must contain, among other thmgs: 

• ilk! ini.il of all coimnittee assets including* cash on hand, amounts owed to the 

ctiinmittcc and capital assets listed at iH^ir fair market value; 

• I lie total of all oiii^i.indiiig obligations for qualified campaign expenses; and 

• cui c^iimate of ncccsN.iry w indiiii:-down costs. 11 CFR §9034.5(a). 

B. Date ol' IneiiKibUity. 'Ihc date of ineligibility is whichever of the following dates 

occurs furst: . 

• the day on^hich the c.indidate ceases to be active m more than one state; 

• the 30th day follow iri!! the second consecutive primary m which the candidate 

receives less than 10 percent of the popular vote; 

• the end of the matching payment period, which is generally the day when the 

party nominates its candidate for the general election; or 

• in the case of a candidate whose party does not make its selection at a national 

convention, the last day of the last national convention held by a major party in 

tiie calendar year. 11 CFR §§9032.6 and 9033.5. 
C. Qualified Campaign Expense. Each of the following expenses is a qualified 

campaign expense. 

• An expense that is: 

o incurred by or on behalf of the candidate (or his or her campaign) during the 

period begmning on tiie day the individual becomes a candidate and 

continuing through the last day of the candidate's eligibility under 11 CFR 

§9033.5; 

o made in connection with the candidate's campaign for nomination; and 

o not incurred or paid m violation of any federal Ig^or the law of the state 

where the expense was incurred or paid. 11 Cl Ki9032.9(a). 

• An expense incurred for the purpose of deter^iint: whether an individual should 

become a candidate, if that individual subse^piil> becomes a candidate, 

regardless of when that expense is paid. 1 < I.-1(a)(2). 

• An expense associated with wmdin>j dou ii tiie campaiiMi and terminating political 

activity. 11 CFR §9034.4(a)(3). 

• Monetary bonuses paid after the d.ii nlineligibility for coinniiilse employees and 

consultants, provided that they are paSTri iccognit^g of camp^^^lated 

activities or services; pur^i^t to a writicii^iL-ontrac^ade before t^^^ of 

meligibility; and, no latefil^ii 30 days after thc date of meligibility. 

llCFR§9034.4(a)(5). 

D. Value of Capital Assets. The fa^market value of capiial ii&sets is 60 percent of the 

total original cost oi' the asxcis when allied. A caiulul.iic mayjelaim a lower fau: 

market value for a l apiial asset by listin^ilic ti^^cl on ilic NOCO statement separately and 

demonstrating, tiiroii^ documentation, tiic lowci fau: mai'kci value. 11 CFR 

§9034.5(c)(l). 

E. ^^^mcnl^^jskivhln^ i'u\miMils al'ler l)»te of Ineligibility. If, on the date of 

ind^pmty, acaS^^^ehas^nci outstanding lAipaignobligations as deHnedunder 11 

that c^^^ate may continue to receive matching payments provided that 

has net oiMiMp.din!! canrtpaign debts on the day the matching pa3mient is 

made. ll^FR §9034.1(bj. ' 

F. Winding l)m\ n Limitati<iii. The total amount of winding down costs that may be 

paid for, in whole "Oari. w i:h matching fimds shall not exceed the lesser of: 

• 10 percent oflic nvvMall expenditures limitation pursuant to 11 CFR 9035.1: or 

• 10 percent of thc tbtal of: 

o The candidate's expenditures subject to the over expenditure limitation as of 

the candidate's date of ineligibility; plus 

o The candidate's expenses exempt from the expenditure limitations as of the 

candidate's date of uieligibility. 11 CFR §9034.11(b)(1) and (2). 
Facts and Analysis 

A. Facts 

The Audit staff prepared a Statement of Net Outstanding Campaign Obligations as of 

January 30,2008, tiie Candidate's date of ineligibility (DOI). The Audit staff presented 

the audited statement that appears on the next page in the Preliminary Audit Report. This 

statement was based on the review of JEFP's financial activity through December 31, 

2008 and included estimates for windmg down costs thereafter. The Audit staff and 

JEFP agreed on all NOCO components except for accoimts payable for qualified 

campaign expenses. 
John Edwards for President 

Statement of Net Outstanding Campaign Obligations 

As of January 30,2008 

Prepared thru April 30,2010 

Assets 

Primary Election Cash-in-Bank 971,887 

General Election Cash-in-Bank '. ^21,290 

Accounts Receivable 455,789 

Capital Assets . 29,134 

Total Assets ^ ^ 7,778,100 

Liabilities 

Primary Election Accounts Payable for Qualified <, 

Campaign Expenses ® 1/30/08 - -2,313,509 ^ 

Refund of General Election Contri-.i ..-i.- 3,321,290 

Loan Payable @ 1/30/08 8,974,713 

Actual Winding Down Costs (1/31/08 ^^(.M • • - S84,568 

Estimated Winding Down Costs (5/1/10 -S|: .• 1/1 j -s?^^,060 [a] 

Payable to U.S. Tr." s-.slo-I)atedChcvk« ^^1583 

Total Liabilities ^ k $18.689.723 

Net Outstanding Cumpaigii ()bli{>aiif ins (1 K-ilcit) as of January 30,2008 ($10,911.623) 

Fool mile to NOC () •SlnirmciU: 

[a] E^iiinfii.s: i -tiding down c>««i«^will be w«:.ii|i:ired to actual winding down costs and adjusted accordingly. 

3lk k I 

Shown below arc adjustmcniN lor fimds received after January 30,2008 and through July 

17,2008. 

Net Outstanding Cimpaign Obligations (Deficit) as of 1/30/08 

Private Contributions Received 1/31/08 tiirough 7/16/08 

Interest Income Received 1/31/08 through 7/16/08 

Matching Funds Received 1/31/08 tiurough 7/16/08 

Remaining entitlement as of 7/16/08 

Matching Funds Received 7/17/08 

Amount Received in Excess of Matching Fund Entitlement 

($ 10,911,623) 

358,983 

22,110 

8,825,425 

($ 1,705,105) 

4,057,453 

$ 2,352,348 
10 

As a result, in the Prelimmary Audit Report, the Audit staff concluded that JEFP was not 

entitied to $2,352,348 of tiie matching fimd payment ($4,057,453) it received on July 17, 

2008. 

1. Cash-In-Bank 

The primary difference between the NOCO presented on the previous page and those 

prepared by JEFP is the cash-m-bank balance. JEFP understated cash by $4.5 

million. Most of the understatement of cash represented fimds received for the 

general election during the primary election period. Tlu- understatement of assets 

caused the NOCO statements to show a larger deficit^iul matching fimd entitlement 

than was the case. The Audit staff and JEFP aj'icc un ilic cash balances presented in 

tiie NOCO statement. 

2. Accounts Payable for Qualified CampuiKn Expenses - I'uyroll 

Even though JEFP's accounts payable figure on its NOCO w.i^ nMaccurate, the 

Audit staff and JEFP now agree on thc amount of accounts payal^^xcept for the 

February 7,2008 payroll. The Audit siaiT* t .ilculation of account^ayable on the 

NOCO statement does not include $556,871 in pa.Moll paid on Februai ) "^2008. 

Absent further documentation. b556.871 is auiNickMvd lo be a monetary bSnus paid to 

99 employees. As noted m ilic Icyal '^i.iiuhirds, ii^Snlcr to be a qualified campaign 

expense, monetary bonuses paicl aftei IX)I ui empkncc^ in recognition of campaignrelated activities or .services mu.si he paid nn hiter^tiian 3M^ys after DOI and 

provided for pursuant to a written cgnii.ict gade prior to D^|(l l CFR 

§9034.4(a)(5'i^iJ^El'P representative^ coiifirnicd lhat there were no written contracts. 

JEFP paid stai i ii\^^moiiilil>ifrom incepti(m through January 30,2008. In January 

200§^^g|^oll p^ituU ended on J.inuar\ 1^2008 and January 30, 2008. On 

J^^^^3l^)08. antiilielierr p.i p.i\\ peniu pei iiHll concluija conclii^.. Thi Thiss payrol payrolll totale totaledd $761,19 $761,1933 and 

i^^^ai d on Pebruajy 7,^008,. The amouru,4n effect, tripled each employee's pay for 

^^month of Jani^^ Throuizlitiiit the au^t fieldwork, the Audit staff made 

numerous requests loi; an explanaiion and documentation of this payroll. 

B. Preliminan .Vudit Report & Audit Division Recommendation 

1. First Exit Cnnl'mm'c 

This matter was piCNL-iiicd to JEFP at the exit conference held on February 3,2009. 

The Audit staff provided its NOCO and workpapers supportmg all NOCO 

components. 

Subsequentiy, the Assistant Treasurer responded that the purpose of the February 7, 

2008 payroll was to reimburse employees who had not been paid their entire salary 

due to limited fimds available beginning sometime m August 2007. Although 

requested, JEFP provided no specific details to explain how this payroll was 

calculated or what employees were not paid their full salary. At the exit conference. 
11 

tiie Audit staff made the Assistant Treasurer aware that documentation supporting this 

payroll had not been made available. 

During the exit conference response period, the Audit staff analyzed JEFP's payroll 

for tiie period August 2007 tiurough January 2008. The review indicated tiiat JEFP's 

explanation was incorrect. Employees were paid m fiill from August 2007 through 

January 15,2008. However, during the following pay period, which ended January 

30,2008, employees received half of theu: normal net pay.^ Therefore, the Audit staff 

considered that portion of the February 7,2008 payroll necessary to make up tiie 

difference in net pay plus associated employee/employer payroll taxes ($204,322) to 

be a qualified campaign expense and included the aiiiciiini im the NOCO m accounts 

payable. The Audit staff considered the remaining! pnriion of the February 7,2008 

payroll, or $556,871, a non-qualified campaign expense and not included in the 

NOCO payables. ^ 

Subsequently, JEFP provided a second e.xplanation of this payf^ill. 'llie Assistant 

Treasurer indicated that as of January 1,2008, campaign staff workcd24 hours a day, 

seven days a week, with the understandiii!: ih4 salary uould be incrl^^ed for those 

affected. The Assistant Treasurer fiirtiier inB^ted«lliai JEFP did nol lia\^ufficient 

funds to pay the mcreased salary on the normal d.ites in January and that after 

DOI, JEFP calculated the total amouii|^e each employee and paid the increased 

salary on February 7,2008. It is JEl-i^femion tiiat the l ebruary 7,2008 payroll 

represents a qualih^jcampaign expcnseT^^i i^.i^ due aiOOI and therefore should 

be included in ilie NOCO. 

With respect to resources not being a^ aihihle ilurmg January 2008 to pay the 

increased salaries. JKFP rei-ords indicate ii^ average daily cash was approximately 

$4.2.inil.lioii for Januii^x. c\clilti1nL' general election contributions, which could not be 

us^d for prima^gxpeiiNeN. i<ui iliei, JI I 'P ol^ed no explanation as to how the 

nncreased amoiuii \\ .i^ calculated or how ai^ when employees were notified; nor did 

it^^vide any documentation loi tiie decision to increase salary. As a result, the 

Aud^taff did not acccpi JEI P'^ explanation. 

The Audil^mff notified .11 .iFP of its conclusion by email and gave JEFP 10 days to 

pd that $556,871, representing employee net pay and 

^^1 taxes, would not be mcluded in the NOCO. Counsel 

objected to the nM^^t^ by email and demanded a second exit conference. 

s It is not clear why this payroll was reduced. As can be seen from the NOCO statement, JEFP appears to 

have had funds available to meet the payroll, even setting aside the general election contributions, which 

could not be used for primary expenses. 
12 

2. Second Exit Conference 

Although not required, a second exit conference was held on April 2,2009. 

Payroll 

The Audit staff again mformed JEFP tiiat $556,871 of salary and payroll taxes 

were considered non-qualified campaign expenses, excludable from the NOCO. 

Counsel offered as a possible (fimd) explanation that certain staff may have 

traveled to state office locations m order to clean out the offices and retum rental 

cars. However, no documentation supporting this explanation was provided. 

Again, the Audit staff provided JEFP an additional lO-^ay response period. 

In response. Counsel stated that in December 2007. JI-LFP determined that those 

staying through the end of the campaign, would recei\^|^salary increase, which 

would be paid out as permitted by Ji I P le^ources. JEFP iniended this pay 

increase primarily to compensate si.ii I lm ilie fact that JI I-'P ilispatched staff to 

many different field locations throiiiilumt the country for the .1 jpuary primaries 

and caucuses, placing them on an aitmnd ilie-clock schedule. JEFP also designed 

the mcrease in pay to cov^mcreased CONIN ihai sunicrs incurred bccimse they 

were on tiie road. In addn inn. ('ounsel stated liiat on January 30,20^ the date of 

ineligibility, JEFP had appitixiinaicly 70 office .-iiul volunteer sites m several 

cities in various states. JEFP li.ul dep1ti\ed stafl in ihe^e locations, where it was 

necessary to clean out and cln^c field m l ices. JF.FP determined that it would be 

more efficient to pay these indix idiials a finite amount iii;^tead of asking 

employees to turn in receipts for iciinbiii cement. According to Counsel, this 

would have been a diriiciili accouiit:im nincess, whi^h JEFP could more 

efficiently mmage by a lump-sum sl.ii \ payment. 

.-\ lew davN later, JM P iunx ided a schedule;that reflected JEFP's determination 

^ - - » TO • 

that all cinp]n>ees received a 31 perc^^increase m salary between December 23, 

2p07 and FehriiMrV 15, 2008. which was paid in one lump sum on February 7, 

^^OOS. JEFP ga\e examples p'&three different employees and how this paycheck 

w nil Id have been allocated between payable and winding down categories. 

With respeci to thc accounting burden of paying travel expenses, JEFP had 

accountiiii! pi-ncediiioN in place for handling travel reimbursements. Throughout 

the campaign, ilie st.ii'i submitted travel reimbursements. Some were included ui 

the NOCO's accounts payable. The effect of a campaign increasing salary in lieu 

of paying for travel reimbursements creates additional expenses for the campaign, 

such as the employer's share of payroll taxes, not to mention the additional tax 

burden placed on employees. While it is reasonable that some staff would have 

been involved in the office closeout process, it is not likely that all staff, such as 

the chief of staff, chief financial officer or fmance director, took part in this effort. 

The close out took place after DOI when only 14 people remained on the payroll. 
13 

Estimated Winding Down Expenses 

In response, JEFP estimated it would spend a total of $2,771,004 m winding down 

expenses for calendar years 2009 tiurough 2011 ($969,972 for 2009, $959,972 for 

2010, $841,060 for 2011).^ For tiie period January 31,2008 tiurou^ April 30, 

2010, estimates were converted to actual winding down expenses. Based on 

JEFP's acmal spending from January 2009 tiirough April 2010, tiie Audit staff 

calculated that estimated wmding down expenses for the period of May 1,2010 

through December 31,2011, $1,423,060 may be necessary to wind down the 

campaign. With the exception of the adjustment for storage costs, the Audit 

staffs remainmg estimated wmdmg down expciiNC^ .ne very close to the amount 

calculated by JEFP. 

It should be noted that throughout the poNt-audii period, ilic Audit staff 

consistentiy monitored estimated winding: down expenses. Dank records and 

reported activity are reviewed in order in convert estimated w indmg down 

expenses to actual winding down expenses. 

JEFP's Overall Objection to the Repayment iil' .Matching Funds 

JEFP argues that the com^^dpn of a shortfalL in ilie Presidential Primary 

Matching Payment Acco^^^aicliiiig PaymenlpAccount) and the lack of a 

quorum in tiie Commissior^rini! ihc first half"6\ 2008 put JEFP at a 

disadvantage with respect to%\c rcccipuifimatching liMds. JEFP argued that 

matchable contributions received ^rior to DOI ^linuld hej|patched regardless of 

whether ^r e are qiuilii'ied campaii-'n exiien^e^ in pa\. and concluded that the 

failure to^^^h these cmuributioiix \ iola^s the I 'irsi .\mendment rights of both 

the candidateiaiul those individuals w ho ccmtributed to the candidate's committee. 

Witii ie-|K'ci In Jj l i"s rcNpoiiNC, ilie .\iulii staff believes tiiat under 26 USC §9033(c)(2), 

a (^^date who h ^ paNsed the date of ineli^ility is not entitled to any fiirther matchmg 

fimd;^^nents except t(r^fra> i|i|glified campaign expenses incurred before the 

candidale became meli^i^. Th^:^act lhat JEFP received contributions that otherwise 

would be m^^^able does limj^eteniiinc whether the candidate is eligible for fiuther 

payments, ^^intent of thiN section is to allow the candidate to receive matching fimds 

after the date of incligibilitx nnly to pay debts for qualified campaign expenses. In 

implementing tiiis pi-ovisioii. ilie Commission considered both debts incurred before the 

date of meligibility and iiece^^ary costs of wrapping up the campaign. It also established 

a procedure to monitor whether tiie candidate still has qualified campaign expenses to be 

paid prior to each post date of ineligibility payment, known as the NOCO Statement.^ 

Finally, the possibility of a shortage m the Matching Payment Account is recognized and 

an equitable distribution calculation is specified in both 26 USC §9037(b) and 11 CFR 

§9037.2. That equitable distribution formula was followed. 

^ In its 2009 estimates, JEFP included storage costs of $18,000 for the next seven years. JEFP 

inadvertentiy included this same cost in its 2010 and 2011 estimates. The necessary adjustment has been 

made. 

^ See 11 CFR 9034.1(b), and 9034.5 
14 

Subsequent to the date of ineligibility, campaigns are required to submit a NOCO 

indicating the campaign has sufficient net debt to justify additional matching fimds. The 

last matching fimd payment JEFP received was $4,057,453 on July 17,2008. This 

payment was based on a NOCO filed on June 25,2008 that reflected net debt of 

$4,684,340. However, as previously noted, that NOCO statement was misstated. 

There is no question that the combination of the shortfall in the Matching Payment 

Account and the Commission's lack of a quorum delayed payments. The Commission 

took all steps in its power to minimize the impact on all matching fimd recipients. All 

matching fimd requests received through December of 2007 w;cre processed and certified 

while the Commission still had a quorum. That allow ed the 1'rcasury Department to 

begin making payments as soon as fiinds became availablc-wiihout the need for fiirther 

Commission action. All payments certified by the C'oniiiii^^ion before January 1,2008 

were paid as fimds became available between Febriiar\ and .\|)MI 2008. This procedure 

also allowed campaigns to borrow fimds usin^ the matching i in ids as collateral. JEFP 

used this avenue to borrow $8.9 million in No\ ember and Decembei 2007, before any 

payments could have been made under an\ circumstances. Even tiiniii:li ilie Commission 

could not certify any payments during the fir^ijialf of 2008. matching I und requests 

received after January 1,2008 were processed, and the campaigns were infci^ed of the 

matchable amount. Campaigns ^niild use those amounts iis collateral for loans if they 

desured. Fmally, any additional expenses incurred by ^eainpaigns as a result of these 

circumstances, such as interest on loans or incre.ised legal.ch^t^. would have been treated 

as qualified campaiLin expenses and i^\ : h.i\e resiilied in an ailditional matching fimd 

entitlement. 

In summary, althoiii!h it is true Wt matching fund paymenl^f'were delayed during the first 

half of 2008, the Act and CommSsion's rental inns are clear that in order to receive 

matching fund payment^ aiier the dale ni ineligibility, a candidate must have net 

outstaiiding cainpaiiin obligations nn the date thatjhe matching fimd payments are made. 

JEI -'P dncs not anjue tfeat it had sufficient obligations to justify tiie fiill amount it received 

and .iiirees that it signlieandy ui^-i ^i.ited its assets on its NOCO Statement. The fact 

that JEFP may have recci\ cd contnl^uticms before the date of ineligibility that were not 

matched or that payments were delaxed for reasons beyond the control of the 

Commissioii^i^EFP, does not allow JEFP to receive matching fimd payments after the 

date of ineligibility in excess of the amount of qualified campaign expenses to be paid. 

Based on tiie above, J^l -.l -P w .i^ not entitied to $2,352,348 of the matching funds payment 

($4,057,453) it received on July 17,2008. Therefore, the Audit staff reconunended tiiat 

JEFP demonstrate that it did not receive matching fimds in excess of its entitiement. The 

Preliminary Audit Report noted that absent such a demonstration, the Audit staff will 

recommend that the Commission make a determination that $2,352,348 in matchuig 

fimds is repayable to the United States Treasury. 

C. Committee Response to the Preliminary Audit Report 

In response to the Preliminary Audit Report, Counsel related that there were no major 

discrepancies with the NOCO. Counsel continued to maintain, however, that the enture 
15 

February 7,2008 payroll should be considered a qualified campaign expense and not as a 

bQnus. 

Counsel also restated JEFP's overall objection to repayment of Matching Funds as 

discussed in its exit conference response on page 13 of this report. 

In addition. Counsel provided another explanation for the February 7,2008 payroll and 

included a chart that categorized that portion of the payroll in dispute differently from its 

previous explanations. 

JEFP's Breakdown of That Portion of the Februai-\ 7.2«0K, Payroll in Dispute: 

Additional Make-up Salary ^ $ 44,917 

Winding Down Expenses 

Salary January 31,2008 through February 7,2008 S187,567 

Lump Sum Payment for Expenses ^$320,659 

Total $W3.143^ 

JEFP provided a chart that indicated it reduced ilie N«ikii \ nl six employee^ in 2007. 

Although JEFP provided no documentation to suppnri ihiN chart, it concludeothat these 

six employees were owed $44,917 and thakat a minimiiiii, this amount should be added 

to tiie $204,322 tiiat the Audit staff recn^^^d a^ perm^mvle make-up salary. 

JEFP mdicated that the leinaining poiiinn nf ihe i vbriiar> 2008'payroll was for 

winding down c^ K w Inch aie cinalified cain|)<iign expen^es. The two main components 

of these winding costs wen: staff salaries and lump sum payments made to staff to 

reimburse for travel^)di!ing and incal expenses incurred during the month of January, 

and throiidi Febi nary 7. 2(U)8. 

lb. 

According to the response, staff salaries for the|period of January 31,2008 through 

Feliruac^7,2008 totaled $487,567, an average $3,552 per staff. Lump sum payments for 

expen^V i»iided $320,65>9. an average-reimbursement of $3,239 per staff. 

The Audit si.il i leviewed JEI-P's response and offers the following: 

Make-up Salary - $44,917. The Audit staff conducted a review of the available payroll 

records for each mdi\ idual liNied by JEFP. The payroll records supported a reduction in 

pay for the six employee^, totaling $44,917. However, one of the six individuals listed, 

(make-up salary - $16,500) was not paid on Febmary 7,2008. Therefore, any reduction 

in pay for this individual is krelevant when discussmg the February 7,2008 payroll. This 

individual received a payment of $7,675 for salary on February 11,2008 that had already 

been included m accounts payable on the NOCO. As a result, the Audit staff included an 

additional $28,417 ($44,917 - $16,500) as a qualified campaign expense on tiie NOCO. 

The amount in dispute is actually $556,871. JEFP's total is misstated by $3,728. 
16 

Winding Down Salary - $187,567 January 31,2008, to February 7,2008. JEFP 

indicated that winding down salaries for the period averaged $3,552 per employee. JEFP 

appears to be sayuig that this payroll represented salary payments for only 53 (of the 99) 

individuals paid on February 7,2008 ($187,567 / $3,552). JEFP has not provided any 

documentation that identities the staff members who were paid. This new explanation is 

inconsistent witii tiie fact tiiat 99 individuals were paid on February 7,2008. 

Furtiier, if tiie average salary per staff member ($3,552) is incorrect and JEFP meant that 

all 99 individuals were paid for winding down activities during this period, it should be 

noted that 14 of these individuals remamed on the payroll .md received their normal 

salary for this same period on Febmary 15,2008 (pay period J:muary 31,2008 through 

February 14,2008). The amount of tiiat payroll has al w a\ - been included in tiie NOCO 

as a winding down expense. The Audit staff does not accepi JEFP's explanation. 

Lump Sum Payment for Expenses - $320,659. JEFP claimed iliiat all 99 mdividuals 

mcurred expenses for windmg down the cimpaign ($320,659 / s ».2.*y). However, JEFP 

has not provided documentation demonsdaiintLtiiat all 99 individual^iiiciirred expenses 

or retained any documentation supporting tiiea.rt"xpense^." ^ 

The response stated that high-lex el ^lalf performed w nuling down duties such as 

organizing and archiving financi.il dnciinficni^. contact iii!! \endors, thankmg donors and 

coordinatmg with the candidates. ^^|jnlikel> ihese type^ nf .ictivities would generate 

reimbursed expenses. Again, these l^^level enip1n\ces, I I in lotal, received their 

normal pay covert^ ih.e ^aine period.l^ly for performiipj ihc^o'same tasks. As 

indicatedabove,^mainniiiii nl ihoFelini.ii> 15. 2008pa>rnll (January 31,through 

February 14,20^^ms inchideil in the NOC'() as a winding down expense. The Audit 

staff does not accepSfFFP's expUination. 

Fui.i11>. iiiciiii in&i salary and dncumehtcd rcimbui^d expenses after the candidate's date 

ofunelifibility wmild be eonsideied perm issil^^ windmg down expenses. Even if the 

Coinim|gion were to ticcegt Jl .l-P'^ explanation with respect to the amount m question 

($528^4 (S556,871 - j^S. l 17);, tije .NOCO statement presented on page 18 includes 

maximum allowable amount of winding down expenses. Including this amount would 

require an adjiiMinent to the remaining estimated windmg down expenses presented in 

that NOCO but not affect the amount of matching fimds determined to be in 

excess of the candi^^'<! eniiilement. JEFP would still be requured to make a repayment 

of matching funds, toiiliiii! sJ, 136,507. 

Specifically, based on JEFP's actual winding down expenses during the post ineligibility 

period, the Audit staff estimated that JEFP will spend an additional $1,216,981 in 

winding down expenditures and reach the wmding down limit ($4,205,000) by August 

31,2012. As previously stated, should the Commission accept JEFP's position on the 

remaining $528,454 the Audit staff would reduce estimated winding down expenses to 

$688,527 ($1,216,981 - $528,454). As a result, assuming a constant level of windmg 

down spendmg, JEFP would reach the windmg down limit by October 2011. The 

repayment would remain at $2,136,507. If, however, the Commission does not accept 
17 

JEFP's explanation and JEFP spends less tiian the windmg down estimate shown, the 

repayment would increase accordmgly. 

The Audit staff continues to believe tiiat only $232,739 ($204,322 + $28,417) of tiie 

February 7,2008 payroll represented a qualified campaign expense. The remaming 

$528,454 represented a non-qualified campaign expense. 

Additional NOCO Adjustments 

Based on JEFP's response to Finding 4, Stale-Dated Checks, the following components 

of the NOCO have been adjusted accordmgly: (1) Cash-in-bank, (2) Accounts Payable 

for Qualifled Campaign Expenses and (3) Payable to I. ..S. I ivasury - Stale-Dated 

Checks. 

The Audit staff revised the NOCO to include alWevisinns discussed above. We have also 

calculated actual winding down expenses thinii>.!h December 31,2010 and updated the 

estimated windmg down expenses thron^jh .XIIIIIINI 31,2012. Thc revised NOCO appears 

on the following page. 
Assets 

John Edwards for President 

Statement of Net Outstanding Campaign Obligations 

As of January 30,2008 

Prepared thru December 31,2010 

18 

Primary Election Cash-in-Bank 

General Election Cash-in-Bank 

Accounts Receivable 

Capital Assets ^ 

Total Assets 

Liabilities 

Primary Election Accounts Payable for Qualified Camp.i::j:i 

Expenses @ 1/30/08 

Refund of General Election ContributiriiLoan Payable @ 1/30/08 

Actual Winding Down Costs (1/31/08 - 12/31/10) 

Estimated Winding Dimii Cf)>i> (1/1/11 - 8/.^ I/l 2j 

Payable to U.S. Treasur\ - .Siiilc-IX-.ic.l Checks 

Total Liabilities 

\ • 

^?.968.555 

.V -21,290 

155,789 

''9,134 

^2.341.276 

3,321.290 

8.974,713 

|2i988,019 

»|98 I [a] 

•fe. ^95 3 

Net Outstahdiii}! Oliligiilimis f l)i-lk-ii) as ul'January 30,2008 

1 iiiiliiiite to NOCO .Sliiicmcnt; 

$ 7,774,768 

$18,902,232 

($11,127,464) 

[a] Estimattil iiuling down cost^ l-.:;\c been IS^Ulated not to exceed limitations at 11 CFR §9034.11(b). 

Shown below aie .uliustmcnt^ for fimds received after January 30, 2008 through July 17, 

2008. 

Net Outstanding Campaign Obligations (Deficit) as of 1/30/08 

Private Contributions Received 1/31/08 tiu-ough 7/16/08 

Interest Income Received 1/31/08 through 7/16/08 

Matching Funds Received 1/31/08 tiu-ough 7/16/08 

Remaining entitlement as of 7/16/08 

Matching Funds Received 7/17/08 

Amount Received in Excess of Matching Fund Entitlement 

($ 11,127,464) 

358,983 

22,110 

8,825,425 

($ 1,920,946) 

4,057,453 

$ 2,136,507 
19 

As a result, JEFP was not entitied to $2,136,507 of the matching fimd payment 

($4,057,453) it received on July 17,2008. The Audit staff believes tiiat JEFP should 

make a repayment of $2,136,507 to the United States Treasury. 

I Finding 2. Misstatement of Financial Activity I 

Summary 

A comparison of JEFP's reported Hnancial activity to its bank records revealed a material 

misstatement of reported cash-on-hand in calendar year 2007 through March 31,2008. 

JEFP understated its December 31,2007, cash-on-hand balance by $585,814 and 

understated its March 31,2008, cash-on-hand balance b\ s 168.676. 

The Audit staff recommended that JEFP amend its^mn^i leccntly filed report to correct 

the cash-on-hand balance. ^ ^ 

In response, JEFP materially complied wi^ the recommendation. 

Legal Standard \ » 

Contentsof Reports. Each repniT I mist disclose: ^• 

• the amount of cash-on-hand ai the beginniii!: and end of the reporting period; 

• the total amount of receipts foc; thc report ing period and for the election cycle; 

• the total amount of disbursements lor the repori ing perind .ind for the election cycle; 

• certain transs^U^n^ that require itemi/ation nn .Scheiliile A itemized Receipts) or 

Schedule BWeniized Disbursements). 2 L'.S.C. §43-lCbXl), (2), (3), (4), and (5). 

Facts and.Analysis 

A. ^^t'ts ^ "••^ 

During fieldwork, a enmparisnn nl Jl IP's retried fmancial activity to its bank records 

revealed a material missiat^eni nl reported cash-on-hand for calendar year 2007 

through Mareh 31,2008. The endmg cash-on-hand balance for calendar year 2007 was 

understatedF^^85,814 and the ending cash-on-hand balance as of March 31,2008 was 

understated by^fi8.676. 

B. Preliminary Au^dil Report & Audit Division Recommendation 

The misstatement of c.i^h cm-hand was primarily due to two factors. First, JEFP 

understated unitemized receipts, most of which represented small credit card transactions. 

This was due to a contribution processing software malfunction. JEFP was unaware of 

this problem until tiie audit fieldwork. Second, certain disbursements, although initially 

reported, were inadvertently voided and missing from the amended reports. 

This matter was discussed at the exit conference. The Audit staff provided JEFP 

representatives copies of the Audit staffs bank reconciliations and JEFP indicated a 

willmgness to correct the misstated cash-on-hand figures. 
20 

The Audit staff recommended that JEFP amend its most recently filed report to correct 

the cash-on-hand balance, with an explanation that the change resulted from a prior 

period audit adjustment. It was also recommended that JEFP reconcile the cash balance 

of its most recent report to identify any subsequent discrepancies that may have affected 

the adjustments recommended by the Audit staff. 

C. Committee Response to the Preliminary Audit Report 

In response, JEFP amended its reports and reiterated that tiie misstatements were the 

result of an anomaly in the software used by JEFP. 

I Finding 3, Failure to Itemize Loan Repa^^ents 

Summary ^ 

During audit fieldwork, the Audit staff identified loan i-epa> inenK. totaling $4,344,469, 

that were not itemized. Although JEFP repmied ihe amounts nn the Detail Summary 

Pages and itemized them on Schedule C (I n.inNj .ind Schedule C-1 i l.n.iiis and Lines of 

Credit From Lending Institutions), it did nm ::einize them on Schedule li-P (Itemized 

Disbursements). , 

The Audit staff recommended tiiai .ll:l-P file amended lepm is to itemize the foan 

repayments. 

In response, JEFP complied with the recommetl^aiioii. 

Legal Standard -

When to itemi/e: AVlien a loan repaymcir. ix in.ide to any pirson in any amount, the 

committee must repi^'^he: 

name and addre^^ nl the pa>ee: .jnd 

^ date and^mioiintol.pa\nieiii. 24.'.S.C'. §43)j(b)(5)(D) and 11 CFR 

iSI04.3(b)(4)(iii). 

Facts aiid^Analysis 

A. Facts 

Durmg fieldA\'oi-k. thc Audit ^laff identified loan repayments, totaling $4,344,469, which 

JEFP did not itemiyc. .Mihmigh JEFP included the aggregate amount of these payments 

on the detailed summai \ pa'je^, it failed to provide supporting Schedules B-P, itemizing 

the payments. 

B. Preliminary Audit Report & Audit Division Recommendation 

This matter was discussed at the exit conference. There was no obvious reason why the 

loan repayments were not itemized, but a JEFP representative agreed to amend the 

committee's reports as necessary. 

The Audit staff recommended that JEFP file amended reports itemizmg the loan 

repayments on Schedule B-P, Ime 27(b). 
21 

C. Committee Response to the Preliminary Audit Report 

In response, JEFP filed amended reports itemizing the loan repayments. 

I Finding 4, Stale-Dated Checks 

Summary 

The Audit staff identified 202 stale-dated checks, totaling $267,529, and recommended 

that JEFP provide evidence that the checks are not outstanding or make a payment to the 

United States Treasury. 

In response, JEFP documented that 83 checks, totaling s I .^X,871, were no longer staledated as they either had cleared the bank or were for aiiiniinis that were determmed to be 

not owed. As a result, the remaining 128 stale-dat^ checktotaling $141,808, requure 

repayment to the United States Treasury. 

Legal Standard ^ ^ 

Handling Stale-Dated (Uncashed) Checks. Ii a committee has issifed checks that the 

payees (creditors or contributors) have not e.i^heti. the cnirirnittee musi nniiiy the 

Commission of its efforts to locale ihe payees and encourage tiiem to cash ili ^ 

outstanding checks. Tlie commitiee must also submit a check payable to the^united 

States Treasury for tiie total amount nf the outstanding checks. 11 CFR §9038.6. 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit st>ai'l identified 202 stale d.iied checks, totaling $267,529. 

The checks were dated hetweeii l-ebruary 22. 2()07 and May 21,2008 and had not cleared 

the bank as of Februai > 28. 2010. A inajorit> nl the stale-dated checks represented 

refimd^'nf general election cniiinhiiiinns. 

i ' •. k 

B. ^ PjHiminary Audh Reportt& .Vudit isitm Recommendation 

This miiitei was discusNed ai thc exit conference during which the Audit staff provided 

JEFP re[)!e^tatives with .1 schedule o^the stale-dated checks. In response, JEFP 

indicated ^^^^ontacted a number of individuals/vendors and reissued $114,481 in 

stale-dated CI^TN but did not provide the check numbers of the reissued checks. 

Without the check iiiiinber^. ihe Audit staff could not determine whether any of the 

reissued checks had cleared the bank. 

In the Preliminary Audit report, the Audit staff recommended that JEFP provide evidence 

tiiat: 

• the $114,481 m reissued checks have cleared the bank by providing copies of the 

front and back of the negotiated checks along with bank statements; 

and 

• tiie remaining stale-dated checks, totaling $153,048 ($267,529 - $114,481) had 

either been reissued and cleared JEFP's bank or had been voided because no 

obligation exists. 
22 

Absent such evidence, the Audit staff recommended that JEFP pay $267,529 to the 

United States Treasury. 

C. Committee Response to the Preliminary Audit Report 

In its response, JEFP stated that 83 checks, totalmg $138,871, should be removed from 

the stale-dated check list and provided documentation in support of its position. 

Based on a review of JEFP's response and the documentation presented, the Audit staff 

identified tiiat 74 checks, totaling $125,721, were no loniiei ^lale-dated. For the 

remaining stale-dated checks, JEFP did not provide sufficient documentation to support 

its position that no obligation existed or that the checks had cleared the bank as of 

December 31,2010. Therefore, JEFP is requured to pa\ ilie I 'nited States Treasury for 

the remaining 128 stale-dated-checks, totalin!: *sl-11,808.