Checks, controls followed embezzlement

Deirdre Newman

As a result of the embezzlement 10 years ago of about $4 million,

the school district implemented a series of checks and controls to

prevent a greedy, powerful employee from having free rein with the

district’s finances.

The embezzlement, discovered in October 1992, shattered the

Newport-Mesa Unified School District’s credibility and sent the

budget director, Stephen Wagner, to jail, where he would eventually

die. Wagner had used the stolen funds to support his lavish

lifestyle, which included mink-lined tuxedos, expensive cars and

jewels.

In the aftermath of the scandal, auditors and district officials

tried to piece together the complex web of deceit that Wagner had

woven and started setting up a series of safeguards to prevent

another embezzlement. The system has since become a model for the

rest of the state.

“Ethics, clarity, proper checks and balances -- all of these

things have to be done in a very routine way,” Supt. Robert Barbot

said.

Wagner pleaded guilty that December to embezzling more than $3.5

million. The embezzlement losses were in excess of $4 million, and

the district recovered only about $1 million of that, through

settlements with Wells Fargo and two accounting firms and by taking

Wagner’s state retirement funds, said former Assistant Supt. Mike

Fine, who started with the district in November 1992.

Confronted with the financial morass left by Wagner, Fine -- now a

deputy superintendent for the Riverside Unified School District --

began the process of establishing some internal controls for the

district, mostly starting from scratch.

“[Wagner] clearly demolished and wiped out any system of internal

controls the district at one time had, and so we needed, piece by

piece, to put those controls back in place,” Fine said. “I started

fresh because, in going back, we didn’t know what was contaminated.”

In the past, written financial procedures had been very informal:

For the most part, employees wrote out their responsibilities on a

piece of paper when they went on vacation, Fine said.

The next step was refining the cash collection procedures -- how

money comes into the district and how it is documented -- since

Wagner had been diverting huge checks that came into the district,

Fine said.

Accounts also had to be reconciled, since one of the accounts

Wagner stole from was used by previous auditors to reconcile the

district’s balance, Fine said.

The embezzlement also led the district to address its entire bank

account management system, since it worked with a variety of banks

throughout the area.

“At the time, everybody banked with whomever they wanted,” Fine

said. “A school would go to their local bank to make it convenient. A

bank requires a governing board resolution to open accounts and make

changes, but banks generally look the other way with some of that

because they want to be friendly to their local school. So the very

controls that we as an organization depend on, the banks were not

enforcing.”

Fine said it took a while to go through all the accounts and

identify which ones were legal and which weren’t.

The district also established an audit committee, which consists

of a district official, a few board members, a teacher’s union

representative and several community representatives.

This was an important step, because before the embezzlement was

discovered, auditors felt something was awry, but didn’t decisively

say someone was stealing, Fine said.

“I think some people with good audit experience would have read

those things differently and, if they had the ability to interact

with auditors, they would have been able to find out more,” Fine

said.

In the years since the embezzlement, the district has added a

layered system of oversight to the finances, Barbot said. The

district does not currently allow anyone to sign anything for

themselves, and deposits are made by one person, then checked by

someone else and double-checked independently.

The district also uses Bitech, a county system of additional

checks and balances with special audits. The district sends its

financial expenditure information to the county and officials there

check what was supposed to be spent and then pay the bills for the

district, Barbot said.

“Right now, we have checks and balances,” Barbot said. “Nobody has

a say over any particular account. We’re checked and audited

regularly. We even have auditors who audit other auditors.”

The newest means of keeping the district’s financial status open

and accessible is breaking down the budget to show, in layman’s

terms, where all the money will be spent, Barbot said.

Even with all the oversight in place, the district cannot be

complacent about its various means of protection, Barbot warned.

“You have to have ongoing vigilance by the public, the board, the

teachers, all the groups in the system,” Barbot said. “It’s like kids

breaking into computers. You think you have a security system, and

someone will still try to break into it.”

* DEIRDRE NEWMAN covers education. She may be reached at (949)

574-4221 or by e-mail at deirdre.newman@latimes.com.