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Whither the CAFR?

Officials on various floors of the John A. Wilson Building have been waiting on pins and needles for the release, probably next week, of the D.C. government's long-delayed Comprehensive Annual Financial Report. And D.C. Wire has gotten word that City Hall is bracing for a critical review by BDO Seidman, the outside firm conducting the independent review of city finances mandated by Congress a decade ago.

In recent years, the CAFR had begun to take on a rather routine quality, as the city's financial house continued on its slow, but steady, trajectory on Wall Street. This year, however, a combination of factors has conspired to make city officials more nervous than usual.

First, of course, was the public disclosure in November of a $50 million embezzlement scandal in the city's tax and revenue office. Second, D.C. Council member Jim Graham threatened that the city might sue BDO Seidman for failing to have discovered the tax office fraud. Third, new accounting standards went into effect last year that require auditors to downgrade departments that fail to improve after being flagged for problems.

BDO auditors, according to city government sources, have been conducting more tests of the city's financial reporting systems in the wake of the tax scandal and appear determined to "write up everything" they find to be sure the company is not vulnerable to more second-guessing. The extra reviews have added a two-month delay in the release of the CAFR.

Last year, BDO flagged the city's school system for "material weaknesses" in four areas related to the public schools: payroll, procurement, federal grants and Medicaid services. Among the areas cited were poorly trained staff, incomplete records, unauthorized overtime pay and inadequate monitoring of federal grant money. The "material weakness" designation was the most serious level of concern below an "unclean" audit, which could affect the city's bond ratings on Wall Street.

City government sources who have been involved in conversations with the BDO auditors this year said the school system will remain a problem. The sources expect the tax office to be cited as a material weakness, and said other vulnerable departments include the city's procurement office and perhaps the city's Health Care Alliance.

"There's going to be a lot more negative news," said one source, who, like the others, spoke on the condition of anonymity because the CAFR has not been released. "We're going to take a hit."

None of the sources D.C. Wire spoke with expects the city to receive an "unclean" audit. But each said the additional red flags will force Mayor Adrian M. Fenty (D) and the council to take notice and address the problems aggressively.

"This could be a good thing," another source said. "We've never had a more thorough audit. If we follow through on the different recommendations we get, we'll be able to make a lot of good changes."

By David A Nakamura  |  April 3, 2008; 7:00 AM ET
Categories:  City Finances , David Nakamura  
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