17

contained a request for occupation and name of employer. However, the records
provided to the Audit staff did not contain any follow-up requests for the missing
contributor information. As such, TFS does not appear to have made “best efforts” to
obtain, maintain and report occupation and name of employer information.

At the exit conference, the Audit staff provided TFS representatives with a schedule of
the individuals for which occupation and/or name of employer was not properly
disclosed. TFS representatives stated they would review the spreadsheets provided and
would file amended reports to correctly report this activity.

Interim Audit Report Recommendation

The Audit staff recommended that TFS take the following action:

e Provide documentation such as phone logs, returned contributor letters, completed
contributor contact information sheets or other materials which demonstrated that best
efforts were made to obtain, maintain, and submit the required disclosure
information; or

e Absent such a demonstration, TFS should have made an effort to contact those
individuals for whom required information is missing or incomplete, provided
documentation of such contacts (such as copies of letters to the contributors and/or
phone logs), and amended its reports to disclose any information obtained from those
contacts.

| Finding 9. Failure to File 48-Hour Notices

Summary
TFS failed to file 48-hour notices for 77 contributions totaling $106,100. The Audit staff
recommended that TFS provide evidence that 48-hour notices were timely filed.

Legal Standard

Last-Minute Contributions (48-Hour Notice). Campaign committees must file special
notices regarding contributions of $1,000 or more received less than 20 days but more
than 48 hours before any election in which the candidate is running. This rule applies to
all types of contributions to any authorized committee of the candidate. 11 CFR
§104.5(f).

Facts and Analysis

The Audit staff reviewed those contributions of $1,000 or more that were received during
the 48-hour notice filing period for the primary, general and runoff elections. TFS failed
to file 48-hour notices for 77 contributions totaling $106,100 as summarized on the next

page.


11

The loan documentation provided neither described the collateral intended to secure this
loan, nor indicated that such security interest had been perfected. The Candidate’s
financial statement, presumably submitted as part of the application process, fails to
provide any specific information of other debts owed to FBT which could be subject to
“cross-collateralization.” Further, the financial statement states the borrower has no
accounts at FBT. Therefore, it is the Audit staff's opinion that the loan does not meet the

Commission’s “assurance of repayment” standard.

At the exit conference, the Audit staff presented this matter to TFS representatives. No
questions or comments were posed by the representatives.

Interim Audit Report Recommendation

The Audit staff recommended that TFS provide documentation to show that the loan was
secured with collateral that assures repayment; that the security interest in the collateral
had been perfected; and/or provide any comments it feels are relevant. Such
documentation should have included a description and valuation of the collateral as well
as the balance of all other outstanding debt secured by such collateral.

| Finding 4. Misstatement of Financial Activity

Summary
TFS misstated receipts, disbursements, and the ending cash balance during 2002. The
Audit staff recommended that TFS amend its reports to correct 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;

¢ The total amount of disbursements for the reporting period and for the calendar year;
and,
Certain transactions that require itemization on Schedule A or Schedule B.

2 3U. S.C. §§434(b)(1), (2), (3), and (4).

Facts and Analysis

The Audit staff reconciled reported financial activity to bank records for 2002. The
following chart outlines the discrepancies for receipts, disbursements, and the ending
cash balance on December 31, 2002. Succeeding paragraphs address the reasons for the
misstatements, most of which occurred during the period after the general election. TFS
representatives indicated that during that period the volume of activity and staff turnover
contributed to lapses in the data entry of some receipt and disbursement transactions.


Part II

Overview of Campaign

Campaign Organization

Important Dates

Terrell for Senate

e Date of Registration

July 16, 2002

e Audit Coverage

July 19, 2002 - December 31, 2002

Headquarters

Alexandria, Virginia

Bank Information

e Bank Depositories

1

e Bank Accounts

1 Checking, 1 Money Manager (Savings)

Treasurer

e Treasurer When Audit Was Conducted

Bryan Blades (Starting March 31, 2003)
Justin Schmidt (Starting December 22, 2003)

e Treasurer During Period Covered by Audit

Cliff Newlin

Management Information

e Attended FEC Campaign Finance Seminar

No

e Used Commonly Available Campaign
Management Software Package

Yes

@ Who Handled Accounting, Recordkeeping
Tasks and other Day-to-Day Operations

Vita Levantino — Consultant

Overview of Financial Activity

(Audited Amounts)
Cash on hand @ July 19, 2002 $0
Receipts
o From Individuals $ 2,532,544
© From Political Party Committees 154,726
oO From Other Political Committees 665,149
© Transfers from Other Authorized Committees 420,500
© Loans — Made or Guaranteed by the Candidate 300,000
Total Receipts $ 4,072,919
Total Operating and Other Disbursements $ 3,721,155
Cash on hand @ December 31, 2002 $ 351,764


18

Election Type Number of Notices Total
Primary 1 $1,000
General 6 $6,000
Runoff 70 $99,100
48 Hour Notices Not Filed 77 $106,100

At the exit conference, TFS was provided a schedule of the 48-hour notices not filed.
TFS representatives stated they would review the spreadsheets and provide additional
documentation that would reduce the number of errors.

Interim Audit Report Recommendation
The Audit staff recommended that TFS provide evidence that 48-hour notices were
timely filed or submit any written comments it considers relevant.



15

Finding 7. Disclosure of Proceeds from Joint Fundraising
Activity

Summary

TFS failed to properly disclose the receipt of net proceeds from joint fundraising activity
with Louisiana Victory 2002 Fund and Terrell Victory Committee. The Audit staff
recommended that TFS file amended reports to correctly disclose these receipts.

Legal Standard

A. Itemization of Contributions From Joint Fundraising Efforts. Participating
political committees must report joint fundraising proceeds in accordance with 11 CFR
102.17(c)(8) when such funds are received from the fundraising representative. 11 CFR
§102.17(c)(3)(iii).

Each participating political committee reports its share of the net proceeds as a transfer-in
from the fundraising representative and must also file a memo Schedule A itemizing its
share of gross receipts as contributions from the original contributors to the extent
required under 11 CFR 104.3(a). 11 CFR §102.17(c)(8)(i)(B).

Facts and Analysis

The Audit staff determined that TFS received a total of $420,500 in net proceeds from
joint fundraising activity; $396,000 from the Louisiana Victory 2002 Fund and $24,500
from the Terrell Victory Committee. Our review of these transfers noted the following:

e TFS did not report nor itemize transfers totaling $295,000 from Louisiana Victory
2002 Fund and $7,000 received from Terrell Victory Committee on Schedule A, line
12, Transfers from Other Authorized Committees, as required. (See Finding 4)

e TFS incorrectly disclosed the amount of a transfer received from Terrell Victory
Committee as $175,000, when the actual amount of the transfer was $17,500,
overstating reported receipts by $157,500. (See Finding 4)

e TFS did not itemize its share of the gross receipts as contributions from the original
contributors as required on memo Schedules A for any of the $420,500 in transfers of
joint fundraising proceeds. TFS records did not contain this information. During
fieldwork, TFS obtained the information from both of the joint fundraising
committees.

At the exit conference, the Audit staff provided TFS representatives a schedule of the
omitted transfers from joint fundraising activity noted above. TFS representatives stated
their intention to review the spreadsheets provided and expressed a willingness to file
amended reports to correctly report its activity.

Interim Audit Report Recommendation
The Audit staff recommended that TFS file amended Schedules A to disclose the receipt
of net fundraising proceeds, along with the required memo entries.


Facts and Analysis

A review of contributions received by TFS resulted in the identification of 65 prohibited
contributions from 47 different corporate entities totaling $64,600.” Of these prohibited
contributions:

e TES received directly 46 prohibited contributions, which totaled $43,400. Of
these, 27 contributions, totaling $32,750, were from LLCs but lacked the
necessary documentation to establish that contributing entities are not treated as
corporations for tax purposes, and 19, totaling $10,650, were from corporate
entities. During the course of the audit, TFS provided photocopies of letters,
dated August, 2003, sent to the corporate entities that were returned by the
contributors acknowledging their corporate status. Three of the letters were
returned to TFS as undeliverable. Further, the Audit staff contacted the
appropriate Secretary of State’s office to confirm the corporate status for the 19
contributions from corporate entities. None of the contributions have been
refunded.

e Inaddition, TFS received 19 contributions from limited liability companies,
totaling $21,200, as part of a transfer of proceeds from a joint fundraiser
conducted by the Louisiana Victory 2002 Fund. As with the other contributions
from LLCs, TFS records did not contain any notifications from these contributors
stating they were eligible to make such a contribution.

At the exit conference, the Audit staff provided TFS representatives with a schedule of

the prohibited contributions. As part of documentation submitted subsequent to the exit
conference, TFS representatives confirmed that the 46 contributions ($43,400) received
were from prohibited sources. They further indicated that letters will be sent relative to
the other 19 contributions received from LLCs requesting their IRS filing status.

Interim Audit Report Recommendation

The Audit staff recommended that TFS provide evidence that the 19 contributions
($21,200) received as part of proceeds from a joint fundraiser are not prohibited. Absent
such evidence, TFS should have refund the $64,600 in contributions and provided copies
(front and back) of each negotiated refund check. If funds were not available to make the
necessary refunds, the amounts due should have been disclosed on Schedule D (Debts
and Obligations) until funds become available to make the refunds.

| Finding 2. Receipt of Contributions that Exceed Limits

Summary

A review of contributions from individuals and political committees identified 541
contributions, totaling $552,773, which exceeded the contribution limits. In some
instances the contributions were solicited after the election to which they relate but there

2 If some of the possible prohibited contributions from LLC’s (limited liability corporations) are
determined to have an IRS filing status of partnership and no longer prohibited, the Audit staff will
evaluate them as possible excessive contributions.


Finding 5. Failure to Itemize Contributions from
Individuals

A sample test of contributions revealed that TFS did not itemize 15% of the contributions
from individuals on Schedules A as required. The Audit staff recommended that TFS file
amended Schedules A, by reporting period, to disclose contributions not previously
itemized. (For more detail, see p. 13)

Finding 6. Failure to Itemize Contributions from Political
Committees

TFS did not itemize 80 contributions totaling $134,597 received from political
committees. The Audit staff recommended that TFS file amended Schedules A
disclosing the contributions not previously itemized. (For more detail, see p. 14)

Finding 7. Disclosure of Proceeds from Joint Fundraising
Activity

TFS failed to properly disclose the receipt of net proceeds from joint fundraising activity
with Louisiana Victory 2002 Fund and Terrell Victory Committee. The Audit staff
recommended that TES file amended reports to correctly disclose these receipts. (For
more detail, see p. 15)

Finding 8. Disclosure of Occupation and Name of
Employer

TES did not adequately disclose occupation and/or name of employer information for
1,173 contributions from individuals totaling $812,585. In addition, TFS did not
demonstrate best efforts to obtain, maintain and submit the information. The Audit staff
recommended that TFS either: provide documentation that demonstrates best efforts were
made to obtain the missing information or contact each contributor lacking the
information, submit evidence of such contact, and disclose any information received in
amended reports. (For more detail, see p. 16)

Finding 9. Failure to File 48-Hour Notices

TES failed to file 48-hour notices for 77 contributions totaling $106,100. The Audit staff
recommended that TFS provide evidence that 48-hour notices were timely filed.

(For more detail, see p. 17)


Part III
Summaries

The interim audit report (IAR) was forwarded to TFS for response on May 21, 2004. The
Audit staff contacted counsel for the committee and verified receipt of the report. The
response was due on June 23, 2004. TFS requested and received a 15-day extension to
July 8, 2004 to respond to the IAR. On July 20, 2004, TFS submitted (draft) amended
reports for the Audit staff’s review prior to filing them with the Commission. Our review
indicated the amendments were deficient; materially resolving only two of the findings.
This information was relayed to TFS representatives via email on July 21, 2004. TFS
representatives indicated they are working on a response. To date, no further response
has been received; nor amended reports filed with the Commission.

Findings and Recommendations

Finding 1. Receipt of Prohibited Corporate Contributions
TES received 65 prohibited contributions totaling $64,600 from 47 different Limited
Liability Companies (LLCs) and corporate entities. The Audit staff recommended that
TES either provide evidence that these contributions were not from prohibited sources or
refund the $64,600. (For more detail, see p. 5)

Finding 2. Receipt of Contributions that Exceed Limits

‘A review of contributions from individuals and political committees identified 541
contributions, totaling $552,773, which exceeded the contribution limits. In some
instances the contributions were solicited after the election to which they relate but there
were insufficient net debts to allow TFS to keep the contribution. The Audit staff
recommended that TFS either provide evidence that the identified contributions were not
in excess of the limitations or refund $552,773. (For more detail, see p. 7)

Finding 3. Receipt of Bank Loan

The Candidate loaned TFS $101,000 from the proceeds of a bank loan. The Audit staff
was unable to determine if the bank perfected its security interest in collateral for the
loan. The Audit staff recommended that TFS provide documentation to show the loan
was properly secured. (For more detail, see p. 10)

Finding 4. Misstatement of Financial Activity

TFS misstated receipts, disbursements, and the ending cash balance during 2002. The
Audit staff recommended that TFS amend its reports to correct the misstatements.
(For more detail, see p. 11)


16

Finding 8. Disclosure of Occupation and Name of
| Employer

Summary

TFS did not adequately disclose occupation and/or name of employer information for
1,173 contributions from individuals totaling $812,585. In addition, TFS did not
demonstrate best efforts to obtain, maintain and submit the information. The Audit staff
recommended that TFS either: provide documentation that demonstrates best efforts were
made to obtain the missing information or contact each contributor lacking the
information, submit evidence of such contact, and disclose any information received in
amended reports.

Legal Standard

A. Required Information for Contributions from Individuals. For each itemized
contribution from an individual, the committee must provide the contributor’s occupation
and the name of his or her employer. 2 U.S.C. §431(13) and 11 CFR §§100.12.

B. Best Efforts Ensures Compliance. When the treasurer of a political committee
shows that the committee used best efforts (see below) to obtain, maintain, and submit
the information required by the Act, the committee’s reports and records will be
considered in compliance with the Act. 2 U.S.C. §432(h)(2)(i).

C. Definition of Best Efforts. The treasurer and the committee will be considered to

have used “best efforts” if the committee satisfied all of the following criteria:

e All written solicitations for contributions included:

o Aclear request for the contributor's full name, mailing address, occupation,
and name of employer; and
o A Statement that such reporting is required by Federal law.

e Within 30 days after the receipt of the contribution, the treasurer made at least one
effort to obtain the missing information, in either a written request or a documented
oral request.

e The treasurer reported any contributor information that, although not initially
provided by the contributor, was obtained in a follow-up communication or was
contained in the committee’s records or in prior reports that the committee filed
during the same two-year election cycle. 11 CFR §104.7(b).

Facts and Analysis
The Audit staff reviewed all contributions from individuals itemized on Schedules A of

TFS disclosure reports, which were in an amount or aggregate greater than $200 for
adequate disclosure of occupation and/or name of employer. The review identified 1,173
contributions from 939 contributors, totaling $812,585, that did not have an occupation
and/or name of employer disclosed properly. Of the 1,173 errors identified, 1,080
(92.07%) were blank, disclosed as “N/A” or “Information Requested.” The remaining
errors (7.93%) consisted of incomplete disclosures (for example, an employer was
disclosed but no occupation). It was noted that TFS solicitation devices properly


e¢ LLCas Partnership. The contribution is considered a contribution from a
partnership if the LLC chooses to be treated as a partnership under Internal Revenue
Service (IRS) tax rules, or if it makes no choice at all about its tax status. A
contribution by a partnership is attributed to each partner in direct proportion to his or
her share of the partnership profits. 11 CFR §§110.1(e)(1) and (g)(2).

e LLCas Corporation. The contribution is considered a corporate contribution—and
is barred under the Act—if the LLC chooses to be treated as a corporation under IRS
tules, or if its shares are traded publicly. 11 CFR §110.1(g)(3).

e LLC with Single Member. The contribution is considered a contribution from a
single individual if the LLC is a single-member LLC that has not chosen to be treated
as a corporation under IRS tules. 11 CFR §110.1(g)(4).

D. Limited Liability Company’s Responsibility to Notify Recipient Committee. At

the time it makes a contribution, an LLC must notify the recipient committee:

© That it is eligible to make the contribution; and

© Inthe case of an LLC that considers itself a partnership (for tax purposes), how the
contribution should be attributed among the LLC’s members. 11 CFR §110.1(g)(5).

E. Questionable Contributions. If a committee receives a contribution that appears to
be prohibited (a questionable contribution), it must follow the procedures below:

1. Within 10 days after the treasurer receives the questionable contribution, the
committee must either:

e Return the contribution to the contributor without depositing it, or
e Deposit the contribution (and follow the steps below). 11 CFR §103.3(b)(1).

2. If the committee deposits the questionable contribution, it may not spend the
funds and must be prepared to refund them. It must therefore maintain sufficient
funds to make the refunds or establish a separate account in a campaign
depository for possibly illegal contributions. 11 CFR §103.3(b)(4).

3. The committee must keep a written record explaining why the contribution may
be prohibited and must include this information when reporting the receipt of the
contribution. 11 CFR §103.3(b)(5).

4. Within 30 days of the treasurer’s receipt of the questionable contribution, the
committee must make at least one written or oral request for evidence that the
contribution is legal. Evidence of legality includes, for example, a written
statement from the contributor explaining why the contribution is legal or an oral
explanation that is recorded by the committee in a memorandum. 11 CFR
§103.3(b)(1).

5. Within these 30 days, the committee must either:
© Confirm the legality of the contribution; or
e Refund the contribution to the contributor and note the refund on the report

covering the period in which the refund was made. 11 CFR §103.3(b)(1).


FEDERAL ELECTION COMMISSION
Washington, DC 20463

August 13, 2004

MEMORANDUM

TO: ROBERT W. BIERSACK
PRESS OFFICER
PRESS OFFICE

FROM: JOSEPH F. STOLTZ
ASSISTANT STAFF TOR
AUDIT DIVISION

SUBJECT: | PUBLIC ISSUANCE OF THE REPORT OF THE AUDIT DIVISION ON
TERRELL FOR SENATE

Attached please find a copy of the final audit report on Terrell for Senate, which
was approved by the Commission on August 4, 2004.

Informational copies of the report have been received by all parties involved and
the report may be released to the public on August 13, 2004.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
Web Manager


review of contributions from individuals and political committees identified 541
contributions, totaling $552,773°, that exceeded the contribution limits for the primary,
general or runoff elections. In some cases the contributions were received after an
election at a time when the Audit staff determined there were no net debts outstanding.
The Audit staff noted that a significant portion of these excessive contributions resulted
from TFS receiving $3,000 contributions from contributors after the general election.

e As of August 23, 2002, the date of the primary election, the Audit staff calculated that
TFS did not have net debts outstanding. The Audit staff identified certain contributor
checks dated and received subsequent to the primary election that were designated by
the contributors for that election. TFS received 79 such contributions totaling
$115,500. These contributions were not later redesignated by the contributor to
another election and should have been refunded. In addition, one excessive
contribution for $1,000 was received prior to the primary, which could neither be
reattributed nor redesignated.

e As of November 5, 2002, the date of the general election, the Audit staff calculated
that TFS had net debts outstanding of $157,802. The Audit staff identified
contributions totaling $430,750 received after the general election some of which
were designated specifically for the general election and some of which were the
undesignated, excessive portions of run-off contributions that could be applied to
general election debt. These contributions were applied to the general debt in
chronological order until the debt was exhausted. A review of the remaining
contributions determined that TFS received 63 contributions designated for the
general election, which exceeded the amount needed to retire the net debts
outstanding for the general election by a total of $68,398. The remaining
undesignated, excessive run-off contributions that could not be applied to general
election debt are included in the excessive run-off contributions discussed below.

e The Audit staff determined that TFS had received 398 excessive contributions
totaling $367,875 relative to the runoff election. These excessive contributions were
all received prior to December 7, 2002, the date of the runoff election.

At the exit conference, the Audit staff provided TFS representatives with a schedule of
the excessive contributions noted above. TFS representatives had no comment.
Subsequent to the exit conference, TFS stated that they lack sufficient cash on hand to
make the refunds but would amend its reports to include all excessive contributions as
debts on Schedule D.

Interim Audit Report Recommendation

The Audit staff recommended that TFS:

e Provide evidence that the identified contributions were either not excessive or were
applicable to a net debt outstanding for a particular election; or

3 The Audit staff's analysis of TFS account balances through the end of the audit period indicated sufficient
balances were maintained so that contributions designated for a particular election were not used for earlier
elections.


were insufficient net debts to allow TFS to keep the contribution. The Audit staff
recommended that TFS either provide evidence that the identified contributions were not
in excess of the limitations or refund $552,773.

Legal Standard

A. Authorized Committee Limits. An authorized committee may not receive more
than a total of $1,000 per election from any one person or $5,000 per election from a
multicandidate political committee. 2 U.S.C. §§441a(a)(1)(A), (2)(A) and (f); 11 CFR
§§110.1(a) and (b) and 110.9(a).

B. Handling Contributions That Appear Excessive. If a committee receives a
contribution that appears to be excessive, the committee must either:

e Return the questionable check to the donor; or

e Deposit the check into its federal account and:

o Keep enough money in the account to cover all potential refunds;

o Keep a written record explaining why the contribution may be illegal;

0 Include this explanation on schedule A if the contribution has to be itemized
before its legality is established;

o Seek a reattribution or a redesignation of the excessive portion, following the
instructions provided in Commission regulations (see below for explanations
of reattribution and redesignation); and

0 If the committee does not receive a proper reattribution or redesignation
within 60 days after receiving the excessive contribution, refund the excessive
portion to the donor. 11 CFR §§103.3(b)(3), (4) and (5) and
110.1(k)(3)(ii)(B).

C. Contributions to Retire Debts. If an authorized candidate committee has net debts

outstanding after an election is over, a campaign may accept contributions after the

election to retire the debts provided that:

¢ The contribution is designated for that election (since an undesignated contribution
made after an election counts toward the limit for the candidate’s upcoming election);

e The contribution does not exceed the contributor’s limit for the designated election;
and

e The campaign has net debts outstanding for the designated election on the day it
receives the contribution. 11 CFR §110.1(b)(3)(i) and (iii).

D. Revised Regulations Applied. The Commission recently adopted new regulations
that allow committees greater latitude to designate contributions to different elections and
to reattribute contributions to joint account holders and has decided to apply these
regulations to current matters. The Audit staff has evaluated the excessive contributions
discussed below using the new regulations.

Facts and Analysis

Ms. Terrell participated in three elections in 2002; a primary that consisted of filing the
necessary papers to qualify for the general election ballot, a general election, and because
no candidate received more than 50% of the vote in the general election, a runoff. A


Part IV
Findings and Recommendations

The following findings were discussed with the TFS’ representative at the exit
conference. Appropriate workpapers and supporting schedules were provided.

The interim audit report (IAR) was forwarded to TFS for response on May 21, 2004. The
Audit staff contacted counsel for the committee and verified receipt of the report. The
response was due on June 23, 2004. TFS requested and received a 15-day extension to
July 8, 2004 to respond to the IAR. On July 20, 2004, TFS submitted (draft) amended
reports for the Audit staff’s review prior to filing them with the Commission. Our review
indicated the amendments were deficient; materially resolving only two of the findings.
This information was relayed to TFS representatives via email on July 21, 2004. TFS
representatives indicated they are working on a response. To date, no further response
has been received; nor amended reports filed with the Commission.

|Finding 1. Receipt of Prohibited Corporate Contributions

Summary

TES received 65 prohibited contributions totaling $64,600 from 47 Limited Liability
Companies (LLCs) and corporate entities. The Audit staff recommended that TFS either
provide evidence that these contributions were not from prohibited sources or refund the
$64,600.

Legal Standard
A. Receipt of Prohibited Contributions — Candidates and committees may not accept
contributions (in the form of money, in-kind contributions or loans):
1. In the name of another; or
2. From the treasury funds of the following prohibited sources:
© Corporations (this means any incorporated organization, including a non-stock
corporation, an incorporated membership organization, and an incorporated
cooperative);
e Labor Organizations;
e National Banks;
2US.C. §8441b, 441c, 441e, and 441f.

B. Definition of Limited Liability Company. A limited liability company (LLC) is a
business entity recognized as an LLC under the laws of the state in which it was
established. 11 CFR §110.1(g)(1).

C. Application of Limits and Prohibitions to LLC Contributions. A contribution
from an LLC is subject to contribution limits and prohibitions, depending on several
factors, as explained below.


Part I
Background

Authority for Audit

This report is based on an audit of Terrell for Senate (TFS), 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

Following Commission approved procedures, the Audit staff evaluated various factors
and as a result, this audit examined:

The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

DAWPYWNS

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.


12

2002 Campaign Activity
Reported | Bank Records | Discrepancy

Opening Cash Balance @ July 19, 2002 $0 $0 $0
Receipts $3,379,343 $4,072,919 $693,576
Understated
Disbursements $2,760,279 $3,721,155 $960,876
Understated
Ending Cash Balance @ December 31, 2002 | $633,564" $351,764 $281,800
Overstated

The understatement of receipts was the net result of the following:

Transfer of funds from joint fundraisers not reported (see Finding 7) + $302,000
Transfer from joint fundraiser reported incorrectly (see Finding 7) - 157,500
Contributions from political committees not reported (see Finding 6) + 134,597
Deposits which appear not to have been reported (see Finding 5) + 405,713
Unexplained differences + 8,766

Net Understatement of Receipts $ 693,576

The understatement of disbursements was the net result of the following:

e Payments to media vendor not reported +  $ 685,000
e Bank Loan Repayments not reported + 301,422
© Miscellaneous Operating Expenses not reported + 3,006
e Disbursements Reported Twice - 9,000
e Disbursements Reported - Unsupported by Check or Debit - 15,000
Memo

e Reported Void Check - 12,834
e@ Unexplained Differences + 8,282

Net Understatement of Disbursements $ 960,876

TFS misstated the cash balance throughout 2002 because of the errors described above.
In addition, an incorrect cash balance was carried forward from the 30 Day Post Election
Report to the Year End Report which resulted in an overstatement of the cash balance by
$14,500. On December 31, 2002, the cash balance was understated by $281,800.

At the exit conference, the Audit staff explained the misstatements and provided
schedules of the reporting discrepancies. TFS representatives stated their intention to
review the spreadsheets provided and expressed a willingness to file amended reports to
correct these misstatements.

* This total does not foot; see explanation of ending cash balance below.


14

subsequent to the exit conference, TFS stated it is in the process of amending its reports
to disclose all omitted individual donors.

Interim Audit Report Recommendation
The Audit staff recommended that TFS file amended Schedules A, by reporting period, to
correct the deficiencies noted above.

Finding 6. Failure to Itemize Contributions from Political
Committees

Summary

TFS did not itemize 80 contributions totaling $134,597 received from political
committees. The Audit staff recommended that TFS file amended Schedules A
disclosing the contributions not previously itemized.

Legal Standard

A. When to Itemize. Authorized candidate committees must itemize:

Every contribution from any political committee, regardless of the amount; and
Every transfer from another political party committee, regardless of whether the
committees are affiliated. 2 U.S.C. §434(b)(3)(B) and (D).

B. Definition of Itemization. Itemization of contributions received means that the
recipient committee discloses, on a separate schedule, the following information:
The amount of the contribution;

The date of receipt (the date the committee received the contribution);

The full name and address of the contributor; and

Election cycle-to-date total of all contributions from the same contributor. 11 CFR
§§100.12 and 104.3(a)(4) and 2 U.S.C. $434(b)(3)(A) and (B).

Facts and Analysis

A review of all contributions received from political committees identified 80
contributions totaling $134,597 which were not itemized on Schedules A of disclosure
reports filed by TFS. Similar to Contributions from Individuals discussed above, the
majority of these errors resulted from contributions that were part of December 2002
deposits not entered into the database TFS used to file its disclosure reports (See Finding
4, Misstatement of Financial Activity).

At the exit conference, the Audit staff provided TFS representatives with a schedule of
the political committee contributions not itemized. TFS representatives stated they would
review the spreadsheets provided and make appropriate changes to TFS reports.

Interim Audit Report Recommendation
The Audit staff recommended that TFS file amended Schedules A, by reporting period,
disclosing the contributions not previously itemized.


Table of Contents

Part I. Background
Authority for Audit
Scope of Audit
Changes to the Law

Part II. Overview of Campaign
Campaign Organization
Overview of Financial Activity

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Receipt of Prohibited Corporate Contributions
Finding 2. Receipt of Contributions that Exceed Limits
Finding 3. Receipt of Bank Loan
Finding 4. Misstatement of Financial Activity
Finding 5. Failure to Itemize Contributions from Individuals
Finding 6. Failure to Itemize Contributions from Political Committees
Finding 7. Disclosure of Proceeds from Joint Fundraising Activity
Finding 8. Disclosure of Occupation and Name of Employer
Finding 9. Failure to File 48-Hour Notices

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Report of the
Audit Division on

Terrell for Senate
July 19, 2002 - 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.

' 2 U.S.C. §438(b).

About the Committee (p. 2)

Terrell for Senate (TFS) is the principal campaign committee for
Suzanne Haik Terrell, Republican candidate for the U.S. Senate
from the state of Louisiana, and is headquartered in Alexandria,
Virginia. For more information, see the chart on the Campaign
Organization, p.2.

Financial Activity (p. 2)
« Receipts

o From Individuals $ 2,532,544

o From Political Party Committees 154,726

o From Other Political Committees 665,149

o Transfers from Other Authorized 420,500
Committees

o Loans — Made or Guaranteed by the 300,000
Candidate

o Total Receipts $ 4,072,919

¢ Disbursements
o Total Operating & Other $ 3,721,155

Disbursements

Findings and Recommendations (p. 3)

Receipt of Prohibited Corporate Contributions (Finding 1)

Receipt of Contributions that Exceed Limits (Finding 2)

Receipt of Bank Loan (Finding 3)

Misstatement of Financial Activity (Finding 4)

Failure to Itemize Contributions from Individuals (Finding 5)

Failure to Itemize Contributions from Political Committees

(Finding 6)

© Disclosure of Proceeds from Joint Fundraising Activity
(Finding 7)

¢ Disclosure of Occupation and Name of Employer (Finding 8)

e Failure to File 48-Hour Notices (Finding 9)


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e Refund $552,773 and provide evidence of such refunds (copies of the front and back
of the cancelled checks); and

e If funds were not available to make the necessary refunds, TFS should have amended
its reports to reflect the amounts to be refunded as debts on Schedule D (Debts and
Obligations Excluding Loans) until funds become available to make the refunds.

| Finding 3. Receipt of Bank Loan

Summary

The Candidate loaned TFS $101,000 from the proceeds of a bank loan. The Audit staff
was unable to determine if the bank perfected its security interest in collateral for the
loan. The Audit staff recommended that TFS provide documentation to show the loan
was properly secured.

Legal Standard

Loans Excluded from the Definition of Contribution. The term “contribution” does

not include a loan from a State or federal depository institution if such loan is made:

© in accordance with applicable banking laws and regulations;

ein the ordinary course of business;

© ona basis which assures repayment, as evidenced by a written instrument; and

¢ bearing the usual and customary interest rate of the lending institution. 2 U.S.C.
§431(8)(A)(vii); 11 CFR §100.7(b)(11).

Assurance of Repayment. Commission regulations state a loan is considered made on a

basis which assures repayment if the lending institution making the loan has:

e Perfected a security interest in collateral owned by the candidate of political
committee receiving the loan.

© Obtained a written agreement whereby the candidate or political committee receiving
the loan has pledged future receipts, such as public financing payments.

¢ If these requirements are not met, the Commission will consider the totality of
circumstances on a case by case basis in determining whether the loan was made on a
basis which assured repayment. 11 CFR §§100.7(b)(11) and 100.8(b)(12).

Facts and Analysis

On August 2, 2002, the Candidate obtained a $101,000 loan from First Bank and Trust
(FBT) which included a $1,000 prepaid finance charge and had a maturity date of August
2, 2003. On August 5, 2002, the Candidate loaned TFS $100,000 from the proceeds of
this bank loan. The loan was repaid by TFS with a direct payment to the bank on
December 16, 2002, in the amount of $101,358, which included $1,358 in finance
charges. TFS provided the Audit staff with a copy of the promissory note between the
Candidate and the bank that states that collateral securing other loans with Lender may
also secure this note; referencing it as “cross-collateralization.” Further, a business loan
agreement submitted with the promissory note specifies the borrower is granting a
“continuing security interest” in any and all funds the borrower may now or in the future
have on deposit at FBT.


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Interim Audit Report Recommendation

The Audit staff recommended that TFS file amended reports, by reporting period, to
correct the misstatements noted above, including amended Schedules A and B as
appropriate.

Finding 5. Failure to Itemize Contributions from
Individuals

Summary

A sample test of contributions revealed that TFS did not itemize 15% of the contributions
from individuals on Schedules A as required. The Audit staff recommended that TES file
amended Schedules A, by reporting period, to disclose contributions not previously
itemized.

Legal Standard

A. When to Itemize. Authorized candidate committees must itemize any contribution
from an individual if it exceeds $200 per election cycle either by itself or when
aggregated with other contributions from the same contributor; 2 U.S.C. §434(b)(3)(A).

B. Election Cycle. The election cycle begins on the first day following the date of the
previous general election and ends on the date of the next general election. 11 CFR
§100.3(b).

C. Definition of Itemization. Itemization of contributions received means that the

recipient committee discloses, on a separate schedule, the following information:

¢ The amount of the contribution;

e The date of receipt (the date the committee received the contribution);

¢ The full name and address of the contributor;

¢ In the case of contributions from individual contributors, the contributor’s occupation
and the name of his or her employer; and

¢ The election cycle-to-date total of all contributions from the same contributor. 11
CFR §§100.12 and 104.3(a)(4) and 2 U.S.C. §434(b)(3)(A) and (B).

Facts and Analysis

Based on a sample review of contributions from individuals, the Audit staff determined
that TFS did not itemize 15% of such contributions on Schedules A as required. The
majority of these errors resulted from contributions that were part of December 2002
deposits not entered into the database TFS used to file its disclosure reports (See Finding
4, Misstatement of Financial Activity). On October 10, 2003, TFS provided an up-dated
receipts database which included the missing contributions for the month of December
2002.

At the exit conference, the Audit staff presented this matter to TFS representatives who
had no questions or comments at that time. As part of documentation submitted