Wrapping up an internal investigation, Bally Total Fitness on Tuesday fired two mid-level executives and accused its former chief executive officer and former chief financial officer of overseeing “multiple accounting errors” and fostering a “culture of aggressive accounting.”
The moves came as the Chicago-based fitness-center operator concluded a five-month investigation into its finances that also raised questions about the conduct of its former auditor, Ernst & Young.
Bally announced in November that it would restate its financial results from 2000 through the first quarter of 2004, primarily to correct what it described as errors in recognizing revenue.
The investigation, led by Bally’s audit committee, found mistakes in the company’s methods for deferring sales commissions and booking doubtful accounts.
The review determined that former Chief Executive Lee Hillman and former Chief Financial Officer John Dwyer “were responsible for multiple accounting errors and creating a culture within the accounting and finance groups that encouraged aggressive accounting,” according to a statement from Bally.
Investigators further concluded that Dwyer made a false and misleading statement to the Securities and Exchange Commission. Bally said that as a result of its findings, the company will make no further payments to Hillman and Dwyer under their severance arrangements and will “evaluate its legal options” with respect to those former executives.
Also accused of improper conduct were Controller Ted Noncek and Treasurer Geoff Scheitlin. Both were dismissed by Bally. The company said Tuesday that it has appointed David Reynolds, most recently controller at Comdisco Inc., to replace Noncek.
The four former Bally executives could not be reached for comment Tuesday evening. No one from Ernst & Young could be reached either.
“I think we took an important step today,” said Bally CEO Paul Toback. “This brings credibility and a fair amount of closure to what went on with the accounting and where responsibility lies for what happened.”
Hillman and Dwyer are both accountants who formerly worked for Ernst & Young on the team that audited Bally’s former parent company for several years. Toback declined to say how their connection with the accounting firm might have influenced Ernst & Young auditors, or to specify missteps made by the accounting firm.
“We believe there were errors made by Ernst & Young,” said Toback. “We didn’t at all times get great advice.”
Hillman, now president of Liberation Investment Advisory Group and a director of four other companies, left Bally in 2002. Dwyer left in 2004.
The company hired KPMG to audit its books early last year and is now working on restating its financial statements. KPMG also is conducting fresh audits for the previous three years.
“We really don’t have a clear picture on how the restatements will come out,” said Toback. The revised financials probably will be available this spring, he said.
The investigation was led by former SEC attorney Herbert F. Janick of Bingham McCutcheon LLP, with forensic audit work by PricewaterhouseCoopers LLP.
The company said it has reported the investigation results to the SEC and is cooperating with an ongoing SEC investigation.