Auditor Threatens to Quit, Fearing It Might Be Sued

By David Nakamura
Washington Post Staff Writer
Friday, November 30, 2007

The firm that performs the District government's annual financial audit is threatening to quit because, it says, a D.C. Council member threatened the company with a lawsuit.

The dispute began during a meeting Wednesday between council members and officials from BDO Seidman, which conducts the Comprehensive Annual Financial Review required by Congress since the city's financial crisis of the mid-1990s. During a question session, several council members asked why the company had not uncovered the major embezzlement scandal that has rocked the city's Office of Tax and Revenue.

In a letter to District officials yesterday, BDO partner James C. Nesbitt said one council member questioned whether the company had "bonding or insurance," which company officials interpreted as the threat of legal action. Such a threat, Nesbitt said, could compromise BDO's ability to perform this year's audit, which has begun.

"External impairments to independence occur when auditors are deterred from acting objectively and exercising professional skepticism by pressures, actual or perceived, from management and employees of the audited entity," he wrote. "If we are not independent, we need to stop working on the audit immediately and will be unable to issue an opinion."

Nesbitt asked the District to provide written assurances that the city has no plans to sue the company.

The letter alarmed several council members who said that without a timely audit, the city could risk violating Congress's mandate and send a bad message to Wall Street.

"It would be a huge issue," Chairman Vincent C. Gray (D) said, because it would set back the audit "for an indeterminate amount of time and we'd have to begin anew."

Gray stressed that he knows of no plans to sue BDO. But the chairman said he is not willing to write a letter that would promise that the city would never sue the company because "we don't know what else will come out."

Jim Graham (D-Ward 1) said he was the member who asked whether BDO had insurance to protect against a lawsuit. Graham said he was concerned by BDO officials' responses about the embezzlement scheme. Two tax office employees were arrested and charged last month by federal authorities with stealing more than $20 million in bogus property tax refunds.

BDO is paid $7 million to conduct the annual audit, Graham said, but the company made no mention of potential tax office problems in its 2006 review. He also said D.C. Auditor Deborah K. Nichols had noted several times that the city should monitor property tax revenue flows after noticing a spike in tax refunds in 2004.

"We're trying to figure out who is responsible," Graham said. He didn't know whether BDO is "responsible because we don't have all the facts," he said. "Now, they're putting up this smoke screen when they have not had any clear answers for me."

Last night, D.C. Attorney General Linda Singer sent a one-paragraph response to Nesbitt that the city had no current plans to sue BDO.

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