ORANGE COUNTY IN BANKRUPTCY : Auditor-Controller Says Others Ignored His Citron Concerns

On the day the most serious irregularities yet in the county fund became public, County Auditor-Controller Steve E. Lewis went on the offensive, issuing a letter stressing that his office “did its job” and that he had acquitted himself better than most.

In a defensive 5 1/2-page letter addressed Friday to “the Citizens of Orange County, My Employees, Friends and Family,” Lewis said his office “did more than others with oversight responsibility in pointing out concerns with (Treasurer-Tax Collector Robert L. Citron).”

Lewis laid blame on several doorsteps, including the County Administrative Office, the five county supervisors and the accounting firm KPMG Peat Marwick, the county’s independent auditor.

Each ignored warnings from his office, Lewis said, in some cases assuring him that all was well.

Lewis’ unusual public disclaimer comes one day after news accounts that investigators for the district attorney and county supervisors are questioning what role the auditor-controller may have played in the improper diversion of $85 million of other public entities money into an obscure county account.

In his letter addressing his role in the financial crisis, Lewis said he could not be faulted for failing to spot problems with the fund because he had “continually” been reassured by Citron, Schneider and his staff that “things were under control.”

Lewis said Schneider and his staff, “clearly understood that the Auditor-Controller had concerns about the amount of borrowing being done to earn extra interest . . . As interest earnings grew and surpassed budgeted projections, we asked questions and both the Treasurer and the CAO gave reasonable explanations.”

Schneider also ignored a letter he wrote in June, 1994, Lewis said, in which he objected to the county issuing retirement bonds and “the large amount of bonds/notes being issued for the sole purpose of making additional interest revenue.” The letter was copied to each of the supervisors, he said.

“Instead of being pulled along by the pressures of the budget and the financial banking community trying to make a buck, we need a very strong and visible policy in regards to what we should or should not be doing in the arbitrage arena,” Lewis wrote in his June letter.

After sending the letter, Lewis said, he never heard back from any supervisor.

Friday, Supervisor Roger R. Stanton scoffed at Lewis’ public letter and disputed that some of the information had been circulated to his office.

“(Lewis) has not given me a straight answer to any question I’ve asked him since this whole thing happened,” Stanton said.

Supervisor Gaddi H. Vasquez said he had “serious concerns” about the auditor’s office. Schneider did not return a phone call for comment.

But Lewis wrote in his letter Friday that he was one of the few who was “not afraid” to be “outspoken” in his concerns about Citron.

His office questioned Citron’s management style and the control environment in his office in internal audits in 1987 and 1993 and recommended the creation of an oversight committee to monitor investment strategies. After Citron refused to participate, the committee was abandoned.

“The Auditor-Controller’s role . . . is not one of setting policy,” Lewis wrote. “We make recommendations to management and its up to them to determine the risk and decide whether or not to implement the recommendations.”

Lewis said any suggestions that his office should have known Citron was acting improperly are “unfair and unrealistic.”

If anyone were to blame for giving Citron ever-widening investment freedom, it was the Board of Supervisors, Lewis said. The board passed resolutions giving Citron unrestricted ability to use reverse repurchase agreements in his investment strategies and the “unusual ability” to invest out for as long as a decade, he said.

“The auditor-controller was never consulted,” he said.

Lewis said he also asked Peat Marwick to look at Citron’s investment program during its 1993 and 1994 independent audits of the county’s financial statements.

In its 1993 audit, Peat Marwick found no major problems with the treasurer’s office.

“Based upon our audits, requests made to our outside auditor, assurance given by the Treasurer and CAO, and the oversight given to the pool by Wall Street and others, we had no reason to exercise more than our normal review processes for transactions made by the Treasurer,” Lewis wrote.

Times staff writer Matt Lait contributed to this story.