TJP

Preventing Another D.C. Tax Scheme

Byron A. Ellis

November 09, 2007 

We do not know the complete story of D.C. tax scheme. However, it is difficult to understand how such a massive tax fraud could occur without being noticed or captured by the leadership or the available information systems.

The District has several major enterprise systems for financial management, payroll and pension administration, and tax administration.

Several high-ranking officials at the Office of Tax and Revenue have been asked to resign. According to Channel 4, D.C. Chief Financial Officer (CFO) believes that they should have discovered the irregularities earlier.

Apparently, the scheme started in 2004, or earlier, and involved real estate tax refunds. The Washington Post (Nov. 8, 2007) reported that this summer a bank employee refused to cash a $410,000 refund check triggering a federal investigation.

According to the Washington Post, D.C. CFO championed multimillion-dollar investments in audits and on a computer tracking system, specifically for the Office of Tax and Revenue to spot financial irregularities. So, why did the audits and the computer tracking system failed?

Software tracking systems, such as enterprise resource planning (ERP) systems are widely used for measuring individual and organizational performance, preventing internal theft, enforcing laws and workplace rules, and integrating production, inventory control, scheduling, purchasing, and cost accounting.

An ERP is an integrated system with modules addressing each process in the organization. However, many organizations implement information systems in a fragmented fashion; meaning that they implement various stand-alone systems in different departments that do not seamlessly interact with one another. D.C. government appears to have implemented multiple stand-alone systems. A 1999 statement, from D.C. former CFO Valerie Holt, on Year 2000: The Readiness of SOAR and other Information Systems, lists 8 systems.

Often, fragmented systems are territorial and outside of the purview of the organization hierarchy. Thus, the group managing the system can allow it to degenerate. Some stand-alone systems are not even reconciled on a monthly basis.

In practice, however, information systems support best practices, such as Business Process Redesign (BPR) across several core business functions. BPR is a pre-planning stage for ERP, a key “mapping” concept for aligning business strategies with information technology. So, the organization codifies “best practices” within the software. Therefore, if the Office of tax and Revenue information system issues large real estate tax refunds, such as the $410,000 refund check that the bank teller refused to cash, there should be a procedural check to validate the refund.

The DC Office of Tax and Revenue should revisit existing procedures and managerial roles to ensure that a similar situation will not occur. Moreover, it should evaluate the effectiveness of its informational systems, as well as auditing procedures.

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