WASHINGTON (Map, News) - An outside audit of D.C.’s scandal-ridden tax office found that Chief Financial Officer Natwar Gandhi’s staff has operated an ineffective anti-fraud program, failed to justify manual tax refunds and may have approved refund checks without review.

The audit of internal control failures across the D.C. government, performed by BDO Seidman and released Wednesday, delves deeply into the deficiencies that riddle the city’s financial management.

The first 18 pages of the so-called “Yellow Book,” an attachment to the 2007 Consolidated Annual Financial Report, target the Office of Tax and Revenue, home to the largest theft case in District history.

“The District may have elements of an anti-fraud program, but it does not seem to have as coordinated and comprehensive an anti-fraud program as it should given its size and complexity,” BDO auditors wrote.

The Yellow Book notes three “material weaknesses” in financial controls: the tax and revenue office, management of the Medicaid program, and the D.C. Public Schools. Material weaknesses, if not corrected, have the potential to damage the District’s reputation on Wall Street.

Another six areas were labeled “significant deficiencies,” including the management of grants, compensation, and management of the disability and unemployment compensation programs.

“Yes we have regressed somewhat, in terms of the comments we’ve received from the auditors,” Gandhi told the D.C. Council’s finance and revenue committee Wednesday.

At-large D.C. Councilman Kwame Brown, the only local legislator to publicly call for Gandhi’s resignation, said the Yellow Book “demonstrates another area of concern and alarm,” and moving forward might require “a different cast.”

In fiscal 2007, the scope of BDO’s audit, 26 manually issued property tax refund checks were found to be fraudulent, totaling $8.8 million, or $338,461 per check. The scam, allegedly led by two OTR employees as far back as 1989, cost the treasury at least $20 million.

Many of the refund checks lacked any supportive correspondence, BDO found, and in the case of five refunds, the square and lot numbers to which the refund pertained “did not appear to exist.” A review of 134 manually issued refund vouchers found 127 missing significant data.

OTR agreed to re-evaluate its anti-fraud program, to finalize a directive on processing refunds, to explicitly document when a refund check can be marked “Hold for Pickup,” and to attach all relevant data to each refund voucher.

mneibauer@dcexaminer.com