The PTL CLub - Jim and Tammy Faye Bakker

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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 countrys 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 Bakkers 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. Bakkers reply to any questions was that God wants his people to go first class. BEGINNING OF THE END Without the PTL Club boards knowledge, a confidential payroll account was kept. When Laventhol & Horwath (L&H) became PTLs 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 Bakkers 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 Bakkers 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 PTLs 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 dont 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 its time Gods 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 PTLs 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, PTLs 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, Deloittes 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 PTLs 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 Deloittes 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 Clubs 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 PTLs 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 Bakkers resignation This information led PTL officials to conclude that Bakker was aware of the ministrys 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 Clubs 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?