This Has To Stop

Whatever one may think of John Martel, he consistently manages to come up with great one-liners. Mind you, they’re not going to be heard on the big movie screen anytime soon. They’re just pithy observations on the problems at Lake Holiday. We took the title of this post from his remarks on the issue of ordering tote bags for new owners for the Welcoming Committee.

Too many bags were ordered at a price double what they should have cost because the wrong person ordered the bags.

Wayne Poyer described the mix-up:

A batch of bags was ordered which, based on the rate of people coming into the community, it’s going to last about 40 years.

As Martel said: “this has to stop, this has to stop.” We’ll go out on a limb and guess that the Welcoming Committee only welcomes new homeowners and not new membership lot owners with one of the too many totes ordered at an exorbitant cost.

The budget review was made a little more difficult when it was discovered that one of Mike Kilmer’s staff incorrectly coded an expense item as an income item. Robin Pedlar thought Kilmer’s firm was “overpaid.” According to Martel, the distribution of work between the LHCC office and Kilmer’s firm has created problems. His view:

It’s hard to sort out who’s doing what to whom.

Kilmer’s firm is paid $4250 per month (an annual rate of over $50,000), and the board was reviewing other cutbacks to balance the budget at the May 15th budget meeting. Despite that, Pat Shields didn’t think that meeting was the appropriate time to address the value of Kilmer’s services.

In the video of overpaying for too many tote bags, Robin Pedlar worried:

If this is indicative of how phony all the numbers could be, it scares me.

She was not alone in her concern about sloppy accounting. Wayne Poyer asked somewhat rhetorically:

How bad is our accounting?

Let’s look at one area, the relationship between delinquencies and receivables. In our videos 2008 1Q Delinquencies and How Bad Is Our Accounting, Treasurer John Martel gave the numbers on delinquencies: 114 homes (including trash assessments), 70 water/sewer lots, and 242 membership lots. Based on LHCC’s published assessment rates, this is a monthly delinquency of $30,748.08. Yet the difference between LHCC’s reported accounts receivable in March and April of 2008 is only $9,299.73. If the delinquency rate is actually that high, why didn’t accounts receivable go up by a larger amount? If it’s not that high, why is the board over-stating the delinquency rate and budgeting based on this over-statement? As Poyer himself remarked, the delinquency report “just doesn’t pass the nonsense test.”

Budget-related videos from this meeting also include a discussion of getting foreclosing banks to pay their dues and a brief review of Kilmer’s role (which includes a little spat between a frustrated Martel and Suzy Marcus). A few unrelated topics were addressed after the budget review: creating the nominating committee; handling road violations, in which directors acknowledged that the roving patrol is not authorized to stop alleged violators; and relisting lots for sale with Oakcrest.

If you find it odd that in all this budget talk, the name of Steve Locke doesn’t come up much, we do as well. Steve’s resume says he’s a certified financial planner and a former member of the Financial Management Task Force. He had little to say about changes to the budget, a topic that is very relevant to his background and experience. What is the point of serving on the board if you don’t have much to say on the topic most directly related to your background or work experience? Congratulations, Steve. You’re our Silent Sitter for the May budget meeting.

With all of the excitement about accounting and budgets (a subject that caused Robin Pedlar to comment a little past the half-way point of the budget meeting that “we’ve got to move faster or I’m going home”), we realized that we neglected to announce our Silent Sitter winner for the April 28th meeting. The most important topic covered at the April 28th meeting was a proposal to refinance the clubhouse balloon note. In a meeting where directors openly acknowledged they breached their fiduciary responsibility, Suzy Marcus sat in almost total silence. She neither objected to the characterization expressed by several board members that the board (of which she was a member) had in fact breached its fiduciary responsibility or raised any concern about the cost to fix that mistake. Important issues require the input of all board members. Congratulations, Suzy. You’re our Silent Sitter for the April meeting.

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We Probably Will Not Meet That

Back in April of 2007, we wrote about the contingent payments that LHCC might receive from Aqua Virginia. These payments made it on to LHCC’s 2006 financial statements, audited by Kositzka Wicks & Co of Alexandria. They made it on in a big way – in the amount of $794,213. In our April post, Dear Mike Kilmer, we criticized allowing contingent gains that might never be received to be recorded on financial statements. We expressed the view that recording contingent gains was inconsistent with the accounting principle of conservatism and inconsistent with FAS No. 5. Despite this criticism, the only response we received was from Mike Kilmer, which was really no response at all. Through LHCC’s 11/30/07 Balance Sheet, the most recent one we have available as of this writing, the contingent gain remains on the books.

We quote from Kositzka Wicks’ 2006 audit letter:

…we conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made the Association…

2007 is now in the history books, and we don’t think any check is coming from Aqua Virginia for 2007′s contingent payment. Let’s forget what actually took place and consider only the reasonableness of the estimates provided by LHCC.

In our earlier post, we provided a variety of readily available data to show that no reasonable estimate would predict the contingent payments would be received for the next several years. In fact, Aqua Virginia’s publicly available SCC filings from February 2007 show that their accounting entries do not record these contingent payments on their financial statements. If Aqua Virginia’s auditors believed there was a reasonable expectation that these contingent payments would be made, wouldn’t they be recorded on Aqua Virginia’s books?

Did LHCC give its auditors complete and accurate information?

In February, Wayne Poyer told the auditors in his management representation letter:

There are no estimates that may be subject to a material change in the near term that have not been properly disclosed in the financial statements. We understand that near term means the period within one year of the date of the financial statements.

Then, in July Lake Holiday homeowner Bill Masters raised the issue of collecting the contingent payments at a public meeting. Wayne Poyer openly told members:

Mr. Masters criticizes the $76,000 which Aqua America will return to the association, assuming we meet a certain number of hookups. And he’s right about that, that’s part of the contract. He’s also right that during this terrible market downturn we’ve got, we probably won’t meet that.

Here’s an actual audio recording of Wayne Poyer’s remarks:

Get the Flash Player to see the wordTube Media Player.

We. Probably. Won’t. Meet. That.

Evidently, Wayne Poyer convinced the auditors on February 26th that the Aqua Virginia contingent payments would be received. Then he flip-flopped when speaking to members – a little more than 4 months after his representation to the auditors. That seems to fall within the near term time frame, and not getting the money seems to be material.

Maybe not collecting the early year payments that make up the $794,213 is not a “material change” to Wayne Poyer.

Unfortunately, LHCC’s representations to its auditors also raise other questions. Wayne Poyer informed the auditors that “…as of February 26, 2007…there are no liens or encumbrances on such assets nor has any asset been pledged.” Really? Does the $750,000 Wachovia note executed on February 2, 2007 count? Does the deed of trust pledging LHCC real estate count? Those documents are part of the balloon note that Wayne Poyer and John Martel signed to refurbish the clubhouse. Both the loan documents pledging assets and the letter to auditors claiming there were no assets pledged were signed by the same person – Wayne Poyer.

These are simple and straightforward representations to LHCC’s own auditors. Why aren’t they accurate?

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Dear Mike Kilmer

Mike:

We’d like you to double-check LHCC’s accounting treatment of the contingent funds which might be received from Aqua Virginia relating to the sale of the Utility. Your name came up in LHCC Treasurer John Martel’s explanation to the board of directors regarding certain accounting entries. He explained that an accountant required that these contingent monies be discounted to reflect their value in today’s dollars, or their present value. In simple terms, he said the discount was required because an accountant “cannot let that ride.”

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