Newport-Mesa Theft Raises Fears : Embezzlement: Cutbacks have left districts vulnerable by eliminating checks and balances on finances, experts say.

The embezzlement of at least $3 million from the Newport-Mesa Unified School District has triggered fear and alarm among school district officials across California who wonder: “Can it happen here?”

At a recent California School Boards Assn. convention in Long Beach, more than three times the usual number of school superintendents, trustees and finance officers jammed a panel discussion on audits, said William Pieper, a school finance and audit specialist for the Sacramento-based consulting firm School Services of California.

Pieper and fellow organizers asked how many in the packed conference room had heard of the scandal, in which Newport-Mesa’s once-trusted top fiscal officer has been charged with looting an employee health fund, developers’ fees and federal food funding for poor children over at least a five-year period.

“Virtually every hand went up,” Pieper said. “It was quite clear . . . that’s why a lot of people were there: They wanted to know how vulnerable their school districts are.”

The answer is that every district--indeed every business or city--can become prey to an insider who has knowledge, access and the intent to steal, school finance experts and auditors say.

Newport-Mesa, Orange County and state school officials say state law requires adequate checks and balances on the handling of school funds, including annual audits that must be reviewed by county departments of education and the state controller’s office. Moreover, the state controller has guidelines that auditors must follow when conducting school district audits.

But critics of Newport-Mesa say that those checks and balances clearly broke down in a case that is by far the largest school district embezzlement in state history.

The investigation of the Newport-Mesa fraud is not complete, but education experts predict that what investigators learn about how the fraud occurred will change the way school district finances are handled and audited statewide.

“It’s important that we take a very unfortunate situation and learn from it,” said John Nelson, assistant superintendent for business services of the Orange County Department of Education. “It’s going to cause us all to revisit our procedures, and especially to work with auditors to make sure a district’s checks and balances are working.”

Stephen Aldrich Wagner, a 21-year employee who rose from bookkeeper to director of business support services, has been charged with five counts of misappropriation of public funds and state tax evasion in the alleged theft of at least $3 million in district funds from April, 1987, through April, 1992. Wagner, 40, has pleaded not guilty. But through his attorney, he has offered to cooperate with authorities and make full restitution.

State and local education experts say that thefts are not unusual in school districts. But most are petty crimes ranging from a few dollars missing from the student body fund to hundreds of dollars in stolen supplies.

Occasionally, larger schemes are uncovered.

In 1986, police uncovered a scandal in the Orange Unified School District in which the district’s maintenance officer and two contractors were convicted for rigging bids in exchange for kickbacks totaling nearly $700,000. Four of the school district’s elected trustees lost their jobs after they were unsuccessfully prosecuted on charges of willful misconduct in failing to oversee district finances.

In the Los Angeles Unified School District, a 1986 sting operation uncovered a ring of 21 employees and outside accomplices who stole and resold more than $1 million in district supplies ranging from pesticides to toilet paper.

Last year, a former California Community Colleges official and his wife pleaded guilty in Sacramento to setting up a fictitious business and diverting nearly $1 million in school funds from 1982 to 1988 by submitting fake bills for computer services and surveys.

But the suspicions of theft at Newport-Mesa outstrip those, state education experts say. As the tally climbs to $3 million or more, school districts throughout the state want to know how so much money could be stolen over such a long period without being detected.

There are three ways that embezzlements are carried out in school districts and other institutions, Pieper said.

* Through dummy employees or employees who have died or left but remain on the payroll.

* Through dummy vendors, vendors who give kickbacks for contract services, or theft of school district property that is sold by outside vendors.

* Through unauthorized bank accounts or diversion of checks.

Court documents allege that Wagner used two of the methods. He allegedly diverted school funds to a secret account, which he tapped by way of withdrawal slips and cashiers checks made out to himself. In July, 1991, he allegedly began siphoning funds from another account by writing checks to a shoe repair company he co-owns and wiring money to the bank account of a Florida gem trading firm with which he did business.

“I think we will probably find that there was too much authority placed in one person,” said Nelson of the Orange County Department of Education.

“In past years, we’ve all been cutting back and cutting back on personnel,” he said. “When you do that, you run the risk of eliminating some of your checks and balances. A lot of (school district officials) will want to . . . see if we’ve cut back too far in some areas.”

In Newport-Mesa, the district’s business manager and top finance officer retired in 1989. Their jobs were consolidated to save money, and Wagner was appointed director of business support services, leaving no one at the district’s Costa Mesa business office to oversee him on a daily basis.

“In an ideal situation, you don’t have the same person who opens the mail make the cash deposits,” said Don Driftmier, a partner in the certified public accounting firm of Vavrinek, Trine, Day & Co. of Rancho Cucamonga.

“You don’t have the same person able to approve expenditures and make those expenditures,” said Driftmier, whose firm is conducting the in-depth audit of Newport-Mesa’s books. “But anytime you have a smaller office with one person doing a lot of different things with no oversight, then you have room for problems.”