The CotoBlogzz

Posted By CotoBlogzz  | 12/23/2008  10:00 PM

What is the common denominator between Denmark’s Entrepreneur of the Year, KPMG, Aide to Madoff HOA/CID board of directors’ fiduciary duty?

In doing research  for series of articles dealing with HOA/CID fiduciary responsibilities, we have stumbled upon  a number of whistle blower incidents, not unlike the typical breach in  for-profit organizations: When someone wants to cook the books, he or she simply does it with or without the help of an auditing firm. 

For instance, in a Reuters’ article dated March 27, 2008,  Amanda Beck reports that “Auditor KPMG KPMG.UL either initiated accounting fraud at New Century Financial Corp NEWCQ.PK or stood idly by as the failed subprime mortgage lender committed fraud in 2005 and 2006, an independent report requested by the U.S. Department of Justice shows”.  In other instances, the client sues its auditor, such as the case of  Fannie Mae suing, KPMG, for negligence and breach of contract, as reported in the December 12, 2006 issue of CFO.com:  “Filed Tuesday with the Superior Court of the District of Columbia, the complaint accuses the Big Four accounting firm of failing to serve its role as an independent watchdog and prevent $6.3 billion in accounting errors, according to Bloomberg”

More dramatically, last month in Copenhagen, accounting firm Ernst & Young, hosted some one thousand guests, Denmark’s tax minister and leading business people, to celebrate the feat of Entrepreneur of the Year, Stein Bagger , while he was  surrendering to police in New York for what from investigators now describe as Denmark’s biggest business scam in decades. According to Wall Street Journal accounts, Asger Jensby, chairman of IT Factory, founded by Mr. Baggar, “.. says he is flabbergasted by the fate of what he thought was a “real company” run by a chief executive who was “sharp, a bit arrogant, very articulate and extremely orderly.””.  KPMG audited IT Factory’s accounts from 2005 through 2007. Deloitte the previous two years.  KPMG in Denmark says it is “shocked” and “cooperating with police.” Deloitte’s Danish unit said it has double-checked its 2003 and 2004 audits and found no problems.

And just this week, investigators probing the alleged fraud carried out by Bernard Maddoff are looking at  key lieutenant at the firm, and have issued a subpoena to the accountant who audited the firm’s financial statements, seeking documents back to 2000. A December 23 Wall Street  Journal article reports that authorities are trying to determine who helped Mr. Maddoff carry out what they say appears to be a 30-year scheme that  may have caused at least $50 billion in loses/

In non-profit organization, things get even more complicated :  Take for instance the  full-page advertisement in the December 15, 2008 issue of the New York Times, paid for by the Center for Union Facts (CUF) - www.UnionFacts.com -highlighting the Service Employees International Union’s (SEIU) role in Governor Rod Blagojevich’s recent pay-for-play scandal. The ad also connects the SEIU to the much-indicted group ACORN (Association of Community Organizations for Reform Now). The text of the ad reads:

SEIU has given more cash to Rod Blagojevich than any other group in America. They also offered to help in his “sale” of a U.S. Senate seat. And SEIU has been a long-time financial partner of the often-indicted ACORN.

What’s next for SEIU?

The union is now using their political influence to pass the deceptively-named Employee Free Choice Act. This bill would give [Andy Stern and other union bosses the tools to intimidate employees and force them into paying billions in union dues.

Homeowner’s association (HOA/CID) are no different.  The problem in this case is even more acute, given that the expertise dealing with fiduciary responsibility regulations seem to be at a premium.  In a whistle blowing case for instance, the individual was referred to Ogden, Utah, as the IRS did not have local HOA/CID expertise.

To make matters worse, last year, when Governor Schwarzenegger signed legislation to bring direct elections to Homeowner’s Associations such as the one in Coto de Caza, the CZ Master Association president called the legislation an act of “micro-management”, and proceeded to ignore the spirit and the law.  When the auditing firm refused to answer questions, a board member quipped in essences:  What does an auditing firm gain from withholding information? Then the auditing firm never responded.  Shortly thereafter, a  call to the office of Senator Sheila Kuehl  by a member of the  HOAATM group inquiring about the reasoning behind the Senator’s support of Senate Bill 127, the person attending the phones characterized the Senator’s stakeholders as “property management companies and HOA board of directors”, NOT HOA residents

Hans Strupat, publisher of SaveMarinaHills.org note that the board of directors approved the  audited financial report – 2006, Keystone, the property management company said it was OK – but he had many unanswered questions - click here for the rest of the story

The Laguna Woods Village July 22, 2008 Golden Rain Foundation Finance Community meeting scheduled to review the budget including property management company PCM’s Executive Vice President Janet Price’s proposed 30% budget increase for general manager Milt Johns elicited a number of shareholder objections including charges of breach of fiduciary responsibility citing that such moves 1) violated IRS Code 4958, given that local newspaper reported that given state of the economy, “no mayor or city manager received pay increases”, 2)  Shareholders questioned why a tax-exempt board suggested an excessive benefit transaction for a disqualified person 3) Shareholders requested the increase be rescinded and would also report the action to the Internal Revenue Service.

In a related matter and despite Milt Johns’, General Manager of Professional Community Management (PCM) emphatic defense of his business practices, the Laguna Woods Village oversight committee continues to call for Johns’ removal, as well as a call for a forensic financial audit. The Laguna Woods Village Oversight Committee in a document released to the media titled Conflict of Interest called for the removal of Mil Johns:” The document alleged violations of 501(C)3 self-interest restrictions, and requested the removal of Milt Johns “ Mr. Johns has held closed meeting in iolation Davis-Stirling Act and has threatened board members with law suits. The community has documents that indicate Mr Johns has misused/misapplication of Laguna Woods Village assets and resources. We are asking the board for immediate removal of his “self interest” status”.

In the next installment, we discuss certain whistle-blowing efforts as well as IRS efforts to  avoid non-compliance issues in the HOA/CID environment, including Compliance Guide for 501(c)(3) Tax-Exempt Organizations, aimed at  educating  the public in general, and specifically HOA/CID governances.  The guide attempts to answer the questions:

Why keep records?

What records should be kept?

How long should you keep records?

What federal tax reports and returns must be filed?

What disclosures must a 501(c)(3) organization make?

This entry was posted on Tuesday, December 23rd, 2008 at 11:23 pm and is filed under Laguna Wood Village, HOA/CID, Fiduciary Responsibility, California. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.