While many companies have focused on internal controls over financial reporting, few have considered implementing controls over their political action committees (PACs). That may change soon.
The Federal Election Commission has proposed an embezzlement-controls policy that creates a safe harbor for PACs with reporting errors stemming from misappropriated funds — as long as certain minimum safeguards have been put in place. The presence of recommended safeguards would curb the PAC’s liability in an embezzlement case.
The comment period for the proposal ends on November 30.”This is a wakeup call for corporate America that PACs are going to be subject to the same kind of internal-control scrutiny that the corporateÂbooks are already subject to,” says Robert Kelner, a partner at law firm Covington & Burling. “It is not quite the FEC’s version of Sarbanes-Oxley, but it’s their first step in that direction.”
Recognizing that different kinds of controls can be effective, the framers of the proposal suggest a range of optional safeguards for PACs rather than mandating specific controls. The result is likely to be “a mix-and-match menu approach” — a flexible policy that lets companies tailor their approach to their size or resources, predicts Wesley Bizzell, an attorney at Winston & Strawn.
The set of recommended controls is reminiscent of safeguards that are second nature to finance chiefs and internal auditors. As one of the proposed measures, for instance, the FEC suggests that all bank accounts be opened in the name of the PAC and never in the name of an individual.
Another proposed control is that checks over $1,000 and all wire transfers be authorized in writing by two people who are identified in writing in the PAC’s internal policies. Further, the FEC would take into account the actions a committee takes after it discovers misappropriation, such as notification of the FEC and other law-enforcement units.
The recent rise in the number of enforcement cases involving misappropriated committee funds by committee staff prompted the proposal, according to the FEC. One recent high-profile case involved Lockheed Martin Corp.’s assistant PAC treasurer, Kenneth D. Phelps II, who wrote committee checks to himself to the tune of $170,000.
In another example of embezzlement, Earl Allen Haywood, a former assistant treasurer for campaign committees associated with North Carolina Sen. Elizabeth Dole’s 2002 senatorial campaign, admitted to stealing about $175,000 from the campaign.
Since the passage of the Bipartisan Campaign Reform Act of 2002, which bars corporate donations to campaign committees and political party committees, corporate PACs have become a significant vehicle for funding those entities, Bizzell notes. As PACs have raised more money, they have become tempting targets for their treasurers and others involved in committee operations.
Indeed, with the growth of funds flowing into PACs has come the growing risk of theft. To help manage that risk, some committees have built controls firmly into their reporting structures. At the Grant Thornton PAC, for instance, the seven partners or principals of the firm that are members of the committee each have specific roles to perform, notes Steven Poe, senior counsel at the accounting firm. The PAC bylaws set up by the firm require an internal review, he says, and the results of the review are given to the PAC committee, the PAC leadership, and the committee’s treasurer.
To help his clients protect themselves against theft, Bizzell urges them to put in place controls and bylaws that govern the PAC’s day-to-day operations. Ideally, those bylaws should require an annual audit —one either overseen by the finance chief or conducted by outside auditors.
Most PACs, however, have long resisted installing audits. Recently, though, “when a client has questioned the need for something like that, it has been easier to convince them by pointing to embezzlement cases,” says Bizzell.