From: Carol Spooner
Date:Tue Mar 5, 200212:30 am
Subject: Pacifica Accountants' Recommendations
Kimerling, Margulies & Wisdom, Ltd.
370 Lexington Ave. #310
New York, N.Y. 10017
Board of Directors February 9, 2002
2390 Champlain St. NW
Washington, DC 20007
Dear Members of the Board:
Pursuant to the Abbey, Westernberg, Hollman &
Emery, PC letter of
January 10, 2002, we have been engaged on a "special project" basis to
assist the new board of directors with fully assessing and quickly obtaining
control of Pacifica's financial matters". We have interviewed management and
accounting staff at the National Office, compiled and analyzed financial
information taken from "Solomon" general ledgers and "Great Plains" accounts
payable reports, and gathered such other books and records including the
proposed budgets for FYE 9/30/01 as we deemed necessary in the circumstances
in order to fulfill the purposes of this engagement as described in the
January 10th letter. Given that this engagement was limited to two weeks and
that all general ledger information was not up-to-date and available
(specifically, bank reconciliations and accounts payable have not been fully
completed for the period beginning October 1, 2001 to-date), we used our
best efforts and the best information available to estimate financial
results and financial position. Accordingly, this information is not only
unaudited and unadjusted, but rough estimates were often used based on
historical monthly expenses, budgets and/or current cash flow management
reports. Reported financial information for the period beginning October 1,
2001 and, of course, projected 2002 information should be considered
provisional and subject to change significantly. The requested financial
reports are enclosed with our qualified compilation letter. This letter is
written to provide our comments and recommendations:
Since September 30, 2000, when an annual surplus of $601,270 was
reported (see enclosed Statement of Activities by Division FYE Sept. 30,
2000 as audited by T. Curtis & Co.), the Pacifica Foundation (Pacifica) has
incurred deficits of ($3,449,719) for FYE Sept. 30, 2001 (see enclosed
Statement of Activities per unadjusted trial balance) and roughly
($1,887,035) for the three months ended Dec. 31, 2001 (see enclosed
Statement of Activities estimated & unaudited - no trial balance available).
Also, from October 1, 2000 to December 31, 2001 Current Assets
decreased by approximately $1,857,117 and Current Liabilities increased by
$4,157,463 and consequently Working Capital went from a normal operating
positive balance of $1,222,065 on Sept. 30, 2000 to a Working Capital
Deficit of ($4,792,515) as of Dec. 31, 2001, a total decrease in operating
capital of $6,014,580 in fifteen months!
- .. 1.Stop the financial hemorrhaging. The new management
has already taken many actions to achieve financial day-to-day stability and
to begin to restore a system of financial and administrative controls that
had been grossly neglected for over a year. The new Controller has also been
quickly effective in re-establishing basic systems and controls and
improving the morale and productivity of an accounting department that has
suffered through extensive management turnover and systems breakdowns. She
is now providing new management with timely weekly and monthly cash flow
management reports (see a current copy attached) and taking immediate steps
to cut costs and collect revenue. However, prior to new management, Pacifica
had incurred Legal and Professional Fees and Expenses of approximately
$3,787,798 since October 1, 1999 of which approximately $2,141,157 remained
unpaid as of January 25, 2002 (see Schedule of Professional Fees by Firm
- .. a. Terminate all nonessential services and review all
engagement letters, contracts and invoices. Were the engagement letters
signed? By an officer? Acting within their capacity and with board approval
for major contracts? Were services performed in accordance with contracts?
Any conflicts of interest? Self-dealing? Gross negligence involved?
Pre-approved hourly rates? Pre-approved nature of services rendered?
Detailed time & billing records provided? Any "double billing" due to
duplicated efforts, internal conferences, one-tenth or one-quarter hour
minimum billing increments applied to uncompleted phone calls, voice mail
messages etc.? Were paralegal or clerical services performed and billed at
Partner rates? Etc.
- .. b.Corporate counsel (or an attorney specializing in
bankruptcy or financial workouts) should immediately issue letters disputing
any defective contracts or invoices and commence negotiations for settling
creditor disputes and responding to or defending against notices of any
pending judgments and/or lawsuits.
- .. c. Explore the possibility of a prearranged settlement
plan with major creditors in advance of a voluntary or involuntary Chapter
11 filing for bankruptcy protection and financial reorganization; Perhaps in
conjunction with a national fundraising campaign with the explicit and sole
purpose of settling creditors claims at a pre-agreed amount (e.g. 25% or
$535,300 for professional firm creditors). Once the settlement amount
(probably $750,000 to $1,000,000 including all general unsecured creditors
that would have reached a settlement agreement but excluding severance
packages) has been achieved, then the campaign can be declared a success,
and Chapter 11 will have most likely been avoided. If enough creditors are
not willing to settle, then Chapter 11 is probably unavoidable.
- .. d.If necessary, file for Chapter 11 Reorganization
under the supervision of a Federal bankruptcy court. This will effectively
"freeze" all collection action by creditors and allow the new management
time to put into place a strong foundation of administrative and financial
controls that should allow for a financial recovery period of probably five
years. The first year's objective would be to establish financial stability
and a breakeven cash flow without payments to the pre-petition, general
unsecured creditors. Essential services and monthly operating expenses would
be paid currently. With strong administrative and financial controls in
place, Pacifica should return to a positive cash flow of probably around
$500,000 per year with which to pay creditors in accordance with a
settlement to be worked out in court. Once Pacifica's finances are under
control and the accounting department is able to issue timely reports, it is
likely that the court would allow Pacifica to operate normally as a
Debtor-in-Possession. It is imperative that Pacifica consult with a
bankruptcy attorney now, even if bankruptcy may be avoidable, to negotiate
with creditors and advise management of prudent steps to be taken
2.. 2.Recruit a Chief Financial Officer/Treasurer.
a very dedicated member of the Board has volunteered to be the interim
Treasurer. However, Pacifica needs to recruit a CFO with, ideally, a banking
and financial background, preferably an MBA, and expertise in nonprofit
budgeting and controls and with banking, finance and donor or fund-raising
contacts. This position should not be filled with a member of the Board.
Perhaps a qualified retiree wishing to voluntarily support the Foundation in
its time of crisis could be found to serve for a year at a time on a
permanent part-time basis of approximately 20 hours per week. Top
- .. a. Budgeting & Controls
- .. (1) Establish a Board approved FYE 2002 budget that
would address the issue of interdepartmental allocations for "central
services and national programming" and provide a basis for station business
managers to pay bills against a pre-approved budget and a basis for the
Board & CFO to manage the National Office against a pre-approved budget.
- .. (2) Assist the Executive Director in managing each
department against a monthly budget and provide a monthly report to the
Board. This was the critical procedure missing in FYE 9/30/01 when the
Foundation exceeded its budget by $3,660,972.
- .. (3) Act as a liaison with the Board, Department
Managers, Executive Director and the Controller.
- .. (4) Help manage relations with creditors by coordinating
contacts between creditors, accounts payable, management and corporate
- .. (5) Coordinate between the Board, management and the
Controller to help establish controls and procedures (e.g. the Procedures
and Policies manual developed by Holloway can be used to formalize basic
procedures but needs to be revamped to allow for procedures to be performed
at the station level and certain issues may have to be decided by the Board)
- .. b.Banking & Finance
- .. (1) Explore the refinancing of real estate and prepare a
proposal for the Board to consider in order providing additional working
capital. Pacifica needs to restore at least $1,000,000 in cash for working
- .. (2) Review banking relationships and consider electronic
banking. Pacifica incurred $237,103 in bank charges last year.
- .. (3) Improve the check signing policy. The Foundation has
developed a policy of using check signature stamps that should be
discontinued. (except for disbursements for payrolls, which are, the type
best suited for the use of facsimile signatures on an imprest basis). Also
consider establishing a threshold for dual signatures on checks.
- .. (4) Explore new avenues of fundraising and donor support
including long-term gifting, testamentary gifts and endowments.
- .. 3.Balance the budget for the twelve months ending
December 31, 2002. It is most imperative for the Board, working with the
Stations and National Units and in consultation with the Controller, to
confront the difficult budgeting issues quickly and make the tough decisions
necessary to achieve financial stability within calendar 2002. The current
cash projection for 2002 (see enclosed) projects a deficit of ($1,564,681)
which represents 14.5% of the total projected operating budget of
$10,766,975. We have two suggestions:
- .. a. Request revised budgets from all departments
reflecting 15% cutbacks; or
- .. b.Eliminate PNP ($1,169,093 annual savings, however
only $955,038 savings in 2002 due to already incurred expenses and
severances); payroll cuts across the board of 10% ($410,000 approx. savings)
and require all employees to co-pay for 25% of health and dental benefits
($118,000 savings). Also, the specific control recommendations listed below
will gradually reduce various operating costs as implemented.
- .. c. There are other critical operational issues outside
the scope of this letter which could favorably effect revenues such as the
KPFK transmitter and production studio project and other projects at other
stations which, if financed and completed effectively and efficiently could
provide additional listener support and half of the costs could be covered
from matching grants. Perhaps asset based financing or a national fund
raising campaign could also be used for this. These steps would also improve
affiliate relations, which would also positively affect finances.
- .. d.There may also be FCC regulatory compliance issues
which should be considered in connection with the recommendations of this
- .. 4.Establish a sound system of administrative and
financial controls. This was one of the primary causes of the current crisis
and no grand financial plan can succeed without a solid foundation of
internal controls and procedures.
SPECIFIC RECOMMENDATIONS FOR IMPROVING SYSTEMS AND CONTROLS:
- .. 4.1Safeguarding Equipment, Computer Networks & Software
- .. a. Install a computer Firewall/VPN or subscribe to an
ISP with security services included (e.g. NTT/Verio)
- .. b.Take a physical inventory of all equipment and
supplies and update annually.
- .. c. Adopt a formal policy concerning property additions
- .. d.Prepare a capital expenditures budget for Board
- .. 4.2Personnel
- .. a. Conduct staff reviews at all levels for
qualifications and performance.
- .. b.Consider utilizing volunteer staff as appropriate.
- .. c. Establish and document procedures relating to
employee terminations such as changing of locks and passwords, collection of
system and operations documents, and a supervised exit conference.
- .. d.Develop and use a checklist of items to be returned by
terminated employees (e.g. keys, cards, laptops, cell phones, pagers, credit
cards, files and diskettes, etc.)
- .. 4.3Accounting Staff: It was apparent that the changes in
management, accounting systems, offices, financial instability and computer
systems breakdowns has put a strain on the current staff to complete their
responsibilities in a timely manner.
- .. a.The Accounts Payable supervisor was often involved in
solving computer problems since "he knew the computer". There is no IT or
MIS staff position within the organization currently, however outside
consultants are called repeatedly to solve recurring problems at high hourly
- .. b.Hire a computer "techie" staff person (or perhaps get
a college intern) and cut way back on outside consultants.
- .. c.Also the A/P supervisor is bogged down with completing
check requisitions that should be completed prior to submission to his dept.
I informed him that since he pays the bills he's "got the power" to no
longer tolerate this practice.
- .. d.Management should refrain from making system changes
or relocating accounting offices until the accounting department has had a
chance to catch-up.
- .. e.Once the station business managers are all trained and
using the new Great Plains accounting software, the load will be lightened
on the accounting dept.
- .. 4.4Accounting System: The Great Plains software is good,
but it has only partially been set-up and not everyone is trained to use it.
- .. a.Hire a temporary accountant who already knows Great
Plains to train the staff and assist in getting the system fully set-up and
- .. b.Maintain only one set of books. Ask Terrance Chang to
help train other station business managers on the system. (especially WBAI
- .. c.Once the system is being fully utilized, the Controller
should manage the department such that Payroll is posted by the 10th.; Cash
Receipts & Disbursements are posted and bank accounts reconciled by the 15th
; adjustments made and a trial balance produced by the 30th. Currently, this
process is three months behind.
- .. 4.5Accounting Procedures: Please refer to the Holloway P &
P manual for an overall description of basic procedures, however, their
procedures assumed all centralized accounting functions, so these procedures
will need to be broken down between Dept. or Station procedures vs. National
Office procedures. However, the following areas are in need of improvement:
- .. a. CASH & AMEX CARD
- .. 1.Have management open and review bank statements.
- .. 2.Review cancelled checks for irregular endorsements.
- .. 3.Reconcile bank accounts on a timely basis.
- .. 4.Controller to review, approve, initial and file bank reconciliations.
- .. 5.Controller to review, initial, and date payroll register before checks are disbursed.
- .. 6.Discontinue the corporate American Express card and establish a travel reimbursement policy.
- .. 7.Controller to review procedures for making deposits at each department and at bank lock boxes.
- .. 8.Controller to review station procedures for collecting pledges receivable.
1.. b.ACCOUNTS PAYABLE
- .. 1.Improve A/P recording and payment practices.
- .. 2.Key invoices upon receipt by the station business manager or the A/P supervisor at the national office.
- .. 3.Establish a regular payment process, e.g. invoices
must be keyed prior to preparation of Ck. Req. which must be submitted by
Monday for payment on Friday.
- .. 4.Enter disputed invoices into A/P.
- .. 5.Transfer 9/30/01 A/P balances from Solomon to Great Plains
- .. 6.Reconcile A/P detail to the G/L.
- .. 7.Reconcile vendor statements to A/P ledger.
- .. 8.Print timely aged A/P trial balance.
1.. d.MONTHLY CLOSINGS
- .. 1. Centralize purchasing to achieve quantity discounts on
- .. 2. Purchase office supplies and equipment online. The
Foundation would set-up a purchasing site linked to one or more distributor'
s internet sites. Employees placing orders could log on, view products, fill
out an electronic order form and click send. Orders could be batched for
discounts. Purchasing agents are available by phone for advice. Some sites
offer deep discounts on a core list of items most frequently ordered. The
Controller can input spending limits by individual or dept. and can access,
review, modify or cancel orders before distribution. The distributor usually
provides Training and set-up. We would be pleased to provide the Foundation
with references for distributors.
- .. 1. We would be happy to assist you in preparing the
reconciliations and adjusting entries needed on a monthly basis.
- .. 2. We also encourage you to consult us on financial
management and accounting systems and procedures throughout the year.
- .. 3. Monthly budget vs. actual reports should be submitted
to the Board with any large discrepancies investigated and explained so that
any necessary corrective action can be taken and to help the Board make
informed decisions based on timely information.
Please feel free to contact us should you have any questions or wish
further assistance with these recommendations.
Ross Wisdom, CPA
Date: Tue Mar 5, 2002 7:27 pm
Subject: Accountants' Report
Thank you, Lyn, for forwarding this
very interesting report. Please also
consider the following:
The hijackers contracted with law
firms, pr firms, etc. not in their own
as individuals but in the name of the
"corporation" -- Pacifica. After going
through the accountants' suggestions
(making sure the contracts were signed
properly by authorized persons, etc.),
request copies of EVERYTHING -- all
emails, internal messages, discussions,
meeting NOTES, etc. -- pertaining to
the handling of the Pacifica cases from
This would include many items that the hijackers, and possibly the firms
themselves, might find embarrassing, unethical and possibly illegal. (I am
especially thinking of strategy sessions with Epstein, Becker and Green, for
example.) These are rightly the property of Pacifica, as Pacifica -- not
Utrice Leid -- was the client.
In those documents we would find grounds for cancelling severance packages.
We would also find exactly what the creditors did for their contracts.
If any documents are found to have been shredded (good possibility), that
should be grounds for cancelling the remainder of all contracts.
We might also be able to claim, legally, that the services provided do not
match up to serving the interests of Pacifica, and so those contracts should
be cancelled for failure to actually work in the interest of Pacifica and for
Also, John Murdock -- as both an ILLEGAL member of the Board of Directors,
and as an associate(?) at Epstein, Becker, and Green represents at BEST
unethical behavior and possibly criminal behavior that should void these
contracts. We should fight for REPAYMENT of all contracts paid out thus far
under the hijackers.
If they FAIL to provide all documents, we should file for repayment.
If they PROVIDE all documents, we should expose the sabotage that would be
evidenced in those reports and stop all payments (and demand repayment).
Either way, we must make this demand to have copies of ALL documents.
I urge the iPNB to take this up as one facet of strategy in saving our
- Mitchel Cohen [ NYC ]