Poor valuation procedures of illiquid securities prompted
Van Wagoners lack of procedures and oversight amounted to "significant deficiencies in the design or operation of internal control that, in our judgement, could adversely affect the Funds ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements," Ernst & Young said in the report .
The report also said that there were just two board members responsible for approving fair values, one of whom was actively involved in the process of adjusting securities valuations.
Van Wagoner Funds also broke fundamental investment restrictions on its funds, investing more than 15% of the funds assets in illiquid securities.
In order to put a stop to the allegedly shoddy practices, the firm added an additional independent director late last month and has added a database which provides a complete history the private placement securities held in all of the funds as well as "information on the basis and timing for each valuation change including those changes that occurred in 2001," the report said. Also, the firm will conduct monthly reviews of any and all valuation changes with its board of directors.