In Search of Trumpets

As in the case of any business, our SCA financial statements tell us the story of the financial condition of our Homeowners Association. If the financial statements are not right, we get the wrong story. If that story is not being told correctly, we should be concerned and demand answers.

In the case of Trumpets, there is some evidence that our financial accounting story is not being told correctly. We understand that Trumpets accruals are not being recorded or reported as intended under generally accepted accounting principles (GAAP). GAAP is a set of conventions, rules, and procedures which define accepted accounting practices.  GAAP is an accounting standard, a standard we believe the Association (and RMI) should adhere to. All companies keep some form of accounting records. Whether an organization is for profit or not for profit, subject to or not subject to SEC regulations, some Generally Accepted Accounting Principles (or GAAP) are recognized and applied to the organization’s financial statements. That should be no different in the case of the financial statements of the Sun City Anthem Community Association. GAAP requires that contractual obligations are recorded in the financial statements, whether monthly, quarterly or annually, when earned. Furthermore, provisions may be made to record as a separate line item the extent to which this tenant obligation may not be collectible in what is referred to as a “provision for doubtful accounts”. What you have then is an informative financial disclosure which reflects the tenant receivable for past due rent, interest and penalties and a separate line item disclosing the extent to which responsible management deems the receivable to be uncollectible, either partially or in its entirety. Any reader of the financial statements would be able to recognize the extent to which there is an issue/problem. Not to record/disclose the foregoing is an obvious omission and would ultimately mislead the reader. According to SEC Commissioner Cynthia Glassman, GAAP’s value is in providing “basic uniform accounting standards, as well as consistency of accounting standards across all companies. And . . . GAAP itself is indeed based upon certain fundamental principles of accounting.”  [1]

Because Trumpets accruals are not being recorded according to these guidelines, we are left with what, at best, could be called misleading SCA financial statements. While GAAP guidelines are one thing, having persons in charge who are committed to following those guidelines is quite another matter. In other words, if GAAP guidelines are adhered to, there should be no reason for residents to be concerned. But, as the Finance Committee is acutely aware, GAAP guidelines are not being adhered to in the case of Trumpets.

Misleading financial statements serve no legitimate purpose in any organization, least of all in a nonprofit community association. This brings me to Alan Socolik, a former Finance Committee member, CPA and long-time dedicated volunteer to our community. Alan, who was tasked with reviewing the financial statements, was summarily removed from the Committee by the Board for making an inquiry about accruals for interest and penalties for Trumpets, among other “disruptive” behavior, as reported in David Berman’s Anthem Journal. I and others attending the August 11, 2006 Finance Committee meeting witnessed nothing out of the ordinary, with the Chair reminding Alan and the audience, in response to his inquiry, that the Board had instructed the Committee not to discuss Trumpets. The Committee moved on to other business and the matter was quickly forgotten, or at least everyone had thought. [You may read David’s article on this matter, by clicking here.]

I viewed the crux of Alan’s inquiry as going to the heart of GAAP. For reasons that were not apparent to Alan, RMI’s financial records then before him and other committee members at that time had failed to record all of Trumpets accruals. This was viewed as a serious omission, something in need of follow up, a follow-up that ultimately resulted in Alan’s firing by the Board. Here is the problem. GAAP mandates the inclusion in financial statements of all expenses, was well as all income earned during the corresponding period. This requires the recording (by RMI) of an “accrual” for both payables (amounts owed to others) and receivables (amounts owned to us). [For definitions and more information on accrual accounting, see “Guide to Understanding . . .” on our website by clicking here, or here to read a "Guide to [Association] Financial Reporting . . . ." ]

In the case of the lessee of Trumpets, where the lessee has not made rental payments since September 2005, it is critical that our books accurately reflect payments earned whether or not those payments were received. In such cases, the accounting records should show an “accrual” for any and all unpaid and outstanding income earned.[2] Since these very missing accruals were properly recorded in prior years, a huge red flag is raised by their omission for 2006. Please understand that accruals allow income to be reported when earned, but not yet received. Not to report earned income would amount to a serious deviation from generally accepted accounting principles. As noted in footnote #2, income is earned pursuant to contractual obligations, such as those contained in our Trumpets lease.

A reasonable person observing such an omission might conclude there is some type of reporting error or, more likely, there is some ongoing attempt to manipulate our financial statements. So what happens when all known Trumpets accruals are not being recorded? If Trumpets accruals that can be calculated are not being recorded, then our financial statements are not merely misleading, they are materially wrong by under-reporting what is owed the Association by the lessee of Trumpets, S&D Café V, LLC.    

Assuming Alan’s concerns are accurate, there are many unanswered questions, the least of which would be - why would someone want to under-report what Trumpets owes? Did the Board vote to amend the terms of the lease on late fees and penalties? That’s unlikely. Another question might include -why is RMI not making a complete accrual accounting of Trumpets indebtedness to the Association, including amounts owed due to late fees and interest penalties? Does RMI’s license to operate as a community manager mandate the production of accurate accounting statements? As one can readily imagine, late fees and interest penalties are one thing when not paying on time, as from 2002 to 2005. It’s quite another matter when those late fees and penalties are accruing on the lessee’s failure to pay at all.

Is it possible the Board is under the mistaken belief they are relieved of any responsibility in such matters simply because they are in negotiations with S&D Café V, LLC, over some disputed matters? On the contrary, nothing could be further from the truth. It’s at such critical times when the Board must be fully cognizant of the facts, neither sheltered from nor precluded from having access to the Association’s financial statements, at least ones that are accurately maintained. Based on the financial data that is currently made available to the Finance Committee, the Board is being kept in the dark about the financial standing of the Association in relation to the lessee of Trumpets. Also, it would be inconceivable to think that the Trumpets accounts are being "doctored" at the instruction of the Association’s attorney. In today’s world, lawyers are being held “liable for damages if they assist a client with fiduciary duties to others in breaching those duties.”[3]

Without having an ongoing, current and correct accounting of the lessee’s accruals, Board members are teetering on the verge of breaching their fiduciary duty to the members they were elected to serve. This is NOT an issue of the Board taking over or taking charge of matters delegated to others, but of simply demanding and being privy to the information the Association is required to maintain if it is going to comply with generally accepted accounting principles. Nor is this an issue of being allowed to negotiate in secret and in strict confidence. Negotiations of any sort have absolutely nothing to do with the Association’s books and the integrity of the accounts contained therein. Either the Board demands ongoing compliance with GAAP as it relates to Association accounting on Trumpets or the Board is willing to acknowledge their adherence to non-GAAP procedures will likely place their governance of the community in question.

If I have failed to make my point clear enough, here is a very telling and reaffirming account I witnessed from the most recent Finance Committee meeting on the 2007 budget. The FC was about to review RMI projections for FY 2007 for the Landscaping and Facilities Departments, the latter of which covers operations in the Anthem Center, including Trumpets. One former Board member, four current Board members and two former FC members were present, as well as an unusually large number of residents for this type of meeting. Representing RMI was Karen DuBose, Vice President of RMI’s Community Association Management Operations.

When it came time to discuss the proposed operating budget for the Facilities Department, almost the first word out of Chairman Jack Troia’s mouth was, inexplicably, the verboten name, “Trumpets.” What came to Jack’s immediate attention from the RMI spreadsheets before him, which had been displayed for the audience in summary format on a projection screen, was the fact that RMI was projecting essentially nothing for Trumpets income owed, either in 2006 or in 2007. The data was simply missing. That omission clearly piqued Mr. Troia’s interest, if not concern. When Jack proceeded to inquire about the missing Trumpets accounting information, Favil West, either in despair or expressing his utter disbelief at what he had heard from Jack, didn’t let out a whimper, but, instead, bowed his head and firmly pressed his hands into his eyes, as if saying to himself (and demonstrating to Jack sitting directly opposite), “Oh my god, what is he doing?”  Jack then asked Karen “where are the Trumpets financials being recorded?” With great anticipation from the audience, Karen, apparently taken aback by the inquiry concerning the missing financials, said she did not know where the Trumpets financials could be found. The Trumpets inquiry ended and Mr. Troia moved on to the next lines in the table. 

What's at stake? That’s difficult to ascertain. If, as suggested, the financial statements are not as accurate as they should be, the Board needs to address this issue expeditiously. Omissions of earned income from the financials should not be tolerated. This is a serious governance matter requiring the highest level of ethical standards in meeting one’s fiduciary duty to the members of the Association.

Aside from the apparent "ethical" lapse in not reporting Trumpets accruals for late fees and penalties, etc., are there any other potential downsides? Since our financial books set forth our assets and liabilities, it’s important that such records be accurate. Following well established accounting principles will help to insure such accuracy. However, if the books are not accurate by omitting certain potential assets (Trumpets accruals), the Association’s legal position may be substantially weakened in a court of law to the extent tenant obligations have not been fully recorded. By admitting, through omission, that a debt does not exist can be an incurable breach of fiduciary responsibility. Moreover, such an omission may damage the position of the SCA Board in a court of law since the Board is admitting the tenant obligation does not exist.

On the other hand, instead of writing off as uncollectible another Trumpets indebtedness, as was done last year, it would appear that the Board may have decided a sort of work-around by claiming the indebtedness of the type that was uncollectible last year does not even exist in the first place. If it does not appear on the books, as the theory goes, it's not an asset requiring an explanation. As a result, the Board will be relieved from having to explain another giveaway to the lessee of Trumpets.

In concluding, I’ll leave you where we began with these thoughts. Since it is important that our financial statements be right and that the correct story is told, members of the Board will have a key decision to make. They will have to decide whether he or she wants the correct or the wrong story to be told by our financial statements. By their actions, the community should be able to learn where members of the Board stand on this important governance issue as we look to the future.

Ron Johnson, 18 September 2006, Revised

A.  On the Internet: For some basic GAAP concepts, click here:  http://en.wikipedia.org/wiki/US_GAAP

B.  Two helpful articles on our website:

1.  For a general understand of some accounting principles, see “Guide to Understanding Community Association Financial Reports,” by David Regenbaum. Available on our website by clicking here: Guide to Understanding

2.  For a more in depth understanding of these accounting principles, see "A Guide to Financial Reporting Responsibilities for Common-Interest Community Associations in Virginia," By Dr. Felix E. Amenkhienan, Professor of Accounting, Radford University, and Dr. Bruce W. Chase, Professor of Accounting, Radford University. Click here for "A Guide to Financial Reporting . . . ."

C.  Two accounting books on GAAP for nonprofit organizations:

1. Nonprofit GAAP Practice Manual. Used by thousands of nonprofit controllers and managers to develop compliant financial reports, Nonprofit GAAP Practice Manual is a complete reference on the latest GAAP rules for nonprofits.
2. Wiley Not-for-Profit GAAP 2006: Interpretation and Application of Generally Accepted Accounting Principles. A comprehensive accounting and financial reporting guide for use by not-for-profit organizations and their auditors in preparing financial statements in accordance with the generally accepted accounting principles (GAAP).

[1] Cynthia Glassman served as a Commissioner from 2002-06. This quote was taken from her speech at the Northwester School of Law on April 10, 2003. See http://www.sec.gov/news/speech/spch041003cag.htm
[2] A determination of what’s owed should be based on a strict application of the contract the Association has with S&D Café V, LLC. This would include basic rent, items considered rent, including all late fees and interest called for under the contract. Whether or when the Association will actually receive all such amounts owed is a different matter altogether, which GAAP accounts for and reports separately.   
[3] “Eye on Ethics-Derivative Liabilities a Danger,” by David D. Dodge, Arizona Attorney, June 2006. To view a copy of this article on our website, click here.