D.C. Council members challenged paying an outside company $1.5 million extra for an audit that failed to uncover “a fairly simple” scam that ripped off the city tax office of up to $40 million.
“It’s a legitimate and important question why their auditing samples completely missed $40 million in theft,” Councilman Phil Mendelson said of auditor BDO Seidman.
In the wake of the unprecedented D.C. tax office scandal uncovered last November, BDO required an additional two months to finish its review of the District’s finances and internal controls.
Yet the tax scam “seemed to be a fairly simple scheme” that should not have required a forensic auditor to uncover, Council Chairman Vincent Gray said during a public briefing on the Consolidated Annual Financial Report and the associated Yellow Book audit.
“There’s an insult-to-injury aspect here,” Gray said. “The auditors should have caught this before, which may or may not be correct. But $624 an hour?”
Bill Eisig, a partner in auditor BDO Seidman’s Washington office, responded that the fraud in the Office of Tax and Revenue was a “failure of the management of the District” and was “simply not an audit issue.”
To detect the theft of a handful of unusually large but fraudulent refund checks would have required a two-year forensic audit that cost “20, 30, 40 times more than the CAFR,” Eisig claimed.
D.C. Inspector General Charles Willoughby agreed: “This was not something that was visible to the naked eye.”
Two former OTR employees are alleged to have stolen more than $20 million, and according to some estimates as much as $40 million, over the course of two decades by manipulating the real estate tax refund process.
Following the arrests, BDO, D.C.’s auditor since 2005, put an extra 10,000 hours into certifying the District’s 2007 financial statements and reviewing the government’s internal controls.
What BDO ultimately found and printed in the Yellow Book was failure across the government: Three material weaknesses in OTR, Medicaid and the public schools and six areas of “significant deficiency.”
“After years of progress, this audit clearly is a step backward,” Gray said.
Councilwoman Carol Schwartz described the audit’s findings as “all very disturbing.” Councilman Phil Mendelson said things are “getting worse.” But Councilman Jack Evans focused on the “silver lining” — that BDO found D.C.’s financial statements to be “clean.”
“Frankly that outweighs much of the concerns that people have, because the clean opinion allows us to keep our bond ratings where we are,” Evans said.
