Embezzlement Warnings Ignored : Investigation: Department of Finance officials say two audits pointed out problems in the operations at State Water Resources Board that allowed the alleged $5.1 million theft.

The State Water Resources Control Board, which got stung for the theft of $5.1 million, ignored a warning in 1983 that office workers could steal money because of loose accounting controls, Department of Finance officials said Wednesday.

The warning came just months after authorities now say that a water board accountant, Louis Fowler, began systematically looting a sewage bond fund account of $5.1 million. Fowler, 35, and his former wife, Jill Baume, 26, were arrested last weekend and accused of an array of felonies in the alleged embezzlement scheme occurring from 1983 to 1985.

The November, 1983, audit report found that “there is not adequate separation of duties among accounting office employees to minimize the risk of an employee diverting funds for personal use and concealing the act.”

Although water board officials then promised to clean up the problem, Finance Department officials contended Wednesday that the warning was ignored. In a second audit five years later, Finance Department officials said they uncovered the same problem.

Cynthia Katz, an assistant director for the Department of Finance, said: “We asked them to make some improvements. According to our auditors, the improvements weren’t made.”

Richard Ray, the Finance Department official responsible for overseeing the audit, said: “We said in our first audit, ‘Hey, it ain’t right. Fix it.’ They didn’t. We had no reason to believe that they were stonewalling it. But when we looked again in 1988, we found the same problem; that there should be a separation of duties.”

Officials say Fowler was able to get away with his scheme because he was given so many different duties that he was able to forge contracts to create a phony sewage treatment plant, process claims for payments and submit the claims to the controller’s office, all with no one looking over his shoulder.

Fowler forged the name of his supervisor, Harry M. Schueller, on the documents sent to the controller’s office, officials said. Fowler directed the controller’s office to send the payments to a dummy corporation he set up.

Despite numerous audits, state officials say they would not have uncovered the scheme had not law enforcement authorities received a confidential tip last January.

Water board officials, responding Wednesday, said they have followed up on all audit recommendations made by the Department of Finance and the controller’s office.

James Stafford, chief of the board’s Division of Administrative Services, said the 1983 audit focused on two jobs that were not held by Fowler.

“Our system was set up with good safeguards to assure checks and balances,” Stafford said. But he conceded that he and other officials may have overlooked flaws in the system because Fowler’s alleged scheme showed up weaknesses “I would not have even anticipated.”

“If you had come in a year ago and said, ‘Be cute and figure a way to get around the system,’ I never would have picked this route,” Stafford added.

The 1983 audit warned that too many jobs were being assigned to individual accounting office employees.

Ray said Department of Finance auditors generally gave the water agency a favorable report. One exception was a section dealing with the separation of duties.

The auditors found that one accountant trainee received and deposited payments to the department, prepared checks, initiated documents for payments and was also responsible for feeding all the information into the computer. Auditors also found that a single clerk approved payments and was given the responsibility of comparing checks to invoices for proper authorization as well as doing the final reconciliation on payments.

Two subsequent audits--one by the state controller’s office in 1986 and another by the Department of Finance in 1988--zeroed in on the same problem.

The audit by the controller’s office found that in 1984 and 1985 individuals in the department responsible for keeping time cards were also the same ones distributing the checks. The controller noted that state law “requires that these duties be separated. Without such separation of duties, personnel records could be manipulated.”

The 1988 audit found that the same employee who signed checks had access to blank check stock. “Good internal controls dictate that the person signing checks will not have access to the blank check stock,” the auditors wrote.