posted 07-07-2004 06:38 PM            

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Pentagon "misplaces" $2.3 trillion
"According to some estimates we cannot track $2.3 trillion in transactions."
(Donald Rumsfeld, quoted on CBS News, 29/1/02)

Rumsfeld admitted that the Pentagon misplaced $2.3 trillion. This money has disappeared – nobody knows where it's gone. Government officials have blamed the accounting systems – the US Department of Defense has failed to produce independently audited accounts since 1995.

See the full CBS News story: http://www.cbsnews.com/stories/2002/01/29/eveningnews/main325985.shtml
(Note: the full CBS text is also given below)

US Department of Defense confirms trillions "loss"
The $2.3 trillion figure is confirmed in the following DoD documents (which include transcripts of testimony before the House Budget Committee and a speech by Rumsfeld):
http://www.defenselink.mil/news/Apr2002/n04032002_200204033.html http://www.defenselink.mil/speeches/2001/s20010910-secdef.html http://www.defenselink.mil/news/Feb2002/n02202002_200202201.html http://www.defenselink.mil/speeches/2001/s20010711-depsecdef2.html

For related details see: http://www.anxietyculture.com/bulletin030903.htm

CBS News story 29/1/02: The War on Waste
(CBS) On Sept. 10, Secretary of Defense Donald Rumsfeld declared war. Not on foreign terrorists, "the adversary's closer to home. It's the Pentagon bureaucracy," he said.

He said money wasted by the military poses a serious threat.

"In fact, it could be said it's a matter of life and death," he said.

Rumsfeld promised change but the next day – Sept. 11 – the world changed and in the rush to fund the war on terrorism, the war on waste seems to have been forgotten.

"According to some estimates we cannot track $2.3 trillion in transactions," Rumsfeld admitted.

$2.3 trillion – that's $8,000 for every man, woman and child in America. To understand how the Pentagon can lose track of trillions, consider the case of one military accountant who tried to find out what happened to a mere $300 million.

"We know it's gone. But we don't know what they spent it on," said Jim Minnery, Defense Finance and Accounting Service.

Minnery, a former Marine turned whistle-blower, is risking his job by speaking out for the first time about the millions he noticed were missing from one defense agency's balance sheets. Minnery tried to follow the money trail, even crisscrossing the country looking for records.

"The director looked at me and said 'Why do you care about this stuff?' It took me aback, you know? My supervisor asking me why I care about doing a good job," said Minnery.

He was reassigned and says officials then covered up the problem by just writing it off.

"They have to cover it up," he said. "That's where the corruption comes in. They have to cover up the fact that they can't do the job."

The Pentagon's Inspector General "partially substantiated" several of Minnery's allegations but could not prove officials tried "to manipulate the financial statements."

Twenty years ago, Department of Defense Analyst Franklin C. Spinney made headlines exposing what he calls the "accounting games." He's still there, and although he does not speak for the Pentagon, he believes the problem has gotten worse.

"Those numbers are pie in the sky. The books are cooked routinely year after year," he said.

Another critic of Pentagon waste, Retired Vice Admiral Jack Shanahan, commanded the Navy's 2nd Fleet the first time Donald Rumsfeld served as Defense Secretary, in 1976.

In his opinion, "With good financial oversight we could find $48 billion in loose change in that building, without having to hit the taxpayers."

(From: http://www.cbsnews.com/stories/2002/01/29/eveningnews/main325985.shtml)

posted 07-07-2004 10:14 PM            

The U.S.-led occupation authorities were much quicker to channel Iraq's own money, expending or earmarking nearly all of $20 billion in a special development fund fed by the country's oil sales, a congressional investigator said.

Only $366 million of the $18.4 billion U.S. aid package had been spent as of June 22, the White House budget office told Congress in a report that offers the first detailed accounting of the massive reconstruction package.

Thus far, according to the report, nothing from the package has been spent on construction, health care, sanitation and water projects. More money has been spent on administration than all projects related to education, human rights, democracy and governance.

Of $3.2 billion earmarked for security and law enforcement, a key U.S. goal in Iraq, only $194 million has been spent. Another central objective of the aid program was to reduce the 30 percent unemployment rate, but money has been spent to hire only about 15,000 Iraqis, despite U.S. promises that 250,000 jobs would be created by now, U.S. officials familiar with the aid program said.

U.S. officials involved in the reconstruction blame security concerns and bureaucratic infighting between the Pentagon, the State Department and the White House for delays in the allocation of funds. By the time the Pentagon's contracting office in Baghdad began awarding contracts, the risk of kidnapping and other attacks aimed at foreign workers was so dire that many projects never began. Several Western firms that won contracts have summarily withdrawn their employees from Iraq.

Fewer than 140 of the 2,300 reconstruction projects that were to be funded with the U.S. aid package are underway, the officials said.

Officials with the contracting office contend the amount of money actually spent does not reflect the full scope of work being performed. A more accurate figure, they said, is the amount of money allocated for reconstruction work. Just over $5.2 billion had been allocated as of June 22, according to the White House budget report.

"The money that is disbursed is typically not disbursed until the work is completed, so it doesn't give the best picture of what's going on," said John Proctor, a spokesman for the contracting office. "Some of our projects take months, or even years, to complete."

Proctor said actual spending had increased to $400 million since the figures were provided to the White House on June 22.

Spending patterns have been different with the Iraqi money. The Coalition Provisional Authority, the now-dissolved U.S.-led occupation administration, spent or locked in for future programs more than $19 billion from the $20 billion Development Fund for Iraq, which was established by the U.N. Security Council to manage Iraq's oil revenue, said Joseph A. Christoff, director of international affairs and trade at the General Accounting Office, the watchdog arm of Congress.

Christoff said in a telephone interview on Saturday that all but $900 million of the fund had been spent or allocated by the time the United States transferred political authority to an interim Iraqi government last Monday.

Some Iraqi officials have criticized the contrasting spending practices. The occupation authorities "came here and spent a lot of our money but very little of theirs," said a senior Iraqi official, who spoke on condition of anonymity on the ground that criticism could affect his relationship with the new U.S. Embassy here.

The official did not contest the CPA's decision to use the development fund money to pay the expenses of running Iraq's government during the occupation, but he condemned spending on what he called "less essential projects that should have been left up to the Iraqis to decide."

"They wanted to do things their way before they left," the official said.

The CPA appears to have earmarked more than $6 billion of the Iraqi funds over the past two months alone, as it prepared to hand over political authority -- and control over the development fund -- to the interim Iraqi government. As of May 6, the CPA had earmarked only $13 billion from the fund, according to a GAO report released this week.

Allocations and disbursements from the development fund were made by the 12-member Program Review Board, a committee composed of Americans representing the CPA, Iraqis from the U.S.-appointed government and officials from the governments of Britain and Australia. Most of the voting members were non-Iraqis.

"It was a CPA-run thing," the senior Iraqi official said. "There was lots of talk about taking input from the Iraqis, but in the end, they made all the decisions."

At a meeting on May 15, the board allocated $2 billion, according to minutes of the session posted on the CPA's Web site. Among the commitments were $500 million for Iraqi security forces, $315 million for electricity repairs, $460 million to rehabilitate the oil industry and $180 million to fund a property-claims commission.

It was not clear what specific projects would be funded in the security, electricity and oil sectors. The CPA had already earmarked $3.2 billion for security, $5.5 billion for electricity and $1.7 billion for the oil industry from the $18.4 billion aid package, although little of that money has been spent.

The development fund, at least until May 6, was used largely to bankroll day-to-day Iraqi government operations. More than $7.5 billion was withdrawn to pay for operational expenses -- principally employee salaries -- at ministries and government agencies.

From July 2003 to May 2004, the CPA allocated about $4.8 billion from the development fund for relief and reconstruction projects and services. But as with the U.S.-funded aid package, the CPA had trouble actually spending money to address those needs, disbursing only about $1.8 billion of the $4.8 billion.

Of the $972 million allocated for repairs to electric-power infrastructure before May 6, only $157 million was disbursed, according to the GAO report. Of the $842 million allocated to address increased security needs, only $2 million was spent, the GAO said.

One of the principal beneficiaries of the development fund money was Halliburton Co., which was paid hundreds of millions of dollars to truck gasoline and other fuels into Iraq -- a country with the world's second-largest oil reserves -- because of problems with Iraq's refineries.

According to the GAO report, $1.1 billion of the $1.9 billion allocated for fuel imports was disbursed. Although it is not clear how much went to Halliburton, a firm formerly chaired by Vice President Cheney, U.S. officials familiar with spending patterns said a majority of those funds went to Halliburton and other non-Iraqi firms.

The Defense Department has been investigating a Halliburton subsidiary for allegedly overcharging for imported fuels.

Two former CPA officials involved in contracting issues said the CPA spent money from the development fund faster because it was not governed by the same rules requiring competitive bidding as the money from Congress was. The CPA has not identified how many noncompetitive contracts were awarded.

U.S. officials have said that Halliburton was among the firms to receive no-bid contracts from the Program Review Board.

Although the Security Council created a monitoring board composed of representatives from the United Nations, the World Bank, the International Monetary Fund and the Arab Fund for Economic and Social Development to oversee the CPA's spending, its efforts to audit the process were stymied by the CPA, according to other officials, who spoke on condition of anonymity.

The monitoring board has not received many documents it has sought from the CPA pertaining to uncompetitive contracts. "Transactions worth billions of dollars in Iraqi funds have not been independently reviewed," the GAO wrote in its report.

The slow rate of spending of the U.S. aid package has dismayed several members of Congress who worked to speed passage of the White House's supplemental budget request last year.

"It's unacceptable for this to have taken so long," said Sen. Joseph R. Biden Jr. (Del.), the ranking Democrat on the Foreign Relations Committee.

Biden, who recently returned from Iraq, said he had "learned from our military commanders that these projects have a direct bearing on their ability to defeat the insurgency."

© 2004 The Washington Post Company

posted 07-07-2004 10:44 PM            

EDITOR’S NOTE: This article describes the connections between the Corporate and Government Criminals of the Bush Cabal. Thomas White practiced accounting fraud at Enron and now he's in the big leagues at the Pentagon, which "loses" trillions of dollars a year. How's that for failing upward?

Originally published by Salon.com, this article about Enron insider and US Army Secretary Thomas E. White was subsequently used by New York Times columnist Paul Krugman as the basis for his column on September 17th “Cronies in Arms.” Krugman reused the information and described White as an “evildoer”. And then came the backlash -- and the censorship. Salon.com removed the story citing "flaws." Paul Krugman too has published a partial retraction at the end of his column of Oct 4th. In the interest of freedom of information, the original article is reproduced below in full.
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Tom White played key role in covering up Enron losses
As Enron neared the end, the Army secretary used highly dubious accounting methods to inflate its revenue.

posted 07-07-2004 10:51 PM            

Aug. 29, 2002 - Three months before he was nominated as secretary of the Army by President Bush, Thomas White faced what surely was the most difficult task in his 10-year career as an Enron executive: Helping hide the hundreds of millions of dollars in losses from Enron Energy Services, the retail division he had headed since 1998.

It was February 2001 and for White and others in charge of EES, it was imperative that the division find ways to inflate its first-quarter earnings and hide what was becoming a black hole of losses.

But after White had left to pursue his Army post, the company was boasting a record quarter for EES, with a remarkable 18-percent increase in earnings over the previous year and new contracts with Eli Lilly, Owens-Corning, Quaker Oats, J.C. Penney and Saks. EES reported a 59-percent increase in new retail energy services contracts totaling $5.9 billion. But those figures were based on highly questionable accounting practices. According to documents obtained by Salon, EES helped Enron keep its illusion of profitability by grossly inflating the value of contracts it signed in February and April 2001, showing EES turning a profit when it was not.

Presiding over and even encouraging EES's accounting was Tom White.

When White testified July 18 before the Senate Commerce Committee about his role at Enron, questions focused primarily on his relationship to the various Enron schemes already familiar to the public, such as the alleged price-fixing schemes that contributed to the energy crises of many Western states in 2001. They also explored, to a limited degree, how Enron managed to hide some of EES's problems by transferring more than $500 million in losses into the company's wholesale services division.

White explained how, unlike Enron's wholesale division, the energy crisis caused grave cash-flow problems for EES. "I can say categorically that it was not ever in the interest of Enron Energy Services to have wholesale energy prices escalate," White testified.

But when asked about the troubled accounting of his own division, he offered an adamant -- but curiously qualified -- statement: "The deals that we put together within the accounting structure that was accepted and was the standard in the industry -- I stand behind that -- were signed and the right deals to do and were properly accounted for at the point that we signed those up."

What he did not explain was how these multibillion-dollar deals were able to create such a false picture of prosperity. Two off-the-books partnerships set up by White and Pai in February 2001 shed some light on EES's illusory profits and how the division was willing to go to great lengths to fool Wall Street.

On Feb. 20, 2001, Enron announced that EES had entered into a $1.3 billion, 15-year contract with Eli Lilly, the Indianapolis-based pharmaceutical company. Following in the Enron tradition of nicknames (like the price-setting "Fat Boy" scheme, or the famous off-budget shell companies named "Jedi" after "Star Wars") EES coined the deal "Heston" after the actor Charlton Heston, according to a former EES sales manager. According to a news release at the time, Enron was to "manage the supply of electricity and natural gas for Lilly facilities in Indiana, as well as perform operations and maintenance on energy assets and related energy infrastructure upgrades that will increase energy efficiency at Lilly facilities."

It helped EES that Kenneth Lay, former chairman and chief executive of Enron, was a member of Eli Lilly's board of directors and used his influence in getting the drug manufacturer to agree to the deal, according to one of the sales executives who worked on the contract. This former employee also said Lay discussed the contract at a meeting of Eli Lilly's board of directors, saying Enron would offer the pharmaceutical company cash if it signed the contract.

The problem with the deal, however, was that Indiana had not yet deregulated its wholesale electricity market. EES, therefore, could not yet provide Lilly with electricity. So, according to the source, White and Pai instructed the salesmen to predict when Indiana would deregulate and then predict how much Enron would earn during the projected 10 years of the contract. Ultimately, the deal was valued at around $600 million, even though it was based on two unreliable factors: When Indiana would deregulate, and the wholesale prices in the wildly erratic energy market.

This accounting method -- forecasting a future profit and counting it as revenue -- is called "mark-to-market" accounting, and is required under rules adopted in recent years by the Financial Accounting Standards Board. Mark-to-market involves recording the value of deals based on forward prices, allowing a company that agreed to supply gas or power at a fixed price to optimistically project future energy prices below the contract price. A company can then record the difference as profit as soon as a deal is signed, even though fluctuating prices change the value of the deal over time. The Securities and Exchange Commission has urged trading firms and other corporations to begin immediately, in 2001 financial reports, to boost disclosure in several areas, including valuation of energy trading contracts and the impacts of mark-to-market practices on earnings.

But back then, mark-to-market accounting was a loophole to exploit. Every quarter, prior to Enron's earnings release, an elite EES group that included White and that referred to itself as "G5," and then later (just like the United States and its economic allies) "G7," would meet to discuss, among other things, how EES would use mark-to-market accounting to boost Enron's earnings and standing on Wall Street. One former EES employee who attended the meetings said it was White and Pai who were responsible for implementing the mark-to-market approach to EES's earnings.

The employee explained how, under their guidance, energy contracts EES would sign over a 10-year period were booked as immediate gains for the company and helped inflate Enron's earnings when, in fact, the contract would cause EES to hemorrhage cash. According to the documents, White and Pai signed off on all of the long-term energy contracts EES entered into.

"Mark-to-market accounting allowed Enron to show a false profit and delay taking the loss," the former EES employee said. "It is not mark-to-market accounting that caused that, but instead the misuse of the method."

As a result, the method has its critics. "Because mark-to-market accounting allows for a considerable degree of discretion on how companies value their energy trading portfolios, there always is the potential that some companies may succumb to the temptation to use more favorable methods or techniques to increase the value or earnings associated with their portfolio when no independent market exists to verify that," said Paul Patterson, an independent energy consultant based in New York, who has been a leading critic of mark-to-market murkiness. "If this method is misused it's very possible that a company's earnings growth may prove illusory.

"Giving companies such wide latitude in reporting their results can become a prescription for disaster," Patterson said.

Said one former EES executive who worked on one of three off-the-books energy contracts: "Where Enron pushed the envelope is that many of these contracts are ones that usually would have been signed for one to three years, whereas EES would sign deals lasting 10 years and immediately book the projected revenue as profit. But there isn't a market that exists that far out that could accurately predict the revenue stream EES said it would be getting."

White has been portrayed as an EES "cheerleader" who was in the dark about Enron's financial machinations and questionable accounting practices. "White was the guy who shook hands with people and motivated the sales staff," said Lance Dohman, a former sales manager for the division. "He would just try and get everyone all fired up to go out and sign contracts." When sought for comment for this story, White's spokesman, Maj. Mike Halbig, said White had answered all questions about his tenure at Enron and has put the issue behind him to focus on his job running the Army.

But White, the only Enron executive who seemed liked by almost everyone who knew him, played a much more crucial role in the day-to-day operations at Enron, according to the documents, which include EES memos and interoffice e-mails.

In one February 2001 e-mail, as panic about EES's mounting losses began to spread among White's employees, an EES employee reported to ESS chairman Lou Pai and to White that the division was losing more than $3 million a month on other contracts signed because of rising wholesale energy costs.

"Close a bigger deal to hide the loss," White responded in the e-mail.

White's word choice is illuminating, because at that point, EES's primary concern became how to "hide" growing losses behind new contracts that, through a questionable use of an accounting loophole, allowed it to claim profits that were wildly speculative in order to give the appearance that the company was actually making money. That false image, of course, would be shattered in the fall, when Enron became the country's biggest bankruptcy ever and 4,500 employees lost their jobs.

But White's employees saw ominous signs long before that.

In February 2001, it was widely known among the EES staff on the seventh floor of Enron's Houston towers that some of the contracts the division had signed in 1999 and 2000 were causing EES to hemorrhage money, according to former EES sales manager Margaret Ceconi, and rumors were spreading that White and Pai might be forced out as a result. The growing energy crisis was causing the wholesale costs of electricity and natural gas to skyrocket, and EES, Enron's retail division, was paying a steep price.

Intensifying the pressure, Pai and White had set the bar dizzyingly high for their division just weeks earlier. At a conference for Wall Street analysts on Jan. 25, 2001, in Houston, Pai and White made the bold prediction that Enron Energy Services' revenues would jump to $10 billion that year, up from $4.6 billion the year before. Earnings, White and Pai said, would reach $225 million in 2001, up from $103 million in 2000. Those were the numbers Jeff Skilling, appointed that month as Enron's chairman, and Andrew Fastow, the company's former chief financial officer, told White and Pai they would have to meet in order for Enron to keep its standing on Wall Street, according to a former EES sales manager who worked on six of EES's large contracts and attended the analysts meeting in Houston.

But within weeks, White and Pai tried to cancel an electricity contract with two University of California campuses. EES was spending as much as $300 a megawatt-hour for the power it delivered to the colleges, but was only charging the universities around $32 a megawatt-hour, based on its 1998 contract. EES executives said the unit could lose as much as $1 billion annually on the U.C. contract alone. But the U.C. system sued Enron, and a judge later ruled in April 2001 that EES must continue to supply the college campuses with power.

Pressure began to grow to land new deals, and make them look as big, and as profitable, as possible. Even if it wasn't entirely true.

The Lilly contract, however, also included a perk to Lilly hidden from the public, Enron shareholders and the budget sheets. According to a copy of the Eli Lilly contract (which, according to an EES source, was ultimately signed by White, Pai, Skilling and Fastow) Enron and Lilly established a limited liability company, made up of Enron and Lilly executives, in order to facilitate the contract. Being a part of the LLC gave Eli Lilly and Enron huge tax incentives. Enron also, through the LLC, would pay Lilly $50 million in cash upfront to win the partnership; Lilly would have to pay back the money over time.

According to John Couch, a Houston tax attorney with Bracewell and Patterson who looked at the contract for Salon, the shares appeared to be the primary attraction for Lilly to sign. "The reason Eli Lilly signed this is because they got $50 million in cash from Enron that the company was able to use to accelerate income and to absorb other losses the company incurred," Couch said. "It says it would provide a legitimate service to Eli Lilly, which an LLC needs to do. But what makes this deal a better deal is it was structured through an LLC and it gave a Eli Lilly a tax advantage."

Once EES formed a limited liability corporation to handle the partnership, the company would then sell its stake at a profit to a third party, such as a bank, which is exactly what EES did in the case of Quaker Oats and Owens Corning, two other deals that were set up in the form of LLCs, according to the former EES sales executive.

And, perhaps most startlingly, the contract stipulated that any earnings Enron made off the contract would be split between Enron and Lilly 30 percent to 70 percent. That means the $600 million that Enron projected as revenue would have been, at best, only $180 million.

So the Lilly deal, listed in the company quarterly reports as worth $600 million, would only mean, optimistically, profits of $130 million. And that was based on a rosy, best-case scenario market report.

Nonetheless, White and Pai were a step closer to reaching their earnings goal.

The Lilly contract says Enron will "develop, design, construct and implement demand-side energy management projects" but all that entailed was removing and replacing a chiller, projecting the revenues over 20 years, and booking the revenues as a mark-to-market profit.

The Eli Lilly deal, which was handled by EES executives Jeff Forbis, Michael Mann and Richard Zdunkewicz, earned White, Pai and others a sizable bonus, according to sources within EES.

But according to Joan Todd, a spokeswoman for Eli Lilly, the deal never actually commenced. "The contract was structured in a manner that allowed the partnership to enter into routine leases for assets," Todd said. "We barely got into the contract with Enron before the company got into its problems."

Todd said the contract was unwound last month and Lilly resumed control over its own energy management. Todd also said that Lilly never accounted for the $50 million payment from Enron on its balance sheet and that the money was not booked as income. Todd did not know whether Lilly received tax incentives from the partnership but she said the company is negotiating with Enron's creditors on whether to pay the $50 million back to the company.

The deal, though, allowed Lilly to keep the transaction off its balance sheet. If Lilly did receive tax incentives from the deal, it's likely the company would have to restate its earnings after the deal was unwound, Couch said.

To fully understand the Enron/Eli Lilly deal, said one of the three sales executives who worked on the contract, "you have to understand why we needed to sign the contract in the first place."

"We were scrambling," the EES sales executive said. "We needed to sign as many large deals as we could between February and April to keep EES from collapsing. If we didn't sign these contracts it's likely that Enron would have imploded right then."

Ceconi, the former EES sales manager, said the Lilly contract allowed EES to claim revenue and margins in the current quarter that were not coming in. "That's what created the cash-flow crisis," she said. "It gave the appearance that EES was a cash machine. In that kind of environment the only way to continue -- and this gets to the issue of the house of cards -- was to continue and generate more business.

"Pai and White told us we had to keep feeding the fire," she said. "That's where the nervousness started to set in."

Also, some of the profits EES booked from the Eli Lilly deal don't appear to make sense. EES projected earnings on equipment it would install for Eli Lilly and maintenance, but no forward market exists for that. EES would do the same thing on Feb. 21, 2001, a day after it announced the Eli Lilly deal. On that day, EES announced in a press release another multibillion-dollar contract, this time with Quaker Oats, the second off-the-books partnership set up under White and Pai that brought them closer to reaching earnings. This deal was set up as a "special purpose entity" in order to provide both companies with tax incentives, according to the contract.

Tom White played key role in covering up Enron losses | 1, 2, 3, 4

EES agreed to supply 15 Quaker plants with energy management, from supplying natural gas and electricity to a staff of EES employees who would maintain boilers and pipes and procure spare parts. Enron, according to a copy of the contract obtained by Salon, guaranteed Quaker it could save $4.4 million from its 1999 energy bill. Enron forecast a $36.8 million profit over the 10-year deal and used mark-to-market accounting to book $23.4 million of that -- before it had even consummated the Quaker deal.

Under accounting rules, such treatment is permitted for commodities, such as natural gas and electricity. But the rules are more restrictive when it comes to services, such as boiler maintenance and parts procurement, for which no forward markets exist. Profits from these activities are supposed to be, according to the FASB, booked on a more conservative "accrual" basis, whereby a fraction of the profit is realized each year as it comes in.

According to a report earlier this year in the Financial Times, Enron's problem was that almost all the profits projected for the Quaker deal were derived from services, not commodities. How did it manage to book them upfront? The company used a questionable method called "revenue allocation." The net effect of this highly complex treatment was to redefine as commodities some of the money Quaker was paying for services and thereby create more profits that Enron could book upfront.

Under the system, Enron's internal accountants created a new category called "allocated revenues." These were based not on what Quaker had historically paid for energy commodities and its service contracts, but on figures that Enron claimed reflected the open market value of the commodities and services.

This revaluation made a significant difference to the reported worth of the contract. Enron would have earned only a small margin supplying gas and power to Quaker based on the original revenue figures it used to calculate the deal. Instead, revenue allocation allowed the company to claim an immediate hefty profit on the deal. Asked if such a move is illegal, a former Enron accountant told the Financial Times: "It's certainly skirting the edge. It's very, very aggressive."

The former EES sales executives claim the division, under White and Pai, managed to list as mark-to-market $85 million in energy services profits from 12 deals, including the Quaker contract, that should have been listed as accrued. In some instances, the sales executives said, the profits came from changing light bulbs and air-conditioning filters, the Financial Times reported.

Former employees say it was easy for White and Pai to get their sales staff to inflate services margins, because no one could accurately predict them. Perhaps Enron's boldest assumptions had to do with something called "efficiency projects." No one will ever know how accurate EES's projections were for the Quaker deal. Enron collapsed just months into the deal. Quaker says it has since made "other arrangements."

During White's contentious hearing before the Senate, one issue that came up repeatedly was how White weighed the importance of his division against the competing divisions, particularly Enron's wholesale division, which profited heavily from the energy price spikes in 2001, and also Enron, the company. White continually tried to paint his role as that of a captain of his own ship, autonomous with respect to the rest of the company.

"Well, when the difference was between the interests of the company, the Enron Corporation, or your divisions, which interest wins?" Democratic Sen. Byron Dorgan of North Dakota asked during the testimony.

"The division," responded White.

But according to key documents and sales reports obtained by Salon, known within Enron as "The Lou and Tom Report" (after Pai and White), their loyalties are clearly to the company -- and the company's bottom line. They detail, for example, how EES shifted more than $500 million in losses to Enron North America and listed the losses as debt. This made EES look like it was turning a profit -- because the division wiped out the losses and only showed profits -- and made Enron's wholesale division look like it was entering into lucrative electricity deals.

They also, in plotting the division's course, were heavily influenced in their actions by a keen concern for the company's overall health. "We need to push Tyco to take this deal or ENA [Enron North America, the parent company] isn't going to make the quarter," White and Pai said in their report, referring to a pending outsourcing energy management deal with Tyco Healthcare Group LP, a unit of Tyco International Ltd., in 1999. "You guys need to close the books a month before earnings."

On many occasions, the documents show, EES would be forced to renegotiate long-term energy contracts it signed with large corporations as many as three or four times, often resulting in the contract losing its original value (which itself was based on a bogus curve) by hundreds of millions of dollars. One example of this is a contract EES signed with Tyco in 1999 that was renegotiated four times.

Analysts said Enron should have disclosed this information or restated its quarterly earnings. "If the contract was amended or changed, that would lower your earnings for the period in which the value of the contract fell," Patterson said. "If the contract has fallen because of price changes or because it was renegotiated, then theoretically the value of the contract has fallen; then one would expect that the earnings from that contract would go down in the period in which the value fell."

But such disclosures, including in the Tyco case, were never made. And as EES's fortunes were slowly dwindling away, officials, including White, remained silent.

posted 07-12-2004 11:01 PM            

Rabbi Zakheim has left the Pentagon. Thank God.

After more than 20 years of presiding over more than $3 trillion worth of military fraud, Pentagon Comptroller Dov Zakheim has left the building. He will join Booz Allen Hamilton through the traditional revolving door for government-corporate insiders.

A former Deputy Undersecretary of Defense from 1985-1987 and Pentagon Comptroller since 2001, Zakheim was responsible for mismanaging more than $400 billion annually, as Pentagon discredited audits have persisted year after year.

The Department of Defense has never received a clean financial audit.

As recently as the December 18, 2003 audit by GAO (General Accounting Office), the Pentagon's 'War on Iraq Scam' and other Information Technology (IT) Fraud yielded $1.6 billion in "losses," money "missing" and otherwise unaccounted for.

In an article from "Government Executive" magazine ("Bye Bye Budgeteer," May 2004) Zakheim admitted, "...we are in the business of fighting wars.

We are not in the business of balancing books."

Zakheim, an ordained rabbi, is leaving Pentagon finances in shambles with more than 5,000 different financial systems supposedly in place. That means 5,000 open-ended opportunities for fraud.

If his position was Chief Financial Officer of a major corporation, Zakheim would be charged with criminal conspiracy, negligence and thousands of counts of fraud. As it is, he is joining the so-called private sector.

After all, privatizing government fraud through the control of accounting and IT systems in federal agencies is the most lucrative scam in America.

The US, after all, is One Nation Under Fraud.

posted 07-13-2004 11:14 PM            

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...and who did they hire with these billions in tax cuts?