FEDERAL ELECTION COMMISSION

WASHINGTON. DC. 20463

May 9, 2000

MEMORANDUM

TO:

FROM:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

ROBERT J. COSTA

ASSISTANT STAFF DlRE{Tcl...'--

AUDIT DNISION

p=.

, ' ,"" SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

DEMOCRATIC PARTY OF ARKANSAS FEDERAL ACCOUNT

Attached please find a copy ofthe final audit report and related documents on the

Democratic Party of Arkansas Federal Account which was approved by the Commission

on April 20, 2000.

Infonnational copies ofthe report have been received by all parties involved and

the report may be released to the public on May 9,2000.

Attachment as stated

cc: Office of General Counsel

Office ofPublic Disclosure

Reports Analysis Division

FEC Library

Infonnation Division
REPORT OF THE AUDIT DIVISION

ON THE

DEMOCRATIC PARTY OF ARKANSAS

FEDERAL ACCOUNT

Approved April 20, 2000

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
•

TABLE OF CONTENTS

DEMOCRATIC PARTY OF ARKANSAS FEDERAL ACCOUNT

PAGE

Executive Summary

Final Audit Report 3

Background 3

Findings 6

Transmittal to Committee 17

Chronology 19
A97-108

FEDERAL ELECTION COMMISSION

Washington, DC 20463

•

DEMOCRATIC PARTY OF ARKANSAS FEDERAL ACCOUNT

EXECUTIVE SUMMARY

The Democratic Party of Arkansas Federal Account (the Committee) registered

with the United States General Accounting Office as the Arkansas State Democratic

Committee on October 16, 1972. The audit was conducted pursuant to 2 U.S.C. §438(b),

which states that the Commission may conduct audits of any political committee whose

reports fail to meet the threshold level of compliance set by the Commission.

The findings ofthe audit were presented to the Committee at an exit conference

held at the completion offieldwork on February 18, 1999 and later in the interim audit

report. The Committee submitted an untimely response to the interim audit report

findings and, as a result, it was not considered in preparation ofthis audit report.

The following is an overview ofthe findings contained in the audit report.

Receipt ofContributions from Individuals in Excess ofthe Limitation - 2 U.S.C.

§441a{a)(l)(C), 11 CFR §103.3(b)(3) and (4). The Audit staffidentified contributions

from 2 individuals which were in excess ofthe $5,000 contribution limitation by $25,000.

The Committee transferred $20,000 in December 1996 and $5,000 in January 1997 to its

main non-federal account relative to these contributions. The Audit staff notes that both

ofthese transfers were made after the sixty days allowed by 11 CFR 103.3(b)(3) and that

the transfers were made subsequent to the Committee receiving "Request for Additional

Information" notices from the Commission's Reports Analysis Division questioning

whether these were excessive contributions.

Receipt ofApparent Prohibited Contributions - 2 U.S.C. §441b(a), 11 CFR

§103.3(b)(2) and (4). In 1996, the Committee disclosed a $1,000 contribution from

Georgia Pacific and a $5,000 contribution from Southwestern Bell. In 1997, the

Committee filed an amendment noting that these two contributions had been deposited

into the wrong account and that they were subsequently transferred to a non-federal

account. The Audit staff verified that a $6,000 transfer was made to the Committee's

main non-federal account, apparently to move these two contributions out ofthe federal

account.

Recordkeeping for Disbursements -2 U.S.C. §432(c)(5), 11 CFR

§104.3(b)(4)(i)(A). The Audit staff conducted a sample review ofthe Committee's

disbursements and determined that the Committee did not satisfy the minimum

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recordkeeping requirements for a material percentage ofthe items tested. The exceptions

noted involved: (I) not maintaining receipted bills, invoices and/or canceled checks; (2)

missing or incomplete addresses; and, (3) inadequate descriptions of why certain

disbursements were made. The Committee has not provided any further documentation.

Disclosure of OccupationlName of Employer -2 U.S.C. §434(b)(3)(A), 2 U.S.C.

§43I(l3)(A),2 U.S.C. §432(i) I I CFR §104.7(b). The audit identified a material number

of errors regarding the Committee's disclosure of contributor's occupation/name of

employer. This infonnation was not maintained in the Committee's records and the

Committee was not able to demonstrate that it had exercised best efforts to obtain,

maintain, and submit this infonnation. The Committee has not provided any further

documentation on this matter.

Misstatement of Financial Activity - 2 U.S.C. §434(b)(I),(2) and (4).

Disclosure reports filed for the period January 1, 1995 through December 31, 1995

contained material misstatements. For this period, reported receipts were understated by

$165,960 while disbursements were understated by $165,676. As a result ofidentified

reporting discrepancies, the cash figure at December 31, 1995 was understated by $656.

Subsequent to the forwarding ofthis report to the Commission, the Committee filed an

amended report which materially corrected these misstatements. 1

Joint Federal and Non-Federal Activities-II CFR §104.10(b), II CFR

§104.14(b), II CFR §I06.5(a), II CFR §I06.5(f), II CFR §106.5(g). The Committee

incorrectly used its Schedule H-I (Method of Allocation for Shared Federal and NonFederal Administrative Expenses and Generic Voter Drive Costs) ratio to allocate

expenditures related to each ofthe eight events listed on its Schedule H-2 (Allocation

Ratios). The Audit staff was unable to verify the correctness ofthe Committee's

disclosure, on Schedules H-3 (Transfers from Non-Federal Accounts), of91 transfers

from its non-federal to its federal accounts, totaling $1,832,426, due to a lack ofrecords.

Nine ofthese transfers, totaling $31,247, were not located on the Committee's bank

documentation. Ten additional transfers from its non-federal to its federal accounts,

totaling $99,203, were not reported by the Committee.

On its Schedules H-4 (Joint Federal/Non-Federal Activity), the Committee

applied the ratio derived on Schedule H-I relative to administrative/voter drive costs to

all shared expenses and categorized all expenses as "Administration." Ratios were not

developed for other categories of expenditures, such as those related to fundraising or

direct support of candidates. The Audit staff analyzed the available records and

detennined that the Committee's non-federal accounts apparently over-funded the federal

accounts by $11,046. On April 17, 2000, subsequent to the forwarding ofthis report to

the Commission, the Committee provided a photocopy of a check which indicated that a

reimbursement from a federal account to a non-federal account had been made as

requested in the interim audit report.

I The Committee's response to the interim audit report was due on April 4, 2000; on April 17, 2000 an

amended report was filed.

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FEDERAL ElECTION COMMISSION

WASHINGTON. 0 C. 204(,J

REPORT OF THE AUDITDIVISION ON THE

DEMOCRATIC PARTY OFARKANSAS

FEDERAL ACCOUNT

A97-108

This report is based on an audit ofthe Democratic Party of Arkansas

Federal Account (the Committee), undertaken by the Audit Division ofthe Federal

Election Commission (the Commission) in accordance with the provisions ofthe Federal

Election Campaign Act of 1971, as amended (the Act). The audit was conducted

pursuant to Section 438(b) ofTitle 2 ofthe United States Code which states, in part, that

the Commission may conduct audits and field investigations of any political committee

required to file a report under section 434 ofthis title. Prior to conducting any audit

under this subsection, the Commission shall perform an internal review ofreports filed by

selected committees to determine ifthe reports filed by a particular committee meet the

threshold requirements for substantial compliance with the Act.

I. BACKGROUND

A. AUDIT AUTHORITY

B. AUDIT COVERAGE

The audit covered the period from January 1, 1995 through December 31,

1996. During this period, the Committee reported a beginning cash balance of$8,308;

total receipts of $3,354,124; total disbursements of$3,340,240; and a closing cash

balance of $22,192.'

I All figures in this report have been rounded to the nearest dollar.

Page 3 of 20 Approved 04/20/00
2

C. COMMITTEE ORGANIZATION

The Committee registered with the United States General Accounting

Office as the Arkansas State Democratic Committee on October 16, 1972. The

Committee maintains its headquarters in Little Rock, Arkansas. The Committee had two

Treasurers during the period covered by the audit. Ms. Dawne Benafield Vandiver from

January 1, 1995 through April 2, 1995. Mr. Jim Pledger was elected Treasurer on April

2,1995 and remained in office for the remainder of the audit period. The current

Treasurer is Mr. Ron Oliver.

To manage its federal financial activity, the Committee maintained seven

federal bank accounts. The Committee's receipts were composed of contributions from

individuals, political committees, transfers from party committees, refunds/rebates, loans,

and transfers from its own non-federal accounts. The Committee maintained seven nonfederal bank accounts during the period covered by the alldit. '

D. AUDIT SCOI'E AND PROCEDURES

The audit included such tests as verification of total reported receipts and

disbursements; the review of the required supporting documentation; and such other audit

procedures as deemed necessary under the circumstances. The general categories tested

as part of audit procedures are detailed below.

There were several categories covered by this audit in which the scope of

testing was limited due to a lack ofsufficient documentation. The Audit staff was unable

to perform the substantive testing normally undertaken when reviewing the following:

(1) disbursements (see Finding II.C.); (2) debts and obligations owed by the Committee;

(3) allocation ofshared expenses (see Finding rLF.3.); and, (4) expenses associated with

transfers [TOm the non-federal accounts to the federal accounts (see Finding II.F.2.).

The current Committee officials stated that it was difficult for them to

locate the missing documentation because they were not associated with the Committee

during the period covered by the audit.

On July 6,1999, the Commission approved subpoenas to the Committee's

banks and major media vendors to produce documentation which would enable the Audit

staffto complete its testing. Several responses to the subpoenas were received between

July 29, 1999 and November 17, 1999. This documentation, which was materially

complete, was considered in preparing this report.

2 Although the Committee maintained seven federal and seven non-federal accounts, the Audit staff refers

to the "main federal account" and the "main non-federal account" throughout this report. These were the

accounts with the majority of activity.

Page 4 of 20 Approved 04/20/00
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The audit included testing ofthe following general categories:

1. The receipt of contributions or loans in excess ofthe statutory limitations

(see Finding B.A.);

2. the receipt of contributions from prohibited sources, such as those from

corporations or labor organizations (see Finding II.B.);

3.

4.

proper disclosure of contributions from individuals, political committees

and other entities, to include the itemization of contributions when

required, as well as, the completeness and accuracy ofthe information

disclosed (see Finding II.D.);

proper disclosure of disbursements including the itemization of

disbursements when required, as well as, the completeness and accuracy of

the infonnation disclosed (see Finding ILF.);

5. proper disclosure of debts and obligations;

6. the accuracy oftotal reported receipts, disbursements and cash balances as

compared to bank records (see Finding II.E.);

7. adequate recordkeeping for transactions (see Finding II.C.);

8. proper disclosure ofthe allocable expenses (See Finding II.F.);

9. other audit procedures that were deemed necessary in the situation.

Unless specifically discussed below, no material non-compliance was detected. It

should be noted that the Commission may pursue any ofthe matters discussed in this

report in an enforcement action.

In the Audit Report on Clinton/Gore '96 Primary Committee, Inc. (the

Primary Committee), a media program sponsored by the Democratic National Committee

(ONC) was discussed. The program was used to air a number oftelevision commercials

between August, 1995 and August, 1996 that featured President Clinton, or President

Clinton and Senator Dole. The Primary Committee Audit Report placed the cost of this

program at $46,580,358. It was also explained that DNC funds were routed through the

state party committees which in turn effected payment to the media vendors. The DNC

would have been required to use 65% federal funds and 35% non-federal funds to pay for

the program. These state party committees involved in effecting payment, on average

operated under more favorable FederallNon-Federal allocation ratios than the DNC.

Page 5 of 20 Approved 04/20/00
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The Democratic Party of Arkansas Federal Account was one of 35 state

party committees involved with this DNC media program, and paid out $1,487,021 to the

media vendors which placed the television and radio commercials in connection with this

program.

II. AUDIT FINDINGS AND RECOMMENDATIONS

A. RECEIPT OF CONTRIBUTIONS FROM INDIVIDUALS IN EXCESS OF THE

LIMITATION

Section 441a(a)(1)(C) ofTitle 2 ofthe United States Code states, in

relevant part, that no person shall make contributions to any other political committee in

any calendar year which, in the aggregate, exceed $5,000.

Sections 103.3(b)(3) and (4) ofTitle II ofthe Code of Federal

Regulations states, in part, that contributions which on their face exceed the contribution

limitation set forth in 11 CFR 110.1 or 110.2 shall be returned to the contributor. Ifany

such contribution is dcpositcd, the trcasurcr may requcst redesignation or rcatlriblltion of

the contribution by the contributor. If a redesignation or reallribution is not obtained, the

treasurer shall, within sixty days ofthe treasurer's receipt ofthe contribution, refund the

contribution to the contributor. Further, any contribution which appears to be illegal and

which is deposited into a campaign depository shall not be used for any disbursements by

the political committee until the contribution has been detern1ined to be legal. The

political committee must either establish a separate account in a campaign L1epository for

such contributions or maintain sufficient funds to make all such refunds.

During our review ofreceipts, the Audit staff identified two contributions

from individuals that appeared to exceed the $5,000 contribution limitation. In 1995 the

Committee deposited, into one ofits federal accounts, $25,000 in contributions from an

individual ($20,000 on October 6, 1995 and $5,000 on November 30, 1995). The

Committee transferred $20,000 to its main non-federal account on December 23, 1996

relative to this individual.

In 1996, the Committee deposited into its federal accounts $10,000 in

contributions from an individual ($5,000 on July 15, 1996 and $5,000 on October 3,

1996). The Committee transferred $5,000 to its main non-federal account on January 23,

1997 relative to this individual.

The Audit staff notes that both ofthese transfers were made after the sixty

days allowed by 11 CFR I03.3(b)(3) and that the transfers were made SUbsequent to the

Committee receiving "Requests for Additional Information" notices from the

Commission's Reports Analysis Division questioning whether these were excessive

contributions.

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No separate account was maintained by the Committee relative to

questionable contributions and the Committee did not consistently maintain a sufficient

balance to cover the refund/transfer the amounts deposited in excess ofthe limitation (see

II CFR I03.3(b)(4)). The Audit staff also considered the apparent prohibited

contributions received by the Committee in determining ifthe Committee maintained a

sufficient balance to refund the apparent excessive/prohibited contributions (see Finding

II.B.).

At the exit conference, the Audit staff presented this matter to the

Committee. The Committee officials did not provide any relevant information on this

matter.

In the interim audit report, the Audit staffrecommended that the

Committee present evidence that the contributions in question did not represent excessive

contributions and stated that the Committee could provide any additional information or

explanation relative to this matter. The Committee did not respond to the interim audit

report.

B. RECEIPT OF APPARENT PROHIBITED CONTRIBUTIONS

Section 44Ib(a) ofTitle 2 ofthe United States Code states, in relevant

part, that it is unlawful for any corporation organized by authority of any law of

Congress, to make a contribution in connection with any election to any political office,

or for any corporation or labor organization, to make a contribution in connection with

any election to federal office and that it is unlawftJ1 for any candidate, political committee

or any person knowingly to accept or receive any contribution prohibited by this section.

Sections 103.3(b)(2) and (4) ofTitle 11 ofthe Code of Federal

Regulations state, in part, that the treasurer shall refund any contribution determined to be

illegal to the contributor within thirty days ofthe date on which the illegality is

discovered. Further, any contribution which appears to be illegal and which is deposited

into a campaign depository shall not be used for any disbursements by the political

committee until the contribution has been determined to be legal. The political

committee must either establish a separate account in a campaign depository for such

contributions or maintain sufficient funds to make all such refunds.

The Committee disclosed on its Quarterly Report, which covered the

period January 1, 1996 through March 31, 1996, the following entries on its Schedules A

(Itemized Receipts): (1) a $1,000 contribution from "Georgia Pacific," and (2) a $5,000

contribution from "Southwestern Bell Co." Febmary 14, 1996 was the date disclosed for

both contributions. In January of 1997, the Committee filed amended Schedules A which

noted that these two contributions were "Deposited in wrong account" and that the

contributions were "transferred to Non-Federal 1-23-97 see Deposit Slip attached."

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The Commission issued a subpoena to NationsBank requesting all

documentation related to these two contributions. The bank provided photocopies ofthe

two contribution checks, along with the relevant deposit slips. The payee relative to both

checks was the "Arkansas Democratic Party Non-Federal."

The Audit staff verified that the Committee transferred $6,000 to its main

non-federal account on January 23, 1997; this $6,000 apparently represented the $1,000

and $5,000 contributions noted above. No separate account was maintained by the

Committee relative to questionable contributions and the Committee did not consistently

maintain a sufficient balance to cover the refund of these two contributions during the

period in question (see 11 CFR 103.3(b)(4» (see Finding Il.A.). The Audit staff notes

that both ofthese transfers were made after the thirty days allowed by 11 CFR

103.3(b)(I).

At the exit conference, the Audit staff presented this matter to the

Committee. The Committee officials did not provide any relevant infonnation on this

matter.

In the interim audit report, the Audit staff recommended that the

Committee present evidence that the contributions in question were not from prohibited

sources and stated that the Committee could provide any additional infonnation or

explanation relative to this matter. The Committee did not respond to the interim audit

report.

C. RECORDKEEPING FOR DISBURSEMENTS

Section 432(c)(5) ofTitle 2 of the United States Code states, in part, that

the treasurer of a political committee shall keep an account ofthe name and address of

every person to whom any disbursement is made, the date, amount, and purpose of the

disbursement, including a receipt, invoice, or canceled check for each disbursement in

excess of$200.

Section 104.3(b)(4)(i)(A) of Title 11 of the Code of Federal Regulations

states, in relevant part, that purpose means a briefstatement or description of why the

disbursement was made.

The Audit staff conducted a sample review of the Committee's

disbursements to determine ifrecords were maintained as required. The Audit staff

determined that the Committee did not satisfy the minimum recordkeeping requirements

for a material percentage ofthe items tested. The exceptions noted involved: (1) not

maintaining receipted bills, invoices and/or canceled checks; (2) missing or incomplete

addresses; and, (3) inadequate descriptions ofwhy celiain disbursements were made. As

part ofthe inventory ofthe records, the Audit staff provided a listing of the missing

canceled checks to the Committee.

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At the exit conference, the Audit staff presented this matter to the

Committee. Committee officials stated that the Committee's banks had been contacted

and requested to provide copies ofthe missing canceled checks; none of which have been

provided to date. Copies ofthe requests to the Committee's banks were provided to the

Audit staff.

In the interim audit report, the Audit staffrecommended that the

Committee obtain and submit the missing disbursement information and/or provide an

explanation ofits efforts to obtain this information. The Audit stafffurther recommended

that the Committee implement procedures to insure compliance with the Act's

recordkeeping requirements and provide a written description ofthese procedures to the

Audit staff. The Committee did not respond to the interim audit report.

D. DISCLOSURE OF OCCUPATIONINAME OF EMPLOYER

Section 434(b)(3)(A) ofTitle 2 ofthe United States Code requires, in part,

a political committee to report the identification of each person who makes a contribution

to the committee in an aggregate amount or value in excess of$200 per calendar year,

together with the date and amount of any such contribution.

Section 43 1(13)(A) ofTitle 2 ofthe United States Code defines the tenu

"identification" to be, in the case of any individual, the name, the mailing address, and

the occupation ofsuch individual, as well as the name ofhis or her employer.

Section 432(i) ofTitle 2 ofthe United States Code states, in part, that

when the treasurer of a political committee shows that best efforts have been used to

obtain, maintain, and submit the information required by this Act for the political

committee, any report or any records ofsuch committee shall be considered in

compliance with this Act.

Section I04.7(b) ofTitle 11 ofthe Code ofFederal Regulations states, in

relevant part, that the treasurer will only be deemed to have exercised best efforts to

obtain, maintain and report the required information iffor each contribution received

aggregating in excess of $200 per calendar year which lacks required contributor

information, the treasurer makes at least one effort after the receipt ofthe contribution to

obtain the missing information. Such effort shall consist of either a written request sent

to the contributor or an oral request to the contributor documented in writing. The

written or oral request must be made no later than thirty days after receipt ofthe

contribution. The written or oral request shall not include material on any other subject

or any additional solicitation, except that it may include language solely thanking the

contributor for the contribution.

The Audit staff conducted a sample review of contributions from

individuals to determine ifthe required information, relative to receipts required to be

itemized, was adequately disclosed. Our testing revealed that the Committee did not

Page 9 of 20 Approved 04/20100
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meet the minimum requirements for reporting occupation and/or name of employer in

74% ofthe items tested. The majority of these errors resulted from the Committee not

disclosing the contributor's name of employer. This information was not maintained in

the Committee's files and the Committee was not able to demonstrate that it had

exercised best efforts to obtain, maintain and submit the missing infonnation.

Although requested, the Committee did not provide any documentation,

such as copies ofletters, to demonstrate that it had made a follow-up request to those

contributors for which occupation and/or name of employer was incomplete. The Audit

staff located one type ofsolicitation device in the Committee's receipt records. This

device requested the required information, but the Audit staff could not determine to

whom it was sent.

At the exit conference, the Audit staff presented this matter to the

Committee. The Committee officials did not provide any relevant infomlation on this

matter.

In the interim audit repOli, the Audit staffrecommended that the

Committee take the following action:

• Provide solicitation materials and "one effort after receipt" materials which

demonstrate that best efforts have been used to obtain, maintain, and submit

the required disclosure information; or

• Absent such a demonstration, make an effort to contact those individuals

whose contributions aggregate in excess of $200 in a calendar year for which

required information is missing or incomplete, in accordance with 11 CFR

104.7; and

• Provide documentation ofsuch contacts, such as copies ofletters to the

contributors andJor phone logs of oral requests; and

• File amended Schedules A (Itemized Receipts) to disclose any information

obtained from those contacts.

The Committee did not respond to the interim audit report.

E. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(I), (2), and (4) ofTitle 2 ofthe United States Code

require a political committee to disclose the amount of cash on hand at the beginning of

each reporting period and the total amount of all receipts and disbursements for each

reporting period and the calendar year.

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The Audit staffreconciled the Committee's reported financial activity to

its bank activity for the period January I, 1995 through December 31, 1996 and

determined that the Committee's reported 1995 activity was materially understated.

The Committee understated reported receipts by $165,960. This net

understatement was primarily due to the following: eleven wire transfers from the

Democratic National Committee (DNC), totaling $77,566, were not reported; nine wire

transfers from the Committee's main non-federal account, totaling $93,221, were not

reported; and, two transfers-in, totaling $10,895, that were reported on Schedules H-3

(Transfers from Non-Federal Accounts) as coming from the Committee's main nonfederal account, but there were no cOiTesponding credits indicated on the Committee's

bank statements.

It should be noted that the eleven wire transfers from the DNC, totaling

$77,566, and the nine transfers from the Committee's main non-federal account, totaling

$93,221, were forwarded to Squire Knapp Ochs (SKO), a media vendor, shortly after

receipt by the Committee (see Background Section LD.).

The Committee understated reported disbursements by $165,676. This

understatement was primarily due the Committee not reporting eleven wire transfers to

SKO, totaling $165,786.

It should be noted that the $165,786 in wire transfers to SKO were

apparently related to the earlier transfers-in from the DNC and the Committee's main

non-federal account discussed above.

The reported beginning and ending cash on hand balances were

understated by $341 and $656 respectively.

At the exit conference, the Audit staff presented this matter to the

Committee. The Committee officials did not provide any relevant infonnation on this

matter.

In the interim audit report, the Audit staffrecommended that the

Committee file amendments to the applicable 1995 reports to correct the misstatements

noted above. These amendments were to include the Summary and Detailed Summary

Pages for each applicable reporting period in 1995, as well as revised Schedules A

(Itemized Receipts), Schedules B (Itemized Disbursements), and Schedules H-3

(Transfers From Non-Federal Accounts). The Committee did not respond to the interim

audit report.

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F. JOINT FEDERAL AND NON-FEDERAL ACTIVITIES

1. DISCLOSURE OF ALLOCATION RATIOS (SCHEDULE H-2)

Section 104.1O(b)(2) ofTitle II of the Code of Federal

Regulations states, in part, that in each report disclosing disbursements for the direct costs

of a fundraising program or an exempt activity, the committee shall assign a unique

identifying title or code to each such program or activity and shall state the allocation

ratio calculated for the program or activity. The Committee shall explain the manner in

which the ratio was derived.

Section 106.5(a)(2)(ii) ofTitle 11 ofthe Code of Federal

Regulations states, in part, that committees that make disbursements in connection with

federal and non-federal elections shall allocate expenses according to this section for the

direct costs of a fundraising program or event including disbursements for solicitation of

funds and for planning and administration of actual fundraising events, where federal and

non-federal funds are collected by one committee through such program or event.

Section I06.5(f) (1) and (2) ofTitle 11 ofthe Code of Federal

Regulations states, in part, that iffederal and non-federal funds are collected by one

committee through ajoint activity, that committee shall allocate its direct costs of

fundraising according to the funds received method. Under this method, the committee

shall allocate its fundraising costs based on the ratio of funds received into its federal

account to its total receipts from each fundraising program or event. This ratio shall be

estimated prior to each such program or event based upon the Committee's reasonable

prediction ofits federal and non-federal revenue from that program or event, and no later

than the date 60 days after each fundraising program or event from which both federal

and non-federal funds are collected, the committee shall adjust the allocation ratio for

that program or event to reflect the actual ratio offunds received.

Section 104.14(b) ofTitle 11 ofthe Code ofFederal Regulations

states, in part, that each political committee required to file any report or statement shall

maintain all records relevant to such reports or statements... [and such records] shaH

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 Audit staffreviewed the Committee's Schedules H-2

(Allocation Ratios) which disclosed eight separate events: three were noted as fundraising

activities; two were noted as exempt activities; and, three were noted as direct candidate

support activities. No documentation was available regarding the calculation of the

allocation ratios relative to these eight events.

The Audit staff detennined that the Committee repOlied the same

allocation ratio on its Schedule H-l (Method of Allocation for Shared Federal and NonFederal Administrative Expenses and Generic Voter Drive Costs) as it reported on its

Page 12 of 20 Approved 04/20/00
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Schedule B-2 relative to each ofthe eight events reported on its H-2. The Audit staff

determined that the Schedule B-1 ratio was calculated correctly, but it appeared that the

Committee incon'ectly used this same ratio to allocate expenditures between its federal

and non-federal accounts relative to the eight events reported on Schedule B-2.

2. DISCLOSURE OF TRANSFERS FROM NON-FEDERAL ACCOUNTS

(SCHEDULE H-3)

Section 104.10(b)(3) ofTitle II ofthe Code of Federal

Regulations states, in part, that a political committee that pays allocable expenses in

accordance with 11 CFR 106.5(g) shall report each transfer offunds from its non-federal

account to its federal account for the purpose of paying such expenses and that in the

report covering the period in which the transfer occurred, the committee shall explain in a

memo entry the allocable expenses to which the transfer relates and the date on which the

transfer was made.

Section I06.5(g)(2)(ii) ofTitle II of the Code of Federal

Regulations states, in part, that funds transferred from a committee's non-federal account

to its federal account are subject to the following requirements: (A) For each such

transfer, the committee must itemize in its reports the allocable activities for which the

transferred funds are intended to pay as required by II CFR 104.1 0(b)(3); and (B) Such

funds may not be transferred more than 10 days before or more than 60 days after the

payments for which they are designated are made.

The Committee disclosed 91 transfers from its non-federal

accounts to its federal accounts, totaling $1,832,426, during the period covered by the

audit. The Committee reported these transfers on Schedules B-3 (Transfers from NonFederal Accounts) and characterized the expenses relative to these transfers as

AdministrativeNoter Drive. The Committee's records relative to these transfers did not

allow the Audit staff to identify the category of allocable expenses associated with each

transfer. As a result, the Audit staff was unable to verify that the amounts transferred for

the allocable activity were calculated correctly by the Committee. In addition, we were

unable to test the timing oftransfers to determine ifthey were made no more than 10 days

before or 60 days after the payments were made to the vendor.

In addition, the Audit staff determined that the Committee did not

report 10 transfers, totaling $99,203, from the Committee's non-federal to its federal

accounts. The Committee also reported nine transfers on its Schedules B-3, totaling

$31,247, that the Audit staff was unable to verify on the Committee's bank

documentation. The Audit staff concluded that these transfers should not have been

reported on Schedules B-3.

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12

3. DISCLOSURE OF DISBURSEMENTS FOR SHARED ACTIVITY

(SCHEDULE H-4)

Section l04.1O(b)(4) ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that a political committee that pays allocable expenses in

accordance with 11 CFR 106.5(g) shall also report each disbursement from its federal

account in payment for ajoint federal and non-federal expense or activity. In the report

covering the period in which the disbursement occurred, the committee shall state the full

name and address of each person to whom the disbursement is made, and the date,

amount and purpose of each disbursement. Ifthe disbursement includes payment for the

allocable costs ofmore than one activity, the committee shall itemize the disbursements

showing the amounts designated for payment of administrative expenses and generic

voter drives, and for each fundraising program or exempt activity as described in 11 CFR

I06.5(a)(2). The Committee shall also report the total amount expended by the

committee that year, to date, for each category of activity.

Section I06.5(g)(3) ofTitle II of the Code of Federal Regulations

provides that a political committee that transfers funds between accounts and pays

allocable expenses according to this section shaH report each such transfer and

disbursement pursuant to II CFR 104.1 O(b).

The Committee maintained separate federal and non-federal

accounts and did not utilize a separate allocation account. During the period covered by

the audit, the Committee paid shared expenses from its federal accounts as required.

Shared expenses were itemized on Schedules H-4 (Joint Federal/Non-Federal Activity

Schedule), however, the federallnon-federal shares disclosed for all shared expenditures

were based on the ratio derived on Schedule H-I relative to administrative/voter drive

costs (43% Federal/ 57% Non-Federal). Ratios were not developed for other categories

of expenditures, such as those related to fundraising or direct support of candidates (see

Finding II.F.1. above). Furthermore, the Committee categorized all ofits Schedule H-4

expenditures during the audit period as "Administration."

4. APPARENT OVER-FUNDING BY THE NON-FEDERAL ACCOUNT

Section 106.5(g)(2)(iii) ofTitle 11 ofthe Code ofFederal

Regulations states, in part, that any portion of a transfer from a committee's non-federal

account to its federal account that does not meet the requirements of paragraph (g)(2)(ii)

of this section shall be presumed to be a loan or contribution from the non-federal

account to a federal account, in violation ofthe Act.

The Audit staffs review of disbursements was limited due to a

lack ofreceipted bills, invoices and/or canceled checks being maintained by the

Committee (see Background Section I.D.). Howevcr, the Audit staffreviewed the

Committee's computerized listing of disbursement transactions in an attempt to

determine whether the Committee over-funded its federal accounts from its non-federal

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13

accounts. The data contained the check amount, payee, and purpose relative to each

disbursement made from the Committee's federal accounts during the period covered by

the audit.

Using this computerized listing, the Audit staff categorized the

Committee's disbursements by purpose and payee in an attempt to determine the correct

ratio offederal to non-federal funds which should have been applied to each Committee

disbursement. The disbursements were divided into three major categories: I) 100%

federal, 2) 100% non-federal, and 3) allocable disbursements. The Audit staffsurmised

that the Committee made disbursements for federal activity totaling $217,570,

disbursements for non-federal activity totaling $40,000, and disbursements for shared

activity totaling $3,249,766. Even assuming that all $3,249,766 in apparent shared

expenses were correctly allocated using the administrative/voter drive ratio (see Finding

rLF.3.), we concluded that the Committee could have transferred no more than

$1,889,336 from its non-federal accounts to pay for the shared federal/non-federal

activity mentioned above. The Committee transferred $1,900,382 from its non-federal

accounts. The difference of $11,046 ($1,900,382 - $1,889,336) represents an apparent

over-funding by the Committee's non-federal accounts. Should additional information

become available, the amount of over-funding would likely increase.

In the interim audit report, the Audit staffrecommended that the

Committee take the following action:

• Provide documentation related to all joint federal/non-federal fundraising

activities occurring during the period covered by the audit, along with a

breakdown by deposit identifying the joint activity responsible for the

contributions; and file amended Schedules H-2 with revised federal/nonfederal allocation ratios, if different from the original filings (see Finding

II.F.!.); and

• Provide documentation related to the all transfers from the nOll-federal

accounts to the federal accounts during the period covered by the audit, which

suppolis the breakdown of allocable expenses associated with the transfers, as

well as the Committee's calculations relative to amounts transferred; and, file

amended Schedules H-3 with revised breakdowns ofthe allocable expenses

relative to these transfers, if different from the original filings (see Finding

ILF.2.); and

• Provide documentation relative to all shared expenses which would enable the

Audit staff to detemline the correct expense classifications relative to these

payments and file amended Schedules H-4, if different from the original

filings (see Finding ILF.3.): and

• Demonstrate that the non-federal account did not over-fund its portion of

shared expenses, or refund $11,046 to the non-federal account and provide

documentation in support ofthe refund (see Finding II.FA.).

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14

The Audit stafffurther recommended that the Committee implement

procedures to insure compliance with the Act's requirements related to the allocation of

expenses between federal and non-federal activities and provide a written description of

these procedures to the Audit staff. The Committee did not respond to the interim audit

report.

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FEDERAL ELECTION COMMISSION

WASHINCTON, D.C. 20463

May 2, 2000

Mr. Ron Oliver

Democratic Party ofArkansas Federal Account

1300 West Capitol Avenue

Little Rock, AR 72201

Dear Mr. Oliver:

Attached please find the Report ofthe Audit Division on the Democratic Party of

Arkansas Federal Account. The Commission approved the report on April 20, 2000.

The Commission approved Final Audit Report will be placed on the public record

on May 9, 2000. Should you have any questions regarding the public release ofthe report,

please contact the Commission's Press Office at (202) 694-1220. Any questions you have

related to matters covered during the audit or in the report should be directed to Terry

O'Brien or Marty Favin ofthe Audit Division at (202) 694-1200 or toll free at (800)

424-9530.

Sincerely,

Attachment as stated

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CHRONOLOGY

DEMOCRATIC PARTY OF ARKANSAS FEDERAL ACCOUNT

Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

11/0911998 - 0211811999

03/0212000

No Response'

04/20/2000

I The Committee's response to the interim audit report was due on April 4, 2000; partial responses were

received on April 17, 2000 and April 18, 2000. TIle final audit report was forwarded to the

Commissioners on April 13, 2000. The materials included in the untimely responses were not

incorporated into the final audit report.

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,.

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