1. 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 PTLs 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 organizations televised appeals.

Before 2018, Jim Bakkers 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 Bakkers claims. Those investigations revealed that the organizations internal controls were extremely weak, and non-existent in many cases.

Investigator found that Bakkers subordinates 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 PTLs accounting records.

Questions

1. What is agency cost and how can an external auditor help solve any agency problem between the agent and the principal (4 marks).