Mazars Thumps Trump
Being fired by your accounting firm is never a good thing. When the accounting firm not only walks away from you but does so loudly with an express warning to users of your financial information that they can no longer rely on its accuracy, that’s even worse. When access to loans is the lifeblood of your business, it’s worse yet. And when all of this happens in the midst of civil and criminal investigations into your financial dealings, you could be in big trouble.
This is where Donald Trump and the Trump Organization find themselves in the wake of the revelation that their longtime accounting firm, Mazars USA, cut ties with them and disavowed a decade’s worth of their financial statements.
In a letter dated February 9, Mazars informed Trump’s company that its statements of financial condition spanning the period from 2011 to 2020 “should no longer be relied upon” and advised the company to inform anyone relying on those statements that they “should not be relied upon.” Without revealing its specific reasons for casting shade on a decade of Trump’s financial disclosures, Mazars said its conclusions were based on filings made by the New York attorney general, its own investigation, and information obtained from unnamed “internal and external sources.”
Mazars also fired the Trump Organization as a client, stating that due to its decision regarding the financial statements and “the totality of the circumstances,” it had “a non-waivable conflict of interest with the Trump Organization.”
The letter came to light in a court filing this week by the New York attorney general, Letitia James. James is seeking court approval to obtain testimony from Ivanka Trump and Donald Trump Jr. in connection with a civil investigation of the Trump Organization’s business practices, which James described in court papers filed last month as “fraudulent and misleading.”
This is terrible news for the man who calls himself the King of Debt. Access to cash is the lifeblood of the real estate business. Trump is already deeply in debt. His main lender, Deutsche Bank, cut its ties with him after the Jan. 6th Capitol attack. Prospective new lenders would have to be convinced, contrary to all existing evidence, that they could rely on the accuracy of the financial information provided by the Trump Organization. Existing lenders, including Deutsche Bank, could see the Mazars letter as a basis to call for immediate repayment of loans that are otherwise not yet due, depending on the terms of their loan agreements.
In a truly comical display of Trumpian dishonesty, the Trump Organization pretended that this potentially calamitous development is something positive. A statement from the Trump Organization seized upon a single sentence in the Mazars letter to put forth the preposterous claim that a letter brutally disavowing the accuracy of Trump’s financial statement was actually good news:
While we are disappointed that Mazars has chosen to part ways, their February 9, 2022 letter confirms that after conducting a subsequent review of all prior statements of financial condition, Mazars’ work was performed in accordance with all applicable accounting standards and principles and that such statements of financial condition do not contain any material discrepancies. This confirmation effectively renders the investigations by the DA and AG moot. [Emphasis added.]
The key point in the Trump statement—that Mazars had confirmed that Trump’s financial statements “do not contain any material discrepancies”—is a lie.
The Mazars letter says nothing of the sort. The whole point of the Mazars letter was to warn potential users that the Trump Organization’s statements of financial condition are unreliable.
Rather than representing that the statements contained no material discrepancies, as the Trump Organization claims, Mazars said only that it had “not concluded that the various statements, as a whole, contain material discrepancies, based upon the totality of the circumstances” (emphasis added).
This self-protective statement from Mazars is so opaque and vague as to be meaningless. What are the “various statements” that Mazars refers to? All ten years of them? Some of them? Parts of them? And what does “taken as a whole” mean? That some were inaccurate, but not all? That each was inaccurate standing alone, but not all ten years taken together? Who knows.
But whatever Mazars’s “no conclusion” statement is intended to mean, one thing is certain: It does not mean that Mazars is confirming the accuracy of the Trump Organization’s financial statements. By telling users of those statements that they can’t rely on Trump’s financial information, Mazars is doing the opposite of providing assurance: it is disavowing the accuracy of the Trump Organization’s statements of financial condition. The difference between Trump’s mischaracterization of the Mazars statement and what Mazars actually said is nothing less than the difference between expressing an opinion, on the one hand, and refusing to express an opinion, on the other.
And there’s good reason for Mazars’s refusal to state an opinion, one way or the other, on the accuracy of the Trump Organization’s statements of financial condition: It had never stated such an opinion because it had never performed the procedures that would allow it to do so—an audit conducted under Generally Accepted Auditing Standards.
Mazars performed compilations of the Trump Organization’s statements of financial condition, not audits. A compilation is a completely different animal from an audit. The accounting literature governing compilations, AR-C Section 80A*, makes the distinction clear:
Because a compilation engagement is not an assurance engagement, a compilation engagement does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements.
When accounting firms such as Mazars issue compilation reports stating that management, not the accounting firm, is responsible for the statements, and that they neither audited the financial statements nor performed procedures to verify their accuracy, they are not hiding behind their work. They are making required disclosures designed to alert potential users that the accounting firm isn’t expressing an opinion on the accuracy of the financial statements.
Just as accounting firms are prohibited from stating in a compilation report that the client’s financial statements are in conformity with applicable accounting rules, they are also prohibited from stating that the financial statements are not in conformity with financial reporting requirements. “Such a statement would be tantamount to expressing an adverse opinion on the financial statements as a whole. Such an opinion can be expressed only in the context of an audit engagement.” (AR-C 80A.A38, emphasis added)
In other words, Mazars did not state an opinion that Trump’s financial statements were inaccurate because it could not have made such a statement under the rules that govern the accounting profession. Not having ever performed an audit, Mazars was prohibited from opining on the accuracy of the financial statements, one way or the other. Trump himself acknowledged this point in a statement released last night.
But Mazars could warn off potential users of the financial statements if, after it had issued compilation reports on Trump’s financial statements, it became aware of previously unknown facts that may have existed when it issued its reports that, if known at the time, might have caused it to believe that information supplied by the client was inaccurate. Indeed, if Mazars was aware that persons were likely to be using or relying on the Trump Organization’s inaccurate financial statements, it was required to warn them off.
This all spells big trouble for Trump and the Trump Organization.
The Mazars February 9 letter is just the tip of the iceberg. The New York Times has reported that Mazars has been cooperating with the Manhattan district attorney’s criminal investigation, and that Trump’s main accountant at Mazars has already testified before a grand jury. No prosecutor or grand jury will unquestioningly accept vagaries like “taken as a whole.” Mazars will have to explain in detail what it discovered, how the new information differed from what the Trump Organization represented at the time the statements were prepared, and exactly why it decided to fire Trump as a client and warn investors not to rely on the Trump Organization’s statements.
This is a big deal. It means that Mazars has flipped and is now protecting itself, not Trump. (Or, as Trump put it in his statement last night, that Mazars didn’t feel it could “fight it out.”) That is undoubtedly the “non-waivable conflict of interest with the Trump organization” referred to in Mazars’s February 9 letter.
Trump has so far managed to avoid accountability for what his former lawyer Michael Cohen calls his “dirty deeds,” and there are so far no public indications that Merrick Garland’s Department of Justice is targeting Trump in a criminal investigation.
But Mazars just made it more difficult for Trump to conduct his business and tightened the noose in New York.
[* AR-C 80A applies to compilations of financial statements for periods ending on or after December 15, 2015, which includes the last six years of the Trump statements in question. The previous years were covered by AR Section 80. There are no meaningful differences between the revised standard and the previous standard for purposes of this analysis.]