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Checks, controls followed embezzlement

October 24, 2002

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

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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

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