Newport Schools Fire Business Chief Wagner : Investigation: Official allegedly diverted $175,000 in district funds to own use. A 1990 audit disclosed ‘errors.’

Stephen A. Wagner, the Newport Beach school district business director who is under criminal investigation, was fired Tuesday night for allegedly diverting to his personal use at least $175,000 from an employee health insurance fund.

That same fund was cited in the summer of 1990 for bookkeeping “errors” by school district auditors, and school district officials acknowledged at the time that “proper controls were not maintained,” it was learned Tuesday.

Officials of the Newport-Mesa Unified School District said they implemented corrective procedures recommended by the auditors the same year. But Forrest K. Werner, president of the district’s elected board of trustees, said any tightening of procedures is only as good as the person who would implement it--and in this case, it would have been Wagner.

The seven trustees of the Newport-Mesa district voted unanimously Tuesday night to immediately fire the 40-year-old Wagner. He has been suspended without pay since Oct. 23, when the first of four checks written to a shoe repair company he co-owns came to light as part of an ongoing criminal investigation by the Orange County district attorney’s office.

Wagner did not attend the board meeting in Newport Beach or send a representative to appeal the dismissal. He could not be reached for comment on the trustees’ action.

Several parents Tuesday night demanded that the trustees begin a national search for someone to replace Supt. John W. Nicoll as early as July 1, 1993, when his current contract runs out.

Greg Wohl, owner of a Newport Beach investment company, told the seven trustees that he and a group of about six parents had collected 160 signatures on petitions seeking Nicoll’s removal.

“This is not a personal vendetta against Dr. Nicoll,” said Wohl, saying he was aware that the superintendent faces quadruple heart bypass surgery today. “I hope he gets well. . . . However, we need new leadership.”

Wohl said news reports of Wagner’s suspension sparked the petition drive. “Wagner is a symptom of the problems--a district with poor leadership and no vision,” Wohl said.

Two years ago, an auditor hired by Newport-Mesa to examine its books discovered certain bookkeeping deficiencies in the health plan fund that is now at the center of the Wagner investigation.

The Long Beach accounting firm of Lemke & McDade made several recommendations to school officials in a fiscal 1990 report in order to correct the problems. In the audit report, school officials cited staff shortages for the problems.

Thomas Godley, the district’s assistant superintendent for budget, said the district adopted the audit recommendations. But on Tuesday, Wagner was fired for writing four checks totaling $175,357 from the health fund to Cobbler Express Corp. between June, 1991, and April, 1992. The health insurance fund singled out by the auditor’s report is a revolving account used to reimburse medical claims by the district’s approximately 1,800 employees. As claims are paid out, the fund is replenished by transfers from the district’s self-insured health account, which is kept at about $5 million, Werner said.

The revolving fund, which has a constant flow of checks, is supposed to be kept at about $600,000 on a monthly basis. It is one of a handful of accounts at the Newport-Mesa district that does not fall under the scrutiny of the County Department of Education, which funnels state, federal and local property tax funds to local school districts.

Wagner’s attorney, Paul S. Meyer of Santa Ana, could not be reached for comment Tuesday. Meyer has said repeatedly that when the criminal investigation of Wagner and his handling of school district funds is concluded, no money will have turned up missing.

However, officials with the district attorney’s office noted that even if no money proves to be missing, it would still be illegal to divert school district funds for personal use.

“It would still be a form of embezzlement,” said Deputy Dist. Atty. Carl Biggs, who is overseeing the criminal probe. “Instead of stealing the money, it would be stealing the use of the money and creating a risk to the district that would not exist otherwise.”

Biggs could not say when the investigation would be completed.

“We are continuing to sort through a number of different accounts that Mr. Wagner had access to to determine if there have been any thefts,” he said.

According to the fiscal 1990 audit, the Lemke & McDade firm was concerned about several bookkeeping problems with the health fund, including unusual transfers of money and the fact that it wasn’t reconciled at the end of every month.

The firm found that “certain reimbursement checks from the cafeteria fund had been mistakenly deposited in the health plan revolving cash fund savings account.”

The reimbursement checks from the cafeteria fund were supposed to go to Newport-Mesa’s general fund account under the Department of Education’s supervision but somehow ended up in the health plan fund instead.

General fund monies had been used to pay cafeteria employees’ wages, and the cafeteria fund, controlled solely by the school district, was supposed to be used to reimburse the general fund.

Although cashier checks were drawn to repay the school’s general fund account held at the county treasurer’s office after Lemke & McDade highlighted the transaction, it would be four months before they were deposited, according to the 1990 audit.

On Tuesday, Assistant Supt. Godley said Wagner attributed the health fund’s problems to staff cutbacks. The district’s official response to auditors in the 1990 report blamed health fund irregularities on “numerous staff positions being vacant.”

Godley declined to estimate how much in cafeteria funds ended up in the health account.

“We’re looking at that now,” he said. “I don’t know that we have determined that.”

He said the transfer of funds “is unusual and they shouldn’t go there.” He said a clerk may have just written down a wrong account number.

“We don’t know if it was a deliberate wrong transfer,” Godley said. “It might just be an honest mistake.”

Godley said Wagner, when asked why it took four months to repay the general account, again blamed staff shortages for the trouble.

“I was told at the time that people were just too busy to get it moved right away,” Godley said.

“It should have been done the next day. . . . It just involved getting the cashier’s checks from the bank and getting them moved to the treasury,” Godley said. “I wouldn’t say it is that complicated.”

Lemke & McDade further questioned in 1990 why interest earned on the health fund account was never recorded. There were also no service charges recorded.

“These errors would not have occurred if the health plan revolving fund bank accounts were reconciled on a monthly basis,” the accountants said. Monthly reconciliation was the auditors’ chief recommendation. Godley said he passed on those orders to Wagner.

“I gave the instruction I wanted it reconciled monthly and again was told (by Wagner that) people were just too busy to keep a monthly reconciliation,” Godley said.

Trustees’ President Werner said he does not recall being alerted to specific problems in the revolving health fund in connection with the audit of the district’s 1989-90 finances. “That was never disclosed to us as a board,” Werner said. Still, he added that trustees would have voted to implement whatever suggestions were made by the auditors to correct or tighten financial procedures as soon as they received the audit report, which is typically about 60 days after it is given to the district.

“We asked a few questions and we left it up to the district to respond to those recommendations,” Werner said of the audit.

Actual implementation of recommendations would be done by district officials and their designees, in this case, Wagner, Werner said. “That would have been Steve Wagner’s responsibility.”

Following the trustees’ firing of Wagner, Werner read a statement.

“The action the board has taken tonight regarding Stephen Wagner brings to a conclusion any and all comment from the district Board of Education members, as well as staff, until all investigations are completed,” Werner said.

Times correspondent Mimi Ko contributed to this story.

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