FEOEJ., •„. !.;CTIC>; 

COM'*;-, ri-'l 

SECriCrAKIAT 

FEDERAL ELECTION COMMISSION Z.".'! DEC 21 P U- ll 

WASHINGTON, D.C. 20463 ' ' 

December 27,2011 

MEMORANDUM 

To: The Commission 

Through: 0 •>^lec Palmer j 

Y StaffDirector 

From: Patricia Carmona ^ 

Chief Compliance Officer 

Tom Hintermister 

Assistant StaffDirector ^jA) 

Audit Division ^"^^ 

Martin Favin ^fc^Jvch 

Audit Manager 

By: Randy Harris ^^{^ 

Lead Auditor 

Subject: Audit Division Recommendation Memorandum on Smoot for Congress 

(AlO-Ol) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

the Audit stafTs recommendations are presented below and the findings are discussed in the 

attached Draft Final Audit Report (DFAR). The Office of General Counsel has reviewed 

this memorandum and concurs with the recommendations. 

I 

Finding 1. Misstatement of Financial Activity 

The committee did not file amended reports in response to the interim audit report, 

nor the DFAR. However, the Candidate stated via telephone and email that they 

are working on amended reports to comply with the Audit staffs recommendation 

and will file them when completed. 

The Audit staff recommends that the Commission find that Smoot for Congress 

misstated their financial activity for calendar years 2009 and 2010. 

Finding 2. Receipt of Apparent Prohibited Contributions 

The committee did not provide a response to the DFAR. However, the Candidate 

subsequently stated that since no funds are available to remedy the apparent 

prohibited contributions, they intend to disclose them on Schedule D (Debts and 

Obligations) when they file amended reports. 
The Audit staff recommends that the Commission find that Smoot for Congress 

received apparent prohibited contributions. 

The Committee did not request an audit hearing. 

If this memorandum is approved, a Proposed Final Audit Report will be prepared within 

30 days of the Commission's vote. 

Should an objection be received. Directive No. 70 states that the Audit Division 

Recommendation Memorandum will be placed on the next regularly scheduled open 

session agenda. 

Documents related to this audit report can be viewed in the Voting Ballot Matters folder. 

Should you have any questions, please contact Randy Harris or Martin Favin at 694-1200. 

Attachment: 

- Draft Final Audit Report on the Smoot for Congress 

cc: Office of General Counsel 
Draft Final Audit Report of the 

Audit Division on Smoot for 

Congress 

(March 11, 2009 - December 31, 2010) 

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 

(tiie Act). The 

Commission generally 

conducts such audits 

when a committee . "•0ri^--h' 

appears not to ha^^l^nii^ ^ 

the threshold v jy . 

requirements fbr * -is^- • 

substantial,.cpmpliance': v:.. 

witiijp^iiifg5;;audit' • v.; 

detMillies whetH^I||^. 

conil^ee complied w^mL^ 

the linimions, ''l^ ; ^. 

prohibitidr^^d V^,|: 

disclosure requirements 

ofthe Act. '"•^i^il^v, 

Future Actiofit'W' 

TTie Commission may 

initiate an enforcement 

action, at a later time, 

with respect to any of the 

matters discussed in this 

report. 

About the CampaJ^ (p. 2) 

Smoot fbr Congress is th^ioohgressional campaign committee fbr 

Sheila Smoot, Democrsdii^j^didate fbr the U.S. House of 

Representatives frotn tKe S'tS&^of Alabama, 7* District, and is 

headquartered in Birminghani'^-<|||abama. For more information, 

~~~ the chart on the campaign or^|^ation, p. 2. see 

Financial Activity (p. 2) 

• Receipts r-?'' 

'•;? Contributions frpjtA Individuals 

.:.::-6 iiCpntributions jfrona Other 

Political Committises 

Total Receipts. 

Disbursemients 

o Operating Expenditiures 

o Other Disbursements 

Total Disbursements 

$ 151,083 

98,750 

$ 249,833 

$ 250,380 

1,030 

$ 251,410 

Findings and Recommendations (p. 3) 

• Misstatement of Financial Activity (Finding 1) 

j« Receipt of Apparent Prohibited Contributions (Finding 2) 

2 U.S.C. §438(b). 
Draft Fi ofthe 

Audit Division on 

Smoot for Congress 

(March 11, 2009 - December 31, 2010) 

'•'i'.L«l!!"'. 

,.'••.1 • • • 'rt'.'V ii- i-
Table of Contents 

Page 

Part I. Baclcground 

Authority for Audit 

Scope of Audit 

Part II. Overview of Campaign 

Campaign Organization 

Overview of Financial Activity 

Part III. Summaries 

Findings and Recommendations 

4fr--''~-

Part IV. Findings and Recoi^endations 

Finding 1. Misstatement of Financial Aa 

Finding 2. Receipt of Apparent Prohibited 

^'^^^^ 

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Parti 

Background 

Authority for Audit 

This report is based on an audit of Smoot for Congress (SFC), 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 coi|^i|tee that is required to file a 

report under 2 U.S.C. §434. Prior to conducting any audit^3er this subsection, the 

Commission must perform an intemal review ofrepj^ 

determine if the reports filed by a particular conun;y^ 

for substantial compliance with the Act. 2 U^.C.-^ 

Scope of Audit ' 

Following Commission-approved procedures 

factors and as a result, this audit examined: 

1. the receipt of excessive conM^Mons and 

the receipt of contributions 

the disclosure of individual 

the consistency between reporte 

and 

jted by selected committees to 

16(1^:^ threshold requirements 

Audit s|^|ff evaluatedcvmous risk 

name of employer; 
Part II 

Overview of Campaign 

Campaign Organization 

Important Dates 

• Dateof Registration April 22, 

• Audit Coverage March U#p 9 - December 31,2010 

Headquarters Birmi^ift.. Alabama 

Bank Information 

• Bank Depositories 

• Bank Accounts ^ 

Treasurer : 

• Treasurer When Audit Was Conducted lyrienne Mson ^$h^ 

• Treasurer During Period Cover^j|)y Audit ^lildinaHfj^lKn. March 1 llfl|t§? -

O^^CZOIO ; and ^ 

Adrienii|llison. October 18,2010 -

J3ecembifei,2010 

Management Information ^^.^ 

• Attended FEC Camip^^Hi^fuice Semi^ljE 

• Who Handled A^WSngS^ ^ 

Recordkeeping fl^k ^ % | 

•if'" ^%iiditeii 

l^'Staipl^ 

f^ial Activity 

Isiounts) 

Cash-on-haiUl^^March 11,2|$9 W $0 

Receipts ^ 

o Contributions fr^^lndividv^ 151,083 

o Contributions fronii^|^|H;Pical 

Committees ^iS^ ' 

98,750 

Total Receipts "^'^ $ 249,833 

Disbursements 

o Operating Expenditures 250,380 

o Other Disbursements 1,030 

Total Disbursements $251,410 

Cash-on-hand @ December 31,2010 $(1,577)^ 

^ SFC overdrew its bank accounts in the amount of $1,577. The bank later forgave $1,574 when one account was 

closed out. See Finding 2 for discussion of apparent prohibited contribution from the bank for $1,574. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

A comparison of SFC's reported financial activity with its ^nk records revealed a 

misstatement of receipts and disbursements in calendar y^^p009 and 2010. The 

Interim Audit Report recommended that SFC amend itjpl^posure reports to correct the 

misstatements. No amended reports have been fileddSlMek The candidate stated that 

SFC would file the amended reports in tiie near futatfr (ForHnQre detail, see p. 4) 

Finding 2. Receipt of Appar^j^jit^Prohibite^^^^ 

Based on a review of all contributions rec^f^by SFC, the Audit ^ 

contributions totaling $9,994 that appear to l^fem prohibited source^ 

Audit Report recommended that pjFC demonstrati|1|)ay^^^^ the contri^^^s with 

permissible funds or refund thei^^^||sponse to iKy^^^m Audit Report, M't) stated 

that one of the contributions in qS^tk||^4.s reflmded|^^^ not incorporated, 12 were 

from sole proprietors or partnershi^^ni%i||was not pM^p^jted but resulted from a 

vendor error. However, SFC provid^|%o doBii^lptUition tbt^uiDport its statement and 

tiierefore the Audit ,s^tii^$till^jX)nsiders^ti^^contriM apparent 

prohibited contri, 

li_dentified 15 

le Interim 

<^ -. . v^,,. 
Part IV 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

Summary 

A comparison of SFC's reported financial activity with its bank records revealed a 

misstatement of receipts and disbursements in calendar years.2009 and 2010. The 

Interim Audit Report recommended that SFC amend its dis^psure reports to correct the 

misstatements. No amended reports have been filed tg.^|||f The candidate stated that 

SFC would file the amended reports in the near futuEeil|;^%%. 

4 'JS * 

Legal Standard 

Contents of Reports. Each report must di ^ 

• the amount of cash-on-hand at the^^^^ing and end of the f^pj^ing period; 

• the total amount of receipts for the re^j^i||g peri<g4^d for the^i^^tion cycle; 

• the total amount of disb^i^ents fbr thlii^p|g|^^riod and fbr lllpelection 

lization on'' 

cycle; and 

• certain transactions that r^pii^^ization on'^^edule A (Itemized Receipts) or 

Schedule B (Itemized Disb«mei^^^.S.C. ^(b)(l), (2), (3), (4) and (5). 

Facts and Anaj#I^^K M^. . 

A. Facts ^^1^, ^ 

The Audit ^ " "^'^^^ ^ ^ 

misstatein<ent? 

detailttk^^^br€^[>^^ aun^^pceedn^^^j^aj^piiexplain the reasons fbr the 

misstatements, if'faib?«m. ^"'"^''^^^^^ ^ 

2009 Aii ^ 

•,.ve":'if • >w,: % Reported Bank Records Discrepancy 

Beginning Casl^^Balance | 

@ March 11,2()Sfe:,. J 

S 50 $0 $0 

Receipts "4i;'f:;Y^-i^ ^' $60,008 $60,038 $(30) 

Understated 

Disbursements $55,674 $54,678 $996 

Overstated 

Ending Cash Balance 

©December 31,2009 

$4,334 $5,360 $(1,026) 

Understated 

SFC understated receipts in 2009 by $30. However, when evaluating the identified errors, 

regardless of whether the errors were positive or negative (absolute values), the Audit staff 

discovered tiiat the committee misstated receipts by $5,694 ($2,862 + $2,270 + $562). 
The misstatement of receipts resulted from the following differences: 

• Receipts not reported, primarily contributions from individuals 

• Receipts reported twice 

• Reported receipts not supported by bank deposits or credits 

Sum of Reporting Adjustments 

$2,862 

2,270 

562 

$5.694 

SFC overstated disbursements in 2009 by $996. However, when evaluating the identified 

errors, regardless of whether the errors were positive or negative (absolute values). The 

Audit staff discovered that the committee misstated disbursements by $4,305 ($1,383 + 

2,922). . 

The misstatement of disbursements resulted from thejfoBo^ing differences: 

• Disbursements not reported iS®^' --S^^, $1,383 

Disbursements reported not supported by^j|§^(i^ed check's^i: 

Sum of Reporting Adjustments 

2.922 

2010 Activity 

Reported "^ankfitiiSBrds Disiliicpancy 

Opening Cash Balance 

January 1,2010 

^'^P5,360 $(1,026) 

Understated 

Receipts '"%795 $(19,097) 

Understated 

Disbursements w $19» 4 $2,872 

Overstated 

Ending Cash Balaiib^^,^ 

December 31, 201CI 

^$(24,57^ r $(1^77) 

v. 

$(22,995) 

Understated 

'::>lE:lS^:s!If|j."iniil 

The^dnd'eFsfatemea^t^of reeeiits resultei^%im the^ollowing 

^5;"-l^eipts not itpl^ed "'^il.TM 

Si^jE^ts reporterf=i^g|ie or ffi^ijectiy 

ROpitiiit^ contributofehecks r^n ^ by bank for insufficient 

fim J%n o report ^itments*^ 

Reporte$i|geipts not s|fMorted by bank deposits or credits 

Bank correcti^%erron^£^ly reported as receipt 

Net Understat^^foipeceipts 

$22,417 

(410) 

(700) 

(1,810) 

(400) 

$19.097 

SFC overstated disbursements in 2010 by $2,872. However, when evaluating the 

identified errors, regardless of whether the errors were positive or negative (absolute 

values), the Audit staff discovered that the committee misstated disbursements by 

$35,357 ($15,481 + 19,876). 

The misstatement of disbursements resulted from the following differences: 

• Disbursements not reported $ 15,481 

• Disbursements reported not supported by canceled checks 19.876 

Sum of Reporting Adjustments $35.357 
The reporting discrepancies noted above resulted in the $22,995 understatement of the 

ending cash balance. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff and SFC representatives discussed this matter at the exit conference held 

at the end of audit fieldwork. SFC representatives acknowledged the discrepancies in the 

reports and indicated that the committee would file corrective amendments. 

The Interim Audit Report recommended that SFC amend its reports to correct the 

misstatements for 2009 and 2010 as noted above and amend4ts most recently filed report 

to correct the cash-on-hand balance with an explanation,|||t|l|ne change resulted from a 

prior period audit adjustment. It further recommend^|ii[|SFC reconcile the cash 

balance on its most recent report to identify any s^b|iq@mtr:d^^^ that may 

impact the $22,995 adjustment. 

•(Sim^^L 

C. Committee Response to Interim Audijti^eport '"^^h 

SFC did not file any amended reports in res;|ionse to the Interim Audilfi^eport. In a 

subsequent communication, however, the carididl^te state^'ithat the requesi^4 amendments 

would be filed in the near future.^ .•s^ ^. tr^j;^ "^#1 

•^'•••J^y 

Finding 2. Receipt ofljj^jaj^eint Prohibited Contributions 

Summary ^^^f-:,.,^ 'I'rV 

Based on a review^^?||cHS^^ f ig|iyed.||^=^F^ staff identified 15 

contributions totSji^ $9,994lpt appear tq|bi^lpfn pro^tt^ sources. The Interim 

Audit Report recol^p^iended thafl^FC demonsiifate that it made the contributions with 

permissible funds or re||nd th^ | In response;^fo the Interim Audit Report, SFC stated 

that on^|i^|GQn^ ref|l|^ed, one was not incorporated, 12 were 

frong^lfi'f ropi^ii^^^ pari^ships, aiiil'^nO:waf prohibited but resulted from a 

veM^error. Howe%r|SFC'il^^^ no diociiitnentation to support its statement and 

therl^il^the Audit staS^|l coiilSi^ the contributions totaling $9,994 apparent 

prohibii^feontributions.'lsllh, 

Legal Stan^lgL ^ 

A. Receipt of I^rip^j^|bitedj|(nt^^ - General Prohibition. Candidates and 

committees may^||^a^||i contributions (in the form of money, in-kind contributions 

or loans) from thelilallury 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); 

• labor organizations; or 

• national banks. 2 U.S.C. §441b. 

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. Applications 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: 

1. LLC as Partnership. The contribution is considered a contribution from a 

partnership if the LLC chooses to be treated as a partnership under Intemal 

Revenue Service (IRS) tax rules, or if it makes no choice at all about its tax 

status. 11 CFR §110.1(g)(2). 

2. LLC as 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 rules, or if its share^^£UFe traded publicly. 11 CFR 

§110.1(g)(3). 

3. LLC witii Single Member. The contribution iSo^nsidered a contribution from 

a single individual if the LLC is a sipgle-membef LLC that has not chosen to 

be treated as a corporation under IFtS-fules. 11 CF^ji^O. 1(g)(4). 

4. At the time it makes the contribution; an LLC shall prd^j^to the recipient 

committee information on how th0>contribution is to be aii^|uted and affirm 

that it is eligible to make the contnliuitipn. 11. ^ER § 110.1 (l)fe|v 

D. Questionable Contributionsv: If a contributiom^ai^presents genuine questions 

about its permissibility is recei^^d iEuid deposited, t^^^ shall mske his or her 

best efforts to determine wheth^it is fh)m-a prohibiii^^cmrce. If the legality ofthe 

contribution cannot be verified in 30 days oif tiie treasurei;fs;;;igeceipt, it shall be 

refimded to tiio^j^p^ft;^. 11 CFR §103.3(b)(l). 

Facts and AnM^is 

A. Factejj'^.a^^ ..i^r; 

Bas^ll^pi^^^e^^f all ^^Icibutions'^^^^^ by SFC, the Audit staff identified 15 

con^pSions totMi=^^9,99%||at appear to'be'vfrom prohibited sources. This amount 

incl^pi^contributions:^^ 12"tS|l|;s, totaling $7,720, two corporations, totaling $700, 

and onl^tional bank, tWing 

The Audit st:i|i|r>pquested thiat^ SFC provide documentation confirming how each LLC 

elected to be trS;tM.under IF^S^rules at the time the contributions were made. To date, 

SFC has provided'^^^iuch dIfUmentation. The Audit staff verified the corporate status 

with the appropriate S^i^etaiies of State and could not determine the status of one of the 

entities. '^-'^ 

SFC incurred a negative bank account balance in November 2010, when it overdrew its 

account with a debit charge for a rental car. In January 2011, the account was closed 

when the bank posted a $1,574 credit. SFC provided no information to indicate that the 

credit posted by the bank was the result of a deposit by the committee. 

B. Interim Audit Report & Audit Division Recommendation 

The Audit staff requested that SFC provide documentation from the bank explaining this 

transaction. The candidate stated that SFC would provide a letter from the bank. To 
date, no such letter has been provided. The Audit staff and committee representatives 

discussed this matter at the exit conference held at the end of audit fieldwork. The Audit 

staff requested that SFC provide documentation verifying that the contributions in 

question were pennissible. To date, SFC has not submitted any additional documentation 

conceming this matter. 

The Interim Audit Report recommended that SFC provide evidence demonstrating that 

the contributions in question were made with permissible funds. For the contributions 

from LLCs, it was recommended that SFC provide documentation from each entity 

explaining its tax treatment. It was further recommended that SFC provide 

documentation from the bank explaining the $1,574 credit?]^^s(ted to SFC's account. 

The Interim Audit Report stated that if SFC did nq|pn(jo,i^Miiri^^^^ that the funds were 

permissible, it should have made refunds to the^c^3tbutors'o¥^|^^ to the U.S. 

Treasury the impermissible amounts. The A^i^t^aff requesteSSjaJ SFC provide 

evidence of any refunds by providing the fri^mid back of the nepliated refund checks. 

In addition, if funds were not available to m^^plie neces.s|^ refunds or^dkgorgement. 

the Audit staff requested that SFQ4isclose the ^li^buti^^ requiring 

Schedule D (Debts and Oblieatifiistiimtil funds becMllaVailable to m 

refiji^d^'On 

(Debts and Obligati^0^s||imtil funds be6i^e|available to make such refunds. 

C. Comniittee Response to Interili^ii^SillSfiport "^kh. 

In response to the Interim Audit Repo||j3FC fciEii^that it rin.4ed one of the two 

In its response, SFC'^x|>][ained :|Qat the vendorll^or resulted from a double charge by a 

rental car^^jf^y, whicMjpd|i:^;it^^g^^ bal:^9e in the committee's bank account. 

Accj|^|pPii|||i|jie $i;5^:&edit&j6y^b^to SFC's account occurred after SFC 

w(^^ with both t^lb^k an^j^e rental cM^^^pany to correct a duplicate charge by 

the '^m^ car companJ^lKf pie SF%||id not submit any documentation in support of this 

explanai^^ so the Audif%t|g[f still ^^nsjiders the $1,574 to be an apparent prohibited 

contributib^pm the banl^ljik 

With respect to'^&^contribuMii SFC stated was not incorporated, the Audit staff was 

unable to verify it^if^or^||||tatus with the Secretary of State. However, since the name 

on the contribution ci[i(^;|j^iuded "Inc.," the Audit staff still considers this item to be an 

apparent prohibited coiMbution. 

SFC did not document the contribution it claimed to have refunded or the 12 

contributions SFC claimed were made by sole proprietors or partnerships. Without 

further documentation to support the statements above, SFC did not comply with the 

Interim Audit Report recommendation. The Audit staff considers the contributions 

totaling $9,994 to be apparent prohibited contributions.