Interiin Audit Report of the 

Audit Division on the 

California Republican Party/V8 

January 1, 2007 - December 31. 2008 

Why the Audit 

Was Done 

Federal law pennits the 

Commission to conduct 

audits and field 

investigations of any 

political conimittee 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. 

About the Committee (p. 2) 

The Califomia Republican Party/V8 is a state party conunittee 

headquartered in Burbank, Califomia. For more information, 

see the chart on the Committee Organization, p. 2. 

Financial Activity (p. 2) 

• Receipts 

o Contributions from Individuals 

o Contributions from Other Political 

Committees 

o Transfers from Affiliated Party Committees 

o Transfers from Non-federal and Levin 

Accounts 

o Other Receipts 

Total Receipts 

• Disbursements 

o Operating Expenditures 

o Transfers to Affiliated/Other Party 

Committees 

o Contributions to Federal Candidates 

o Coordinated Party Expenditures 

o Federal Election Activity 

o Contribution Refunds 

Total Disbursements 

• Levin Receipts 

• Levin Disbursements 

$ 6,367.753 

87.646 

7.557.282 

3,389,660 

188.928 

$17,591,269 

$11,110,199 

3.968,892 

30.000 

41.660 

2.392,956 

33,688 

$ 17,577,395 

$620,349 

$ 624,378 

Findings and Recommendations (p. 3) 

• Misstatement of Levin Financial Activity (Finding 1) 

• Reporting of Debts & Obligations (Finding 2) 

• Extension of Credit by a Commercial Vendor (Finding 3) 

2U.S.C. §438(b). 
Interim Audit Report of the 

Audit Division on the 

Califomia Republican Party/V8 

January 1. 2007 - December 31, 2008 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Part II. Overview of Committee 

Committee Organization 2 

Overview of Financial Activity 2 

Part III. Summaries 

Findings and Reconmiendations 3 

Part IV. Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 4 

Finding 2. Reporting of Debts & Obligations 5 

Finding 3. Extension of Credit by a Commercial Vendor 6 
Part I 

Background 

Authority for Audit 

This report is based on an audit of the Califomia Republican Party/V8 (CRP), undertaken 

by the Audit Division of the Federal Election Conmiission (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 Ihis 

subsection, the Commission must perform an intemal 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 risk 

factors and as a result, this audit examined: 

1. the disclosure of individual contributors' occupation and name of employer; 

2. the disclosure of disbursements, debts and obligations; 

3. the disclosure of expenses allocated between federal, non-federal, and Levin 

accounts; 

4. the consistency between reported figures and bank records; 

5. the completeness of records; and 

6. other committee operations necessary to the review. 
Part II 

Overview of Committee 

Cominittee Organization 

Important Dates 

• Date of Registration March 5,1981' 

• Audit Coverage January 1.2007 - December 31,2008 

Headquarters Burbank, Califomia 

Bank Information 

• Bank Depositories One 

• Bank Accounts Four Federal. Two Levin & Ten Nonfederal Accounts 

Treasurer 

• Treasurer When Audit Was Conducted Keith Carlson 

• Treasurer During Period Covered by Audit Keith Carlson 

Management Information 

• Attended FEC Campaign Finance Seminar Yes 

• Who Handled Accounting and Recordkeeping Tasks Paid Staff 

Overview of Financial Activity 

(Audited Amounts) 

Cash-on-hand @ January 1,2007 $ 66,827 

o Contributions from Individuals 6.367.753 

o Contributions from Other Political Committees 87.646 

o Transfers from Affiliated Party Committees 7.557.282 

o Transfers from Non-federal and Levin Accounts 3,389,660 

o Other Receipts 188,928 

Total Receipts $ 17,591,269 

o Operating Expenditures 11.110,199 

o Transfers to Affiliated/Other Party Committees 3,968,892 

o Contributions to Federal Candidates 30,000 

o Coordinated Party Expenditures 41,660 

o Federal Election Activity 2,392,956 

o Contribution Refunds 33,688 

Total Disbursements $17,577,395 

Cash-on-hand @ December 31,2008 $ 80,701 

Levin Cash-on-hand @ January 1,2007 $ 11322 

Total Levin Receipts $ 620,349 

Total Levin Disbursements $ 624378 

Levin Cash-on-hand @ December 31,2008 $ 7,293 

^ CRP originally registered with the Secretary of the Senate on August 7.1974. as the Republican State Central 

Committee of California Federal Election Account, under a diffo-ent identification number. This previous 

oommittee terminated on August S, 1981, shortly after the formation of the current Committee. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

During audit fieldwork, a comparison of CRP's reported Levin activity with bank records 

revealed a material misstatement of receipts and disbursements in 2008. CRP 

understated receipts and disbursements by $50,071 and $54,000, respectively. The Audit 

staff reconunehds that CRP amend its disclosure reports to correct the misstatement. 

(For more detail, see p. 4.) 

Finding 2. Reporting of Debts & Obligations 

Audit fieldwork indicated that CRP failed to report debts and obligations for 28 vendors 

totaling $2,188,950 on Schedule D (Debts and Obligations). The Audit staff 

recommends that CRP amend its disclosure reports to include these debts and obligations. 

(For more detail, see p. 5.) 

Finding 3. Extension of Credit by a Commercial Vendor 

After reviewing and analyzing disbXirsement records during audit fieldwork, the Audit 

staff noted that an incorporated vendor appeared to make a prohibited contribution to 

CRP by extending credit beyond its normal course of business and by failing to make 

commercially reasonable attempts to collect $1,171,002 for services rendered. The Audit 

staff recommends that CRP provide documentation demonstrating that the credit 

extended to CRP was in the vendor's ordinary course of business and that the vendor 

made reasonable attempts to collect these debts. 

(For more detail, see p. 6.) 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Levin Financial Activity 

Summary 

During audit fieldwork, a comparison of CRP's reported Levin activity with bank records 

revealed a material misstatement of receipts and disbursements in 2008. CRP 

understated receipts and disbursements by $50,071 and $54,000, respectively. The Audit 

staff recommends that CRP amend its disclosure reports to correct the misstatement. 

Legal Standard 

A. Reporting. If a state, district or local party committee's combined annual receipts 

and disbursements for federal election activity (FEA) are $5,000 or more during the 

calendar year, then it must disclose receipts and disbursements of Federal funds and 

Levin funds used for FEA. 11 CFR §300.36(b)(2). 

B. Contents of Levin Reports. Each report must disclose: 

• The amount of cash-on-hand for Levin funds at the begiiming and end of the 

reporting period; 

• The total amount of Levin fund receipts and disbursements (including allocation 

transfers) for the reporting period and for the calendar year; and, 

• Certain transactions that require itemization on Schedule L-A (Itemized Receipts of 

Levin Funds) or Schedule L-B (Itemized Disbursements of Levin Funds). 

llCFR§300.36(b)(2)(B). 

Facts and Analysis 

A. Facts 

As part of fieldwork, the Audit staff reconciled CRP's reported Levin activity with bank 

records for 2Q08. .The following chart outlines the discrepancies for the beginning cashon-hand balance, receipts, disbursements, and the ending cash-on-hand balance. 

Succeeding paragraphs address the reasons for the misstatements, if known. 
2008 Committee Activity 

Reported Bank Records Discrepancy 

Beginning Cash-on-Hand 

Balance @ January 1,2008 

$14,988 $14,443 $545 

Overstated 

Receipts $556,470 $606,541 $50,071 

Understated 

Disbursements $559,692 $613,692 $54,000 

Understated 

Ending Cash-on-Hand 

Balance @ December 31,2008 

$11,766 $7,292 $4,474 

Overstated 

The beginning cash-on-hand balance was overstated by $545 and is unexplained, but 

likely resulted from prior period discrepancies. The $50,071 understatement of receipts 

resulted mostly from contributions from individuals that were not reported, the 

understatement of disbursements by $54,000 resulted from a vendor payment that was 

not reported, and the $4,474 overstatement of the ending cash-on-hand balance was the 

result of the misstatements previously described. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff discussed the reporting errors and presented relevant work papers to the 

CRP representative at the exit conference. The representative stated that he would 

review the matter. 

The Audit staff recommends that, within 30 calendar days of service of this report, CRP: 

• amend its reports to correct the misstatement for 2008, as noted above; and 

• 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. 

Further, CRP should reconcile the cash balance of its most recent report to 

identify any subsequent discrepancies that may impact the $4,474 adjustment 

recommended by the Audit staff. 

I Finding 2. Reporting of Debts & Obligations 

Sununary 

Audit fieldwork indicated that CRP failed to report debts and obligations for 28 vendors 

totaling $2,188,950 on Schedule D (Debts and Obligations). The Audit staff 

recommends that CRP amend its disclosure reports to include these debts and obligations. 

Legal standard 

A. Continuous Reporting Required. A political committee must disclose the amount 

and nature of outstanding debts and obligations until those debts are extinguished. 

2 U.S.C §434(b)(8) and 11 CFR §§ 104.3(d) and 104.11(a). 
B. Separate Schedules. A political committee must file separate schedules for debts 

owed by the committee and debts owed to the committee, together with a statement 

explaining the circumstances and conditions under which each debt and obligation was 

incurred or extmguished. 11 CFR § 104.11(a). 

C. Itemizing Debts and Obligations. 

• A debt of $500 or less must be reported once it has been outstanding 60 days from 

the date incurred (the date of the transaction); the committee reports it on the next 

regularly scheduled report. 

• A debt exceeding $500 must be disclosed in the report that covers the date on 

which die debt was incurred. 11 CFR §104.11(b). 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff reviewed disbursement records and disclosure reports 

for proper reporting of debts and obligations. This review identified debts owed to 28 

vendors totaling $2,188,950 that required disclosure. Most of the identified debts were 

greater than $500, and all remained outstanding during the reporting period in which they 

were incurred. 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff discussed these debts with a CRP representative 

and provided relevant work papers. The representative stated that he would review the 

matter. 

The Audit staff recommends that, within 30 calendar days of service of this report, CRP 

amend its reports to disclose these debts and obligations on Schedules D. 

I Finding 3. Extension of Credit by a Commercial Vendor 

Summary 

After reviewing and analyzing disbursement records during audit fieldwork, the Audit 

staff noted that an incorporated vendor appeared to make a prohibited contribution to 

CRP by extending credit beyond its normal course of business and by failing to make 

commercially reasonable attempts to collect $1,171,002 for services rendered. The Audit 

staff recommends that CRP provide documentation demonstrating that the credit 

extended to CRP was in the vendor's ordinary course of business and that the vendor 

made reasonable attempts to collect these debts. 

Legal standard 

A. Corporate Contributions Impermissible. A corporation is prohibited from making 

any contribution in connection with a federal election. 2 U.S.C. §441b(a). 
B. Definition of Commercial Vendor. A commercial vendor is any person who 

provides goods or services to a candidate or political committee and whose usual and 

normal business involves the sale, rental, lease or provision of those goods or services. 

llCFR§116.1(c). 

C. Extension of Credit by Commercial Vendor. A conunercial vendor, whether or not 

it is a corporation, may extend credit to a candidate or political committee provided that: 

• The credit is extended in the vendor's ordinary course of business; and 

• The terms of the credit are similar to the terms the vendor observes when 

extending a similar amount of credit to a nonpolitical client of similar risk. 

11 CFR §116.3(a) and (b). 

Facts and Analysis 

A. Facts 

During fieldwork, the Audit staff identified an incorporated vendor that appeared to make 

a prohibited contribution to CRP by impermissibly extending credit beyond its normal 

course of business and by not providing documentation demonstrating that the vendor 

made commercially reasonable attempts to collect the debts. The vendor. Strategic 

Fundraising, Inc. (SFI), performed voter/donor file prospecting and telephone fundraising 

services for CRP. There are 297 invoices, totaling $1,171,002, which were outstanding 

between 121 and 757 days. Several of these invoices, dated between October and 

December 2006, were outstanding for services rendered during the 2006 election cycle. 

CRP paid all invoices between March and October 2007 and also in November 2008. 

Other than the initial invoices, CRP made no other documentation available to 

demonstrate that SFI made further attempts to collect these debts. 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff discussed this matter with a CRP representative 

and provided relevant work papers for review. The representative stated that he would 

review the matter. 

The Audit staff had questions regarding SFI's billing and payment practices; therefore, a 

copy of the SFI vendor contract was requested. In response, CRP. provided the contract 

and a letter from SFI addressing the extension of credit. The contract contained the 

following pertinent provisions: 

• While SFI was responsible for planning, preparing, managing and conducting all 

telephone fundraising efforts directed at both previous and prospective donors, 

CRP was responsible for collecting, depositing and recording all contributions 

generated by SFI and providing SFI with regular reports "identifying all 

individuals who contributed to the Committee as a result of SFI's efforts, along 

with the amount and date of each contribution." 

• SFI shall invoice CRP weekly, and CRP shall pay all invoices within 30 days of 

the invoice date and pay all prospecting invoices upon receipt. 

• Outstanding balances 30 days past due shall accme interest of 1 % compounded 

monthly. 
• The prospective donor fundraising section included a "Break-Even Guarantee," 

whereby in exchange for the right to be CRP's exclusive telephone fundraising 

firm, SFI agreed to cover the costs of all calls to prospective contributors. As 

such, CRP was not expected to pay more for prospecting calls than the sum of all 

actual contributions generated by those calls. The Guarantee included a provision 

in which the parties acknowledged that SFI was "accepting significant business 

risk" by extending the Guarantee to CRP and provided partial mitigation of the 

risk by granting SFI the exclusive right to conduct CRP's fundraising programs 

over the course of an entire year. 

• SFI would be paid for its prospecting services at "an amount equal to the gross 

receipts generated by each prospecting project." In addition, if the "cumulative 

gross proceeds from all Prospecting campaigns performed in a calendar year 

exceeded the total of all prospecting calls.. .the positive difference [would] be 

credited to the Committee." 

The letter from SFI states that credit was extended to CRP because it, as well as many of 

SFI's other Republican Party clients, was unable to engage in sustainable new donor 

acquisition, renewal and reactivation of old donors as a result of die external political 

climate at the time. SFI further states that it believed at all times diat diis extension of 

credit would further CRP's receipt of new funding, and that at no time did it intend to 

make a contribution by virtue of its extension of credit. SFI contends that the extension 

of credit was in its ordinary course of business, and that it followed its established 

procedures and its past practice widi odier telephone fundraising clients in die political 

arena in approving die extension of credit. SFI furdier adds diat CRP and SFI negotiated 

a resolution of disputed billing items by devising a payment plan diat involved its 

continued telephone fundraising for CRP and retention against die outstanding but unpaid 

balances of receipts until the obligation was satisfied in 2009. SFI contends that it 

received reasonable, prompt payment in full from CRP based on this extension of credit. 

After consideration of all the aspects of this matter, the Audit staff suggests diat there are 

two separate and distinct issues to be considered. First, CRP must establish that SFI's 

extension of credit was in its ordinary course of business. Second, if the first provision is 

met, CRP must demonstrate that SFI made commercially reasonable attempts to collect 

die debts. If CRP does not establish eidier provision^ a prohibited contribution will 

result. 

Ordinary Course of Business 

In determining whether an extension of credit was in the ordinary course of business, the 

Commission considers whether the vendor followed established procedures and past 

practices, whether the vendor received prompt payment in full for previous extensions of 

credit, and whedier the extension of credit conformed to die usual and normal practice in 

die industry (11 CFR § 116.3(c)). 

In considering similar fundraising agreements, die Commission has sought to determine 

whether an extension of credit was in a vendor's ordinary course of business by 

considering the presence of adequate vendor safeguards. The Commission has required 

committees to have safeguards in place to ensure that committees, in fact, pay for all die 
costs of the fundraising programs. See MUR 5635 (Conservative Leadership PAC); AO 

1991-18 (New York State Democratic Committee); AO 1976-36 (Committee for 

Fauntroy). Safeguards proposed by the Commission have included requiring advance 

deposits by a committee to reimburse vendors for potential shortfalls, limiting the term of 

die contract, or allowing vendors to terminate the contract early and demand full payment 

as a result of poor fundraising performance. 

The terms of the "Break Even Guarantee" and the exclusivity clause in the contract raise 

a question of whether SFI's extension of credit to CRP was in its ordinary course of 

business. The Guarantee appears very similar to die type of "no-risk" or "limited-risk" 

provisions diat, in previous matters, the Commission has found could constitute in-kind 

contributions in the absence of safeguards ensuring diat (1) the committee would pay for 

all of the costs of the fundraising programs and (2) die vendor would bear all of the 

financial risk of programs not paying for diemselves (MUR 5635; AO 1991-18; AO 

1979-36). However, unlike die previous cases, SFI was not responsible for the "caging" 

of contributions resulting from its fundraising activity. The contract outlines that 

contributions were to be sent to CRP, which was supposed to deposit them in its own 

account and then pay the invoiced amounts to SFI. This provision, in combination with 

the Guarantee, raises questions as to whedier the arrangement between CRP and SFI was 

one in which "the committee retainfed] contributipn proceeds while giving up litde, or 

assumfing] litde to no risk with the vendor bearing all, dr nearly all the risk." See AO 

1991-18 (New York State Democratic Party). It appears diat die exclusivity clause was 

included to offset any risk that prospecting calls would not generate contributions 

sufficient to cover SFI's costs in making them. This raises a question regarding whether 

this clause provided sufficient fmancial value to SFI such that it negated SFI's 

assumption of the risk diat it would lose money on the prospecting calls. However, 

absent additional information showing diat the value of the exclusivity clause was 

comparable to SFI's financial risk or that "no-risk" or "limited-risk" agreements such as 

die Guarantee between CRP and SFI conform to the usual and normal practices in die 

telemarketing industry, die Audit staff concludes diat SFI did not extend credit to CRP in 

its ordinary course of business. 

Commercially Reasonable Debt Collection 

Even ^ere an extension of credit by a commercial vendon is legally permissible when 

made, it may evolve into a contribution over time through die lack of commercially 

reasonable attempts on the part of die vendor to collect the resulting debt. The 

Commission determines diat these attempts are commercially reasonable if die vendor 

has pursued its remedies as vigorously as it would pursue its remedies against a nonpolitical debtor in similar circumstances (11 CFR §116.4(d)(3)). In this matter, it appears 

that many of the debt collection provisions oudined in the contract were not fulfilled. 

• As previously mentioned, other than initial invoices, no other documentation was 

made available to demonstrate diat CRP was billed weekly or diat any furdier 

attempts were made to collect these debts. 

• No documentation was presented to die Audit staff to demonstrate that CRP was 

billed the 1 % interest, compounded monthly, for its debts outstanding more 

than 30 days. 
10 

In regard to die letter submitted by SFI, SFI admits diat credit was extended to CRP and 

other political clients. It also mentions a negotiated repayment plan; however, this has 

never been discussed with the Audit staff nor presented to the Audit staff for review. 

The Audit staff reconunends diat, within 30 calendar days of service of diis report, CRP 

provide documentation or any other comments to demonstrate that SFI extended credit to 

CRP in its ordinary course of business. The documentation should include, but not be 

limited to, evidence diat (1) the "Break Even Guarantee" widiin die SFI contract is 

common industry practice, (2) verification diat the value of die exclusivity clause 

provided sufficient fmancial value to SFI such that it negated SFI's assumption of die risk 

that it would lose money on the prospecting calls, (3) confirmation that the terms of the 

credit are similar to the terms SFI observes when extending a similar amount of credit to 

a nonpolitical client of similar risk. 

The Audit staff also recommends that, widiin 30 calendar days of service of this report, 

CRP provide documentation or any odier comments to demonstrate diat SFI made 

commercially reasonable attempts to collect these debts. The documentation should 

include, but not be limited to, evidence supporting the negotiated payment plan and 

examples of other SFI customers or clients of similar risk for which similar services had 

been provided and similar billing arrangements had been utilized. CRP should also 

provide documentation conceming SFI's billing policies for similar clients and work, 

advance payment policies, debt collection policies, and billing cycles. 

Absent such a demonstration, the Audit staff will consider die $1,171,002 an 

impermissible contribution from SFI.