Fraud Suspect Knew System Well : Investigation: The state treasurer is concerned by the apparent breakdown in the system of checks and balances against theft. He has asked for an audit of all of the state’s bond funds over the last five years.

Why did it take until this year to discover that $5.1 million in bond funds had been stolen from the Water Resources Control Board between 1983 and 1985?

The official explanation offered by the water agency is that former water board staff accountant Louis Fowler, 35, the man authorities have accused of stealing the money, knew the state’s accounting system so well that he was able to expertly cover his tracks.

Officials in the water agency said the former accountant did that by forging documents and setting up apparently legal-looking claims with the controller’s office. The controller’s office wrote out 15 checks totaling $5.1 million to Fowler’s alleged bogus operation between 1983 and 1985.

State Treasurer Thomas A. Hayes said Tuesday that he is so concerned by the breakdown in the state’s system of checks and balances that he has asked Acting Auditor General Kurt R. Sjoberg to audit all of the state’s bond funds over the last five years.

“Obviously, there was a breakdown in internal control at the water board,” said Hayes, the official responsible for state bond sales. “I’d like the auditor general to make sure we don’t have a bigger problem. I don’t think we do, but I want to make sure.”

Sjoberg said his auditors have already begun an investigation to determine why the water board’s internal auditing system did not turn up the $5.1 million in payments allegedly paid to the dummy corporation, an entity called the Sacramento Community Service District that authorities say was set up by Fowler.

Sjoberg said he wants to know why his office, which is supposed to be notified when there are cases of embezzlement or suspected embezzlement in state agencies, was not called in by the board when agency officials apparently found out about the theft months ago.

“We are in the same position as everyone else. We read about it in the paper this morning,” Sjoberg said.

Sandra A. Salazar, a spokeswoman for the water board, said the auditor general’s office was not notified because of a request by investigators to keep the matter under wraps until the criminal investigation was completed and Fowler was arrested.

Fowler was arrested Saturday in Mesa, Ariz., where he was using the identity of William David Rice, a Sacramento man who died in an electrocution accident. Fowler’s ex-wife, Jill Baume, 26, was also arrested over the weekend at her home in Citrus Heights near Sacramento.

James Baetge, executive director of the water board, said the agency has undertaken 10 major audits since the money was stolen and none of them turned up the missing funds.

The money allegedly paid out to Fowler was part of a $375-million sewer bond issue approved by voters in 1978. Baetge said the former accountant was helped by the length of time it takes for sewer and water projects to be built, normally a period of years. He said normally there is not a final accounting until all the money has been spent for a particular bond issue.

“This fellow found a way through the process of checks and balances that existed in 1983 and 1984. He was in just the right position to get it through,” Baetge said.

Salazar said Fowler’s accounting job put him in a position to both review contracts and handle payments. “He apparently was able to pull this off because he knew the system so well. He knew the format required for contracts, the proper format for invoices under the contracts, and the appropriate signatures required for payment under the contracts. So he dummied up the contract and submitted the invoices and authorization for payment,” Salazar said.

Edd Fong, a spokesman for state Controller Gray Davis, said the controller’s office paid the claims submitted by Fowler because they appeared valid. He said responsibility for checking out the contracts rested with the water board. Fong said, “You have to operate on the premise, at least we do, that when you receive a claim signed and reviewed by three different people that one or more of those people took a look at it carefully and determined that they signed a valid claim.”

Davis said there now are 55,000 contracts on file with his office. Hundreds of thousands of checks are written each year. In the case of the water board, Davis said the controller’s office was presented with documents, signed under penalty of perjury, that the claim was valid.

Davis said he believes that the Fowler case “is uncommon.” He said getting checks drafted and paid to a dummy corporation is much more difficult than the Fowler case makes it seem.