Several weaknesses in accounting practices at the Florida Thoroughbred Breeders and Owners Association and a recommendation to more aggressively pursue an investigation of the impact of an embezzlement two years ago were included in a special report recently submitted to the FTBOA board of directors.
FTBOA president Fred Brei said the report does show a lot of work needs to be done but added several of the shortcomings have already been addressed. He also said the association is pursing prosecution through the state attorney’s office of a former employee who stole an undetermined amount of money by fabricating sales transactions.
Pam Mattox, a FTBOA member and a certified public account who does auditing and tax work, conducted the inspection of the association’s books and accounting practices. She was not paid anything for the work she did on her own time over a period of three to four months. She was appointed as an adviser to an FTBOA audit committee in December following a members meeting during which a lot of grievances were aired and accusations made.
“The reason I volunteered my time is that I wanted to bring some resolution to the dispute,” said Mattox, who stressed in her report that what she did should not be considered an audit, rather an inspection of the records.
The main problem areas she found were:
• Proper internal reviews of credit charges were not being performed. She found an unusual pattern in payments to computer expense accounts, showing where disbursements had abruptly ceased. Mattox said in a later interview she had not been aware embezzlement had occurred when she found this pattern and asked FTBOA executives whether an embezzlement had occurred or was suspected. She said she was told embezzlement was identified as the cause.
• The trust fund, which includes all money for state incentive awards, is not managed by a general ledger system. Instead, incentives are managed on an Excel spreadsheet and paid out by writing checks. The problem here is that figures in the spreadsheet can be changed without a record of when they are changed and who made the changes. General ledger accounting software creates an audit trail for all changes. Mattox said she sees no reason an organization like the FTBOA, which is responsible for administering a trust worth $8-$10 million, should not be operating on a more advanced level.
• A proper investigation of the embezzlement was never performed. Mattox said her inspection “points to an embezzlement in excess of $100,000, not $10,000 as presented by the Executive Director to the board.”
“The Association owes it to its members to pursue a full investigation as the amount could be much larger because of the employee’s longevity with the Association,” Mattox wrote in her report.
• Computer equipment that was retired was allowed to leave the FTBOA offices without the hard drives destroyed, creating the possible security breach of members’ information. Members were never notified of this possibility.
“In conclusion, the FTBOA and FEP (Florida Equine Publications) are in need of policies and procedures to prevent future embezzlement and security breaches,” Mattox wrote. “It is discouraging that the embezzlement occurred and the removal of computer equipment occurred and no changes were made at the Association. It appears business continued as usual.”
Mattox did note a review of the general ledgers generated from the accounting software used for the administration of the trust fund did balance with financial audit statements and that no problems with the balances of the trust itself were found.
Brei said the association has had a new chief financial officer since the embezzlement occurred and has already made progress in fixing the problems Mattox found. He said the association is pursuing a fully integrated accounting system that will connect the administrative functions of the trust, the management of the trust fund itself, and incorporate racing information obtained from The Jockey Club to verify who qualifies for incentive payments.
“We were using a system that might have been adequate 20 years ago but was not appropriate today,” Brei said. “What we are looking for right now is an integrated system that pulls it all together. Last Thursday (Aug. 30), I asked our IT man to contact the The Jockey Club to see if they have a system. They don’t have an off-the-shelf solution but they are going to give a quote on creating a system that may help other associations.”
As for how the embezzlement was handled, Brei said the former employee had sold the FTBOA $95,000 worth of computer equipment he passed through a fabricated account and marked up about 10%.
“He took about $10,000 to $12,000 in profit,” Brei said. “The officers got $10,000 in reimbursement. We got the money, and the board did not want to go through tying this up in court for a couple years and spending 10 times the amount for the cost of prosecution. It was not about avoiding transparency, it was a business decision.”
The FTBOA did follow up with its own internal investigation to get some assurance that the $10,000 to $12,000 loss was really the extent of the damage. The investigation revealed that the FTBOA’s inventory control was so poor it could not adequately match products to invoices, according to Brei.
“We hit a dead-end of what we could put our hands on,” he said. “Under subpoena, (the state attorney’s office) can put their hands on things we don’t have access to.” The FTBOA contacted the state attorney’s office about six weeks ago, within about five days of when Mattox and the audit committee was finishing up their work.
Brei also said the association has made other accounting policy changes. Previously broad catch-all accounts have been divided into more specific categories. For example, an account that would have been called “office supplies” has now been subdivided into categories for ink cartridges, copy paper, etc., according to Brei.
The board of directors has also changed the association bylaws to state the chief financial officer no longer answers just to the executive vice president, the position that has been held by Richard Hancock since 1988. According to Brei, the CFO now reports equally to the executive vice president and the FTBOA officers.
The FTBOA fired the CFO who was in charge when the embezzlement occurred but Brei was asked whether Hancock also bore responsibility for the weaknesses in the accounting policies and systems that allow the embezzlement to occur undetected.
“I think he should have caught it,” Brei said. “He is the man that should have seen that we had an appropriate system of accounts.”
When Hancock was contacted, he said there was really nothing he could say.
“This is in the hands of the audit committee and either the chairman of that committee or the president should be the ones to comment,” he said.
Hancock announced back in June he intended to retire in 2012. As of now, he is expected to continue working full-time until the end of the year and then work two days a week on legislative issues until his contract expires in August 2012.
Despite all the problem, Brei believes a majority of the FTBOA membership still supports the organization and the board.
“We have been aggressive in dealing with these problems in the past 10 months,” Brei said. “My experience during that time is that we have 10% of the membership that feels all of these things were done in a non-transparent way and not handled right, but the other 90% seems to be ‘let’s just get this out of the way and move on with it.’ That same 10% will never believe, even when we’re done, that it is right.”