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Lake House Review Spells Out Need for Greater Transparency, Internal Controls

by Dave Emke — March 1, 2017 at 11:15 am 51 Comments

Lake House/Reston AssociationStoneTurn Group’s independent review (available here) of Reston Association’s Tetra/Lake House purchase has given 15 recommendations to the Board of Directors for how to avoid a similar situation from happening again.

The forensic accounting firm was contracted by the Reston Association board in January, at a cost of $45,000, to review the controversial purchase and the cost overruns associated with the building’s renovation. The 30-page report, released Wednesday morning, focuses on “identifying areas for process improvement, potential changes to internal controls and/or modification to governance procedures to help ensure situations like the Lake House cost overrun can be avoided in the future.”

Among the findings of the StoneTurn Group were a lack of written internal control policies for RA staff to rely upon during the transaction; internal control processes that are “not sufficient” to account for funds when they are contracted or encumbered; and an estimation process for renovations that “was not performed in a manner that could have yielded a reasonable estimate and was not documented.”

In the review, the firm noted a lack of a comprehensive Code of Conduct or Code of Business Ethics, which are “generally considered to be cornerstone documents for an effective internal control environment.” (The Board’s Governance Committee is now in the process of creating such a code.)

The firm also noted that its analysis of items discussed in executive session was “significantly hampered by the absence of any meeting minutes and retained packages of information presented and discussed.” In addition, the review reads that RA “does not have a clear or central document retention policy and procedure” and that StoneTurn had to rely on finding documents “from various employees and directors based on their individual retention decisions.”

The recommendations made by StoneTurn to the RA Board of Directors in the review are as follows:

Recommendation 1: Policies should be established, documented and then reviewed and updated on an annual basis. All updates to the policies should be tracked within the policy itself.

Recommendation 2: For every established policy, internal written processes should be established and “owners” of the internal processes should be identified. We recommend that these internal processes include both the procedures required to execute the policy (a preventative control) as well as procedures that will verify that the process has been followed properly (a detective control).

Recommendation 3: Establish a comprehensive Code of Conduct for both the Association Board of Directors and staff.

Recommendation 4: Consider adopting a policy that will provide greater transparency to the considerations undertaken in Executive Session.

Recommendation 5: Establish a process whereby the threshold is calculated and included in the budgeting documents. Establish a procedure at the estimation of Capital Projects to compare the aggregate estimated cost of a project to the threshold.

Recommendation 6: Clarify the existing policy to provide guidance for situations where a project expands or where an estimate is found to be insufficient. This should include guidance on when an overrun should be brought to the attention of the Board of Directors as well as guidance on the appropriate process to follow when the revised amounts exceed the threshold.

Recommendation 7: Prepare a long term Capital Improvement Plan and update it on an annual basis.

Recommendation 8: Establish written policies and procedures for the evaluation and management of capital projects which should include: 1) a requirement to specify the design in advance of the estimate or budget being prepared; 2) a requirement to identify and disclose the key assumptions including in the estimate or budget; and 3) a requirement to maintain the documentation supporting the estimate or budget.

Recommendation 9: Establish a process to ensure that purchase orders and contracts cannot be issued without encumbering the funds and ensuring that the approved budgeted amounts are sufficient.

Recommendation 10: Establish a quarterly or semi-annual review process where the aggregate amount of encumbered amounts plus estimates of all amounts remaining to be contracted are compared to the annual approved budget.

Recommendation 11: Revise the resolution to remove the language stating the policy is only required to “the extent practical”. In the event that written quotations are deemed not to be necessary require that a memorandum be prepared and approved detailing the reasons and authorizations for the decision.

Recommendation 12: Develop a process to ensure that prior to an invoice being paid they are matched and agreed to properly approved contracts or purchase orders. This should include an analysis of the aggregate amount paid under any to ensure that the invoice is within the approved terms.

Recommendation 13: Establish a formal document retention policy specifying the nature of the documents required to be maintained which should include specific requirements for financial documents, documents presented to either the Board of Directors or a Board Committee, etc.

Recommendation 14: Establish a procedure to record and track all proffered amounts and any restrictions on such amounts.

Recommendation 15: Establish a procedure to analyze likely annual covenant compliance at interim periods but no less frequently than semi-annually.

In a community meeting with a StoneTurn Group representative in early February, many residents spoke to express what they were hoping to see in the review — including individual culpability, specific conflicts of interest and potential law-breaking that may have occurred in the process of the purchase. That type of information, which the StoneTurn representative at the meeting said was outside the scope of their work, is not explicitly outlined in the review.

The Reston Association Board of Directors plans to review the report, and a special public meeting will be held Tuesday, March 14, at 6:30 p.m. regarding its findings.

Photo via Reston Association

  • Bah

    Lake House Review Spells Out Need for RA Senior Leadership to Resign and Go Away Forever

    • Genghis Khan

      At $3000 per recommendation its obvious Genghis Khan could have done a better job feeding horse manure to the local population.

      Dont forget to vote!

  • Drip

    Translation: Use some common sense, hire competent people, and don’t be shady.
    But in another thread, someone this morning noted that “Tetra is over.” So all is well?

  • Terry Maynard

    According to people who have read this report (we have not read it fully), it highlights numerous errors and omissions by the RA staff, including the CEO, as well as the Board–some of which were not accidental–in the course of the Tetra purchase and renovation.

    Maybe the most serious error is that no one can find a copy of the contract to renovate Tetra, not RA, not the contractor, which cost us more than $600K. “What? The initial contract was signed in October 2015 for $268K, and bumped several times. Here’s what happened in March 2016: “The Application and Certificate for Payment through February 29, 2016 from Oseth Group for the internal renovations indicates a contract date of March 1, 2016, an original contract sum of $584,283
    and a total completed balance of $70,396. The Association has not located the contract for this work and was unable to obtain one from either Cresa or Oseth Group.” We still wonder what a priori Board approval was given for this expenditure–instead of May 2016 when almost all the money had been spent. We also wonder why public disclosure of this much elevated contract sum was postponed until May 2016, after the RA elections.

    Also, nothing in the report indicates that either the CEO nor any Board member nor RA staff member tried to negotiate the purchase price of Tetra–which, at $2.65MM, according to the STG report, was the “maximum purchase price” based on the appraisal (NOT an “as is” fair market value).

    Not recorded in the StoneTurn Group report are two important additional points about the review:

    First, RA contract attorney Ken Chadwick coached each staff member who was to meet with StoneTurn Group (STG) about what they were to say. According to STG, some staffers stuck closer to the script than others, but they thought they got the full story despite this RA effort. We wonder who directed Chadwick to coach RA staffers.

    Second, the CEO and Chadwick were on the Tetra Review Committee email alias (but NOT on the committee), and so read ALL the communications within, to, and from the committee email address from the outset. (Note: This is why we recommended you contact STG directly if you had any confidential info to convey that might help them rather than going through the RA email alias. Yes, RA leaders spied on their own committee and their own members.)

    That’s your RA at work.

    Reston 20/20 will take a more complete look at this report soon and report our results on the Reston 20/20 blog for the community to review.

    • Reston Realist

      Terry, looking forward to your comments after you have had time to fully analyze the report. I, for one, appreciate your watch-dog efforts.

      • Guest

        Completely agreed. No one can find a copy of the contract? Amazing.

        • Reston Realist

          RA not having a copy of the contract is bordering on malfeasance. Perhaps it would be an exercise in futility, but we should try to get the list of the subcontractors on the Tetra job and then look at their contract with the GC. That could help put together some relevant pieces of the puzzle.

          • Greg

            Did the attorney not review the contract? Sorry–silly me. Did the he many RA attorneys not review the contract? The attorney for the other contract party? Did the RA auditor not review the contract?

            Does the RA not have a filing system in its taj mahal of an expensive office? Does it not follow an HOA-standard document retention guidelines? Does RA even have a document retention policy? (See below)

            Does not RA have a computer file among its multi-million-dollar IT system that stored the contract?

            How will the RA complete it tax returns without the contract? What will happen if the RA is audited by the IRS or the commonwealth?

            How will the RA defend itself in a lawsuit without the contract?

            http://www.wtplaw.com/documents/2014/05/a-guide-to-association-records-retention-what-you-need-to-know

            One more damning reason a long and growing list why Cate Fulkerson should be fired.

          • 30yearsinreston

            Anybody who believes the contract is ‘lost’ hasn’t looked hard enough
            Get the Director of Projects to get off his butt and look for it

          • 30yearsinreston

            Bordering ?
            Maybe RA needs a Director of Accounts Payable
            That would fix it

        • JoeInReston

          The lost contract doesn’t sound credible. RA can’t be this comically evil.

          Not to cast doubt on Terry Maynard, a very credible guy. Just a bit of cognitive dissonance in my mind right now.

    • Sick of RA

      Thanks Terry, for your diligence on all things Tetra.

    • Sally Forth

      What and how would you know that anyone in RA was monitoring email traffic?! You can’t just say whatever you want! How do you know this?!!!

      • cRAzy

        Better yet, Sally, why don’t you ask Chadwick and Fulkerson whether they coached RA staffers and monitored Tetra-related e-mail. Then you wouldn’t have to take Maynard’s word for anything, assuming they told the truth.

        • Donald

          Seems if you’re fake new reporter, you need to fess up.

          • cRAzy

            I didn’t report anything.

          • Donald

            Actually I was responding to your response to Sally. She made a good point to Terry Maynard.

            I think the community, and the country for that matter, is tired of receiving “facts” from undisclosed/unnamed sources.

    • John Higgins

      Interesting observations, Mr. Maynard. Given that the focus of this review was on “process”, we have a blueprint for better management going forward. What many will find missing is analysis of how scores of decisions were taken (and by whom) that got RA into this project, and then careening bumper car-like to conclusion.

      Pro forma financials, estimates, reporting, and accounting are central to members’ concerns. I find it odd that missing from the interview list are the then-CFO and volunteer members of the Fiscal Committee. STG did an excellent job in serving up this appetizer. But it looks like the kitchen is now closed.

      • Donald

        Mr. Higgins, weren’t you on the RA board and also their Treasurer at the time all this started? I see here, you stated:

        ‘Board member and treasurer John Higgins said the schedule is ambitious but doable. “Lets put as much information out there to the membership as we possibly can,” he said.’

        http://m.connectionnewspapers.com/news/2015/feb/04/referendum-land-purchase/?templates=mobile

        Why didn’t you intervene with your concerns back then?

        • John Higgins

          Fair question. I believe that quote is from the January 2015 meeting when the purchase was proposed. Although sitting at the table without a vote, I had a voice. My view was that there was far too little information available on which to form an opinion on this proposal. With the short timeline, I had doubt that there was time to compile good financial data and to give the membership a reason to support the purchase. I left office in May 2015 as the question was going to referendum. Outside the public eye, I counseled directors to not proceed if the referendum passed, even if it meant loss of RA’s deposit.
          As an officer of the corporation, I had an obligation to not lobby against the board’s referendum question. And by the time the cost overrun became known, it was too late…the work had already been done.
          I regret I did not speak out against using $650.000 of Comstock contributions for this project. Of course, that was only my opinion on wise use of the funds, but it is s lingering regret.

          • Donald

            I see, according to meeting minutes, you were involved in the Code of Ethics and Governance sessions. Was there not opportunity to bring issues to the table?

          • John Higgins

            No apology needed. This is exactly the type of personal accountability directors (and others) should expect. It’s not enough to work long and hard. When we are not effective, we should be called on it and either change or leave. I chose the latter.

      • Reston2000

        Agree – financials are important – my questions are not around the renovations however but around the original purchase price, and who decided not to negotiate that down

  • Greg

    Shame on all of the RA Board of directors and shame on Cate Fulkerson. She’s worked there too long (decades) and STILL no codes of ethics or conduct. Time to fire her.

  • 30yearsinreston

    Recommendation 16. Realtors or ex- realtors should not be involved in any real estate transactions

    The Lake House fiasco is not the first time this has happened

  • 30yearsinreston

    If the contractor can’t provide a copy of the contract, why are we paying ?
    I’ll bet that if RA withholds payment, it would turn up

  • John Farrell

    Chadwick and Fulkerson surreptitiously monitoring the e-mail traffic to and from StoneTurn is outrageous and a breach of faith of RA members.

    Chadwick and Fulkerson coaching staff and Board members on their answers to StoneTurn’s anticipated questioning constitutes witness tampering and undermines the credibility of the StoneTurn’s report.

    These two are just venal in too many instances and too many ways.

    • Guest

      How can anyone make such a claim!? This is crazy. You and Terry are crazy.

      • John Farrell

        Our source is someone with the direct knowledge of these events.

        • Guest

          Than NAME them. This is total BS.

          • John Farrell

            A person posting here anonymously insists on the disclosure of someone else’s identity.

            Troll, much?

        • Donald

          Wow, smells like the NYT.

    • Reston2000

      The report was compromised way before this. (1) With the appointment of Eve Thompson to the committee formed to select the independent review; how can she be independent when she was a central player to the transaction (having signed several documents) and as the owner of a restaurant across the street, had a personal interest in not seeing this property developed as a restaurant; (2) With the decision to allow the two attorneys (who were also central to the transaction) to develop and negotiate the contract with the FIRST group selected to do the independent review, on their own; not surprisingly, the provisions in the contract were so restrictive and so onerous, that this group, all Reston residents/professionals who agreed to do the review pretty much for free, backed out; (3) With the decision to start this report at the referendum. The decisions made before this point were the crux of the problem. While I think StoneTurn did a great job, given the time restriction, I think the Board also needs to look at roles and responsibilities of the Board, staff, and attorneys and make sure there are appropriate checks and balances in place to ensure members’ interests are protected.

  • OldBlindDog

    Sue the contractor for a copy of the contract.

  • egbessou Géléhéso

    It’s time to clean house at the RA and get some professionals in there who know what they are doing… this is inexcusable….management needs to be fired and held accountable. Moving forward I’m getting involved.

    • Donald

      “Getting involved.” Other than firing everyone (and then holding them accountable?? really??), what solutions, pray tell, do you intend to bring to the table. Just curious.

      I’ve read the statements of the candidates of the board and they all say they are going g to come in and slash and burn. Do they know how boards work? That decisions are made with a quorum, and by the majority of nine people – not one person?

      I agree with one thing you said – we need experience at the table. But beyond that, you missed it. What we need are true adults, who behave like adults.

      • egbessou Géléhéso

        The more people involved, the more eyes on the situation asking questions, the more people offering experience, more RA members looking out for how their fees and interest can only improve the situation and keep the fees down… the RA needs to remember people work hard for the fees that are handed to them each year and that they have an obligation to spend that money wisely and frugally….

        • Donald

          How will you get more people involved when the average member turnout for elections gets no more than 10-15 %.

          • egbessou Géléhéso

            I will be involved…. I’ll go to the meetings and be a pebble in your shoe….

          • Donald

            Great. That sounds productive. Another disruptor. Personally, I’m waiting for someone to disrupt the disruptors.

          • egbessou Géléhéso

            I’m wanting someone to manage the money intelligently with concern for the members….

          • Donald

            So, do you want the board to manage the daily finances?

          • egbessou Géléhéso

            Whatever it takes… if management can’t do it and apparently they can’t then yes…

          • Donald

            I see. So nine volunteer board directors are going to focus on managing day-to-day operations. Do you know what any experienced CEO and his or her Senior Leadership team would tell you?

            “Go %*** yourself, and the horse you rode in on.”

            Do you understand what it means to be on a board, and making it a productive, impactful board?

          • egbessou Géléhéso

            well that maybe true, but if they continue to waste money and raise fees from incompetent decision making ”using the Patch, Nextdoor, Facebook and other forms of social media can turn the pressure up quite a bit…. Next January I don’t want to get a $1000 fee increase..

          • Donald

            Do you understand the concept of inflation and budgeting. I believe from the year 2000 to present our assessments have gone up around $140 in real dollar terms.

            My question is this: given how old our community is, how much it is growing, with the extra demands being placed on it — is the present $692 enough???

          • egbessou Géléhéso

            See you at RA meeting, I’ll be the guy asking all the questions…..

          • Donald

            Great.

          • Donald

            Do you understand the Virginia laws for nonstock corporations require among other things, a Fiscal committee. Did you ever attend one? Do you who sits on RA’s.
            https://www.reston.org/AboutRestonAssociation/Governance/Committees/FiscalCommittee/tabid/350/Default.aspx

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