It is shocking that anyone would think to steal from the one of the most tightly regulated - and publicly disclosed - bank accounts in the United States. And yet political committees, flush with cash and often poorly supervised by their connected organizations, are the repeated targets of fraud and embezzlement.
The National Republican Congressional Committee is in the throws of an internal investigation (with a parallel law enforcement investigation) to determine how one trusted bookkeeper may be responsible for $740,000 in "accounting irregularities."1 Other recent victims of fraud have included Senators Elizabeth Dole and Joseph R. Biden Jr., House Minority Leader John A. Boehner, the Democratic Senatorial Campaign Committee, and the Lockheed Martin Corporation political action committee. These headlines have a common theme: lack of oversight or controls for the PAC.
Most associations already have controls to monitor finances comply with various provisions of the Internal Revenue Code. They should make certain that they have adequate financial control for their PACs - after all, trusted employees have been able to hoodwink the most sophisticated players in Washington. This article offers six steps to implement PAC financial controls.
These steps are based on a 2007 Statement of Policy issued by the Federal Election Commission ("FEC"). The FEC recognized that a PAC might be the victim of fraud and still be subject to fines for misrepresenting its finances on its FEC reports. The Statement of Policy created a safe harbor: if a set of basic internal controls are in place at the time of a "misappropriation," and if an association promptly notifies the FEC of the incident, the FEC will not penalize the association for failing to file accurate reports. These safeguards should not be expensive or extensively different from measures that are probably already in place to protect the association's other accounts.
1. Divide PAC Responsibilities.
Basic PAC management involves at least three different jobs:
- one person to handle the committee's internal bookkeeping as the committee receives and distributes contributions;
- one person with the authority to deposit and withdraw funds from the committee's bank accounts; and
- one to perform routine audits of both the books and the bank accounts before filing disclosure reports with the FEC.
How do some PACs find themselves in trouble? They hire one individual to perform all three tasks.
Separating these responsibilities is crucial to protecting a political committee. An employee with the authority to withdraw large sums of money from a bank account should not also be responsible for reconciling monthly bank statements to internal books. Similarly, an employee asked to monitor incoming contributions should not also be asked to manage the committee's accounting records. When no single individual has total control over the finances of the PAC, its security increases dramatically.
2. Regularly Reconcile the Records.
A PAC should review its monthly bank statements and reconcile each transaction to the committee's internal records. As discussed, this task should not be assigned to any employee also designated to sign checks or monitor bank accounts. Prior to filing any report with the FEC, a PAC should also square its banking and accounting records with any information it has provided on the form. The FEC has suggested that this one step would have either prevented or quickly uncovered most of the misappropriations it has investigated in recent years. It is also an excellent technique for discovering accidental errors and omissions in disclosures that are made available to the public and subject to penalties for inaccuracy.
3. Limit Access to the Cash and Checks.
PACs should limit the number of persons authorized to sign checks, and any expenditure in excess of $1000 should require the signature of two responsible individuals. Because a parent association can spend its own funds to cover PAC operating expenses, most PACs have little need for debit or credit cards. When they are necessary, it is often possible to place both per transaction and cumulative limits on these cards until individual expenditures have been independently approved. The FEC recommends that any PAC with a petty cash fund use an imprest system and keep no more than $500 in circulation - association PACs have very little need for access to petty cash.
4. Find the Right People for the Job.
Although associations may use member volunteers to raise the profile of the PAC, the accounting functions should be assigned to association employees who are trained in their responsibilities. Many qualified third party vendors are also available to provide auditing services and to prepare FEC disclosure forms; generally speaking, third party involvement in committee finances should be limited to these roles. When outside vendors are given access to the bank, there is a greater risk of mischief. In addition, the association should carefully review and approve the reports before they are filed.
5. Keep Accounts in the Committee's Name.
Every association should have an employer identification number ("EIN") issued to it by the Internal Revenue Service. All PAC bank accounts should be held in the committee's name and keyed to the EIN of the association. Association leadership should never approve of opening an account in the name of an individual, or use an individual's Social Security Number for account identification. Only the PAC treasurer or his or her designee should have the authority to open and close accounts, and the committee should receive all of its bank statements, unopened, at its primary business address.
6. Document the controls.
After implementing a system, the association should document the policies and procedures as contemporaneous evidence of the system.
Just as no one set of internal governance procedures is right for every association, no one set of internal controls is right for all political committees. But absent a straightforward arrangement of checks and balances, a political action committee is almost certainly left exposed. These basic safeguards should help an association to protect its assets and comply with FEC disclosure requirements.
For more information on nonprofit organizations and political activities, contact the authors at firstname.lastname@example.org or 202-344-8215 and email@example.com or 202-344-8289.
1Wayne, Leslie, "Awash in Contributions, Campaigns Offer Tempting Targets for Thieves," N.Y. Times, May 27, 2008.