PNB Audit Committee Minutes 10/26/04 A regular meeting of the Pacifica National Board Audit Committee was held via teleconference on Tuesday, October 26, 2004, at 7:30 pm EST. Teresa Allen convened the meeting. The minutes of the previous meeting were amended and approved. Eight Members present, constituting a quorum: Max Blanchet, William Walker, Terry Goodman, Teresa Allen, TC Smythe, Susan Young, Berthold Reimers, Ambrose I. Lane, Sr. One Member excused: R. Paul Martin Six Members absent: Marnie Tattersall, Jan Goodman, Sonali Kolhatkar (brief appearance), Miguel Maldonado, Tom Fulcher, Thomas Ruffin, Jr. Guests: Ben Garcia, Lonnie Hicks, Ross Wisdom Authority and Notice: This second meeting of the committee was scheduled by committee convener Teresa Allen prior to the committee's first meeting. Notice was distributed on multiple Internet listservs and posted on Pacifica websites in response to an email from the PNB Secretary distributed on October 11, 2004 (APPENDIX A). The meeting was webcast live on http://kpftx.org. Meeting audio will be archived online at http://www.kpftx.org/archive.htm#pnb. Other than invited guests, there was no provision for public participation. The summary of conversations in these minutes is an approximation for committee reference and not verbatim. Because of its importance as the first meeting between the auditor and the audit committee, more detail is presented for this meeting than is normal for committee minutes. Committee Chair Teresa Allen called the meeting to order at 7:58 pm EST. Terry Goodman served as Secretary Pro-Tem for the meeting, as approved by the Committee at its first meeting. Announcement from Chair: That the absence of R. Paul Martin is excused. There was no objection (excuse requested at the meeting of 10/21/04). Reading of minutes was waived. Motion from T. Goodman That the minutes of the prior meeting be amended to indicate that Ben Garcia attended as a guest rather than ex officio, that the time of Jan Goodman leaving the meeting be corrected to 9:21 from 9:19, and that the time of Sonali Kolhatkar joining the meeting be indicated as 9:35 pm. PASSED without objection. Motion from T. Goodman That the minutes of the PNB Audit Committee meeting of October 21 be approved as amended. PASSED without objection. Pacifica Auditor Ross Wisdom joined the call at 8:02 pm. He indicated that a great deal of trouble could have been prevented if Pacifica had a functional Audit committee in 2001. Pacifica CFO Lonnie Hicks thanked Wisdom for performing above and beyond the call of duty in prior audits. Sonali Kolhatkar joined the meeting at 8:06 pm. She indicated that she was overcommitted on committees and would notify the KPFK LSB of her intention to withdraw. (Note to Chair: as this member is a Director appointed by the PNB, her replacement must be similarly qualified and similarly chosen.) Kolhatkar and Walker left the meeting at 8:07 pm. Pursuant to Bylaws Art. 8, Sec. 5 and Art. 6, Sec. 5, the meeting continued in the absence of a quorum. Wisdom outlined the audit timetable. There will be two days of preliminary groundwork this week, including the mailing of confirmation letters to third parties and assignment of tasks to the Accounting staff in Berkeley. There will be a week of detailed field work in Berkeley in the first or second week of December. Because of the staff's experience with prior audits, this one should go smoothly. By January 15th, a draft audit report should be available to staff and the Audit Committee, with the final report and IRS filings due on February 15th. Reimers asked Wisdom several questions from the BoardSource document "Financial Committees" by Thomas A. McLaughlin, which was recommended to committee members prior to the meeting. Reimers: "What internal controls are in place to prevent an employee, officer, or outside agent from intercepting checks intended for our organization prior to their being recorded in our books?" Wisdom explained that Pacifica stations typically use lock boxes secured by banks for the security of checks received by mail, that the responsibility for recording deposits and making deposits is split between two individual, and that a number of additional internal controls are followed, as outlined in a procedures manual reviewed by the auditors. Additionally, there are spot checks of the MemSys membership database. Reimers: "What controls are in place to prevent the unauthorized disbursement of funds from our bank accounts (general and payroll) by an employee or officer?" Wisdom reiterated that this is covered in the procedures manual. Reimers: "What controls are in place to prevent one of our vendors from overbilling our organization?" Hicks explained the policies and procedures in place, indicating that primary authorization occurs with budget approval, that major contracts require officer approval and are reviewed and signed by national, and that invoices require separate administrative and accounting approval at each station. Hicks explained that all station accounting systems are accessible from the national office, that payroll is issued by national, that every check is subject to review, that review is typical of any expenditure over $500 (unless a continuing and expected expense), that there is a monthly review of general ledger entries, and, of course, an annual spot check by the auditors. Reimers: "Are you aware of any forms of compensation or benefits received by our organization's officers, directors, or key employees that were not specifically approved by the board of directors?" Wisdom replied, "Not since February, 2002." Wisdom pointed out that an audit committee is a deterent to both wrongdoing and sloppiness. Reimers: "Are you aware of any inappropriate or undisclosed relationships between officers, directors, key employees, vendors, or donors?" Wisdom replied that no such relationships were discovered in the last audit and indicated that he would bring anything questionable found in the current audit to the attention of the committee. Allen asked if committee members should sign confidentiality agreements. Wisdom recommended that officers, board members, and certain committee members all sign such agreements, and pointed out that auditors are bound to confidentiality by the Auditors' Code of Ethics. In answer to other questions, Wisdom indicated that he was auditor for the Pacifica audits of 2001, 2002, and 2003, and that one of the main problems he saw initially was inadequate oversight over executive spending. He emphasized that careful budgeting was essential to proper operations, with ongoing review by a finance committee. Wisdom indicated that comprehensive checklists are used as part of the auditing process, and that these are included in the work papers. While auditors look at everything, inter-divisional transactions are not as likely to receive close scrutiny as long as they balance out within the organization. Stations are not fully audited individually, but at each audit one station is chosen for extra focus and attention. Lane: How has Pacifica performed compared to other nonprofits? Wisdom: Pacifica's turnaround from a $4.3 Million debt to a $0.3 Million positive balance has been dramatic. Lane: How is that possible? Wisdom: Creative and effective fundraising and good payables management. Listeners ralleyed and you played hardball with certain creditors, forcing them to write off $1.5 Million of the debt billed for services that were not in the best interest of the Foundation. You also reduced expenses. The budget has come back up, but so has revenue. with respect to reconstructing the due-to and due-from inter-divisional transfers of January to June, 2002, we do have work papers on that and it is doable, but you should go back to October 1, because audits are based on the fiscal year. You can go month-by-month to identify the inter-divisional transfers, but the problem is opening balance reliability. You may have to go back a few years to make sure that those opening balances are a reliable baseline. The Foundation uses the accrual method in its accounting, so the budgeting is not actually with cash on hand. When there are variances from projections, there are prior period adjustments via footnote. Fullfillment rate on pledged receivables varies from a high of 88% at KPFA to a low of 70% at WBAI. A fairly accurate estimate of what will and won't come in is made in mid-December. T. Goodman: Are Pacifica's procedures in any way special or unique so that another auditor would not be prepared if we switched? Wisdom: We would turn over our working papers if you switched auditors, but the Foundation is more complex than a typical nonprofit and is beyond the expertise of many auditors with typical nonprofit experience. You have eight different departments or divisions, CPB grant income, pledges, the Democracy Now! contract, payroll, union agreements, an endowment account, and an investment account. Lane: Note 17 of the last audit pointed out that we had more cash on deposit in one institution than was covered by deposit insurance. Hicks: Most Pacifica capital beyond what is needed for operations is currently invested at moderate risk, but we could do better and we need to look at that. There is no policy on managing that investment. We need an investment committee, because we are not effectively leveraging contributions. We need to look at physical assests, as well. Lane: Note 15 of the last audit mentions a charitable trust. That asset is not owned, it is anticipated. Young: Do current policies and procedures address records retention, whistleblowing, and the audit committee charter? Hicks: We don't have a clear policy on retention but we are compliant with the requirements of existing law. Wisdom: There is a three year retention requirement for tax records, not including the current year, a six year requirement for employment records, a seven year requirement for legal records, and a permanent retention requirement for contracts. Hicks: Since 2003, we have inventoried all existing active files in Oakland and created a searchable database of pdf files. This includes all personnel records of the past three years. We have older historical documents in storage in Los Angeles, and these have not yet been inventoried. I've assembled the last fifteen years of audit information and sent these to committee members. Young: Is it prudent to periodically rotate auditors? Wisdom: Personnel rotation is more an internal control consideration than an external control issue. My firm has no interest in Pacifica that compromises its integrity as an auditor. Reimers: I'm pleased that you began this discussion with a recognition that the auditor reports to the audit committee rather than to staff. Hicks: With respect to the sizing of various divisions in the organization, it would be instructive to review variances over the fifteen years of audit reports that I distributed. T. Goodman: I think that it is the sense of this committee that we don't want to run up an auditor's bill with independent inquiries from committee members, and that such inquiries should come from the whole committee through the chair. Wisdom: I'm not comfortable with the idea of individual conversations, anyway. Reimers: Our future questions and your responses might both be better presented in writing, if not at a formal meeting. Ross Wisdom left the meeting at 9:09 pm EST. Ben Garcia left the meeting at 9:12 pm EST. After discussion, the committee set its next teleconference meeting for Monday, November 15, 2004, at 4:30 pm PST, 6:30 pm CST, 7:30 pm EST. The meeting was adjourned at 9:16 pm EST. Terry L. Goodman Secretary Pro-Tem These minutes were approved on December 13, 2004. ----- APPENDIX A - NOTICE From: Roger Manning To: PNB, Pacifica Webmasters, General Managers, LSB Secretaries Subject: NOTICE - PNB commmittee meetings - Oct. 18, 19, 21, 26, 28, 29 Date: Sat, 16 Oct 2004 00:45:07 -0400 PLEASE POST WIDELY (and announce on-air where possible) Meetings of the following committees of the Pacifica National Board are upcoming via teleconference: - Mon. Oct. 18, 6:00pm Pacific, 7:00pm Mountain, 8:00pm Central, 9:00pm Eastern: PNB Archives Committee - Tues. Oct. 19, 12:30pm Pacific, 1:30pm Mountain, 2:30pm Central, 3:30pm Eastern: PNB Coordinating Committee - Tues. Oct. 19, 5:00pm Pacific, 6:00pm Mountain, 7:00pm Central, 8:00pm Eastern: PNB Special Personnel Committee [executive session for personnel matters] - Thurs. Oct. 21, 4:00pm Pacific, 5:00pm Mountain, 6:00pm Central, 7:00pm Eastern: PNB Governance Committee - Thurs. Oct. 21, 5:30pm Pacific, 6:30pm Mountain, 7:30pm Central, 8:30pm Eastern: PNB Audit Committee - Tues. Oct. 26, 4:30pm Pacific, 5:30pm Mountain, 6:30pm Central, 7:30pm Eastern: PNB Audit Committee - Thurs. Oct. 28, 5:00pm Pacific, 6:00pm Mountain, 7:00pm Central, 8:00pm Eastern: Committees of Inclusion national conference call - Fri. Oct. 29, 12:30pm Pacific, 1:30pm Mountain, 2:30pm Central, 3:30pm Eastern: PNB Finance Committee ------ Up-to-date National board meeting information: http://pacifica.org/about/pnb/meetings.php Meetings will be webcast and archived at http://kpftx.org (except those in executive session) Pacifica: 510-849-2590 http://pacifica.org Roger Manning PNB Secretary http://wbai.org http://wbai.net rogermanning@yahoo.com