E&Y charged by US watchdog for audit failures

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.