When accounting goes unaccounted for
“Could Ernst & Young have done a better job? Maybe, but claiming they could have done a better job doesn’t necessarily make them liable. Even the best of auditors can be fooled.”
~ Anthony Sabino, professor of law and business at St. John’s University
Today in unaudited stripper expense news, two Ernst & Young auditors have been accused in an SEC enforcement action for not investigating a “tax loan” that was misappropriated by a Chicago investment adviser.
John Orrechio founded AA Capital, Inc. in 2002 and he immediately started wining and dining potential clients (primarily unions) in Detroit and Las Vegas. In August of ’03, Orrechio started dating a Detroit stripper (as these stories often go) and he started spending truckloads of money on her and her family. Shortly thereafter, in 2004, Orrechio started taking money directly from client’s tax accounts to fund said his lifestyle and the lifestyle of said stripper.
Orrechio’s stripper fund must have ran dry at some point and he decided to pursue other methods of financing his family fun time. Since he probably wasn’t too keen on letting everyone in on his little problem, Orrechio told his CFO, Mary Beth Stevens, that he owed a grip to the IRS because of his ownership in one of the affiliate private equity fund and that E&Y screwed up filing one of his tax returns:
Orecchio told Stevens that he needed to borrow money to pay his taxes. At Orecchio’s direction, Stevens withdrew $602,150 from AA Capital’s client trust accounts and then wired the money to Orecchio’s personal bank account.
Between May and December 2004, Stevens made three additional disbursements to Orecchio to pay his purported tax liability. During 2004, Orecchio received a total of four separate disbursements under the guise of the “tax loan” totaling approximately $1.92 million.
Ms Stevens, probably not wanting upset the boss (i.e. get in the way of a man and his stripper girlfriend), played ball. When the two auditors in question, Gerard Oprins and Wendy McNeely, learned of this tax loan, they are accused of doing, well, not much:
20. After learning about Orecchio’s purported “tax loan,” Oprins and McNeeley failed properly to evaluate the transaction or require other audit team members to do so. The audit team did not obtain any documentation reflecting Orecchio’s tax liability or the terms of the “tax loan.” They did not discuss the “tax loan” with Orecchio. They did not take steps to confirm Stevens’ statements that Orecchio “made a payment to the IRS for $1,921,050” or that the “tax loan” would be repaid by Orecchio or the IRS during 2005. They did not take steps to assess the collectability of the “tax loan.” They also failed to discuss Orecchio’s tax liability with their colleagues in Ernst & Young’s tax department who prepared the tax filings for AA Capital and its affiliated private equity funds.
21. Oprins and McNeeley also failed to scrutinize Orecchio’s “tax loan,” or require other audit team members to do so, in light of several red flags that the audit team encountered related to Orecchio’s spending habits.
This all led to an unqualified opinion issued by Ernst & Young on AA Capital’s and AA Capital Equity Fund’s (the affiliated private equity fund) 2004 financial statements. Because of the undisclosed stripper piggy bank, the actions of the auditors amounted to financial statements that weren’t in accordance with GAAP and an audit that wasn’t performed in accordance with GAAS.
An Ernst & Young spokesperson declined to comment.
The two auditors are accused of “improper professional conduct” which could result in the two not being allowed to appear or practice before the SEC, which, if you were to ask Harry Markopolos, will save you the trouble of working with idiots.
ACCOUNTING AND AUDITING ENFORCEMENT [SEC]
Ernst & Young Auditors Accused in Investment Case [Web CPA]
By now, everyone has heard the news we broke Monday afternoon that Mark Weinberger is […]
Charlie Gasparino is reporting that the SEC probe in the Lehman Brothers bankruptcy is “ramping up” and that the Commission is under hella-pressure to bring civil charges against Dick Fuld, Ernst & Young and whoever else is on the list.
It’s unclear if the SEC can muster the necessary proof to show that top executives like former CEO Richard Fuld or the firm’s outside auditor Ernst & Young intentionally misled investors about the health of Lehman’s balance sheet in the months before it filed for bankruptcy in mid-September 2008, according to people close to the probe…It’s unclear when any charges might be filed by the SEC, but people close to the inquiry say the SEC believes it does bring one, it must do so “very soon,” possibly within a few months given a combination of the outrage over the report’s findings and that Lehman’s bankruptcy is going on two years old.
Okay, so things are urgent but not that urgent. It’ll be Father’s Day maybe the 4th of July by the time we get a Mary Schapiro smackdown.
But that’s not all! Things are really serious at Ernst & Young now because Charlie reports that E&Y “has hired high-profile white-collar attorney William McLucas as its outside counsel in the matter, people close to the firm say. McLucas had been the SEC’s enforcement chief before entering private practice.” We checked with our friends over at ATL and it turns out that Mr McLucas is a partner at high-powered WilmerHale and was lead counsel to the special committee of the Enron Board that reported “hard-hitting findings” (sayeth he).
Since Mr McLucas doesn’t take shit from the likes of short-seller Jim Chanos, we’ll take Charlie’s word that things are pretty serious over at 5 Times Square.
E&Y spokesman Charlie Perkins declined to comment.
SEC Probe of Lehman Picking Up Steam [FBN]
See also:
Gasparino: SEC May Be Forced To Do Something About This Whole Lehman Thing [DB]