In a recent issue of Campaigns & Elections, I offered a list of ways to avoid reporting trouble with the Federal Election Commission. Unfortunately, mistakes do happen, and enough mistakes could land your campaign in an FEC audit.
What should you do if that happens? First, don’t panic. You are not the first campaign to be audited, and you will not be the last. Some audits are mandatory: presidential candidates who accept taxpayer funding must undergo an audit, for example. Regular campaigns, however, can only be audited for cause.
Fortunately for those being audited, audits remain confidential and out of the public eye until complete. But that doesn’t mean you should take an FEC audit lightly. They can often lead to further enforcement action, and even a civil penalty.
If you are being audited, the good news is there’s a set process that all audits follow, and understanding that process can mitigate some of the harm that a FEC audit can otherwise cause. The first step is getting a full understanding of the seven stages of the audit process.
If you are to be audited, you will receive a letter stating this. Note that although this letter usually comes from the Audit Division staff, there must be the affirmative vote of at least four FEC commissioners to launch an audit. Although some believe they are being audited because of their political beliefs, or other subjective factors, the determination to audit a committee is clinical. The FEC’s Reports Analysis Division reviews reports filed by committees and assigns audit points for various reporting issues. The process of assigning such points is approved by the commissioners themselves, prior to the staff conducting its review.
Once the commission approves an audit and a committee is notified, the Audit Division staff will ask for basic accounting materials—bank statements, account reconciliations, and other data maintained by a committee in its reporting software. Once received and reviewed by the Audit Division, the staff then determines how much fieldwork needs to be done. FEC auditors can perform fieldwork on site in a campaign’s headquarters. This can be particularly distracting to campaign operations, and suggesting an alternative location may be a smart move.
Around the time the Audit Division receives preliminary information, it will have an entrance conference, where the committee will be given an outline of the audit procedures and can explain how its records are organized. During fieldwork, the Audit staff will inventory the committee’s records and probably ask some questions about potentially missing records. It is unwise to simply ignore auditors’ requests for such information. In the event the auditors are asking for information that is either not legally relevant or is beyond the scope of the audit, it is a good idea for the committee to raise that with the auditors. Similarly, if need be, the auditors can attempt to subpoena records. The auditors must seek approval of the FEC commissioners to issue such subpoenas—such action is rare in the audit context.
Once the Audit Division has obtained the necessary records, it will follow a fairly predictable process. First, it will review the committee’s disclosure reports to determine whether receipt and disbursement information was properly reported and mathematically accurate. Second, it will conduct a reconciliation of bank account records as compared to the reports as filed. Finally, and depending on the results of the first two, the Audit Division may then focus efforts on particular aspects of a committee’s operations to determine whether or not it substantially complied with the law.
3. Exit conference
Once fieldwork is concluded, the Audit Division will hold an exit conference. This is a critical meeting as it is usually the first time the committee will learn what sort of errors the audit has uncovered and what adverse findings may be recommended. At this stage, the Audit Division could again ask for records, and such requests are usually directed toward correcting potential problems spotted by auditors. Sometimes, providing proper documentation can avoid an adverse audit finding.
4. Interim Audit Stage
After fieldwork, and after the exit conference, the Audit Division drafts its initial report, called the Interim Audit Report. Oftentimes, legal issues will arise during either the fieldwork or the exit conference, and frequently the Audit Division will send the draft report to the FEC’s Office of General Counsel for legal review. Interim Audits also are circulated to the FEC commissioners for cursory review.
Since the audited committee has not yet had a chance to respond to the Interim Report, it is rare for the commissioners to object at this stage, and committees should not assume the commissioners have “signed off” on the Interim Report. It is just that: an interim document that is much more of a first step and not a final conclusion. The committee is afforded an opportunity to respond to the Interim Report, and it is wise to do so. In some instances, a committee can ask that the commissioners consider certain legal issues raised by the auditors.
5. Draft Final Report
After it receives a committee’s response, the Audit Division will prepare a Draft Final Report. This document is what the auditors hope the commission will approve. Although in the past it was viewed by many as some sort of formal “finding,” it is not. Instead, it is merely a staff draft. The committee gets to respond to the Draft Final Report and can also ask for a hearing before the commissioners.
6. Audit Hearing
Upon request by an audited committee, the commission may grant a hearing. Such hearings are held during open sessions of the commission (meaning the public can attend), and are designed to give the commissioners an opportunity to hear directly from an audited committee. It also presents a critical opportunity for a committee to contest recommended audit findings.
Because this is a relatively new opportunity, even otherwise experienced election lawyers do not quite realize the value of this hearing, particularly when a committee disagrees with the Audit Division’s read of the applicable law. Although the format is somewhat informal, a committee ought to be prepared to provide a succinct summary of its arguments, and be prepared to answer any and all questions posed by commissioners. Oftentimes, commissioners will ask how the commission in the past has dealt with a particular issue raised by the auditors. Thus, detailed knowledge of the FEC’s precedents and past rulings is critical to maximize the opportunity presented by the hearing and be of the most help to the commissioners.
7. Final Audit Report
After the completion of the Draft Final Audit Report, and receipt of the committee’s response (if any), and a possible hearing, the Audit Division will prepare a Proposed Final Audit Report, which will be circulated to the commissioners for approval. Sometimes, the commission approves the Final Audit Report without further deliberation. But usually the commissioners will require additional deliberation to address issues raised by the audited committee in its various responses and will do so during a public meeting.
A Final Audit Report must be approved by the commission to take effect. In the event a proposed finding contained in a Final Audit Report is not approved, it is moved to a section entitled “Other Issues.” Once a Final Audit Report is approved, it will be sent to the committee, and will be placed on the FEC’s website.
As this cursory summary ought to demonstrate, a command of the FEC’s audit process is key. One common question is whether or not a committee needs to hire a lawyer. Old thinking is that a committee need not hire a lawyer until after the audit is completed, and only after it is clear that it will result in further enforcement action.
Frankly, although probably sound years ago, today this is bad advice. FEC audits are not like the sort of audit that small businesses undergo—one that simply tracks whether a committee spent money on what it says it spent money on. Instead, they are enforcement-minded audits that are designed to determine whether a committee complied with the law. Thus, the underlying facts are often intertwined with the applicable law to a degree that even some otherwise experienced lawyers have found confusing.
In addition, there are now a number of opportunities for an audited committee to be heard, and an aggrieved committee ought to take full advantage of them: During audit fieldwork, committees should try and nip as many problems in the bud as they can. Having some experienced help can resolve potential issues and save valuable committee resources.
Response to audit fieldwork: A committee has 10 days to respond to whatever was presented by the Audit Division during the exit conference. This is the first and probably the best opportunity a committee has to convince auditors that a finding is not warranted. Unfortunately, some committees neglect to respond, which only sows suspicion in the minds of the auditors.
Response to the Interim Audit Report: If the auditors identify problems in the Interim Report, the committee has 30 calendar days to respond. Sometimes, corrective action can address the issue. Other times, however, such corrective action will be deemed an admission of wrongdoing. Only with experience can one know the difference.
Consideration of legal questions by the commission: A committee can also seek review of certain legal questions by the commissioners themselves. In years past, committees who believed the auditors were pursuing flawed legal theories had no recourse but to endure the grind of the audit, and if they were lucky, fight over the reach of the law at the tail end of the process. Now, committees can ask to bring such issues before the commission much sooner and save valuable time and resources.
Response to the Draft Final Audit Report: A committee has 15 days to respond and can request a hearing before the commission. This hearing is subject to its own procedures, which are available in the Federal Register.
Referral for further enforcement: After the commission adopts the Final Audit Report certain matters may be referred to the Office of General Counsel or the Alternative Dispute Resolution Office for additional enforcement action. Committees are given an opportunity to respond to any recommendation for further action. By the time a matter reaches this stage, however, the die is almost always cast. It is for this reason that a committee ought to take advantage of prior opportunities to be heard and not hesitate to seek the help of experienced counsel or similar professional accounting help.
Some committees do not think they can afford to seek the help of an experienced lawyer or similar professional help. Recent matters before the FEC demonstrate that committees can’t afford not to.
Don McGahn is a partner with the law firm Jones Day, and is the former Chairman of the Federal Election Commission. Nothing in this article ought to be construed as legal advice.