"CREATIVE" Accounting also known as "Cooking the Books" is alive and well in California

June 03, 2005

By Chester D. M'Bezlah
Copyright 2005 HOA Fraud Investigations News Services

President Reagan coined the term "VOO DOO Economics". More recently, we Californian's have heard the term "Enron-itis".

"CREATIVE" Accounting also known as "Cooking the Books" is alive and well in California Homeowner Associations. Residents are being victimized by enron-like fraudulent accounting practices as board members and managers conceal, hide and cover up stealing, gross negligence and failure to comply with Section 1366 of the California Civil Code.

RED INK GREENS HOMEOWNERS ASSOCIATION

But, in a recently uncovered stack of documents, a Southern California homeowners association (common interest development), which for purposes of this article will be referred to as "RED INK GREENS HOMEOWNERS ASSOCIATION" in order to protect the residents any further catastrophic Southern California-type SLIDE in property values and to protect the integrity of an ongoing investigation.

Sources close to the story have disclosed that RED INK GREENS, which like many California HOA's is a non-profit mutual benefit corporation, and more particularly, the Directors, Officers and property mamagement agents and CPA of RED INK GREENS, appear and are believed to have so negligently driven the 30 + year old established, and once desireable HOA into a ruinous and irreversible financial condition that in order to attempt to bail itself out of the hole, the Directors, Officers and property management agents and CPA engaged in a well orchestrated conspiracy to disregard the accumulated, established financial history of RED INK GREENS and to have literally recreated a new financial history from scratch.

Some persons are reporting that this is not an uncommon occurrence, but reviews of the California Corporations Code appear to suggest that such forms of fiscal schenanigans by any Corporations Directors, Officers of Agents are either a "crime" (Section 8813) or a "felony" (Section 2254).

For approximately 10 years, RED INK GREENS and more particularly its Directors, Officers and Agents failed or refused to "audit" RED INK's books and records of account, although required to do so per the CC&R's, By Laws and Civil Code.

However, a confidence inspiring, well respected CPA provided thorough and detailed financial statements which appeared to provide some semblance of accuracy pertaining to the financial condition of the Corporate HOA entity, even if not all of the financial statements were provided to the HOA residents.

Then, without notice in the early part of the present decade, the CPA was fired without explanation, the accumulated financial history of RED INK HOA, including its reserve trust fund accounts, was put in the proverbial shredder by the Board of Directors, property manager and new CPA (whom the author shall refer to as "Loose Louie") all of whom appeared to recreate from scratch a financial history which did not reflect the accurate and true historical history of RED INK.

Although the investigation is ongoing into this unfolding situation, all California HOA residents would be well served to look closely at, and to question, any and all unexpected changes in their HOA's financial statements, or any sudden, unexpected and unexplained (unannounced) changing of hats by their HOA's CPA or property management company.

Any such sudden changes in the vendors employed by your HOA may be signs that something fishy is going on, and that you need to take your heads out of the proverbial sand, and come out of the ethers - even if momentarily - to make certain that you and your HOA aren't being taken to the cleaners.

Or more likely, that you and your HOA haven't already been taken to the cleaners, while you and your neighbors were sleeping.

Think it can't happen to you, or won't happen to you?

Think again - it happened to the folks at RED INK GREENS and it happened to the hard working folks at Enron - both of which are corporations and must be run like businesses to avoid fraud and financial ruin.

All over Southern California HOA reserve trust fund accounts have been raided and in fact depleted for such frivolous and fool hearty endeavors as construction defect quality cyclical maintenance and repair projects, slipshod and fly by night vendors, litigation to line the pockets of HOA lawyers to clean up the debacles created by the previously referenced projects and vendors, and overlooking stealing, embezzlement and gross mismanagement of HOA trust funds.

For example, say for instance that your 100 unit HOA development gets taken to the cleaners, otherwise known as "cleaned out" or "ripped off" to the tune of $ 1,000,000. - and you would never know because the financial statements are not completely audited (in most HOA's the reserve trust fund accounts are in fact NEVER audited).

$ 1,000,000. divided by 100 homes (or condominium "air space" units) equates to a per home ("unit") special assessment of $10,000. just to replenish the money squandered, stolen or otherwise misappropriated.

And this is on top of the $ 350. per month you are already paying per month, a portion of which was supposed to be held in trust in accounts, but which your elected HOA directors and officers and property manager have permitted to be squandered to the tune of $ 1,000,000.

Before you reach into your pocket, 401K account, or retirement/kids college/ or vacation funds to pay off this additional financial levy, ask yourself why the insurance company which insures your HOA isn't paying off the loss under the D&O / Errors and Omissions insurance policy, and or why the Directors, Officers and property manager haven't been subjected to criminal charges for their complicity in any embezzlement, misappropriation, fraud and or felony/criminal conduct as representatives of the Corporate entity which is your own particular HOA.

Don't let yourselves fall victims to any such RED INK debacle as has apparently befallen others in the California HOA community.

Here's how you can avoid being ripped off as a Homeowner Association resident:.

PROTECT YOURSELF

1. Demand that all books and records be AUDITED annually - includng the reserve accounts, by a reputable, licensed CPA who carries insurance.

2. Do not accept a "review" of the books and records, or any "opinion based on inquiries of the property manager" about anything. Property managers are uneducated and thus are not "experts" in anything, especially financial matters.

3. If your reserve fund disclosures are labeled "Un-Audited", check your CC&R's, By Laws and other governing documents to see if an "AUDIT" is required on an annual basis.

4. If your reserve funds are "Un-Audited", demand an explanation from your Board members - in writing - if they ignore you, demand an answer.

5. If your reserve funds are "Un-Audited" realize that the statements are not worth the paper they are written on, and unless a formal "AUDIT" occurs, your HOA could be in desperate trouble (ie. RED INK) and you would never know.

6. Monitor closely if your HOA is borrowing money from reserves to pay operating expenses, and whether any such borrowing is done properly and lawfully by providing written notice to owners of any such borrowing and of plans to repay the money within the statutory time periods.

7. Monitor closely if your HOA is squandering money on legal or professional fees, including unnecessary "updating" of CC&R's and other governing documents - and or unlawfully spending money on litigation without providing written notice to the HOA members.

8. Monitor if your HOA board transfers all budgeted reserve funds to reserve accounts during the fiscal year.

9. Review any special assessment history or dues increase history at your HOA - neither of which are necessary if any HOA is being properly, diligently and prudently run - as required by State Law.

10. NEVER - under any circumstances - should any property manager be named as an additional insured on your HOA's insurance policy. This is a commercial insurance underwriting RED FLAG and no no.

11. NEVER - under any circumstances - should any property manager ever be permitted to sign checks, or to transfer money into or out of reserve trust funds accounts. This is the cause of much financial loss in HOA's.