UPDATE 1-Edwards campaign owes $2 mln - U.S. election panel

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By Molly O'Toole

WASHINGTON, July 21 (Reuters) - The Federal Election Commission approved a final audit on Thursday that concludes former U.S. presidential candidate John Edwards' campaign owes the government more than $2 million.

The former U.S. senator from North Carolina already faces other legal woes. He was indicted on June 3 for allegedly using nearly $1 million in illegal campaign funds to help cover up an extramarital affair with Rielle Hunter, a campaign worker, while he was running for president in 2008.

Hunter had a child by Edwards as a result of the affair.

"We'll call it the pink elephant in the room, talking about the indictment," said FEC Commissioner Donald McGahn. "The allegation from our end is that money was paid and in theory it benefited the candidate."

The FEC voted 6-0 to approve the June 23 memorandum from its chief compliance officer and audit division, which said the Edwards campaign owed $2,278,315.

The report found John Edwards for President got matching funds in excess of his entitlement as a candidate, misstated its cash-on-hand balance by nearly $100,000, failed to itemize loan repayments of more than $4 million and stale-dated at least 128 checks worth $141,808.

The FEC, whose audit staff will prepare a proposed final report within 30 days, may initiate an enforcement action later. Edwards' lawyers may return to dispute the report and already have registered objections.

"I think at this point I can support the audit report but keep an open mind if they come back, which is their right," said McGahn. "I don't like micromanaging campaigns. I don't think that's my job. But it's taxpayer money."

Federal law requires the FEC to audit every political committee set up by a candidate who gets public funds for a primary election campaign, commission members said.

The audit examines whether a candidate was entitled to the matching funds received -- or more -- and whether the funds were used according to election law.

The audit's overview of John Edwards for President found receipts from individual contributions, matching funds and bank loans of $57,119,378 but disbursements of $55,508,491. As of March 31, 2008, it had $1,610,887 in cash on hand.

Edwards' lawyers object to repayment of the matching funds for several reasons. They say a portion in question, exceeding $500,000, was received before a date of ineligibility kicked in and should be treated as a "qualified campaign expense" to compensate staff.

John Edwards for President also added a request for extra funds for "winding down" costs to allow for fees incurred during the legal process over the campaign money.

Edwards' lawyers declined the opportunity for an audit hearing and did not respond to three of the audit division's four findings. They have responded to prior drafts of the report but Audit Manager Thomas Nurthen said on Tuesday that the documentation so far provided was not sufficient.

In the federal prosecution, Edwards has pleaded not guilty to six charges including taking illegal campaign contributions, making false statements and conspiracy.

Edwards could stand trial as early as October. If he is convicted, each count carries a sentence of up to five years in prison and a $250,000 fine.

"This has not come up like this before," said McGahn. "This can get more complicated before it gets simple." (Editing by Jerry Norton and John O'Callaghan)