Part II

Overview of Committee

Committee Organization

Important Dates

Lockheed Martin Employees’ Political
Action Committee

e Date of Registration

May 19, 1995

e Audit Coverage

January 1, 2001 — December 31, 2002

Headquarters

Arlington, Virginia

Bank Information

e Bank Depository

1

e Bank Accounts

2 Federal Accounts

Treasurer

e Treasurer When Audit Was Conducted

Steve Chaudet

e Treasurer During Period Covered by Audit

Steve Chaudet

Management Information

e Attended FEC Campaign Finance Seminar _| Yes

e Used Commonly Available Campaign Yes
Management Software Package

e Who Handled Accounting and Paid Staff

Recordkeeping Tasks

Overview of Financial Activity

(Audited Amounts)

Cash on hand @ January 1, 2001 $ 55,579
o Contributions from Individuals 1,042,820
o Other Receipts 2,708
Total Receipts $ 1,045,528
o Contributions to Federal Candidates &

Committees 987,418
o Operating Expenditures 97,430
o Other Disbursements 17,495
Total Disbursements $ 1,102,343
Cash on hand @ December 31, 2002 ($ 1,236)



Cash Balances

Opening Cash Balance at 2001
This misstatement is likely due to reporting errors in prior periods. LMEPAC was unable
to be more specific.

Ending Cash Balance at 2001

The ending cash balance was understated due to the unexplained difference of $6,547, as
well as, the misstatements noted above. This cash misstatement was carried through
December 31, 2002.

Further during 2002, LMEPAC did not report ‘unauthorized’ disbursements to Mr.
Phelps totaling $7,000 and a payment to the Registry of Election Finance for $5,000. The
Audit staff informed LMEPAC officials of these errors.

During the exit conference the Audit staff provided LMEPAC representatives a schedule
detailing the misstatements of financial activity. They stated they would amend their
reports to correct the public record.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that LMEPAC amend its disclosure reports to correct the
misstatements noted above.

LMEPAC complied by filing amended reports for calendar years 2001 and 2002
correcting the misstatements.

Finding 3. Failure to Maintain Contributor Payroll
Deduction Authorizations

Summary

Based on a review of all payroll deduction authorization forms (PDAs) provided by
LMEPAC, the Audit staff determined PDAs were not available for 42% of the
contributors. In response to the interim audit report, LMEPAC provided a description of
policy changes implemented to ensure that such authorizations are maintained in the
future and have taken measures to obtain the missing PDAs noted above.

Legal Standard

Recordkeeping. Each political committee or other person required to file any report or
statement under this subchapter shall maintain all records relevant to such reports and
statements. Records to be maintained with respect to the matters required to be reported,
include bank records, vouchers, worksheets, receipts, bills and accounts, which shall
provide in sufficient detail the necessary information and data from which the filed
reports and statements may be verified, explained, clarified, and checked for accuracy
and completeness. The Commission has determined that, under 11 CFR § 104.14(b)(1),
separate segregated funds established pursuant to Part 114 of the Commission’s rules


Part IV
Findings and Recommendations

| Finding 1. Disclosure of Operating Expenditures

Summary

LMEPAC failed to accurately disclose sixty disbursements totaling $69,500 to Mr.
Kenneth Phelps, the Assistant Treasurer during the audit period. These items were
unauthorized payments to Mr. Phelps, which LMEPAC disclosed as contributions and
travel reimbursements to federal/non-federal candidates. LMEPAC complied with the
Audit staff’s recommendation by filing amended reports correctly disclosing these
unauthorized disbursements.

Legal Standard
Reporting Operating Expenditures. When operating expenditures to the same person
exceed $200 in an election cycle, the committee must report the:

e Amount;

e Date when the expenditures were made;

e Name and address of the payee; and

e Purpose (a brief description of why the disbursement was made). 2 U.S.C.

§434(b)(5)(A) and 11 CFR §104.3(b)(3)4).

Background

Mr. Kenneth Phelps was the Assistant Treasurer of LMEPAC from August 11, 1997 to
February 24, 2004. Mr. Phelps was responsible for the following: depositing
contributions; receiving and opening bank statements; preparing and disbursing checks
(which were required to have two signatures); data entering the information to create the
FEC disclosure reports; and, maintaining all bank records. A Lockheed Martin
Corporation internal audit report dated June 2001 recommended that some of the duties
performed by the Assistant Treasurer should be assigned to other staff to ensure assets are
safeguarded. It appears LMEPAC did not reassign any of Mr. Phelps’ responsibilities.

In October 2001, Mr. Phelps began writing checks, which according to LMEPAC
officials were for unauthorized disbursements to himself. During the period covered by
the audit, these ‘unauthorized’ disbursements totaled $89,500.7 As discussed below,
$69,500 was inaccurately disclosed and $20,000 was not reported at all (See Finding 2).
LMEPAC officials stated they were unaware of this activity until communication
between the Audit staff and the Treasurer of LMEPAC regarding the upcoming
Commission audit. It was at this point that LMEPAC officials discovered that Requests
for Additional Information Letters from the Commission’s Reports Analysis Division had
not been addressed by the Assistant Treasurer. Upon discovery of Mr. Phelps’
misappropriation of funds, LMEPAC stated they began an investigation and implemented
procedures to improve its internal controls.

2 There were additional unauthorized disbursements made subsequent to the period covered by the audit.


Part III
Summaries

Findings and Recommendations

Finding 1. Disclosure of Operating Expenditures

LMEPAC failed to accurately disclose sixty disbursements totaling $69,500 to Mr.
Kenneth Phelps, the Assistant Treasurer during the audit period. These items were
unauthorized payments to Mr. Phelps, which LMEPAC disclosed as contributions and
travel reimbursements to federal/non-federal candidates. LMEPAC complied with the
Audit staff’s recommendation by filing amended reports correctly disclosing these
unauthorized disbursements. (For more detail, see p. 4)

Finding 2. Misstatement of Financial Activity

A comparison of LMEPAC’s reported figures to its bank records revealed that cash-on-
hand and disbursements had been misstated for calendar year 2001. LMEPAC complied
with the Audit staff’s recommendation by filing amended reports for calendar years 2001
and 2002 correcting the misstatements. (For more detail, see p. 6)

Finding 3. Failure to Maintain Contributor Payroll
Deduction Authorizations

Based on a review of all payroll deduction authorization forms (PDAs) provided by
LMEPAC, the Audit staff determined PDAs were not available for 42% of the
contributors. In response to the interim audit report, LMEPAC provided a description of
policy changes implemented to ensure that such authorizations are maintained in the
future and have taken measures to obtain the missing PDAs noted above. (For more
detail, see p. 7)

Finding 4. Timely Deposit of Contributions

The Audit staff determined that 54% of the contributions included in the payroll
transmittal checks, as well as the individual contribution checks, were not deposited
timely. In response to the interim audit report, LMEPAC stated that internal control
procedures have been established and implemented to correct this problem. (For more
detail, see p. 9)


| Finding 2. Misstatement of Financial Activity

Summary

A comparison of LMEPAC’s reported figures to its bank records revealed that cash-on-
hand and disbursements had been misstated for calendar year 2001. LMEPAC complied
with the Audit staff’s recommendation by filing amended reports for calendar years 2001
and 2002 correcting the misstatements.

Legal Standard
Contents of Reports. Each report must disclose:

The amount of cash on hand at the beginning and end of the reporting period;

The total amount of receipts for the reporting period and for the calendar year; and
The total amount of disbursements for the reporting period and for the calendar year.
Certain transactions that require itemization on Schedule B (Itemized Disbursements).
2 U.S.C. §§434(b)(1), (2) and (4).

Facts and Analysis

The Audit staff reconciled LMEPAC’s reported activity to its bank records and
determined that there was a misstatement of cash on hand and disbursements for calendar
year 2001. The following chart details the discrepancies between the totals on
LMEPAC’s disclosure reports and the bank records.

2001 Committee Activity
Reported Bank Records Discrepancy
Opening Cash Balance $62,116 $55,579 $6,537
at January 1, 2001 overstated
Receipts $492,554 $492,554 $0
Disbursements $539,533 $552,543 ($13,010)
understated
Ending Cash Balance at $15,138 ($4,409) $19,547
December 31, 2001 overstated

Disbursements — 2001

The understatement of disbursements was the result of the following:

e Payments Not Reported - LMEPAC did not + $ 13,000
report eight ‘unauthorized’ disbursements to
Mr. Phelps (Assistant Treasurer).

e Bank Service Charge Not Reported 10
Total Understatement $ $13,010

+


FEDERAL ELECTION COMMISSION
Washington, DC 20463

June 8, 2005

MEMORANDUM
To: Robert W. Biersack

Press Officer
From: Joseph F. Stoltz i “G

Assistant Staff ict

Audit Division
Subject: Public Issuance of the Audit Report On Lockheed Martin Employees’

Political Action Committee

Attached please find a copy of the audit report and related documents on
Lockheed Martin Employees’ Political Action Committee, which was approved by the
Commission on June 6, 2005.

The report may be released to the public on June 15, 2005.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
DSDD Website


To ensure compliance with the regulations, LMEPAC stated they have substantially
merged all payroll systems into one location, have created a requirement that all PDAs be
sent to the LMEPAC headquarters for permanent retention and have incorporated a
review of the PDAs into the annual audit.

| Finding 4. Timely Deposit of Contributions

Summary

The Audit staff determined that 54% of the contributions included in the payroll
transmittal checks, as well as the individual contribution checks, were not deposited
timely. In response to the interim audit report, LMEPAC stated that internal control
procedures have been established and implemented to correct this problem.

Legal Standard

Deposit of Receipts. Within 10 days after the treasurer receives a contribution, it must
be either:

e Returned to the contributor without being deposited; or

e Deposited into a committee bank account. 11 CFR §103.3

Facts and Analysis

The Audit staff reviewed all transmittal checks from payroll centers as well as individual
contribution checks and determined that a majority of contributions was not deposited
timely. The date on the check was compared to the date of deposit.> The number of days
between the check date and deposit date ranged from 14 to 110 days for 54% (216 of
397) of the checks.

During the exit conference the Audit staff provided LMEPAC representatives a schedule
detailing the information noted above. Representatives made no comment.

Interim Audit Report Recommendation

The Audit staff recommended that LMEPAC demonstrate that the transmittal and
contribution checks were deposited timely or that internal control procedures have been
established and implemented to correct this problem.

Committee Response to Recommendation and Audit Staff's
Assessment

In response, Counsel stated that the untimely deposits were the result of twenty payroll
systems at different locations which were on a monthly schedule rather than a 10-day
cycle. Consequently, in March 2004, LMEPAC implemented a system in which all the
payroll deposits were wired from one payroll location on a weekly basis. Additionally,
the independent audit conducted each year (See Finding 1) will review the timeliness of
deposits to insure compliance.

5 LMEPAC did not maintain the date that it received contributions.



must maintain copies of Payroll Deduction Authorizations for each individual who makes
any contribution(s) via automatic payroll deduction. See, e.g. MUR 4955 (Metropolitan
Life). 11 CFR §104.14(b)(1).

Facts and Analysis

The Audit staff reviewed all PDAs provided by LMEPAC both during the audit and
subsequent to the conference held at the end of fieldwork. LMEPAC contacted Lockheed
Martin Corporation’s various payroll centers to obtain the PDAs. According to the
Treasurer, Lockheed Martin Corporation merged with numerous companies in recent
years, therefore, the PDAs were not always maintained at one location.

The review revealed that LMEPAC did not maintain 42% (1,272 of 3,015°) of PDAs
required to be maintained. They submitted 14% of the PDAs during fieldwork and 44%
of the PDAs following the exit conference.

Interim Audit Report Recommendation

The Audit staff recommended that LMEPAC demonstrate its compliance with the
recordkeeping requirements and attempt to obtain replacement PDAs for those employees
whose authorizations could not be located. It was further recommended that in the future
LMEPAC implement procedures to ensure that PDAs are complete and maintained in an
auditable state. Copies of the procedural instructions were to be submitted with
LMEPAC’s response and were to include an action plan for implementation of the
changes. Once these procedures were in place, the Audit staff could verify that they were
adequate to assure compliance via follow-up audit work. Although LMEPAC may
choose to maintain PDAs at the payroll centers, it was recommended that the copies of
PDAs be maintained at the committee headquarters.

Committee Response to Recommendation and Audit Staff's
Assessment

LMEPAC stated the Lockheed Corporation and the Martin Marietta Corporation merged
in 1995 and became Lockheed Martin Corporation. At the time of this merger there were
multiple independent payroll centers in operation throughout the corporation. The
following year, the Lockheed Martin Corporation acquired another company which also
had numerous payroll locations. Because of the merger and the acquisition, the original
PDAs were difficult to locate, especially for some employees who had been contributing
for over twenty years. However, LMEPAC officials stated they used extensive resources
to locate nearly 60% of the PDAs during the audit fieldwork.

In response to the interim audit report, LMEPAC officials stated they sent letters to
individuals with missing PDAs who are still employed with Lockheed Martin
Corporation and who are still active contributors.* LMEPAC was able to obtain 197 of
these missing PDAs. Further, LMEPAC officials stated they were exploring a plan to
obtain the PDAs electronically.

3 This represents the number of contributors during the audit period.
4 Of the 1,272 contributors missing PDAs, 633 are current active LMEPAC members.


Facts and Analysis

LMEPAC reported sixty disbursements totaling $69,500 as either contributions or travel
reimbursements to federal/non-federal candidates. The disbursements were actually
‘unauthorized’ disbursements to Mr. Phelps. According to the LMEPAC officials, Mr.
Phelps issued these checks to himself without knowledge or approval from the Treasurer.

At the exit conference, LMEPAC representatives were given a schedule detailing the
disclosure errors. They stated they would file amended reports to correct the errors.

Interim Audit Report Recommendation
The Audit staff recommended that LMEPAC:
e Amend its reports to correctly disclose the ‘unauthorized’ disbursements made to Mr.
Phelps; and,
¢ Provide any additional information that addressed:
o The efforts of LMEPAC to prevent the misreporting of disbursements (i.e.,
safeguards and internal controls);
o The details of when and how LMEPAC officials learned of the ‘unauthorized’
disbursements; and,
o The identities of the individuals responsible for establishing the duties of the
LMEPAC assistant treasurer position.

Committee Response to Recommendation and Audit Staff's
Assessment

In response, LMEPAC filed amended reports correctly disclosing the unauthorized
disbursements made to Mr. Phelps and provided additional information regarding the
actions taken by Mr. Phelps and LMEPAC.

LMEPAC Counsel (Counsel) stated that the Treasurer was not aware of the unauthorized
disbursements until he was contacted by the Audit staff in December 2003 regarding the
commencement of the audit. Prior telephone calls and correspondence from the
Commission had been intercepted by Mr. Phelps. Furthermore, Counsel stated that
LMEPAC officials believed the recommendations provided in the June 2001 Lockheed
Martin Corporation Internal Audit Report had been implemented by Mr. Phelps. Asa
result of the internal audit report, Mr. Phelps was instructed by the Treasurer to outsource
the administration of LMEPAC. Mr. Phelps repeatedly assured the Treasurer that this
outsourcing was ‘in process’ and was being delayed because of firewall security issues.
Eventually, Mr. Phelps informed LMEPAC officials that the outsourcing was complete
and consequently no further action was taken by LMEPAC officials. Once LMEPAC
officials were made aware of Mr. Phelps “embezzlement scheme,” immediate internal
controls and safeguards were incorporated in the administration of the LMEPAC’s
operations. The disbursement process was de-centralized by check requests being made
in one location and the checks being issued in another location. Monthly LMEPAC bank
statements were re-directed to the corporate accounting office and an independent
reconciliation was completed. Moreover, LMEPAC by-laws were amended to require an
audit by an independent accounting firm and federal election law counsel once a year.


Part I
Background

Authority for Audit

This report is based on an audit of the Lockheed Martin Employees’ Political Action
Committee (LMEPAC), undertaken by the Audit Division of the Federal Election
Commission (the Commission) in accordance with the Federal Election Campaign Act of
1971, as amended (the Act). The Audit Division conducted the audit pursuant to 2
U.S.C. §438(b), which permits the Commission to conduct audits and field investigations
of any political committee that is required to file a report under 2 U.S.C. §434. Prior to
conducting any audit under this subsection, the Commission must perform an internal
review of reports filed by selected committees to determine if the reports filed by a
particular committee meet the threshold requirements for substantial compliance with the
Act. 2 U.S.C. §438(b).

Scope of Audit

This audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The disclosure of disbursements, debts and obligations.
The consistency between reported figures and bank records.
The completeness of records.

Other committee operations necessary to the review.

NAWPYON

Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
Except for the period November 7, 2002, through December 31, 2002, the period covered
by this audit pre-dates these changes. Therefore, the statutory and regulatory
requirements cited in this report are primarily those that were in effect prior to November
7, 2002.


Table of Contents

Page

Part I. Background

Authority for Audit 1

Scope of Audit 1

Changes to the Law 1
Part II. Overview of Committee

Committee Organization 2

Overview of Financial Activity 2
Part III. Summaries

Findings and Recommendations 3
Part IV. Findings and Recommendations

Finding 1. Disclosure of Operating Expenditures 4

Finding 2. Misstatement of Financial Activity 6

Finding 3. Failure to Maintain Contributor Payroll Deduction Authorizations 7

9

Finding 4. Timely Deposit of Contributions


Report of the Audit Division on
the Lockheed Martin Employees’

Political Action Committee
January 1, 2001 - December 31, 2002

Why the Audit

Was Done

Federal law permits the
Commission to conduct
audits and field
investigations of any
political committee that is
required to file reports
under the Federal Election
Campaign Act (the Act).
The Commission generally
conducts such audits when
a committee appears not to
have met the threshold
requirements for
substantial compliance
with the Act.' The audit
determines whether the
committee complied with
the limitations,
prohibitions and disclosure
requirements of the Act.

Future Action

The Commission may
initiate an enforcement
action, at a later time, with
respect to any of the
matters discussed in this
report.

1 2US.C. §438(b).

About the Committee (p. 2)

Lockheed Martin Employees’ Political Action Committee
(LMEPAC) is a separate segregated fund. LMEPAC qualified for
multi-candidate status on May 19, 1995 and is headquartered in
Arlington, Virginia. For more information, see chart on
Committee Organization, p.2.

Financial Activity (p. 2)
« Receipts

o Contributions from Individuals $ 1,042,820
o Other Receipts 2,708
o Total Receipts $ 1,045,528
« Disbursements

o Contributions to Federal

Candidates & Committees $ 987,418
o Operating Expenditures 97,430
o Other Disbursements 17,495
o Total Disbursements $ 1,102,343

Findings and Recommendations (p. 3)

¢ Disclosure of Operating Expenditures (Finding 1)

© Misstatement of Financial Activity (Finding 2)

e Failure to Maintain Contributor Payroll Deduction
Authorizations (Finding 3)

e Timely Deposit of Contributions (Finding 4)