Ernst & Young auditors accused in investment case

Two former auditors of Ernst & Young had failed to uncover the misappropriation of client funds by an investment advisor. The Securities and Exchange Commission has instituted public administrative proceedings against them.
The proceedings were instituted against Gerard A.M. Oprins, 50, was a partner in Ernst & Young’s financial services practices group since 1995 and against Wendy McNeeley, 33, she’s a former audit manager in Ernst & Young’s financial services group. Now, she’s working for another firm.

The case handles about the audits of the 2004 financial statements of AA Capital and its connected AA Capital Fund. The Chicago-based investment advisory firm managed more than $ 194 million for six union pension funds. During the audits, Oprins and McNeeley learned that John Orecchio, the AA Capital’s president, had borrowed $1.92 million in funds belonging to AA Capital’s clients between May and December 2004. So, he could pay a personal tax liability coming from his ownership interest in AA Capital’s private equity funds. The SEC also says that Orecchio had invented the whole story about the ‘tax loan’ to hide his misappropriation of client assets for his personal use.

According to the Sec, Oprins and McNeeley failed to review the transaction in accordance with Generally Accepted Auditing Standards. Between 2004 and September 2006, Orecchio misappropriated more than $23 million in client funds, at least $5.7 million of the so-called ‘tax loan’. The commission obtained a temporary restraining order in September 2006 against AA Capital and Orecchio Partners.

The commission accused the 2 auditors of inappropriate professional behaviour. Now, the public administrative proceedings are started. The auditors can be excluded or appearing from practicing before the SEC. Ernst & Young refused to comment.

In my opinion the auditors should be severely punished. They have to realize that such practices can’t be tolerated.