Audits At Deer Ridge - The Fallacy and Joe Thomas - The Deer Ridge $10 Million Man

Joe Thomas and the board make a big deal out of the fact that we have audited financial statements for GGRC and RML – and that, because of this, owners don’t have any need for copies of the books and records.

They make out that this “comprehensive oversight by an outside accounting firm” should give all owners complete confidence that all the books and records of our homeowner’s association are being done correctly.

This is a fallacy — and many owners are being lulled into false complacency just because they are being told the books and records are “audited.”

Hickman and Company A.K.A. Hickman and Associates

These folks have been our auditors at least for the past 8 years since I know they did the audits for 2002.

Is this some large regional, certified public accounting firm that has the proper, internal controls and procedures to thoroughly audit an organization and uncover any misdeeds or malfeasance that may be present in our homeowner’s association?

Judge for yourself.

Their website can be found at http://www.hickmanaccounting.com/about/

As you can see from their website, “Hickman and Associates is a tax and bookkeeping firm located in historic downtown Sevierville, Tennessee. A family firm, we have proudly served the community with three generations of for over fifty years.  Hickman and Associates currently has four employees (all family members.)”

While these folks may very well be good bookkeepers and accountants, it is not clear from their website that any of the four of them is currently a CPA.  It also is not clear whether this firm has ever had any recent peer review by the American Institute of Certified Public Accountants.  The AICPA requires most CPA firms which claim to do audits have this periodic peer review to help ensure that audits are done correctly.

Again, I know of absolutely nothing negative whatsoever about this company, it owners or employees or its bookkeeping and accounting services.  I will take on face value that they must have at least one certified public accountant who participates in the annual GGRC and RML audits they do for Deer Ridge.

Accounting Company Concerns

Even if Hickman are the best accountants and bookkeepers in the world, another major concern is that such a small firm may be overly dependent upon the business handed out by Joe Thomas.  For such a small company, two audits and the bookkeeping services for Deer Ridge could make up a significant of their annual revenue.

During the Special Meeting that was held on February 6, 2010, Joe Thomas stated that we pay Hickman and Associates, et al the following each year:

• $1,300 for the GGRC audit and $1,800 for the RML audit.
• $5,400 for the GGRC bookkeeping and $21,000 for the RML bookkeeping.
• Total annual payments to Hickman from GGRC and RML:  $28,600

What percentage of Hickman’s four person accounting company’s annual revenues does the above $28,600 represent?

If, hypothetically speaking of course, Joe Thomas threaten to take “his” GGRC and RML accounting business elsewhere unless the books were “cooked”, would such a small firm feel compelled to bend the rules or “look the other way?”

Consider that much larger CPA firms have been influenced by similar circumstances. (Example: Bernie Madoff’s auditor, David Friehling, CPA of Friehling & Horowitz, a tiny CPA firm that operated from a 13-by-18-foot office.  Or, consider the 89 year old, 28,000 employee firm, Arthur Andersen CPA, that went out of business as a result of their federal criminal conviction for manipulation of the books for a company called Enron.)

Again, Hickman is most probably a very reputable firm with great people — but the above should be major red flags to all Deer Ridge owners that just because financials are audited does NOT mean that they are right – or that owners are protected from fraud.

What Exactly Is Audited?

Even if the CPA firm is doing a reasonably competent job, there are major opportunities for potential malfeasance at Deer Ridge.

Could something like that be happening at Deer Ridge using the small accounting firm that depends so much on Deer Ridge business?  Again, it may or may not be an issue here with Hickman and Associates — but how can we know for certain?

The first thing to know about most audits is that all transactions are NOT checked.  Most audits would only include “spot checking” sporadic accounts – and in many cases the CPA firm is directed by the client company to only check specific accounts that they know are pristine.

Let’s look at Hickman’s own cover letter for the audits they do for Deer Ridge:

“These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

“We conducted our audit 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.”

So, what does this mean?

They claim no responsibility whatsoever for the financial statements themselves – washing their hands of it like Pontius Pilate – distancing themselves from whatever was contained in those Joe Thomas directed financials.

Secondly, and this is key, their audit only includes a smattering taste test of entries on those financials.  So, how much was tested?  Which accounts were tested?  Who, really, decided which accounts were tested?

No matter those answers, it is clear that our audit was NOT the thorough review of all accounts and all bills and receipts that many folks have as their preconceived notion of an audit.

Some “Hypothetical” Examples of Possible Fraud At Deer Ridge

Let’s consider the wild and crazy idea that our much beloved general manager, Joe Thomas, was not the pillar of honesty and forthrightness that Luther Parker asserts.

I know — it’s hard to imagine that Joe Thomas would even take a nickel that did not belong to him.  But let’s assume, for argument’s sake, that there was a bad and evil general manager running Deer Ridge – instead of the saint we are so blessed to have controlling our money.

Is there any possible way that this fictional bad and evil general manager could possibly circumvent the audits of GGRC and RML?

Let’s consider some hypothetical examples:

• Our general manager decides to have his personal house painted for $12,400.  As part of the deal for choosing the painter, he requires them to mark the invoice that the work was done at Deer Ridge.  The general manager then marks the invoice with the proper chart of accounts number for Deer Ridge maintenance and then files the invoice with the other maintenance receipts for the year for Hickman bookkeeping to enter into the general ledger.

  In this case, even a good auditor doing a normal audit would probably not uncover this embezzlement.  The only way this might be caught would be by owners reviewing copies of all the books and records.  Even then, it would take someone who could connect all the dots to understand that no work at Deer Ridge was actually performed for this $12,400 expenditure.

  An even harder thing to catch would be a derivative of this:  The general manager is getting ready to award a $170,000 paint bid for painting all of Deer Ridge.  But he either requires the contractor to ALSO paint his house for the same dollars – or agrees to a higher bid of $185,000 if it also includes his house – but still only lists the Deer Ridge property as being painted.

  Again, even a forensic audit might have a problem catching this kind of malfeasance.  But owners seeing all the books and records, including all competing bids for painting the property, would probably catch this.

  And, here is the important part:  Knowing that any and all owners had a right to have copies of all the books and records, including all competitive bids, might worry a bad and evil general manager so much – that they would not want to risk being investigated.

• Next example, our general manager decides to go to Myrtle Beach, South Carolina on vacation.  He secretly cuts a deal with the manager or owner at a Myrtle Beach resort for free use of their luxury ocean front condo for two weeks – in exchange for the manager or owner of the Myrtle Beach resort to use one or more Deer Ridge Mountain Resort condos for him and his family.

  Of course, our general manager doesn’t OWN any condos at Deer Ridge – so he finagles the secret use of units managed by RML to fulfill his side of this bartered deal.  Since he doesn’t receive any money, there are no rents ever paid to the actual owners of the units at Deer Ridge.

  Again, even a reasonably competent auditor would probably not be able to uncover this embezzlement either.  The only way it could probably be spotted would be a review of copies of all the RML books and records including the computerized reservation system (excluding any and all credit card info of course.)

• Our fictional bad and evil general manager has some golfing buddies who want to party at Deer Ridge.  He tells them, “Pay me cash for just one night and I will give you a whole week’s stay in a nice unit.”  The general manager pockets the cash, marks the unit as unavailable and the owner never knows their unit was used.
• Our general manager decides to have big weekend parties during the month of October to celebrate Oktoberfest in the mountains.  He orders a massive amount of food and beverages for these occasions — but over orders intentionally so that he can take the lion’s share home for his personal consumption.
• Our general manager decides at budget time to pad various accounts so that he can have the maneuvering room to use money undetected.  For example, hypothetically speaking, he has a budget of $10,000 for “seasonal decorations.”  In this budget, he shows a receipt for $1,700 worth of pumpkins including buying one pumpkin for a whopping $300 (these were actual numbers for 2009 according to Joe Thomas at a recent board meeting.)

  However, back to our story, assuming the $1,700 was spent, there were no other seasonal decorations bought during the year.  This would give our general manager $8,300 slush fund to use anyway he wished and still be able to report that he stayed under budget. But, back to our pumpkins:  What if the real costs for those pumpkins were only $700 – and a bad general manager pocketed a $1,000 as a kickback?  Or, how do we know if the pumpkin company was really owned by the evil general manager’s wife or son?

• Our bad general manager edicts that all units in RML must have new mini-blinds for all windows so that all units are upgraded and standardized.  He orders all the blinds from one company and cuts a deal that they have to provide free delivery.  However, he is creative and takes their letterhead and makes his own shipping invoice for $2,500 which he pockets.

Again, those are a half dozen simple, hypothetical examples of how malfeasance could slip past most audits IF we didn’t have our current saint for a general manager.

No Checks And Balances At Deer Ridge

Based on comments made at the February 6, 2010 Special Meeting, Luther Parker admitted that there are NO checks and balances of ANY kind in place at Deer Ridge.

Luther stated that:

• There are NO written policy manuals for Deer Ridge and the operation of GGRC and RML.
• There are NO written Delegation of Authority forms that are signed and on file.
• There are NO written systems and procedures for GGRC or RML.
• There is NO written employee manual.

Folks, this is Management 101 stuff that they teach in freshman year of undergraduate school.

Additionally, it appears that no one on the current Board of Directors performs ANY kind of managerial review of any of the actual receipts for goods and services paid at Deer Ridge.

• No one ensures that every check that is written at Deer Ridge pays for what is used and needed at Deer Ridge.
• No one sees ANY of these documents – except Joe Thomas.
• No one even questions Joe Thomas on any of these issues.

In my opinion, all of this is grounds by itself for finding the entire Board of Directors guilty of Gross Negligence and Gross Incompetence!

Management 101 Stuff, For God’s Sake!

Even if we assume we have a 100.00% honest general manager, common business sense would dictate that you have these kinds of systems and procedures, policies and written delegation of authority’s and checks and balances in place to ensure that no nonfeasance or embezzlement can ever take place.

And, on top of all that, Joe Thomas and the board refuse to allow owners to have copies of all books and records that would help the owners ensure no malfeasance or embezzlement was taking place.

What are Joe Thomas and the board trying to hide?

Joe Thomas — The Deer Ridge $10 Million Man

According to the 2010 budget issued by the board in December 2009, GGRC and RML will handle cash receipts of over $1.1 million during this calendar year.  This includes HOA fees, special assessments and RML revenues.

Assuming this was a typical year, that means that Joe Thomas during the past nine years would have handled over $10 million related to Deer Ridge.

This is a massive amount of money.  Huge.

• And, NO checks and balances in place?
• NO systems and procedures, policies and delegation of authority are in place?
• No forensic audit to help ensure that everything is done right?

This is INCREDIBLY bad management by President Luther Parker and the entire board of directors.

I am sure that Joe Thomas greatly prefers to continue things as they are:

• Completely unaccountable to anyone about anything.
• Completely allowed free reign to pretty much do whatever he wants to do with the $1 million plus a year that passes through his fingers.
• Completely insistent that NO owner EVER gets to make copies of any books and records that might catch any malfeasance.

Folks, even if trust your employees, it is incredibly bad management to not have the checks and balances in place to make sure you are protected just in case you hire someone who is not honest.

And, all of this goes beyond holding the general manager position accountable.

Joe Thomas, as general manager, is guilty of gross negligence and bad management by not having a written employee manual, and other control documents, in place in case of lawsuits, EEOC actions, claims of organizational misconduct for drug abuse, claims of sexual misconduct, etc.   Even a $100, fill-in-the-blank software program could solve the problem regarding an employee manual.

Plus, good management practice dictates that ALL positions in an organization should have WRITTEN systems and procedures, policies and delegations of authority.  There are all kinds of risks to GGRC and owners by this gross oversight by both Joe Thomas and each and every board member.

It Is Past Time For A Change

Lots of changes are needed at Deer Ridge.

Immediately fixing this massive policy and procedures hole is one of them.  Firing the Board and Joe Thomas for gross incompetence and gross negligence are also at the top of my list.

But the immediate thing to do is to give ALL owners oversight into what is REALLY happening, financially and operationally, at Deer Ridge.

And, we do this by allowing ALL owners to have copies of ALL books and records – so that all of us can audit the books, so ALL of us can institute our own checks and balances – so that all of us can finally have some assurance that things have been done right.

So that we know if ANY of our $10 million has been embezzled or misappropriated in ANY way.

All it takes is Luther Parker finally agreeing to allow COPIES of all books and records will be made available to ALL owners – starting at 9 AM yesterday morning.

If he doesn’t, we ALL should be wondering:  Exactly what ARE they trying so desperately to hide from the owners?