COMPLIANCE FUND 

December 20,2011 

VIA ELECTRONIC AND CERTIFIED MAIL 

Thomas E. Hintermister 

Acting Assistant Staff Director 

Audit Division 

Federal Election Commission 

999 E Stteet, NW 

Washington, DC 20463 

Re: Preliminary Audit Report Response of the McCain Presidential Committees 

Dear Mr. Hintermister: 

McCain-Palin 2008, Inc. and McCain-Palin Compliance Fund, Inc. have endeavored to 

comply sttictiy with Commission rules. They believe that their success in doing so is 

demonsttated by the fact that the Audit Division's three-year audit of McCain-Palin 2008, 

McCain-Palin Compliance Fund, and their seven affiliated joint fimdraising committees has 

identified only two outstanding issues: (1) press reimbursement calculation methods that the 

Audit Division concedes did not result in '^e General Committee ... receiv[ing] ttavel 

reimbursements from the Press that exceeded the maximum allowed by the regulations";' and (2) 

certain 48-Hour Notices that were not fried due to an outside vendor's data-management error 

and concemed conttibutions only used for compliance purposes. 

McCain-Palin 2008 and McCain-Palin Compliance Fund discuss each of these issues, 

which were identifred in the Commission's Preliminary Audit Report ("PAR"), in the paragraphs 

below. 

L PRESS REIMBURSEMENT CALCULATION METHODS 

The Press covering Senator John McCain's participation in the 2008 presidential 

campaign ttavelled predominantiy on an aircraft chartered by the McCain Campaign through a 

conttact with Swift Air, LLC. John McCain 2008 (the "Primary Conimittee") and McCain-Palin 

2008 (tiie "General Committee") agreed to pay Swift Air $6,384,000 in exchange for 425.6 total 

' Fed. Election Comm'n. Preliminary Audit Report at 10 (Sept. 30.2011). 
flight hours from June 30th to November 15tii.^ The total fee paid by the Primary Conunittee 

and the General Committee was fixed, in that $6,384,000 was still due even if fewer than 425.6 

hours were ultimately flown.^ This is relevant because the two Committees, in fact, only used 

252.1 of the 425.6 contracted flight hours (111.8 hours were used by the Primary Committee, 

140.3 hours by the General Committee). 

The Primary Conimittee and the General Committee were legally authorized to seek 

reimbursement from ttavelling Press entities for a pro rata share of the $6,384,000 fixed-payment 

total and other ttavel expenses.^ The Audit Division does not allege that any ineligible expenses 

were billed to the Press for reimbursement.^ And significantiy, the Audit Division concedes that 

the Primary Committee and the General Committee collected the proper total from the Press: 

The Audit staff agrees that when using the total Swift Air LLC conttact amount for both 

the primary and general election periods ... the General Committee did not receive ttavel 

reimbursement from the Press that exceeded the maximum allowed by the regulations.^ 

Press "overbilling" is therefore not an issue in the PAR. The total amount billed and received by 

the Primary Coinmittee and the General Committee was, by the Audit Division's statement, a 

legally proper amount. 

Instead, the Audit Division argues that the two Conimittees should have better 

"match[ed] the cost of the campaign to the proper election."' Put differently, the Audit Division 

thinks that, although the two Committees togetiier collected the proper total from the Press, the 

General Conimittee received too much of the total and the Primary Conimittee received too 

little.* 

The General Coinmittee, which is named in the PAR, does not dispute that Press 

reimbursements could be rebalanced between the two Committees, now with the benefrt of 

hindsight. The General Committee, however, argues that: (A) the Primary Committee and the 

^ The contract permitted a maximum number of 22.4 flight hours flown in a week. If the maximum weekly hours 

were not flown, the leftover hours "rolled over" for use in subsequent weeks. If the conttacted 22.4 weekly flight 

hours were exceeded and no "rolled over" hours were available. Swift Air charged $15,000 per additional hour. The 

maximum weekly flight hours were never exceeded. 

^ The fee excluded aircraft reconfiguration costs and variable costs (e.g. fuel, baggage fees). Reconfiguration costs 

and variable costs are not at issue in the PAR, so they are not discussed in this PAR Response. See Fed. Election 

Comm'n, Preliminary Audit Report at 9 (Sept. 30,2011) ("The General Committee correctly reimbursed the 

Primary Committee $390,000 ... for these aircraft configuration costs."). 

11 CF.R §9004.6. 

MlC.F.R.§ 9004.6(a)(1). 

^ Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011) (emphasis in original). 

^ Fed. Election Comm'n, Preliminary Audit Report at 13 (Sept. 30,2011). 

' Fed. Election Comm'n, Preliminary Audit Report at 13 (Sept. 30,2011) ("The General Committee received 

reimbursements from the Press for campaign travel that were above the maximum amount billable to the Press. The 

Primary Committee appears to have billed an amount that was less than its cost."). 
General Coinmittee used a reasonable process in the first instance to predict the eventual, proper 

allocation of Press reimbursements between the Committees; and (B) to the extent a 

misallocation of Press reimbursements between the two Committees still exists, it may correct 

the imbalance through a payment to the Primary Committee. 

A. The Primarv Committee and the General Committee Used a Reasonable 

Process to Predict the Eventual. Proper Allocation of Press Reimbursements 

between the General Committee and the Primarv Committee 

Commission rules require an authorized committee seeking reimbursement from Press 

entities to present an itemized invoice within 60 days of a campaign ttip or event.^ The invoice 

must reasonably estimate a Press entity's pro rata share for the air ttansportation of "each 

segment of the trip," which is calculated by "dividing the total actual cost of the ttansportation 

and services provided by the total number of individuals to whom such ttansportation and 

services are made available."'^ 

A travel segment's "total actual cost of the ttansportation" is comprised of both variable 

and fixed expenses. Variable expenses, such as fuel, catering, passenger taxes, and ground 

handling fees, are easily atttibuted to a particular ttavel segment since they are that same 

segment's direct costs. Fixed expenses are different. They are not the result of any particular 

ttavel segment and would exist even if a ttavel segment did not occur. To calculate the fixedexpense share of a ttavel segment's "total actual cost of the ttansportation," then, one must 

devise a method to assign some portion of the overall fixed cost to that single ttavel segment. 

The Primary Committee and the General Conunittee presented itemized invoices that, as 

required, listed a reasonable estimate of each Press entity's pro rata share for air transportation, 

calculated by dividing the "total actual cost of the ttansportation" by the total number of 

individuals to whom the ttansportation was made available. Variable costs were easily attributed 

to each ttavel segment. To determine each ttavel segment's "total actual cost of the 

ttansportation," though, the two Committees still needed to devise a method to assign a portion 

of their fixed costs to each ttavel segment. 

This was not easily done in advance with the two Committees' largest fixed 

ttansportation-related cost, the $6,384,000 fee for 425.6 flight hours paid to Swift Air. (Again, 

this $6,384,000 fee was a fixed expense, because it was still due in fiill even if fewer than the 

maximum 425.6 hours were ultimately flown.) The Committees knew the total fee ($6,384,000), 

the total number of flight hours to which they were entitled (425.6 hours), and, therefore, the 

baseline hourly rate ($6,384,000 / 425.6 = $15,000/flight hour). But tiie fmal hourly rate for the 

' 11 C.F.R. § 9004.6(bX3). See also 52 Fed. Reg. at 20886 (June 3,1987)(stating tiiat tiie rules permit an estimate 

of a media entity's costs because it "eases the burden of accounting precisely for such costs m the heat of the 

campaign. In addition, this allowance permits reunbursements received from some media organizations to 

compensate for those that do not pay in full."). 

*° 11 C.F.R. § 9004.6(b)(2)-(3). 
Swift Air conttact could be calculated only at the end of the contract, when the Committees 

would know exactly how many flight hours over which to spread the $6,384,000 fixed fee. 

While an hourly rate for a ttavel segment could be predicted, the ultimate hourly rate for that 

ttavel segment would fluctuate based on subsequent use or disuse of the plane. For example, the 

Press could be billed a pro rata share using a $15,000 per-hour estimate for a July ttavel segment, 

but the ultimate hourly rate for that segment would go up if plane use was less than anticipated in 

August through November, or go down if the plane was flown more than expected in the postJuly period. The Committees' calculations were therefore not hampered by "the fast pace of the 

election campaign," as the Audit Division surmised." The Committees could not "calculate" 

here. At best, they could predict the proper hourly rate for a travel segment, knowing that the 

actual hourly rate would, in the end, depend on future, unknowable events.'^ 

Facing this situation, the two Committees could have arbittarily applied a calculation 

method or an hourly rate. Instead, the Committees undertook an effort to continually adjust each 

new ttavel segment's hourly costs based on the evolving total of estimated hours to be flown 

under the Swift Air conttact.'^ Press reimbursement billings were then sent out and collected 

using these estimated hourly costs. Realizing that the Swift Air conttact sttaddled the primaryand general-election periods, the two Conimittees fiilly anticipated that they would need to later 

"rebalance" the Press reimbursements between them when the actual hourly rates for all ttavel 

segments became known (and knowable) after the 2008 election. 

The Audit Division acknowledges that the Committees' method for predicting the proper 

allocation of Press reimbursements between the General Committee and the Primary Committee 

"reflect[s] the comparative actual use of the aircraft between the Primaiy ... and General 

Committees.. ."'* The Audit Division nonetheless advocates a new, never-before-announced 

technique for calculating a ttavel segment's hourly rate, and by extension, the proper allocation 

of Press reimbursements: divide each weekly installment of the $6,384,000 Swift Air payment 

"divided by the actual weekly hours flown during the general election period.. ."'^ 

The Audit Division's method is convenientiy simple. But this simplicity is wrought by 

ignoring important realities about the Swift Air conttact. For one, the Swift Air conttact was 

jointly held by the Primary Conunittee and the General Committee. It spanned four months, 

sttaddling the divide between primary- and general-election periods. The Conimittees and Swift 

Air intended this exact stmcture. A four-month conttact held by two entities is manifestly 

" Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

Because the actual hours flown were far less than the hours the Campaign was "entitled" by the contract (252.1 

hrs V. 425.6 hrs), the actual per hour cost was much greater ($25,208 per hour using the Campaign's methodology 

and $27,350 per hour using the Audit Division's methodology) than the per hour cost envisioned by the contract 

($6,384,000 / 425.6 hours = $15,000 per hour). 

*^ As the Audit Division noted, "The General Committee... relied on adjusting the per hour billing rates on a 

segment-by-segment basis due to using fewer flight hours than available in the Swift Air contract. Fed. Election 

Conun'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

Fed. Election Comm'n, Preliminary Audit Report at 13 (Sept. 30,2011). 

*^ Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 
different than a two-montiii contract held by one. The Audit Division, however, wants to now 

artificially bisect the Swift Air contract without even considering whether the parties would have 

stmctured two separate two-month conttacts another way. For instance, the amount and 

frequency of the weekly installment payments might have been different, and the costs certainly 

would have been greater since a key factor in the cost of securing a dedicated aircraft is the 

lease's duration.' The Audit Division cannot disregard a conttact's fimdamental elements 

without its analysis spinning into the realm of fiction. 

The Audit Division also ignores that the Swift Air transaction was a fixed $6,384,000 fee 

in exchange for up to 425.6 flight hours. The payment and the hours were divided into equal 

weekly installments, but a particular week's fixed installment payment was not in exchange for 

that week's flight hours. Dividing a week's installment payment by the week's actual flight 

hours therefore does not reflect what a ttavel segment's hourly rate and "total actual cost" were. 

Yet the Audit Division does that very thing, presumably to simplify the hourly rate calculations 

since one uses only a week's actual flight hours rather than waiting until the end of the conttact 

to determine how many actual flight hours over which to spread the $6,384,000 fixed fee.'' 

Simplicity is indeed atttactive. It interferes with accurately calculating each ttavel segment's 

"total actual cosf here, though. 

The Committees' calculation method for a ttavel segment's hourly rate, on the other 

hand, does not rely on coimterfactuals. It recognizes the Swift Air conttact as it is, and in doing 

so, is more consistent with Commission precedent and with Generally Accepted Accounting 

Principles. The Primary Committee and the General Committee therefore used a reasonable 

process to predict the eventual, proper allocation of Press reimbursements between the 

Committees. 

1. The Committees' Calculation Method is More Consistent with 

Commission Precedent. 

The Committees' calculation method to determine a ttavel segment's hourly rate was 

stmctured to match Commission precedent. That precedent is embodied in this instmctive 

statement from the Dole-Kemp Final Audit Report, which discusses the proper method for 

prospectively estimating the hourly cost of a fixed-rate conttact: 

Regardless of whether the conttact is for two months or four months, the aircraft operator/owner is required to 

place die aircraft through Federal Aviation Administration inspection and thereby remove the aircraft from regular 

commercial service. The cost of setup and servicing the aircraft for the inspection is relatively static. This allows 

the lessor of the aircraft to factor that cost throughout the duration of the contract adding to the weekly operating fee. 

Timing for the complex reconfiguration and then its retum to an original state after use are also factors in 

determining the time the aircraft would be out of service for other commercial rentals. Therefore, the contract 

would naturally be cheaper based on the longer duration. Several outside experts on aircraft lease pricing confirmed 

this conclusion, that a four-month leas would be 5 percent to 20 percent less expensive than a four-month contract. 

The statements of those experts can be provided to the Commission up on request. 

Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011) (stating that under the Audit Division's 

method "the actual flight hours are known soon after flights occur...") 
The contracts for these aircraft contained a fixed price and specified the maximum 

number of hours that could be flown at that price. This required [Dole-Kemp] to estimate 

not only the variable costs (such as fiiel, landing fees, catering, etc.) related to operating 

the aircraft, but also estimate the total number of hours to be flown by each aircraft. 

These estimates were revised several times during the campaign. The estimated hourly 

rate used by [Dole-Kemp] increased as the campaign progressed and then dropped 

slightly prior to the campaign's conclusion. The Audit staff determined the hourlv rate 

for each aircraft bv accumulating all operating costs and dividing that total bv the actual 

number of hours flown bv each aircraft. That calculation resulted in a significantly lower 

average hourly cost for the aircraft used by Senator Dole and Secretary Kemp than used 

by [Dole-Kemp] to bill the Press and Secret Service.'* 

The Dole-Kemp Audit staffs methodology for determining a ttavel segment's hourly rate for a 

fixed-rate conttact was to divide the total amount of payments made under the aircraft lease by 

the total number of actual flight hours. 

The Primary Committee and the General Committee assigned a portion of their 

$6,384,000 fixed Swift Air payment to each travel segment using the methods employed by the 

Dole-Kemp Audit staff. They initially undertook an effort to continually adjust each new ttavel 

segment's hourly costs based on the evolving total of estimated hours to be flown under the 

Swift Air conttact. Press reimbursement billings were then sent out and collected using these 

estimated hourly costs, realizing that the actual rate would differ from the estimate when the 

actual hourly rates for all ttavel segments became known (and knowable) after the 2008 election. 

The Audit Division rejects the Conunittees' method because "only those costs 

atttibutable to the General Committee should be used in determining the ttavel cost the General 

Conimittee may bill to the Press"'^ and because "the General Committee should recognize only 

those ttansportation costs froih September 1,2008 through November 4,2008 in the calculation 

for billing the Press."^^ The Audit Division is only setting up "sttaw men" here so that it can 

knock them down. The Committees do not disagree with the Audit Division's truisms— 

certainly only Press reimbursements for general-election ttavel should be billed and kept by the 

General Committee. The real issues here are how should the Conimittees have predicted the 

amount of "those costs atttibutable to the General Committee"? And what was the proper 

method for prospectively calculating the "ttansportation costs from September 1,2008 through 

November 4,2008"? The Committees' point is that they used the Dole-Kemp method to 

calculate in advance each ttavel segment's hourly rate, and thereby used a reasonable method to 

predict the amoimt of Swift Air-related fixed "costs [that would be] attributable to the General 

Conunittee." 

" Fed. Election Comm'n, Final Audit Report on Dole for President Committee, et al. at 2 (2007) (emphasis added). 

" Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

Fed. Election Comm'n, Preliminary Audit Report at 12 (Sept. 30.2011). 
The Audit Division also cites the Dole-Kemp Audit, but they tacitiy suggest that the 

Dole-Kemp Audit prevents the Division from recognizing that the Swift Air conttact extended 

back into the primary-election period. This is not the case. The Dole-Kemp Audit did indeed 

deal only with general-election activity, but that was because it was examining a generalelection-only aircraft lease.^' The Dole-Kemp Audit's scope was limited by the underlying facts, 

not by any legal considerations. The Dole-Kemp Audit should therefore not be seen as precedent 

that the Audit Division may not recognize that the Swift Air conttact extended back into the 

primary-election period. 

Commission precedent is also valuable here. While only general-election conunittees are 

subject to mandatory audit,^^ the Audit Division has conducted limited inquiries into primaryelection committees conceming jointly held assets and other items. For example, the KerryEdwards 2004 and Bush-Cheney 2000 campaigns held air charter leases that, like the Swift Air 

conttact, sttaddled the primary- and general-election periods. 

The Kerry-Edwards 2004 Final Audit Report states that the campaign leased an aircraft 

for a period of seven months (April to November 2004).^^ This time frame clearly demonsttates 

a conttact that crossed election periods and therefore is also potentially a reasonable comparison 

to the Committees' circumstance if the Audit records do indeed show a similar conttact and 

payment stmcture. Additionally, the Kerry-Edwards 2004 air charter lease allowed unused 

flying hours to be "banked" each month and moved forward, as needed, without changing the 

overall cost of the conttact. A total of 10.4 hours were banked from the Kerry-Edwards 2004 

primary-election coinmittee and used by their genered-election committee instead. According to 

the post-election Final Audit Report, the general-election committee owed the primary-election 

conmiittee a total of $205,067 for these banked and ttansferred hours.^"^ While not specifically 

stated in the Kerry-Edwards 2004 Final Audit Report, we believe that if unused "primary" 

banked hours were later used by their general-election committee and a reimbursement from the 

general committee to the primary committee was required after the fact to pay for those hours, 

there must also have been a misallocation of deposited offsets to those expenditures from the 

^' Based on research of the news media from that time period and the Dole for President Committee reports filed 

with the Commission, it seems that the Dole Primary Committee had run out of room to spend money on normal 

operatmg expenses by May 1996, and therefore would not have had the opportunity, as our Campaign, Bush-Cheney 

2000 and Kerry-Edwards 2004 did, to sign a contract for and implement reconfiguration costs related to a large air 

charter for a period of time that crosses the Primary/General periods. Research from the Commission reports shows 

that the Dole campaign's main air charter vendor was named "AV Atlantic." While we found millions of dollars in 

expenditures to that firm in September and October 1996, we could find no payments in June 1996 and only one 

payment to the fum in July 1996 during the end of the primary-election period. It would seem on its face, then, that 

the Dole Campaign's arrangement with its air charter vendor was vastly different then the type of contract setup the 

McCam Campaign used. We also note that a New York Times article during June 1996 validates the conclusion that 

the Dole Primary Committee did not have sufficient funds available to enter into the same type of agreement as our 

Campaign did. Kor^ TVme.;, "Democrats Charge Dole Violated Rules on Spending," 6/12/96 ("At the end of 

April, his campaign reported having spent all but $177,000 of that sum..."). 

° 11 C.F.R.§ 9007.1(a). 

" Fed. Election Comm'n, Final Audit Report on Kerry-Edwards 2004, et al. at 13 (2007). 

^ Fed. Election Comm'n, Final Audit Report on Kerry-Edwards 2004, et al. at 21 (2007). 
Press by both committees. Press ttavel reimbursements could not have been properly reconciled 

by the Kerry-Edwards general committee if the Audit Division did not make them account for 

the 10.4 primary banked hours that were rolled forward to the general committee until after the 

audit was completed. Yet the Kerry-Edwards Final Audit Report does not include any comments 

or findings as to how Press reimbursements should be handled in these types of "cross-election" 

scenarios. 

As for Bush-Cheney 2000, it held an aircraft lease with Miami Air Intemational, Inc. that 

was stmctured in a manner nearly identical to the Swift Air conttact.^^ The Miami Air 

International conttact sttaddled the primary- and general-election periods, from August 1,2000 

to November 7,2000, and entitled Bush-Cheney 2000 to a maximum number of flight hours for 

a fixed payment of $3,444,312.88. The Bush-Cheney 2000 compliance staff used the same 

billing methodology for ttavel under this conttact as the Committees did in 2008 with the Swift 

Air conttact.^^ However, the Bush-Cheney 2000 Final Audit Report did not contain an adverse 

audit finding related to Press ttavel reimbursements. And the Audit Division did not even 

communicate informally any objection over calculation methodology to Bush-Cheney 2000 

compliance staff, many of whom are now involved in the McCain Campaign audit. As the Audit 

Division put it: 

The General Committee also referenced the 2000 Bush-Cheney audit and explained that 

it used the same billing methodology and personnel in that audit, which did not include 

an adverse audit finding or any informal advice from the Audit Division suggesting a 

correction to the accounting methods was necessary. The Audit Division acknowledges 

that the same billing methodology was used in 2000 Bush-Cheney.. ^ 

The Division excuses its silence during the Bush-Cheney 2000 audit now by claiming that "the 

amount of tiie overbilling of the Press was not material."^* This statement is highly questionable. 

Press reimbursements were not minimal—over $40,000 was sought under the Miami Air 

Intemational conttact during the primary election and the Bush-Cheney campaign incurred over 

$200,000 in ttavel expenses during that same period.^^ Putting aside the amount, though, the 

Audit Division still should have given notice of methodology errors, even if the Division now 

somehow considers the amount involved as "not material." In the context of an audit, the 

Commission's acquiescence in a recordkeeping practice has precedential value because silence is 

reasonably constmed by the audited party as approval. This is particularly the case where, as 

here, the Commission has otherwise failed to issue general guidance conceming a particular 

^ Bush-Cheney 2000 Conttact with Miami Air Intemational, Inc. attached hereto as Attachment A. 

Bush-Cheney 2000 Press Reimbursement Spreadsheet attached hereto as Attachment B. 

Fed. Election Comm'n, Preliminary Audit Report at 11 (Sept. 30,2011). 

Fed. Election Comm'n, Preliminary Audit Report at 11 (Sept. 30,2011). 

^ Bush-Cheney 2000 Press Reimbursement Spreadsheet attached hereto as Attachment B. 
recordkeeping practice. Indeed, "if an agency glosses over or swerves from prior precedents 

without discussion it may cross the line from the tolerably terse to the intolerably mute."^° 

The Audit Division should not be allowed to "swerve" from prior precedent here. The 

Primary Committee and the General Conunittee followed the Commission-audited campaigns' 

proven path. Particularly, the Bush-Cheney 2000 method for a fixed-rate conttact that sttaddled 

primary- and general-election periods was replicated exactly because, again, the same 

compliance consultants and personnel were involved in the two campaigns. The calculation 

method used by the Primary Committee and the General Committee is clearly more consistent 

with Commission precedent than the Audit Division's favored method. The two Committees 

therefore used a reasonable process to predict the eventual, proper allocation of Press 

reimbursements between the Coinmittees. 

2. The Committees' Calculation Method Is More Consistent with 

Generally Accepted Accounting Principles 

The Committees' calculation method is based on mles and standards adopted by the 

accounting profession called Generally Accepted Accounting Principles ("GAAP") that are used 

to prepare, present, and report financial statements.^' The Coinmission has endorsed GAAP's 

use in presidential campaign audits and cited GAAP to make an adverse audit finding against the 

Keiry-Edwards Campaign.^^ 

GAAP dictates the use of accrual-basis accounting in nearly all circumstances.^^ In 

accmal-basis accoimting, revenue is recognized when it is eamed and expenses are recognized 

when incurred. This is in conttast to cash-basis accounting, a non-GAAP method, which records 

revenue when cash is received and an expense when cash is paid.^^ Why is accrual-basis 

accounting a GAAP method and cash-basis accounting not? Because "[i]n many instances, the 

cash basis just does not present fiilly enough the financial picture..."^^ After all, the timing of 

cash receipts and payments may be detached from a ttansaction's underlying substance. 

Bush-Ouavle '92 Primarv Comm.. Inc. v. Fed. Election Comm'n. 104 F.3d 448,453 (D.C. Cir. 1997) (citing 

Greater Boston Tel Corp. v. FCC. 444 F.2d 841, 852 (D.C.Cir.). 

" BARRY J. EPSTEIN, RALPH NACH & STEVEN M . BRAGG, WILEY GAAP: 2010 INTERPRETATION AND APPLICATION 

OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 2-4 (2010). 

Fed. Election Comm'n, Final Audit Report on Kerry-Edwards 2004, et al. at 13-14 (2007). 

" RICHARD F. LARKIN & MAR E DITOMMASO, WILEY 2011 NOT-FOR-PROFIT GAAP: INTERPRETATION AND 

APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR NOT-FOR-PROFIT ORGANIZATIONS 9.17 

(2011) ("For financial reporting in accordance with generally accepted accounting principles, the accrual basis of 

accounting must be used."). 

" DONALD E. KIESO, JERRY J. WEYGANDT & JERRY D. WARFIELD. INTERMEDIATE ACCOUNTING: PROBLEM SOLVING 

SURVIVAL GUIDE 3-4 (2011). 

" RICHARD F. LARKIN & MARIE DITOMMASO, WILEY 2011 NOT-FOR-PROFIT GAAP: INTERPRETATION AND 

APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR NOT-FOR-PROFIT ORGANIZATIONS 14 (2011). 
The Primary Committee and the General Coinmittee used GAAP-compliant accrual-basis 

accounting to calculate the fixed-expense share of each ttavel segment's "total actual cost of the 

ttansportation." Accmal-basis accounting required that the Swift Air conttact expenses (and 

offsets to those expenses in the form of Press reimbursements) were recognized as actual flight 

hours were used. A portion of the Swift Air conttact's fixed cost was assigned to each ttavel 

segment using a depreciation technique called the "units of production" method, which is 

expressed as Cost / Estimated Units = Depreciation Per Unit Produced (i.e. $6,384,000 / 

Estimated Flight Hours = Aircraft Hourly Rate).^^ The "units of production" method was most 

appropriate here because the actual flight hours, and thus the actual conttact costs, were not 

incurred ratably over the individual weeks ofthe contract.^' 

By conttast, the Audit Division relied on non-GAAP cash-basis accounting to estimate 

the fixed-expense share of each ttavel segment's "total actual cost of the ttansportation." The 

"Audit staff used the weekly $336,000 installment" as the ttigger for recording expenses (and 

offsets to those expenses in the form of Press reimbursements).^* Like all cash-basis accounting, 

this simplifies the hourly rate calculations since one uses only a week's actual flight hours rather 

than waiting until the end of the conttact to determine how many actual flight hours over which 

to spread the $6,384,000 fixed fee. But again, like all cash-basis accounting, this does not offer a 

fully accurate picture of the ttansaction here because a week's installment payment was not paid 

to Swift Air in exchange for that week's installment of flight hours. 

When the PAR reaches this subject, the Audit Division declares, all too convenientiy, that 

"cash or accrual-basis accounting" is not "[t]he issue."^^ GAAP-compliant methods, in the Audit 

Division's view, are "[t]he issue" only when candidates fail to use them.^^ The Audit Division 

then artfiilly changes tiie subject ratiier than confess that it used non-GAAP accounting: 

At issue is whether the activity of a separate reporting and corporate entity (the Primary 

Committee) should be recognized by tiie General Committee and by this audit. An 

underlying assumption to GAAP is that every entity is separate and, therefore, the 

revenue and expenses of each entity should be recognized as such.^' 

Depreciation is not a matter of valuation, but a means of cost allocation. The method of depreciation chosen must 

result in the systematic and rational allocation of the cost of the asset (less its residual value) over the asset's 

expected useful life. See RICHARD F. LARKIN & MARIE DITOMMASO, WILEY 2011 NOT-FOR-PROFIT GAAP: 

INTERPRETATION AND APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR NOT-FOR-PROFIT 

ORGANIZATIONS 239 (2011). 

" RICHARD F. LARKIN & MARIE DITOMMASO, WILEY 2011 NOT-FOR-PROFIT GAAP: INTERPRETATION AND 

APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR NOT-FOR-PROFIT ORGANIZATIONS 240 

(2011). 

^' Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

See Fed. Election Comm'n, Final Audit Report on Kerry-Edwards 2004, et al. at 13-14 (2007). 

^' Fed. Election Comm'n, Preliminary Audit Report at 10 (Sept. 30,2011). 

10 
Again, this "corporate separateness" statement does not validate the Audit Division's reliance on 

cash-basis accoimting—just because one tteats corporations as separate entities does not mean 

one should arbittarily use weekly installment payments as the basis for calculating a ttavel 

segment's "total actual cost." 

The Audit Division's point about corporate separateness instead seems to be that the 

Division must bisect the Swift Air conttact and entirely disregard its primary-election portion.*^ 

This is, again, counterfactual. The Primary Committee and tiie General Conimittee are separate 

for Commission reporting purposes and only the General Committee is subject to mandatory 

audit, but they are otherwise tightly integrated entities, having shared a candidate, staff members, 

consultants, tiie Swift Air conttact, and other resources.^^ The Audit Division suggests GAAP 

mandates its proposed suspension of reality, but that suggestion is incorrect. In fact, GAAP 

provides for separate commonly conttolled organizations that share an economic interest, like the 

Primary Coinmittee and the General Committee, to issue consolidated financial figures.^ And 

GAAP's "matching principle" counsels against bisecting the Swift Air conttact, as it requires the 

cost of a long-lived asset to be allocated over all of the accounting periods during which the asset 

is used (i.e. the entire contract period).^^ 

In sum, the calculation method used by the Primary Committee and the General 

Committee is more consistent with GAAP, llie two Conunittees therefore used a reasonable 

process to predict the eventual, proper allocation of Press reimbursements between the 

Committees. 

B. To the Extent a Misallocation of Press Reimbursements between the 

Committees Still Exists, the General Committee May Correct the Imbalance 

through a Pavment to the Primarv Committee 

*^ Interestingly, in the Kerry-Edwards Final Audit Report, the Audit Division quotes the Wiley GAAP 2007 

Interpretation and Application of Generally Accepted Accounting Principles textbook stating, "costs that are 

capitalized upon acquisition are any reasonable cost involved in bringing the asset to the buyer and incurred prior to 

using the asset." The reason the Audit Division includes this section is to later make its point that part ofthe 

reconfiguration costs paid by the Primary Committee are really owed by the General Committee. The Campaign 

finds this passage interesting because the Audit Division has shown that it is ok to bridge Committees and they use 

the principles of GAAP when making their findings that the reconfiguration costs for travel purposes are a capital 

asset that must be calculated and paid for by the General Committee even though the checks were originally written 

during the Primary Committee. Having interpreted GAAP previously as requiring a "cross-election" inquiry earlier, 

it is not apparent how the Audit Division may now make the opposite claim. Fed. Election Comm'n, Final Audit 

Report on Kerry-Edwards 2004, et al. at 13-19 (2007). 

11 C.F.R.§ 9007.1(a). 

** RICHARD F. LARKIN & MARIE DITOMMASO, WILEY 2011 NOT-FOR-PROFIT GAAP: INTERPRETATION AND 

APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR NOT-FOR-PROFIT ORGANIZATIONS 160 

(2011). 

See PATRICK R. DELANEY, RALPH NACH, BARRY J. EPSTEIN & SUSAN W. BUDAK, WILEY GAAP 2003: 

INTERPRETATION AND APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 66 (2003). 

11 
The General Committee believes that, to the extent a misallocation of Press 

reimbursements between the General Committee and the Primary Committee still exists, the 

General Committee may correct the imbalance through a payment to the Primary Conimittee. 

The Audit Division contends that this is impossible, as "refimding the Primary Committee ... 

would be considered a non-qualified campaign expense subject to repayment."^^ The Audit 

Division is wrong for several reasons. 

First, the Audit Division cites the "qualified campaign expense" definition for the 

proposition that "regulation state that a general election coinmittee cannot incur primary-related 

expenses because they are not in fiulherance of the general election."^' This is a misstatement of 

the law. Primary-election expenses do indeed fall outside the "qualified campaign expense" 

definition. But not all fimds received by a general-election candidate committee must be spent 

only for a "qualified campaign expense." Commission mles are precise: "An eligible candidate 

shall use payments received under 11 CFR part 9005 only ... [t]o defray qualified campaign 

expenses..."^* Funds received under circumstances outside Part 9005 (conceming the generalelection public grant), such as Press reimbursements, are not similarly restricted. 

Second, the Audit Division never explains how the General Committee's ttansfer to the 

Primary Conimittee would be an "expense" at all—qualified or non-qualifred. The General 

Committee and the Primary Committee are "affiliated."*^ For conttibution limit purposes, 

affliiated conunittees are "considered ... a single political conimittee" and ttansfers between 

them are imlimited by typical resttaints on movement of funds.^° The General-to-Primary 

ttansfer itself would therefore not be an "expense." Now, the Audit Division may counter that 

the "expense" refers to the Primary Committee's outlay for Press ttavel. This is also incorrect. 

The Primary Committee, according to the Audit Division, already paid for Press ttavel without 

recoupmg its fiill costs.^' Given that it is over three years after the 2008 election, fimds 

ttansferred to the Primary Conimittee will likely sit in the Primary Committee's bank account 

without actually defraying any primary-election activity. In other words, the General Coinmittee 

will not actually incur any primary-related expenses. The ttansfer is simply to correct what the 

Audit Division views as the original "misdeposit" of Press reimbursements. 

Third, the ttansfer would not be a "non-qualified expense" because the Coinmission has 

in the past repeatedly permitted ttansfers from publicly funded general-election coinmittees to 

their affiliated primary-election committees to correct misallocation and similar issues. For 

example, the Commission required the Kerry-Edwards Campaign's general-election committee 

to pay the Campaign's primary-election conunittee to fix a misallocation of joint reconfiguration 

Fed. Election Conun'n, Preliminary Audit Report at 13 (Sept. 30,2011). 

" Fed. Election Comm'n, Preliminary Audit Report at 13 (Sept. 30,2011). 

*'11C.F.R.§ 9004.4(a)(1). 

*'11C.F.R.§ 100.5(g). 

'MlC.F.R.§l 10.3(a)(1), (c). 

" Fed. Election Comm'n, Preliminary Audit Report at 13 (Sept. 30,2011) ("The Primary Committee appears to 

have billed an amount that was less than its cost.") 

12 
costs and banked flight hours. Here, the circumstances are similar. The General Committee is, 

according to the Audit Division, receiving another "free ride" at the Primary Committee's 

expense. The Primary Committee's Press cost-to-reimbursement balance is negative, while the 

General Committee's is positive. The General Committee should be allowed to transfer fimds to 

reach a cost-benefit equilibrium for both Committees. 

And frnally, a General-to-Primary transfer should not be prevented under the Audit 

Division's "non-qualified expense" rationale because the only reason for this misallocation issue 

is the Commission's failure to provide guidance on how to prospectively calculate the fixed-cost 

portion of a particular ttavel segment's "total actual cost pf... ttansportation." The Primary 

Committee and the General Committee had no notice that they were not using the Conunission's 

preferred calculation method. In fact, the Commission's past acquiescence during the 2000 

election cycle led directly to the Primary Committee and the General Committee using the cost 

calculation method that tiiey did, adjusting each new ttavel segment's hourly costs based on the 

evolving total of estimated hours to be flown under the Swift Air conttact. This was a reasonable 

method in light of the Commission's silence and misleading acquiescence, and the General 

Committee should not be penalized through a forced refimd to Press entities. The Commission 

should permit the transfer here, even if it decides not to do so for future committees, who now 

understand the Commission's preferred calculation method under these circumstances. 

In sum, the General Conimittee asserts that to the extent a misallocation of Press 

reimbursements between the General Committee and the Primary Committee still exists, the 

General Committee may correct the imbalance tiirough a payment to the Primary Coinmittee. 

The Audit Division claims this is legally prohibited because the ttansfer would be a "nonqualified campaign expense." The Audit Division's claim is undermined, however, by the text 

of Commission mles, the "affiliated" status of the General and Primary Committees, the 

Commission's practice of allowing ttansfers to correct misallocation-like issues, and the 

Commission's failure to provide advance guidance on Press reimbursement calculations. We 

respectfully request that the Commission permit the ttansfer from the General Committee to the 

Primary Committee to resolve any lingering misallocation of Press reimbursements between 

them. In the event the Commission somehow does not permit the transfer, the General 

Committee asks that it be allowed to disgorge the Press reimbursements to the U.S. Treasury, as 

has been permitted previously. 

" Fed. Election Comm'n, Final Audit Report on Kerry-Edwards 2004, et al. at 19-22 (2007). 

" Fed. Election Comm'n, Final Audit Report on die Mondale-Ferraro Committee at 23 (1987) ("The Interim Audit 

Report included an amount for accounts payable due the Press of $32,381.36 which represented amounts collected 

from the-Press for air charters and incidentals which were in excess of amounts billed. The figure was as of March 

31, 1985. The General Fund's response, verified by follow-up fieldwork, indicates that after March 31, 1985 an 

additional $927.40 was received. Therefore, accounts payable due the Press has been increased to $33,308.76. 

General Fund officials intend to research these prior to making any refimds. A review of the General Fund's 

disclosure reports through September 30,1986 show that none of these refiinds have been made. Ifit is determined 

that the refunds will not be made, the amount of the surplus repayment [to the US Treasury assumed to be also for 

other items and their receipt of the federal grant] should be adjusted accordingly.") (emphasis added). 

13 
n. 48-HOUR NOTICES 

The Audit Division has identified some conttibutions included on the Compliance Fund's 

December 4,2008 Post-General Report that did not appear on "48-Hour Notices" filed before the 

election. 

Under Commission regulations, authorized committees must file a notice within 48 hours 

"if any conttibution of $1,000 or more is received... after the 20th day, but more than 48 hours" 

before 12:01 a.m. on Election Day (October 16th to November 1st during the 2008 election 

cycle).The Compliance Fund filed 48-hour notices on October 17th, 22nd, 24th, 29th, and 

31st. 

The Compliance Fund previously addressed this matter in its Exit Conference Response 

and in a March 5, 2009 letter to the Reports Analysis Division. The Compliance Fund has 

explained that 48-Hour Notices were not required for many contributions identified by the 

Commission throughout the audit process, as they were merely redesignations that took place 

during the 48-Hour Notice reporting period^^ or they were refunded immediately after receipt. 

And as noted in the March 5th letter, the Compliance Fund's normal practice of filing a 48-Hour 

Notice was not followed for a remaining group of contributions, due to data-management errors 

made by its outside vendor. To elaborate, the Compliance Fund's outside data-management 

vendor "tagged" this group of conttibutions with an incorrect date in its database and 

consequently failed to locate the group in a subsequent, computerized search for conttibutions 

requiring a 48-Hour Notice. The Compliance Fund has now taken measures with this outside 

vendor to ensure that this unintentional oversight is corrected, and Compliance Fund staff 

believes that this was a one-time occurrence. And, as stated above. Compliance Fund 

subsequently and fully disclosed all of these contributions in its Post-General 2008 Report. 

48-Hour Notices are intended to bring to light any last-minute conttibutions that a 

candidate might deploy for campaign-related activities, such as advertising and get-out-the-vote 

efforts, during an election's final days. Donations to the Compliance Fund, however, may not be 

used for any candidate's election and may only support "legal and accoimting services to ensure 

" 11 C.F.R.§ 104.5(f). 

" The Eileen Kamerick contribution (received by JM2008 2008 10/23/2008; redesignated 10/23/2008) identified by 

the Audit Division on its PAR list was redesignated during the 48-Hour Notice Period. The Compliance Fund did 

not receive any of these contributions during the Notice period. This conttibutions was originally received by John 

McCain 2008, the primary-election committee, and was merely redesignated by the contributor during the Notice 

period. The redesignation itself did not cause the Compliance Fund to receive any fimds, and this conttibution was 

received by the Compliance Fund only after the Notice period ended. The date listed under "Date of Receipt" on the 

Compliance Fund's Post-General 2008 Report was intended only to identify the date on which the contributor 

authorized redesignation. The Compliance Fund therefore did not list, and did not need to list, this redesignation on 

any 48-Hour Notice. 

^ Jeffrey A. Hill's entire $1000 donation was refunded on Nov. 2,2008; $200 of Cole Forsydi's $2,500 conttibution 

was refunded on Nov. 2,2008; $200 of Thomas Meehan's $2,500 conttibution was refiinded on Nov. 2,2008; and 

$2,700 of Stuart Harris's $5,000 conttibution was refunded on Nov. 10,2008. It is our view that no fine should be 

levied on the portions of these transactions that were refiinded as the Compliance Fund was not able to keep the 

receipts in its bank accounts or spend them on any election-related activities. 

14 
compliance with Federal law."^' It should also be noted that the Compliance Fund today 

maintains a balance of over $10 million, meaning that these fimds received shortly before the 

2008 general election still have not been spent for any purpose. The Compliance Fund was 

therefore not in material violation of the 48-hour notice requirement when its reliance on an 

outside vendor caused it to delay disclosure of donations that would only fiind lawyers' and 

accountants' legal compliance activities. For these same reasons, the Compliance Fund should 

not be fined for this vendor failure even if the Commission somehow finds that a technical 

infringement of the 48-hour notice requirement occurred. 

Finally, the Compliance Fund requests that the Commission provide in the Final Audit 

Report a description of how the 48-Hour Notice will be resolved (e.g. no action, enforcement 

matter, administtative fine program), as this decision will impact the Compliance Fund's ability 

to terminate. The Compliance Fund would like to terminate as soon as possible so that it does 

not incur needless wind-down expenses. 

III. CONCLUSION 

For all of the foregoing reasons, McCain-Palin 2008 and McCain-Palin Compliance Fund 

believe the Final Audit Report should state that the Conunission found no legal violations and 

that the two committees may terminate their registtations with the Commission immec 

Respectfull 

(signed) 

Salvatore A/Mfurpiaa 

Assistant IMisurer 

McCain-Patfn 2008 and McCain-Palin Compliance Fund 

" 11 C.F.R. § 9003.3(a)(l)(i)(A). 

15