Professional Obligations of Accountants to Clients
You may have heard that Donald Trump and the Trump Organization’s accountant, Mazars USA, split up after Mazars sent a letter dated February 9, 2022 to the Trump Organization. The letter was included in a court filing and said 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.” 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.”
Reliance on Financial Statements
Mazars advised the company to inform anyone relying on those statements that they “should not be relied upon.” Without revealing its specific reasons for its actions, 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.”
As Jason Bramwell points out, 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. 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.
The specific language in the letter is: “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. The letter added that Mazars “performed its work in accordance with professional standards.”
It is unclear whether Mazars’ break with the Trump Organization will have any bearing on the district attorney’s criminal investigation into Trump. The firm has been cooperating with that investigation, and Mr. Trump’s main accountant at Mazars has already testified before a grand jury hearing evidence about Mr. Trump.
Both investigations still face obstacles. While the statements may contain exaggerated estimates of Trump’s property values, those same documents also include a number of disclaimers, including acknowledgments that Trump’s accountants had neither audited nor authenticated his claims.
Another disclaimer notes that Mazars did “not express an opinion or provide any assurance about” the statements, a common disclosure in statements of financial condition that are simply compiled. The firm also disclosed that, while compiling the information for Mr. Trump, it had “become aware of departures from accounting principles generally accepted in the United States of America.”
Compilation vs Audit
There is a case to be made that Mazars is not at fault. This is because Mazars performed what is known as a compilation of the financial statements; they did not audit the statements and did not express an opinion each year on whether those statements could be relied upon. Moreover, they stated that they had not concluded that the various financial statements, as a whole, contain material discrepancies. This seems to be the off-ramp for Mazars. But is it really?
In the Bramwell article, accounting and ethics experts, including myself, opined about the whole matter. Some pointed out that “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.” This means that, according to the opinions, the compiled statements should not be relied upon for financial decisions, such as granting credit/loans. Mazars claims they performed service in accordance with professional standards.
A compilation engagement follows guidance from the Statements on Standards for Accounting and Review Services (SSARS) issued by the American Institute of Certified Professional Accountants (AICPA): “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.”
“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.” The accountant should request that management consider the effect of these matters on the financial statements and communicate the results of such consideration to the accountant.” Additionally, the accountant should consider the effect of management's conclusions regarding these matters on the accountant's compilation report. In circumstances when the accountant believes that the financial statements may be materially misstated, the accountant should obtain additional or revised information. If the entity refuses to provide additional or revised information, the accountant should withdraw from the engagement.
I was interviewed by Jason Bramwell for a piece he did for Going Concern, an online investigative website that is a frequent critic of accountants and the accounting profession. Here is a summary of my thoughts, which focus on the ethics of the relationship between Mazars and the Trump Organization with respect to the Statements of Financial Condition and withdrawal from the engagement.
In general, 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. However, this is not required in a compilation. 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 had been lost.
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.
For Mazars, the bottom line is whether they could be sued given their professional responsibility was to compile the financial statements based on information submitted by the Trump Organization. After all, if Mazars did not due any independent verification, which is not required with compiled statements, then how can they be held liable for their work and the fact that ten years of financial statements were retracted.
In conclusion, it is up to the courts to determine whether Mazars should have extended their work based on the information given by the Trump Organization and Mazars’ own observations, not the least of which is the loss of trust that the numbers provided by Trump were accurate and reliable. Trust is the backbone of the ethical obligations in an accounting professional-client relationship.
Blog posted by Dr. Steven Mintz, The Ethics Sage, on February 22, 2022. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/. Follow him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.