The Securities and Exchange Commission has launched an inquiry into audits handled by the D.C. Office of the Chief Financial Officer, requesting all reports from the office’s internal affairs unit dating to January 2010.
In an Oct. 19 letter obtained by The Washington Post, the SEC’s enforcement division says it is conducting a “confidential, informal inquiry.”
Natwar M. Gandhi’s office has a Nov. 2 deadline to provide the commission with copies of the audits; any communications with outside auditors, the mayor’s office or the inspector general about the audits; and “document retention policies and procedures,” including those that pertain to the use of e-mails.
The inquiry follows a series of articles by The Post about previously unreleased audits critical of the tax office overseen by Gandhi, the chief financial officer, and a unanimous vote by the D.C. Council last week requiring the office to post completed audits online.
The commission declined to comment Tuesday.
The SEC’s action was revealed in a letter Gandhi wrote to Mayor Vincent C. Gray (D) and D.C. Council Chairman Phil Mendelson (D) on Tuesday about a recent bond offering. He said his office was attaching an explanation of the SEC’s request to the bond offering in the form of a supplement.
The supplement said Gandhi’s office received the SEC letter Monday, requesting “all audits, inspections, reviews and investigations (including drafts)” performed by the internal-affairs unit.
Gandhi has come under intense scrutiny in recent weeks because of his long-standing policy of keeping the audits out of public view, saying they could be used as a primer to take advantage of weaknesses in the office. But even Gandhi’s closest allies on the council have faulted his agency for failing to release the audits that chronicled problems in the tax office.
The SEC’s inquiry indicates that concerns about the audits could stretch beyond the public’s right to know and into the city’s coveted bond rating and bond sales. For years, Gandhi has touted the city’s improved bond rating as a measure of his success as fiscal chief. But council member Jack Evans (D-Ward 2), who formerly worked at the SEC, said a failure to disclose the critical audits to investors in offerings could have been a violation if the information is considered material.
“It’s very serious when the SEC sends a letter, even if it is an informal inquiry. This is the first step,” said Evans, who met with Gandhi and his staff Tuesday. “My recommendation is that the city hire an expert securities lawyer to represent them. We need to take this matter seriously and totally cooperate.”
Evans, chairman of the Committee on Finance and Revenue, noted that the city offered bonds Monday and that the SEC likely read stories about the audits in The Post. “Doing their due diligence . . . in the SEC’s mind, were there any material items in those audits that were not disclosed in the bond offerings? Would they have influenced the decision making of bond buyers?” Evans asked. “The key is ‘material.’ ”
In the letter to the CFO’s office, SEC attorney-adviser Yolanda Gonzalez said the inquiry “should not be construed as an indication by the Commission or its staff that any violations of law have occurred, nor should it be considered a reflection on a person, entity or security.”
For 15 years, the District’s finances have cleared annual reports. The Comprehensive Annual Financial Report, which helps determine the District’s credit ratings, has scrutinized the financial operations of city agencies, such as the tax office, procurement, public schools and Medicaid.
A separate but related audit explores internal controls and management issues. The reports, conducted this year by KPMG LLP, are overseen by the D.C. inspector general.
The internal audits the SEC is seeking are related to offices overseen by Gandhi: finance and treasury; tax and revenue; and financial operations and systems. The copies must be exact duplicates, meaning that any fax lines should be visible, and the OCFO must retain all originals in case the SEC requests them in the future, according to Gonzalez’s letter, which she addressed to David Tseng, the OCFO’s general counsel.
This month, William J. DiVello resigned as executive director of Gandhi’s internal affairs unit, known as the Office of Integrity and Oversight. He said Gandhi’s senior staff had told him that they would not publicly release an updated version of an audit conducted by his office that found that senior tax managers could make changes to property assessments undetected.
Gandhi’s office, however, again disputed DiVello’s finding in its supplement to the bond offering, saying there was a way to trace changes to the property assessments. But DiVello has told the council that the system that tracks such changes was not being used.
David Umansky, a spokesman for Gandhi’s office, distributed the supplement and the letter sent to Gray and Mendelson to the media. He did not respond to requests for further comment.