It shall be the policy of the Association to fully disclose its financial status to all members.
Finance Policy 4.30
Over the past four years, FOLW has noticed a number of symptoms that point toward potentially serious deficiencies in the Association’s financial management and reporting practices. For example, the Auditor’s 2015 post-audit Management Letter to the Board identified inadequate Internal financial controls that necessitated twenty-three adjustments to financial results provided by management, including adjustments ranging from $10,000 to $5 million. The Auditor also reported that there was no formal cash management process in place, which resulted in some instances of non-sufficient funds and inadequate reporting of cash balances. He warned that the existence of such internal control weaknesses could prevent management or employees from detecting misstatements on a timely basis. He again reported internal control weaknesses this past year.
Not concerned yet? Please read on. We believe you will see an emerging pattern of symptoms that reveal inadequate financial management, misleading, even deceptive, financial reporting, and growing efforts to obscure or hide financial results from members.
- For more than fifteen years, the Association excluded about 75% of our major common facilities and common elements from replacement reserve reporting and funding to keep assessments low. After closing the Clubhouse in January 2014, the Board added all previously excluded common assets to the reserve study, preliminarily increasing current replacement costs $10 million.
- The May 31, 2014 Audited financial statements understated current replacement reserve obligations by more than $10 million because the Finance Manager submitted results from the 2013 Reserve Study instead of 2014. Internal audit processes did not catch that error, which occurred during the period members were voting on a $4 million special assessment to replace the Clubhouse. Hmmm
- In February 2015, the Board approved the expenditure of $1.5 million from Replacement Reserves to help fund Clubhouse cost overruns. That action was improper because the closed Clubhouse structure was not included in reserve reporting, no reserve funds had been saved for that purpose, and it was not even listed as an asset on the books of the Association. No loss was reported when the Clubhouse was closed.
- The Association, for the first time, hired a credentialed reserve specialist to produce the Reserve Study in 2015. That study increased current replacement costs for major common elements another $5 million. Surprisingly, the 2015 reserve study departed from past practice and did not report the discrete financial status of our two restricted and segregated replacement reserve funds. Instead, it consolidated them into a single account, which made it very difficult to track funding discipline. Discrete reporting was important since reserves for capitalized assets were only 20.5% funded while non-capital reserves were 148% funded in the 2014/15 budget.
- On March 22, 2016, the Board resolved to transfer the Audit function of the Finance Committee to a new Board Audit Committee. That authorized the Board to audit its own financial decisions and practices, as well as those of management. Minutes from Board Audit Committee meetings provide virtually no significant financial information and, although the committee is required to submit an annual report to the Board, there is no record of that financial report in Board or Audit Committee minutes.
- Between October 2016 and April 2017, FOLW submitted seven written requests for copies of the quarterly financial reconciliation reports for the two reserve funds, which the Board is required to review quarterly. The Association declined to provide discrete budget vs. actual reserve expense reconciliations or fund balance information.
- According to Finance Committee minutes, required monthly and quarterly financial reports were chronically late the first seven months of fiscal 2017/18. It was also reported that bank account reconciliations were up to 3 months late. Finance Committee members expressed frustration with the absence of required reports, including Board Audit Committee reports.
- On September 26, 2017, the Board and Finance Committee held a joint meeting to review the Auditor’s Management Letter. Neither the Board nor the Finance Committee published minutes of that meeting. However, the Board Audit Committee noted that the Auditor’s May 31, 2017 management letter reported “Internal Control Weaknesses Found During Audit.” The committee also commented that “Audit Committee Charter and Modifications needed” with no further explanation.
- At the regular Board Meeting that same day, the Board accepted the Auditor’s report without comment or debate. The Treasurer reported that the tardy June, July & August Financials would be completed in October. When two audience members asked the Board how many adjustments to financial information were made by the Auditor, those requests were rejected
After the meeting, FOLW submitted three written requests for a copy of the Auditor’s 2017 Management Letter, all of which were denied. We believe those actions were inconsistent with Association Finance Policy 4.30, which stipulates that, “it shall be the policy of the Association to fully disclose its financial status to all members.”
- In November 2017, FOLW noticed that the Charter for the Board Audit Committee on the LWA website had been changed to read “Board Executive Audit Committee.” By law, an executive committee functions similar to an Executive Meeting of the Board in that it’s actions and decisions are not reported to, or available to, the membership. When FOLW asked the General Manager to provide copies of the Board resolution approving that change he could not find one. The GM then removed the revised Charter from the website.
- FOLW recently noticed that the new Website again displays a revised charter for the Board Executive Audit Committee. Again, no Board resolution approving that change is published in Board minutes.
- In March 2018, the Board approved very substantial amendments to Association replacement reserve Finance Rules. The two restricted reserve funds were formally consolidated and most restrictions on reserve expenditures were eliminated. Those changes created a virtually unrestricted fund that can be spent at Board discretion.
- At that same meeting, the Board approved the expenditure of $61,533 to replace a $1,000 Clubhouse dumpster enclosure using reserve funds saved for other purposes. That component was not included in the 2017/18 reserve study, but the Board improperly approved a mid-year addition to the Reserve Study, which is the property of the consultant. FOLW challenged that action but received no response.
- The Association did not retain the reserve specialist to produce the 2018/19 Reserve Study and, instead, allowed uncredentialed “members and management” to produce that report. FOLW wonders if that was done to enable the Board to make unapproved changes to the reserve study and funding plan?
- Because the reserve specialist was not hired this year, the required inspection of major common facilities, which must be completed every 3 years, was not conducted and there was no independent review of the Reserve Study or Funding plan.
- The internally generated FY 2018/19 Reserve Study projects a need to increase annual reserve assessments 13% over each of the next five years, increasing annual reserve assessments from $695 to $1,133. That increase is based on the “need” to fund $3.5 to $5 million in renovations to the golf course and to raise funding to 30% of full funded obligations. Please recall that the Board unilaterally cancelled the Self-supporting Amenity rule for Golf in 2012.
- In four of the last five years, the Board has imposed maximum special assessments to cover deferred maintenance. That, despite having stated in the Reserve Summary to members, “The board of directors as of the date of this study does not anticipate the levy of a special assessment for the repair, replacement, or restoration of the major components.” Special assessments are generally considered to be an indicator of poor planning.
- This year, the Association established a banking relationship with a Las Vegas Bank, presumably to obtain a $1.25 million loan to repay replacement reserve funds borrowed last year. It then required members to submit their $7.1 million in annual assessments to a post office box (lock box) in Vegas without explaining the full nature of our relationship to that bank.
It is well known that lock box banking can be very risky. Bank employees who have access to lockboxes are rarely supervised, which opens the situation up to possible fraud. The fraud primarily occurs in the form of check counterfeiting because the checks that are in the lockboxes provide all the information needed to make counterfeit checks. A company can protect itself from such fraud by using a bank that it trusts and by constantly monitoring its lockbox. Sounds like lots more work for LWA employees to me. What concerns FOLW most is the fact that the Association’s Auditor has repeatedly reported the Association suffers from inadequate internal controls (including FY 2017/18) and that we have no formal cash management processes.
FOLW will sponsor a series of workshops during the next few months to acquaint members with an emerging pattern of inadequate financial management, misleading, even deceptive, financial reporting, and growing efforts to obscure or hide financial results from members.
Workshop attendees will be introduced to specific instances of financial improprieties and their effects. They will then be asked to consider alternative corrective actions to those unwelcome financial practices. Based on participant feedback, FOLW will prepare a survey that’s aimed at identifying the needs and preferences of the membership. Findings and recommendations from that survey will be presented to the Board, along with a request to produce a responsive Action plan.
Please respond to this message (or send an email to FOLW at email@example.com) if you are interested in participating in one of the planned workshops or if you would like to be added to the Friends of Lake Wildwood distribution list.
We believe that your participation can help awaken the great silent majority of Lake Wildwood members and improve our common financial prospects.