Financial Controls Faulted in Schools, Medicaid, Tax Office

By David Nakamura
Washington Post Staff Writer
Tuesday, April 8, 2008

The D.C. government has serious flaws in its handling of finances in the public schools, Medicaid and the Office of Tax and Revenue, according to an independent audit to be released tomorrow.

In its recently completed Comprehensive Annual Financial Report, BDO Seidman cited each of those areas as a "material weakness" in the District's internal financial controls, according to city officials who were briefed yesterday.

Overall, BDO auditors gave the city a "clean" audit for fiscal 2007, D.C. Chief Financial Officer Natwar M. Gandhi said. But the three material weakness citations -- the most serious level of concern below an "unclean" audit -- are part of a disturbing trend and could pose a threat to the city's good standing on Wall Street if the problems remain uncorrected.

In the audit for fiscal 2006, only the school system's financial controls were cited for material weakness, and the District received no citations in the two previous years. Furthermore, the 2007 audit found six "reportable conditions" -- one step removed from a material weakness.

Among the reportable conditions were problems with the city's handling of federal grant money, its payment of unemployment and disability compensation, its system for approving overtime pay and the financial management of two now-defunct planning agencies.

BDO Seidman also determined that the District's procurement operations and its payment of city vendors were not in full compliance with the law.

The annual independent audit is mandated by Congress. Gandhi attributed some of the citations to new accounting standards that require auditors to upgrade the seriousness of problems that go unaddressed from one year to the next.

"We have gone backward, and some of that is because standards have become harsher," Gandhi said. "That's what we have to deal with. The accountants were quite cautious."

Officials acknowledged that the city has a tough road ahead to fix the problems, which came in chronically troubled departments.

"The thrust was nothing new here," said D.C. Council member Jack Evans (D-Ward 2), head of the council's Committee on Tax and Revenue. "These are a continuation of problems we had in the past. We've made some progress, but what we're going to do is address the three material weaknesses and other stuff in there on a constant basis."

Last year, BDO auditors cited significant concerns about the school system's internal controls over payroll, procurement, federal grants and Medicaid services. Among the problems cited were poorly trained staff, incomplete records, unauthorized overtime pay and inadequate monitoring of federal grant money.

Those problems continued through fiscal 2007, which ended in September, according to the new report.

Mayor Adrian M. Fenty (D) took control of the schools away from the Board of Education in June. Mayoral aides said yesterday that Fenty and his school chancellor, Michelle A. Rhee, have made significant strides but that their work will not be fully recognized until next year's audit.

The tax office was rocked by an embezzlement scandal in November that could involve more than $50 million, according to federal law enforcement officials. BDO auditors spent 20 pages on the tax office's problems, city officials said.

Defects cited in Medicaid, the health-care program for the poor, include problems with transportation and managed-care expenses. The District has begun to address those problems through new vendor contracts, mayoral aides said.

Fenty also has proposed creating a health-care finance agency that would focus exclusively on shoring up the finances of the Health Department, aides said.

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