Reviewed by Joni J. Young University of New Mexico
Based upon court documents and testimony and other evidence, Anatomy of a Fraud by Gary Tidwell provides a thorough description of the $150,000,000 fraud perpetrated by Jim Bakker and Richard Dortch of the PTL Club. These individuals “sold” lifetime partnerships that promised partners would receive free lodging each year for life at various PTL facilities. The sales of such partnerships were to be limited in number. Despite these promises, the actual number of partnerships sold far exceeded the promised limits and little of the money raised was used to construct the lodging facilities. Instead, the funds were used to pay PTL operating expenses including enormous bonuses to Jim and Tammy Bakker and other members of the executive staff.
The book also describes the subsequent litigation arising from the fraud as well as the role of various corporate officers in perpetrating the fraud. In subsequent chapters, Tidwell considers the effectiveness of the PTL board of directors, auditors, and the Evangelical Council for Financial Accountability.1 If boards of directors, audits and memberships in the ECFA increase the accountability of organizations, then “how could the fraud that occurred at PTL ever have happened? More importantly, how could it have gone undetected, given its magnitude?’ [p. 112].
The author devotes a separate chapter to examining the roles of the board of directors, the auditors and the ECFA outlining first the legal and/or reported responsibilities of each and then discussing the ways in which each functioned at PTL. For example, the PTL board was not independent but controlled by insiders including Bakker and Dortch. Its outside directors were not especially knowledgeable of financial matters and remained apparently unaware of the cash flow difficulties confronting PTL even as they continued to approve significant bonuses for Dortch and the Bakkers. These directors did not interact with
‘The ECFA is “an accrediting agency for Christian Ministries .. . [with] a set of standards concerning governance of the organization, Board of Directors, composition function(s), audits and disclosure of financial reports, fundraising practice(s) [and] conflict of interests” [p. 249].
outside legal counsel nor the PTL financial officer who write numerous internal memos emphasizing PTL’s financial difficulties and internal control problems. They also remained unaware of oversell of lifetime partnerships and the tax difficulties facing PTL. As a consequence, the Board was ineffective in preventing the irregularities that routinely occurred with PTL.
The discussion of the work of the auditors is particularly interesting for accounting students, academics and practitioners. In this chapter, the author focuses much of his attention in considering whether the auditors at PTL should have detected and reported the oversell of the partnerships. In particular, he asks whether the auditors exhibited an appropriate level of professional skepticism given the control environment at PTL [pp. 211212] and its serious cash flow problems. Deloitte, Haskins and Sells, auditors until 1985, claimed to be unaware of the oversell of partnerships which began after year end but prior to their last audit sign off. Despite the GAAS requirement to consider subsequent events, the auditors testified that “we were auditing balance sheets as of May 31, and there was no reason in my judgment to look at this number [the sale of lifetime partnerships] after May 31” [p. 215]. The audit partner further indicated: “I don’t think that their system provided adequate information that would give you a reliable number” [p. 211]. A statement that leaves one wondering how an audit could have been conducted. Although Deloitte did not consider whether PTL had exceeded the promised limit on partnerships, the firm did consider the sales of these partnerships in deciding not to issue a qualified audit opinion for PTL. Tidwell comments: “It is difficult to understand how Deloitte could understand PTL’s future financial plans but yet not evaluate the current sales status of the Grand Hotel lifetime partnerships” [p. 218]. Laventhal and Horwath, who became the PTL auditors in 1985, argued that they were unaware of any promised limitations on the sale of lifetime partnerships. They did not examine any sales brochures for these partnerships as these documents were not financial documents [p. 221]. However, these auditors were aware of the number of partnerships sold and some simple mathematics would have suggested the near impossibility of keeping the promises made to the purchasers of these partnerships [p. 224].
The chapter on the role of the auditors raises several interesting issues regarding independence, responsibility for subsequent events and fraud detection. However, I wish that the author had also raised questions about the responsibility of auditors (if any) in monitoring the activities of an organization. In broadcasts soliciting lifetime partnerships, Bakker indicated that the funds received would be used to complete production of certain lodging facilities and also for operations. However, much of the monies raised were used to pay for operating expenses rather than to build these promised facilities. Does an auditor have a responsibility to highlight the ways in which monies raised for certain purposes are subsequently expended? Further, does the auditor have a responsibility to prevent “misuse” of the audit report? Although auditors do not tout their work as equivalent to a Good Housekeeping seal of approval, in his broadcasts Jim Bakker discussed the existence of outside auditors and their reports in ways that suggested their work provided proof of the propriety and integrity of PTL operations [pp. 243245].
Throughout the fraud, PTL remained a member of the ECFA even though the ECFA was aware that PTL was purchasing expensive homes and cars for the Bakkers. Membership continued despite ECFA questions regarding the financial accountability of PTL and concerns about the percentages of donated income allocated to fundraising and management costs and that allocated to ministry and program services. What then is the significance of ECFA membership?
Tidwell’s book documents very well the ways in which supposed “watchdog” institutions such as the board of directors, auditors and ECFA may be seen to have failed in their expected functions. This book could be usefully employed in auditing classes to raise questions about the role and purposes of auditors or in a more general discussion of business ethics and the role of institutions in “ensuring” accountability.
