The US watchdog has charged Ernst & Young and six of its current and former partners for their roles at a fitness business, for failing to know about its fraudulent financial accounting and disclosures. E&Y in the US issued unqualified audit opinions stating that Bally’s 2001 to 2003 financial statements confirmed with GAAP, and its audit conformed with accepted auditing standards.
“These opinions were false and misleading,” said the Securities and Exchange Commission.

E&Y, which audited Chicago-based fitness centre business Bally Total Fitness Holding Corporation, agreed to pay $8.5m to settle the SEC’s charges.

The firm had flagged up 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 plan focused unduly on reported earnings.

Bally was one of E&Y’s riskiest 18 accounts out of 10,000 audit clients.

“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,” said Robert Khuzami, director of the SEC’s Division of Enforcement.

The three current partner charged were Randy G. Fletchall, the partner in charge of E&Y’s national office; Mark V Sever, national director of area professional practice; and Kenneth W Peterson, the professional practice director for the Lake Michigan Area office.

The three former E&Y partners charged 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; and John M. Kiss, the E&Y engagement partner for the 2001 and 2002 audits.

All six charges were settled. In settling the allegations, Ernst & Young and the former and current partners did not admit to any wrongdoing, the SEC said.

“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,” Ernst & Young said, reported Reuters.

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

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