The big news that sent shockwaves through the accounting profession on Monday afternoon was Mazars USA breaking up with longtime client Donald Trump and his company on Valentine’s Day, saying in a letter to the Trump Organization, which was included in a court filing, that “the Statements of Financial Condition for Donald J. Trump for the years ending June 30, 2011 – June 30, 2020, should no longer be relied upon.”
The letter from Mazars was submitted by New York Attorney General Letitia James, whose office is investigating whether the former president undervalued his properties, such as his golf courses, to avoid paying a hefty tax bill. She is also looking at whether the Trump Organization overstated the value of its properties to banks to get better deals on loans. And to no one’s surprise, the Trump Organization has denied those claims and is currently trying to halt the civil investigation in court.
A separate criminal investigation is being led by the Manhattan district attorney, whose office alleges that the Trump Organization doctored tax records to avoid paying taxes.
In the letter, dated Feb. 9, Mazars said it’s now considering that decade’s worth of Trump Org financial statements that the firm compiled unreliable based on court filings made by James on Jan. 18, its own internal investigation, and “information received from internal and external sources.”
The firm added:
While we have not concluded that the various financial statements, as a whole, contain material discrepancies, based upon the totality of the circumstances, we believe our advice to you [Trump Organization] to no longer rely upon those financial statements is appropriate.
As we have stated in the Statements of Financial Condition, Mazars performed its work in accordance with professional standards. A subsequent review of those workpapers confirms this.
Now here’s the part where Mazars dumps Trump:
Due in part to our decision regarding the financial statements, as well as the totality of the circumstances, we have also reached the point such that there is a non-waivable conflict of interest with the Trump Organization. As a result, we are not able to provide any new work product to the Trump Organization.
After watching The Break-Up for the third time in a row, eating a gallon of cookie dough ice cream, and waiting until their tears finally dried, the Trump Org released this statement, which attorney and The Bulwark columnist Philip Rotner said contains a lie—and also something telling about Mazars:
“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.
Is that “self-protective statement” from Mazars a way of saving its ass from potential sanctions and litigation down the road? Does the firm have any culpability at all for this entire mess? The Washington Post asked that question to Barbara McQuade, a former federal prosecutor who is with the University of Michigan Law School, who said it’s possible:
“This effort to distance themselves could be an effort at self-preservation,” she said. It depends on whether Mazars knew the information it was getting from the Trump Organization was false or whether it was misled, too.
I wondered what some accounting professors had to say about whether Mazars is blameless or shoulders at least some of the blame in this matter. So I reached out to several yesterday to get their opinion.
Erik Boyle, PhD, CPA, a former KPMG auditor who is now an assistant professor of accounting at Idaho State University, said he doesn’t think there’s enough of a case right now to sanction Mazars because the firm’s engagement with the Trump Organization was a compilation engagement—something Rotner also mentions in his column for The Bulwark.
In an email, Boyle said: “A compilation engagement follows guidance from the Statements on Standards for Accounting and Review Services (SSARS) issued by the AICPA. AR-C Section 80A paragraph .02 states, ‘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’ (emphasis added).
“However, paragraphs .13-.16 state that, in the course of the compilation agreement, if the accountant becomes aware that the accounting policies issued by management, or ‘the records, documents, explanations, or other information, including significant judgments, provided by management are incomplete, inaccurate, or otherwise unsatisfactory,’ then the accountant should ‘request additional or corrected information,’ and failing that, then the accountant should withdraw from the engagement.
“Culpability should be determined based on the timing of when Mazars was able to determine that the information they were receiving could not be relied upon. In their letter dated 2/9/22, they indicate that this determination occurred only recently as a result of ‘filings made by the New York Attorney General … our own investigation, and information received from internal and external sources.’ If this is true, then they would likely not be found culpable. If a deeper investigation determined that they signed off on financial statements when they had reason to doubt the reliability of the information provided by management, then they should be found in violation of professional standards and would have some culpability.
“The other consideration to be aware of is that their letter is only stating that the financial statements cannot be relied upon because Mazars feels there are significant enough concerns about the reliability of the information they were provided. However, this is different from stating that the Trump Organization’s financial statements are misstated. Because Mazars hasn’t conducted an audit of the Trump Organization financial statements, they aren’t able to issue an opinion as to whether or not the financial statements are actually misstated.”
Dr. Boyle wasn’t the only academic who had something to say about whether Mazars is at all at fault. Here’s what other accounting professors told me via email:
Steven Mintz, PhD
Professor Emeritus of Accounting
California Polytechnic State University
Accountants should ensure that the financial statements are accurate and reliable and do not contain any material misstatements, but they are not guarantors that fraud does not exist. Accountants should retract previously issued financial statements when they believe they can no longer be relied upon. This protects the public interest—that of investors and creditors. This is the appropriate step to take because trust between Mazars and the Trump Organization has been lost. There’s no way Mazars should perform future services for the organization when they doubt the veracity of the financial information provided to them.
Trust is important between accountants and their client. Accountants should not necessarily abandon clients because financial statements have been retracted. It’s better to work with the clients and clean up their financials so they can start to be relied upon. However, if the accountants don’t trust the numbers provided by the client, then it’s time to withdraw from the engagement. No matter what happens, Mazars must maintain the confidentiality of Trump’s financial and tax information, unless they are under a court order to disclose perhaps in the lawsuit against the Trump Organization.
One question is why it took 10 years for Mazars to figure it out. If they were to be investigated by the state board of accountancy, this question would surely come up. I don’t think they would automatically be investigated (or sanctioned) because they retracted 10 years of financial statements. Retraction occurs from time to time, although 10 years clearly shows a pattern of wrongdoing by the Trump Organization. However, if it comes out in court that they were somehow complicit in the likely fraud, then an investigation would surely ensue. Mazars can also be sued by investors and creditors who had/have a financial interest in the Trump Organization if their financial interest has been compromised by the organization’s actions.
Randal Elder, PhD
Dixon Hughes Goodman Term Professor and Head of Department of Accounting and Finance
University of North Carolina, Greensboro
Well, this has certainly attracted a lot of attention. One key thing is that most people will read the headlines and think these are audited financial statements for a public company. It would certainly be concerning if an auditor indicated you could not rely on 10 years of audited financial statements.
However, from what I understand, these were compiled personal financial statements using fair values provided by the client. So, unless they knew those values were clearly incorrect, I don’t think they are culpable. However, this is based on limited information about the actual financial statements and report on them.
John DeJoy, PhD, CPA
Associate Professor of Accounting and Corporate Ethics
A compilation provides no assurance by the accountant. The accountant is not expected to perform tests or analytical procedures in a compilation. Compilations are the lowest level of financial statements, below reviews and audits. In a compilation, the company’s management (i.e., the Trump Organization) assumes all responsibility for the financial statements. Compiled financial statements do not need to be prepared according to US GAAP standards and the accountant is not required to be independent of the client. This should be made clear in an engagement letter between the accountants and management. In general, it is management who assumes the risk in compiled financial statements, not the accountant.
Also, the big picture takeaway is that, according to reporting, these were not AUDITED financial statements and should not be relied upon for financial decisions, such as granting credit/loans. I assume banks and other lenders would understand this and seek audited financial statements before granting loans. A general reader of the news reports, however, may assume these were audited financials or that all financial statements prepared by an accounting firm are audited. This, of course, is erroneous.
Allen Blay, PhD, CPA
Accounting Department Chair and EY Professor of Accounting
Florida State University
I wouldn’t be surprised if someone sued them if it became clear the financial statements were in some way fraudulent, but they didn’t actually take any responsibility for the statements and shouldn’t have any liability. They did not sign off on the financial statements, unlike what many of the articles covering this state. I’ve seen several articles saying they “signed off” on the statements. That is not an accurate depiction of what they did. All they did was compile, or in some cases prepared, the financial statements. That means they took the information given by the Trump Organization and prepared a set of financial statements from them. They did not perform any procedures on the information, nor did they provide any assurance. This was not an audit or a review where there is assurance. In fact, it appears they specifically stated that the organization did not follow GAAP.
So although they might get sued by Trump, or possibly by someone who contracted with Trump if they lose money as a result of relying on the statements, I don’t see much that Mazars did that would result in real legal liability (presuming they followed the standards for compilation engagements, and there is nothing that indicates they didn’t).
Agree or disagree with anything this group of accounting professors said regarding the Mazars/Trump situation? Do you think Mazars is in any way culpable in this matter? Feel free to let ’er rip in the comment section.