This is the leading item on the SEC.gov website today, with the SEC charging Ernst & Young LLP and 6 current and former partners for their roles in the accounting fraud at Bally Total Fitness Holding Corporation...
Friday, December 18, 2009
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Recently, I researched the AAER regarding Ernst and Young and Bally and was a surprised how simple the fraud was. The incorrect revenue recognition Bally used was not in compliance with GAAP under the loosest of interpretations. Bally also ignored the auditors when told to increase its Allowance for Doubtful Accounts, yet this did not stop the auditors from issuing an unqualified opinion. After further reading into the release, it did not shock me that Bally's upper-management had once worked for Ernst and Young and that the issue of independence was compromised. The 8.5 million dollar fine really shows that the SEC takes the utmost priority in the case that audits are performed with due diligence. Besides the fines, I further researched the punishments on the partners involved. Randy Fletchal and Mark Sever had both served leadership positions on the AICPA and Fletchal for the PCAOB as well. Fletchal's punishment was much smaller than the other partners only being given a censure. The other two current partners, Sever and Peterson were barred from auditing public companies for at least two years and the three non-current partners were given similar punishments ranging from nine months to three years.
I do find it interesting how the SEC took over six years to unravel this case and wonder how many more frauds have yet to be detected. I know that the SEC has a proposed budget of one billion dollars for 2010 and are trying to be more aggressive enforcing, but will this really put a halt on the fraud in large accounting firms? Mary Schapiro did announce this month that she would make it easier for SEC staff to launch formal investigations on corporations. I think this puts a lot of pressure on accounting firms during this time of economic hardship. With every accounting fraud that is uncovered, the reputation and trust of the industry decreases. I am just curious how many more frauds are going to be uncovered and how will the integrity of accounting firms be kept up if this is the case? I think now more than ever, public accounting firms need to hold themselves to a higher standard, not having to rely on the SEC to uncover their wrongdoings.
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