Big accounting firm Ernst & Young has agreed to pay $8.5 million to settle federal regulators' charges in connection with an alleged accounting fraud at Bally Total Fitness in 2001-2003.
The Securities and Exchange Commission announced the settlement Thursday with Ernst & Young, which also agreed to change its policies and practices to prevent future problems. Officials said it was one of the largest settlements ever paid by an accounting firm.
The SEC had alleged that Ernst & Young knew or should have known about Bally's accounting violations.
New York-based Ernst & Young neither admitted nor denied the SEC's allegations but did agree to refrain from future violations of the securities laws.
Also agreeing to settle the SEC's charges were a former chief financial officer and a former controller of Bally as well as six current and former Ernst & Young partners.
"These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago," the accounting firm said in a statement.
Ernst & Young was the outside auditor of Bally Total Fitness Holding Corp., a fitness center operator based in Chicago.
The SEC said that Ernst & Young gave Bally's financial statements from 2001-2003 a clean audit bill of health. Those audit opinions were "false and misleading," the SEC alleged.
Ernst & Young and the partners who worked on Bally's accounting violated their duty to function as public watchdogs, even after the accounting firm had identified Bally as one of its 18 riskiest audits _ of more than 10,000 audit clients in North America, the SEC said.
"It is deeply disconcerting that partners, even at the highest levels of (Ernst & Young), failed to fulfill their basic obligations to the investing public by not conducting proper audits," SEC Enforcement Director Robert Khuzami said in a statement. "This case is a sharp reminder to outside auditors that they must carry out their duties with due diligence."
The settlement "reflects the seriousness of their misconduct," Khuzami said.
The former Bally chief financial officer, John Dwyer, agreed to pay $250,000 and to be permanently barred from serving as an officer or director of any public company. The former controller, Theodore Noncek, will be banned for two years from public-company work.
The three current Ernst & Young partners are: Randy Fletchall, the partner in charge of the firm's national office; Mark Sever, the firm's national director of area professional practice; and Kenneth Peterson, the professional practice director for the Lake Michigan area office.
The former partners are: Thomas Vogelsinger, who was the area managing partner for the Lake Michigan area until October 2003; William Carpenter, the firm's engagement partner for the 2003 Bally audit; and John Kiss, the engagement partner for the 2001 and 2002 audits.
The two former Bally executives and the six Ernst & Young partners neither admitted nor denied the SEC's allegations.