Bill Cracks the Case of Sam Schemer!
Mary, Bill, Elise, and Pat just joined the board of directors of their Association, Shady Acres HOA. It was difficult to get volunteers, so these four souls just happen to be at the annual meeting, wrong place, wrong time, where the association was desperate for volunteers. Reluctantly, the four of them agreed when they were told by Sam from the management company “Don’t worry, you don’t really have to do anything but show up four times per year for quick meetings.”. So, with that they all volunteered to be the board of directors for the next term. Sam then told them they needed to volunteer for officer positions of President, Vice President, Treasurer, and Secretary. Again, Sam said, “it’s just a formality, we handle everything for you.”
Bill volunteered to be Treasurer, he had never served on an HOA board before but was pretty sure he didn’t want the responsibility of President since it sounded like the first person to be named in a law suit and didn’t really know what the other positions did. He was familiar with basic accounting concepts so he figured it would be okay.
The following month, Bill received the monthly financials from Sam the manager. He started looking them over and, on the surface, everything seemed in order. He noticed the Association had a large amount of assets which he attributed to “reserves”, at least that’s what Sam explained. He accepted Sam’s explanation and forgot about it. Later that same month, Bill received a notice to pressure wash his driveway. Bill thought this was odd because he knew we were in the middle of a water ban and he just cleaned his driveway a month ago. He called Sam to discuss this, and Sam explained – “Oh, we send those out to everyone, based on the time of year, just respond that you washed your driveway, and we’ll close it out”. Bill being fairly new to HOAs thought Sam’s answer might sound legitimate, but it gave him an uneasy feeling. Why would a management company waste all that time and effort to send out blanket letters based on the time of year? He decided he didn’t know enough to question so would just leave it alone for now.
The next month, Bill got the financials again and decided he better check them to see how much was attributed to sending letters. He couldn’t find an actual line item for postage, so he called Sam the manager to ask about it. Sam said, “We incorporate that into the Miscellaneous Expense on the financials” and this drew Bills attention to that line item of $3,000 for the month. Bill asked, “Is this $3000 all postage and paper for letters?” Sam replied “No, of course not, not all of it, there are other miscellaneous office expenses rolled in but we try to keep it simple for the board to understand, we’ve done it this way for years”.
Bill didn’t want to be argumentative with Sam as he was a licensed manager and clearly Bill was not. Nonetheless, this started to really bother Bill. He started researching a little more about accounting principles and poured over the financials with reference websites so he could try to make sense of it all. Bill was really bothered by the miscellaneous expense line item. He also noted that the Accounts Receivable account with more than $150,000 seemed unusually large after reading that the accounts receivable was money owed. Annual assessments were only $125,000 for the year and it was July, how could so much be owed to the association? Had they not collected any assessments this year? Bill knew he paid his and so did his neighbors and other board members. Bill decided he was going to say something, so he wrote an email.
Bills email to Sam
“Hi Sam, I appreciate you always providing me with the financials and taking care of things for us but I have to be honest, I have some real challenges with some of the numbers on the financials and I hope it’s my lack of understanding. Could you please give me a full itemization for the Miscellaneous Expense account for the last 3 months? Also, I don’t understand why the Accounts Receivable is so high, can you provide me a breakdown of who owes what and what it’s for? Sorry to bother you with this but I appreciate your assistance – Bill”
Bill thought that he would get a response from Sam in the next couple days but then days turned into weeks and finally, Bill sent a follow-up.
“Hi Sam, can you confirm that you received my email request sent to you back on July 25th? – Bill”
Sam finally responded. “Hi Bill, attached are all the items you requested, let me know if you have any questions.” What Sam sent was a massive quantity of excel spreadsheets and reports titled “Aging Reports”. It gave dollar amounts for what was owed but not what the amount due was for. The Miscellaneous Expense account was broken down into postage, materials, and miscellaneous processing fees. This information is technically what Bill asked for, but it still didn’t help him to understand the accounting. At this point concern turned to frustration and he reached out to other board members for advice. Mary, the President, a full-time schoolteacher said, “I’m sorry Bill, I just don’t know about this accounting stuff that’s why I’m glad they didn’t ask me to be treasurer.” Elise and Pat gave Bill similar responses.
Bill was now on a mission to completely figure this out. He felt either he was on to something that just seemed very wrong, or he was so out of touch with that freshman high school accounting class he took years ago that he was sure to become the joke of the neighborhood. He decided, the risk of embarrassment was worth it. The other board members signaled they supported his efforts, so he went on the offensive.
Bill wrote another email. “Sam, upon reviewing the materials you provided, I find I have more questions than answers. I will need to have all homeowner ledgers in pdf format, all Miscellaneous Expense account information going back to the annual meeting, and upon receipt, there may be more information required. – Bill Smith, Treasurer, Shady Acres HOA”. This time, with a cc to Association General Counsel.
Sam replied, “There seems to be some real concern on your part, have you considered taking some accounting courses to help you understand accounting principles?”
Bill felt this was a knee jerk response from Sam but decided to keep emotion out of it and simply replied – “Sam, as treasurer, I am entitled to review any and all Association Accounting information requested. I have copied Association General Counsel on this request. Please consider this official records request and provide all requested materials in 10 business days via email or sent to my address – Bill Smith, Treasurer – Shady Acres HOA.
Sam received the materials, all 573 pages of it. There were over 400 residents so more than 400 pages were account ledgers alone. Bill diligently pulled every account listed on the aging report and found dozens of past due accounts. The rest of the homeowners that were not past due he segregated for shredding.
After an exhaustive search he found some disturbing information. He contacted the Association Secretary and the head of the Fining Committee. Pat who volunteered to be the Association Secretary, received detailed meeting minutes from all meetings in a binder from the former secretary at the annual meeting. Tim, from the Fining Committee was on the Fining Committee for years and had a pretty good memory. Bill showed them what he discovered.
Tim immediately saw all the fines that were levied in the most recent 24 months and noted he didn’t remember seeing most of them. Pat confirmed that many of the fines listed were not part of official Fining Committee minutes. They were all in shock. Could this be real? They decided it was time to contact Association General Counsel who suggested having a meeting. The meeting was held privately without Sam, who’s usually in attendance and because the meeting involved personnel matters, namely the manager and potential legal matters with the association’s attorney, public attendance was not required. They all met with the Association’s attorney. The attorney agreed that they had a serious problem on their hands and suggested they contact another management company to potentially take over in case it became necessary.
The board got several bids, and all were prepared to start immediately. Bill then prepared his notes for the next meeting. Instead of Sam creating the agenda for the next meeting, Bill created the agenda which called for a discussion and vote on association management and review of fining procedures. Bill decided to play his cards close to his chest and said to Sam, “This is normal for the board to regularly review management contracts, like you always tell me, this is routine stuff”.
At the next meeting, Bill was nervous with anxiety about this potential confrontation, but he knew as Treasurer, it was his responsibility. When it was Bill’s turn to speak, he swallowed hard, took a deep breath and began speaking.
“Good evening ladies and gentlemen. My name as you know but for the record is Bill Smith, Treasurer of Shady Acres HOA. I have to the best of my ability completed a review of the association’s accounting records and am here to report some disturbing findings. I have found it appears that the association manager may have placed fines on properties without going through the regular Fining Committee process. I have found that these fines are placed on homes that are in foreclosure so the Florida Safe Harbor law would render them uncollectable. I believe this was done to artificially inflate the amount of accounts receivable due the association so it would make the assets appear larger. It’s my opinion this was done to offset or take attention away from, the high amount of Miscellaneous Expense charges. I have found that the Association was charged a processing fee in the amount of five dollars for every violation letter sent and based on communications with Sam the manager, it is normal for his firm to send out blanket notices throughout the year for violations like dirty mailboxes and driveways. Since our association has 400 units, one such blanket letter campaign would amount to an additional $2000 in charges to the association beyond the $3000 already paid for management. I noted that the management contract contains this provision for processing fees, but it does not contain any provisions for board oversight which means effectively Sam can dictate his own company’s revenue simply by deciding how many letters to send in a given month. It is also my personal opinion this was done deliberately to benefit the management company at the expense of the association. I believe given the facts that have already been shared with Association General Counsel, it is in the best interests of the Association to replace the management company. I have as required by the statute for competitive bids secured 3 bids for management, I move to terminate the existing management contract and deliberate and vote on a new management contract.”
Bill was relieved that was done. Sam immediately spoke up “You can’t do that; you are under contract for another 2 years.” Bill turned sharply and spoke sternly “Association General Counsel was aware that you would say that, he is prepared to discuss this matter with you directly should you have concerns”.
With that, Sam was fired. A new management company was voted on, contracted, and working together with the new management company’s accounting department, slowly all the invalid fines were removed and the accounting cleaned up potentially saving the HOA massive legal expenses.
Summary of Lessons Learned
- As a board member, question everything you don’t understand. Don’t worry about questions seeming dumb, your vendor should answer questions whatever they may be or how simple. Quality vendors are not going to risk reputational harm to make a little extra money.
- High Accounts Receivable during a time well past when assessments are normally due are ALWAYS a red flag that should be questioned.
- NEVER allow anyone in charge of accounting to list expenses as “Miscellaneous” – Everything has a name, everything has a purpose, everything must have a paper trail. Managers may be busy, and it may take a few days to gather information you request, but it should always be attainable and explainable.
- Be on the lookout for management companies that charge “processing fees” for violation letters. Signing a contract with this embedded in it essentially creates a blank check for total monthly management fees.
