“ . . . it has been very difficult to maintain our ability to prepare monthly and quarterly financial closes timely. We are behind on the year-end close and Audit, and financial reporting set-up in Jonas (hence no June, July or August results as of yet). The Financial Statement reports are being designed, and the budget and beginning audited balances loaded. We expect to have the first quarter financial reports at the October Board meeting.” (Emphasis supplied)
MANAGEMENT FINANCE REPORT (9/26/2017)
That information is not our opinion. It was a small part of the status report provided in the written Management Report at the 9/26/2017 Regular Board meeting.
Friends of Lake Wildwood (FOLW) attended that meeting, at which the Agenda called for acceptance of the 2017 Annual Audit Report and review and discussion of the First Quarter Financial Report. Board minutes for the meeting reported the following results regarding those financial issues:
3. QUARTERLY FINANCIAL REPORT – The Board discussed the quarterly financial update during Treasurer’s Report.
7. ACCEPTANCE OF ANNUAL AUDIT REPORT – Representatives from the McClintock Accountancy Corporation, the firm that conducted an audit of our 2016/17 Fiscal Year expenditures and financial status presented their findings during Reports to the Board. The Board accepted this report.
In fact, the Association has not produced timely monthly financial reports for the past six months and the 2017 First Quarter Financial Report was unavailable for review at the September Board meeting. It was also unavailable a month later at the October meeting.
The Auditor did deliver a summary video presentation of his Audit report in a half dozen, barely legible slides, that did not include standard elements of a financial audit such as the Balance Sheet, Statement of Revenues and Expenses, Statement of Fund Balances, or Statements of Cash Flows. He concluded his summary with a statement that he had issued a “clean opinion” without qualification.
The Board then accepted the Audited Report without further review or discussion. We wonder when the required review occurred?
Frankly, we have difficulty understanding how the Auditor could issue an unqualified report given the current status of Association financial reporting!
But sometimes an auditor will not identify material weaknesses in an audit and will, instead, report internal control deficiencies and recommendations for improvement in a “management letter” to the association. Auditor McClintock submitted a “management letter” to the Board with the 2016 and 2017 audits.
It’s useful to know that the term “internal controls” refers to a system of financial checks and balances that are designed to ensure reliable financial reporting and safeguard the association’s assets against error, fraud, and embezzlement.
After the Auditor’s presentation, members Tom Cross and Fred Huberty both asked the Board what issues or findings had been identified in the Auditors’ management letter. Board VP, Nita Edwards, stated that since the management letter addressed personnel issues, that information could not be disclosed. She was then asked to state how many findings had been identified by the Auditor without disclosing their content. Again, Ms. Edwards stated that the Management Letter was not subject to disclosure because personnel issues were discussed in the management letter.
The inclusion of “personnel issues” in the Auditor’s management letter is not a legitimate reason set forth in Bylaws, Article XII, Section 1 (e) for withholding or redacting information from the Association’s accounting books, records, or minutes.
To expand your sense of why access to the “management letter” seems particularly important at this time, we suggest you read the minutes of the Finance Committee. For example, the following comments appear in the August 17, 2017 meeting minutes:
- The full year-end closing reports of May 31, 2017, as well as the June and July budget/actual reports were unavailable.
- Bank statement reconciliations are behind by 3 months.
- Food and beverage is still a concern. Revenues are down but labor is still high.
- Former President, Mike Zemetra, expressed concerns that the Audit Committee had not made a required report to members and that there is a lack of transparency with the Audit Committee because they have not provided minutes of all their meetings.
- The Treasurer also expressed frustration with the absence of financial reporting.
If you want more hard facts, read the FINANCE section of the Management Report that’s posted in the Hot Topics section on the Association website. Our new General Manager is doing an admirable job of providing us with important information.
FOLW also wrote the Auditor on May 17, 2017, expressing our concerns regarding what appear to be multiple instances of false or incomplete financial reporting and improper reserve expenditures. We asked Mr. McClintock to review our concerns with the Board.
Although we never received a response to our letter from the Auditor or the Board, we learned from the May 25, 2017 Audit Committee meeting minutes that “Letters sent to the Auditor by a member related to Reserves was discussed with the auditors. The external auditor did not plan on providing a response to the member and felt the concerns had no merit based on their opinion.”
On October 16, 2017, member Bob Bumgarner wrote President John Valentine, requesting to view and copy the management letters for 2016 and 2017, in part, to validate that assertion. Jack rejected his request on grounds that, “Correspondence to the Association is simply NOT an “Association Record” that is open to member inspection under Civil Code section 5200.”
In his October 23, 2017 reply to that rejection, Bob pointed out that the Association had already provided him with a copy of the Management Representations Letter to the Auditor, which falls into the same category of association records as the Management Letter from the Auditor.
Moreover, to the extent that Association governing documents are more stringent than Civil Code 5200, they must be followed. For example, Bob cited Finance Policy 4.30, which provides that:
- It shall be the policy of the Association to fully disclose its financial status to all members.
- Such disclosure shall conform to all Federal and State laws and Association Governing Documents. (Emphasis supplied)
Bylaws Article XII, Section 1, Inspection of Books and Records, also requires:
“The accounting [CC 1365.2] books, records, minutes (except executive session minutes), operating rules … and Member lists of the Association shall at all times, during reasonable business hours, be subject to the inspection of any Member or his duly appointed representative at the offices of the Association for any purpose reasonably related to the Member’s interest as such.”
Civil Code ¶1365 defined Financial Records and Reporting requirements, “Unless the governing documents impose more stringent standards . . .” Although ¶1365 was superseded when the entire Davis-Stirling Act was amended and recodified in 2014, new ¶5305 regarding Review of Financial Statements continues to subordinate statutory requirements to more stringent provisions in an association’s governing documents. Our Association has yet to incorporate any of those amendments into the governing documents three years later.
We consider the Board’s actions to reject proper requests to review the management letter(s) that could explain reporting irregularities this year and last are unreasonable and improper. We have even heard that the Board has denied the Finance Committee access to the management letter.
We will continue to pursue our investigation regarding inadequate financial reporting and provide you with further information on October 31 when the Association is required by law to provide Mr. Bumgarner with copies of the current management letter.