The Securities and Exchange Commission has 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.