The Securities and Exchange Commission has instituted public administrative proceedings against two former Ernst & Young auditors who failed to uncover the misappropriation of client funds by an investment advisor they were auditing.

The proceedings were instituted against two CPAs: Gerard A.M. Oprins, 50, who had been a partner in Ernst & Young’s financial services practices group since 1995; and Wendy McNeely, 33, a former audit manager in E&Y’s financial services group who now works for another firm.

The case involves the firm’s audits of the 2004 financial statements of AA Capital Partners and its affiliated AA Capital Fund. The Chicago-based investment advisory firm managed more than $194 million for six union pension funds. During the audits, according to the SEC, Oprins, the engagement partner, and McNeeley, the manager, learned that AA Capital’s president, John Orecchio, purportedly had borrowed $1.92 million in funds belonging to AA Capital’s clients between May and December 2004 to pay a personal tax liability arising from his ownership interest in AA Capital’s private equity funds. In fact, Orecchio had invented the story about the so-called “tax loan” to conceal his ongoing misappropriation of client assets for his personal use, according to the SEC.

Despite learning about the “tax loan” during the audits, Oprins and McNeeley failed to review the transaction in accordance with Generally Accepted Auditing Standards, according to the SEC. Instead of properly evaluating the “tax loan” as a related-party transaction, Oprins and McNeeley relied solely upon unsubstantiated information from AA Capital’s CFO, Mary Beth Stevens. As a result, they caused Ernst & Young to issue unqualified audit reports for AA Capital’s and the equity fund’s 2004 financial statements.

Between 2004 and September 2006, according to the SEC, Orecchio misappropriated more than $23 million in client funds, including at least $5.7 million under the guise of a “tax loan.” The commission obtained a temporary restraining order in September 2006 against Orecchio and AA Capital Partners. 

The commission is now accusing the two auditors of improper professional conduct and has ordered public administrative proceedings to be instituted, under which the auditors may be subject to censure or barred from appearing or practicing before the SEC. Ernst & Young declined to comment.

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