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Auditor approves Enron math to mask O'Learygate loss

Once upon a time there was a company called Enron.

Nobody really knew what they did. Or how they made money.

But every year they would announce large profits, and their auditors would swear it was all on the up-and-up according to generally accepted accounting principles.

Fast forward to Winnipeg, 2007.

Manitoba's Auditor General Carol Bellringer released her report on a shady land development undertaken by the Seven Oaks School Division, known colloquially as O'Learygate, after Brian O'Leary, Superintendent of the Seven Oaks School Division (and, by coincidence, former NDP campaign chairman).

* In 2001, anticipating the need for a new high school, the school division bought land in the Riverbend area of West Kildonan.
* They bought twice as much as they needed for a school.
* Instead of simply selling the surplus, they decided to become land developers-- with taxpayers' money.
* They eventually sold 71 finished lots in what is known as Swinford Park--- and lost their shirts.

Bellringer acknowledged that the school division lost slightly more than $307,000 on the undertaking (page 28 of her "special audit") but that, using generally accepted accounting principles, the school division showed "net income" of $512,118 (page 29).

In the Enron debacle, a lot of people went to jail and the auditors...well, after their conviction, the venerable firm of Arthur Anderson became a footnote in history.

In Winnipeg, apparently, creative accounting gets the blessing of the province's top auditor.

How did the Seven Oaks trustees manage to turn a loss into a profit?

Start with two sets of books, one ostensibly to show the finances of the land purchase for the school site, and the other ostensibly to show the finances of the illicit land development.

Then, count one alleged asset twice, once on each set of books. Presto chango. Magic, right before your eyes.

The trick, is in the asset.

The school division says it cost exactly $819,810 to buy and develop the land for a new school in Riverbend. Because the Public Schools Finance Board will pay the legitimate costs of a new school, including land, the full $819,810 is carried as an asset on the books of the school site.

This "asset" shows up again, minus the $307,000 loss, on the books of the Swinford Park land development as "Due from the Seven Oaks School Division---Capital Fund."

Abracadabra, instant "net income", in Carol Bellringer's words.

If you think this smells fishy, then hold your nose, because it gets more rank.

Unlike Carol Bellringer, The Black Rod took a close look at this magic asset.

What gives this asset its value? Obviously the fact that someone will pay $819,810 for the land in question.

Not fair market value. But exactly $819,810.

And who is that somebody?
Are you sitting down?

To collect on its asset, the Seven Oaks School Division has to "sell" the school site---TO ITSELF.

That's right. The buyer of the school site will be the Seven Oaks School Divison, which already owns the land.

How does that work?

Seven Oaks doesn't have the money for a new school, so it has to get it from the Public Schools Finance Board. The PSFB will, it's hoped, eventually approve a new school and cough up the money to pay for it, including the cost of the land.

So Seven Oaks will essentially sell the land it already owns to itself!

The taxpayer, who has already spent $819,810 on the school site, will pay another $819,810 for the same land, bringing the total cost to $1.6 million! (And lots more, as you'll read in The Black Rod next time.)

And you thought Enron was a scandal.

Faced with the hundreds of thousands of dollars in red ink from the Swinford Park development, the Seven Oaks School Division wrote itself an IOU and put it in the books.

The IOU covered the loss and created an imaginary surplus. In Carol Bellringer's world, this counts as generally accepted accounting principles.

And how soon will this asset be cashed in?

Well, it seems there's no limit on how long a school division can carry land for a potential school.

Seven Oaks School Division has had a new elementary school in Riverbend in its five-year capital plan since 2002. Its school plan for 2008 states that it has plenty of room in existing schools for elementary school students, including those from 500 new homes in Riverbend. So does that mean the Riverbend school site expires?

Hell, no.

According to Brian O'Leary, Seven Oaks has been holding land in Amber Trails for 16 years and has no plans for a new school there, either. Perfectly normal, says Education Minister Peter Bjornson.

During debate in the Legislature on O'Learygate, Bjornson said the "normal practice" was for school divisions to buy land and hold it until it was needed.

"So the process for acquisition is one that is on speculation that new schools will be built. There are a number of school divisions that do speculate and acquire land as a result of their long-term planning, and there are many school divisions that do own property for the purpose of the construction of schools."

There you have it from the Education Minister himself.

But should we be reassured that from now on Seven Oaks School Division is now engaging in land "speculation" rather than land development?

Next: More dubious accounting in O'Learygate.

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