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Volume II, Issue 15  2008

Financial Reports for period ending November 30, 2007 More Questions Than Answers!

The latest financial update published in the Village News Money Matters feature appeared in its January 4^th 2008 edition.  The financial highlights through November 30, 2007 was written in the familiar "Lois speak" prose with its convoluted explanations, tortured analysis and confusing rational to justify its unsubstantiated financial claims. 

In the meaning time there has been a financial information black out with no news concerning the MVF December 2007 financial statements , the status and results of the 2007 fiscal year annual audit not to mention the financial statements for January and February 2008.   The only thing the Village has heard is the newly appointed Director of Finance and Administration, Bill Blum, no long works for the Foundation.   Isn’t he the one who was going to cure MVF’s fiscal, financial and record keeping ills? 

 This Observer’s rendition of the November 30th 2007 financial statements differs from MVF reports in two (2) ways: 

1. MVF Fixed Price Maintenance Contract MVF negotiates a contract with itself in which the Maintenance Facility and Public Works department provides maintenance, landscaping and snow removal services for the care and maintenance of a) Large parks, lakes and other facilities of common benefit (charged to the Montgomery Village Foundation (MVF) Fund), and b) Recreation, pool and clubhouse facilities located throughout the Village (charged to the Designated Users Facilities Fund). 

Monthly, a general ledger accounting entry equal to 1/12th of the annual estimated payroll and operating expense to perform such maintenance services  ($725,000   in 2007 and $900,000 for 2008) is posted to both the income and expense “MVF Fixed Price Maintenance Contract”  account. This tradition of booking offsetting equal income and expense amounts overstates income and expense which confuses and misrepresents the Foundation’s financial condition.  This is not a commonly accepted accounting, budgeting, reporting or auditing practice for Common Interest Realty Associations. 

By ignoring MVF’s “Fixed Price Contract’s” offsetting income and expense entries, the Observer’s financial report version reflects actual income generated and expenses incurred during the period of the report.  When the end of the period statement closing is preformed correctly (see below), the budget to actual comparison by  general ledger account code line item, income and expenses categories and groupings should be reasonably accurate. 

2. Allocable Expenses A portion of certain overhead expenses is allocated among fund types based on a predetermined cost distribution formula.  However, these cost allocations are not posted routinely and are not reflected in the MVF monthly financial reports and statements.  It appears that these cost allocations are only made annually as a year end accounting adjustment entry.

Consequently, the accounting of expenses within fund types during the year is  misleading since MVF fund expenses are overstated and charges to the CM and MA funds are understated.  Therefore the Observer’s version of the monthly financial reports reflects up-to-date overhead cost allocations resulting in a more accurate statement of deficits and surpluses by fund type.  

Clearer and more accurate financial statements are possible when confusing mask of the MVF “Fixed Price Maintenance” contracting and the manipulative shell game of the cost allocations among fund types are no longer factors. 

Income and Expenses Report 

The “Income and Expenses Report”, also know as “Profit and Loss Statement”, “Income Statement” and or “Budget Comparison Statement”, is a statement of an organization’s revenue and expenses from operations over a given time period.  For example “Montgomery Village Foundation Income-Expense report period ending November 30, 2007” is a statement of revenue and expenditure activity from January 1 to November 30, 2007.   

The total of expenditures is subtracted from the total income to determine the current period’s surplus (+) or deficit (-) for non-profit organization such as the Montgomery Village Foundation.  The revenue and expenditure activity for each reporting period (MVF’s being monthly) is normally displayed in a columnar format heading “Current Month/Period” and the accumulative activity labeled “Year to Date”.   As the fiscal year progresses from month to month the cumulative monthly activities will equal the most recent “Year to Date” totals.   

Summary Comments Statement of Income and Expenses 

Income MVF's year end revenue shortfall for 2007 is estimated to be $767,234 or 10.1 of the annual budget.   The significant unfavorable budget variances are Maintenance Landscaping service income (-$408,022), Administrative charges (-$220,057) and Management administrative service Income ($156,319).  (See schedule C4) 

A note of caution: there are two (2) income general ledger accounts credited to the Community Management Fund (not to any specific Homes Corporation account) that have had irregular income patterns throughout the year and should  be explained and verified before speculating with any confidence the outcome of 2007 fiscal year’s operating deficit or surplus. In other words, show me the money. 

 (See schedule J) 

Expenses A favorable operating expenditure budget variance of $239,720 is projected for the 2007 fiscal year with expenses under budget  for “Office and Administrative” ($85,309), “Trash Removal” ($63,855), “Grounds, Landscaping, Lakes & Streams” ($410,852), “Insurance” ($19,661) and “Contribution to Reserves” ($171,368) categories.  This could mean cost savings as in the case of “Insurance” or expenditures were not made for the intended purpose such as “Contribution to Reserves”. 

Expenses are projected to exceed budget in the following categories: “Payroll Cost” (-$373,731), “Utility” (-$26,519), “Maintenance Repair and Supply” (-$45,118), “Security” (-$29,928), “Legal” (-$3084) and “Audit and Accounting” (-$33,074).   

Pending an accurate year end closing procedure that will verify and adjust all income and expenditure general ledger account totals the Observer projects a $527,514 deficit for the 2007 fiscal year.   (See schedule M) 

Balance Sheet

The “Balance Sheet” is a statement  of “Assets” , “Liabilities” and the resultant “Net Worth”, “Equity” or “Fund Balances” when the “Assets are offset by the “Liabilities”  at a point in time.  For instance, “MVF Balance Sheet as of November 30, 2007” would be an accounting of the “Assets”, “Liabilities” and “Fund Balances” on November 30^th 2007.  

The surplus (+) or deficits (-) amount from the “Income and Expenses Report”  will equal the change in the Equity or Fund Balances” portion of the Balance Sheet to a “Undesignated Surplus” account.     

Accurate financial statements can only be produced when there is in place a predetermined, end-of-accounting-period statement closing procedure.  At a minimum all income, expense, payable and receivable accounts are adjusted to the last day of the reporting period prior to preparation, distribution and publishing of the monthly financial results. A flawed closing process raises questions as to the accuracy of the report.   

The MVF November 30, 2007  balance sheet presentation  only summaries selected categories.  Missing from the current MVF balance sheet presentations are component categories that would validate a legitimate closing procedure and add transparency to MVF’s financial picture.   When the November 30, 2007 Balance Sheet is compared to the 2006 Fiscal Year Audit balances there are no balances for “Checking accounts”, “Money Market and Savings”, “Certificate of Deposits” Debt Instruments”, “Accounts Receivable and Payables’ due to and from Operating”,  and “Accounts Receivable and Payables due to and from the Homes Corporations

 Summary Comments on Balance Sheet Analysis

 Comparing the November 2007 to the 2006 fiscal year audit summary categories we discover that  “Total Investments” declined by $348,791 and “Total Assets” and “Liabilities and Fund Balances” both declined by $564,577” These figures indicate a significant  operating deficit through November 2007.  

 Cash Flow from Activities

The Statement of Cash Flows is an exhibit to the annual audit that identifies and reconciles the sources and uses of cash assets during the period of the audit.  This statement is divided into two (2) components “Cash flow from operating activities” and “cash flows from investment activities.”  The statement of “Cash Flow from operating activities” included with the monthly financial report provided to the Board of Directors for the November 2007 statements, reports that there was $358,686 income not included in the “Statement of Income and Expenses Report”  used to offset 2007 operating expenses.   

Contribution from assessment to the Reserve Fund                     $107,829

Interest earned on Reserve Funds                                             $205,401

Restitution from the embezzlement funds                                    $49,151

Total                                                                                        $358,686

 The $313,330 reserve designated contribution from assessments and interest was not reported as revenue in the MVF monthly “Income and Expenses Report” as income diverted to fund operating deficits. 

 Restitution from the embezzlement funds Quoting from the October 24^th edition of The Gazette,  “Stephen Chaikin, an Assistant State’s Attorney, said in court. Buttry has repaid $14,000 of that, plus interest…“Buttry’s father-in-law, who lives with the family, had agreed to make a payment of $100,000 on Tuesday, and Buttry has 90 days upon her release to pay the rest. 

From the MVF Financial Report for the Period Ending October 31, 2007  “Net Income from Operations through October 2007 showed an excess of revenue of expense of $137K…This overall improvement in performance is due partially to the restitution paid to us as a result of the embezzlement settlement hearing.” 

From the MVF income-Expenses Report October 2007 General Ledger Account detail. 

The $114,000 plus unspecified interest recovered from embezzled funds was not reported as revenue in any 2007 Income and Expenses reports.  An estimated $68,544 of the recovered funds was credited to operating line items including “auditing and accounting and “Legal” expenses ($$114,000 - $$45,456). 

The “Cash flow from investment activities”  lists the following “acquisition of property and equipment”  as a reduction of “Cash flow from investment activities” that decreased  “Cash and cash equilvant:” 

Buildings                                                                      $111,905

Pools                                                                            $122,564

Parks and Lakes                                                            $ 90,303

Maintenance Equipment                                                 $135,606

Office Equipment                                                           $24,700

Total                                                                            $488,079

 These property and equipment acquisitions were not included as reserve expenditures in the “MVF Income and Expenses” statement. However, the reserve fund balance sheet amounts were reduced by this amount with no evidence that actual activity; contracting, work performance occurred or that improvements were made to the Foundation’s buildings, pools, parks and or Lakes.   Also lacking is documentation that specific maintenance or office equipment totaling $160,306 was actually purchased.    

The January 4 2008 Village News Money Matters reported “Through November 2007, reserve spending was $488,000.  Reserve contribution and reserve interest income totaled $313,000.   Like the grain in Billy Sol Estes’ Silos the MVF reserve coffers may also be empty.   The bottom line here is that serious problems exist in MVF's financial accounting.  Addressing these conditions should be the highest priority of the Foundation's Board of Directors.