“The scope of the audit was to identify fraud risk, it was not to identify fraud.”

   IVGID Trustee Ray Tulloch, August 7, 2024, Committee meeting on Local Government Finance – State of Nevada Tax Department

And that is why the report doesn’t include the word F-R-A-U-D. Because Trustee Tulloch and General Manager Bobby Magee made sure FRAUD was not in SCOPE. This was a BAIT-AND-SWITCH as the original audit scope in the RFP was clear.

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The long-awaited and carefully worded forensic audit report for the Incline Village General Improvement District (IVGID) has been released, revealing significant concerns about the district’s financial management and internal controls. As property owners and stakeholders in IVGID, it’s crucial to understand the implications of this report and take appropriate action.

 

Key Findings
The report identifies a high risk of fraud and abuse within IVGID’s control environment, citing numerous internal control weaknesses. These issues span from transactional-level problems to deficiencies in the review and monitoring processes of internal controls. Specific concerns include:

1.     Weak disbursement processes, with instances of no approver or self-approval

2.     Insufficient support for vendor disbursements

3.     Bank reconciliations not performed for multiple accounts

4.     A failed implementation of a new accounting system

5.     A “loose culture” around financial controls

6.     High employee turnover

      7. No physical inventory for fixed assets, food & beverage operations, and retail shops for 3 years

The audit categorized 41 observations, with 16 ranked as high risk, 12 as moderate risk, and 13 as low risk. This distribution suggests that the issues are serious and pervasive throughout the organization.

 

Report Leaves Questions Unanswered

An unreconciled difference of over $7 million dollars existed as of June 2023 in IVGID’s main checking account. The reason? The report does not say.

Personal use of procurement cards was found. What did these employees buy? How much money was involved? And were the employees disciplined? The report is silent. And the report is not clear on the number of pcard transactions that were examined, so it is unknown whether other uses of pcards for personal use occurred.

The report fails to quantify amounts or provide details for multiple high risk observations. As RubinBrown was paid around $400,000 for the report, the question of less than adequate work by RubinBrown should be followed up by Trustee Tulloch, as he was the Board point of contact.

The report does not state that the general ledger is still out-of-balance. In our review, the general ledger is now ($15,782,015.80) out-of-balance; for fiscal year 2023, it was $5.3 million out-of-balance. Yet, hundreds of thousands of dollars were paid to BakerTilly for temporary accounting services. IVGID’s Finance Dept / Adam Cripps cannot explain what is wrong or how it will be corrected.

The Federal Government Defines Personal Use of Procurement Cards as Fraud

The forensic audit report should have stated that fraud was found, even though the employee reimbursed IVGID. Here’s why:

1. Definition of fraud: The Office of Management and Budget (OMB) Circular A-123 defines fraudulent purchases as those “made by cardholders that were unauthorized and intended for personal use”. This definition applies regardless of whether reimbursement occurs later.
2. Personal use is prohibited: Using government procurement cards for personal purchases is against IVGID policy and potentially illegal, even if there’s an intent to reimburse.
3. Reimbursement doesn’t negate fraud: The fact that the employee reimbursed IVGID does not change the fraudulent nature of the initial transaction. Fraud occurs at the time of the unauthorized personal purchase.
4. Multiple instances: There were two instances of personal use by one individual, which suggests a pattern rather than an isolated mistake.
5. Criminal implications: Personal use of institutional funds, including procurement cards, may be construed as a criminal act, regardless of reimbursement.  “Wire Fraud” can be used to prosecute for personal use of a credit card  such as this case when a hospital employee used a hospital credit card for personal use.  And here is a case where a water district employee was charged with wire fraud for using the district’s credit card and checks to pay for personal expenses.

LAND Account Not Examined

The LAND account, which we found to have over 13 million dollars in improper capitalized expenses was NOT examined. Three forensic firm partners were provided with this information, as well as the IVGID Audit Committee. This leads us to have concerns that other seemingly fraudulent activity may have been purposely excluded. 

It is surprising that the report says:, “We recommend IVGID research the Federal and State of Nevada tax regulations to assess whether or not the employee clothing allowance should be employee taxable income.”  Doesn’t the forensic auditor, Rubin Brown, KNOW  the specific Federal IRS rules for employee uniforms and that Nevada has NO state income tax?  This issue was also part of the information provided the forensic audit partners.  

What This Means for Property Owners
These findings indicate potential mismanagement of public funds and resources. As property owners, you have a vested interest in ensuring that IVGID operates efficiently and transparently, as its performance directly affects your property values and quality of life in the community. Recommended Actions for Property Owners:

1.     Stay Informed: DOWNLOAD and read the full forensic audit report.  Consider attending upcoming IVGID Board meetings where the findings will be discussed. You can attend meetings virtually.

2.     Demand Accountability: Contact your IVGID Board Trustees and express your concerns. Insist on a clear, time-bound action plan to address the issues identified in the report.  Ask them why the LAND account was not addressed. And ask them whether they will request law enforcement to investigate.

3.     Support Reforms: Advocate for the implementation of stronger internal controls, improved financial reporting processes, and enhanced transparency in IVGID’s operations.

4.     Monitor Progress: Keep track of IVGID’s efforts to address the audit findings. Request regular updates from the Board on the implementation of corrective measures.

5.     Consider Legal Action: If you believe that IVGID’s management has been negligent or engaged in misconduct, consult with legal professionals about potential actions that property owners could take collectively.

6.     Support Independent Oversight: Advocate for the establishment or strengthening of independent oversight mechanisms to ensure ongoing monitoring of IVGID’s financial management. Currenly, the  Nevada Department of Taxation is supposed to provide oversight –  but it is a rubber stamp.  Consider contacting the Washoe County Commissioners and your elected representatives in the Nevada legislature.

The release of this forensic audit report indicates all is not right at IVGID.  Only by taking an active role in demanding accountability and supporting necessary reforms, will changes be made.  Remember, your engagement and vigilance are crucial in safeguarding the long-term interests of the Incline Village/Crystal Bay community.

The forensic audit report was released to the public at 9:25 AM PDT on July 10, 2024, less than 9 hours before the IVGID Board meeting in which it was to be discussed. Therefore, the public did not have sufficient time to be aware that the report would be on the agenda, and to read its contents. The timing shows NOTHING HAS CHANGED AT IVGID WITH THIS REPORT.

IVGID Mgmt Response to the Rubin Brown Report [updated July 24, 2024] For many of the observations/findings, the response is “more to come in the weeks ahead.” For most audits, this response would be viewed as inadequate, as it is a deferral and not a response with a specific action plan for the observation/finding. Read the AI (artificial intelligence) analysis of the IVGID management response.

Forensic Audit Report (last updated Aug 14, 2024): Some tweaks to the original draft report. Also, the appendixes have been removed.

• (updated 7-31-2024 with Chris Nolet’s public comments)

Comments by former Chair of the Audit Committee, Chris Nolet, at the July 31, 2024 Board Meeting

 

Chris Nolet, full time resident, former chair of the  [IVGID] Audit committee through February of [2024] 24.  I want to comment on the Rubin Brown fraud report tonight.

 

One of the major problems with the report that we raised during the scoping process when I was following the audit committee is they never defined fraud, but yet they concluded they didn’t see any.

 

Well, that’s utterly ridiculous.

 

So they identified 16 areas of high risk of potential fraud and abuse.

That’s staggering.

And they said there was no tone at the top with regard to leadership to mitigate these risks.

That more than validates what some of us said last summer.

 

And for anyone, including [resident] Mick Holman, to say that a $7 million difference between book and the bank recs [reconciliations] is not fraud is utterly unconscionable.

 

CAPEX [Capital expenditures], as Mr. Dobler has been saying for years, unable to reconcile the ledger to the general ledger.

 

Mick last year said I was spreading hysteria. The findings from this report are much worse than I ever suggested. So Mick, I accept your apology.

 

With these findings, there’s likely no [2024]  24 audit.

As I suggested a couple [of ] meetings ago, there’s likely no [2023] 23 audit being completed.

And any of these assertions I’m making tonight, if I’m wrong, please correct me and I’ll be happy to correct my public comments in the future.

 

As I explained during two tutorials last year, the fraud definition that everyone should have been working with was statement of auditing standards number 99, auditor’s consideration of fraud and financial statement audit.

 

Of course, these results represent fraud under that standard and Michaela [IVGID Board Trustee Tonking] can validate that at some future date with you on a private session.

 

But to say, [chuckling] as many have said, that, well, there’s a lot of risk of fraud, but there isn’t any fraud is utterly ridiculous.

 

I also like to point out that in February of [2024] 24, I suggested very strongly in a very difficult phone

call with some of the board members, at least one that, you know, promoting Bobby [Magee]  to GM [General Manager] and promoting Adam Cripps to acting DoF [Dept of Finance] was going to result in both of them failing, which here we are, they have.

I don’t know where Adam is, maybe he’s on an LoA [Leave of Absence], but certainly the zero based budgeting process was a debacle, to say the least.

 

In conclusion,  I said on March 28, 2024, there will be no. [2023] 23 audit and likely no. [2024] 24 audit.

So please work with Jennifer Farr, squeeze this conclusion out of her and save your money.

 

And as far as the management rebuttal went, completely unacceptable. It wasn’t vetted with the general manager.

 

And I’ll just point out lastly, [TIME BUZZER]because I won’t point out lastly, thank you.

 

Chris Nolet is a retired CPA and former EY partner.