Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, December 17, 2009

Six Ernst & Young Partners Settle SEC Accounting Charges Involving Bally Total Fitness

The SEC 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.  In addition, 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 E&Y partners also has settled the SEC's charges against them.

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.

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