Part II
Overview of Committee

Committee Organization

Important Dates Tennessee Republican Party Federal
Election Account

e Date of Registration July 14, 1976

e Audit Coverage January 1, 2001 - December 31, 2002

Headquarters Nashville, Tennessee

Bank Information

e __Bank Depositories 2

e Bank Accounts 8 Federal and 3 Nonfederal accounts
Treasurer

e Treasurer When Audit Was Conducted Joe R. Arnold

® Treasurer During Period Covered by Audit | Joe R. Arnold

Management Information

e Attended Commission Campaign Finance | No

Seminar
¢ Used Commonly Available Campaign Yes

Management Software Package
¢ Who Handled Accounting and A paid consultant and paid Committee

Recordkeeping Tasks staff.

Overview of Financial Activity
(Audited Amounts)

Cash on hand @ January 1, 2001 $ 102,294
Receipts
o Contributions from individuals 2,915,450
o Transfers from affiliated/other party committees 1,014,314
o Transfers from nonfederal account for joint activity 824,619
o All other receipts 450,400
Total Receipts $ 5,204,783
Disbursements
o Operating disbursements 4,900,340
o All other disbursements 255,446
Total Disbursements $ 5,155,786
Cash on hand @ December 31, 2002 $ 151,291



| Finding 2. Receipt of Contributions that Exceed Limits

Summary

TRP received contributions from 20 individuals, three Political Action Committees (PACs) and
one authorized committee that exceeded contribution limits by $300,850, $8,500, and $1,000,
respectively. The Audit staff recommended that TRP submit documentation to show that the
contributions were not excessive or refund the excessive portion to the contributors. In response,
TRP provided copies of refund checks (front only) and correspondence to support the refunds.

Legal Standard

A. Party Committee Limits. A party committee may not receive more than a total of $5,000
per year from any one contributor. 2 U.S.C. §441a(a)(1)(C) and 11 CFR §§110.1(a) and (d)
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:
1. Return the questionable check to the donor; or
2. Deposit the check into its federal account and:
+ Keep enough money in the account to cover all potential refunds;
+ Keep a written record explaining why the contribution may be illegal;
* Include this explanation on Schedule A if the contribution has to be itemized before
its legality is established;
+ Seek a reattribution of the excessive portion, following the instructions provided in
Commission regulations (see below for explanation of reattribution); and
* If the committee does not receive a proper reattribution 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. Joint Contributions. Any contribution made by more than one person (except for a
contribution made by a partnership) must include the signature of each contributor on the
check or in a separate writing. A joint contribution is attributed equally to each donor unless
a statement indicates that the funds should be divided differently. 11 CFR §110.1(k)(1) and

(2).

D. Reattribution of Excessive Contributions. Commission regulations permit committees to
ask donors of excessive contributions whether they had intended their contribution to be a
joint contribution from more than one person and whether they would like to reattribute the
excess amount to the other contributor. The committee must inform the contributor that:

1. The reattribution must be signed by both contributors;

2. The reattribution must be received by the committee within 60 days after the committee
received the original contribution; and

3. The contributor may instead request a refund of the excessive amount. 11 CFR
§110.1(k)(3).

Within 60 days after receiving the excessive contribution, the committee must either receive
the proper reattribution or refund the excessive portion to the donor. 11 CFR §§103.3(b)(3)


Part IV
Findings and Recommendations

| Finding 1. Misstatement of Financial Activity

Summary
TRP misstated receipts, disbursements and cash-on-hand balances for calendar years 2001 and

2002. In response to a recommendation in the interim audit report, TRP filed amended reports
that corrected the misstatement of reported activity. (For more detail, see p. 4)

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

e Certain transactions that require itemization on Schedule A (Itemized Receipts) or Schedule

B (Itemized Disbursements).
2 US.C. §§434(b)(1), (2), and(4).

Facts and Analysis

The Audit staff reconciled reported activity to bank records for calendar years 2001 and 2002.
The following charts outline the discrepancies for the beginning cash balances, receipts,
disbursements, and the ending cash balances. The succeeding paragraphs explain why the
differences occurred, if known.

2001 Committee Activity
Reported Bank Records Discrepancy
Opening Cash Balance @ $94,098 $102,294 $8,196
January 1, 2001 Understated
Receipts $1,307,283 $1,311,148 $3,865
Understated
Disbursements $1,210,909 $1,246,313 $35,404
Understated
Ending Cash Balance @ $190,472 $167,129 $23,343
December 31, 2001 Overstated



Part III
Summaries

Findings and Recommendations

Finding 1. Misstatement of Financial Activity

TRP misstated receipts, disbursements and cash-on-hand balances for calendar years 2001 and
2002. In response to a recommendation in the interim audit report, TRP filed amended reports
that corrected the misstatement of reported activity. (For more detail, see p. 4)

Finding 2. Receipt of Contributions that Exceed Limits

TRP received contributions from 20 individuals, three Political Action Committees (PACs) and
one authorized committee that exceeded contribution limits by $300,850, $8,500, and $1,000,
respectively. The Audit staff recommended that TRP submit documentation to show that the
contributions were not excessive or refund the excessive portion to the contributors. In response,
TRP provided copies of refund checks (front only) and correspondence to support the refunds.
(For more detail, see p. 7)

Finding 3. Receipt of Prohibited Contribution

TRP deposited a contribution of $25,000 from an apparent prohibited source into its federal
account. The Audit staff recommended that TRP document that the funds received were not
from a prohibited source, document that the funds have been transferred to a nonfederal account,
or transfer the funds from the federal account to the nonfederal account. In response, TRP
documented a transfer of $25,000 to a nonfederal account. (For more detail, see p. 10)


Opening Cash Balance - 2002

As a result of the prior year’s misstatement and an unsupported change in the cash on hand
balance for January 1, 2002, as compared to the ending cash on hand for December 31, 2001,
the beginning cash balance was understated by $3,251.

Receipts — 2002
The understatement of receipts was the net result of the following:

e Reported receipts from Schedule(s) A and H3 (Transfers From Nonfederal
Accounts) that were never credited to a federal bank account - principally

two reported transfers from a nonfederal account that never occurred - $ 220,220
¢ Unreported interest earned + 5,563
e Unreported receipts, from individuals ($391,950°) and PACs ($241,200)*

deposited into a federal account + 633,150
e Over-stated unitemized receipts - 148,059
e Unexplained difference : 276

Net understatement $ 270,158

Disbursements — 2002
The overstatement of disbursements was the net result of the following:

e Unreported bank fees +$ 6,352
e Disbursements reported on Schedule(s) B and H4 (Joint Federal/
Nonfederal Activity Schedule) that were never charged to a federal

bank account because they were voided, duplicated or never charged - 26,650
¢ Unreported disbursements — principally payroll, related payroll expenses

and other federal operating expenditures + 228,192
e¢ Unexplained difference + 5,542

Net overstatement + $ 213.436

Ending Cash Balance — 2002
The $59,973 overstatement of the closing cash on hand was the net result of the misstatements
described above.

The Audit staff discussed this finding with TRP’s representatives at an interim field conference
and during the exit conference, and presented them with copies of relevant workpapers. TRP
representatives stated that corrective amendments would be filed.

Interim Audit Report Recommendation And Committee Response

The Audit staff recommended that TRP file complete amended reports, including all supporting
schedules, by reporting period, for calendar years 2001 and 2002. In response to the interim
audit report, TRP filed amended reports that corrected the misstatement of reported activity.

> As more fully discussed in Finding 2, $300,850 of the unreported receipts are individual contributions that exceed
annual limits. TRP reported only that portion of the contribution that could be retained in the federal account.
* Neither TRP nor the Audit staff could explain this omission.


FEDERAL ELECTION COMMISSION
Washington, DC 20463

November 9, 2004

MEMORANDUM

TO: ROBERT W. BIERSACK
PRESS OFFICER
PRESS OFFICE

FROM: JOSEPH F. STOLTZ
ASSISTANT STAFF WWMECTOR
AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE AUDIT REPORT ON
TENNESSEE REPUBLICAN PARTY FEDERAL ELECTION ACCOUNT

Attached please find a copy of the audit report and related documents on Tennessee
Republican Party Federal Election Account which was approved by the Commission on
November 1, 2004.

The report may be released to the public on November 9, 2004.

Attachment as stated

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


| Finding 3. Receipt of Prohibited Contribution

Summary

TRP deposited a contribution of $25,000 from an apparent prohibited source into its federal
account. The Audit staff recommended that TRP document that the funds received were not
from a prohibited source, document that the funds have been transferred to a nonfederal account,
or transfer the funds from the federal account to the nonfederal account. In response, TRP
documented a transfer of $25,000 to a nonfederal account.

Legal Standard

A. Federal v. Nonfederal Account. The federal account may contain only those funds that are
permissible under the federal election law; the nonfederal account may contain funds that are
not permitted under the federal law (but are legal under state law), such as contributions that
exceed the limits of the federal law and contributions from prohibited sources, such as
corporations and labor organizations. 11 CFR §102.5(a)(1)(i) and (a)(3).

B. 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:
¢ Return the contribution to the contributor without depositing it; or
¢ 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
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).


and 110.1(k)(3)(ii)(B). Further, a political committee must retain written records concerning
the reattribution in order for it to be effective. 11 CFR §110.1(1)(5).

E. Revised Regulations Applied. The Commission recently adopted new regulations that
allow committees greater latitude 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.

F. Federal v. Nonfederal Account. The federal account may contain only those funds that are
permissible under the federal election law, the nonfederal account may contain funds that are
not permitted under the federal law (but are legal under state law), such as contributions that
exceed the limits of the federal law and contributions from prohibited sources, such as
corporations and labor organizations. 11 CFR §102.5(a)(1)(i) and (a)(3).

Facts and Analysis

TRP deposited individual contributor checks that exceeded the $5,000 contribution limitation
into the federal account but only reported the federal portion on the Commission’s disclosure
reports. The apparent intent of the committee and contributor was to “split” the contribution
between the federal and nonfederal bank accounts and then transfer the nonfederal portion to a
nonfederal bank account. Only three such transfers, totaling $126,000, were made. Even then,
TRP failed to make these transfers in a timely fashion, resulting in the apparent excessive
contributions. After considering the transfers noted above, the review of contributions identified
20 individuals, three PACs, and one authorized committee that exceeded the limitations by
$300,850, $8,500, and $1,000, respectively. TRP did not deposit the questionable contributions
into a separate account nor did it consistently maintain sufficient funds to refund these
contributions.> (See Finding 1, 2002 Committee Activity.)

The Audit staff discussed this finding with TRP’s representatives at an interim field conference
and during the exit conference, and presented them with copies of relevant workpapers. TRP
representatives stated that they would contact the donors and make refunds in accordance with
our recommendations.

Interim Audit Report Recommendation And Committee Response
The Audit staff recommended that TRP:
e Provide evidence demonstrating that the contributions in question are not excessive; or
© Refund $300,850 to individuals, $8,500 to PACs, and $1,000 to the authorized
committee, providing evidence of such refunds (copies of the front and back of the
negotiated refund checks); and
© If funds are not available to make the necessary refunds, disclose the refunds due on
Schedule D (Debts and Obligations) until funds become available to make the refunds.

In response to the interim audit report, TRP provided check copies (front only) and
correspondence to support the recommended refunds.

5 The Audit staff also considered the apparent prohibited contribution received by the TRP in determining if a
sufficient balance was maintained to refund the questionable contributions. (See Finding 3)


Opening Cash Balance — 2001
The beginning cash on hand was understated by $8,196; due principally to prior period
misstatements of financial activity and unreported bank depositories.

Receipts — 2001
The $3,864 understatement of receipts was unexplained.

Disbursements — 2001
The understatement of disbursements was the net result of the following:

© Unreported bank fees +$ 2,375
e¢ Unreported credit card charges + 5,514
e Reported disbursements that were not reflected in the bank

records - principally transfers to the nonfederal account - 52,987
e Unreported disbursements - generally payroll related expenses and

other federal operating expenditures + 77,656
e Unexplained difference + 2,846

Net understatement +$ 35,404

TRP staff stated that reported disbursements not reflected in the bank records ($52,987) were
intended to be transferred electronically. However, because a number of the transfer requests
were not in writing, a failure to execute the transfers occurred. As for the $77,656 in
unreported disbursements, TRP used an electronic payroll vendor and much of the
disbursement information was not captured by TRP’s accounting system.

Ending Cash Balance - 2001
The $23,343 overstatement of the closing cash on hand was the net result of the misstatements
described above.

2002 Committee Activity
Reported Bank Records Discrepancy
Opening Cash Balance“ @ $163,878 $167,129 $3,251
January 1, 2002 Understated
Receipts $3,623,477 $3,893,635 $270,158
Understated
Disbursements $3,696,037 $3,909,473 $213,436
Understated
Ending Cash Balance @ $91,318 $151,291 $59,973
December 31, 2002 Understated

? The change in the “Reported” cash on hand balance between December 31, 2001, and January 1, 2002, (a
reduction of $26,594) was not supported by TRP records.


Part I
Background

Authority for Audit

This report is based on an audit of the Tennessee Republican Party Federal Election
Account (TRP), 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 US.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 and other receipts.

The disclosure of disbursements, debts and obligations.

The disclosure of expenses allocated between federal and nonfederal accounts.
The consistency between reported figures and bank records.

The completeness of records.

Other committee operations necessary to the review.

erNawaRYN DS

Changes to the Law

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


Table of Contents

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

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

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Misstatement of Financial Activity
Finding 2. Receipt of Contributions that Exceed Limits
Finding 3. Receipt of Prohibited Contribution

Page

NN

x


Report of the Audit Division
on the Tennessee Republican

Party Federal Election Account
January 1, 2001 - December 31, 2002

Why the Audit

Was Done

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

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

' 2 U.S.C. §$438(b).

About the Committee (p. 2)

The Tennessee Republican Party Federal Election Account (TRP)
is a state party committee headquartered in Nashville, Tennessee.
For more information, see the chart on the Committee
Organization, p. 2.

Financial Activity (p. 2)
« Receipts

o Contributions from individuals $ 2,915,450
o Transfers from affiliated/other

party committees 1,014,314
o Transfers from a nonfederal

account for joint activity 824,619
o All other receipts 450,400
o Total Receipts $ 5,204,783

« Disbursements

o Operating disbursements $ 4,900,340
o All other disbursements 255,446
o Total Disbursements $ 5,155,786

Findings and Recommendations (p. 3)

© Misstatement of Financial Activity (Finding 1)

¢ Receipt of Contributions that Exceed Limits (Finding 2)
© Receipt of Prohibited Contribution (Finding 3)


10

Facts and Analysis

In reviewing the transfers from other political committees, the Audit staff noted a $25,000
contribution, deposited in May 2002, from the Republican National Committee’s “nonfederal
accounts of party committees” which was earmarked to a TRP nonfederal bank account. TRP
erroneously deposited the funds to a federal bank account. The Audit staff was unable to
determine if these funds were ultimately transferred to a nonfederal account. The TRP did not
deposit these questionable funds into a Separate account nor did it consistently maintain

sufficient funds to refund the contribution.

The Audit staff discussed this finding with TRP’s representatives at an interim field conference
and during the exit conference, and presented them with copies of relevant workpapers. TRP
representatives stated they would take corrective action.

Interim Audit Report Recommendation And Committee Response
The Audit staff recommended that TRP:
¢ Provide evidence that these funds are not from a prohibited source; or
¢ In the alternative, transfer $25,000 to a nonfederal account and provide evidence of such
a transfer in a timely manner; and,
¢ If funds are not available to make the necessary transfer, disclose the amount due on
Schedule D (Debts and Obligations) until funds become available to make the transfer.

In response to the interim audit report, TRP documented a transfer of $25,000 to a nonfederal
account.