SEC Charges Ernst & Young and Six Partners for Roles in Accounting Violations at Bally Total Fitness

Ernst & Young to Pay $8.5 Million to Settle Charges. Former Bally CFO and Controller Also Charged.
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Washington, D.C. — The Securities and Exchange Commission today charged Ernst & Young LLP and six of its current and former partners, including three who are members of the firm's national office, for their roles relating to an accounting fraud at Bally Total Fitness Holding Corporation. The SEC finds that E&Y knew or should have known about Bally's fraudulent financial accounting and disclosures.

The SEC finds that E&Y issued unqualified audit opinions stating that Bally's 2001 to 2003 financial statements were presented in conformity with Generally Accepted Accounting Principles and that E&Y's audits were conducted in accordance with Generally Accepted Auditing Standards. These opinions were false and misleading.

E&Y, which was the independent auditor of the Chicago-based operator of fitness centers, has agreed to pay $8.5 million to settle the SEC's charges. Each of the E&Y partners also has settled the SEC's charges against them.

"It is deeply disconcerting that partners, even at the highest levels of E&Y, failed to fulfill their basic obligations to the investing public by not conducting proper audits. This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence. The $8.5 million settlement, one of the highest ever paid by an accounting firm, reflects the seriousness of their misconduct," said Robert Khuzami, Director of the SEC's Division of Enforcement.

"Ernst & Young and its partners on the Bally engagement violated their fundamental duty to function as public watchdogs, even after E&Y personnel identified Bally as one of the firm's riskiest audit clients," added Fredric D. Firestone, Associate Director in the Division of Enforcement.

Bally's former chief financial officer John W. Dwyer and former controller Theodore P. Noncek also were charged today by the SEC, which previously charged Bally with accounting fraud in 2008. Dwyer and Noncek agreed to settle the SEC's charges.

The SEC's order against E&Y finds that the firm identified Bally as a risky audit because its managers were former E&Y audit partners who had "historically been aggressive in selecting accounting principles and determining estimates," and whose compensation plans placed "undue emphasis on reported earnings." Out of more than 10,000 audit clients in North America, E&Y identified Bally as one of E&Y's riskiest 18 accounts and as the riskiest account in the Lake Michigan Area.

The three current E&Y partners charged by the Commission are:

  • Randy G. Fletchall, the partner in charge of E&Y's National Office
  • Mark V. Sever, E&Y's National Director of Area Professional Practice
  • Kenneth W. Peterson, the Professional Practice Director for the Lake Michigan Area office

The three former E&Y partners charged by the Commission are

  • Thomas D. Vogelsinger, the Area Managing Partner for E&Y's Lake Michigan Area through October 2003
  • William J. Carpenter, the E&Y engagement partner for the 2003 audit
  • John M. Kiss, the E&Y engagement partner for the 2001 and 2002 audits

The SEC issued settled cease-and-desist and Rule 102(e) orders finding, among other things, that E&Y partners Sever, Kiss, Peterson, and Carpenter knew or should have known that E&Y's unqualified audit opinions regarding certain Bally financial statements were materially false. Under their respective orders, Sever and Kiss may not appear or practice before the Commission as an accountant for three years, and Peterson and Carpenter may not appear or practice before the Commission as an accountant for two years.

In addition, the SEC issued settled Rule 102(e) orders against Vogelsinger for engaging in repeated instances of unreasonable conduct and Fletchall for engaging in a single instance of highly unreasonable conduct. Under their respective orders, Vogelsinger may not appear or practice before the Commission as an accountant for nine months and Fletchall was censured.

The Commission filed settled civil injunctive actions against former Bally CFO Dwyer and former Bally Controller Noncek. Dwyer settled the Commission case against him by consenting to permanent antifraud and related injunctions, payment of $250,000, a permanent officer-and-director bar, and a permanent bar from practice before the SEC in a related Rule 102(e) proceeding. Noncek settled the Commission case against him by consenting to permanent injunctions and a two-year bar from practice before the SEC in a related Rule 102(e) proceeding. The settlements with Dwyer and Noncek are subject to court approval.

In addition to agreeing to pay $8.5 million to settle the SEC's charges, E&Y agreed to undertake measures to correct policies and practices relating to its violations, and agreed to cease and desist from violations of the securities laws.

Each of the respondents and defendants agreed to settle with the SEC without admitting or denying the charges against them.

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