Board - MVF board breaks with past - at last!

In the New! Decisions on search committee, treasurer draw concern

In its front page head line in its May 9th edition of The Gazette broadcasted “New board and president make first move in Village – Decisions on search committee, treasurer draw concern”. Staff writer Sebastian Montes wrote “The MVF new leadership is beginning to make its mark after appointing a search committee for a new EVP and naming a permanent treasurer. In creating the search committee, President Robert Hydorn discarded an 8 member lineup previously recommended and a 5 member search committee including the 3 recently elected board members. Hydorn added the selection of a treasurer to the agenda at the meeting and in an unusual closed session the board voted recently elected board member Katherine Gray, treasurer. According to The Gazette’s account Hydorn drew criticism for;
1. Adding the selection of a treasure to the agenda “at the last moment”,
2. Calling a closed session of the board during meeting to discuss the search committee make up and treasurer appointment.
3. Appointing a board member as treasurer as opposed to a non board member
4. Rejecting a previously recommended 8 member search committee structure and is proposed member composition

In discussing the search committee decision, Board President Robert Hydorn stated the newly elected board members who now control the voting majority are “looking at the new direction” mandated by the election results. In appointing Katherine Gray as treasurer the board purposely selected a person with extensive professional and educational background in business and finance.

Gazette staff reporter Sebastian Montes wrote, several HOA presidents in the Village disagree, and are alarmed by the board’s actions. Patton Ridge Homes Corporation president Ed Brandt sees Hydorn and the new board members as having aligned into a “cabal” that is now making the kind of “surreptitious” moves that Hydorn, King, Johnson and Gray roundly criticized the previous foundation leadership for. The way this was done was by subterfuge and by ignoring protocol, ignoring 40-year history of the Village; this certainly is not the open administration they said it was going to be.” Board member John Silliman said he was disappointed in the way the search committee was changed at the last minute and without public discussion, and objected to the decision to appoint a board member as treasurer. He cannot remember at any point in his time on the board in which the treasurer was someone who had no ties to the board. That independence is healthy”.

The Observer’s View

Aside disregarding tradition, protocol and history the actions current voting majority should come as no surprise. The decision of the board’s voting majority was driven by lack of positive board action on filling key positions 288 days after Zakian and Barber’s resignations. Remember the election mandate validated King, Johnson and Grey’s call for financial reform and to place in motion an effective action plan to staff senior staff vacancies with competent, qualified professionals.

Hiring for senior staff vacancies

The 2007 MVF Budget allocated $4,720,000 for staffing and personnel or 65% of the entire $7,360,000 operating budget. The ability of the foundation to cost effectively manage its operations; delivery recreation and resident services; maintain and preserve facilities, lakes, streams and other assets as well as effectively govern depends on the existence of a stable, trained, experienced, dedicated and effective workforce.

The MVF board of directors has the duty, responsibility and obligation to hire, fire and supervise the staff. However, the MVF has a history and tradition of failure to attract, hire and retain qualified, experienced professionals to fill certain senior staff vacancies. The foundation is slowly gearing up to conduct its fourth job search since 1991 when Pat Huson first retired and Peter Kristen was promoted to the position of Executive Vice President. During this period twice, Pat Husen returned to the staff as the Interim EVP of 10 month term each time. As the tenure declined with each succeeding hired EVPs (96, 42 and 30 months) so too did their perceived performances. As painful as it may be to think about, if we as a community are to learn and improve the foundations’ past hiring practices we should acknowledge that the hiring of John Zakian was a disaster of epic proportions.

In 2004 when Diane Vogel left as Director of Administration and Finance, Glenda Hoagland, the Financial Affairs Supervisor, served as interim director until Geraldine Barber was hired in December 2004. Ms. Barber resigned in August 2006 and the position has been filled by Lois Campbell, a former board member and treasurer for the past 10 months. A disquieting thought at best.

As reported in the May 2005 edition of The Gazette, a Director of Community Management position was filled by Jose Ponton Jr. after the foundation’s first choice initially accepted the position, then accepted a different job offer”. Debbie Cipriano, the deputy director of the department was appointed interim and is now the permanent Director of Community Management.

The MVF annual report list Mike Conroy as Acting Director of Communications. Prior to the 2006 annual report Sharon Goldberg was list as the Director of Communications for the better part of a decade. During the last year Rob Meier was hired in the newly created position of Director of Landscaping and Public Works.

Before the May MVF board meeting other than reports in The Gazette and The MV News Pat Huson. Interim EVP, was looking forward to working with the “search committee”, there was no board actions, reports to the board, proposal before the board, and/or in the official communications in The MV News that there was:

¶ A board agreed, approved or draft statement of qualifications, position description and/or the board short term and long term goals/ expectations of a selected qualified candidate.
¶ A job search plan for board approval that outlines how, when and who will seek, advertise, screen, evaluate, compare, investigate prior history and background of applicants and candidates and make reports and recommendations to the board.
¶ A draft recommended or proposed ad hoc search committee charter and terms of reference for board approval.

The May 2005 MVF board meeting was over 9 and half months since the EVP and DAF positions have been open, which is more than enough time to make a baby and fill a key position. But in both situations, however, you have to start the process.

Appointment of Katherine Gray as Treasurer

The Community Associations Institute (CAI) publication “The Role of The Association Treasurer” by Howard Goldkang, CPA, and MBA states “There is nothing of greater importance to the association than its financial health. The treasurer is the board member charged with that responsibility. The treasurer must be proactive in pushing the community toward the sound financial objective discussed in the following pages of this report.”

The treasurer is an officer of the board of directors. In most governing documents the officers are the president, vice president, secretary and treasurer. Many documents allow the board to appoint a non board member as the treasurer or secretary. The officers of the board are in no way independent of the board, its duties, obligation and powers and to suggest a treasurer as an entity independent of the board as a goal, policy, tradition or concept is absurd.

Goldkang outlines the following “Guide Posts” of duties and responsibilities of the treasurer:
¶ The treasurer is the financial voice of the board of directors and the community.
¶ The treasurer should be aware of all of the critical areas of financial responsibilities and coordinate those financial activities between the board of directors, the community and the management agency.
¶ The treasurer should be the board’s liaison to the association’s auditor and monitor the progress of the annual audit. The treasurer should also make sure that all appropriate tax returns are filed timely.
¶ The treasurer should implement a replacement reserve program based on an engineering study and see that there is appropriate and adequate funding.
¶ The treasurer should make sure that there are safeguards in place to protect the association’s assets.

The current proactive MVF board voting majority should be applauded for breaking with the past with its non traditional decisions. It was the first step to change the history and tradition of board non action and move forward with the mandate of the election to “put our financial house in order” and “hire the very best director of finance and executive vice president we can find”.

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."

Money - Following the Money - Part II

What might have happened?

What you always wanted know about fraud and embezzlement but were afraid to ask
Following are excerpts from Polices & Procedures to Prevent Fraud and Embezzlement – Guidance, Internal Controls, and Investigation, a book published by John Wiley & Sons, Inc. in 2006 written by Edward J. McMillan, CPA, CAE

1. Who Embezzlers rarely fit a stereotypical image and almost always someone above suspicion.
2. Why Despite the appearance of honesty in their personal life they are desperate people capable of taking desperate action and have a gambling issue, alcoholic and/or substance abuse problem or are experiencing financial difficulties.
3. The Fraud Triangle From the “Statement of Auditing Standards Number 99” of the American Institute of Certified Public Accountants, for fraud to occur the Fraud Triangle of incentive, opportunity and rationalization is present. Incentive (See why above with an employee experiencing financial difficulties), Opportunity (To much trust, poor internal controls, lack of supervision by supervisors, no financial audit by independent CPAs). The basis purpose of effective controls is to remove the opportunity for fraud. Rationalization (Over time the embezzlers are convinced they are not stealing, but rather self-correcting a perceived wrong such as a pay discrepancy or the like.
4. How They Get Caught Despite belief to the contrary, most fraud is discovered by accident and due to unanticipated work interruptions. CPAs financial audit 2% - The embezzler knows the auditors routines and what its supervisors look for and do not look for. The auditor engagement is to render an opinion on fairness and accuracy of the financial statements and not to uncover fraud.
Results of internal audit 18% - A good internal audit program is very effective if effective established procedures and internal controls are followed between annual audits.
Whistle blowing 30%
Luck of by accident 50% - Stumbling into something or the thief’s careless accounts.
5. The Financial Services and Accounting Department Most internal embezzlement schemes and other financial related difficulties involve someone assigned to an accounting function such as handling checks, cash, deposits, bank statements and reconciliation, payroll preparation, payroll tax deposits and employees with sole custodian of accounting records. Also the incidents of accounting irregularities are greatly increased if the person assigned to these function is not an accounting specialist by training, education and certification.
6. When Most embezzlements take place during the “window of opportunity” that is open between the time the CPA has concluded the audit field work for one year and the time the auditor starts the subsequent annual audit.

In the case of the MVF “misdirected- suspicious transfer” All 6 conditions excerpted from Mr. Mc Millan’s book were present creating a perfect storm for financial disaster, a trusted long term accounting department employee, with financial problems, apparently solely responsible for “managing its benefits program” embezzling funds after the audit field work for 2004 was completed.

What we know about the MVF employee retirement and saving plan
Note 8 B (Employee benefit plans – Retirement and Savings Plan) to the “Notes to Financial Statement of the audit of the financial statement of Montgomery Village Foundation, Inc. for the year ending December 31, 2001 states “ The foundation makes a fixed contribution fo 2% of salaries and wages to the retirement savings plan. In addition, if the employee elects to defer a percentage of their pay the Foundation will make matching contributions as follows:
Employee Elective Deferral 2%, 3%, 4%
Employer Matching Contribution 3%, 4%,5%

The maximum employer match is 5%. Employer contributions to the plan were $94,537 in 2001.”

How do these plans work?
The administration of “retirement and saving plans” is normally a function of the payroll accounting and record keeping department of a large scale community association such as MVF using a payroll service company and/or the payroll module of its in-house accounting program. The benefit program, the savings funds and individual retirement and saving accounts are normally maintained and managed under contract by a benefit or investment management firm as the fund manager.

It is common practice to establish a payroll transfer bank account as the depository of the gross payroll including the employer’s cost of payroll taxes and fixed and matching employer contributions to the retirement and saving funds are deposited each payroll period. Logging on to a web based computer program of the fund manager the total of the current employee withholding retirement fund contribution and the employer’s fixed and matching contributions are posted to each individual employee’s account balance and simultaneously wire transferred to the fund manager. For larger employers federal and state income fax employee withholding and employer social security contributions are paid as a function of the withholding tax reporting system by electronic transfer knows as “impoundment”. Any payroll or tax and benefit expenses not paid at the end of the monthly accounting period is usually recorded on the books and records as a current liability.

So what do you think happened?
The 2007 payroll budget for salary and wages is $3,011,092. If the assumption that the total of the payment to benefit and saving fund is 6% of salaries and wages, the annual contribution would be approximately $180,000 or $15,000 a month. Remember the employer pays a 2 % fixed contribution for eligible employees. Each employee can elect a deferral amount from 2 to 4% and MVF contribution a matching contribution from 3 to 5%. In 2001 MVF contributed $94,537 so it would be reasonable to assume that the total employer-employee contributions to for 2001 would be $150,000 to $160,000. If we assume MVF electronically transmitted the contributions monthly to the benefit and retirement fund, it is a good possibility that the “fraudulently transfer of $13,684 from the MVF retirement fund” was the March 2005 “retirement and saving” transfer normally electronically transferred to the benefit manager.

Such a misdirected transfer could go unnoticed even if others employees were responsible for balancing the bank statements, producing the financial reports and performing other balancing and internal control procedures. All bank, payroll and general ledger accounts would appear in order until the 2005 audit is conducted in the spring of 2006.

On page 15 of the 2004 MVF Annual Report in the section on Finance and Administration it is written “The department underwent several changes during 2004. The financial affairs supervisor served as interim director until the new director (Geraldine Barber) was hired in December 2004. During the transition, staff readily assumed additional responsibilities to keep the department running. Fixed asset, payroll and COBRA software was upgraded.” There were plenty of changes, distractions and stress on the remaining and new staff to assume the “unauthorized transfer” would probably go undetected for at least a year.

Normally the benefit manager provides a variety of paper and on-line monthly, quarter and annual reports to its clients and employee enrollees to the benefit and savings plan. During the annual audit payroll transactions and balances from the fund including individual employee transacts and balances would be examined to ensure all payments from MVF accounts were received and properly transmitted and posted.

If the audit uncovered the "unauthorized transfer" why wasn't it disclosed?

If the “suspicious and unauthorized transfer” was discovered during the course of the 2005 audit, should this have been reported and prominently noted as part of or during the audit process? Should it have been included as an employee receivable; as part of the “Notices to Financial Statement” Note 8 B, Employee benefit plans – Retirement and Savings Plan”; Note 10 “Concentrations of credit risk”? Should it have been a reported condition in the Management Letter as a concern or weakness of the internal controls when the draft audit was first presented to the board of directors?

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Financial Reports - MVF The Financial Report - Follow the Money!

What do you think really happened?

According to written reports it took 460 days to discover that MVF cash funds under the care, control and custody of MVF staff were missing, misdirected, stolen and or embezzled. The event was first publicly reported by the embattled staff writer of The Gazette Sebastian Montes in its February 7, 2007 edition that a police warrant of a former MVF employee accused of fraudulently authorizing transfer of $13,684 from MVF retirement fund. Seven (7) months latter in the February 16, 2007 issue of the Village News , The Official Newsletter of Montgomery Village Foundation, Inc., reported that the “Employee theft was shocking, but audit and internal investigations averted financial loss, …the financials are clean and No funds will be lost and MVF retirement accounts and all other foundation accounts are in order” (Lois Campbell, Interim Treasurer); “Arrangements have been made to recover all of the funds, plus interest.(Keith Silliman, Interim MVF President) and “…the auditors, local police and Board of Director have worked together to make everything right”. (Pat Huson, Interim EVP). Everyone has questions but as Pat Huson, Interim EVP stated in response to Marilyn A. Cadoff, a CPA and a resident of The Points in her questions on the embezzlement “The staff is excellent, details of the loss will not be given since the case is not yet entirely closed and Ms. Cadoff can go apply for membership on the MVF Audit Committee.” Let’s list the questions and speculate about the answer.

How and who discovered this unauthorized transfer? Why did it take so long to discover that MVF funds were fraudulently transferred and take action after the discovery?
What and who knew and when did they know it?
What can we say about MVF’s financial management systems and practices?
What can we say about MVF’s Board of Directors oversight and communications of financial matters?

The “gap” between discovery and resolution

On July 11, 2006 (Day 460) the Gazette reported John R. Zakian alerted police to “the suspicious transfer, according to police reports”. How long before Zakian was aware of the situation? Heaven knows, John was a promoter and public relations type and didn’t have the skills or desire to supervise a petty cash account let along be in charge and take responsibility for a community with $ 9 million in assets and a $6 million budget. As Sebastian Montes, the “annoying” staff writer for the Gazette, wrote on August 2, 2006 Day 481, that soon after Zakian left his job as executive director of the Yonkers (N.Y.) Industrial Development Agency/Job Development Corporation (1984 to 1993) his secretary at Yonkers was accused of embezzling $350,000 and pleaded guilty to a lesser charges. Zakian told the Gazette he was the one who realized his secretary had written checks to herself and said he was unfairly blamed for failing to discover the embezzlement, which should have been uncovered in an audit. We could give John credit for “Embezzlement Reduction”, as embezzlements under his watch declined from $350,000 to $13,000 but I don’t think he uncovered the theft, he only provided the environment that encouraged such things to happen.

Not withstanding Pat’s Huson’s comments above about “details about the loss will not be given”, as reported in the Village News President’s Message column “The discrepancy was noted approximately a year later during the 2005 Audit” in April of 2006. That would mean a “gap” of at least 81 days between the “notation” of the discovery by the auditors and when Zakian “alerted police to the suspicious transfer”.

This only increases the quantity of unanswered questions about handling and condition of the financial and fiscal affairs of the Foundation as well as the creditability of those with power, duty and obligation in such matters.