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Auditor Report to the Pacifica National
Board
New York City, April 2, 2005
Report by Ross Wisdom, Auditor, to PNB.
Dan Coughlin, Executive Director:
Just before you start, Ross, I just want to point out to all
the Board members: In your red packet, you will see a copy
of this audit that Ross has just done. It’s right in
your red booklet.
Ross Wisdom:
So, you’re looking at the audit report just completed,
fiscal year ending September 30, 2004. Essentially, it’s
good news. The numbers are up. Also, the accounting systems
are up to date, and this reflects a job well done across the
organization, especially at the national office with the national
accounting staff. I want to acknowledge them.
Would you say that again, please?
It reflects a job well done across the organization.
[laughter]
Organization-wide, everybody’s included. But I want
to specifically acknowledge—
[laughter]
The national office—
Could you include names, please?
You’ve come a long way, Pacifica, and you should feel
some sense of accomplishment. You really should.
Thank you.
[applause and laughter]
Now, to go right into the numbers. The total revenues are
up from the year before. They’re at $16 million, up
from $15.8 million. The total expenses are also up. They’re
at $15.4 million, up from $14.5 million the year before. This
reflects a surplus in the current year of $640,000. And you
see that as an increase in working capital. A year ago—when
I say a year ago, I mean September 30, 2003, the working capital
of the organization was basically at break even, which is
really low, really a little too low. You’re now up to
$643,000 working capital surplus.
Ideally, you should have about one month in the bank. That
would mean another $600,000. If you do another year like you
did last year, you’re there. So, probably about now,
you’re getting very close to being there. So this organization
has now returned fully—very close to fully—to
financial soundness and solvency that it hasn’t known
since the year 2000. And as everyone is aware, there was a
big hole between 2000 and now of about $4.7 million. At about
the time Dan came in and the new board came in, everyone pulled
together, especially the listeners, and you were able to get
out of that hole without taking really drastic measures. The
organization just recovered, a very healthy sign.
The accounting systems are also up to date. When I first
came in, started our work—we were first engaged in early
2002 with the new management—the accounting systems
were about six months behind, at least, the general ledgers.
And there were software systems problems. There was a lot
of turnover in accounting staff. That made this very difficult.
But now you’ve got a good staff. Your software has been
stable for a long time. And the general ledgers are up to
date within 30–60 days pretty much across the board.
The network and stations are not quite at the same level as
other stations.
I have a few comments about consistency in application of
accounting practices and procedures across the network and
across the stations. Each station right now has a different
accounting manual. We’ve had several conference calls
between me and the Audit Committee. That’s another accomplishment
of the organization: It now has a very active, a very full,
Audit Committee. This was the key element that was missing
back in 2001 that could have prevented a great deal of financial
trouble at that time had it been in place. So it’s sort
of like an insurance blanket, if you will, to prevent that
sort of thing happening again. And it’s also more than
that. It’s a good dialog to have between the organization
and the outside auditors through an audit committee. And it’s
also an opportunity to do things during the year internally
to improve policies and procedures and how things are performing.
So it’s good that you have that.
So the Audit Committee is looking into these inconsistencies
of accounting procedures during the year. The burden sort
of falls at the end of the year to the national staff to bring
all those books and records up to date, basically doing some
allocations between programs, management in general, and fundraising
that have not been done during the year at some of the stations
so that the [accounting?] national office will catch that
out and get that for us later on and a little bit this year.
I know Ben has taken some steps. I know the Audit Committee
is looking into this. I think they’re really working
together right now to improve the accounting manuals. And
payroll, I think, is being allocated each pay period now.
So they’re moving forward on that.
When we complete an audit, it’s an opportunity for
us to comment on your internal control system. Basically,
you’re looking at two things. One, we’re trying
to give you accuracy in your information. And we’re
also trying to evaluate the systems that generate that information.
By giving you—this is considered a clean audit, an unqualified
audit opinion—it means that we’re comfortable
with your numbers, that there should be no material discrepancy,
as a whole, in revenues, expenses, assets, liabilities; that
it presents fairly the organization as a whole.
Also, we look at the internal controls and state that we
audit no matters involving internal control in this operation
that we consider to be material weaknesses. It doesn’t
mean we don’t notice things that could be improved.
I’ve mentioned the allocations not being made at some
of the stations. The accounting for petty cash is sometimes
sort of after the fact instead of on an impressed basis, which
is a better way to account for it. The check-in and check-out
procedures for premiums inventory could be done on a more
timely basis. All the stations are now conducting physical
inventories on a more regular basis, which was better and
an improvement from the past. But there’s still a little
more fine-tuning and improvement in each of these areas, really,
at some of the stations.
In summary, the numbers are up, the systems are up, the
accounting staff is up, and you have a full Audit Committee.
And that’s my report. Thank you.
Board member:
Okay, thank you very much. I have a series of quick questions
that should have quick answers, I guess. Now, you’ve
been auditing since 2002, correct?
Right.
Board member:
This continues to be an honest [unintelligible] relationship?
I mean, you’re not too cozy with our national staff,
are you?
I’m kind of cozy with Dan. I’m sorry to see
him go.
Okay.
[laughter]
Board member:
I don’t know whether to take that as a no or yes. When
you prepared the audit, do you visit all five local stations?
No. This is not … Let me point out something. We’re
doing an organization-wide audit. It would be much more expensive,
although you could do it, to audit each station fully as a
separate entity and then combine it. We do audit procedures
at each station, but we don’t do a full field audit
at each station.
Okay.
Let me explain that. So, we will select certain things to
confirm, certain accounts to analyze, certain things—
We go over almost all the account reconciliations of banks
and confirmations, accounts payable confirmations. The grant
contracts, things like that. And basically, through the national
primarily, at the stations that we don’t get to, we
get that information and we check it out. So, we are doing
our work across the network. But we’re not making each
year a full field trip and auditing each station independently.
Okay. I owned my own business for several years with
a [unintelligible], so I had to do an audit every year. And
the auditors would come in and would do a transactional analysis
and they’d pull randomly different—and I’d
have to go through the whole thing, the trail all the way
from beginning to end. Do you do that?
Right.
So you do transactional—
Transactional testing. Oh, sure.
Transactional testing, accounts payable, the whole bit.
At every station.
I want to go finally to the question about internal
controls with respect to making it consistent throughout all
the stations. And you had indicated this is still an area
of concern. Do we have the same charter accounts at all five
stations?
Yes, although sometimes during the year they’re modified
and someone will add an account that’s not really consistent,
so we don’t really find that till the end of the year.
But then it gets corrected.
Okay. So, in your report here, do you make recommendations
regarding how we could improve internal controls? You mentioned
petty cash and certainly premium inventory control, which
as you know is a rising expense of the network. Have you made
recommendations or do you just simply flag these as areas
that need to be addressed?
As of this moment, we’ve flagged them. We’ve
discussed them with the Audit Committee, with the accounting
staff, and we’ll be issuing a letter with formal recommendations.
So finally, the flagged items, is that included in your
report here? Do you know?
In the audit financial statements, the internal control
comments are not listed. They’re listed in a separate
letter, which is forthcoming.
Okay. So we’ll make sure that we get a copy of that.
Basically, I’d like to see what your suggestions and
recommendations are.
Right.
Okay, thank you.
Marty.
I have a couple of questions, Ross. One is, do you do the
CPB audit at the same time you do this? I mean, you satisfy
the requirements of the CPB for the audit?
The CPB accepts the audited financials, which are submitted
to the CPB as well. And then, the CPB requires the accounting
staff of the organization itself to complete the CPB reports,
and then I sign off on them. I basically review them to be
sure they’re consistent with the audited report that
we did.
Okay.
And review them and then sign off on them.
And then the NFFS figures—are they for each station
or for the foundation as a whole?
I’m sorry. The which figures?
The NFFS. The Non-Federal Financial Support..
Yeah, the NFFS are for the five stations’ figures.
They’re not non-federal financial support. That is basically
the listener support. And we actually also reallocate the
listener support to the national office to the local stations
in that process as well.
So are there five NFFS figures? Or one?
Five.
Okay. And the total assets seem to be low to me considering
what we have here, and I’m … None of the appraisals
of the signals are within the total assets. Is that correct?
You’re talking about an intangible asset, the value
of something? You said the appraisal of the signals.
I mean, in terms of the assets of the entire organization,
6.4 million seems low to me.
No, it doesn’t include the value of those licenses,
which are, whatever, half a billion dollars.
Are huge, actually. Yes.
That’s considered an intangible asset, which means
fair market value if they were to be sold. Accounting practice
is that we don’t record those values until they’re
sold. So you could have appreciated assets on the books just
listed at the old cost—whatever it originally cost you—which,
in the case of licensing is practically nothing. So yes, those
are not on the books.
So the $6.4 million is really a deceptive figure in terms
of the assets of the organization.
In terms of the value of the organization, correct. Very
deceptive. Accounting is a historical cost based system. It
doesn’t try to represent current values.
Thank you.
Lavarn.
I’m Lavarn Williams. Thank you. I think that is a
very good report. I’m sorry I haven’t had a chance
to look at it more. I’d just like to compliment the
national office and the finance staff for doing an excellent
job over the years, also. So just a couple of little, quick
questions: I see when you’ve laid out the revenue, it’s
just a little thing that we’ve talked out in the Finance
Committee, when you’ve laid out the revenue, of course,
you’ve eliminated the central services so that the total
revenues reflects without the central service allocation to
the national. And so I’d kind of like to see that on
our reports all the time.
The other thing is on a couple of items that you had pointed
out, like the issues with premiums. What I’d probably
like is for the national finance or to get into a task force,
perhaps, and work on that in the National Finance Committee
to look at premiums and accounting for premiums. Because,
for example, we talked about the issue of volunteer hours.
And we have resources here on the board. For example, Mike
Martin and his firm has offered to look at how we account
for volunteer office hours and perhaps utilize the software
that his firm uses. So perhaps if we were to start a task
force on that, we could use some of the resources on the board
to really look at how do you account for premiums and perhaps
that will result in a reduction in the cost and also more
fully accounting of premiums so that [unintelligible] would
result in a reduction in the cost of premiums.
Also, the other issue that you had brought up in terms of—and
we had kind of talked about that some before—charter
accounts and how that’s used to cross the network. And
again, as far as the National Finance Committee, those are
some of the items that we can look at and add on with the
task force or some type of project so we can make sure that
across the network it is consistent and that the business
managers have the training and that, perhaps, we can work
on that together as a group to have that consistency across
the network. So thank you very much.
Thank you.
[unintelligible]
Oh, yeah. I’m I on here?
No. Hold on. Let me get all the board members first.
[unintelligible]
Hi. One of the things the board had asked for was some form
of accounting for inter-unit transfers dating back to the
transition in the board. And I know that there was a discussion
about the way that would be audited, whether staff would gather
the numbers and you would just give it a once-over; or that
you would do it yourself and go through those numbers. What’s
the status of that request for accounting of transfers between
units?
Right. It would have been time-consuming and costly for
us to do extensive detail work on that. The national accounting
staff has taken it on and they’re doing a very detailed
analysis going back some time. I believe it’s to the
beginning of ’02. All the way to 2000. And they’re
going to be able to label each transaction in and out of those
accounts. So you’ll be able to fully see what’s
flowing in and out and how it was treated. They’re pretty
far along on that, I believe.
[unintelligible]
Mr. Wise, thank you very much for the time you’ve
taken [unintelligible].
[laughter]
As with Wisdom. Who is Wise?
[laughter]
Wisdom connotes wiseness and I commend you on the wise presentation.
[unintelligible] was actually a combination of wise and
dumb.
[laughter]
Well, that is certainly not what I was suggesting. Good
job. You identified no substantive material weaknesses, but
you identified four flagged items and I want to make sure
I understand them. One of the flagged items was—I thought
I understood you to say station allocations. Could you be
more specific on what you’re talking about there?
Sure. One station in particular, KPFA, which I’ll
be glad to mention, is really a role model. Everything is
allocated as they go along so if something relates to programming,
it goes to programming. If something relates to fundraising,
it goes to fundraising. If it needs to be split up, they split
it up. Et cetera. Other stations just put everything into
administration because it’s Department-01, so it’s
more convenient to just put it under 01. They don’t
have to break it down. That burden then falls to the national
staff, really, to go back, do an analysis, and break it down,
which is normally done at the end of the year. However, that’s
not true at the moment. The national staff has gotten involved
now on a monthly basis and payroll is being done currently.
So you think—which stations did you identify had weaknesses
in providing those specific allocations on a monthly basis?
I don’t believe allocations were being done timely
at WBAI or, I believe, KPFK is lacking a business manager
at the moment. So it would be those two stations. I think
KPFT is generally okay, but maybe not as good as KPFA.
Second question.
I’m just talking about allocations and timely accounting.
[unintelligible]
[laughter]
Geez, Louise, these guys are really making me nuts.
You identified problems with accounting for petty cash.
I agree with that and I think we need to institute a better
monitoring system for petty cash. How would you recommend
that the station do that?
Each station needs to use what’s called an impressed
petty cash procedure. Very simple. You write a check for the
amount that you want to keep in petty cash, for example, $500
or $1,000. That petty cash box is always composed of that
amount of money, either in cash or receipts. So when it gets
low, you’ve spent most of the money, you write a check
for the exact amount to replace it, replenishing the cash
up to the original amount, say $1,000. When you write that
check, that check is broken down into the exact amount of
receipts and those are booked.
Can you give us a sample policy procedure if you’ve
got one in one of your files or books to throw into your letter
report? Would that be possible?
Of course. I believe you have that procedure already in
your policies and procedures manual.
We just need to follow it, then?
Yes.
Okay. You indicated that the third flag was premium inventory.
Right.
Can you explain that? What specific problem there is?
Well, when we do the audit, we ask for a physical inventory.
We do get a physical inventory of the premiums. That’s
just once a year, and sometimes it’s prepared after
the fact. At some of the stations, I believe, if you were
to show up there today and say, “Let me see your premium
inventory,” I’m not so sure they could produce
a very good inventory figure and I don’t believe they
could produce for you a sign-in and sign-out sheet showing
exactly what’s flowing in and out of that inventory.
So it’s not really controlled as well as it could be.
So there needs to be a tracking system created for the inventory.
Right, right.
Okay. Any recommendations from your standpoint as to how
best to accomplish that tracking system?
Have a perpetual inventory with a sign-in and sign-out sheet
so at any time you can reconcile what you have on hand to
what you should have on hand.
You said a fourth flag, and I didn’t get it. What
was the fourth item? Been through three. Was it just three?
I had mentioned that the monthly accounting systems which
had been a flag last year is no longer a flag.
So the monthly accounting system, which has now been incorporated
through the national office, is something you identify as
an improvement from last year’s practice.
Yes, and that was really the major comment. Dan can tell
you, since day one that I’ve been involved with this
organization, I have been stating, “Listen, what you
need is—let’s take a look at your accounting department.
If it’s 30 days after the last month—today is,
what, April 2?—we should have February completely reconciled,
the reports up to date, the general ledgers up to date. You
should be able to pull out a report for February right now
that would be reconciled and accurate. The organization didn’t
have that until just very recently.
Right. And I commend the staff at the national office for
working diligently on accomplishing that. But you’re
saying that it shouldn’t be a problem at this point
to get a monthly reconciliation on a line-by-line basis of
the books. You feel comfortable with that at this point?
Right. And I think the accounting process is now up to date.
That’s a major comment that I’m making.
Thank you, Mr. Chair.
Donna.
Hello, Ross. I’m Donna Warren.
Hi, Donna, nice to meet you in person.
We talked a little bit on the phone.
Right.
In trying to make sure that the Audit Committee did their
job. I know there was a little confusion on the board about
the duties of the Audit Committee and the duties of the Finance
Committee. I wanted to read a little bit what the bylaw said.
(Too many papers.) And then I have some questions, of course.
Okay. It’s very, very sketchy in the bylaws. The only
thing I could find says that “an audit committee shall
oversee the annual audit of the foundation’s books and
shall not include the Finance Committee members.” And
I noticed that some of the Finance Committee members were
asking Mr. Wisdom to ensure that certain criteria—not
criteria, but things, are given to the Finance Committee.
So I’m going to ask the Finance Committee at this time
to channel their requests through the Audit Committee so that
we can work directly with Mr. Wisdom. Of course, we can talk
about that a little bit more. We in the Audit Committee looked
at the audit report a couple of times, and I have some concerns
which— I believe most of the people sitting on this
board are not auditors and they may have these concerns as
lay people. First of all, I want to commend you for the work
that you did. And I want to thank you for your patience during
our telephone conversations to answer our questions. I don’t
ask more questions than the people sitting on this board.
I usually ask a lot of questions. But believe me, they ask
more. They do. [laughs] Anyway, one of the questions that
I had asked, you gave, basically, a clean report on the audit
report. And that’s very, very good. But I had wanted
at that time and now for you to explain a little bit more
about what that clean report meant. I think that probably
the members are very, very interested. I think it’s
page 7 where it shows the expenses for the year. And what
I was looking for is more detailed notes. And as we talked
before, the AICPA did not require you as the auditor to give
more notes, which is fine. But for our benefit, again, I believe
once the members actually review the audit report, they’re
going to ask certain questions because there’s stuff
that jumps out at them, like the legal expense. They’re
very, very interested in legal expense. So I’m going
to ask that as we work together for the new audit—I
know we didn’t talk about that, or you didn’t
talk about that today, but we are going to sit down and figure
out what it is that we want to see or that we want the auditor
to do for fiscal year ’05. And let me ask you right
now: When do you start the review of fiscal year ’05?
I know it’s going to be after the end of the fiscal
year, but when are you planning to start preparing for that
audit?
The pre-audit planning would occur right around year end,
so in September. Then, there’s preliminary audit work
which can be done immediately after the year end, once we
have the figures, to send out confirmations to third parties
and start analyzing some of the transactions during the transaction
testing that he was alluding to, to sort of spot check and
see if there are any problems with the systems at that point.
But then we really have to wait until the books are completely
ready to be audited, and in the past, that’s been a
problem. But like I say, now that the monthly accounting procedures
are up to date, we should be able to start that in November.
And then our audit would normally take about two months.
Now, I know that you do the audit at the national office.
Who specifically audits the stations? Is there an audit of
the stations?
In terms of a physical field audit, we paid a visit to WBAI
and KPFA during this audit. But we also sort of reach through
the national staff and grab the records and audit those records.
Even though they’re remotely located, we get those records
and audit them. So in terms of a physical presence, it’s
two stations, but we do audit procedures at all stations.
Do you consider that sufficient or do you think stations
need to have maybe an internal auditor on location?
I do think that there should be some internal auditing done.
And that could be rotated through. A good place to start would
be those accounting manual that your committee has already
requested. And you could go station by station and see how
they’re being implemented and applied.
Is that a recommendation that you’re going to have
in the management letter, or what?
Yes, it would be.
Okay. I noticed the date on the audit report says February—the
21st, I think it was.
Twenty-eighth.
Twenty-eighth. But we had a revision of March the 21st.
So I’m wondering why the audit report is dated February.
That’s the date of the completion of audit field work
or the last real adjusting, last inspection adjusting entry
[unintelligible]. That’s when you define the date for
the completion of the audit. After that, it’s really
compiling the reports, issuing the reports, vetting for typos,
having people review it, getting a sign-off from Dan and Lonnie
on the audit, etc. So the audit date of the report is always
going to be prior to the actual final report being published
and issued.
Okay. Just so the board understands that so they don’t
think the Audit Committee has been fooling around. Okay. I
wanted to ask a question. On page 7 of your audit report,
if you would explain—and I know you explained it to
me on the phone, but if you would explain for the board—the
increase in accounts payable, which was legal settlements,
I think for the March 21 revision, we had a -$421,000. And
also in this audit report.
Okay. The accounts payable have been broken down so that
you can isolate out accounts payable at national office, which
are really for legal fees, board expenses, and settlement
costs related to the whole organization. And then, on page
7 that you’re referring to, it shows the change in year
that that has decreased by $421,000. Now, that reflects the
amount of liability at the beginning of the year versus the
amount of liability at the end of the year. So this organization
has reduced its indebtedness for legal fees and settlement
costs by $421,000. At the end of the year, that figure is
now—if you go to footnote 20, you’ll see a line
that says “legal services and settlements, board legal
debt, $388,000.” So it was roughly $800,000. And that’s
been sort of an onerous liability of the organization that’s
now been reduced down to a manageable level.
Thank you.
Rob?
Well, thank you, Mr. Wisdom, for your report. It’s
very thorough. I wanted to ask you, in terms of your review
of the records at WBAI. There have been various allegations
about financial irregularities at the station. I was wondering
if you were able to determine whether, in terms of sufficiency
of cash receipts or documentation for expenses or allocations
of line items, if you found any irregularities.
Okay. Our audit is not designed to find irregularities or
fraud or something of that nature. We are not an investigative
firm. We do some procedures that could find it. And if we
find it, we report it. We did not find anything that was an
irregularity or fraudulent. But it doesn’t mean it doesn’t
exist because we’re doing spot-checking and we’re
looking at the books to see if they reconcile. Oftentimes,
if you have something like that, you could have a situation
of collusion or something, which would be designed so that
we wouldn’t find it. So it’s a very limited assurance,
really, that we provide in that area. That’s where your
Audit Committee could come in. You could do some internal
auditing. And certainly, if directed, we could do more work.
Rob, Fadi, and Mark.
Thank you very much, Mr. Wisdom. It’s a good report,
as usual. I want to follow up on that a little bit. In terms
of the fiduciary responsibilities that we have as directors,
and particularly with regard to the Finance Committee and
the Audit Committee, are there regular reports that we should
be generating for those committees that would enable them
to look at the transactions that take place or the budget
processes or the way the money is allocated that are not being
done right now, which should be supplied to the Finance Committee
or the Audit Committee on a regular basis so that they could
satisfy themselves that there is not money not being accounted
for or disappearing or something like that? In other words,
are there reporting schedules that we’re not getting
that we should be getting in order to exercise our own fiduciary
responsibilities as directors?
That’s an excellent question. Let me respond. Yes,
there are two different functions that are performed on two
different committees that can help you very much in that area.
You mentioned the Financial Committee, which is primarily
devoted to financial management. One way of detecting irregularities
is if you’re monitoring your budget versus your actual
expenses on a month-to-month basis and analyzing those differences
and explaining those differences, you’re going to find
some unintended results there if there’s something wrong.
And you now have a much more timely accounting system where
you could actually perform that function on a timely basis.
And I don’t know where the Finance Committee is with
that now, but that’s something that would be very useful.
On the Audit Committee, that’s a separate function which
is more of an internal audit function. Just like Donna was
stating she wanted to understand certain line items. Well,
you have really a crackerjack national accounting staff. I’ve
got a copy of a very detailed spreadsheet analysis done by
Alvin on legal expenses and legal liabilities. That information
could be provided to the Audit Committee and you could really
track down anything you’re interested in that way.
Yeah, we recently received a copy of that.
Fadi.
Thank you. Fadi Saba. Thank you for the report and thanks
for your time. Since CPB funding is something that obviously
is part of the audit—we receive CPB funding at all five
stations here in the network— my question is: Does the
audit take a look at CPB funding, it being federal funding,
federal regulations with regards to all federal regulations
with regards to the various stations at Pacifica, including
ADA access?
Yes, we have representations from management that there’s
full compliance with federal regulations. We sent out confirmation
letters to your legal counsel, both for general liability
and also for regulatory exposure and FCC regulations. Those
all came back clean. We’re not aware of any noncompliance
with federal regulations.
So if a particular station does not have access to a rest
room …
Are you talking about an ADA regulation for a restroom?
Yeah.
I’m not aware of any violations in that regard. If
there was one, we probably would have noticed it. I can’t
guarantee that, but … There are lots of regulations.
Building regulations, all kinds. I’m not saying that
the organization might not have any exposure for any violation
of any regulation whatsoever. But I’m saying that we
did not detect any noncompliance, and we don’t have
any violations that I’ve noted on record, that I’m
aware of. You might have a bathroom that’s not compliant
with ADA regulations. I wouldn’t know that.
Dave, Patty.
You mentioned that crackerjack finance staff and I was wondering—you
may or may not be able to comment on this, but—I think,
if I understand correctly, that the size and composition of
that staff—not the people, but the various jobs—came
partly out of a recommendation from the auditors in years
past. I don’t know if that’s accurate. My question
is: Do you think that that staff’s presently sufficient
for the task and, if we’re going to grow, we’ve
had some discussions on Finance about the number of people
required as a function of the total amount of money coming
into the organization. So if the foundation grows, if its
finances grow, can you comment on what might be needed by
way of that finance staff and on the sufficiency of the staff
to the current tasks.
Okay. The organization has been growing. It looks like it
may continue to grow. I do know that the accounting staff
is probably at capacity in what they can perform. They do
meet your demands, but I do see that they’re working
very hard. I can’t evaluate that on the spot, but I
wouldn’t be surprised if they might need to add a person
to the accounting staff as the organization grows. There probably
should be a little bit more assistance between the accounting
staff and the stations. That might require a little more time
where they work with … Let’s say you get a new
business manager at a station, for example, like KPFA. That’s
going to require some time from the national accounting staff,
etc. So I do believe they’re stretched a little thin
at the moment.
Patty, Mark, and then Lonnie.
I’ve just been asked from a member of the audience
or a member of the foundation if there could be any floor
questions of the auditor—how they would go about that?
That was not part of the plan. But let’s make sure
that we get all the dialog from the board first and we’ll
see.
There are 20 minutes remaining.
Eighteen.
Mark?
Thank you. I had a couple of questions as I was listening
to what you were saying. I wanted to follow up on what Bob
said about fraud or the detection of it. My understanding
is—I mean, let’s say that I’m the station
and I’ve said that I spent $10,000 and I bought a computer.
And let’s say you see that transaction and I reduce
my cash by $10,000 and I increase the asset or maybe there’s
some associated expense or whatever. And you ask to pull that,
right, as one of your audit trail, one of your investigations.
So you want to know where the receipt is; you want to see
that in fact the check was cut to a vendor; you want to see
that there’s a receipt for the item. Correct?
Right.
If you were an investigator—because I could presumably
create an invoice from my mother’s computer company
and stick it in the file and presumably write it to her and
then she could go to the bank and whatever. So that’s
what you mean by investigation. You don’t go to the
extent to insure that it is indeed Best Buy and not my mother.
But you do insure that the receipt exists for that transaction
that you have pulled. Correct?
Not only that the receipt exists, but that it’s been
properly approved and signed off on, both by someone with
the authority to approve invoices outside of the accounting
department as well as someone inside the accounting department.
Okay.
So you have to have collusion going on to really fool the
auditor.
Right. So it would have to be a pretty broad plot.
Right. It should not just be one person, although—
Right, right. But we have those controls in place, right?
You do have controls.
Sorry, Mom, I’m not trying to—
[laughter]
And the second thing I wanted to ask you was a general kind
of field since you’ve been auditing for a while. And
I know that you can’t comment on, let’s say, the
release of financial data once it leaves the national office
to, for example, members of the board or members of the community.
But I’m just wondering because a lot of times people
feel that the flow of financial data within the foundation
is not as free as they would like, or whatever, do you, in
terms of your evaluation of the internal flow of financial
data, do you find it to be secretive or difficult to obtain?
And please answer this notwithstanding your affection for
Dan. But how do you feel about the flow of financial data
within Pacifica at this point, internally?
I don’t think I would know if there’s a problem
internally with the flow of financial information. Obviously,
the flow has been good with me. I get the information I need
or I couldn’t do the audit. So if there’s a problem
internally with someone not getting a report that they’ve
requested, I don’t know that I would be aware of that.
But let me do say that there’s a very extensive accounting
system with a lot of access to it from a lot of different
members across the network. And I noticed that there’s
a lot of things on the web site as well. Also, the 99, which
is the federal form, it’s a public document. There’s
a great deal of financial information that is publicly posted.
It may only be posted annually. And I know Lonnie has posted
a lot of historical information as well, and comparisons.
So relative to other organizations I am aware of, this organization
certainly does a lot more disclosure than what is normal.
Thank you.
But internally, I wouldn’t know.
Lavarn and then Lonnie.
Thank you. I just wanted to thank you again. I just wanted
to go back over a point you had made when you were, I believe,
speaking with Mike, or maybe it was with Mark. One of the
“M”s over there. You said in terms of looking
at the finances on a monthly basis, you were saying that the
process is a monthly review of actuals to budget. I just wanted
you to go over that again so that people could understand
that that is the process. And did you have an opinion in terms
of looking not only at expenses and revenue, but also at head
count? If you could just talk about that a little more, I
would appreciate it.
Excuse me, do you mean head count in terms of payroll?
Well, in terms of people who are on board, the employees
of the foundation.
Okay, yes. Yes. Head counts. Independent, specific statistical
information to go along with financials is very useful. That’s
a very good thing. That could also fall to the Audit Committee
if you’re concerned about any particular line item.
The Audit Committee could have a subcommittee, an internal
audit, that would go in and check head counts and things like
that for you. But basically what I mean is a line-by-line
comparison. How did we do this month actually versus what
the budget was? How did we do year to date versus what the
budget is? And projecting that to the end of the fiscal year,
what’s our remaining budget? We may be over budget for
the first six months, but we’re anticipating going under
budget for the next six months. So, as you get involved in
that process line by line, looking at a monthly number, a
year-to-date number, and a remaining balance to the end of
the year number, you get a very good understanding of what’s
going on. And you will be able to isolate problems as they
occur and deal with them. So you can deal with something hopefully
before it gets out of hand.
Well, before we get to you, Lonnie, we’ve got two
others, Steve and Dave and [Patty?].
Hi, I’m Steve Pierce from WRPI in Troy. Thanks for
your report. I’m trying to understand more of what the
information represents. Is it accurate to say it’s basically
that your role is to confirm the accuracy of the information
that the board has supplied? Is that the purpose of the audit,
for the most part?
The purpose of the audit is a confirmation and issuing an
opinion on information provided by the organization. We are
commenting on the organization’s report. This is not
our report. This is Pacifica’s report and we interact
with the accounting staff. We recommend adjusting entries.
They come up with adjusting entries. And our job is to be
sure this is consistent with generally accepted accounting
principles, that we’ve done our work, and that it presents
fairly the financial results.
Yeah, because I know that board members are having to evaluate
the information that comes officially through the national
staff and then a flood of information comes from outside in
the form of emails and anecdotal information. It’s very
difficult to evaluate because we don’t have a basis
to do it. But, for example, if listener revenue is down at
a particular station, you don’t have an evaluation about
whether that’s good or bad or systemic. Your report
just confirms the accuracy of the information that the revenue
is down.
Exactly. We might have a question. We might go back to management
and state, Is there a reason for this? Would you have a comment
on this? Just so that we understand the information. We’re
looking for an error, really. If there’s no error, then
that’s pretty much as far as we go with it. We just
want to be sure the financial information is fairly correct.
And so, to follow up on Marty’s question about the
presentation of the value or the frequency of intangible assets—one
of the intangibles, it strikes me, is the—I don’t
know how to phrase it—listener trust or … Well,
for instance, the station that I’m from is a very small
station. It’s mostly volunteer and it has a small budget.
But we as an operating strategy have chosen not to do underwriting
because it helps us differentiate ourselves from commercial
and public stations. And I know Pacifica does the same. But
we’ve also chosen not to do on-air fundraising, for
similar reasons, to the extent that we can. Instead of raising
money to pay for things, we try to get it donated and we use
volunteers. But we can because it’s such a small station
and such a small market. The reason I bring it up is in conversations
over the past day or so, routinely people suggest new initiatives
and new programs and then that there’ll be a day of
fundraising to cover it. It seems to me that there’s
a value to the amount of fundraising days that there are available
to the station. The maximum amount that people will give.
And when the stations are doing more and more on-air fundraising,
it seems that from a common sense perspective, you’re
getting into dangerous territory, that it’s sort of
the over-fishing argument. You might not realize that until
years after the problem is irreversible. I’m just wondering
whether there’s any way to ascertain those types of
strategic problems from this kind of financial information.
Yeah, you’re referring to strategic management issues,
and planning processes and decision making as to what’s
in the best interest of the organization. We pretty much come
in after the fact and we may comment. We have the luxury of
time there, meaning we comment on the results of those decisions
financially. That’s not something that we would be making
recommendations in the area.
Thanks for answering the questions.
Dave, Pat, Lonnie.
We recently got an income statement for the end of January.
We have since gotten February and it indicated that it was
an audit statement. And when I looked at that— No, it
was not audited. There was a question about how certain lines
became the way they are, but if they’re not audited,
they’re not relevant now if it wasn’t audited.
You’re saying you had a February financial statement
that says it was audited?
January.
Oh, January?
I think January. The issue was in KPFK’s total listener
income for the month and their CPB grant, the year-to-date
numbers match our records but the listener for the month,
the monthly income, is a far cry from what [unintelligible]
reports came in during the month. And also, it shows a CPB
block of money in that month that I don’t think came
in in that month. I don’t know how it’s coming
in, but the question was really: Are you looking at the year-to-date
numbers or do you look at the monthly numbers?
We haven’t done any audit work since the end of the
financial year, September 30, ’04.
Then the question’s not relevant. We’ll deal
with it.
Patty.
Yes, thank you very much. In looking at the statement of
functional expenses here for FY ’04, I see as consulting
fees $14,000. In New York last year, I think ours was $125,000
at least. I’m concerned or curious as to— And
then, I think we were told that they dropped consulting fees
into salaries and related. So I’m wondering, do you
separate those out? Where would those consulting fees be?
Is a subcontractor the same as a salaried person? How is that
broken out? Or is there any way to see that? Are the contracts
related? Do you check contracts related to subcontracting
and consulting fees or is that just all mixed in with salaries?
There is a salaries and related area, which I believe includes
outside services that are sort of considered normal operating
activities. And then below that section, under the other expenses,
you have separate line items for consultants’ and professional
fees, which are not a normal, recurring activity. So because
I believe the organization does have certain outside services
that are ongoing labor activity, so it’s been treated
that way just for budgeting purposes. One is budgeted different
than the other.
Because, like, $208,000 across the network, if WBAI was
around $125,000, you’re saying that the rest of the
network only consults for $70,000?
Which page are you looking at?
Page six.
Six, page six. Is that outside services? Is that what contract
consulting is, or whatever we call that? Unsalaried employees
or …
Okay, outside services for the whole organization was $263,000.
And then consulting fees, $14,540. Yeah, those are two different
things. I’d have to see what’s in that consulting
number, but I would expect that to be a nonrecurring item.
That was a specific consultant for a specific purpose. Whereas
outside services are performing regular activities for the
organization. Maintaining transmitters and stuff like that—I
just heard a comment.
Lonnie. Go ahead.
The question is, in relation to WBAI specifically, you want
to look at the functional expenses in this audit under the
WBAI—
[unintelligible]
Page 22. And there you can see the true salaries versus
consulting. And that’s the true number. Now, the $135,000
that you referred to was an error. They, in fact, were putting
salaries and consultants in one line item. That was corrected.
So the $135,000 changed. And on audit, as you can see if you
look at salaries up top, you see that number there for WBAI,
1.1 or so. And then you want to look for consulting, consultant
fees. And you look down below, you’ll see that consulting
is different than the consultants and salary and related.
So that’s how that’s got broken out on audit.
The corrections are made for misclassifications. Stuff that
went into consulting didn’t belong in consulting. These
people were actually salaried and shouldn’t have been
consultants. A consultant, the task for a consultant, as Ross
will identify, or an independent contractor is that an independent
contractor—ten IRS tests for an independent contractor.
If they don’t meet that test— What we did last
year is have WBAI reclassify those folks to where they belonged—either
salaried, true independent contractor, or consultant, or vendor.
And those are the areas that they got placed into. So to see
what happened to WBAI on an audit, that’s the page that
we want to go look at.
So, for either Lonnie or Ross, we’re not going to
see our employees as consultants anymore? Because that’s
what I keep seeing. So when our employees—they’ll
be salaried from now on.
I see consultant payments for people that are either full-
or three-quarters-time staff. I mean, I think the IRS has
something to say about that, right?
Yeah, [unintelligible] we’re going to move through
everybody’s books and make sure that across the station,
everybody’s classified the same way.
Steve, Bob.
A question from one of the members of the finance committee
is how is a consultant distinguished from a vendor? Like for
yourself, are you a vendor or a consultant? And how does one
distinguish between the two things when you’re dealing
with things like professional services?
Okay, that’s a pretty complicated issue. There’s
a 20-factor common-law test applied to determine whether someone
is paid as an independent contractor or as an employee. But
one of the key factors is if you’re dealing with a trained
professional who brings their training to the job, then usually
that’s recognized as an outside, independent relationship.
Versus someone that you have to train and supervise and manage
on the job. That’s the key issue.
Outside relation? One thing is an outside relationship,
but you can have an outside relationship with either a consultant
or a vendor, can you not?
You can have an outside relationship—like outside
service, independent contractor relationship?
Yeah. You could have been signed on— Well, just in
this instance, you’re a vendor. Your company bills and
that would drop into the slot for vendors.
Correct.
Legal services, obviously, not consultant fee. But somebody
who comes in and, for example, looks at your architectural
plan for ADA compliance issues. Is that a consultant? Or is
helping you with an elevator project like we have at the Pacifica
building in Los Angeles. Is that a consultant or is it a vendor?
Does it depend on the way that person bills you? How is it
distinguished?
Well, we have a line item for legal and professional fees
and a separate line item for the audit and accounting fees.
Those are for those outside legal and professional services.
For technical consultants, typically that would be under consultants
or some of them might be under repairs and maintenance and
things like that. The outside services that’s up in
the salaried and related area are sort of ongoing— These
are really for the contractors, or they should be, that are
conducting regular activities but they’re identified
as an independent contractor versus an employee because they
really don’t show up for work every day at 9:00 a.m.
and ask to be assigned their task for the day. They come in
on a contractual basis and they do a specific job. And they’re
bringing their own expertise and training and tools, etc.,
with them to do that job. That is one of the key factors in
defining whether it’s an independent contractor versus
an employee. Like I said, it is a little bit of a gray area.
[unintelligible]
I hope I answered it as best I could.
[unintelligible]
We are running out of time, you know.
Bob.
Yeah, I know we’re running out of time.
I have a very short question.
Okay, Bob, Donna, Lavarn. Very, very short.
Okay, yeah. I just wanted to follow up on these definitions
of consultants and outside services. There’s been some
confusion—I’m on the Finance Committee at WBAI
and the line item in our budget has been labeled consultants
when actually, when we probed it further, it turns out that
it actually is a combination of genuine consultants and people
who are 1099’s as outside services or vendors, contractors,
and so on. So I would like to ask your recommendation in terms
of nomenclature. What would be the clearest language and the
most consistent language in the future for line items? Should
they be broken out to separate— I notice in your report,
you do, as we’ve been discussing, separate outside services
from consultants. So how do you think budgets should be organized
so that that distinction is clear?
That’s why it’s being done the way it is now
is the salaries and related area is budgeted differently than
the consulting line. The consulting line would be sort of
on a nonrecurring, specific, as-needed basis, whereas if your
budgeting for the salaries and related area, you’re
going to need a certain level of vendor support or outside
services. And that is why it’s being broken out. I mean,
technically, there’s no difference with the IRS whether
it’s an outside service or it’s a consultant.
That’s the same thing in terms of tax law. But for budgeting
purposes, you have two separate line items.
Donna.
Very short. On the listing of the expenses under audit and
accounting fees, it has $80,942 for fiscal year ’04.
Was that what we paid you for the year? Or does that include
other fees? I’m just wondering, how much does it cost
to employ you, Mr. Wisdom?
That’s how much it cost for the audit and the tax
work and the manager comment letter and that’s pretty
much it.
All of that was yours?
Right.
Oh, okay.
It’s coming in at a little lower this year.
Oh, okay.
Thank you. This is very brief. When you were talking about
contracts in terms of IRS definition, do you also include
in there in terms of length of service in terms of determining
whether it’s a contract or consultant or an employee?
And is there a cutoff? And also, did you look for signed contracts
with these consultants and perhaps any competitive bids? Or
would you have an opinion about that in terms of how that
should be handled?
In audit work, we do look at the documentation supporting
the transaction, whether it’s a signed contract or a
paid invoice, and we do look at that. We don’t look
at something such as competitive bidding, for example. Whether
there should be or whether there was, we don’t really
look at that. What was the rest of your question?
Length of service in terms of determining whether the person
is a consultant or an employee and is there a suggested cutoff
in terms of if a person is a consultant and how long that
person should be on board before he or she becomes either
an employee or no longer with the foundation?
Okay. There is no specific criteria. There’s no what’s
called a bright-line test determining that if you have this
or you don’t have that, then you’re either an
employee or you’re an independent contractor. That’s
why I said this is a complicated issue. It’s a 20-factor
common-law test. You can present the same facts to different
people and get different results. Essentially, does that go
to length of service? Essentially, it goes to who controls
the nature of the work. Is it an independent relationship
or is it really an employer/employee with the employer controlling
the activities of the employee relationship?
This is just hypothetical. A person could be on board for
five years and still be defined as a consultant versus employee?
Yes. I’ve been an accountant here since 2002. I’m
still an outside consultant.
Yeah, but I consider you more professional fees versus coming
in-house—
It’s still the same issue. I happen to be licensed.
That pretty much determines it. But it’s still the same
issue.
But in terms of … you wouldn’t be in the facility
like on a weekly basis, 52 weeks a year, though.
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