On August 24, 2023, the IVGID Board of Trustees voted to perform a forensic audit on IVGID’s accounting and financial reporting. A request for proposal to seek a qualified CPA firm to perform a scope of work is in process.  It is estimated that the costs could be as high as $150,000.  This audit has been prompted by a continued need to adjust prior period financials, outside auditors concerns about material weaknesses in internal controls, resistance to accept Audit Committee recommendations by management and some Trustees, and false statements made by management in the Representations Letters provided annually to the outside auditors.

Jennifer Farr, a partner in the CPA firm of DavisFarr, stated at the October 5, 2023 Audit Committee meeting

“The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of financial statements is intentional or unintentional”.

Our thoughts on seven instances below concludes that past unacceptable accounting and reporting was intentional and fraud has been perpetrated.  In our opinion, the pattern of ignoring AICPA and GASB standards and Board policies was created to boost revenues and understate expenses in order to claim that operations of the various recreational venues were performing well when indeed so many expenses were being capitalized as fixed assets.

Conclusions

Below is a summary of the seven instances and estimates quantifying the amounts:

1 – Misrepresentation – $21 million not restricted as promised

2 – Noncompliance with GASB – six years of financial statements make quantification unfeasible

3 – Improper capitalization of costs – Noncompliance with GAAP  – $10.7 million

4 – Improper capitalization of  costs as LAND – Noncompliance with GAAP – $8.98 million

5 – Improper revenue accounting – Noncompliance with GAAP – $8.5 million

6 – Improper revenue accounting – Noncompliance with GAAP –  as much as $6.7 million per year

7 – Improper interest income accounting – $500,000 interest income

Details on each are provided in the section Seven Instances Pointing to Fraud at the end of this article.

Yet in their municipal bond disclosure statements, IVGID has stated it complies with GAAP (Generally Accepted Accounting Principles). 

We believe these practices are evidence of fraud, as intent is evident. IVGID has issued $44,700,000 municipal bonds between 1990 and 2012, and is subject to federal law.  The Securities and Exchange Commission is responsible for prosecuting fraud affecting municipal bond investors. In 2021, two officials of a school district in San Diego were charged with fraud: violating Section 17(a)(3) of the Securities Act of 1933.   “As the order finds, [San Diego school district officials] Sweetwater and Michel presented stale and misleading financial information as current and accurate,” said LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit. “The SEC will continue to address deceptive conduct that prevents municipal bond investors from getting an accurate picture of the financial risks of their investments.”

The amounts are “material”.  The financial statements must be restated to accurately reflect IVGID’s financial condition. And an investigation needs to be conducted, beyond the forensic audit that is being arranged.

Anyone who has stated that there has been no evidence of fraud at IVGID should read this article and examine the facts and evidence, which we believe is clear and convincing. They should also read   Cooking the Books (Part 1) and  The Board of Trustees should determine – in writing – whether fraud is covered by IVGID’s insurance, and whether damages are recoverable.  Here is a question they should ask:  Would insurance coverage and recovery of damages include the need for a forensic audit and its costs?

The Board of Trustees has authorized a forensic audit, which is in the Request for Proposal stage. We will be making our research available to the audit firm. And watching to see if any law enforcement investigation is conducted, as it should be.

 

Seven Instances Pointing to Fraud

1) Beginning in 2013, $2,000,000 per year was being collected  from residents to be set aside for the effluent pipeline (link: IVGID new homeowner packet, page 13)  but no restrictions were made.  As a result several million dollars were redirected to other projects.  Even after  the decision  to restrict  funds in March 2020 management failed to comply and in 2022, redirected pipeline funds primarily for a waste water storage facility. This is misrepresentation: $2 million per year has not been restricted as promised for 10.5 years.

2) In 2014, management convinced, the then existing Board of Trustees, to convert the accounting and reporting for the Community Service Fund and the Beach Fund which were enterprise funds to six governmental funds.  Under requirements of GASB (Government Accounting Standards Board), the conversion should never have taken place. GASB clearly states that revenues for capital projects and debt service  could NOT be reported as operating revenues.  This requirement was ignored.  Instead, the facility and beach fee revenues authorized  annually by Board resolutions were specifically allocated for operations, capital projects and debt service but were all reported as operating revenues in order to meet the “substantial portion” of 20% of revenues.  The purpose was to  “beef up” revenues in the operating fund to cover continued losses.  Transfers out of the operating fund to the capital project  were never the amount dedicated  for capital projects and only made to the extent of actual costs. From 2016 to 2023 only 58.3% of money dedicated for capital projects was actually spent. Thus the unspent fees collected remained unrestricted in the operating fund. This allowed management to overstate revenues in the operating fund.   

3)  The most egregious of these instances was the deliberate capitalization of expenses as capital assets.  Our view is this action was intentional fraud in order to state higher operating income and lower expenses. Board policies and governmental accounting practices were not followed and minimum dollar thresholds for capitalization were ignored.

 In January 2021,  the CPA firm of Moss Adams  provided an extensive report on guidance of what type of costs should be capitalized or expensed (link: Moss Adams Report).  The Board of Trustees instructed  management to review the capital assets and construction-in-progress accounts for the past five years to determine costs which should be charged off as expenses based on agreed upon guidance.

In May, 2020, a new Audit Committee was formed, which for the first time included residents. It had been apparent for some time that costs charged to the effluent pipeline project were obviously expenses. Management grappled for at least 5 years seeking forms of financing, partnerships with other agencies and farfetched ideas on methods for replacement. The largest costs were internal staff time and outside consultants assessing the pipeline in order to fend off a 2014 State EPA administrative order to replace the pipeline. Through fiscal 2019, a total of $5.2 million was spent on the pipeline of which $3.2 million had no value and an additional $1.2 million were temporary repairs and installations  to satisfy conditions of the 2014 State EPA administrative order. On January 2020, the Audit Committee provided a recommendation to the Board of Trustees to charge off as expense the $3.2 million as a prior period adjustment in the 2020 ACFR.  The recommendation was turned down on a 3-2 vote by Trustees, however the $3.2 million was subsequently charged off as a prior period adjustment in fiscal 2021.

It became apparent during 2020, that management had no intention of doing a thorough review of the capital and constructions in progress accounts.  For fiscal year 2020 only $804,000 was charged off as prior period adjustments for paving repairs,  painting and two abandoned concept designs. 

For the fiscal year 2021, the Audit Committee requested  the external auditor expand their work on the capital asset accounts. Two areas were examined:

A) Charges to the capital accounts which did not meet the $5,000 minimum dollar thresholds for capitalization.  It was found that in order to meet the threshold, equipment items were grouped together to obtain the minimum standard. A total of  380 charges  having a depreciated book value of $177,413 were required to be charged off.

B) Charges to the capital accounts which were ordinary expenses were found and $2,067,116 had been capitalized and had a depreciated value of $866,504.

In addition, a member of the Audit Committee found that in fiscal years 2020 and 2021, $181,882 in expenses continued to be charged to the effluent pipeline construction in progress account.  Another $1,171,606 were in the construction in progress account. These costs  were preliminary stage activities and temporary repairs to the Burnt Cedar Pool and the Mountain Golf Course Clubhouse and should have been expensed.

The Audit Committee recommended a prior period adjustment to expense these items to be in compliance  with Board Practice and consistency and accuracy of the financial statements.  Management rebutted the recommendations and declared that no prior period adjustments were necessary.  The Board of Trustees vote was 3-2 to make no prior period adjustments  in the fiscal 2021 financial statements.  On April 13, 2022, a Committee member requested written concurrence from the external auditor of management’s refusal to make prior period adjustments. The Director of Finance stated: “A review and revision of items already audited and deemed appropriate by both management and the District’s independent auditor is unwarranted and unnecessary.”  No information from the external auditor was ever obtained.

During the ensuing months it was found that $696,000 of the Audit Committee recommendations for $1,171,606 in charge offs had been hidden in the current year expenses to try and avoid prior period adjustments.  The remaining costs were never charged off.  It took until the end of December, 2022 to admit to the improper treatment of prior period adjustments.   

A member of the Audit Committee decided to embark on reviewing the large capital assets and construction in progress accounts and submitted to the Audit Committee several memorandums for potential new charge offs.  

In May 2022, four new members were selected to the Audit Committee. At the  September 28, 2022 audit committee meeting , three memorandums regarding charge off of expenses which were capitalized were listed for review but were immediately removed from the agenda in violation of Board Policy 15.1.0 -3.5.  A new Audit Committee was formed in early 2023.  In March, 2023 Chris Nolett, the new chairman, gathered 27 memorandums which were previously submitted to the Audit Committee but never reviewed. He brought the author (Cliff Dobler), Mick Homan, an Audit Committee member, and Paul Navazio, the Director of Finance to review the memos. A resolution on 18 memos (albeit requiring adjustments or disclosure) was agreed to and the remaining 9 memos require additional information. Mr. Navazio was to provide a report but failed to do so and subsequently terminated his employment. Conclusions have not been reached.

Based on comments he made while employed, Mr. Navazio may have resisted restating the financials because of the negative impacts on IVGID’s bond rating and issuing municipal bonds.

In early March, 2023, Cliff Dobler received the capital asset report for the year ending June 30, 2022. Current year costs in several capital accounts, which were previously identified as being potential expenses, were finally being charged off.  However no adjustments or reports were provided for the five years of look back originally required by the Board of Trustees. Applying that application of charge offs for the previous 5 years indicates that possibly $10.7 million before reductions for accumulated depreciation may need to be charged off.

4) On June 29, 2023, a memorandum to the Audit Committee was sent by a resident warning of accounting anomalies in the LAND account.   A subsequent detail reconciliation of the land – community services fund  account by members of the Village Alliance  revealed that expenses for rehabilitation of Third Creek, and maintenance at Diamond Peak, such as BMP’s , erosion control, revegetion  and tree removal were recorded in the capital accounts.  Total questionable costs identified were $8,983,657.77. (FY2010 – FY2022). (Link: Cooking the Books Part 1)

On January 4, 2021, James Lazaretto of Moss Adams sent an e-mail to Trustees Mathew Dent and Sara Schmitz stating the following:  “The main issue that likely could result in the need for the largest revisions to the statements – is the possible capitalization of expenditures that would not meet established  governmental accounting practices.  This is the single most significant issue in terms of accuracy of previous issued financial statements. Ultimately it is up to your external auditor  to come to a conclusion as to whether any material errors remain in the financial statements that warrant a modification in the auditor’s opinion.”

5) From time to time, IVGID receives grants for capital projects. Management has been reporting grant receipts as current operating revenue rather than a reduction of the capital costs.  AICPA guidance  states : “Grants that involve recognized assets are presented in the balance sheet either as deferred income or by deducting the grant in arriving at the asset’s carrying amount, in which case the grant is recognized as a reduction of depreciation. Two of the largest grants were for the restoration of Third Creek and the purchase Incline lake.  These grants amounted to approximately $8.5 million over a ten year period from fiscal 2009 to 2020. The grants should have reduced the capital costs rather than reporting the amounts as revenues.

6)  Management continued to report all facility fee and beach fee revenues as general revenues rather than revenues of the Community Service and Beach Funds on the audited statement of activities.   The Moss Adams report clearly stated that the facility fees must be Community Service and Beach fee revenues not general revenues (link: Moss Adams Report).

7) Management  directed interest earned on cash deposits of the Community Services funds (CSF) to the General Fund. After getting caught, management would not transfer back  approximately $500,000 to the CSF.  Audit Committee recommendation were made but the transfer never occurred.

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

The author, Clifford Dobler, is a long-time resident and property owner of Incline Village and a registered voter. J. Gumz, a long-time resident, owner, and voter of Incline Village, contributed to this article. Both are retired CPAs.