Apparently the audit of the 2012 financial records of the Libertarian Party remains unfinished, making this the longest audit in the history of the LP, perhaps by a factor of 2 or more . . .
I say apparently as I offered my resignation as one of the three members of the 2012/2014 Audit Oversight Committee (Aaron Star, Brett Pojunis and myself) to Chair Neale this past October 21st; It was accepted a few days later.
Earlier today George Phillies published the 2012/2014 Libertarian Party Audit Oversight Committee’s Second Interim Report at:
with the file name of:
and the associated text:
>>>This is the Second Interim Report of the LNC Audit Committee, clearly marked “not confidential”. And, no, I did not get it from Starchild. George Phillies<<< He didn't get it from me either, although my name is on it as one of its three authors (Aaron authored the initial draft of this report (while asking Brett and I to create draft reports as well, which neither of us did). We did edit the first draft of this, each of us expressed concerns about its length and purpose, I had some input into its (re-)organization, but overall this is Mr. Starr's work product which I supported. The first five sections are reproduced below. George has not published Section 6 (and may not have access to as it deals with clearly confidential issues). I am available here to answer any questions about my past service on this committee, as well as by email (firstname.lastname@example.org).
For the convenience of IPR Readers I’ve reproduced the text of the file George Phillies posted at the link above as text below.
(Note: Some of the formatting in the PDF version of this document makes it easier to read from the link above (which requires creating (or using an existing) Yahoo account, I believe.)
Also two pages of charts (the last two pages in the report) are not reproduced below. Finally I’m not certain the report posted by Dr. Phillies was identical to the last version I was part of editing (it appears so on its face, but I have not carefully double-checked for that. I’m not confident that the PDF to text conversion below is without error (I’ve attempted to clean up some of the formatting, including removing page numbers from within the text and fixing one misspelling. If you find other errors, please let me know and I’ll fix them here.)
Second Interim Report of the 2012/2014 Libertarian Party Audit Committee
15 October 2013
Note: Our first Interim Report for the 2012 Audit was presented to the Libertarian National Committee, 14 July 2013. Because some LNC members were not present, and because this report may be made available to others, some material has been repeated here. Materials previously presented in executive session are not included here. This report is not confidential.
This report addresses the following major deficiencies:
1) Related Party Transactions with LNC Board Member Cloud, page 3.
2) LNC Funds Used to Pay Personal Expenses of the Executive Director, page 11.
3) Other Questionable Employee Benefit Practices, page 19.
4) Errors in Accounting Records, page 22.
5) Issues not yet addressed, page 23.
6) FEC Reports: (addressed in a separate confidential document).
EXECUTIVE SUMMARY OF INTERIM REPORT RECOMMENDATIONS
• Adhere to the Policy Manual requirement that written contracts between the LNC and all vendors be approved by the Chair and reviewed by General Counsel.
• Cease the practice of payment of commissions where a clear basis cannot be measured.
• Cease the practice of payments where a detailed invoice has not been provided.
• Cease the practice of staff editing of vendor invoices.
• Adhere to the Policy Manual requirement that the Chair or Treasurer must approve expense reimbursements to the Executive Director.
• Recover funds inappropriately paid to or on behalf of the Executive Director.
• Correct errors made in the accounting records.
• Direct staff to obtain documentation on advances made for moving expense.
• Direct staff to provide to the Audit Committee specified receipts or statements from 2013 to determine the nature of shipping expenses recorded as being Carla Howell’s moving expenses.
SCOPE AND AUTHORITY OF THE AUDIT COMMITTEE
An Audit Committee is required by the Bylaws.
Bylaw Article 10.2 states “The National Committee shall cause an efficient double-entry system of accounts to be installed and maintained. Financial statements of the Party shall be prepared in accordance with Generally Accepted Accounting Principles (GAAP). Audits shall be performed annually by an independent auditor. The non-officer members of the National Committee shall appoint a standing Audit Committee of three members with power to select the independent auditor. One member shall be a non-officer member of the National Committee and the other two shall not be members of the National Committee. The Audit Committee shall clarify for the National Committee any recommendations made by the auditor.”
The Policy Manual explicates the role of the Audit Committee:
“The Audit Committee’s tasks are to select an independent audit company and to direct the scale and scope of standard annual audits of the Party’s accounting records and processes. Following receipt of the audit company’s report, the Committee shall help the LNC interpret the audit results and assist the latter in preparing any action plans that might be needed to alleviate deficiencies.”
The Policy Manual clarifies that the Audit Committee shall have access to corporate records:
“Members of the National Committee and Audit Committee are entitled to inspect and copy books, records (including electronic records) and documents of the Libertarian National Committee, Inc. to the extent reasonably related to the performance of the member’s duties to the corporation, including those duties as a member of a committee, but not for any other purpose or in any manner that would violate any duty to the corporation. Prior to obtaining copies the member shall execute a standard nondisclosure agreement. If the member requires an outside professional to assist in reviewing and analyzing the materials, that individual shall also execute a standard nondisclosure agreement prior to receiving the materials.”
The Audit Committee has been granted special rights to review the Party’s records. Each LNC Member has an absolute right under Washington, D.C. law to inspect corporate records in the exercise of his or her duties as a board member and to enlist agents to assist with this.
Any member of the LNC (including the member of the LNC who sits on the Audit Committee) has the legal right to enlist the help of outside professionals to review the Party’s corporate records, provided that such review is reasonably related to one’s duties as a member of the Board of the Libertarian National Committee, Inc.
1.0 RELATED PARTY TRANSACTIONS WITH LNC BOARD MEMBER CLOUD
The LNC Policy Manual requires that each contract or modifications thereto shall be in writing. It requires that the Chair approve any contract in excess of $7,500. It requires that all contracts of more than one year in duration or for more than $25,000 be reviewed and approved by General Counsel prior to signing by the Chair.
1.1 SUMMARY OF RELATED ISSUES IN OUR FIRST INTERIM REPORT At the LNC meeting on July 14, 2013, the 2012/2014 Audit Committee reported that a review of materials supplied by LP staff indicated the lack of documentation required of other vendors for payments of $38,800 to board member Michael Cloud. We reported that the payments were made without a written contract; that Mr. Cloud’s three invoices requesting payment lacked itemized details and were for round dollar amounts; and that the face of the invoices included a promise to provide details at a later date (“I will piece together an itemized and documented bill for all my fundraising and writing services during this time frame – with prices and royalties – before the end of this month.”), which effectively made that a request for an advance payment in anticipation of documentation, or, in effect, a loan.
Because Generally Accepting Accounting Principles requires that we provide disclosure in the financial statements of transactions with related parties, we informed the LNC that the Audit Committee had requested the prior month (June 2013) from staff all information on the work product produced for $38,800 so that an appropriate footnote disclosure could be completed. We reported that we did not yet have that requested information. At the meeting, Chairman Neale and staff both agreed that staff would provide the requested information within 7 days.
We promised to generate a supplemental report based on our findings.
Though we had not seen anything detailing the payment calculations, we had been told that Mr. Cloud’s pay was commission-based. For fundraising services performed by Mr. Cloud, we asked staff for the gross amount of money raised (per solicitation, where applicable) and the net amount after direct costs. We asked for a listing of the donations generated, identical in nature to the demands that had been made by the LNC in the case of Big L Solutions, another related party vendor. For copywriting services performed by Mr. Cloud, we asked for copies of the work provided. In cases where the aim of the copywriting service was raising money, we requested the gross amount of money raised (per solicitation, where applicable) and the net amount after direct costs, identical in nature to what had been provided to us in the case of Big L Solutions.
1.2 SUMMARY OF RESULTS OF REQUESTS MADE FOLLOWING FIRST INTERIM REPORT
The Audit Committee received some of the information on various later dates from Robert Kraus up to and including August 3. The data provided by Mr. Kraus included a database of donations by fundraising appeal. Staff was not cooperative in fulfilling our requests in a timely manner, and it required assistance from Chairman Neale to get additional information. However, as of this date (mid October 2013) some requested data has yet to be provided.
The Audit Committee noted that a July 29, 2013 email Mr. Kraus forwarded to us from Carla Howell made reference to an invoice Mr. Cloud turned in a week prior (“Everything else needed should be on the invoice Michael turned in a week Ago.”), so we then requested and received a copy of that invoice. This new invoice from Mr. Cloud included a detailed breakdown of the items produced by him, along with the money raised. This invoice was the first time a formula purportedly used for calculating Mr. Cloud’s compensation was provided to the committee, despite several prior requests.
We thought that we were close to wrapping up our work, but then an examination of the metadata of some of Mr. Cloud’s work product that Mr. Kraus provided to us revealed that some work product for which Mr. Cloud had been paid was recorded as having been authored by then Executive Director Howell. We realized that we could not rely on Staff assertions about the documents alone to substantiate what Mr. Cloud wrote, so we requested that we be forwarded emails showing that Mr. Cloud had indeed sent the 37 documents for which he had received payment.
Staff claimed that this newly-provided detailed invoice was generated by Mr. Cloud in late December 2012, presumably to fulfill Mr. Cloud’s commitment to providing details prior to his final payment. However, the facts do not support that apparently false or mistaken assertion. We analyzed the donations database Mr. Kraus generated in early August 2013 to calculate the estimated amount raised by each fundraising letter. We compared those figures to Mr. Cloud’s detailed invoice, which also included the dollars raised by each fundraising letter (and upon which a commission had been paid).
The figures on the invoice were larger than the donations known as of December 2012, and those figures either matched or were slightly less than the totals from the database Mr. Kraus sent to us. However, Mr. Kraus’ database of donations includes gifts all the way through August 1, 2013. Staff explained that Mr. Cloud’s detailed invoice included estimates of future gifts. However, we did not find it credible that anyone can so accurately predict the performance of a fundraising appeal to the exact dollar amount many months in advance. The Audit Committee concluded that the more reasonable and probable explanation was that this new invoice had been created in July of 2013, not December of 2012, by LNC board member Cloud with the assistance of one or more staff members.
Mr. Kraus provided the Audit Committee with a database of the fundraising amounts for each letter for which Mr. Cloud had claimed authorship and payment. To the date of this report, however, we have not been provided a similar listing of the amounts raised per email solicitation attributed to Mr. Cloud. Upon inquiry, staff confirmed that the LP does not currently use any mechanism to track whether online donations came in via the “donate” link in an email message or via some other channel. Instead, to calculate commissions on email fundraising, Mr. Kraus had assumed that any non-membership online donations from a 3-5 day period following each email solicitation were attributable to that email appeal. A commission should not be paid on an unknown, immeasurable, or unknowable, amount. (For example, if the day after an email solicitation was distributed, a donor contributed in response to an online Facebook post made by Arvin Vorha, that donation would have been attributed to the fundraising email, for which an inappropriate payment would have then been made, and then incorrectly recorded as an earned “commission.”)
1.3 INITIAL CONCLUSIONS AND RENEWED REQUESTS FOR CLARIFICATION
The Audit Committee concluded that staff could not reliably document the amount of money that Mr. Cloud’s efforts generated, and therefore we could not craft a financial statements disclosure footnote based on such figures. We needed some metric to disclose to our membership in order for them to be able to gauge how much work was done for the paid funds (formerly mischaracterized as “commissions”). We thought perhaps we could craft a disclosure footnote based on a cost per written word, assuming we could verify which words Mr. Cloud had indeed authored.
The Audit Committee then requested additional assistance from Chairman Neale, providing him a list of items we were waiting to receive from staff. We suggested that perhaps he could have Ms. Howell clarify matters, as we had been hearing mostly from Mr. Kraus (in part due to her vacation following the July LNC meeting).
On August 13, 2013, Chairman Neale forwarded to the Audit Committee some responses from Ms. Howell to questions asked by Chairman Neale regarding these matters. We noted with interest that Ms. Howell indicated that for some of the pieces she “was essentially taking dictation from him” for the contents of a mail piece, thus she might be shown as the author of a document, rather than Mr. Cloud.
We then repeated our requests for missing information and over the next few days discussed with Chairman Neale our mutual sense that we could not fully trust the information provided. We agreed we had, at best, an overly constrained ability to substantiate Mr. Cloud’s actual work product.
1.4 AUGUST TELECONFERENCE
August 19, 2013. Chairman Neale then called a teleconference to review the status of the Audit Committee’s work with the LNC’s Executive Committee. Mr. Cloud explained during the teleconference meeting that the reason why documents show Ms. Howell as the author is because Mr. Cloud did indeed dictate fundraising appeal wording to her over the phone and she would type it into a Word document that she created on her computer. As a result, it was claimed that there was no email traffic between them to memorialize or document that Mr. Cloud was the author – or that could be used to show that he was in any way responsible for the editing or coauthoring of these documents. Later, Ms. Howell reported that she would revise the documents independently and/or by reading them aloud over the phone to Mr. Cloud, who would respond over the phone with editorial changes. Ms. Howell would then incorporate into the final document on her computer.
The Audit Committee challenged the reasonableness of the explanation that no supporting documentation existed for the editing of three issues of LP News, the authoring of 28 written fundraising appeals and six major party news releases, because Mr. Cloud did this predominantly by dictating original content and edits over a telephone and rarely, if ever, made use of an email account or computer to perform this work.
1.5 INITIAL RELATED DRAFT FINANCIAL DISCLOSURE STATEMENT FOOTNOTE
In the absence of documentation of the work performed, the Audit Committee proposed that the financial statement footnote include the following language:
• Over-the-phone review and editing services for three issues of LP News $1,500
• Over-the-phone consulting services performed during May through December –dictating to the Executive Director approximately 23,500 words for fundraising appeals and news releases at about $1.60 per word $37,300
1.6 NEW DOCUMENTATION PROVIDED
On August 28, 2013, Chairman Neale directed Ms. Howell to forward to the audit committee the emails which were used to transmit Mr. Cloud’s finished work products to her. We and Chairman Neale agreed that September 5 was a reasonable deadline for this to be done.
Before we received those forwarded emails, on September 3, 2013, Chairman Neale forwarded from Ms. Howell a newly revised invoice from Mr. Cloud. We had not requested that this be done, and were only expecting forwarded emails.
1.7 ANALYSIS OF NEW VERSUS PRIOR DOCUMENTATION:
A comparison revealed a number of differences between this new invoice and the one previously provided to us.
• Some items formerly attributed to Mr. Cloud on the previous invoice had been deemed not to have been written by him at all, and were either removed from the new invoice or amended to award only partial commission from a collaborative writing, or co-authorship, with Ms. Howell.
• New items were listed that were not on the previous invoice.
• One item was re-classified into a different type of work, which then impacted the amount of the calculated fee.
• The new invoice included items Mr. Cloud had previously agreed to do for free before he became a paid vendor. These were related to promotion for the 2012 national convention, and the new invoice suggests he was owed for these under the terms and payment rates of his post- convention vendor agreement, but suggests that Mr. Cloud simply chose not to bill for them and showed them as a “discount”. Additionally, the metadata of this new invoice indicated that it had not been solely prepared by Mr. Cloud, as it was also edited by Ms. Howell.
1.8 APPARENT EDITING BY STAFF OF A PREVIOUSLY SUBMITTED INVOICE
The Audit Committee thought it inappropriate for any staff member to edit an invoice provided by any vendor.
This un-requested new invoice with such substantial changes left us to conclude that staff had used no consistent basis for the payments to Mr. Cloud, either at the time the payments were issued or at the time these subsequent attempts were made, to justify said payments. Neither appropriate documentation, nor detailed invoices of work were provided at the time payments were made. And the determination of what work was performed and by which authors has been evolving over time and remains uncertain to date. At least some portions of the commissions paid were based on revenues that could not and cannot be accurately measured.
1.9 MORE DOCUMENTATION PROVIDED AND REVIEWED
September 5, 2013. Mr. Benedict provided to us copies of 44 emails between Ms. Howell and Mr. Cloud during this contract. We noted that some of the emails had been partially redacted with indicators left to specifically tell us that it was redacted. However, on another email which had not been noted as having been redacted, one portion of the header information was visibly altered, leaving us to question whether the other materials sent to us were unaltered, or whether they had also been partially reconstructed after the fact during the 8 days it took them to provide the emails.
At this point we constructed a chart of what seemed to be substantiated by these emails, presuming they were accurate representations, and what was left unsubstantiated. You will find as an Exhibit to this report titled A Recap and Analysis of Michael Cloud’s Summation Invoice for May through December 31.
1.10 CALCULATION OF COST PAID PER WORD (BOTH AUTHORED AND/OR CO-AUTHORED)
Leaving aside for the moment that the Audit Committee cannot substantiate the dollars raised by Mr. Cloud through email fundraising, it is claimed that $216,106 was raised from all of his writing efforts based on our count of 22,488 words being written, which supports the payment to Michael of $39,466.50 in gross fees and commissions (before discounting the amount to the $38,800 billed).
However, of the total revenues generated, $76,867 (over 1/3) was from work that cannot be substantiated in the emails staff provided to us. If you review the chart provided in the Exhibits you’ll find that there are 11 items for which no documentation was provided to support work the LNC paid for. There is no substantiation for those 4,589 words written, no substantiation that three issues of LP News were edited and therefore no substantiation that $13,252.85 in gross fees and commissions (before discounts) were earned by Mr. Cloud.
Though the Audit Committee’s task does not include making judgments about how much a vendor’s work is worth, we will pass along to the LNC some additional data for your independent evaluations. Of the roughly $26,000 in fees the Audit Committee can substantiate, the Word document properties show around 3,900 minutes of time that these documents were open. We can’t be sure how much time Mr. Cloud spent working on these. (One can easily imagine that a person will often walk away from a document with it open on his computer while working on something else. One can also imagine that someone might spend some time not working directly on a document because there is thinking that goes on before writing commences. And there is work that is done after completing the document.) Using this amount of time as the best available reasonable gauge of the amount of work done, results in a rate of pay of approximately $400 per hour.
1.11 REVISED FINANCIAL DISCLOSURE LANGUAGE BASED ON DOCUMENTATION PROVIDED IN SEPTEMBER
On September 8, we proposed new language for the financial statement footnote concerning this related party transaction:
• Services performed from May through December –editing and co-authoring with the Executive Director approximately 22,500 words for fundraising appeals and news releases at a cost of about $1.72 per word. $38,800
Crafting this footnote for disclosure was our goal in this matter, and that part of the task for the audited financial statements is now concluded. We have informed you of the internal process shortcomings that we found along the way.
1.12 INITIAL CONCLUSIONS:
• The Policy Manual was violated in that there was never a written contract between the LNC and Mr. Cloud that was approved by the Chair and reviewed by General Counsel.
• Ms. Howell approved the payment of $38,800 to Mr. Cloud based on invoices that lacked supporting details explaining how the amount due was calculated.
• Staff assisted with constructing for the Audit Committee a detailed invoice and claimed that it was created around the time of the final payment in December 2012, while the information in the document could not have been known until July 2013. Chairman Neale agreed with our suspicion that staff constructed documents after the fact.
• Staff later provided the Audit Committee with a further revised detailed invoice that removes several works previously attributed to Mr. Cloud and adds several, including some that Mr. Cloud had previously agreed to do for free. The metadata of this revised invoice shows that Mr. Cloud authored the invoice and Ms. Howell edited it. Staff altered an invoice prepared by a vendor, who also serves above them in the organization, namely as a board member.
• Commissions based upon $119,618 raised by email fundraising are not supported and cannot be solely attributed to Mr. Cloud because there is no tracking mechanism to link website contributions with email solicitations.
• It took an inordinate amount of time for Staff to forward to the Audit Committee forty-four emails between Mr. Cloud and Ms. Howell intended to show that Mr. Cloud wrote the documents for which he received payment. The Audit Committee found evidence that the emails were altered.
• No evidence has been presented to the Audit Committee that Mr. Cloud reviewed three issues of LP News for the $1,500 he charged. None of the 44 emails that were forwarded to the Audit Committee showed the sending of drafts or the receiving of suggested edits for LP News.
• No evidence has been presented to the Audit Committee that the terms of the agreement were agreed upon at the commencement of work. We cannot foreclose the possibility that the terms stated in the detailed billing (created long after the payment) were made up after-the-fact to fit the data.
2.0 LNC FUNDS — USED TO PAY PERSONAL EXPENSES OF THE EXECUTIVE DIRECTOR
The LNC Policy Manual requires that all contracts or modifications thereto shall be in writing. It requires that the Chair approve any contract in excess of $7,500. It requires that all contracts of more than one year in duration or for more than $25,000 be reviewed and approved by General Counsel prior to signing by the Chair.
The Policy Manual requires that the Employment Policy and Compensation Committee complete a review of any contract for director-level employment no less than 10 days prior to the Chair signing it, and that the contract be circulated to the LNC on a strictly confidential basis after it has been reviewed by Counsel and the Employment Policy and Compensation Committee.
At its December 2011 meeting in Las Vegas, after the appropriate reviews by General Counsel and EPCC, the LNC exercising its plenary control and management of the Party’s affairs, as stated in the Bylaws, voted to approve a contract to hire Carla Howell as the Executive Director.
The Executive Director employment agreement with Ms. Howell (which she primarily wrote) includes the following language:
“You will be reimbursed for expenses of moving from the Boston area to the Washington DC area and for commuting expenses (travel and lodging) between the two areas as necessary through February 28, 2012, not to exceed $20,000 total overall expenses.”
“As ED, you will adhere to the bylaws and policies adopted by the LNC, you will hold the position of a fiduciary to the LNC, and you will be obligated to act in good faith and with the highest fidelity and prudence in the best interest of the LNC.”
“This letter sets forth the entire agreement regarding your employment.”
Because the Bylaws state that the Chair’s authority to direct the business and affairs of the organization are subject to express National Committee policies and directives issued in the exercise of the National Committee’s plenary control and management of Party affairs, properties and funds, the Chair does not have the ability to modify the Executive Director’s employment agreement without the consent of the LNC. The contract does give the Chair the express authority to extend employment from June 30, 2013 to December 31, 2013, but only under the existing terms of the agreement.
Between December 2011 and July 2013, the LNC did not approve any changes to Ms. Howell’s employment agreement.
On September 8, 2013, we initiated inquiries on a separate matter that had come to our attention. The FEC report filed on April 20, 2012 indicated that the Party paid $1,750 to Recai Yavalar on March 8, 2012 for a “rental deposit”. This is not a common expense one would see on the Party’s FEC reports, and it seemed to coincide with the time that Ms. Howell moved to Washington, D.C. The transaction memo in the QuickBooks file indicated this was related to Ms. Howell’s residence. Mr. Kraus confirmed to us that this was, indeed, a rental deposit on Ms. Howell’s current residence in Arlington.
2.2 INAPPROPRIATE/UNAUTHORIZED PAYMENT OF RENTAL DEPOSITS
A payment of a rental deposit for one’s permanent housing falls outside the bounds of the moving and commuting expenses the LNC had agreed (via her employment contract) to pay for her to move to the D.C. area. This is not an out-of-pocket expense reimbursement, as would be the case with temporary housing, airfare, or hiring movers. It is rather an asset on deposit with a third party, and it will presumably be refunded to Ms. Howell in the future when she leaves this residence. Since the deposit had been paid by the Party, the Audit Committee requested a copy of the current residential lease so that we could confirm that the lease itself was in her name, not under the Party’s name, which would have required another disclosure in the audited financial statements. If you would like to find out about residential leases, you could visit somewhere like https://www.american-apartment-owners-association.org/property-management/landlord-forms/residential-lease-or-month-to-month-rental-agreement/ for more information.
When we later received a copy of the lease, we confirmed that the lease is in the name of Ms. Howell, not the LNC. This means no financial disclosure of a possible liability is needed, but it also means that the deposit will later be refunded to Ms. Howell personally rather than to the LNC.
Mr. Kraus incorrectly recorded this disbursement as an employee benefit expense. Instead, it should have been recorded as an asset (a deposit with a third party) with the expectation that those funds would be returned to the LNC at a later date. This deposit will be refunded to Ms. Howell at the conclusion of her lease, or be retained for damages for which she, not the LNC, should be held personally liable.
We confirmed that there is no provision in the employee handbook offering any subsidies of employee housing costs as a standard benefit. If the intention had been to pay for Ms. Howell’s housing as an employee benefit, the LNC would have been required to treat this as taxable income to Ms. Howell, reportable on her W-2 and subject to employee withholdings and employer payroll taxes.
Upon inquiry, Mr. Kraus confirmed to us that the amount had not been reported as income on her 2012 W-2 form, that no employee withholdings or employer taxes were remitted to the IRS on this amount, and that no other employees have received such a benefit.
2.3 MOVING AND COMMUTING EXPENSES ANALYSIS
Because of this contractual compliance issue, the Audit Committee made further inquiries about all moving and commuting expenses. We requested a schedule of all expenditures be made (along with the supporting documentation) for Ms. Howell’s moving/commuting expenses incurred from her hiring to the present. Staff provided us with some of the additional documentation we requested for the remaining moving/commuting expenses, but not all of it. Examination of the materials that were provided and subsequent other inquiries from us revealed a number of additional reporting and recording concerns.
Mr. Kraus admitted that carte blanche had essentially been given to Ms. Howell, assuming that under the terms of her contract that she had the right to use $20,000 as she saw fit toward hotel, travel, moving expenses, etc. without regard to the limitations set by the agreement that the LNC approved and Ms. Howell signed, and in apparent violation of the policy manual’s requirement that:
“The Chair or Treasurer shall be required to approve (and evidence by signing or initialing) all expenses and expense account reimbursements more than $200 made to the Executive Director or other officers prior to payment. No officer shall approve his or her own expenses.”
Ms. Howell admits to having approved her own expenses and claimed no knowledge of any required approval process even though her agreement required her to “adhere to the bylaws and policies adopted by the LNC” and she was clearly not ignorant of the existence of the LNC’s Policy Manual.
In addition to the lack of proper approvals, there were issues with a number of disbursements.
We include as an Exhibit at the end of this report a summary of all the moving related expenses for Carla Howell paid by the LNC that we were able to examine.
Of the $18,800.87 in expenses paid to Ms. Howell or on her behalf, we found:
• Expenses allowed by her employment agreement and supported by receipts $9,548.07
• Expenses allowed by her employment agreement, but not supported by $2,125.24 receipts
• Expenses of a type allowed by her employment agreement and supported by $2,423.16 receipts, but incurred after February, 2012
• Expenses of a type allowed by her employment agreement, but not supported $415.60 by receipts and incurred after February, 2012
• Expenses not authorized by her employment agreement, though supported by $3,550.00 receipts
• Expenses not authorized by her employment agreement and not supported by $738.40 receipts
2.4 REVIEW OF DOCUMENTATION OF MOVING AND COMMUTING EXPENSES
For expenses that we categorized as supported by receipts, there were some deficiencies in the support. We qualified as “supported by receipts” instances where Ms. Howell provided us only her check carbons – not canceled checks or invoices. Such was the case for the $550 Virtually Nowhere expense for packing and the $1,080 for rent to Marie Allen Properties, LLC for the period March 12-31, 2012. Technically, we should have treated those as having not been supported, but we gave Ms. Howell the benefit of the doubt.
In the case of the $3,201.54 in charges to Arpin Van Lines for Ms. Howell’s moving expense to her current residence in Arlington, while we have not seen an invoice, we have seen a household goods bill of lading issued by the company supporting that the work was performed and a “paid” stamp indicating that it was for the amount in question. We qualified that transaction as having been supported by a receipt.
We did not qualify as having documentation those instances where Ms. Howell provided a copy of her credit card statement (though no receipts) indicating those listed transactions supporting reimbursement to her. There is no way to fully validate with a credit card statement alone that an expense is proper.
For travel and temporary lodging expenses incurred beyond the authorized period of December through February, Mr. Kraus admitted that paying those was an oversight on his part and that if he was paying attention to the dates he would have asked the Chair for authorization, not understanding perhaps that the Chair would need to get permission from the LNC to amend the agreement. Chairman Neale agreed with us that the Chair does not have the ability to modify the agreement.
We have concerns about expenses that were paid without supporting receipts, even in cases where it appears that the category of expense was covered by the agreement. For example, at the end of March, Ms. Howell was reimbursed $2,926.56 for her out-of-pocket expenses. Among the expenses that were not supported by receipts was a $500.00 payment to Helping Hands for packing and moving, and payments amounting to $390 to Bruce Simono (Ms. Howell’s next door neighbor in Wayland, Massachusetts) for packing ($350) and gasoline ($40).
2.5 DETAILED ANALYSIS OF PARTY FUNDS APPARENTLY — USED FOR PERSONAL EXPENSES
Of greater concern are the unequivocal instances where party funds were converted to personal use.
• During Ms. Howell’s transition from Massachusetts to the D.C. area, before she moved into her current residence, she took up temporary residence at a facility owned by Marie Allen Properties, where the rent was $1,800 per month. These temporary housing costs through February 2012 were to be paid by the LNC per her employment contract. In February, two payments were made to Marie Allen Properties, LLC, each for $1,800.00. We were not provided a copy of the first check, but we were provided a copy of the second, which included the following email from Ms. Howell:
“Hi Robert, I got the check for temporary housing you sent – thanks. There is also a deposit due in the same amount. Due to the unexpected outlays I’ve had to make lately to get my house in sell-able condition, it would be helpful not to have to float this. Is this something that can be charged to the travel/lodging budget? If so, I could either apply it to the last month’s rent, in which case it would become a regular lodging expense. Or I could reimburse LNC when it is return to me (minus any they deem me liable for, which I would be responsible for). Please advise. Thanks.”
We were also provided with a copy of the lease, with a two-month term commencing February 11, 2012 and ending April 11, 2012. The lease specifically prohibits the tenant from using the security deposit to pay the cost of rent or any other monthly fee.
There are several problems with the payments made to Marie Allen Properties, including the $1,080 reimbursed to Ms. Howell.
First, Ms. Howell’s agreement allowed her to be reimbursed for expenses of moving from the Boston area to the Washington DC area and for commuting expenses (travel and lodging) between the two areas as necessary, but only through February 28, 2012. Ms. Howell states that the Chair approved extending the time beyond February after she told him that she was not going to be able to sell her Massachusetts home by the end of February. However, this rationale rings hollow to us because the Chair does not have the power to modify an agreement made by the LNC. She can’t rely on a claim that the chair has ostensible or apparent authority to do this because she received actual notice of this limit in his authority when she was provided with copies of the bylaws and policy manual, and she was present at the meeting when the LNC approved the contract terms that hired her.
Second, Mr. Kraus failed to record the security deposit in the books as an asset. As such, the financial statements do not show the amount is owed back to the Party. Instead, he recorded the security deposit expenditure as an employee benefit expense (commingled along with Ms. Howell’s other travel expenses).
Finally, Ms. Howell received a refund of her deposit from her landlord (less any offsets for any damages there might have been) at the end of the lease, just a couple of months later, and she did not return the $1,800 to the LNC. When we inquired of her about this, she stated that this was an oversight on her part and that she is willing to reimburse the party.
• We confirmed with Mr. Kraus that the aforementioned March 8, 2012 payment of $1,750.00 to Recai Yavalar for a “rental deposit” is a rental deposit on Ms. Howell’s current residence in Arlington. We have reviewed the lease agreement, which is in her name and for a one-year term commencing April 1, 2012. When we inquired further as to why the LNC paid this amount, Ms. Howell made the following statement:
“This was another situation that I had forgotten about, and it has taken a while for me to piece together what happened. his was a deposit for an apartment where I now live. At the time I had been looking desperately for an apartment in both DC and Virginia to get out of the temporary place I was in in DC, which was quite uncomfortable for me for a variety of reasons. I found the place I’m now in in Arlington, and was hoping to move in asap. I had hoped it would become a permanent residence and wouldn’t have to move again, but was not sure about whether I would want to eventually land in VA or DC. I was told I would be able to break the lease if I could find a replacement tenant, which seemed to be easy to do given how competitive the housing market was at the time and how expensive any type of temporary living had become. Tourist season had begun in DC, and the Circle Hotel I’d stayed in previous, which I was told was about the cheapest that could be found near Foggy Bottom, had shot up to mid-$200s/day. So I was anxious to secure this apartment. It was a far better deal than anything else I had found, and several others I tried to get had fallen through.
“Recai Yalavar appears to be some relative or associate of the landlord who showed me the apartment. I send regular rental checks to a management company. I did not remember his name.
“During this time I was both juggling sale of my house and the tenant whose apartment I was taking over. He was also trying to close a house sale. When I was first shown the apartment, he was expecting to close and move out within about a week. So I had hoped to move in early or mid March. But then he was having trouble with getting a mortgage, and it was getting repeatedly delayed. I recall that I was calling for status updates quite regularly to try to find out when I could move in. This continued throughout most of the month.
“It was my plan, as far as I can remember, to count the $1750 paid by the LNC for this apartment to pay for rent. As the month wore on, it became more clear that I was not going to be able to move in until near the end of the month of March.
“At that point I was flying back to Boston to close on my house and in the midst of packing and moving, while also juggling my job. That’s about the last time I remember thinking about this deposit.
“Again I am happy to repay whatever may be owed by me and again, I apologize for my neglect in keeping track of expenses. I assume this full amount of $1750 should be refunded, as I do not recall paying, and have no record of paying, for any additional rent in March, even though I may have started to move possessions into the apartment in the last few days of the month. As such I think it is reasonable to assume that this money should be refunded in its entirely to the LNC, and I am happy to do that in whatever form is requested.”
Ms. Howell’s explanation fails to address the crux of the issue. A payment of a rental deposit for one’s housing falls outside the bounds of moving and commuting expenses. This is not an out- of-pocket expense reimbursement, as would be the case with temporary housing, airfare, or hiring movers. It is rather an asset on deposit with a third party. And similar to the $1,800.00 deposit paid to Marie Allen Properties, it will also be refunded to Ms. Howell at the conclusion of her lease, or be retained for damages for which she, not the LNC, should be held personally liable.
Chairman Neale inquired with Mark Hinkle and Bill Redpath (who were Chair and Treasurer at the time) and neither of them reported through him to the Audit Committee any knowledge of this rental deposit having been paid by the Party.
2.6 ABSENCE OF RECEIPTS CONTRIBUTED TO THE PAYMENT OF PERSONAL EXPENSES
• We made an inquiry as to some missing receipts associated with a January reimbursement check made to Ms. Howell. Ms. Howell provided a copy of her credit card statement (though no receipts) indicating those listed transactions supporting the reimbursement. The credit card statement does not provide sufficient detail to determine whether an expense was legitimate. However, we were able to discern from a line on the credit card statement that makes reference to a $173.40 flight between D.C. and Massachusetts, that the passenger was not Ms. Howell. Rather, it was for Ms. Howell’s friend (Leslie Fish). The LNC had reimbursed Ms. Howell for her friend’s travel expense. Had a receipt been provided and scrutinized before reimbursement was issued, this payment likely would never have occurred. This demonstrates that the word of the Executive Director (or even just seeing an amount on a credit card statement) is an insufficient substitute for receipt evidence. The LNC’s newly-passed policy requiring receipts for all expenses should reduce the chances of a similar situation in the future.
2.7 INITIAL RECOMMENDATIONS
To address the above we recommend the LNC require Ms. Howell to immediately reimburse the LNC $9,252.80 for expenses that were:
o not supported by receipts,
o for travel and temporary lodging expenses incurred after February 2012, or
o not authorized by her employment agreement.
Furthermore, we recommend that the books for 2012 record a Miscellaneous Receivable for $9,252.80 and an offsetting reduction in Other Benefits, Goodwill and Training, and that our outside CPA firm be notified of this correction to finalize the 2012 audited financial statements.
3.0 OTHER QUESTIONABLE EMPLOYEE BENEFIT PRACTICES
To confirm that there were no other issues with inappropriate payments made on Ms. Howell’s behalf we requested that staff provide us with a schedule of other expenses incurred in 2012 and in 2013 under the category Other Benefits, Goodwill and Training.
As a result of this inquiry we uncovered two additional issues.
3.1 OTHER EMPLOYEE MOVING EXPENSES
• We received a schedule of an additional $2,402.00 in employee benefits incurred during 2012. No supporting receipts were provided for the $252.00 paid to Bertucci’s for staff food nor for the $150.00 paid to employee Nick Dunbar for an election night party. The remaining $2,000 was paid to incoming employee Eric Dixon for moving expense from Idaho. We were provided with a copy of an employment offer letter from Ms. Howell to Mr. Dixon stating that he “will be given $2,000 with your first paycheck to cover expenses for relocating to the D.C. area with the understanding that you will not end your employment with us nor be terminated for cause before your first year of employment, in which case $2,000 will be deducted from your final paycheck.”
There is no provision in the employee handbook authorizing paying for moving expenses as an employee benefit. It would be appropriate to address in the employee handbook under what circumstances, if any, we should offer to pay for moving expenses.
We were not provided with any other documentation concerning Mr. Dixon’s moving expenses, but we are able to determine that this amount was not paid through the payroll system and therefore will not appear on his W-2.
In order for reimbursed moving expenses to not be considered taxable wages to the employee, the employee must adequately account for his moving expenses by giving his employer documentation of those expenses, such as a statement of expense, an account book, a diary, or a similar record in which he entered each expense at or near the time he had it. Documentation includes receipts, canceled checks, and bills. The accounting should be provided in a reasonable period of time, typically within 60 days, and the employer is required to report the amount of reimbursed expenses on the employee’s W2 in Box 12. If the expenses are not accountable, they should be included in Box 1 and treated as ordinary wages.
Mr. Kraus might recall an email thread that included the current Audit Committee Chairman and then LNC Chairman Bill Redpath back in October 2009 concerning this very issue when Wes Benedict was hired as Executive Director. As a result, Mr. Benedict provided the appropriate documentation and the LNC properly reported qualified non-taxable moving expense for him.
Staff may want to remind themselves of the requirements by re-reading IRS Publication 521.
3.2 UNDOCUMENTED SHIPPING EXPENSES
• We noted that the general ledger records reveal additional expenses incurred for Ms. Howell’s move in March and April of 2013 (more than one year after she moved). We requested documentation supporting those expenses and any others that are not yet listed as moving expenses for Carla. We also asked whether Carla authorized these payments. Mr. Kraus did not provide those records to us. He stated that it was a misclassification on his part based on a prior memorized credit card entry and that he will correct the classification of the transactions. Mr. Kraus is incorrect. We performed a global search with a recent QuickBooks file of the LNC’s accounting records. There are no other examples where another transaction included in the memo field the phrase “CH Move Exp,” such as was found in a $504.75 April 2013 transaction with UPS; or “CH Moving Exp,” such as was found in a $451.55 March 2013 transaction with FedEx Kinko’s. This memo language was not “memorized” from another transaction. It was manually entered. In addition, if Mr. Kraus had been using a “memorized transaction” in QuickBooks, we would have seen other examples where UPS and FedEx Kinko’s transactions were being classified as an employee benefit expense. We found no instances of that, so we repeated our request, to which Mr. Kraus replied:
“Sorry, I can not find any related UPS/Fec-Ex receipts except for one USP from OK to DC on something Geoff signed (the lease I assume). I do know that I personally sent some stuff back to DC from the Chicago Meeting that would account for some of this. I do not have those receipts. There were some other boxes that Carla sent as part of the Candidate archival and Training Project that was defunded. I’ve reclassified all of those related expenses previously to their natural accounts. We can ask Carla to see if she can dig up those receipts. They were charged (obviously) to our credit card. As we mentioned we are now keeping better records of those charges per the new policy and now are getting approval from Geoff or the Treasurer for any credit card charges per the new policy. I honestly still do not know why I put “CH Moving” and simply attributed that to memorized transactions without looking further into it – my apologies for the error. Either way these were obviously misclassified and I thank the audit committee for pointing out the error so that it could be corrected. There are now no “moving expenses” for 2013.”
We do not understand how Mr. Kraus could know now that these were misclassifications on his part if he has no receipts to support his conclusions and his notes at the time indicated otherwise. These transactions took place earlier this year, so the records are available. If staff were directed to inquire of UPS and FedEx about the details of these shipments, they would be able to provide us with the all the details of the shipments, including the shipments’ starting points, destinations, weights, dimensions and who signed for the receipts. Having this information would enable the LNC to determine whether Ms. Howell was paid for additional moving expenses more than one year after she was scheduled to move.
We recommend that the LNC take the following actions:
1) Direct Mr. Kraus to obtain documentation from Mr. Dixon supporting that he incurred at least $2,000 in moving expense. To the extent that receipts cannot be produced, the balance should be treated as taxable compensation on his W2 for 2013.
2) Direct Mr. Kraus to provide to the Audit Committee receipts or statements from UPS and FedEx supporting all March and April 2013 shipments. If complete records do not exist at LPHQ, Mr. Kraus should be required to contact UPS and FedEx to obtain those records.
4.0 ERRORS IN ACCOUNTING RECORDS
There are two errors in the accounting records that need to be addressed.
4.1 FUNDRAISING COST RECORDED AS AN ADMINISTRATIVE EXPENSE
• When Mr. Kraus recorded invoices from Mr. Cloud in the accounting records, during 2012, he arbitrarily classified 25% of the $38,800 (or $9,950) in bills from Mr. Cloud as administrative expense, rather than fundraising. The reconstructed detailed invoice sent in August 2013 shows that only $5,500 is administrative ($4,000 for eight news releases and $1,500 for reviewing three issues of LP News) and the balance fundraising, so our financial statements understate fundraising costs and overstate administrative costs by the same magnitude. Had the detailed invoice been provided prior to the payment being issued, this classification could have been recorded properly the first time.
4.2 MISCLASSIFICATION OF EXPENSES
At the end of March 2012, Ms. Howell was reimbursed $2,926.56 for her out-of-pocket expenses. Of that amount, Mr. Kraus improperly classified $406.56 as travel not associated with her commuting, even though the subject heading of the expense reimbursement request submitted by Ms. Howell states “Expenses against budget for travel/lodging/move – CH paid to be reimbursed” and the details support such a classification (e.g. taxi for temp apt search).
We recommend that the LNC take the following action:
Direct that Mr. Kraus work with the Audit Committee to correct the books for 2012 and that our outside CPA firm be notified of this correction to finalize the 2012 audited financial statements.
5.0 ISSUES NOT YET ADDRESSED
After we have had an opportunity to resolve the above issues, we expect our next, if not final, report for 2012 will focus on the assisting of staff with implementing the recommendations made by the auditor (and adopted by the LNC) and developing recommendations for Policies for the two remaining unaddressed issues identified by our independent auditing firm:
1) Document Retention
2) Whistleblower Protection.
Aaron Starr, Chairman
Joseph G. Buchman, PhD
Brett H. Pojunis