Auditors could not find necessary documents to support expenses and revenue. Compensation was excessive far beyond the regulation of IRS. (Louwers, 867-872) Enron was engaged in aggressive accounting practices. It took advantage of the deregulation to inflate energy price. It utilized off-balance sheet financing vehicle to make its financial statement look far better than it was supposed to be. Both PTL Club and Enron were very risky clients. (Shirur, 4) b) From the CPA firms’ side L&H and Anderson knew that they were walking on the tightrope.
However, for profit’s sake, they chose to close their eyes and took the risk. L&H was surrounded by allegations due to their aggressive approaches on their audit work. As for Anderson, it took in 17 out of 58 L&H’s clients after L&H’s fall, which was close to double of all the clients being taken in by any other Big Six (Read, 6). This behavior was a strong indication that L&H and Anderson shared the same philosophy which was to earn the most out of the hole of regulation and law. 2) No.
According to the Analysis of L&H’s Clients by Subsequent Auditor, Anderson took in the most numbers off clients of L&H, which is 17 out of 107 among 33 CPA firms. L&H and Anderson had very similar management philosophy. They pushed to get the most. It is the result of market economics. Hence, government should play a significant role in putting regulation and law in place to prevent such things from happening. 3) The problem lies not on how audit reports should be used but on what quality audit reports should possess.
In the PTL Club case, red flags were obvious which included but not limited to hazards internal control, far-beyond-reasonable lavish lifestyle of Jim and Tammy, and secret account. These red flags were enough to trigger an in-depth investigation or extensive auditing procedures. However, nothing was done until Mr. Baker’s extramarital tryst. In this case, the only way to prevent such behavior is to keep to the 10 basic
Auditing Standards and improve the ethical awareness of the profession. ) AU Section 560 defines Subsequent Events as “events or transactions occur subsequent to the balance-sheet date, but prior to the issuance of the financial statements, that has a material effect on the financial statements and therefore require adjustment or disclosure in the statements. ”(AU Section 560) The time line of H&L’s audit of PTL Club is: End of fiscal year (May 31, 1984), Audit Completion Date (Dual dated as August 31, 1984 and October 24, 1984). Based on the timeline and the above definition of subsequent events, I believe that it is a subsequent event.
But whether Deloitte needed to evaluate the sales occurring after the balance sheet date of May 31, 1984 depends on the materiality of the over sales occurring during May 31, 1984 and October 24, 1984. It was said that over sales occurred shortly after May 31, 1984. Then how big was the over sales between May 31, 1984 and October 24, 1984? Was the number material enough to subject to disclosure? It was an issue required judgment. Between 1984 and 1987, $158 million was contributed as the (74,000+66,000=140,000) partnerships though the limit of the sale of memberships was only (25,000+30,000=55,000).
The actual sales were almost triple of the limit. However, how was the over sales allocated. Was the over sales occurred between May 31, 1984 and October 24, 1984 significant enough to subject to disclosure? We have no clues from the information provided. But given that Jim Bakker was all the time utilized the good reputation of PTL Club’s audit, Deloitte had reasons to exercise reasonable professional skepticism and did an in-depth investigation, not to mention that Deloitte expressed a going- concern on the draft of 1984 audit report concerning current assets of only $8. million against $28. 5 million current liabilities and all the other red flags signaling possible fraud. As for L&H, since limited number of partnerships was widely published, it had no excuse for not being acknowledged this issue. As a CPA firm, it just exercises due professional care in the performance of the audit and the preparation of the audit report. 5) High risk, high return. Companies willing to accept high-risk clients are striving to provide the so-called value-added service to its clients.
They choose to push the edge of law and regulation to earn high return. This is the nature of market economy. 6) Bonus-approval procedure in PTL Club was a joke. Documentations for large amount of expenditure were lost. Careful inspection of records and documents alone would be able to reveal PTL’s financial problems or at least put them in a position to confess to some of the fraud. Analytical procedure would also help to uncover the “Ponzi” scheme of the lifetime partnerships. Contribution of partnership between 1984 and 1987 was $158 million.