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VIEWPOINT: Comparing Enron, Citron

VIEWPOINT: Comparing Enron, Citron

by John Moorlach

Fortune magazine recently announced that Enron was the fifth-largest corporation in sales volume. That’s an interesting statistic for an entity that filed for bankruptcy protection. But wait,wasn’t Orange County the fifth most populated county at the time of its filing for bankruptcy protection?

Enron is still in the headlines and this trend will continue as more revelations are provided to the public. The OC financial debacle, caused by former County Treasurer Bob Citron’s improper investment strategies, generated headlines for so many consecutive days that the last topic to do so for the local papers was World War II!

The familiarities continue:

& #149; Both Enron and Citron happened suddenly.

& #149; Both had possible criminality, with deceit by key officers.

& #149; Both misstated actual earnings.

& #149; Both used derivatives.

& #149; Both had boards that were ineffective and useless.

& #149; Both lulled investors into believing they were the epitome of perpetual money-making machines.

& #149; Both were able to bamboozle the rating agencies. At least this time the Securities and Exchange Commission is weighing curbs on credit-rating firms.

& #149; Both had audit committees that were left wanting (OC didn’t have one at all).

& #149; Both had incompetent outside auditors. KPMG Peat Marwick endured a suit pursued by the California Board of Consumer Affairs. Arthur Andersen is imploding due to the criminal pursuit by the Justice Department.

& #149; Both auditing firms publicly touted their clients’ credibility and financial soundness to the marketplace. The audit manager from KPMG was recorded on tape attesting to the virtues of Citron’s investment pool literally weeks before its implosion. Arthur Andersen sang the praises of their innovative “integrated audit” pioneered at Enron.

& #149; Both had more red flags than a May Day parade.

& #149; Both had men at the top who would later admit that they didn’t know what was going on.

& #149; Both had whistle blowers who were summarily ridiculed and abused by employers and the press.

& #149; And the media, oh, the media missed both of the stories-in-coming, too.

& #149; Immediately after the announcement of OC’s financial predicament, the then-chair of the SEC was publicly outraged with the county and municipal finance, in general. The current chair of the SEC has inserted himself in the Enron meltdown as well.

& #149; Both generated state and federal hearings and investigations.

& #149; Both increased the amount of disclosure required.

& #149; Prior to OC’s bankruptcy filing, employee unqualified deferred compensation arrangements were forfeitable under Internal Revenue Code Section 457. After the filing, Congress changed the law to make these retirement funds non-forfeitable. We’re seeing that Enron’s 401(k) plan has triggered pension plan discussions in Congress, too.

& #149; Both resulted in numerous innocent people losing their jobs.

& #149; Both lost funds of large magnitudes. OC at $1.64 billion and counting.

& #149; Both called into question the integrity of the nation’s financial reporting system. OC can claim credit for Government Accounting Standard Board Statement No. 31.

& #149; Both have numerous financial advising firms being sued for damages.

Doesn’t that sound familiar? Which is where a critical emphasis of the blame needs to be directed.

Many firms made a lot of money knowing that they were building a house of cards. Everything was fine until the economic winds changed. Overnight, geniuses turned into crooks. But they made money while the sun shined at the expense of others. Analysts were bought off. Lawyers lied. Accountants choked on their arrogance.

The patterns that appear are very unsettling. I suggest that there are three.

The first is that liars do have their day of reckoning.

The second is that the consequences of their actions hurt many more people than just themselves.

And, finally, the suffering is a necessary part of “business nature.”

The lesson provided in the “Sermon on the Mount” about the wisdom of building one’s house on a solid foundation is appropriate to this situation. Corporate America will deal with the winds of economic cycles and the floods of market changes and weather them. But those built on sand will not withstand the pressures. Their sins will be revealed. And many innocent and unsuspecting participants will be hurt.

We live in an environment based on trust. Sometimes we are made to look gullible by the liars among us. Regretfully, when money talks the truth is silent.

The answer? Let the perpetrators be punished. And punished severely. Arthur Andersen is paying the ultimate price. I would guess that partners in every CPA firm are drilling ethics, integrity and verification into their staff members. They have everything to lose now: their money and their reputations.

This brings me to my disturbing third point. It may be good to go through a Citron/Enron debacle from time to time. It is painful, but it provides an opportunity to remove old growth. It cleans out the liars, cheats and incompetents. It is a shame that the innocent inhabitants of the forest are singed in the process. However, after a fire, new growth comes in and a fresh start occurs. Let’s hope everyone learns their lessons, builds stronger foundations and operates in a more truthful and transparent manner.

Moorlach is the Orange County treasurer-tax collector.

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