The Ptl Club Case Analysis

Issues

        1.- a.- What are the ethical questions raise by the maintenance of PTL’s secret payroll account by the Laventhol partner?

        b.- Does the fact that PTL was a private organization not registered with the Securities and Exchange Commission affect the propriety of the partners actions?

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

3.- a.- Under Federal securities law, is the sale of a time-share interest in a multi-unit residential property a purchase of a partial-interest investment in real estate subject to SEC jurisdiction?

b.- Assuming the conclusion in 3a. if yes, what action should the PTL Club auditor have taken?

        4.- a.-  Under Federal income tax law (FITL), what are the requirements for a religious organization to be tax-exempt?

b.- If the PTL Club auditor discovered that the Club had significant unrelated business income (UBI), what action should that auditor have taken?

c.- What role would the PTL Club auditor play in evaluating the revenue received via donations?

5.- What accounting standards would be applicable to the PTL Club audit if it were being conducted in 2015?

Facts

        Jim and Tammy Bakker founded the PTL Club in 1974. PTL was organized as a non-stock not-for-profit corporation to engage in religious broadcasting. Expansion began in 1975 when they bought 25 acres for $3 million near charlotte to construct Heritage Village and a Broadcast Facility. In 1978 they bought 1100 acres to build a Christian theme park. In about a decade it had 500,000 members and $130 million in annual revenues. In 1987, due to a scandal, an investigation started regarding the club finances. The IRS, the Federal Bureau of Investigation, and the U.S. Postal services were involved in this investigation. In March of the same year, Nakker resigned as PTL’s chairman.         

In March 12, 1979, two FCC investigators visited PTL and were denied access to employees and accounting records. A warning was issued but the PTL refused o comply and Bakker claimed that the investigators were sent by Satan. The FCC was swamped by letters and phone calls from PTL’s supporters. The commission’s investigations ended 3 years later when the PTL license was transferred from Canton, Ohio to Tulsa, Oklahoma. Although the FCC stopped its investigation, the information gathered was given to the IRS. In January, 1980, the IRS sent a letter to PTL requesting justification of cash advances and other purchases. The PTL failed to convince the IRS that the expenses were not excessive and they started to evaluate the tax-exempt status.      

        Two years later he was found guilty of fraud and conspiracy and was fined $500,000 and 45 years in prison. This scandal leads to more controls to religious organizations. The investigations revealed that Bakker and his associates were receiving big salaries and bonuses even when the company was having cash flow problems. They were also having a glamorous lifestyle, big houses with expensive decorations and luxury automobiles.

        One of the most troubling weaknesses uncovered in PTL’s accounting system involved a secret payroll account used to disburse funds to Bakker and closest aides. Not even the organization’s CFO or the board of directors knew about this account. What is disturbing is that a partner of Laventhol & Howarth, PTL’s independent audit firm, maintained the secret payroll account, including overseeing the preparation of the checks issued on that account. This same partner also supervised he annual audits. Because of this the firm was named as a co-defendant in a $757 million class action law suit filed by PTL contributors. Levanthol accepted PTL as client after the club dismissed it former audit firm, Delloite, Hankins & Sells.

        Levanthol accepted PTL as client because in those years they were applying an agreesive marketing strategy accepting high risk clients and in three years Levanthol’s revenues raised 300 percent. Critics also state that the large fees paid by PTL to Levanthol influenced the decision of accepting them. The lawsuit maintained that Levanthol allowed the secret payroll account because PTL was their biggest client. In 1990 Levanthol file for bankruptcy. The Jury decided that Bakker had to pay $130 million to the plaintiffs.

Analysis

1.- a.- The ethical questions raise by the maintenance of PTL’s secret payroll account by the Laventhol partner relate to the partner’s independence. An auditor cannot be fully independent according to their professional code of conduct if he is maintaining a secret payroll for the client. He is essentially perpetrating a fraud on behalf of the client. According to the PCAOB’s rules Section 3 Professional Standards, Rule 3520, an Auditor Independence which states a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Rule 3520 applies only to those associated persons of a registered public accounting firm required to be independent of the firm's audit client by standards, rules or regulations of the Commission or other applicable independence criteria (Section 3. Auditing and Related Professional Practice Standards, 2015).