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Wednesday, January 16, 2002 |
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THE ROAD TO RUIN |
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There is a rule applied in
accounting circles known as standard industry
practice. In a nutshell, it allows for the treatment
of transactions according to standard industry practice,
even if that treatment might not be standard outside a
particular industry. There is additional guidance for
companies to continue accounting on the basis of past
practice, even if it is not strictly in conformity with
GAAP, on the basis of consistency in certain situations.
Do it once and you've set a precedent for future
transactions. |
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It is easy to see how things could
get suddenly out of control utilising this standard. Once
a trasaction has been structured a particular way, it
sets the precedent for all to follow. If the company
seems to thrive, business is booming, and the market is
happy, there doesn't appear to be any reason to look more
closely. To change the practice midstream would present
several problems. |
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First, it would require a change
in consistency which would require an additional
paragraph within the unqualified audit opinion. This
could lead to closer examination of past practice and
potentially open up a can of worms. Second, if the change
is ultimately deemed a change from non-GAAP to GAAP, it
would also require restatement of prior year earnings.
This most likely would result in lower rather than higher
earnings. Third, it would imply an admission of bad
judgement in the first instance. This could be a tough
pill to swallow and would be politically unpalatable
unless new management and or auditors were brought on
board. |
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It is all too easy to understand
the slow road to ruin taken innocently enough by that
first step several years ago at Enron. Rules were being
stretched and an old company was being transformed into a
trading powerhouse for the future. Industry practice was
being created. What precedent existed for such a feat?
With each new transaction, questions would be raised.
What was different about this transaction? How did we
account for the last? What are the implications? If it
was substantially equivalent to the previous transaction,
it would be handled the same way. In structuring the
suspect entities, this was the most likely train of
thought. |
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Lest anyone be too smug about the
demise of Enron, this same road is taken countless times
and in many different ways each and every day. I recall a
Director in our German office who once came to me with
the idea that we should have a form for lost expense
slips. This would make it easier for others when they got
left in the airport lounge, as his evidently did. Had we
actually implemented this procedure, the exception would
have become the rule. There are many other examples that
I could give where one isolated action leads to the rule.
I know you have even come across many yourselves. So a
word to the wise. Make certain your first step is the
right first step. Otherwise, unwittingly you could be
setting the stage for your own personal road to ruin. |
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Monday, January 14, 2002 |
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SLEEPLESS NIGHTS |
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It was 8:00 p.m. on a damp
February night and papers were piled high in the office.
A chill ran up Morris's spine. There were over 30
partnerships. On the surface, each entity was carefully
crafted to meet the test of an independent party. So many
different investors and the tremendous volume of activity.
What was the substance of these transactions? Another
chilling thought. No, this was a great company. This was
the new company. These thoughts were counterproductive.
Still, switching the lights out, Morris contemplated the
implications of what he was thinking. |
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Dreams were riddled with
numbers and entities. There was something in the shadows.
Each relationship was represented by a different number.
Relationships within relationships. How much checking had
been done of these relationships? If A owned B and B
owned 49% of C and A owned 49% of C, wasn't this
ownership in excess of the threshold for consolidation?
Was it material? How wide ranging was this practice? How
would they ever trace it all? Another sleepless night of
numbers. |
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Early in the morning there was
more talk about budgets. "We need your report Morris.
What is the status of your field work? The timetable is
rapidly falling behind. What can we cut?" This wasn't
a good time to talk about reservations. Maybe he should
come back. No, it had to be said. Morris cleared his
throat. "I'm not comfortable with the substance of
transactions related to these partnerships." "Substance
Morris?" Stew was cutting. "And just what is
the substance?" Anger flooded through Morris. Stay
cool. "The bottom line is that the form looks clean.
Each and every transaction has been meticulously crafted
to just fall short of detailed disclosure and
consolidation requirements. I'm just not comfortable. We
need more time." "Look Morris, this is a big
client and a big job. If I say that we have a problem and
we start sending false signals to the market, do you have
any idea what kind of damage that could do to a company
that exists on its ability to flawlessly execute millions
of trading transactions?" Stew looked straight into
Morris's eyes. Morris had never seen him so direct.
"If you are going to make a statement like this, I
need evidence," Stew continued, "And it had
better be material. Let me call in Ken." |
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Ken walked in briskly with a
coffee cup in his hand. "What's Up?" Stew
started, "It's Edron. Morris is concerned about the
substance of the transactions at Edron." Ken was
easy going. "Hey these guys are whiz kids. If we can't
understand the transactions, no-one can. I know it's
tough but lets try to be as accommodating as we can. I
understand your concerns Morris but we'll need
substantial evidence, and quickly, to change our view on
Edron. Talk it through with them. Get some explanations."
Morris agreed and felt better to have unloaded his
reservations. He left the room and made a few phone calls.
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Ken took Stew by the side. "Look
Stew, this is our second biggest client and a top earner
for the firm. Edron is getting accolades from every
business journal going. There's another gala just next
week and we've been invited. If we give them a tough time,
we'll lose this account. I'm not prepared to lose a key
account from the most innovative company on the block
just because of a little creative accounting. We have a
reputation to uphold. If anyone can find a common ground,
Anderton can." |
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Stew was afraid that Morris just
wasn't going to be able to cut it. As a supervisor, he
was methodical. This job just might be bigger than he
could handle. Let's see, who can I find? He picked up the
phone. "John, Stew here. Have you got time for a
little chat?" John came in with his usual smile and
relaxed good looks. John was a powerhouse within the firm.
He knew how to bring projects in on-time and on-budget.
In his short time with the firm, Stew had always been
impressed with John's delivery. |
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"How can I help?" John
was always eager to please. Stew admired this quality
most. "How about giving Morris a hand on Edron. He's
got some reservations about the substance of some
partnerships." "Sexy stuff," said John.
"I'll give him a ring this minute. Thanks Stew."
Stew relaxed. He'd done his job. John would straighten it
out. Ken was right. Edron was progressive. Better get
used to this kind of accounting. Things had been
conservative for too long. |
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On December 2, 2001 Enron
filed for protection in the biggest corporate bankruptcy
in U.S. history. For those of you who find it
unfathomable that such a situation could have
materialised, the above little scenario might be helpful.
As a CPA I am both shocked and understanding. It is a sad
fact that independence can never be fully realised as
long as the client is paying. Two great institutions have
been caused irreparable harm and all they wanted to do
was ensure the best interests of their clients and
shareholders. |
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Sunday, January 13, 2002 |
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UNSHACKLED - REAL FREEDOM |
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I have a beautiful coat that I
cannot wear. For the last several years, it has been
hemmed inside a dark closet. In spite of cold, frosty
days when it can best serve the purpose for which is was
made, it must be used secretly. Saved for the odd special
outing, it must be hidden inside a private car. Instead
of giving the freedom to walk, to feel the chill of the
evening and the constrasting warmth which it provides, it
is strictly a door to door accessory. Rather than a
practical item, for which it was exquisitely created, it
is a luxury only allowed for privileged occasions. This
response to the threat from a few miscreants of society
does nothing but perpetuate the negativity surrounding
its creation making it the excessive item which it now is
but certainly was never meant to be. |
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Friends of my parents travelled
with them to visit us at the end of October. I was in awe
of the lovely rings Mrs. L wore and thought her very
brave to wear them. But then she only laughingly said she'd
purchased them exclusively for the trip. They were simply
copies to wear for the real gems which were hidden away
back home. Little did she realise she was taking her life
in her hands by wearing such brilliant copies. |
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Then there are those who live
behind walled security. The reward for their hard work,
for giving generously to charity, for creating thousands
of jobs, for having the courage to believe in something
bigger than themselves is increasing isolation. People
who live to create a better society are prisoners in
their own homes. This natural response to those who tear
down instead of building up simply gives rise to more
rage against the 'evils' of global capitalism. |
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In all three of these situations
we are ensuring that the forces pretending to love while
taking away individual choice succeed in their mission.
By failing to wear a beautiful coat when it is right to
do so to stay warm, we are guilty as charged of excessive
exploitative behaviour. By failing to wear beautiful
rings which were given to celebrate the joy of a love
which should never be hidden, both the wearer and the
jewels are cast under shadows unable to proclaim their
wonderful stories. But it is even worse for those who
live behind walls in isolation. Would they not love to
open up their homes? They who have created so many jobs,
would be overjoyed to share mountains of wisdom and
generosity with good souls seeking to build a better
world. If only they could. If only they had the freedom
to live without fear. |
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A colleague of mine is fond of the
saying, "He who squeaks the most, gets the most
grease." We live in a misguided world of minority
voices. Collectively we have a responsibility to utilise
the world's resources wisely and I believe that we must
put back what we take out. But isn't it time to unbundle
this message from the actual use of any item which is in
itself such a proclamation to the glory of creation? We
stand only just above the quagmire of quicksand that
extinguishs all reason in its wake. Is anyone brave
enough to take the first step? Unshackle yourselves and
proclaim the virtue of this new freedom to work hard, to
proclaim the glory of creation and to praise God for the
goodness he has bestowed on each and every one of us. It
is your God given right to do so. |
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Thursday, December 13, 2001 |
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THE WAITING GAME |
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The December issue of National
Geographic magazine has been on my breakfast table
for the last week and yesterday I finally got around to
reading one of the lead articles, Abraham, the Father
of Three Faiths. I'd understood the link between
Abraham, Judaism and Christianity but somehow had never
really comprehended the nuances of his link with Islam. |
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For those of you who don't know
the story, Abraham is around 75 years old when God calls
him, to leave the land of his fathers, and to travel to a
land that God will show him, the land of Canaan. Out of
Abraham's faith God promises to make him a great nation.
In a vision God promises this land to Abraham and his
descendents who he proclaims will be so numerous that
they will outnumber the stars in the heavens. But Sarah,
Abraham's wife is childless. |
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After ten years in Canaan Sarah is
so desperate to give Abraham children that she lends him
her Egyptian maid, Hagar. Hagar bears Ishmael for Abraham
and from the very beginning his existence creates
conflict. Sarah is jealous of Hagar and her son. Thirteen
years on, when Abraham is 99 and Sarah is 90, God tells
Abraham that in another year he will be a father again
and his wife Sarah will bear him a child. |
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The child is born, exactly as God
has revealed and from this point in history we see the
struggle between Ishmael, Isaac and their offspring. God
promises Abraham that he will be the father of many
nations and many kings; that his covenant will transfer
to the descendents of Isaac; but he also foretells that
from Ishmael will come twelve princes and that he will be
the father of a great nation. |
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In this culture, favour was always
found in the eldest child. Ishmael was the older of the
two children from Abraham's seed. Islam recognises
Ishmael's right to the covenant while Judaism recognises
the Biblical reference to Isaac. Today we see the result
of this struggle, of Abraham's attempt to take things
into his own hands, in the inability to reconcile the
interests between the clans of two half brothers born
almost 4,000 years ago. |
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And so I wonder what would have
happened if Abraham had waited. To modern time clocks,
anything short of instant action would be a sign of
weakness. Even in Abraham's day, suggestions to anyone
that he was waiting for God would have raised quite a lot
of laughter and chiding. And he did wait. He waited
beyond any possible moment of hope in human terms.
Thirteen years on and it would have been a terminal case.
When angels visit Abraham confirming God's revelation of
the upcoming birth of Isaac, they respond to Abraham's
wonder, "Is anything too difficult for the Lord?" |
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History is full of examples where
consequences of actions give rise to present day
conflicts but none so old or relevant to the world we
live in now as this lesson from Abraham. So as we pat
ourselves on the backs for a job well done fighting for
freedom around the world, perhaps we would be wise to sit
back and pray for some patience and perspective this
Christmas. Actions based on good intentions appear to
take us forward, but at what price and of what pain for
future generations? |
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Friday, November 2, 2001 |
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LONE VOICES IN THE DARK |
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When I lived in Germany I met
people who were in a perpetual state of darkness and
depression because mankind now has the ability to destroy
himself. Whole dinner parties were devoted to the state
of man's relationship to man and the earth in general. I've
never met people anywhere else who had such a fixation on
the subject of global Armageddon, but with recent events
increasing the probability of rogue states and peoples
acquiring and using biological, chemical and N - weapons
on a massive scale, these fears are closer than ever
before to reality. |
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Today's headlines state that Bin
Laden has begun a war against Christianity. So is this a
new world war? This is a man addicted to his own power.
His people are helpless victims seduced by clever
packaging. But most frightening of all is the quiet
acquiescence of people who should know better around the
globe. |
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There may be disagreement about
the military campaign currently being undertaken in
Afghanistan. There may be condemnation of certain aspects
of the American way of life. There may be a fear of the
freedom that capitalism can provide to people accustomed
to oppressive regimes. But surely we can all
agree that destroying the common earth, air and water
that we all share is not in the best interests of any
peoples in any land. |
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And so I go back to my German
friends whose lone voices in the dark quietly warned of
the evil to come. Bin Laden has opened the spigot.
If his actions are not widely condemned by
Islamic leaders throughout the world, it
just may be time for Galt's Gulch. Has Atlas
finally Shrugged? |
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Wednesday October 17, 2001 |
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IMPRINTING A WORLD OF HATE
FOR TOMORROW |
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Disturbing scenes continue to
haunt our dreams, even in these turbulent times. Over and
over we see pictures of burning effigies of President
Bush. This is not the beginning. These acts have been
replayed countless times, often with children at the
forefront. Adults are one force to be reckoned with, but
it is the fact that children are being encouraged to
participate that is deeply disturbing. |
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Surely each of us knows someone
who has been affected from a childhood experience which
they blame for a pattern of self destructive behaviour in
adulthood. Efforts to help are thwarted by the
individuals themselves. No matter what solace or
assistance is given, they return to their old ways.
Endlessly retelling tales which will never go away, they
constantly get into new situations adding fuel to the
fire. They say they are being tested. In the end, the
enemy is within. Except for an Act of God, there
is no hope for change. |
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Edward de Bono has an interesting
way of visualising this process. Take a bowl of jelly.
Heat some ink. Using a metered applicator, slowly let
droplets of ink fall onto the jelly. The first drop will
form a pattern. The second drop will ultimately find its
way onto the previous pattern. Each subsequent drop,
while creating new patterns, will flow into the others.
Deep crevasses will be formed. This is how the brain
makes connections. Each new input is measured and
evaluated against the others. |
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Understanding this process doesn't
make the result any more palatable. If we cannot change
the thinking of individuals we know within our own
culture, how will we ever be able to deal with a world
where such hatred has been inbred from birth? With every
shot fired, every missile launched, every aerial bombing,
we are adding more hatred to the world. The young people
exposed to this onslaught now may never recover. A child
at the most formative stage who loses parents or siblings,
especially an innocent civilian, will be imprinted for
life. Like Spielberg's A.I., these children will be
programmed. Instead of the love of David, it will be the
hate of Cain. |
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In a similar way western nations
have returned to old ways of retaliation. Even though the
terrorist network is more widespread than the country of
Afghanistan. Even though the relentless bombing is
creating havoc in the lives of a people who were already
living on the edge. We save American lives while we
commit endless acts of destruction on a defenseless
people. If we believe in Christian values of love, if we
really believe that "vengeance is mine," sayeth
the Lord, our actions state the opposite. Our response is
just as violent as the men who shattered so many lives on
September 11 in the name of their peaceful, non-violent
religion. |
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The people of Afghanistan are
human beings. If all men are created equal, a position
which the American Constitution asserts, these people
need protection. As Colin Powell stated in yesterday's The
Wall Street Journal, they need trade, an opportunity
to make a livelihood, not aid. When we feed them, we keep
them dependent on us for support. How long would any
American put up with a hand to mouth existence without
turning to more lucrative, perhaps subversive ventures
for survival? Our own soldiers cannot exist for one week
without a pep rally from pop stars. |
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Britain and the U.S. have gotten
themselves into a quandary. Bombing Taliban camps may
eliminate some military hardware, but sooner or later
they must go in. And then what? Our soldiers are soft.
Our adversaries are experienced at surviving tough
conditions. We were better off taking the position of
slow infiltration, of cutting off the supply of funds to
known terrorists throughout the world, of fortifying and
protecting our interests. The soft solution of
continued bombing, a show of force to punish an unseen
enemy, is not an option. We cannot afford the
consequences for tomorrow. Let's put an end to this hate
and get on with living and loving. It is our only hope. |
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Wednesday October 3, 2001 |
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CULTURE BOUND |
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We are all 'in the soup' of global
relationships. Anticipating upcoming encounters, we read
up on cultural attributes. Chances are, our partner has
also done their homework. The resulting behaviour may be
similar, but what about the way we think? |
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This evening we entertained 37
Japanese visitors. On meeting an esteemed Professor, we
both bowed. Another colleague, half his age, quickly
shook hands. The Professor was looking on. For me,
shaking hands was a more intimate gesture. It felt
awkward leaving the Professor out. |
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Later in the evening we introduced
the Ruskin quote, "There is no wealth but life."
A Japanese friend had previously translated it for us
using symbols for both wealth and life with a double
negative. This group completely rejected the translation.
Symbols for wealth and life were incompatible on the same
page. Someone took out a bottle of black ink , while
another provided the paper and a brush. One by one,
twelve individuals took turns writing out their own
versions of this phrase. They are now laid out side by
side on the drawing room floor. Not one is the same. Our
friend who prepared the original translation is delighted. |
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When I was working in Germany, we
often held meetings where not one individual was from the
same country. Each of us could answer yes to the same
question, but each of us meant something completely
different. It was hard work. The effort required to
accomplish a genuine consensus increased geometrically in
proportion to the number of cultures that had to be
crossed. |
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The most important factor in
achieving success on any mission is communication. So it's
no surprise that the greatest impediment is our inability
to understand how others think. We are culture bound and
the only sure thing is that great patience and energy
will be required to overcome obstacles along the way. |
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Sunday September 30, 2001 |
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PERSISTENT VULNERABILITY |
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What exactly was the purpose of
the attack perpetrated on September 11? Was it to send a
message or was it the beginning of a strategic assault on
a country which values freedom above tyranny, liberty
above oppression and the law to set man free? I pray that
it was a message but fear we've not seen the end. |
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Today is Harvest Sunday in the U.K.
We are reminded of the horrors that have visited us in
this country over the past year including petrol strikes,
floods, train crashes and diseased livestock. In a poor
country, we'd be on our knees. But we are not poor. We
have a distribution system which ensures that our stores
are well stocked regardless of what happens at home. In
spite of the crippled rail system for much of the year,
the economy thrived. People switched to cars or air
travel. The additional cars lined the pockets of the
treasury with lucrative fuel taxes and the low-cost
airlines thrived. Rebuilding following the floods
increased construction and kept the property market
strong. The bail-outs for farmers forced to cull their
stocks have kept prices high for livestock. The
government poured the surplus into schools and hospitals
creating more jobs. |
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Similarly in the U.S., our hearts
may be reeling from the senseless slaughter of innocent
victims, but Americans will not be held back. They still
have warm and comfortable homes. They still have fuel for
their automobiles. They still have food on the table.
They still have large stocks of grain in storage to feed
starving nations around the world. They still have a
health care system that ensures prompt medical attention
rather than the long waiting lists over here. |
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So it is with fear and trepidation
that I issue a warning today. Everything these
zealots despise still exists. With our soldiers
on watch in distant corners of the world and a sense of
normality returning, risk remains high. What would it
take for a knock-down punch? I won't spell it out here.
You know the answer. Shore up those internal
defences now! |
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TOLERANCE BEGINS AT HOME |
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Yesterday I found myself bombarded
with alternative views. My minister e-mailed the program
for our service on Sunday. It was an innocent enough act
meant only to assist me in preparing for my role.
Glancing down the sheet my eyes hit upon a confession
giving me, the consumer, the blame for a multitude of
ills currently facing the countryside. I couldn't believe
that we would all be expected to say these words. In my
heart I disagreed with the simplistic statements
regarding a complex issue. It was all wrong. |
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Earlier in the day I met with a
neighbour who'd been away for several weeks. I was
immediately criticised, as an American, for allowing
contributions to Noraid to fund IRA bombs. There was even
the implication that America was finally getting the
terrorism it was due. |
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Finally today while I was in the
kitchen above the gardener's storage room, I heard voices.
This is Saturday. Staff don't normally work on Saturday.
I went down to see who was there and found volunteers
diligently moving apples from the barrels for storage. My
appearance surprised them. I reassured them I'd only
wanted to know who was downstairs. Somehow I felt that I
was infringing on them even though it was my home. |
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So what was my response? Regarding
the confession, I'll know tomorrow how it goes. Perhaps
others will be challenged by these words. In any event,
our new minister will only learn by doing. As for my
neighbor, I pleaded ignorance to the issues and the crime
but intend to learn more for the future. As for the
kitchen incident? I think I should get a grip. Life is
too short for fruitless misunderstandings. |
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These issues have made me realise
the daunting task which faces our world. To heal wounds,
move forward, and unite along common values will require
sensitivity from each and every one of us. We must learn
to celebrate the differences and love one another. I
suggest we all start practicing at home. |
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2002 H² Associates All Rights Reserved |
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