CHICAGO -- Bally Total Fitness’ former accounting firm, Ernst & Young, agreed to pay the Securities and Exchange Commission (SEC) $8.5 million in a settlement stemming from Bally’s alleged accounting fraud from 2001 to 2003.

Charges also were settled Thursday against former Bally Chief Financial Officer John Dwyer and former Controller Theodore Noncek, pending court approval. Dwyer agreed to pay $250,000 and has been permanently barred from serving as an officer or director at a public company. Noncek received a two-year ban.

The SEC had determined that Ernst & Young, which audited Bally from 2001 to 2003, failed to find and report fraud despite the fact that Ernst & Young had identified Bally as its riskiest account in the Chicago area, the Chicago Tribune reported. Bally was a high-risk client, the SEC said, in part because Ernst auditors who had become Bally executives had “historically been aggressive in selecting principles and determining estimates,” according to a report in The New York Times.

Bally attempted to distance itself from Thursday’s announcement, pointing to a February 2008 settlement with the SEC, which alleged that from 1997 to 2003, Bally fraudulently accounted for three types of revenue it received from its members: initiation fees, pre-paid dues and reactivation fees, and Bally also fraudulently accounted for its membership acquisition costs.

“Bally entered into its own settlement almost two years ago,” a Bally spokesperson said today. “We have no further comment on yesterday’s Ernst and Young settlement announcement.”

In addition to the $8.5 million settlement against six of its current and former partners, Ernst & Young agreed to change policies and practices to prevent future problems. The SEC said the settlement is one of the largest ever paid by an accounting firm.

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