In the current New York State civil lawsuit for fraud against Donald J. Trump, there has been much reporting about financial statements that were fraudulently prepared, using over valuations for property that was owned. I am not an attorney and cannot comment on the merits of the lawsuit but I am a C.P.A. and can discuss the financial aspects of this trial.

There are normally three kinds of financial reports that a C.P.A. firm can and will prepare for a client. They are commonly referred to as Audits, Reviews & Compilation.

The highest level of assurance to the general public is when a C.P.A. firm does an audit and prepares an Audit Report. There are a set of standards that the C.P.A. firm must adhere to in the performance of an audit and they are referred to as Generally Accepted Accounting Principles or GAAP. These are a set of procedures that the C.P.A. firm must adhere to before they render an opinion as to whether the company’s financial statements, as a whole, present a fair position on the financial condition of the company.

An audit is tedious and time consuming . Certain standards of accounting must be followed. An example is that all assets must be recorded at “cost.” If there is a devaluation of an asset then it must be written down to that amount. However, in the case of buildings, hotels, etc. an increase in value does not result in the value being increased. There are usually numerous footnotes to the financial statements and they should be read judiciously . The financial statements are the representation of management and an audit simply verifies their representation.

The Security & Exchange Commission requires all public companies to file audited financial statements, annually, in accordance with GAAP. Generally, investors and banks will require audited financial statements before money can be invested or lent, depending on the size of the investment or loan.

A Review is less intrusive then an Audit and involves less analysis of the company’s internal controls and testing of the company’s accounting records etc. The C.P.A. firm may do some comparisons with prior periods but does not render an opinion as to whether the financial statements present a fair position.

A compilation is just that, a C.P.A. firm takes the financial information that the company provides and assists in putting together financial statements. The C.P.A. firm doesn’t do any analytics or analysis of the numbers presented and does not render an opinion on the accuracy of the numbers. In essence, they take no responsibility for the accuracy of the financial statements.

Nothing has been reported as to whether the financial statements being discussed in the trial were Audited, a Review or a Compilation. The Trump Organization is not a Public Company and therefore not under any requirement to have audited financial statements. However, based upon the reported amount of the bank loans, by major banks, to the Trump Organization, it would appear to be irresponsible for the banks not to have required Audited Financial Statements. They may not have though.

If valuations of various property was used instead of cost, it would appear that maybe a Compilation was used instead of an Audit or Review. In any case, without an audit, “Let Buyer Beware.”

As to the testimony of the Trump children that they were not accountants and that they relied on their accountants when they signed the certification to the financial statements, maybe or maybe not! I have always found that the senior executives of an organization need to understand the basics of finance if they are going to be effective leaders and managers.

Unless you understand cash flow and profit & loss and budgeting, how can you be an effective manager? This is particularly true if your business is buying, selling or developing large commercial real estate.

The Trump’s C.P.A. firm was Mazars USA. Based upon industry data, it appears that the United States portion of Mazars put them as the 30thlargest C.P.A. firm in the U.S. In the U.S. they have at least 12 offices, 1,043 employees, 103 partners and annual revenue of $260 million. Internationally, they operate in 95 countries and have over 47,000 employees.

Obviously, they don’t compare in size with the Big 4 in the U.S.; Deloitte, KPMG, Ernst & Young and PWC (Price Waterhouse). These organizations have between 45,000 & 156,000 employees in the U.S. and generate between $11 billion and $27 billion in revenue annually. They all operate internationally also.

The major revenue generators for these firms includes audit, mergers & acquisition, management advisory services and tax.

Although Mazars does not compare in size to these firms, you would expect them to still be competent in their work. I am not sure we will ever truly understand what the relationship was between Mazars & the Trump Organization and who prepared the financial statements at the center of attention.

I believe that one of the keys in this trial is “what were the financial statements”, an Audit, Review or Compilation? Based upon what has been reported thus far, they were probably a “Compilation” and as such “anything goes.”

Jess Sweely

November 6, 2023