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Tax Suspect's Guidance on Software Left D.C. at Risk

By Dan Keating
Washington Post Staff Writer
Tuesday, June 10, 2008

The tax manager charged as the mastermind of the biggest fraud in the District's history helped play a role in designing the agency's computer system while she was allegedly stealing millions of dollars a year, current and former employees said.

Following Harriette Walters's input, officials left her small unit out of the new software system, making it easier for her to escape detection as she allegedly produced fake checks that prosecutors say amounted to $50 million.

Directors in the scandal-plagued tax department now want to scrap the $135 million system rather than try to upgrade it to make it more secure. The chief financial officer's technology manager says the system, installed between 2000 and 2004, is too outdated and clumsy to be worth fixing.

Before her arrest in November, Walters was a 26-year tax employee known among her colleagues as a problem solver with a knack for finding solutions by using the department's antiquated and balky computers or finding a way around them. Although she did not have final say over the new Accenture Integrated Tax System, Walters contributed to the decision that her unit, which handled real estate tax refunds, be left out of it.

Chief Financial Officer Natwar M. Gandhi has budgeted $10 million for a search for a new program that can process the city's income, business and real estate taxes. The Accenture computer system is not directly to blame for the embezzlement scandals that have racked the agency, officials said. Rather, the fault lies with the decisions of what was left out of it.

"It was the things that were not included that cost us," said Mike Teller, who took over as Gandhi's technology chief in 2005. "The specification did not include things that, in hindsight, should have been included."

Those decisions by officials were made under dire conditions, and with an alleged mole in their midst.

Walters's guidance came at a critical time in setting up the computers, which were designed to help lift District finances from the 1990s nadir of near-bankruptcy.

By 2003, the District had spent $100 million over five years for Accenture to set up personal and business tax processing. But it was left with only one year and $5 million to add in real estate taxes. Gandhi's tax managers had to decide what to include and what to leave out.

Walters is accused of creating bogus refunds with fictitious names that were not detected because they were processed outside the main system and not matched to authentic real estate records. The theft that prosecutors say might have started in the 1990s was uncovered a year ago when a SunTrust bank teller balked at cashing a $410,000 check, triggering a federal investigation. Five co-conspirators have pleaded guilty so far.

Additional weaknesses were revealed in a new embezzlement scandal last week. Personal income tax clerk Jacqueline C. Wright was charged in federal court with creating six fake tax refunds totaling $184,000 for her boyfriend last year.

An investigation began three months ago when the pair allegedly filed for a seventh refund worth $40,785. That latest attempt triggered system alerts put in place after November.

The charges in the Wright case include creating a false $40,000 refund in March 2007. Even though the check had been cashed, Wright used the Integrated Tax System to issue a replacement check on the grounds that the first check had been lost, according to the charges. Then she issued a second replacement check. Then she issued a third replacement check. At that time, the Integrated Tax System added $33.03 of interest to the check to compensate for the long delay in issuing the refund.

"Wright thus exploited a deficiency that allowed a check to be 'reissued' even without any action being taken to cancel the first check or confirm that the first check had not already been negotiated," according to the charging papers.

The $40,000 checks fell below the threshold for requiring a supervisor's approval, said David Umansky, spokesman for Gandhi. He said 77 personal refunds of at least $40,000 were issued last year.

"Our system has got a plethora of internal controls on it," said tax office head Stephen M. Cordi, hired this year to replace managers cleared out when the Walters embezzlement scandal broke. "On top of that, we have manual controls. But you're always vulnerable to an enterprising employee who knows how the controls work."

In the Walters case, tax managers were fired because refund checks for hundreds of thousands of dollars apiece were issued for years without the required supervisor sign-offs. At the time, Gandhi expressed a sentiment similar to Cordi's, saying, "The most sophisticated audits won't be able to find this kind of corruption."

Some observers, however, have said outside auditors are responsible for detecting when anti-fraud policies are not being followed. It might be impossible to stop an inside person from stealing, but thieves can be deterred if they think someone will detect what they did, said Alan B. Morrison, a former District attorney general who has helped nonprofit groups implement fraud prevention.

The District's pursuit of a new tax system has exposed a rocky relationship between the current generation of tax managers and Accenture. In addition to the $105 million paid to create the system, the consulting firm has been paid at least $5 million a year to help run it, totaling $135 million so far.

Sherryl Hobbs Newman, who took over the tax office after the Integrated Tax System was installed, commissioned a $200,000 report in 2006 to review the software. The report by the Wendell Group, a technology consulting firm, called the system a "failure," blaming Accenture and District managers who made bad choices. The report suggested that Accenture should have to upgrade the system at no additional cost to the city.

Accenture denied all of the Wendell Group's findings. It repeatedly pointed out that Accenture provided the systems chosen by District managers at the time.

The Wendell report held that Accenture's role as the experienced expert gave it greater responsibility for failures.

But Teller disagreed.

"Ultimately, it's the responsibility of the customer -- the government -- to make the decision," he said.

Teller and his staff concluded in their own written analysis that the system needs to be replaced.

Teller said previous managers had to make difficult decisions under pressing circumstances in the midst of changing technologies in the late 1990s.

He expects that putting newer technology in place will eliminate the need to pay a consultant such as Accenture $5 million a year to run it.

Customer service managers who help taxpayers with problems find the system clumsy and hard to use, Cordi said.

Accenture program manager J. Christian Stauffer said the system was state-of-the-art when installed and is far easier to use than Wendell described. He said training provided in 2000 or 2001 needs to be repeated to make sure that newer employees appreciate the software's flexibility.

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