Audits demand big station refunds to CPB

Originally published in Current, Jan. 13, 2003
By Dan Odenwald

For financial officers at pubcasting stations, a call from CPB’s inspector general can mean refunding thousands or even hundreds of thousands of dollars in federal aid, some of which may already have been spent.

South Carolina ETV is disputing a finding by CPB’s fiscal watchdog that it must return $775,000 to CPB, and Santa Monica public radio station KCRW is fighting to keep $224,000. Most disputes involve much smaller sums, and more than a third of audits have no adverse findings at all.

In rare cases of criminal intent, IG audits have contributed to prosecutions and guilty pleas from a university administrator, a CPB-backed minority consortium director and a station production director [related story].

Most problems in IG audits are more innocent, however: stations overreporting their nonfederal financial support (NFFS)—a figure that represents most of their annual revenue excluding federal grants and payments from other pubcasting stations. The higher the NFFS, the larger the Community Service Grants (CSGs) awarded the station.

In the past two years, the IG found exaggerated NFFS in audits of at least seven public TV and radio stations, including South Carolina ETV, Minnesota Pubic Radio, KCRW in Santa Monica, KNPB in Reno, WSBE in Rhode Island, Prairie Public Broadcasting and KKJZ (formerly KLON) in Long Beach, Calif.

In the complex chore of determining NFFS, many stations come up with numbers that differ from CPB’s. According to CPB, 10 percent of all station financial annual reports in 2001 contained errors that resulted in significant changes to NFFS.

Some stations, for example, recorded business income from sideline for-profit projects as NFFS when, in fact, it’s ineligible. In other cases, stations failed to provide adequate documentation for in-kind contributions, rendering the support ineligible as NFFS.

When CPB grant administrators have questions about inconsistent data and unusually large revenue claims, they forward the reports to the IG’s office for investigation, and some are audited. Outside tips trigger other audits, and the rest are conducted at random, according to the IG.

The NFFS numbers not only determine the size of CPB grants but are also used by PBS and other pubcasting organizations in formulas for setting dues and assessing fees.

Though stations can now enter their NFFS and other fiscal data through a streamlined CPB website instead of a detailed paper report, they must crunch numbers for weeks to develop the figures, says David Tanner, CPB’s deputy inspector general.

Very few stations probably seek to mislead CPB by exaggerating their NFFS, Tanner says. In most cases where the IG finds problems, station executives misunderstood the complex CPB guidelines or made mistakes filling out forms. They often repeat the same mistakes year after year.

The signature training seminars of the Public Broadcasting Management Association show station officials how to fill out the forms. The PBMA seminar has become a rite of passage for new accountants in the system, says Chuck McConnell, PBMA’s executive director.

Each year before the filing deadline, CPB revises its reporting guidelines to make the process easier, alert stations to changes and prevent common errors. "If there’s a point that’s being missed, CPB will dwell on it to make it more understandable," Tanner says.

Deep in the rulebook

Most audits go relatively smoothly—especially if they are a result of ignorance or error, Tanner says. In 2001, the IG’s office found problems in audits of Long Beach’s KKJZ and North Dakota’s Prairie Public Broadcasting, but they were resolved without dispute, Tanner says.

The details of these audits illustrate the complexity and pitfalls of CPB’s rules.

KKJZ counted the gross revenue it generated from a blues festival in 1998 toward NFFS when it should have counted only the net revenue, says Mark Roberts, the station’s v.p. of finance. The difference in NFFS was about $533,200.

The station also improperly claimed approximately $80,000 over two years in support from its license-holder, California State University at Long Beach, which donates the station’s building. Because the building is fully depreciated, the station cannot count the market value of its free rent toward NFFS, Roberts says. While Roberts is lobbying to change the CPB policy—he believes it unfairly penalizes stations in older buildings—he doesn’t deny that KKJZ goofed in reporting its NFFS. The twin errors meant that KKJZ is giving back $69,633 of its CPB grant.

Prairie Public Broadcasting and the IG differed over how to report revenue earned from gambling. Unique in the country, the state net owns and operates a bingo hall and manages five pull-tab machines and blackjack sites in bars around the state, says Chief Operating Officer Don Berg.

Here’s the dispute: Prairie regards its gambling venture as an ongoing fundraising activity, meaning that it could deduct less of its costs and claim higher NFFS, but CPB ruled that gambling qualified as special-event fundraising, with full costs deducted and lower NFFS. The snafu resulted in a $1.5 million overstatement of revenue over two years. Prairie ultimately accepted CPB’s interpretation of the gambling income and now receives about $100,000 less in its CSG.

Taking it hard

Other audits are more contentious. KCRW in Santa Monica, Calif., for example, is challenging the IG’s June 2002 finding that the station overvalued its NFFS by $2.5 million over the past three years. The IG is recommending that CPB rescind nearly $224,000 in grants to KCRW.

According to the IG’s audit, the station claimed $2.8 million in NFFS for on-screen advertising from two local movie theater companies.

Each year, the movie exhibitors gave the station letters stating the amount of promotional support they provided to the station, but the letters did not provide any of the detail required by CPB guidelines and did not state that a donation was intended, the report says.

IG auditors conducted their own market research on the value of donated on-screen advertising in the Santa Monica market and concluded KCRW had overstated its NFFS by nearly $2.5 million.

Ruth Seymour, KCRW’s g.m., calls the conclusion outrageous. The IG’s research gathered pricing information on slide advertisements that are projected in theaters before the lights dim, Seymour says. But the ads donated to KCRW are worth much more since they have moving pictures and sound and are shown after the lights go down, she says. Also, the IG ignored the great value contributed by a company that produced the ads for KCRW, she contends.

KCRW has hired a lawyer to appeal the findings to CPB management. In two letters to Washington, KCRW reaffirmed the NFFS it initially claimed on its annual financial report.

But Tanner maintains that KCRW’s numbers are exaggerated and that it failed to follow CPB’s "very specific guidelines" on donated advertising, which calls for an easily determined value and documentation ahead of time stating that a donation was intended.

The greater the recommended refund to CPB, the harder the stations take it, Tanner says. South Carolina ETV is taking the IG’s 2001 recommendations very hard. The state network stands to lose $775,000 if CPB management upholds the finding that it over-reported more than $11 million of in-kind contributions for local productions aired on its satellite service.

The IG regards the programs as a donation of local programming, which is not counted in NFFS, according to SCETV President Moss Bresnahan, while the state network says the programming is instructional and therefore can be counted.

Bresnahan wonders how instructional programming made available on a closed-circuit basis to the state’s classrooms can be considered local programming. Bresnahan says it’s "unjust and punitive" for CPB to force the state net to return $775,000 after earlier audits led it to believe it was following "the spirit and letter of the law."

It’s easy to understand how audits can cause disagreements, even among "people of deep learning and the best of intentions," as McConnell says. Accounting is an "incredible practice in ambiguity and judgment," he adds. "You’re dealing with huge gray zones."

Meanwhile, new gray zones open up as stations discover new ways to raise money.

Confusion may be inevitable, so Tanner advises stations to take their questions to CPB grant administrators and "solve the confusion early.

To Current's home page
Related news: In three recent cases, CPB auditors worked on cases that ended in court with guilty pleas.
Outside link: Website of CPB's Office of the Inspector General.

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