Like Sisyphus, courageous journalists and auditors pushing tough stories up the hills
I don't usually write about public sector cases, unless they involve the Big 4 global auditors and/or public companies and banks. But public sector waste and fraud fighting is in the news!
“And I saw Sisyphus too, bound to his own torture, grappling his monstrous boulder with both arms working, heaving, hands struggling, legs driving, he kept on thrusting the rock uphill toward the brink, but just as it teetered, set to topple over — time and again the immense weight of the thing would wheel it back and the ruthless boulder would bound and tumble down to the plain again — so once again he would heave, would struggle to thrust it up, sweat drenching his body, dust swirling above his head.” Homer, The Odyssey
There is so much going on, including Warren Buffett's 2024 letter to shareholders going out while one of his subsidiaries, SPS Technologies, burns to the ground and creates a public health hazard in Abington PA. Just what we need when planes are crashing and colliding with each other every week since January 20.
Here's a phenomenal story — gift link — by my friend Joe DiStefano at the Philadelphia Inquirer:
SPS, owned by the Precision Castparts unit of multibillionaire investor Warren Buffett’s Berkshire Hathaway Corp., is one of a few Department of Defense-certified suppliers for some of the basic parts used in the Chinook helicopters built by Boeing at its Delaware County plant, the giant Boeing Stratolifter cargo plane, Tomahawk missiles, Apache Longbow and Black Hawk attack helicopters, F-15 fighter jets, and others.
In some cases it is the only approved supplier; the fire damage may force industry and the military to find other sources.
The company, once a paternal employer (neighboring Hallowell Park is named after the founding family; workers resisted repeated unionization efforts), has cut the Abington plant workforce by more than half, to 574, since 2003, when SPS, which also includes facilities in California, England, and other sites, was purchased by Oregon-based Precision Castparts.
Buffett has said he overpaid when his company bought the Precision Castparts group in 2016 for more than $30 billion. Five years later he acknowledged he had “paid too much” and overestimated future profits, and wrote off $11 billion of the purchase as a loss.
Yeah, Joe didn't know that last part until I reminded him, after an earlier story on the fire by other reporters.
There is also more news about CrowdStrike and Carahsoft, a story I did not write about in October when Bloomberg first did, but which I will say more about soon. Don't forget, the last two out of three companies Carahsoft got in trouble with, CrowdStrike and VM Ware, are both PwC audit clients!
And former Biden Administration CIO Tony Scott formerly of VMWare, is now CEO of Intrusion, Inc., another Carahsoft preferred vendor.
And CrowdStrike has its own troubles!
I don't usually write about public sector cases, unless they involve the Big 4 global auditors and/or public companies and banks.
But public sector waste and fraud fighting is in the news!
And, I am preparing to present this week an extended 4CPE workshop to internal auditors for the Springfield Chapter of the Institute of Internal Auditors (IIA) — which will include a significant number of state and local government auditors — and was looking at some new and notable cases of public sector fraud.
I have written about municipal fraud in the past, for example “The Madoff of Munis” for Forbes Magazine.
Orange County, CA, is in the news again and an old story of no-bid contracts and significant lack of formal procurement/contracting oversight, in particular during the COVID era when money was sloshing around to be handed out by state and local governments.
In this case, courageous internal audit professionals are pushing the political rocks uphill, demanding more controls over contracting.
How did it start?
The Orange County Register has the scoop:
Former Orange County Supervisor Andrew Do pleaded guilty to a bribery scheme that enriched himself and his family anywhere from $550,000 to over $700,000 in federal COVID bailout money meant to feed the elderly.
“It’s true. I have great sorrow for my actions,” Do said in court at the Ronald Reagan Federal Courthouse on Thursday morning. “I’m responsible for every word.”
Do channeled over $10 million in federal COVID bailout dollars to a nonprofit run by his daughter that federal prosecutors allege didn’t do almost any of the work it was paid for, according to his signed plea agreement...
Outside of the courthouse Thursday afternoon, Orange County District Attorney Todd Spitzer said “it was pretty monumental” that Do pleaded guilty.
“It’s not a secret, there are additional co-conspirators,” he said. “Our investigation is ongoing.”
Do’s bribery scandal also marks the second major corruption scandal to hit Orange County in less than three years.
A federal probe surfaced in Anaheim in 2022 that would eventually see the Angel Stadium deal collapse, along with Mayor Harry Sidhu resigning and agreeing to plead guilty to obstruction of justice for lying to federal investigators about trying to ram through the stadium sale for up to $1 million in campaign support.
Now the auditors want to look at more contracts and the county officials are pushing back on what they see as a usurpation of their authority. More Orange County Register:
One of Orange County’s top auditors is calling on county leaders to implement a new centralized, standard process for reviewing contracts after a former supervisor pleaded guilty to accepting bribes in exchange for contracts.
But county CEO Michelle Aguirre and other top county staff pushed back on that idea in their response to his report on Feb. 5, saying the recommendation was outside of his purview and saying they’ve already got oversight covered.
It’s the first public review of hundreds of millions of federal relief funds county leaders spent during the COVID-19 pandemic, large portions of which were approved by supervisors without any public discussion.
Aggie Alonso, the county’s internal-auditor, said that while he found no evidence more money was misspent in his initial review of nearly 60 “high risk expenditures,” he did have recommendations for how the county could increase oversight for future contracts...
Recommendations included adding new rules on when county staff could approve contracts without going out for a bid and implementing a new system that would help track whether contractors were delivering on their work.
“These enhancements will strengthen County oversight to ensure entities use funds properly and in accordance with their contract/agreement,” Alonso wrote in his letter to supervisors on Feb. 5.
Aggie Alonso is a CPA, CIA, and and holds a Certification of Risk Management Assurance from the Institute of Internal Auditors and a Bachelor of Arts degree in Accounting from California State University, Fullerton. Here’s his report.
It's an old story in Orange County, 30 years old!
What happened the last time? Every CPA of a certain age knows the story, because it involved gullible state authorities, taken in by fancy bankers, in service to making money off sophisticated derivatives and structured finance products. And this was 15 years before securitized mortgages brought the whole country — the world — to its knees in 2007-2009.
Here's a great story from the Orange County Register, by Teri Sforza from 2019, that explains what happened back then. Teri has been, lucky for her, at the OC Register for 31 years, and is currently the lead reporter on the OCR/SCNG's ongoing probe of fraud, abuse and death in Southern California's addiction treatment industry. Worth a subscription!
Orange County’s treasurer in 1994, Robert L. Citron, was an eccentric man. He had a strong affinity for Navajo jewelry. His closet held 300 ties he rarely wore. He composed 14-page odes to Chrysler automobiles. And, while he hadn’t graduated from the school, his love of USC football was such that his own car horn played the Trojan fight song.
In all of this, some people saw genius.
But the degree wasn’t the only thing missing from Citron’s resume. As a younger man he’d labored at a series of non-high-finance jobs; as a loan manager and car salesman. He landed in the county’s tax collection office in 1960, when county government was a less complex world. He rose to the level of department supervisor and, in 1970, ran for the elected job, handily winning the title of “tax man.”
A twist came three years later, when the county decided to save money by merging the offices of tax collector and treasurer. It seemed a natural fit: The tax collector took in hundreds of millions of dollars on behalf of the county, cities, schools and special districts; the treasurer’s office invested, accounted for and distributed that same money.
It didn’t matter that Citron had no background in accounting or investing. Or that he had never owned a single share of stock.
Perhaps predictably, in the first year that the jobs were combined, Citron stumbled. He bought securities from the highest bidder rather than the lowest one, his former assistant treasurer, Ray Wells, later testified.
Robert Citron leaves the jail commissary after serving the last day of his sentence in 1997. (Photo by Dave Yoder, Orange County Register/SCNG)
Citron’s inexperience meant he came to depend on advice, especially from Wells, who had invested the county’s cash for years. But Citron sought other advisers, too. Merrill Lynch, a financial behemoth aiming to sell him securities, became a source of key information. As conflicted as that relationship appeared, Citron came to think of Merrill as the county’s financial adviser.
In the wake of Proposition 13, passed in 1978, and a dramatic drop in property tax revenue, the pressure to deliver more money for cash-hungry local governments grew intense. So when Merrill salesmen began pitching Citron exotic investments – derivatives, reverse repurchase agreements, high-risk/high-reward securities (financial products that later would send the nation’s economy to the edge of a depression), Citron bought.
It worked. For years, Citron’s investments earned more than twice as much as those made by California’s state treasurer. Betting that interest rates would drop — always — Citron delivered hundreds of millions of extra dollars to the county and local governments. Others sung his praises.
“I don’t know how in the hell he does it,” said Thomas Riley, then chairman of the Board of Supervisors. “But he makes us all look good.”
Others also wanted in. City governments around the state pulled cash from their local treasuries to jump into Orange County’s investment pool, eager to share in Citron’s magic.
And, quite literally, that’s what Citron thought he had. To predict — perhaps even sway — financial markets, Orange County’s treasurer-tax collector consulted psychics, astrologers and a $4.50 star chart.
After Wells retired, young Matt Raabe became Assistant Treasurer, Citron’s right-hand man. Soon, Raabe’s boss informed him that there were two financial worlds — the “regular market,” and the “Citron market.”
“He believed he had tremendous influence,” Raabe would later say in an interview with the Orange County Register.
Citron lobbied for a new state law to allow county treasurers to borrow money against current investments so they could buy even more investments. That allowed him to earn interest on borrowed money — but only so long as the cost to borrow money was less than the money that could be earned.
Technically, the move is known as “leveraging.” Less technically, it’s called “gambling.” But, either way, the bill passed. Soon, Citron had leveraged some $7 billion public dollars into a $20 billion investment fund.
And then the inevitable occurred.
In the span of 10 months, rates skyrocketed from 3.25% to 5.5%. The market value of the bonds Citron had borrowed against plunged, forcing him to either invest more cash as collateral or sell the leveraged securities at a loss.
To avoid taking such a loss, Citron put up $650 million in additional cash. The county’s cash on hand shrank to $350 million.
And local governments — which held more than $7 billion in the pool — started to want their money back. It was a dangerous request. Defections would force the county to sell securities at bad time, turning paper losses into real losses.
Citron countered with a message of calm. He’d hold securities until they matured. All would be well.
“The portfolio is not failing, has not failed, and will not fail,” Citron told The Orange County Register. “We have a liquidity problem which will be solved and no one will lose any principal — if the participants keep their funds in.”
The last gasp of someone in over their head.
"The trade was going to work if I had more time."
See MF Global's Jon Corzine or FTX's SBF, from the New York Times:
BANKMAN-FRIED: I would have thought there would be a chance for a pathway forward here that would bring more value to customers then what would happen if you just sold everything off for scraps. I don’t have confidence. I can’t promise anyone anything, and it’s not really in my hands to a large extent, but I would think it would make sense to be exploring that. I think there is a chance that customers could end up being made a lot more whole or maybe even fully whole if there was a really strong concerted effort.
SORKIN: How would that happen?
BANKMAN-FRIED: There’ve been examples of this before in crypto history where this happened. Obviously, you can look at what happened with Bitfinex back a number of years ago where it got hacked and then ended up making over a few years’ period customers whole. There are a lot of assets that are on hand here, although many of them are not liquid. They were worth quite a bit more than the liabilities a month ago, even, let alone a year ago. There is at least a month ago there were or I guess, you know, three weeks ago, billions of dollars of potential funding opportunities.
Back to Orange County and Robert Citron in the obituary of Robert Citron in the New York Times:
The county declared bankruptcy on Dec. 6, 1994, citing paper losses of $1.64 billion, and the debacle, in one of the nation’s wealthiest, most conservative and most populous counties — the home of Disneyland and John Wayne Airport — attracted national attention.
After a grand jury investigation found that Mr. Citron had consulted a psychic and an astrologer as his investments shriveled, he pleaded guilty to six felony counts of financial fraud, all related to his frenzied activities to borrow ever more money and inappropriately shift it from account to account. (He was never accused of acting for personal financial gain.) He spent a year behind bars.
Mr. Citron blamed his Merrill Lynch broker for leading him astray. In testimony before the California Senate in 1995, he called himself “an inexperienced investor.” The broker, Michael G. Stamenson, responded that Mr. Citron was “highly sophisticated.”
All this reminds us of the importance, the necessity, the incredible work done by those who have always watched out for fraud, waste and abuse in federal, state, and local governments. People like Orange County's internal auditor Aggie Alonso and the 17 federal inspectors general (IGs), which newly inaugurated U.S. President Donald Trump fired.
My friend and former PwC colleague Richard Chambers wrote about how IGs work hard but are often up against the wall, always knowing that politics can undermine their effort to do the right thing.
For those who are unfamiliar with the U.S. IG model, these are (typically) officials nominated by the president and confirmed by the U.S. Senate. Their responsibilities are prescribed in the IG Act of 1978 (as amended):
1. to conduct and supervise audits and investigations relating to the programs and operations of the establishments (agencies);
2. to provide leadership and coordination and recommend policies for activities designed (A) to promote economy, efficiency, and effectiveness in the administration of, and (B) to prevent and detect fraud and abuse in, such programs and operations; and
3. to provide a means for keeping the head of the establishment and the Congress fully and currently informed about problems and deficiencies relating to the administration of such programs and operations and the necessity for and progress of corrective action.
The IIA weighed in on the terminations, expressing “concerns about maintaining the independent oversight critical to government accountability.” While acknowledging Trump’s authority as president to remove IGs, The IIA urged “adherence to the established legal processes to preserve public trust.”
I share the disappointment that The IIA and many others have expressed over removal of these incumbent IGs. But I am not surprised by the move. Suggestions by many that the president’s actions are unprecedented are not supported by the facts. In fact, as the Congressional Research Service (CRS) recently noted, “one of President Ronald Reagan’s first official acts upon his inauguration on January 20, 1981, was to remove all 15 confirmed and acting IGs then working across the executive branch. This action appears to have caused bipartisan concern in Congress.”
So, what does all of this mean? To me, the firings are yet another reminder of the illusiveness of audit independence. This is not limited to the U.S. federal government, or any government in the world, for that matter. The challenge to internal audit independence remains one of the many inconvenient truths our profession faces. I suspect that a day does not go by when a corporate CAE is not removed by a CEO (or even by a CFO in some organizations) in an effort to check the independence of the function. That is why audit committees have a vital role to play in ensuring internal audit independence.
Coincidentally, or not, I have had more than one person suggest I should join Musk’s DOGE team: The immigration officer at the Canadian border in January when I told him I was there to speak at an accounting conference about fraud and my own brothers and friends of the family when I was down in Florida.
Here's what I said to Richard Chambers on LinkedIn and the comments of another internal audit leader I respect a lot, Hal Garyn:
© Francine McKenna, The Digging Company LLC, 2025