WASHINGTON - The District of Columbia received a "clean" audit for fiscal 2007, but was cited for three "material weaknesses" in financial reporting for its Medicaid program, public schools, and Office of Tax and Revenue.
It is not clear whether the material weaknesses will raise concerns among the credit rating agencies that rate the district's debt.
District of Columbia chief financial officer Natwar Gandhi and Mayor Adrian Fenty released on Tuesday the city's fiscal 2007 comprehensive annual financial report, and BDO Seidman LLP, the accounting firm that audits the district's financial statements, yesterday released its "yellow book," a supplement which contains the firm's audit opinion. The fiscal 2006 audit only cited the District's management of public schools as a material weakness.
"Yes, we have regressed somewhat," Gandhi said at a hearing held by the district council finance and revenue committee hearing yesterday. "We're trying to get control of the situation."
The accounting firm also noted as deficiencies, or "reportable conditions," 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. The city's handling of its Medicaid program was a "reportable condition" in the fiscal 2006 audit. Reportable conditions not handled the following fiscal year can make their way into the next audit as a material weakness, which is what occurred with the Medicaid issue, according to a district official.
"Yellow book findings do not necessarily affect the ratings," Karyn-Siobhan Robinson, a spokeswoman for Gandhi's office, said when asked about the issue. "The challenge of a yellow book finding is that if it goes unremediated it could 'evolve/deteriorate' into a qualified opinion on the financial statements. A qualification would be most detrimental."
A Fitch Ratings spokeswoman said analysts are currently reviewing the audit. Moody's Investors Service and Standard & Poor's could not be reached for comment by press time.
Currently, Moody's rates the city A1, and both Fitch and Standard & Poor's rate it A-plus - the highest bond ratings the city has ever garnered.
In late December, the accounting firm had asked for an additional 60 days to complete its audit of the district's fiscal 2007 comprehensive annual financial report, following a federal investigation into the extent of an embezzlement scandal within the district's tax and revenue office. Several employees reportedly stole more than $50 million through a scam involving phony property-tax refund checks that investigators believe could date back to 1990.
When the scam was discovered, market analysts considered the sum to be meager when compared with the hundreds of millions that the office recovered under Gandhi, and the city's more than $7 billion annual budget.
According to the CAFR, the district had a $281 million surplus in fiscal 2007. Its revenues were $52 million higher than initially forecast, whereas general fund expenditures were lower in every category, Gandhi said. The fund balance was $1.5 billion at Sept. 30, 2007.
