Money - Follow the Money - What is the truth?

Follow the Money – The Gap Between Discover & Recovery

Who knew what and when did they know about it? What actually happened during the 310 days between discovery, day 365 and the alleged recovery, day 675? When did each board member know and how did they perform their respective responsibilities, duties and obligations to quickly remedy the situation, examine the conditions that allow the embezzlement to take place and to take appropriate action to avoid future acts of fraud?

At the time, the dominant and controlling force of John Zakian, Executive Vice President, was in charge, in control of the staff, the board and the flow of information about the audit in progress. He undoubtedly signed the auditors engagement letter and it’s a fair assumption that Regardie, Brooks & Lewis audit staff knew John was “the go to guy”. Geraldine Barber had been the Director of Finance and Administration for only a few months and Lois Campbell in April 2006 was a board member and the treasurer.

From the MV Observer’s blog:

Shan said…”As a former employee of the Foundation, I can assure you the Buttry situation was kept very quiet. I am guessing that only three MVF employees even knew about it once the auditors alerted them, and one, of course, was Zakian.” Sane again reported…I am a former MVF employee. Zakian was a monster. That does not excuse the MVF board for letting him happen along with the money mess. He was thrown out of every job he had. Lon Haman, Keith Silliman, Dick Wright and the rest of that board are responsible for everything bad that has happened in Montgomery Village.

On day 675 Keith Silliman in the February 16, 2007, issue of the MV News “President’s Report” wrote in guarded and euphemistic language “In April 2005 a former employee misdirected approximately $14,000 of MVF funds for her own advantage...The discrepancy was noted approximately a year later during the 2005 audit. (April 2006) Arrangements have been made to recover all of the funds, plus interest”. From Keith’s admission we can assume he was informed as president of the board of directors, a member of the executive committee and an elected board director of the “misdirection” at the time of the auditor’s “notation”.

Lois Campbell is quit another story. On the board of directors she was appointed treasurer and a member of the executive committee in March of 2006 only a month or so before the auditor’s “notation”. From the May 19th 2007 issue of the MV News “MV News In the News” column “In her no-nonsense, confident manner, Campbell says, ‘I would characterize our financial health as excellent…We’ve just begun to analyze the numbers for 2006, and although from an early perspective it looks good, we are more vigilant than ever to anticipate unforeseen events so that this year’s performance will meet or improve on budget.’”. May 19th was 36 days after the auditor’s “notation”.

On August2nd, 2006, 124 days after the auditor’s “notation” and 22 days after Zakian “altered police", Montes writes “MVF leaders have not found any money missing in their review of community finances…Lois Campbell…confirmed…A (operating) shortfall…would be $475,000, raising concerns of potential missing money.”

In the September 6th 2006 issue of The Gazette 159 days after the auditor’s “notation” and 55 days after Zakian’s “alert”, “star” reporter Sebastian Montes reports, “MVF leaders have not found any money missing in their review of community finances…Lois Campbell-(now) the interim director of finance and administration… stated “All foundation money has been accounted for…inconsistent bookkeeping and the misdirection of funds resulted in the inflated numbers.” …Campbell-in her mid-year report promises that the foundation will be more forthright about finances. “But among the things the foundation won’t do, is get a new audit.”

Understand John Yakian

To understand the unseen events it important to understand the nature and character of John Yakian. John had history of being selected for positions of public trust by spinning allusions of improving service delivery, exceeding community and industry standards of facility maintenance; lowering operating costs, taxes and assessments levels while balancing the budget with bountiful new funding from private foundations and local, state and federal government grants and appropriations. There are 4 common denominators of Zakian’s known employment record:

1. A controversy surrounding financial reporting and mismanagement and mishandling of funds.
2. A gap between initial promise and performance with a surreal ability to avoid accountability, determined his own performance measurement standards and not take responsibility for any adverse condition.
3. Shortly after John’s arrival a growing distrust in the public press and the general public.
4. Undeserved and continuous support from his immediate supervisors and elected officials who hired him.

John had been in tough situations before. His instinct is to take care of these kinds of public relations problems quietly and when the cure is in progress reveal to as many as possible how he discovered the condition and how his quick action saved the community from great lost and embarrassment. However, the first day of summer 2006, day 446, wasn’t a good time for this personnel matter to happen.

There was growing public concern over the handling of the foundation’s financial affairs, it was becoming difficult to spin a positive financial allusion narrative without revealing actual understandable, detailed and accurate balance sheets and operating reports.

The MV News reported on June 14th, 2006, "over 100 residents attended a community forum and a lively dialog involving the future of Lake Whetstone, the boat house and the dock”. The July 5th, 2006 edition of The Gazette reported the Friends of Whetstone Lake (FOWL) filed a dispute resolution with the foundation. Not something John couldn’t handle. He felt a new sense of confidence and arrogance after the backing and support the board showed him at the lake meeting. The board message was clear – “stay the course”. Didn’t he take the heat for the board that night? John was truly a “war time” EVP. Three days after Zakian “altered the police” his EVP Message in the July 14th edition of The MVNews was titled “Preparing 2007 budget is a delicate balancing act”. John, had a lot on his mind and he could be forgiven he did not handling the misdirected funds issue immediately.

When fraud occurs, what should happen? What did happen?

Being a victim of fraud is an embarrassment to any organization but a reality all organizations. Prudent business practice is to have a preplanned strategy of action if and when fraud occurs. In the event of embezzlement, the logistics of implementing a preplanned strategy of action in the event of embezzlement should not be difficult or take long, The important and urgent within 10 days, the remainder not less than 90 days.

It is a reasonable assumption, when RB&L finished the audit field work on the MVF 2005 financial books, records and statements in April 2006, day 365, the details of “who”, “how”, “how much” and “when” concerning the misdirected-embezzled-stolen- missing money was known documented and communicated to MVF authorized representatives. MVF leaders would have us believe that during this “discovery-recovery gap” the staff offices at 10120 Apple Ridge Road resembled the movie scene when Elliott Ness stood amidst a legion of accountants, FBI suits and police officials as they built an income tax evasion case against Al Capon. The image of members of the board of directors, and other MVF officials looking under desks, in file cabinets and poring over evidence in their “more-than-year-long-investigation as they quietly went about reconstructing what happened” sounds like an adult version of “the dog ate my homework” explanation.

There were no reasons for the fraud and white collar crime department of the Montgomery County Police to investigate what happened or to sign an engagement letter with Regardie, Brooks & Lewis to perform any Forensic Accounting or Fraud Prevention and Detection services.

What happen between discovery & recovery?

Defaulting into his best Dick Cheney damage control mode Zakian revealed the “I’ve taken care of the situation” version of events to John Silliman and Lois Campbell. Sometime later, the remaining members of the MVF executive committee, Toni Negro, VP and Richard Wright, interim-treasurer after a Zakianese style briefing opted for the “local-police-and-board-of-directors- working-together-to-make-everything-right-with-interest” rendition. In compliance with the MVF long standing closed and opaque communications policy this version was only to be revealed on a need to know basis or made public if “talk around the water cooler” leaked a distorted account to “other published report” sources. The remaining board members were part of the “don’t ask, don’t tell” level of awareness group.

The news of an embezzlement by a long time trusted employee sent shock waves in all directions. How can something like this happen and go undetected for so long? Even Zakian was having a hard time getting his mind wrapped around this one, only the offender herself could answer all the questions.

The department of finance and administration by any standards was stretch very thin, understaffed and leaderless. If there was at any time a system of internal controls it slowly eroded as valuable personnel left, remaining employee struggled to keep up and new and temporary employees became uncomfortable with the unproductive working environment.

There were in all probability secret meetings of those with appropriate security clearance to work through the initial panic, denial and non assumption of responsibility. Zakian was worried about the public relations aspect and how he could spin a happy face out of this one.

Best guess at this point Zakian, along with the RB & L audit team leader met with the offender who told her story. She had to know it was only a matter of time. In all probability an arrangement was agreed upon for her to make restitution by selling or refinancing her home. The real estate values in the Village had increased substantially in recent years reaching its peak early in 2006. The pre planned embezzlement action plan wasn’t necessary. This had to be kept quiet. Prosecution was too public. John had his “I’ve take care of the situation” plan in motion with the complicity from MVF leaders and compliance out of fear from senior staff.

As spring turned to summer the plan was falling apart. Village real estate values were in decline. An insurance claim had to be filed but only after a police report was filed. The leverage MVF had with quick and early prosecution had been lost. In the February 7, 2007 issue of The Gazette it was reported on “July 11, 2006, John R. Zakian the foundation’s executive vice president, alerted police to the suspicious transfer, according to police reports.”

The Montgomery Village News vs. The Gazette

Concerns about the MVF financial and fiscal practices, reporting and communications have been ever present and growing. Those who have questioned, requested specific information, challenged financial practices, the accuracy and veracity of the fiscal reporting or the slightest mention of the board and senior staff’s performance of duty were demonized, patronized, minimized, marginalized and treated as the enemy of the foundation. The responses to questions by the MVF board members and staff spokespersons acted out standards scripts that deny problems and defend the honor, dedication and commitment of generations of current and past volunteers and employees.

James Deye of Whetstone, Robert Hess of Maryland Place, Marilyn Cadoff of The Points, and the late Barry Locke are a few who had written letters to the editor, attended and spoken at MVF public board, committee and special meetings about the troubled state of the foundation’s financial recordkeeping, reporting and communications. Because of lack of faith in reliability of the financial information and absence of trust of those in power and control, there was on on-going request for outside professionals to conduct a study, audit, examination and/or assessment of the finances. There was little public questioning about “missing money”.

However, beginning with its August 2nd 2006 edition, shortly after Zakian “alerted the police”, The Gazette began running denials on a regular basis by MVF leaders, especially from Lois Campbell, the MVF media attack dog, that any fraud or embezzlement had taken place.

The Gazette obtained a copy of the police report at the time, day 460, but did not make mention or reference it until its February 7th, 2007 edition, day 666. Evidently Sebastian took every opportunity in questioning MVF leaders about such subjects as the budget process, the annual audit and/or the financial reporting system to make inquires about the possibility of “missing money”. Here is a sampling of the litany of responses:

8/2/2006
Gazette
MVF leaders have not found any money missing in their revenue of the community finances.

8/2/2006
Lois Campbell
“All foundation money has been accounted for…inconsistent bookkeeping and misdirection of funds resulted in the inflated (deficit) number.”

8/2/2006
Lois Campbell
In her report she laid out the foundation’s plan… promising that the foundation will be more forthright about finances. “But among the things the foundation won’t do, is get a new audit.” The residents said they were asking for the audit largely due to concerns of malfeasance or fraud. But with bank records still showing that the foundation holds $8 million in assets Campbell dismisses those claims.

9/6/2006
Gazette
MVF leaders have not found any money missing in their review of community finances.

9/6/2006
Lois Campbell
Campbell said that all foundation money has been accounted for…inconsistent bookkeeping and the misdirection of funds resulted in inflated (deficit) numbers. In her mid-year report promised that the foundation will be more forthright about finances. But the foundation won’t get a new audit.” The residents were asking for the audit largely due to concerns of malfeasance or fraud. Campbell dismisses those claims. “If there’s $37.21 missing, I wouldn’t know it, but hundreds of thousand of dollars missing, which is kind of the implication, absolutely not”.

1/30/2006
Gazette
Confirmation of missing money comes after months of financial cleanup and account reconciliation… . Campbell reported last week that all foundations accounts in arrears have been wrapped up through the November 2006 report.

As of February 7th, 2006 spin plan B, the “local-police-and-board-of-directors- working-together-to-make-everything-right-with-interest” rendition, was in effect.

On Thursday July 27th, 2006 in a closed session of the MVF board of directors John Zakian’s resignation was accepted in a unanimous vote of the board. Toni Negro, board vice president, was quoted by the Gazette in its August 2nd edition that “neither the deficit nor the lake dispute played a role in Zakian’s departure.” Were the “missing money” and the general state of the financial affairs, factors in his leaving? Was it even discussed? Why since his departure has there been no admission, acknowledgement or apology for his serious negative impact on the Village? Or was he just following orders? It is possible that the board was still not fully informed? Did his resignation include a negotiated settlement of silence?

Why did it happen and how could it have been avoided?

Marilyn A. Cadoff, a CPA and a resident of The Point gave us the answer when she asked in her letter to the editor of The MV News “…What was the nature of the theft and what weakness (es) existed in the internal controls that allowed the theft to happen?...What internal control(s) are being put into place by the Foundation to prevent this from happening again?”

Internal accounting controls are the administrative procedures, routines, repetitive actions performed in creating and accounting for the financial and accounting books, records, reports, schedules, logs, files and supporting documentation. Standard business practices is to document internal accounting controls in an “Accounting and Financial Policies and Procedures Manual” to ensure compliance with generally accepted accounting practices (GAAP), tax laws, board approved financial administrative and policy resolutions, the governing documents of the association, local, state and federal laws, ordnances, codes, restrictions and regulations governing Common Interest Realty Associations (CIRA) such as the Montgomery Village Foundation.

From “Tips for Protecting Your Association Finances”, published by the Community Associations Institute (CAI). One of the important business functions of the board is to oversee the association’s financial well-being. Here are 15 tips to help protect association finances.

15. Establish good financial procedures – The board must ensure the safety of its financial systems by implementing effective internal control. Here are examples of good checks and balances.
¶ Use multiple parties to handle cash, whether assessments or from vending machines, guest fees etc.
¶ Require 2 signatures on all checks over a certain amount and on all reserve or investment transactions.
¶ Do not allow the person who approves invoices to write checks.
¶ Do not allow the person recording receipts to make deposits.
¶ Minimize cash transactions.
¶ Write all checks to the payee – not to “cash.”
¶ Pay all employees and vendors with a check.
¶ Insist that all payments to the association are made out in the name of the association-not the manager, managing agent, or board members.
¶ Deposit checks directly to the association’s account on a daily basis or store overnight in a fireproof safe. Reconcile bank statements monthly.
¶ Arrange for an annual audit including a management letter from the accountant.
¶ Obtain an engagement letter from the association’s accountant that defines the work and fees.

From Community Association Finances a collection of articles from Common Ground Magazine published by the Community Associations Institute, (CAI) – Simple Steps to Avoid Embezzlement” by Alan Crandall.

Divide the labor – Begin by reviewing your internal controls procedures. The more people involved in the process, the more likely wrong doing will be identified. Separate responsibility for issuing check from that of balancing and reconciling statements. Reconcile bank statements promptly within 2 to 3 days of receipt. Ensure authorized signers are not the same person who reconciles the account. Ensure there is adequate supervision. Lack of supervision allows unauthorized access to records and account information or to receive, place and or interrupt calls from the bank.

It was reasonable to assume that the offender in this case did just about everything when it came to the retirement program. She was the resident expert on all matters and things. In all probability there was little division of labor.

The fraud could have been avoided if MVF separated from the offender’s duties:
1. Receiving of the benefit reports and statements from the benefit manager and
2. Comparing the monthly retirement and saving benefits transfer payments from the MVF payroll transfer accounts to total and individual enrollees balances with the benefit transfers received with reports and statements from the benefit manager.
3. Preforming summary monthly general ledger posting of payroll and retirement fund activities.
4. Bank account access, signature and/or transfer authority.

Following are MVF comments about internal accounting controls:
3/2/2007
Pat Huson
Internal controls are strengthened by an excellent staff, now in place, who follow advice from our auditors on such matters
6/3/2005
Geraldine Barber
...It's a system of checks and balances...

The last word goes to Keith Silliman, MVF president at the time, quoted in the 2/7/2007 edition of The Gazette "I think it's been methodically pursued and based on what I'm seeking, it will be resolved and there will be no loss to the foundation, I think under the circumstances, this is as reasonable an answer as we can expect."