Jim and Tammy Faye Bakker founded the PTL (Praise the Lord) Club, a religious broadcasting organization, in

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Jim and Tammy Faye Bakker founded the PTL (Praise the Lord) Club, a religious broadcasting organization, in 1974. A little more than one decade later, the PTL Club claimed more than 500,000 members and boasted annual revenues of almost \(\$ 130\) million. Bakker and his close associates came under intense scrutiny in 1987 following a revelation that they used PTL funds to pay a former church secretary to remain silent concerning a brief liaison between herself and Bakker. That disclosure triggered a series of investigations of PTL's finances. Key agencies involved in those investigations included the Internal Revenue Service, the Federal Bureau of Investigation, and the U.S. Postal Service. In March 1987, Bakker resigned as PTL's chairman. Two years later, a federal jury convicted him of fraud and conspiracy charges. A federal judge then fined Bakker \(\$ 500,000\) and sentenced him to 45 years in prison. \({ }^{1}\)

The Bakker scandal spurred a nationwide debate focusing on the issue of whether the financial affairs of religious broadcasting companies should be subject to regulatory oversight. The investigations of PTL revealed that Bakker and his associates received huge salaries and bonuses from funds raised via the organization's televised appeals. In 1986, PTL paid the Bakkers almost \(\$ 2\) million. During the first three months of 1987, while PTL struggled to cope with severe cash flow problems, the couple received \(\$ 640,000\). Critics also chastised the Bakkers for their flamboyant lifestyle. Tammy Faye Bakker decorated PTL's executive suites in Fort Mill, South Carolina, in opulent style, including gold-plated bathroom fixtures and extravagant chandeliers. The Bakkers enjoyed a rambling Palm Springs ranch house on their many trips to the West Coast, a \(\$ 600,000\) condominium in Highland Beach, Florida, and a fleet of luxury automobiles, including Rolls-Royces.

Before 1987, Jim Bakker's critics persistently called for more extensive financial disclosures by PTL. Bakker resisted these demands. He repeatedly insisted that such disclosures were not necessary since PTL maintained strong financial controls. In addition, Bakker often reminded his critics that PTL "had excellent accountants and that it had external audits by reputable [CPA] firms." \({ }^{2}\) The subsequent investigations of PTL failed to support Bakker's claims. Those investigations revealed that the organization's internal controls were extremely weak, and nonexistent in many cases. Investigators found that Bakker's subordinates issued paychecks to individuals not employed by PTL and paid large sums to consultants who never provided any services to the organization. Additionally, investigators could not locate documentation for millions of dollars of construction costs recorded in PTL's accounting records.

One of the most troubling weaknesses uncovered in PTL's accounting system involved a secret payroll account used to disburse funds to Bakker and his closest aides. This account was so secretive that the organization's chief financial officer was not informed of the expenses funneled through it, while PTL's board of directors was totally unaware of its existence. Surprisingly, during the mid-1980s a partner of Laventhol \& Horwath, PTL's independent audit firm, maintained the secret payroll account, including overseeing the preparation of the checks issued on that account. \({ }^{3}\) Even more surprisingly, that same partner also supervised PTL's annual audits.

Laventhol was widely criticized for its role in the PTL scandal and eventually named as a co-defendant in a \(\$ 757\) million class-action lawsuit filed by PTL contributors. The suit alleged that Laventhol assisted Bakker in misrepresenting PTL's financial condition and facilitated Bakker's efforts to embezzle millions of dollars from PTL through the secret payroll account. Among several other parties named as co-defendants in the lawsuit were Bakker and PTL's former audit firm, Deloitte, Haskins \& Sells. PTL had dismissed Deloitte as its audit firm in 1985 for undisclosed reasons and then retained Laventhol as its new audit firm.

Laventhol's decision to accept PTL as a client was apparently linked to an aggressive marketing strategy adopted by the firm in the late 1970s. From 1980 to 1986 alone, Laventhol's nationwide revenues increased 300 percent. This phenomenal growth resulted in part from Laventhol's acceptance of high-risk audit clients that other audit firms hesitated or refused to consider as clients. A former Laventhol employee bluntly observed that the firm "took too many risky clients like PTL-a strategy that, ironically, accountants often advise their clients to avoid." \({ }^{4}\) Critics charged that the large fees Laventhol received from PTL influenced the accounting firm's decisions regarding that client. In the civil lawsuit that named Laventhol as a co-defendant, the plaintiffs maintained that the CPA firm permitted the questionable payments from the secret payroll account "because PTL was the largest client for its [Laventhol's] Charlotte office." 5 In the fall of 1990, Laventhol, the seventh-largest CPA firm in the United States at the time, filed for bankruptcy. Attorneys for PTL's contributors subsequently dropped the accounting firm as a co-defendant in the \(\$ 757\) million class-action lawsuit. \({ }^{6}\) Two months later, the jury hearing that case rendered a \(\$ 130\) million judgment against Jim Bakker to be paid to the plaintiffs. The jury ruled that Deloitte \& Touche, the successor firm of Deloitte, Haskins \& Sells, was not guilty of any malfeasance in the case. In commenting on the jury's verdict, a Deloitte official noted that the suit was "a well-financed and well-executed attempt to recover enormous damages from an innocent accounting firm for the alleged wrongdoing of others."

QUESTIONS
1. Identify the ethical questions raised by the maintenance of PTL's secret payroll account by the Laventhol partner. Does the fact that PTL was a private organization not registered with the Securities and Exchange Commission affect the propriety of the partner's actions? Explain.
2. What procedures should an audit firm perform before accepting an audit client, particularly a high-risk client such as PTL?
3. Briefly define the so-called "deep pockets theory" as it relates to the litigation problems of large public accounting firms in recent years. What measures can these firms take to protect themselves from large class-action lawsuits predicated upon false or largely unfounded allegations?

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Contemporary Auditing Real Issues And Cases

ISBN: 9780324188349

5th Edition

Authors: Michael C. Knapp, Loreen Knapp

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