Question

PTL Case: Ethical Responsibilities

Jim and Tammy Faye Bakker founded the PTL (Praise the Lord) club, a religious broadcasting organization, in 2015. A little more than one decade later, the PTL Club claimed more than 500,000 members and boasted annual revenues of almost £100 million. Bakker and his close associates came under intense scrutiny in 2018 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. The church secretary was given money to remain quiet on fraudulent activities by Bakker. That disclosure triggered a series of investigations of PTL’s finances. Key agencies involved in the investigation included HM Revenue and Custom, National Fraud Authority and UK Charity Commission.

Bakker lived a flamboyant lifestyle such as having a gold-plated bathroom, extravagant chandeliers, a £469,000 condominium in Highland Beach, and a fleet of luxury automobiles including Rolls-Royces. The church also paid him £1,56300 million in 2017. Mr Bakker resigned and he was convicted for fraud and conspiracy charges. Grand juries then fined Bakker £1390, 000 and sentenced him to forty-five years in prison. The investigations of PTL revealed that Bakker and his associates received huge salaries and bonuses from funds raised from the organization’s televised appeals.

Before 2018, 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 has excellent accountants and that it had external audits by reputable accounting firms. The subsequent investigations of PTL failed to support Bakker’s claims. Those investigations revealed that the organization’s internal controls were extremely weak, and non-existent in many cases.

Investigator found that Bakker’s subordinate’s issues pay checks 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.

Questions

1. Identify the ethical questions raised by the maintenance of PTL’s secret payroll account? Explain

2. What procedures should an audit firm perform before accepting an audit client, particularly a high-risk client such as PTL?

3. What is the major phases of the auditing process?

4. How can corporate governance play a major role in reducing abuse of office and

   conflict of interest situation by Jim and Bakker the founders of PTL club?

5. What is agency cost and how can an external auditor help solve any agency problem

   between the agent and the principal .

Answer 1

Answer :

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.

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 relationships among data exist and continue in the absence of known conditions to the contrary information with, for example:time. The application of planned analytical procedures is based on the expectation thatAnalytical procedures include the consideration of comparisons of the entity's financialComparable information for prior periods. Anticipated results of the entity, such as budgets or forecasts, or expectations of theauditor, 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..