ORANGE COUNTY IN BANKRUPTCY : Report Lists Faults in Treasurer’s Office

The Orange County treasurer’s office was plagued by a lack of written investment guidelines, shoddy oversight, outdated technology and a widespread lack of internal control mechanisms, according to a report released Tuesday by Arthur Andersen & Co.

In the 140-page report, the accountants hired in the wake of the county’s unprecedented bankruptcy filing identify 31 weaknesses in internal controls, ranging from shared computer passwords to a lack of accountability for transfers among accounts in the investment pool that the county managed for nearly 200 local agencies.

The report suggests slashing the office’s staff by 40%--eliminating eight jobs--and chopping operating expenses by more than $500,000.

“You basically had no oversight,” said interim Treasurer Thomas E. Daxon, who will leave his post Friday. “You put, ultimately, $20 billion in the hands of one individual and that was a mistake.”

Chris Paskach, a partner with Arthur Andersen, echoed Daxon’s criticism of the office, which for more than two decades was run by Robert L. Citron, who resigned in disgrace Dec. 4.

“There were some serious control problems. It was really pretty much a one-man operation, and the control environment reflected that,” Paskach said. “Some of the major control weaknesses that we identified revolve around the segregation of duties. The checks and balances need to be strengthened and there needs to be oversight.”

Arthur Andersen also recommends that the treasurer’s office stop keeping financial records for local school districts, contract out for management of the county’s deferred-compensation plan and hire private firms to handle investments for the pool.

The report hammers Citron for having no written policies on investment strategy, maximum amounts to be invested in various instruments, or even the most basic office operations.

“Purchases and sales of investments were determined by the treasurer without effective oversight by internal or external parties,” the report states.

“The treasurer’s monthly reports are not required to disclose results, status or makeup of the investment portfolio. . . . The treasurer’s office operating policies and procedures were not documented, thereby increasing the probability that errors or irregularities could occur and not be detected in a timely manner.”

Arthur Andersen suggests that the treasurer’s office be required to report the market value of its investment portfolio monthly--instead of carrying all its investments at book or face value--and also provide written reports showing the daily balances and reconciling monthly statements from brokers handling county funds.

Repeatedly, the report notes situations in which the same employees were allowed to initiate and then approve transactions, resulting in no accountability. The report highlights examples of overlap within the staff, and other areas in which too much responsibility was concentrated in the hands of a few.

“Roles and responsibilities are not clearly defined . . . resulting in inefficient deployment of human resources,” Arthur Andersen states.

Many of Arthur Andersen’s recommendations have already been met by the appointment of a five-member treasurer’s oversight committee, which was given the thick report at its first meeting Tuesday afternoon. Also, written policies have already been adopted.

Times correspondent Shelby Grad contributed to this report.