[UPDATE: Sunday, Nov 5, 2023 Several residents have emailed us expressing concerns and asking what they can do. We have some solution-oriented ideas and would like to share them with you. Email us at village_alliance at ourivcbvoice.com ]

If you spent over half a million dollars for a computer system, wouldn’t you expect your staff to ensure the system worked before you turned off the old system?   This would be normal for a financial systems conversion. Some organizations elect to “run parallel” with their old system for several months to gain confidence and experience.  

But not the Incline Village General Improvement District. The old financial system was turned off – before they had ever completed a “monthly close.”   Normally, organizations close their financial records monthly, and then have an annual close, before progressing to the new fiscal year. Monthly closes are normally completed by a certain day after the month-end e.g. +5 is 5 business days after the last day of the month.

It is now the end of October, 2023. And IVGID has not closed their books FOR ANY MONTHS in fiscal year 2023.

Big Bang approach blows up

IVGID selected the “Big Bang” approach to a system conversion – and burned their bridge behind them.  This is shocking. To turn off a financial accounting computer system without going through a monthly close successfully is tantamount to gross negligence. Especially when the “new” system was $3.9 MILLION dollars out of balance [graphic], and did not have all asset accounts converted. (download: http://ourivcbvoice.com/wp-content/uploads/2023/05/Response.pdf  )

 

What controls were used in the conversion to the Tyler MUNIS system? They were clearly inadequate. 

The old system is no longer available for inquiry or reporting. In an email, IVGID’s temporary Director of Finance Bobby Magee said, “I understand that we made a copy of the data that was contained within Innoprise [old accounting system] so that it could be accessed if any future Auditors wanted to research old items.“ (Oct 29, 2023)

This ignores the fact that the SOFTWARE is needed to access the data. An auditor will need to know the data structure and be an IT expert to access the old system data. In effect, IVGID has concealed its past electronic accounting records. Auditors will have to use paper – and it will be a laborious slog to examine data. But – perhaps that is exactly what former IVGID management wanted. Mr. Magee started in June 2023 – this decision to turn off the old system was in 2022. The Director of Finance at that time was Paul Navazio.

No monthly closes and no bank reconciliations means no reports to give the external auditor. Although Mr. Magee stated that he hoped to close the first month soon, this is months behind a normal accounting schedule (source: email October 28, 2023). The former Director of Finance and former General Manager gave no hint of the real state of IVGID’s financial mess when they left. Audit Committee Chair Chris Nolet gave a succinct description on October 5 in his public comments: “gross mismanagement“. (link)

Accounting Department was short-handed but this was self-inflicted

Several weeks ago, Magee asked for $608,397 appropriation increase[1] for hiring staff and consultants. In 2021, accounting staff were allowed to transfer to the Public Works (Utilities) Department – without new staff being hired, and having the experienced staff train the new hires. It is understandable that the two accounting staff wanted to make more money – the new positions paid higher salaries [graphic].  

But requiring a transfer to wait until staff are hired and trained is common practice in industry. Complaints about the accounting department being short-handed are true – but this was self-inflicted. Director of Finance Navazio was not managing the staff in the department. Navazio let the department implode while he searched for a new job. He is currently the Finance Director of the City of San Rafael.

Controller Martin  Williams worked at IVGID until from January 18, 2021 to December, 2022. Yet no bank accounts were balanced since July, 2022. And no monthly closes were done after June, 2022. What was he doing?  He found time to go to the  Government Finance Officers Association Conference 06/02/22-06/08/2022.

Payroll Conversion

One has to ask: what steps were taken to ensure the payroll conversion was accurate? Was the old system just turned off without running parallel to ensure accurate paychecks?

Fraud and Other issues

Financial statement fraud has been documented. One instance is the Land account has been used to hide capitalized expenses (Links Cooking the Books 1   2  3). The estimated amount is nearly $19 million dollars over 30 years. Six other instances are described here: (link). In her Oct 5,2023 presentation, external auditor Jennifer Farr stated, “The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of financial statements is intentional or unintentional.”

Ms. Farr has indicated CPA firm Davis Farr may withdraw from the engagement, or wait until the forensic auditor has completed their work.

Accounts payable reports still do not list valid General Ledger account numbers – ten months after starting to use the new system. No weekly reports on disbursements have been posted on IVGID’s web site since July 17, 2023.  This article published in May, 2023 points out some of the financial issues observed (link).

 

Conclusions

In our first financial meltdown article, the lack of controls over IVGID’s vehicles and rolling stock was disclosed. The public records requested disposition of vehicles has never been provided, although promised by Sept 25, 2023 by District Clerk Susan Herron. Has asset misappropriation occurred? What else is IVGID hiding?

With the land account reconciliation, millions of dollars in financial statement fraud has been documented.  IVGID issued $44,700,000 in municipal bonds from 1990 – 2012. The Official Statements filed with each of these offerings contained false and misleading information as expenses were understated and income overstated.  This appears to be a violation of federal law: the Securities Act of 1933. And they did this for DECADES. IVGID has recently used “private placement” bonds, which do not require audited financial statements.  The buyers are generally wealthy individuals who want to avoid federal income tax and are willing to forego audited financials.

The Trustees are in the process of selecting a forensic auditor. However, with the reconciliation of the land account, the first assignment for this auditor should be to examine this instance – and report their first findings. No need to wait for 6 months or a year for the full report; after this first assignment, they can continue their work. The evidence has been handed to them on a silver platter. If they take longer than 6 weeks to report back on this assignment – something is wrong.

The lack of professional due care is blindingly obvious.  By accounting management, and the General Manager. And what about the Information Technology Department? They helped turn off the system, without the new system fully tested and in use.  Are these acts  criminal?  Is it gross negligence? The Trustees need to have serious conversations with competent legal counsel. BB&K is compromised as they worked with prior management so they should be excluded due to conflict of interest.

And what about IVGID’s insurance? Are the prior auditors – Eide Bailly and Barnard Vogler & Company  – liable? Does the management representation letter provided by the IVGID Director of Finance at the time give them an out? And does that make former Directors of Finance responsible: Paul Navazio, Gerald Eick and Ramona Cruz?

A lot to think about. Time for Trustees David Noble and  Michaela Tonking to realize what a mess that is IVGID’s financial system.  The Association of Certified Fraud Auditors has a book chapter on their web site that provides legal insights regarding fraud. Maybe all IVGID Trustees should read it.

The author, J. Gumz, is a long-time resident and property owner of Incline Village and a registered voter.She is a retired CPA and implemented financial and payroll systems during her career – always successfully.

This article contains allegations and the defendant is presumed innocent until and unless proven guilty in a court of law.

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