Here are Director Frank’s Responses to the Political Statements by Finance Committee Chair Joe DeMao at the 2008 Annual Meeting and planned to be mailed at community expense by the BoD. 

 The Board has unfairly refused Director Frank’s request to have his rebuttals to the FC allegations included in the Board’s mailing–which will occur during the campaign.

The article can be reviewed online at this link: [1] http://www.lvrj.com/business/34543364.html?numComments=21# or in this file: [2] R-J Article[3]

Finance Committee Made 5 Allegations (they are only summarized here since the full complaint is available from the Board’s mailing and since most of the FC words are political attacks or unrelated to the Review Journal article.)

1. FC Complaint:  Focused on defending the financial management before, during and since the transition in May 2005, and claimed there was no evidence of misconduct or mismanagement by anyone.

My response:  The statement is not correct.  The time frame I was referring to was May 2005 until the end of 2006.  Because of the many changes in management and companies, there is some ambiguity on exactly which individuals were responsible for the association’s accounting and financial management in 2005 and 2006.  The official file records from Del Webb prior to March 2006 were not even made available to the members for open review until mid 2007.  I was told that RMI manually transferred the records and developed a new chart of accounts and other key accounting records when they took over in 2006.  That provided many opportunities for errors and/or financial misconduct.

RMI replaced its own accounting system again–during the following year.  So, the SCA accounting system was rebuilt—again—with a new chart of accounts and extensive re-keying of records.  The conversion in 2007 was supposed to be handled electronically between the old RMI systems to the new RMI system.  But, the conversion failed and the transfer processes had to be manually accomplished during the summer months.  Meanwhile, there were many problems reported while trying to manage the SCA finances and develop the annual budget.  At one point, the SCA member account data was so corrupted by RMI during the conversion that a manual spreadsheet had to be keyed in for the 7,000+ members in order to accomplish the monthly mailing of SCA’s magazine.  The amount of overtime hours required due to the conversion failure was not reported.

So, SCA’s multi-million-dollar accounts had to suffer two complete overhauls of its accounting systems in less than 2 years.  And, since only one member of the current Finance Committee was serving on the committee at transition time, and none of the FC members were ever SCA Directors, the current Finance Committee members do not have the first-hand knowledge to make group allegations against a director.  

2. FC Complaint:  Although he was not involved at that time, Mr. DeMeo insisted that nothing happened during and after transition that would justify an investigative/forensic audit.  The FC has pretended that in spite of the transition activities, nothing could have been missing while millions of dollars of bank accounts were transferred between Del Webb management company’s bank accounts and SCA’s bank accounts with RMI.  FC claimed that during such a multi-million-dollar transfer of assets and management companies, no one should be concerned that only routine audits were performed and the auditor (inherited from Del Webb) reported no significant issues in 2005 or 2006.

My response:  A forensic audit was clearly called for in November 2006 because of the simultaneous transitions of both the Board of Directors and the Community Managers.  The Finance Committee’s use of the term “outside auditor” is deceptive.  The same auditor, Mr. Gary Lein, has performed every audit since Sun City Anthem was initiated.  Of course, he is not an employee of SCA or Pulte or RMI.  But, no one is an employee of SCA.  SCA has no employees.  We only operate with sub-contractors.

In my opinion, the auditing company should have been changed at transition time from the developer’s choice to the community’s choice.  And, the auditor should be changed again every three to five years.  This policy would just be following common sense.  And, since there were some poor financial decisions made during 2005 to 2007 that cost the association hundreds of thousands of dollars, and since the two accounting system conversions and transitions between community managers and boards were so irregular, there is more than sufficient cause to look into the potential for financial misconduct and/or fraud.  If the records and accounting procedures were as clean and complete as the Finance Committee members claim, it would not take a qualified forensic auditor long to verify the results. Everyone would benefit from having such a validation of the associations funds and financial records.

3. FC Complaint:  Because the Del Webb-appointed auditor worked for his own company, members of the FC believe it could be unfair to claim Mr. Lein might have had conflicts of interest with the SCA community’s interests at transition and since.  And, because Mr. Lein is a very nice fellow, has earned high credentials within the auditing community, and because he was endorsed by previous developer-controlled and other SCA Boards, he is above being questioned about possible conflicts of interest.

My response:  It is deceptive and improper for the committee to claim that because Mr. Lein is a named partner in his own firm that he was not retained/did not “work for” the Del Webb Community Management Company—a Pulte Corp. company.  Mr. Lein has admitted he has been the auditor for the SCA since he was originally retained by Del Webb before the year 2000.  And, Mr. Lein’s firm can receive new business from developer referrals when Pulte opens up new communities. 

There is nothing factually wrong with what I said in the paper, or above.  As a Director with relevant business experience in this auditing area, I have the obligation to question Mr. Lein about potential conflicts of interests related to his Del Webb/Pulte business, and he should not feel uncomfortable with such questions.  Nothing untoward or improper was suggested or inferred.

4. FC Complaint:  Because Mr. Lein has always followed normal auditing practices, and because there are 4 CPAs on the FC, no one should question the results of the past audits.  Also, because a forensic audit would cost more money to validate some of Mr. Lein’s work, it would be a waste of time and money.

My Response:   My statement is factual, and the FC’s recommendations have been noted.  As an elected Director I have legal fiduciary duties and responsibilities that appointed FC members do not have.  The FC advises and the Board makes the decisions.  In the case of potential misconduct or fraud, a Director is required to consider and advocate the matter of an investigative audit until being satisfied–even if the majority of the board does not wish to do so. 

We have many examples in this State and Nation where large numbers of highly experienced CPAs have hundreds of years of cumulative experience, but they still failed to identify and act on findings pointing to significant fraud in companies and government agencies.  But, under Nevada law, the boards of directors can be held accountable for failing to use their own business judgment to detect and correct financial problems.  My objections are fully within my authority and duty.  The Finance Committee serves at the pleasure of the Board.  Its charter does not provide it the authority to politically attack a Director.  Only the SCA Board members have such authority.  If a Directors want to challenge another Director, he/she must sign their name to the statements and not use a committee to speak for them.

5. FC Complaint:  The FC continues to categorically deny that there has been any past problems with SCA’s income tax filings.  The FC insists that it was proper for SCA to pay zero income taxes in 2004 to 2006 while we were accumulating over $3 million in “profits” from charging more dues/assessments than could be justified for operating expenses and reserve funds.  The FC and Mr. Lein also claim that the SCA Boards used good business judgment to fail to refund or credit the surplus dues to members and also failed to report the surplus dues as corporate profits—as required by Revenue Ruling 70-604.

My response:  The FC comments are deceptive and incorrect.  This is just a political statement carried over from last year’s board campaign.  It is designed to try to negatively influence the upcoming board campaign against me.  The facts do not support the FC claims.

My retired IRS agent advisers (who are also SCA members) have frequently made themselves available to meet with the FC members, SCA Treasurer and Board President.  But, the Board officers and FC members have refused to meet and discuss our well-documented and precisely explained concerns.  This fact is well-documented. 

The past rationale used to circumvent Revenue Ruling 70-604 has not been proven to be valid.  Until the IRS has provided written confirmation that our tax returns for 2004-2007 were correctly done, I will remain unconvinced of the legality of way our returns were prepared and submitted.  And, I will remain concerned over SCA’s back income tax liabilities that could exceed $1.5 million.  As a Director, I have the fiduciary duty to pursue the matter until it is settled.  The FC can advise, but it can not decide the matter.  And, the FC must not be used as a tool of other board members to try to bully me into agreement by using SCA funds to mail out politically-charged materials to influence the SCA membership.

In addition, the FC and auditor Gary Lein refused to state categorically that there is zero risk to SCA for owing back taxes.  They know that I am right in stating there is a reasonable chance they made mistakes on past income tax returns for this community.  They know there is a chance that our returns that reported zero tax due for 3 consecutive years are wrong.  And, they have refused to join me and my IRS retired tax advisers to consult a qualified, national IRS Agent to settle this dispute.   Instead, they insist on rolling the dice and taking chances while waiting until an IRS audit is conducted in the future.

In summary:  my tax concerns have been clearly stated.  Upon advice of highly competent professionals, I am convinced that SCA’s income taxes have been wrongly submitted in the past few years; and, I am quite worried that significant tax filing errors have been made on our $3+ million of accumulated surplus assessments (profits) have been made in the past.  There appears to have been a cover-up of those errors in hopes that the IRS will not notice.  As a Director, I can not condone that kind of misbehavior.  If our tax preparers (Mr. Lein and Jack Troia) and past SCA Treasurers (West, Dwyer, Roz Berman and Cheri) have made some mistakes or errors in judgment in filing our tax returns, then we have to make the corrections and ask the IRS for permission to make the necessary corrections. 

In the meantime, I am compelled to insist that SCA asks the IRS to confirm that we previously filed our returns correctly.  We can not afford to take the risk of waiting until we are audited to learn we have done our returns wrong.  Such a mistake could cost us hundreds of thousands of dollars in fines and penalties. 

Bob Frank
SCA Director
January 22, 2009