Audit Report
posted on LakeStCharles.com

INFORMATION REGARDING THE LAKE ST. CHARLES COMMUNITY DEVELOPMENT DISTRICT
Basic Financial Statements and Regulatory Reports
September 30, 2006
 

•  Audit Report

•  "Behind the scenes" Audit correspondence: 
Attorney Sid Kilgore, Attorney Roland Santiago, Chairman Lorelei Bowden,
District Manager Toni Leake.

Dear Neighbors:  

          Regarding the results of the Audit, District Manager Toni Leake told LSC homeowners:  "I'm especially happy with our last audit report, which we have passed with flying colors."  (Excerpt from article which appeared in the September 2007 Lake St. Charles Newsletter, full article available at LakeStCharles.org.)

          We agree that flags were flying, but unfortunately they continue to be RED flags. 

          It was our understanding that the Audit Report as of September 30, 2006 was to be posted on the .org site along with the other financial documents that are posted there.  However we have been unable to find the Audit on the .org site.  Therefore we are posting the full audit report here for your review. 

          We are also posting some "behind the scenes" correspondence which consists of audit-related correspondence from Attorney Sid Kilgore, Attorney Roland Santiago, Chairman Lorelei Bowden, and District Manager Toni Leake. 

          Following are excerpts from the Audit, showing some of the red flags, and from attorney Sid Kilgore’s letter to the auditors which also raises red flags, and from attorney Roland Santiago’s letter to Sid Kilgore which also raises red flags. 

          Supervisor John Bakas has been telling residents all year that he believes there are red flags regarding the management operations of the CDD.   Please read the full Audit report and the accompanying “behind the scenes” audit letters. 

          The following was taken from the ValienteHernandez, P.A. Management Letter, September 30, 2006 Audit.  You will see that there were problems with the internal financial controls in the previous audit, and that many of those concerns have yet to be satisfied in the latest audit.  We believe that the Audit report underscores concerns that the LSC CDD board and District Manager lack the experience to manage the finances of the District.  Lake St. Charles needs an experienced, professional District Management firm.

John & Terri Bakas 

     The following are excerpts taken from the ValienteHernandez, P.A. Management Letter, September 30, 2006 Audit:

CURRENT YEAR FINDINGS

Observation 2006-01:

“Criteria:  Safeguarding of assets; segregation of duties: 

Condition:  The District does not currently have a means to verify checks issued to be signed by the Board authorized signatories.  Invoices paid are cancelled using a "PAID" rubber stamp that includes the date paid and the check number.  However, there is no evidentiary support attached (i.e. copy of check) to authenticate payment.

Cause of Deficiency:  The causes of the deficiency are (1) inadequate support for expenditures and (2) segregation of duties.  The individual preparing checks for payment is also responsible for reconciling the bank accounts.  Additionally, the District's bank statements do not include check images, which further limits the District's ability to verify that the check was appropriately authorized.

Possible Asserted Effect of the Deficiency:  “The condition could contribute to misappropriation of funds.  Moreover, the condition does not provide for an adequate control testing audit trail.” (emphasis supplied)

Current status of Prior Year Findings

Observation 2005-01: 

Financial Assessment Procedures:  

“The financial condition assessment procedures consisted of evaluating eight key financial indicators, of which five indicate an unfavorable rating, three were inconclusive, and none rated favorably (the other eleven indicators were not applicable).  The unfavorably rated financial indicators are discussed and expressed in graphs (following the recommendation) depicting the District’s trends over the past five fiscal years in Exhibit C. 

Result:  While the District does not currently meet any of the financial emergency conditions defined by Section 218.503, Florida Statutes, we believe that the results for the indicators listed above indicate that the District’s overall condition is presenting signs of deteriorations which, if not corrected, could result in a future financial emergency.  The unfavorably rated financial indicators indicate future budgetary problems, that the District has overextended itself in the long run, deficit spending, or that current revenues are not supporting current expenditures.  Factors that may have contributed to the deteriorating financial condition include: 

Recommendations:  The District should take appropriate corrective actions to address the above noted control deficiencies, perform periodic cash analyses and forecasts, and develop short-term and long-term financial plans that include steps to strengthen the District’s financial condition.  The financial plans should include:  (1)  a review of spending needs;  (2)  a system for monitoring revenues and expenditures;  (3)  budget reserves to provide for future capital needs and unexpected costs;  (4)  target fund equity levels; and (5) projected revenues sufficient to cover projected costs.

Status as of September 30, 2006:  The condition is partially cleared.  The results from the financial condition assessment for fiscal year ended September 30, 2006 demonstrated a favorable condition.  The District is still in the process of implanting financial plans that include:  (1)  a review of spending needs;  (2)  a system for monitoring revenues and expenditures;  (3) budget reserves to provide for future capital needs and unexpected costs;  (4)  target fund equity levels;  and (5) projected revenues sufficient to cover projected costs.  These plans will help the District’s short-term and long-term financial condition.

Observation 2005-03:

 Cash:  Bank Statement Review

Condition:  Presently, accounting personnel perform bank reconciliation duties with little supervision from a member of the board or others appointed by the board to perform supervisory duties. 

Result:  This condition presents a weakness in the District’s system of internal control.  One important notion is to have proper supervision of those directly or indirectly involved in the cash receipts or disbursement functions.  The reconciliation of bank accounts to the balance in the general ledger is essential to maintain the most basic elements of internal control.  However, the person charged with performing such reconciliation needs someone with higher authority to review the reconciliation and investigate reconciling items such as long term outstanding checks or deposits in transit.  The reviewing person also should go through the checks and note any noticeable changes to names, amounts, dates, endorsements and signature.  The lack of this review may lead to potential errors, omissions or even abuse, including fraud and other defalcation, to exist and not be detected. (Emphasis added).

Status as of September 30, 2006:  The condition is partially cleared.  The accounting personnel are currently performing bank reconciliation duties with improved supervision.  The District Manager compiles a financial packet, which includes copies of the bank statements, credit card statements, and disbursement reports for the Treasurer’s review.  The disbursement report is signed by the Chair and Treasurer.  However, there is inadequate documentation that a review of the bank and credit card statements took place.  Therefore, it is suggested for the Treasurer to sign-off on the statements each month.

Observation 2005-06:

Organizational Chart.

Condition:  The District does not have an organizational chart.  The lack of a formal organizational chart may cause confusion as to accountability and responsibility. 

Status as of September 30, 2006:  Condition is outstanding.  The Board however, has approved an organizational chart in fiscal year 2007.

Observation 2005-07:

Policies and Procedures Manual

Condition:  Currently, the District does not have written policies and procedures describing the conduct of its administrative functions.

Status as of September 30, 2006:  Condition is outstanding.  The Board however, has approved job descriptions in fiscal year 2007. 

Observation 2005-09: 

Purchasing Process/Purchase Order System

Condition:  The District currently does not have a written purchase order system.

Status as of September 30, 2006:  The condition is partially cleared.  A purchasing policy was approved in fiscal year 2007.  Although, the application of a purchase order system is being applied inconsistently.  QuickBooks, the software package the District uses for accounting, may be inadequate for implementing a purchase order system.

Observation 2005-11:

Develop and Document a Disaster Recovery Plan.

Condition:  the District has business property and interruption insurance.  However, it does not have a plan of action in case a fire, natural disaster such as a flood or tornado, a bombing or other terrorist act, should destroy its offices.  Such a disaster could strike at any time, perhaps without warning.

Status as of September 30, 2006:   The condition is outstanding.  The development and documentation of a disaster recovery plan is in progress.

 Excerpts from Sid Kilgore’s 30 April 2007 Audit
letter to ValienteHernandez, P.A.:

“III.  Other information.  With regard to other information in connection with pending or threatened litigation, claims, assessments, or other material loss contingencies known as of 30 September 2006, and from that date through 20 November 2006, the undersigned became aware during the period from 1 October 2006 to 20 November 2006 of a number of potential material issues which may have a bearing on the outcome of the instant audit of the District.”

“A.  Fiscal controls.  On or about 2 October 2006, certain concerns were raised by John Bakas regarding the management practices of the District and in particular, the adequacy of its internal fiscal controls.  He suggested, among other things, that remarks about the inadequacy of the internal fiscal controls of the District appearing in the last annual audit of the District subsequently had not been addressed by the District.”

“B.  Public records.  In an effort to investigate his concerns regarding the fiscal management of the District, on 4 October 2006, Mr. Bakas issued to District staff a written request for public records of the District pursuant to Florida Statutes Chapter 119."

“It is the understanding of the undersigned that the District had, in the past, received public records requests and generally complied with the statutory requirements for responding to, and meeting the substance of, those requests.  The above-referenced request of Mr. Bakas, however, was not immediately honored.  Allegations surfaced that staff had failed or refused to provide him with the records he had requested, and that certain members of the Board of Supervisors actively and intentionally directed staff not to comply with Mr. Bakas’ request, in derogation of Florida law.  The mishandling of Mr. Bakas’ request by the District resulted in an arguable violation of Florida Statutes Chapter 119 for which the District could face potential liability.”

Excerpts from attorney Roland Santiago’s June 29, 2007 letter to attorney Sid Kilgore re the Audit letter:

 “You [Sid Kilgore] improperly exceeded your directives by engaging in discussions with Supervisor John Bakas and billing the CDD for those discussions in the course of preparing your response to the auditors.  On November 7, 2006 you were advised that only Ms. Bowden would serve as your liaison and designated point of contact with the Board.  By engaging with discussions with Mr. Bakas you acted in contradiction to the directive that you only communicate with the designated liaison.”

Excerpts from John Bakas’ August 20, 2007 Objections and Rebuttal to Toni Leake’s Grievance:

“By filing this grievance District Manager Toni Leake seeks to take control of the CDD board and its attorneys by censorship of board-member comments and legal advice of CDD lawyers.”

"The grievance is evidence that District Manager Toni Leake intends, expects, or seeks to control information the CDD auditors have access to.”

“The grievance is evidence that District Manager Toni Leake intends, expects, or seeks authority to censor and control the CDD board’s lawyers regarding what comments or legal advice the CDD board may receive.”

“Additional objections and rebuttal to the grievance:

"1. The grievance filed by District Manager Toni Leake is frivolous on its face and serves to underscore my concerns about District Manager Toni Leake being ill prepared to serve in a government position authorized by chapter 190, Florida Statutes, requiring professionalism, skill, and knowledge of the law as it pertains to CDD operations. The grievance is unfounded."

"2. The grievance serves to underscore my concerns that the Lake St. Charles CDD is not properly managed and that the CDD board should hire a professional district manager."

"3. The CDD board has no jurisdiction to prevent, limit or control the comments of a board member regarding the poor job performance by CDD staff and the wasteful expenditures of special assessment funds collected from the CDD Homeowners ($1,120 annually from each single-family lot owner), and the poor condition of the community landscaping."

 More from the Audit Report:

         Audit Adjustments:  “There were audit adjustments that were proposed during the audit which cumulatively had a material effect on the financial statements.  Several material adjustments were proposed and booked to correct certain balances.  See Appendix A to this letter.”  -- ValienteHernandez, P.A., “Letter to Governing Body Required Under Statement of Auditing Standards (SAS) No. 61 and No. 90.”

       “The Rules of the Auditor General (Section 10.554(1)(h)(3) require that we address in the Management Letter any findings and recommendations to improve financial management, accounting procedures, and internal control.  In connection with our audit, we had such finding.  See the accompanying Exhibit A, Recommendations to Management, relating to the result of our due diligence in complying with the requirements under Section 10.544(1)(h)3.”  --  ValienteHernandez, P.A., “MANAGEMENT LETTER”

"I'm especially happy with our last audit report, which we have passed with flying colors."   -- District Manager Toni Leak tells homeowners in the September 2007 LSC Newsletter. (Full article available at LakeStCharles.org.)

Please read the Audit Report and the "Behind the Scenes"
correspondence for the full report and full correspondence.