The PTL CLub - Jim and Tammy Faye Bakker
I need help with the discussion questions listed at the bottom...
THE PTL CLUB
Jim and Tammy Faye Bakker launched the PTL Club in January 1974.
This show was one of the most successful television ministries for
more than a decade. The broadcast of the PTL Club utilized almost
200 television stations to reach a national audience of
approximately 12 million viewers.
PTL stood for both “Praise the Lord” and “People That Love.” Jim
and Tammy Faye Bakker utilized a traditional talk show format to
focus on religious entertainment, emotional personal testimonies,
and frequent appeals for financial support. The Bakkers also
created a Christian theme park, known as Heritage USA. Heritage USA
was the country’s third most popular amusement park and included
biblically themed rides and attractions as well as a large shopping
mall selling Christin tapes, records, books and religious action
figures. At the peak in 1986, over 5 million people visited
Heritage USA annually, and the PTL club raised approximately $10
million each month.
The PTL club also had detractors. Some noted that PTL stood for
“Pass the Loot” in reference to the frequent Bakker requests for
additional funds to support a lavish lifestyle. Keeping in mind
that $1 in 1980 is worth approximately $3.21 in 2018, the Bakker’s
spent the following funds – in 1980s dollars:
* A $449,000 Palm Spring home with heated pool and hot tub
* An oceanfront condo near Palm Beach that PTL bought for the
Bakkers and spent over $200,000 to furnish
* A $340,000 five story lakeside home with $73,000 in renovations
and a 43-foot houseboat
* A basement health spa and indoor pool in their home in Heritage
USA, including golf-plated bathroom fixtures and an $11,000 sauna
and Jacuzzi
* A 1981 Christmas part for PTL executives served $9,000 worth of
truffles flown in from Brussels
Perhaps the most excessive asset in the Bakkers’ opulent lifestyle
was a 4,000 square foot suite at the Heritage USA theme park and
retreat. The “presidential suite” in the Heritage Grand Hotel was
specified for the Bakkers use even though they often preferred
their lakeside home nearby. The suite had golf-plated bathroom
fixtures, a 10 by 60 foot closet, and mirrored walls. Bakker’s
reply to any questions was that “God wants his people to go first
class.”
BEGINNING OF THE END
Without the PTL Club board’s knowledge, a confidential payroll
account was kept. When Laventhol & Horwath (L&H) became
PTL’s auditor in May 1985, William Spears, a senior L&H
partner, “kept the books” of this secret account. Prosecutors would
later categorize this fund as an “unrecorded payroll” while
creditors who had lost millions and victimized donors would call it
a slush fund.
A significant amount of the money for these activities was generated from partnership interests sold at 4 separate resort hotels built or planned to be built at Heritage USA. These properties were financed by selling “lifetime partnerships” to people who donated $1,000. Like a timeshare model, the donors received in return a four day and three-night stay for their immediate family in a resort hotel, annually, for their lifetimes. To promote this offer, Bakker stated that the number of partnerships were limited, and he also inflated the number of lifetime memberships that had already been sold. Eventually too many lifetime memberships were sold, and it became impossible for every member to stay in the hotels as promised. For example, Bakker sold more than 66,000 in the Heritage Grand Hotel although he had promised only 25,000 would be sold. In a later criminal case against Bakker, the prosecution classified financing these hotel buildings through lifetime partnerships as a giant Ponzi scheme.
MONITORING DEFICIENCIES
After PTL declared bankruptcy, the lack of monitoring by the board
became evident. To obtain additional funds, Jim Bakker would just
tell other key PTL officials to tell a board member to introduce a
resolution recommending a bonus. From June 1983 to March 19887, the
Bakker’s received bonuses in excess of $1 million for Jim and
$335,000 for Tammy.
The bonuses were an addition to the salary and expense payments
that the Bakker’s received to maintain an extravagant way of life.
During the 1984 to 1987 period, they received over $4.8 million in
salary, bonus payments and other disbursements. Although Jim Bakker
received these significant sums, he announced on television that he
did not have the funds necessary to purchase a $1,000 life time
membership but month. Instead, he put the payment on a credit card
(and encouraged viewers to do the same) with the plan to pay for it
the following month.
AUDITORS
Two of the seven largest international accounting firms worked for
the PTL Club. Deloitte, Haskins & Sells served as PTL’s auditor
until May 1985. Jim Bakker routinely referenced these highly
credible firms and presented audited financial statements to
television viewers to indicate both his individual honesty and the
financial integrity of the PTL Club. In April 1986, in response to
allegations against Jim Bakker, he told his television
audience:
We don’t mind letting you know that we print audits of this
ministry. We have done it for, what, ten years now, and we go
through
an audit almost a hundred percent of the time. An
outside auditing firm, one of the big audit firms of America, is in
here at all times
auditing this ministry at our own expense, thousands of
dollars, tens of thousands of dollars, to be responsible. And we
are going
to go forward, but it’s time God’s people say enough is enough.
However, these two firms should have been able to ascertain that Jim Bakker was not forthright with PTL members. Deloitte acknowledged that the firm was aware of the limit on the sale of lifetime memberships but contended that the oversubscription did not occur until after May 31, 1984. This was after the end of the fiscal year where Deloitte prepared the PTL financial statements for the last time. The second accounting firm, Laventhol & Horwath (L&H), admitted that it knew that over 25,000 lifetime memberships to the Grand Hotel had been sold; however, the firm denied any knowledge of a limit placed on the number of partnerships (although the limits had been well publicized).
Both firms prepared the Bakkers’ tax returns. Tax laws ban tax-exempt organizations from paying excessive compensation. Both firms denied knowing that the IRS was considering canceling the PTL’s tax exempt status due to the significant enumeration paid to the Bakkers. In addition, after one law firm resigned over concerns related to the extremely high payments, PTL’s new law firm stated that the compensation could not be excessive since the auditors had reviewed the amounts paid by PTL to the Bakkers.
A significant number of red flags should have been obvious to both accounting firms. Despite acknowledging legal concerns, neither accounting firm had recognized that this idea of excessive compensation might present audit issues as well. Deloitte initially raised some concerns about the extreme compensation, the quickly increasing personal expenses paid for senior executives, and the selling of PTL merchandise at tremendously high mark ups (e.g. PTL bought statues of David and Goliath for $10 each and stated on television that they were worth $1,000). However, Deloitte’s potential concerns did not result in a modified audit opinion or any other type of disclosure.
Deloitte drafted a 23 page memo that listed the inadequacies in PTL’s internal controls for 22 pages. PTL had an unreasonably high number of different bank accounts and a significant issue with bounced checks, and both accounting firms were aware of these facts. In Deloitte’s 1984 audit report, the firm questioned whether PTL could continue to operate in the foreseeable future given current assets of 8.6 million and 28.5 million in current liabilities. However, a note related to the going-concern issue was not included in the audit report issued by the firm.
THE FALLEN
After admitting to an extramarital affair, Jim Bakker resigned from
his ministry and moved with Tammy to Palm Springs, California. The
PTL Club’s new boards appointed the Rev. Jerry Falwell, then a
well-respected and well-known television minister, to take over the
organization in March 1987. The Reverend Falwell was intended to
help the PTL Club address legal threats from creditors, donors, and
the IRS.
The IRS posited that the excessive payments to Bakker and others had violated the tax-exempt rules and asserted that his total compensation of $968,000 for three years should not have exceeded $331,000. Attorneys for the PTL Club contended that this compensation was reasonable given that Bakker was the leader of the ministry and key to the PTL’s success in fundraising.
A new accounting firm, Arthur Anderson, was hired to audit PTL
activities and develop an accurate picture of the current financial
position. In addition to known problems, the Arthur Anderson
auditors found:
* $12 million in misplaced (unaccounted for) funds
* Missing records for $27 million in construction
* $71 million in debt
* $27 million operating loss in the 9 months before Bakker’s
resignation
This information led PTL officials to conclude that Bakker was
aware of the ministry’s pending bankruptcy even before the extra
marital affair and resulting scandal.
LAVENTHOL & HORWATH ACCOUNTING FIRM
L&H went through massive growth during the 1980s with an almost
quadrupling of firm revenues. These new revenues came from
developing accounting expertise in specialized areas of practice
and by accepting risky audit clients. From 1984 to 1990 L&H
purchased 64 small accounting firms, which increased overall
revenues to $345 million. This drive for growth and increased
revenue caused the firm to accept clients known as risky without
appropriate screening methods. After the PTL lawsuit was filed,
L&H had 115 legal actions against it for a total of $362
million. When L&H declared bankruptcy in November 1990, 3,273
employees lost their jobs.
PTL LEGAL ACTIONS
Jim Bakker was convicted of 24 counts of fraud and conspiracy and
sentenced to 45 years in prison. (The sentence was reduced on
appeal and Bakker served 5 years in prison.) Bakker was also found
liable for fraud and almost $130 in damages; however, no money was
ever collected. Deloitte was absolved of fraud allegations as the
intent to commit fraud was not proven.
Required Discussion Contribution 1 (Due on or before Friday)
Why do you think audit firms are willing to accept high-risk clients? As an auditor, how would you assess and respond to clients with high engagement risk? How could the auditors in this case have known and understood that PTL business better in order to audit more effectively and efficiently?
Required Discussion Contribution 2 (Due on a separate day from
Discussion Contribution 1)
What analytical and audit procedures could have led Deloitte and
L&H to have more easily detected and reported PTL Club’s
financial problems? From your perspective, which risk factors were
large enough to require a significant modification of the nature,
timing, and extent of audit procedures?
Answer 1:
1) A) The audit firms are willing to accept high risk clients because they have to meet their Growth targets and also expand their area of expertise.
1) B) As an auditor, they need to apply various analytical assessments , statistical assessments and risk assessments.
The auditor should obtain an understanding of whether the entity has a process of:
a. Identifying business risk relevant to financial reporting
b. Estimating the significance of same
c. Assessing the likelihood of their occurrence
d. Actions to address such risk
When understanding the entity’s risk assessment process, if the auditor identifies any new risk then it has to be evaluated whether there was an underlying risk of a kind that would have been identified by the entity’s risk assessment process. If there is such a risk, then the reason for the non-identification by risk assessment process should be understood and adequacy of internal control has to be determined.
If there is no such process, the auditor has to discuss with the management whether business risk relevant to financial reporting objectives have been identified and addressed. Auditor has to evaluate whether an absence of a documented risk assessment process is appropriate or determine whether it represents a significant deficiency in internal control.
1) C)
Documentation of these is very important as a part of audit procedures.
2) A) “Analytical Procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. The application of planned analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary
Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example:
Comparable information for prior periods. Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation. Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
2) B) The funding for the various lavish lifestyle of Promoters as well as analysis of various ratios that were adverse were sufficient evidence to probe further & extend the nature & timing of audit by auditors.
The PTL CLub - Jim and Tammy Faye Bakker I need help with the discussion questions listed at the bottom... THE PTL CLUB...
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