With high levels of reporting and public scrutiny, Political Action Committees (PACs) are required to have some of the most transparent finances. Even so, PACs are still vulnerable to fraudulent activities. Strong internal controls are crucial to the protection of a PAC’s assets.
In 2007, the Federal Election Commission (FEC) came out with guidance concerning best practices for a PAC’s internal controls. This guidance fell into the following categories:
Separation of Duties
Like any other organization, separation of duties is important for checks and balances. Whenever contributions come in or payments go out, there should be multiple sets of eyes these activities.
When payments are received, one person should be responsible for opening and logging them. A bank lockbox can help ensure independence. Periodically, the payment log should be compared with funds that were deposited in the bank. This is often done during the bank reconciliation process. Checks going out require equal attention to separation of duties. The person mailing the checks should be independent from the person requesting, writing or signing them.
In order to ensure that only trustworthy people are overseeing these tasks, the PAC should conduct background checks on anyone involved with the handling of funds.
Access to Cash and Check
It’s important to ensure that the PAC’s assets are segregated from those of any organization it may be associated with. This can be accomplished by opening at least one bank account. PAC funds, whether hard or soft dollars, should only be used on PAC expenses. Without a separate bank account, the burden to prove that expenses are valid PAC expenses, and not those of the parent organization, falls more heavily on the PAC.
Likewise, segregating access rights to the PAC bank account as well as the parent organization’s bank account helps limit the risk of misappropriation of funds. Inadequate attention to which bank account payments are made from can cause PAC funds to be mishandled and used for unallowable expenses.
Limiting the number of check signers as well as requiring two signatures on checks over a certain amount (the FEC suggests $1,000) can limit the number of fraudulent disbursements. All bank accounts should be opened using the PAC’s EIN. Using an individual’s social security number gives the individual more discretion to move or use funds. Likewise, using the parent organization’s FEIN could lead to misallocation of funds.
One of the best ways to prevent fraud is by regularly reviewing the financial situation of the PAC. Producing and reviewing financial statements and reconciling bank accounts regularly and in a timely manner can help catch errors or fraudulent activities early. Monthly review is considered best practice.
Regular review should also extend to the more specific area of disbursements. Reviewing vendors to certify that the committee or person is legitimate helps further safeguard the PAC’s assets.
Documentation of the controls and how they are being followed
Documenting both what the PAC’s controls are, as well as how they are being followed, serves two purposes. First, it ensures that the PAC is held accountable for following its own internal controls. And secondly, it sets a tone of accountability in the organization.
Additional best practices for internal controls should include more extensive policies and procedures.
With more PACs being formed and a high degree of transparency required by the FEC, strong internal controls are vital. Having strong internal controls enables PACs to confidently prove that they are using their donors’ money as intended.
Need help with making sure your PAC’s internal controls are up to date? Contact Vault Consulting today.