Internet Problem 14 1 Revenue Recogniti Essay

980 Words Oct 25th, 2014 4 Pages

“Internet Problem 14-1: Revenue Recognition Fraud”
Chapter 14

Wahyunda Risa Putri 1210534008
Shabrina Alin Firstiana 1210534010
Atikah Galuh Wilandra1210534013

Lecturer : Suhernita, SE, ForeAcc, Akt.

International Class
Faculty of Economics
Andalas University
INTERNET PROBLEM 14-1: REVENUE RECOGNITION FRAUD The Securities and Exchange Commission (SEC) found that Bally Total Fitness Holding Corporation, a nationwide commercial operator of fitness centers, fraudulently accounted for three types of revenues it received from members. The SEC also charged the audit firm and six partners for their roles in the accounting violations. Visit the SEC’s website ( and search the link to “Litigation
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Instead, they ceased paying dues. Those members who had paid all amounts due under the initial membership contract, but who had then stopped paying monthly dues for six months or longer, were solicite by Bally for “reactivation.” Under that offer, lapsed members could rejoin by paying a “reactivation fee,” which was lower than an “initiation fee.”

Accounting standards prohibit Bally from recognizing any revenue from “reactivation fees” until after the reactivating members had entered into binding contracts. Rather than comply with accounting standards, Bally simply projected the number of reactivating members that it anticipated rejoining up to three years into the future, and then recognized those anticipated but hypothetical reactivation fees as revenue. The company recognized that hypothetical revenue over a period composed of: (a) the average delinquent period (that is, the period between when members stopped paying their monthly dues and when they reactivated)
(b) the average reactivation period. In later years, they abandoned this methodology and adopted a modified cash basis of accounting for reactivation fees.

b. Yes, there is a press release by SEC’s against audit firms and six partners.

c. The press release notes that the SEC’s order against the audit firm (Ernst & Young) finds that the firm identified Bally as a risky audit because its managers were former E&Y

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