This file contains archived live captions of the audit hearing held by the Federal Election Commission on February 08, 2018. This file is not a transcript of the meeting, and it has not been reviewed for accuracy or approved by the Federal Election Commission. >> CHAIRMAN HUNTER: Good morning, everybody. Today we're here to convene the February 8, 2018 audit hearing. Is this your first audit hearing? >> Yes, it is. >> CHAIRMAN HUNTER: And Mr.ÊChris Marston from election. We'll start at the hearing table with a brief opening statement from whoever is ready to go. >> Thank you Chairman Hunter, Vice Chair Weintraub. I'm here on behalf of McSally for Congress in regards to the 2014 election cycle. Chris Marston is with me today. The founder of one of the premier FEC compliance firms in the country. Chris is here to speak a little bit about the work that he did for the committee in 2015 and for quite a bit of time after that. We appreciate the opportunity to appear before you today, really to address some disagreements we have with respect to findings one and two in the draft final audit report. I'll also note it's an honor to be here today for what is the last ha?rah for Commissioner Goodman. I'm sure you're sad to have your last audit hearing today. >> COMMISSIONER GOODMAN: It's hard to call an audit hearing a harah. (Laughter). >> It is. But thank you for your service to the country. Before we get to the substantive disagreements that we have with findings one and two, I just wanted to thank the audit division. This wasn't always my, you know, this was a matter that I kind of came onto a little bit later in the process. My former colleague Beth Beachham White handled a lot of this before I took it over. But she only had good things to say about the process and the audit division in general. Susanna, Allison, and Erica for getting everything together for this hearing. So thank you. And everything has been very professional and courteous and we really do appreciate it. So before, again, I get into the substantive disagreements with respect to findings one and two, I think it's important to emphasize the sort of herculean efforts that the committee did to take a look at the reports in this cycle and also before that. That's one of the reasons that Chris is here today, because he was engaged by the committee to essentially rebuild the database. I'll give Chris just a couple minutes that talk about exactly what he did not just for the audited period, but since the committee's inception in 2012. >> Thank you, Jim. It's a pleasure to be here. My name is Chris Marston. Election CFO is my firm. My colleague, Debra Hankins, and I have about 15 years of experience. I guess the fact that I haven't been to an audit hearing before is probably good news. (Laughing) But McSally for Congress retained us to perform an internal review of their reports. Congresswoman McSally wanted it to be thoroughly addressed. We started from the inception of the committee in February 2012 and the time period that I'll review ended December 31, 2014. So just a little bit into the 2016 cycle, but at the year end. Over the course of that time, there was a 12.3 million dollars in activity. 35,000 contributors, making 84,000 contributions. The committee had bank accounts at different banks. And 8 online credit card systems that were involved in the campaign. The campaign had used Aristotle 360, and we continued to use that, but started from scratch. We moved the existing database to an alternate database. One report at a time reconciling to the bank statements after each report to ensure that we got it right we reviewed all of their requests for additional information that had come from the commission over that period of time to ensure that they were all accurately addressed and we of course identified other issues that we thought might be of concern that we were sure to address. As the audit division noted, we got through a whole lot. We did wind up with some disagreements about some reporting as it relate to the 2014 election cycle. But by and large with 12.3 million dollars of activities and a number of other statistics I won't bore you with because they're all in your audit report, we felt good about the work that we did. It was about three years' worst of activity that we reviewed. We did that over the course of two months at the end of 2015, ultimately filing our amended reports at end of early 2016. It's been two years since we completed that activity. But I will do my best to answer any questions the commission has. With respect to the disagreements on the statement of financial activity, I'll let Jim address those, but I'm prepared to answer any questions you might with regard to those issues. Thank you. >> Thank you, Chris. Is this microphone working? Okay. Great. So thank you, Chris. So I just want to get a bit into sort of the substance of the disagreements and then happy to kind of answer any questions the commission or the audit division might have. So first off, I think it's important to note that all of the transactions here, despite, the issue is really some hypertechnical reporting issues. But the reality is that all of the transactions have been fully disclosed and the public record has been informed of everything that's happened. After Chris's herculean effort to do all of his work. This really boils down to some hypertechnical reporting issues. The draft final audit report correctly noted that the 2014?15 cash on hand was materially corrected as a result of our efforts. But the audit division still maintains that the 2014 receipts remain overstated by $94,528. And the 2014 dispersements remain overstated by over $84,000. We disagree with these figures for three reasons. First, and a little bit of background, the auditors, we believe they've included some transactions in the alleged overstatement totals that don't appear on the audit reports. At the exit conference, the audit staff provided spread sheets right here. If you have any interest. Spread sheets of receipts and dispersements they believe accounted for the overstatements. We spent weeks sifting through these, the spreadsheets. Cross referencing them with the audit reports and we still couldn't really figure out where they got their numbers. For instance, for the receipts, the spreadsheet listed 122 receipts they believed made up the overstatement of 94,528. The committee conducted its own review of the receipts. And of the 122 transactions, at least, and this can be done counting a number of different times, at least 33 of the transactions totally slightly about 27,000 dollars do not even appear on the amended reports. And I have a list of these here, as well, that we provided to the audit division. It's interesting, though, because the draft final audit report actually states in footnote four that the committee quote correctly removed 33 receipt transactions totally $27,115. But it doesn't seem they accounted that amount from the alleged misstatement that they came up with originally of $94,528. So on the dispersement side, the committee reviewed the spread sheet that the audit division provided at the exit conference, which they believe made up the overstatement. And at least 23 of the transactions totally approximately $16,908 were not disclosed on the committee's amended reports. So our first point of contention is we don't know why, we're sort of, ??Êwe don't know why the number is what it is after reviewing it a number of times. It cannot equal the alleged overstatement of receipts. The second issue, the point of contention we have, is that $21,100 of the transactions that make up the alleged overstatements, they were accurately reported on our amended reports as contributions and refunds. They actually were contributions and refunds. The committee reported $21,100 that were later refunded to the contributors. The auditor's position is the number of contributions weren't received by the committee and the committee did not issue the refunds. I have a list here. But it's all information that we provided to the audit division already. Instead of receipts and contributions and refunds, they contend that these were so?called chargebacks, and they should have been reported as negative entries on schedule A, rather than refunds on schedule B. But we have proof that this individual named Sheldon Wayne, and Carol, they actually requested refunds from the committee and they were not bounced checks. The committee believes that these refunds were properly report as receipts and dispersements. Now the remaining $5600 constitutes funds that actually came into the committee's accounts. And we believe that under the regulations the committee is required to show that as a receipt on schedule A. And that's what we did. The campaign guide, which has been referenced a number of times in various different documents, it states that the committee should report a transaction as a negative entry when a contribution is redesignated or reattributed due to insufficient funds. The checks are never cashed for investment losses. The reports analysis division has also issued guidance stating that with respects to contributions, quote negative entries on schedule AÊshould only be used to disclose returned on bounced contribution checks and not for refunds by the committee. And even if these were not refunds, which we contend that they were, the office of general council's own memo to the commission dated July 4th with respect to this audit states that the campaign guide quote recommends that when a contribution is rejected a committee report it as a negative entry on schedule A. It doesn't say anywhere that this is required. In short, the commission hasn't provided clear guidance on how a committee should report a so?called chargeback. So the third point of contention is the committee's reporting of $45,015 in offsets to operating expenditures that we believe was reasonable and not inconsistent with the statute of regulations. The campaign guide provides that uncashed checks written by the committee should be reported as negative entries rather than offsets to operating expenditures. The committee reporting unclear checks as offsets receipts to ensure the cash on hand was accurate. It didn't distort the public record or the contributions by the committee. The reports clearly deleanuate the contributions from contributors and other receipts like interest, loans, or rebates. The amended reports, because those checks did not clear, those funds were treated as offsets. We believe that this is a reasonable way to do it. To account for the transaction even if it was not the preferred way. As I said, the OGC said this is a recommended way of doing things. Even with that said, even if the commission concluded that the 45,000 in offsets should have been reported differently, which we don't think it should have been, in light of the vast amount of money that was raised and spent during this period, it doesn't, it shouldn't really be material. And frankly, with respect to the offsets, many of the checks actually did clear. And were refunded as offsets. The audit division seems to think that the remaining 45,000, they just all didn't clear and they weren't refunded and they shouldn't have been reported as offsets. They're basically saying that none of the 45,000 actually cleared. And so, you know, even assuming that let's say half, which I think is generous, did not clear, you're down to about $20,000 or so that were reported as offsets in universe of $9,264,036 for the period. That's .2% in terms of activity, which we don't believe is material in this context. The initial reports, the audited reports, there was a misstatement. But to say in the draft final audit report that the audit staff maintains that 2014 receipts and dispersements remain overstated by $94,528 and $84,972 respectively for these reasons we don't believe can possibly be accurate. That is what we basically have as conclusions to finding one. And I'll briefly touch on our issue with finding two. Finding two, basically finding two the audit division stated that the best efforts matter is resolved. And that's fine, but we don't believe it should have been a finding in the first place. I mean we have provided specifically we dispute the draft final audit report statement that quote since the committee's corrective action occurred after audit notification, the matter is included in this audit report, end quote. It appears that the auditors seem to be sort of misconstruing the best efforts requirements here. We exhibited best efforts by providing countless documents to the auditors' solicitation materials. E?mails between the team saying these letters went out. All the solicitation materials had the request for occupation employer of over $200. And the former finance team always followed up since the very beginning, since 2012, from the very beginning, that requesting this information at least once. And so it's true that during the audited period and after we were notified of the audit that we started including more information about occupation employer. But that's after the second and third go?around. And so the best efforts requirement requires that all the solicitation materials had that language, but also that you follow up within 30 days verbally or written to get that information. And that's exactly what the committee did. The fact that they didn't get that after so many, you know, after sending these letters out and sending the correspondence out shouldn't have any bearing on the best efforts. They exhibited best efforts right from the very beginning, and that's why we don't believe this should be a finding in the first place. Congresswoman McSally does a lot of direct mail fundraising. Getting small dollars. So oftentimes people will not include that information. They'll donate multiple times, but not include the information of the occupation of employer. Sometimes they just don't include it because they're giving small amounts each time and they may not think they have to. But when we found those contributions aggregated to above $200, and even before then, all of those documentation materials required employer and we followed up with the donors. We are appreciating that they took corrective action. Corrective action is yes we found out more information about our donors and included that on the report We believe that finding two shouldn't be a finding at all. And I think Chris can actually speak, it's become a bit of a practice, if you will, where the reports analysis division if you have a report filled with info requested, info requested, so on and so forth for many, many pages of report, it's almost automatic that you're going to get a request for addition analysis information, regardless of whether they exhibit best efforts in the first place. Chris? >> For several clients, particularly those who engage in direct mail fund raising in the way that Congresswoman McSally did, it's frequent to get a note noting the need to comply with the best efforts provision. To the point where the request would come after every report. In talking to several different analysts about it they recommended that at the beginning of each election cycle each year for unauthorized committees that we simply document what our best efforts process is, which honestly is essentially repeating exactly what the tax to the RFAI asks us to say, to put that in the report of the beginning of each cycle to avoid getting those RFAIs. I've taken to doing that for each client. It's cut down the number of RFAIs. It doesn't necessarily change the public record or what the committee engages in. It simply documents it one more time. Instead of saying info requested per best efforts wherever the information is missing, we now do that as well as putting a disclaimer saying that when we say this we mean that we follow the commission regulation which we repeat it here. I don't know if that has made the world a better place, but I don't think it's material to whether the committee has complianced with the best efforts requirement. >> It seems as though the best efforts finding in finding two, it seems like the burden is being shifted a bit to prove that all of our materials and all of our followup, trying to produce that all to prove that we exhibit best efforts. As I said, we produced numerous documentation e?mails, former treasurer attested to these are all the procedures that we had in place. We did it as opposed to them having proof that we did not. And then I'll also note, which kind of goes to finding two, as well. There was complaint on this exact issue that was filed in 2015. Which covered 2015 reports, but also covered 2014 reports. And number 6953 and that was dismissed 5?nothing. It seems sort of counterintuitive to think that something like that could be resoundingly dismissed with the same allegations and then having that be a finding and saying that it's mentioned in the audit because corrective action was taken after the audit commenced. So with that said, you know, we're happy to answer any questions you might have. Those primarily are the three issues with respect to finding one. And then, you know, what we just discussed with finding two. >> CHAIRMAN HUNTER: Thank you, gentlemen. Any questions? Commissioner Goodman? >> COMMISSIONER GOODMAN: Chris, your math doesn't add up with our auditor's math. >> In the issue of receipts and dispersement. Our cash on hand numbers match. >> COMMISSIONER GOODMAN: Have you identified precisely where they don't match up? >> Not to the penny. >> COMMISSIONER GOODMAN: What's the delta? >> I think Jim cited it. I think we were down to the 40,000s on both sides. >> COMMISSIONER GOODMAN: 40,000s. Our audit staff, is there at least agreement on the delta? Have you looked at his numbers and tried to see where we disagree? >> Absolutely, Commissioner Goodman. We have looked at the amended reports that committee filed at the beginning of 2016 and the totals there and we compared them to the bank figures. And the vast majority of the delta on both sides receipts and dispersements was due to the fact the committee reported the void transactions and the corresponding nonexistent vendor refunds. And the second major group was the chargeback that the counsel mentioned a second go. Those were the two largest groups where we disagree. Everything else is small and we did not really even mention in the report per se. We addressed those two groups of transactions. >> COMMISSIONER GOODMAN: And they account for how much? >> The voided dispersements that ended up being reported totaled $45,000. And the chargebacks total $21,100. So those two groups combined contributed to the misstatement on the receipt and dispersement side, even though as we mentioned several times we do agree with the cash on hand as per the amended reports in 2014. >> COMMISSIONER GOODMAN: Do we have a reporting problem or a mathematical problem or a difference of opinion? >> I believe there's a little bit of both. The reporting problem, as the audit staff has noted amounts to about $45,000 and $21,000 in terms of our disagreement about how to do the reporting. But the numbers that they're citing for the misstatement in the draft final audit report are 95 and 85. It's the difference between those two still being listed as a misstatement, because we don't think there is a misstatement. We identified and acknowledged in the footnotes at least $21,000 for example on the receipt side where we actually did receive it, we have shown them we received it, did refunds, but they still left the large numbers in as to what they think the misstatement is. >> COMMISSIONER GOODMAN: Do you have a response to that? >> I do. As a matter of every audit we look at the committee's reported activity and compare it to what went through the bank. We don't get very creative there. If we see transactions that are being reported and not clearing bank, either way as a receipt or dispersement, we note it. In this particular case, the largest group, the voided dispersements did not go through the bank. Bank knows nothing about them. And in order for the committee to correct the end in cash the committee reported nonexistent refunds, however we're inflating both sides of receipts and dispersements. That's our contention. It's all about what goes through the bank. We understand what the committee is doing math wise, but the bank disagrees. >> If I may, I appreciate that. And that's where we have the fundamental disagreement to how they should be reported. I think what we're talking about now, though, is justÊfiguring out whose numbers were right and wrong in regard to what was on the amended reports. As Chris said, the spreadsheet that we were given at the exist conference listed 122 receipts that the audit division believed made up the overstatement of $94,528. But at least 33 of those transactions aren't even on the amended reports. They're not even on there. And there's a list right here of names and contributions that were on the spreadsheet that we were provided at the exit conference, but is not there on the amended reports. We were miffed by how is that amount still included to add up to $94,528 where at least on the receipt side 33 transactions aren't even there. And then on the dispersement side, 33 transactions totally 27,115 are not there. So I think that we can have the disagreement about the reporting of chargebacks and offsets to operating expenditures. We believe they were right and reasonable. But even before that, I think it's important to note that the numbers just aren't there. They're not in the amended reports. We provided this sheet and, you know, my former colleague Beth provided this fancy highlighted spreadsheet noting where the disagreements were with respect to what was on their exit conference spreadsheets and what was on the actual amended reports. And as I said, they just weren't there. >> COMMISSIONER GOODMAN: So even if you went back and amended your reports to account for these chargebacks in the way that you're being presented would be the proper way to do it, you still have a delta of math on the total transactions. There's still a difference of opinion on the total math. >> That's correct. >> COMMISSIONER GOODMAN: There's still a difference of opinion on the math? >> That's correct. We have the chargebacks and the voids. Had the committee correctly reported those two groups there would be no delta. >> COMMISSIONER GOODMAN: So that indicates to me that this is merely a reporting issue. Now you still think there's a delta? Even if you report? Because Susanna says if you went back and accounted for it on our reports. Put the square peg into the round hole and put them on the right lines, she says the mathematical delta goes away. >> Just one more note. We auditors, we look for material agreement with the bank. We're not looking for perfection here. We're not looking to the penny. We're looking to the ballpark and that is why the little transactions that the counsel referred to, they wouldn't at the end of the day made the difference. Had those two groups of transactions that do make up the majority of misstatement were taken care of. That's all we're saying. >> COMMISSIONER GOODMAN: I guess I'm hearing there's not that big of problem after other than the reporting construct. >> If the standard is material, then I would absolutely agree. I think there is still a difference in numbers because their total that the audit division has listed of 95 and 85 is substantially more than the 45 and 20 that we're talking on the alleged misreporting disagreement. If those numbers aren't material, then I would absolutely agree with the audit division, and I would suggest the whole thing is not material, but that would just be me. (Chuckling) >> COMMISSIONER GOODMAN: Thank you. >> CHAIRMAN HUNTER: Any other questions, comments? Mr.ÊPetersen? >> COMMISSIONER PETERSEN: I have a quick question of the auditors. To what extent is the reporting issue? Have we had these disagreements in the past about how to report these chargebacks? You know, the refunds and so far? Because I don't, at least I've never had this issue teed up for me in this way. And the way I hear it is that there is a recommended way to report these transactions, but your contention is that recommended method is not grounded in either the statute on the regulations. And may be a recommendation in the campaign guides, but not otherwise is grounded in the regs. And whether or not certain information does or doesn't hit the bank isn't necessarily dispositive of whether it's they should be reported as dispersements, negative dispersements, or receipts. >> I think you're right, Commissioner. And I think in our view it's a more accurate view of what happened. Specifically in terms of reporting contributions and refunds, I'll note there's a handful of these contributions and refunds that these contributors actually requested refunds. Hit the account, went into the account, and then they requested refunds. And that's what we did. But the audit division is stating that they still essentially never hit the account and that they weren't actually refunds. >> COMMISSIONER PETERSEN: Okay, I guess I'm just getting confused on that issue. Are there categories of money that did actually hit the account that were then refunded that there is a dispute over? >> Commissioner Petersen, I think that may be the area we labeled as not material. The difference between the 85 and the 45 that account for those. I would not be surprised at all if it was the case that the things the audit division viewed as chargebacks totaled the 45. I would offer that chargeback is an ill?defined term. But there is a substantial difference in my view between for example a person making a credit card charge. They call the credit card company and dispute it the next day and it's reversed. The money never gets to our merchant service account and never makes it to us and the situation where a donor notices four months later that their credit card was charged four months ago and they didn't intend to make that contribution, and the campaign says please refund this to. They gave us the money and now they're going to take back the money and give it to the donor. Both of those things I believe in the parlance of the campaign guide would be considered a chargeback, but I believe they're materially different and it's appropriate to report one as a negative entry and one as a refund. That may be a disagreement between me and reports analysis or the whole world, but I don't believe the commission has promulgated regulations that a chargeback is an answer and it means this and it should always be treated this way or that way. >> COMMISSIONER PETERSEN: Okay. Appreciate that clarification. >> CHAIRMAN HUNTER: Did you have something to say? Because it sounds like there is still a level of disagreement over what the issue is here. And I'm not sure that we're saying that we have a meeting of the minds. >> The group of six contributions that amounted to $21,100, three of them were check contributions that happened to bounce. They were non?sufficient funds checks. The other three were credit card contributions, where in one of the transactions we were able to review the merchant statement and note that it was an accidental donation. We would like to note for the commission that the industry recognizes different types of chargebacks. Chargebacks simply mean return of the money. There could be a technical reason for that. Credit card does not have sufficient funds on it. Or there could be a clerical error. Such as in this situation, the contributor never meant to give $2,000, only $20, for example. So in the three situations, they never intended to give so much money. And in these three instances the money was returned via bank, via the debit, back to the contributor. So the committee per se did not write any refund. It's been done for them. That's all we're saying. >> CHAIRMAN HUNTER: So is there anything that you want them to do to make that be not material anymore? >> Madam Chair, not to burden the committee further, we just simply wanted them to disclose form 99 miscellaneous specs and disclose it as a matter of public record. >> CHAIRMAN HUNTER: Is that something you've already tried to do? >> We think we would just confuse the public record more than anything else. This happened so long ago. The totals are all correct. They're just categorized a little bit differently. I think if we were to file a form 99 explaining all of this, people would not really understand what's going on. This just happened so long ago. And if we're having a discussion about what a chargeback is and there is disagreement legally and there is nothing in the regs or statute about how it should be reported, I don't know anyone in the public record or out there would think about what does this mean. It's our view that it would cause more confusion than anything else. >> How certain nuanced funds were reported, it would be a nonsignificant number. That's my understanding. Anyway, I want to thank you very much for coming in. I understand this is highly detailed. And I understand this committee has incurd a lot of accounting and legal cost to bring their reports current. I want to just thank you both gentlemen for bringing this to our attention. >> Thank you for the opportunity. >> CHAIRMAN HUNTER: Any other questions or comments? OGC? Anything else you would like to say? >> I don't think so. I think we've pretty much said anything. We appreciate the opportunities to bring the issues to the forefront. And we appreciate the audit division's diligent work on this. It's been a bit of a task. Hypertechnical. But everyone has been very professional and courteous and we appreciate it. >> CHAIRMAN HUNTER: Excellent. Thank you to all and thanks so much for coming in. Appreciate it. >> Thank you.