A Little Enron Accounting Puts Water District in Hot Water

California’s largest agricultural water district misled investors who bought $77 million of municipal bonds by using accounting tricks to mask how much its finances were being squeezed by a drought gripping the state, the U.S. Securities and Exchange Commission said.

Officials with the Westlands Water District, which serves the state’s Central Valley, hid a drop in the amount of money available to cover future debt service by reclassifying reserve funds as revenue, a technique that district general manager Thomas Birmingham referred to as “a little Enron accounting,” the SEC said in a statement. As a result, Westlands misled investors when it sold bonds in 2012, the agency said.

The undisclosed accounting transaction “left investors in the dark about Westlands Water Districts’ true financial condition,” said Andrew Ceresney, SEC’s enforcement division director.

The agency agreed to pay $125,000 to settle the case, making it only the second borrower in the $3.7 trillion municipal-bond market to face a financial penalty over the SEC’s rules.

The SEC also charged Birmingham and former assistant general manager Louie Ciapponi for improperly certifying the accuracy of bond offering documents. They agreed to pay penalties of $50,000 and $20,000, respectively.

The water district said that before making the accounting changes it was told by its independent auditor that “the suggested accounting transactions were permissible,” district spokesman Johnny Amaral said in an e-mailed statement. The district also noted the changes in its 2012 financial statement, which was appended to the official statement for the 2012 bonds, Amaral said. Discussions of the changes occurred in open meetings, he said.