By Rob Saunders*
Last week former US President Donald Trump attended legal proceedings in New York. One of the issues is the reliability of the financial statements produced by his businesses.
From what I understand, the financial statements were from some years ago (2012 and later). The Judge has already found before the hearing started (so just from the evidence produced and the pleadings) that these financial statements are fraudulent.
This article sets aside Trump’s guilt, to look at the role of his accountants.
According to news reports, his present and former external accountants were on the “stand” for several hours, providing evidence and being subject to cross examination. And apparently saying “I don’t remember” more than 90 times.
Exactly what they would say would of course be governed by their recall of what they did, supported by their documentation. From lived experience, another factor not far from their minds would be the terms of their professional indemnity cover. And perhaps even the ethical requirements of their professional accounting body?
The accounting profession has been considering the fallout from the PwC scandal in Australia. Is the egregious use of information gained from one client (the Federal Australian government) to promote the services of PwC to other clients an indicator that the profession has “lost its way”?
Some may see other professional organisations acting below expectations -the Law Society and sexual harassment, engineers following the Christchurch earthquake, and famously in New Zealand, the Cartwright Inquiry unethical research practices related to the treatment of cervical cancer at National Women’s Hospital, to name a few.
When actions fall below expected standards in the Court of Public Opinion, we do see a volume of angst. Over the weekend we had the spectacle of Sarah Fitt, the CEO of government agency Pharmac, apparently acting below desired standards.
Listening to Radio NZ last Saturday morning, I heard how the Topp twins mum advising on how to deal with a problem – take the pain early and fast.
To me, it seems that special training and high levels of formal education do not alone fill the definition of what a profession is. Ultimately, accountability to some “standard” is also required. And ethics.
For the sake of this article, I will wave a wand and make President Trump a kiwi. It is apparently not that hard, just ask Peter Theil. Let’s say all these problems arose from Trump being a property developer in NZ. If this trial was in NZ, what questions would the NZ accountants face?
In NZ in 2023 we have the XRB setting financial reporting standards. Trump Corp would likely be a Tier 1, maximum accounting standards compliance, if it was a NZ business. To make this relatable to the reader, I waive my wand again, and now the entity is a Tier 2. (See details on what XRB Tier 1 & 2 means here). And of course the accounts are from the years 2012 and after, so governed by the previous rules with some ability to pick and choose what and how to disclose.
One of the first questions would be; “are the reports produced for general use, say shareholders, creditors, indeed the general public, or are they special purpose reports for say IRD and the owner”?
I am guessing that Trump’s financials would be special purpose. The objective of such reports is set out in CAANZ Special Reporting Framework (“SPFR”) as “provide useful information to users regarding the financial performance and financial position of the reporting entity”.
The accounts plainly can’t be “useful … to users” if they are fraudulent.
Because the Judge has already found that the financial reports were intended to be deceptive and result in financial gain, what responsibility should attach to the accountants who prepared those reports?
The SPFR has words about qualitative characteristics. The words “faithful representation” are used. The accounts must be relevant and reliable. One of the aspects of reliability is independent verification (if requested).
According to the PBS news reports, the financial reports materially overstated the value of the real estate assets shown on the books. The external accountants said that they would “not express an opinion or any conclusion nor provide any assurance on the financial statements”. Also, that they just checked for obvious errors and formatted the statements. And they weren’t always supplied the information they needed.
Every NZ accountant in public practice has faced these problems and said these words. But not every professional would buckle under the pressure put on them by clients like Trump and allow fraudulent statements to be issued on their letterhead.
The defence says that this was a victimless crime. They say that no one was deceived or defrauded, even though the Judge has already ruled that fraud has occurred. NBC sets out some of the unusual practices in this report.
An example is the famous Mar-a-Lago property, which was recorded at a premium in the financial statements as a possible private residence. Not disclosed was the restriction that the property could only be used for a social club, so materially misstating the value.
Trump received the benefit of better deals from his bank, Deutsche Bank, thus lower interest rates were charged. Can you see any victims here? If not, should we all conduct our business like Trump? What would be the result of that?
Lessons for NZ accountants from Trump? A man with more money than Trump said; “only when the tide goes out do you learn who has been swimming naked.” Bending to the will of a client can put you at substantial risk.
*Rob Saunders has practiced accountancy in New Zealand since the 1970s and has a passion for learning.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.