The massive tax office theft uncovered in November cost the D.C. treasury nearly $9 million in fiscal 2007 alone, according to the city’s first concrete account of the scope of the scam.

The Consolidated Annual Financial Report, released Monday by Chief Financial Officer Natwar Gandhi, claims that $8.8 million was taken between Oct. 1, 2006, and Sept. 30, 2007.

In the so-called “Yellow Book” audit attachment to the CAFR, outside auditor BDO Seidman documented numerous failures of internal controls over financial reporting within the D.C. government. Those included three material weaknesses, the most serious of the conditions: The Office of Tax and Revenue refund process, management of Medicaid and the D.C. Public Schools.

The audit also found “reportable conditions” in investment reconciliation, the defunct National Capital Revitalization Corp. and Anacostia Waterfront Corp., management of grants, compensation, and management of the disability and unemployment compensation programs, according to sources familiar with the document.

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Two OTR employees are charged with issuing fraudulent tax refund checks in the millions under Gandhi’s nose. In a letter opening the 170-page CAFR, Gandhi apologized for failing to “detect and stop the fraud.”

“I relied upon the management team that I put into place at OTR, and my trust in their professional and technical competence was obviously misplaced,” Gandhi wrote. “I also failed to more closely monitor the development and implementation of internal controls and management oversight at OTR.”

Federal sources have told The Examiner the thefts began in 1989 and continued while Gandhi was chief of the tax office in the late 1990s.

The CAFR nevertheless offers an unqualified “clean” opinion of the District’s financial statements from BDO, Gandhi said. In other words, the numbers for 2007 prepared by Gandhi’s shop accurately represent the District’s financial condition, including its end-of-year $280 million surplus.

The alleged fraud, Gandhi wrote, will not require D.C. to restate prior financial statements, “nor has it affected this year’s unqualified ... audit opinion from our independent auditors, because the amounts are not considered quantitatively ‘material’ in relation to the District’s overall budget.”

The theft from the Office of Tax and Revenue, which is still under investigation by the U.S. attorney, resulted in the loss of between $20 million and $40 million over the course of at least seven years, according to estimates by law enforcement officials.

In a letter attached to the CAFR, Mayor Adrian Fenty noted the problems cited in the Yellow Book, saying his administration is “committed to remedying the issues identified, to strengthen the District’s financial position and its ability to deliver on our basic promise to citizens.”

The CAFR was due by Feb. 1, but BDO sought a 60-day extension in light of the tax theft. The D.C. Council last week approved a $1.2 million payment to BDO to cover the extra time.

mneibauer@dcexaminer.com