What Auditor Said, How Citron Replied

The following is excerpted from the county auditor’s Aug. 5, 1993, report on then-Treasurer-Tax Collector Robert L. Citron’s operation:

The weaknesses we found seemed to result from the control environment in that management’s style and methods for running day-to-day operations reflected inattentiveness to complying with these policies and procedures. . . .

The department head made all day-to-day investment decisions and also executed the transactions without anyone else involved to provide segregation of duties or oversight. An internal investment committee made up of the department head, the assistant department head, and the chief of divisional operations was created to provide input on investment strategy and types of investments that should be considered. This committee functioned in an advisory capacity only. When the department head deviated from investment guidelines established by Government Code or the investment committee, he did so without consulting anyone in the Treasurer’s Office or on the committee. . . . We were advised that most of these actions were taken to increase yield. . . .

Government Code Sections (GCS) 53601, 53635, 53637, 53638, and 53651 mandate guidelines for investments and depositories that the Treasurer can use for the County’s monies. . . . Our testing revealed some violations of the GCS. We were told that the instances were conscious decisions made to maximize returns. . . . In addition . . . the Treasurer invested $75 million in a negotiable certificate of deposit from Columbia Savings & Loan and $7.5 million in a time deposit from Fidelity Federal Savings and Loan. . . . The Treasurer lost no money with either institution, but we found that Fidelity was rated by Thompson Bank Watch as D/E and that Columbia went bankrupt in 1991. Because of the fiduciary responsibility that the Treasurer has for the County’s monies, it should only invest with institutions maintaining high ratings. . . .

. . . We also found that $25 million of medium-term notes were sold on June 28, 1991, and that similar amounts and types of notes were purchased on July 2, 1991. We were told that the department head entered into these transactions at the request of the broker, Merrill Lynch, to help the broker meet financial statement ratios required by the Securities and Exchange Commission. We reported a similar finding to the Treasurer in a letter dated December 23, 1991, concerning transactions with Merrill Lynch in late December 1990 and early January 1991. . . .

. . . As this is an unusual transaction, the decisions to enter into it should be made by the investment committee, and the reason for it should be documented. . . .

We also recommend that risky or unusual transactions be prudently entered into with documented decisions made by the investment committee and with advice from County Counsel. . . .

The Treasurer documented policies and procedures as an ongoing task with a low priority. . . . We found errors in the preparation of financial analyses and reconciliations that were attributable to either the lack of written procedures or the incompleteness of procedures that were documented.

The following is excerpted from Robert L. Citron’s response to the accountant’s report, dated August, 1993:

We do not agree that management philosophy or style should be changed at this time. The methods by which a department head managed his fiduciary responsibilities is determined by his own personality and abilities as well as his evaluation of the personalities and abilities of his subordinate managers and staff. . . . We believe the current management style, although not the norm for County government, is the best one for the Treasurer-Tax Collector. . . .

We always attempt to comply with government code requirements for investments. It is important to note that the determination of available cash for investment is an inexact art; sometimes we have overestimated our projections of month and cash balances, and that has resulted in our holding more than legally allowed levels of certain securities. We continue to attempt to improve this system.

The words “risky,” “unusual,” and “prudent” as applied in the audit recommendation are difficult for us to objectively evaluate. Those are subjective terms that are subject to a wide range of opinion. . . . We are not as conservative in our investment strategies as some of our contemporaries, and because of that, some transactions that are usual for us may in fact be unusual for others. We also engage in many complex investments, some which are too complex for smaller government entities to utilize. That would not mean those investments are risky.