2005-03-30 Report to Audit Committee

Originally Reported on March 13th

This Report dated March 30, 2005

1

There appears to be no review of inter-unit transfers asked by PNB Motion 43 on August 23, 2004.

Per CFO Hicks, Alvin of Controller Ben Garcia's office is working on this as an internal audit project.  Ben will report on this as it progresses.

2

The auditor supports some but not all amounts by notes to the financial statements.  In the "changes in net assets" schedule, only three financial categories - grants, SCA income, and investment income - are supported by notes.  Why not the other categories - listener support/donations, community events, program services, etc.?  The audit report does not adequately explain the numbers.

The auditor explained that notes are reported in accordance with AICPA requirements.   In my opinion, the notes are insufficient for our purposes; they need to be extensive to enable us to be able to understand the report.  Therefore, I recommend the auditor explain each cost or expense in the report by a written note.

3

The auditor gave a clean report on the following:

• The financial position of Pacifica Foundation at September 30, 2004 - meaning the auditor verified that the balance sheet which includes total assets and liabilities in the amount of $6,396,584 is presented fairly.  Included in this $6,396,584 is $4,419,639 for "net assets - unrestricted".  "Net assets - unrestricted" is explained as "net assets that are not subject to donor-imposed stipulations".  I don't believe this is enough information.  I'd like a note to detail these net assets by name and dollar amount.
• Changes in net assets.  (Is this the "statement of activities and changes in net assets" on page 5?)  This includes "unrestricted revenue & support", expenses, and the resulting "increase in unrestricted net assets" (the term mentioned above).    It appears this schedule should match somehow the statement of financial positions since they both address "unrestricted net assets" but there's no reconciliation to match the two.  I believe we need to see such a reconciliation in the audit report.
• Changes in cash flows.  (Is this "the statement of cash flows" on page 7?)  This includes an increase in accounts payable for legal settlements of $148,345.  Legal is a very sensitive account for Pacifica yet the auditor does not reference any notes to any amount in this statement.  Again, I don't believe this is enough information.  I'd like a descriptive note to explain, e.g., what caused an increase in accounts payable for legal settlements of $148,345.

No change to my original comments (in green).

Additional comments - Changes in cash flows.  Increase in AP -legal settlements changed from $148,345 in the March 8^th report to a minus $421,242 in the March 21^st report.  The auditor needs to explain this.  (See page 5 of this report.)

4

The auditor did not audit and therefore expresses no opinion on:

•·        "Statements of Financial Position, Activities, Other Revenue and Functional Expenses by Division" because the auditor states they are not a required part of the basic financial statements.  These statements appear on pages 18 - 26.

•·        Included in the "Statement of Financial Position (By Division)" are $1,592,406 of inter-division receivables allocated to KPFA ($1,445,495) and KPFK ($146,911) only.  What are these inter-division receivables and why are they received only from KPFA and KPFK?  Could this be the inter-unit transfers asked by PNB Motion 43?

The auditor gave a "clean opinion" for the Statements of Functional Expenses on page 6 of the March 8^th report.  He does not express an opinion on the "Statements of Financial Position, Activities, Other Revenue and Functional Expenses by Division" on pages 18 - 26 which page 6 is a summary of.

What's missing from the report is a statement by the auditor that he reconciled the amounts to the general ledger, that he performed extensive transaction testing of the accounts, and that he reviewed the accounting system and found it to be adequate.

The these inter-division receivables are received only from KPFA and KPFK and represent the inter-unit transfers asked by PNB Motion 43.

5

Who audits the stations if the auditor doesn't express an opinion on divisional amounts?  In effect, he comments on the whole ($6,396,584) but isn't that a little backward?  How do we know the figures from the parts from KPFA, KPFK, WBAI, KPFT, WPFW, and PRA are correct?

The auditor performed a limited review.  The audit of the stations is left to the individual GM's.

6

Looking at the audit report, I see no review of the expenses it takes to run the stations.  In fact, the auditor says "The Statements of Financial Position, Activities, Other Revenue and Functional Expenses (by Division) on pages 18 through 26 are not a required part of the basic financial statements of Pacifica Foundation but are supplementary information.  We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of allocations and presentation of the supplementary information.  However, we did not audit and express no opinion on it".  I believe the auditor is saying that he did not audit $15,119,876 worth of "functional expenses".  OK, did he at least reconcile these expenses to Pacifica's books and test some expenses to supporting documentation?

The auditor reconciled these amounts to the general ledger (G/L) and performed transition testing.

7

I have arranged these expenses in descending order so you can see that the biggest expense is salaries at $5,560,400 and the lowest expense is non-operating grant expense of $1,560.   How do you know this $5,560,400 includes only valid salary expense for employees?  The auditor purposely doesn't comment on these expenses.  You don't know the status of the recipient of this money.  Say, management had a spouse on the payroll who was not an employee, how would you know this if the payroll records are not reviewed?

The auditor reconciled these amounts to the general ledger (G/L) and performed transition testing.

See Excel attachment for the arrangement of these expenses in descending order.

8

The auditor makes a comment however on some of the expenses, like Note 16 on the Democracy Now Agreement but he doesn't show the expense for the year ended 9/30/2004 of $464,933.  He mentions in Note 16 that Democracy Now is $440,000 for the year ended 9/30/2003, and that annual increases are 4% to 10% to be negotiated.  OK, $24,933 is a 5.7% increase over FYE 2003.

The auditor said he reviewed the DN account by reconciling to the books and records and to the DN contract.  He did not reconcile the percentage increase to a supporting document.

6

Additional Comments

Per Ross Wisdom

•·        He signs off on the CPB report but does not prepare the report.  Ben Garcia prepares the report; Ross checks the report to insure it's consistent with the audit report.  The auditor also prepares an information sheet that the CPB requires, e.g. statistics on listeners, grants, etc.

•·        Central services of $1.6 million is to be zeroed out.

•·        Final Report‘s estimate date of issue is to be issued before the NY PNB (don't believe this happened).

•·        Management letter goes to the audit committee 2-3 weeks after the final audit.

•·        There was discussion on a mid-year audit.  Advantages = get some work done in the middle of the year.  Disadvantages = additional cost & not an audit (will be a review which is subject to less stringent criteria).

•·        Auditor reviewed the policies and procedures (P&P) in accordance with the manual reviewed by the finance committee.

•·        Accounting System and System of Internal Controls is deemed to be adequate.

7

Additional Comments

I asked about the "one month reserve" to which Lonnie's reply was that he accumulates a one month operating reserve to add to the cash reserve.  Ross Wisdom added that this was building up the cash reserves in a "Board Designated Reserve Fund".  In my opinion, the question was not addressed and the auditor should audit this "Board Designated Reserve" to show if it's merely one month in total or one month each fiscal year.

8

I suggested the auditor present his findings to the board in person in New York during the upcoming PNB.

Agreed to by the auditor (who's based in New York) and the ED.  However, I don't think 30 minutes is enough time.  It should be 2 hours.

9

Differences between audit report faxed March 8^th by Ben Garcia and audit report faxed March 21^st by Ross Wisdom.

See below.

Page

DesDescription

3/8/2005

3/21/2005

Difference

4

CurrCurrent Liabilities

AccAccounts Payable

 $     1,483,678

 $1,458,599

 $     25,079

Deposit Payable

                   -  

       25,079

      (25,079)

Current Liabilities

 $     1,483,678

   1,483,678

              -  

6

No Difference

      15,119,876

 15,119,876

              -  

There was no difference in each individual cost.

7

Decrease in AP - Trade

         (542,483)

         4,492

     (546,975)

7

Increase in AP - legal settlements

          148,345

     (421,242)

      569,587

7

Decrease in Deposits Payable - Other liabilities

             (7,070)

        (2,467)

        (4,603)

Subtotal

         (401,208)

     (419,217)

       18,009