Posted on 09/17/2005 10:03:32 AM PDT by NormsRevenge
Private auditors have found that San Diego overstated its net assets by more than $640 million in fiscal 2002 – a problem that portends greater difficulty for the city's restoration to sound fiscal health.
The city's net assets will be lowered almost 10 percent from their reported total of $6.8 billion, a miscalculation used in three bond offerings, which opens the city to possible lawsuits and new federal sanctions and fines.
The errors include the double counting of roads and bridges, delays in depreciating the value of water and sewer plants, and the inclusion of abandoned capital projects as well as improvements made to the San Diego Zoo by the leaseholder, the San Diego Zoological Society.
KPMG, which is auditing San Diego's 2003 books, told the City Council last month that its findings would lower the city's net assets by about $640 million for that year. The city Auditor's Office released details of the overstatements this week in response to questions from The San Diego Union-Tribune.
Thirty corrections will reduce by 9.3 percent the net assets San Diego reported as of June 30, 2002, according to a document released by City Auditor John Torell that calculated the overstatement at nearly $641 million.
By comparison, Enron restated about $580 million in revenue in 2001 for the previous five years, an amount described in published reports as a record corporate restatement at the time.
Deputy Mayor Toni Atkins called the accounting revelations "really quite astounding" but said she believes the range of problems won't be repeated.
Assets overstated
Because of errors found by outside auditors, San Diego will have to lower the $6.8 billion in assets it claimed in 2002. The overstatements include:
$105 million for listing San Diego Zoo assets as the city's.
$190 million for capital projects that were abandoned or never completed.
$147 million for double counting assets such as roads and bridges.
$147 million for depreciation delays of water and sewer plants.
$48 million for citing a Padres contribution toward the team's new ballpark as a city payment.
"We're all somewhat disturbed and quite surprised to see this information," Atkins said. "I think it means we're changing a culture and a history of practice within the Auditor's Office and the city."
The disclosures follow admissions by city officials last year that they had masked a mounting pension deficit from bond investors and overcharged residential ratepayers for sewer services.
The well-publicized pension and sewer problems have spawned lawsuits and federal investigations, and outside experts such as the dean of the Levanthal School of Accounting at the University of Southern California say the city could face more of the same in the wake of its accounting errors.
"You don't know whether this was purposeful or this was a mistake that was made in a very big way and no one was sufficiently skeptical about it," Dean Randy Deatty said.
City Manager Lamont Ewell said KPMG is "going back nearly two decades" in recalculating the assets for the fiscal 2003 audit. That audit so far has cost $3.1 million. He said that the city's bonds are insured, so investors shouldn't fear any losses, and that the Securities and Exchange Commission knows about KPMG's diligence.
He added that he resents any reference to San Diego as a sort of "Enron by the sea," an allusion made in national newspaper headlines last year.
"No one in this city has walked out of here with bags of money like the executives of Enron," Ewell said. "These are book value losses and errors that were made as a result of not being thorough."
San Diego's overstatements include:
$190 million for recording as assets capital projects that were abandoned or never completed.
$147 million for double counting infrastructure assets, including roads and bridges.
$147 million for waiting too long to begin depreciating assets such as new water and sewer plants.
$105 million for logging buildings and development at the zoo in Balboa Park as city assets instead of as leasehold improvements made by the Zoological Society of San Diego.
$48 million for classifying a Padres contribution toward the team's new ballpark as a city payment. KPMG, which began its work in April 2004, unearthed most of the errors. Others were identified by Torell's staff and by Macias, Gini & Co., the firm hired to conduct the city's fiscal 2004 and 2005 audits.
Auditors are now trying to verify how many water and sewer pipes the city has and work to ensure the inventory of land the city is holding for resale is assessed at the proper value. KPMG needs city officials to complete this work and its fiscal 2003 financial statements to conclude the audit.
Torell, who next week will begin presenting monthly financial reports to the City Council on San Diego's revenue and expenses, is trying to overhaul the Auditor's Office, which he took over in March.
He said some of the problems stem from the city's use of a geographic information system to log its assets that isn't linked to an accounting database, and he is working to install a new process to eliminate errors.
"Things can't get any worse," said Torell, whose predecessor announced his resignation just before the January 2004 disclosure of the city's pension deficit, which triggered investigations by the U.S. attorney and the SEC.
Former Auditor Ed Ryan, who held the job for more than 20 years, declined comment through his attorney.
Gary Caporicci, a partner in a firm that certified San Diego's 2003 books in an audit that city officials never made public because of the pension-deficit disclosure problems, did not return a telephone call seeking comment.
City Attorney Michael Aguirre said the "creative accounting ... destroys our financial statements for 2002."
"It doesn't look like any of the bondholders are going to be damaged," he added, "but it's certainly something that can be taken into consideration by the SEC."
Torell said the errors accumulated over the past two decades and appear to be unintentional. However, he said, they should not have been made in the first place and should have been caught by the auditing firm of Caporicci & Larson and a firm it acquired in 2003 that had won San Diego's auditing contract 10 years earlier.
"It shows oversight maybe bordering on lack of due care," Torell said.
Caporicci has said a city's financial statements are never free of mistakes. The comment appeared in a July 15 report by a law firm that interviewed him while investigating possible illegal acts related to San Diego's financial disclosures.
"The issue is whether the mistakes render the financial statements materially misleading, and (Caporicci) believes that was not the case with San Diego's (fiscal year 2002) financial statements," the report stated.
Steven Feinstein, a professor of finance at Babson College, a well-regarded business school near Boston, said it's not uncommon for corporations to restate their finances but fairly unusual for a big city to do so.
However, he said, San Diego bondholders could file securities lawsuits only if their bonds fell in value, and they could win in court only if they proved the drop stemmed from the city's financial revelations.
Arnold Rosenberg, a professor at San Diego's Thomas Jefferson School of Law who teaches commercial transactions and bankruptcy, said the latest revelations will at the very least draw the attention of investors if San Diego bonds begin trading at a loss on the secondary market.
"They are certainly going to consider demanding their money back," he said.
In that situation, Rosenberg said, a blame game between the city and its independent auditing firm could escalate.
"The auditors may try to pin the blame on the city," he said. "But, of course, the job of an auditor is to look behind the numbers provided by the city and verify them."
Deatty, the dean of accounting at USC, said skepticism is an auditor's best trait but that it can only go so far.
"There are limits to the technologies of auditing and there are limits to how much society is willing to spend to have auditors check every transaction," Deatty said.
Yet, because of the unusual circumstances, he said he wasn't surprised by the money and time being spent by KPMG and the city on the 2003 audit.
"The auditing firm is looking under every stone right now, and the SEC is going to do the same type of investigation," Deatty said. "And you may discover that some of these things were simple mistakes and some of them may be a lot more serious."
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
We can easily reduce these 641 million $1 mistakes to a much lower 641 one million dollar mistakes. There. That's now that's not too bad for a large city.
And what exactly do you call those obscenely bloated pensions if not bags of money?
Bondholders get to sue government when their bonds fall in value, but landowners are screwed when government takes their property value.
That's equal protection for you.
Hey wait! I thought the property owner always was entitled to any and all improvements to the property by any leaseholder at any time!!! What's wrong with them claiming said improvements? That's NORMAL!!! (somebody please correct me if I'm wrong... no! Wait!! That's not possible!!! forget about it)
Actually... That's SUPREME STUPIDITY!!! (especially on the part of Judge Kennedy from Sacramento who only got in because Bork was "Borked!")
SOOOOOOO glad we left!
WOW! Yes indeed!
I would rather have a fiscal screw up than a huricane.
BWHAHAHAHAHA.
Like that's a choice.
My poor home town is looking almost as corrupt as NO.
Hey, hey, hey....greetings from the Colorado River....I'm a Zonie and LOVING IT!
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