I wanted to write a bit more analyzing yesterday’s Mazars news. As a reminder, we learned yesterday that the former president’s long time accounting firm had effectively fired him and his company as a client and told him that it now considered a decade of his personal financial statements, from 2011 to 2020, unreliable. In particular, I thought it would be helpful to say more explaining my understanding of how we learned the news, who we learned it from, and what its consequences might be. As you’ll see, analysis of these issues requires a degree of supposition and analogy, so as you get further into this post you’ll find I’m at increasing risk of making a wrong inference, but I’ll do my best to stay on the true path.
In sum, as explained below, I don’t think we should overstate the significance of this news. It doesn’t indicate that Mazars has somehow flipped and decided to cooperate against its former client, and it doesn’t mean the Trump Organization is doomed. But it does show that New York AG Tish James’s investigation has made significant progress and its findings have, to a degree, been independently corroborated by the Trump Org’s own accountants.
How we learned the news and who we learned it from
This one starts out straightforward. The letter from the general counsel of Mazars USA, LLP to the Trump Organization’s chief legal officer, Alan Garten, was filed publicly in court on Monday afternoon by the New York Attorney General’s Office in support of their ongoing effort to compel the former president and two of his adult children, Don Jr. and Ivanka, to produce documents and sit for a deposition in its investigation of alleged financial improprieties at the Trump Organization.¹ Almost immediately thereafter—within ten minutes of the time on the filing stamp—the NYAG’s communications staff emailed the documents out to the press.
What’s more interesting is to consider how the NYAG’s office learned about the letter, and how quickly. The letter is dated February 9, 2022—last Wednesday. Less than a week later, it had found its way into the NYAG’s hands and been incorporated—albeit in a cursory way—in a reply brief filed that day in support of the NYAG’s motion to compel.
It’s almost impossible to imagine the Trump Organization proactively disclosing so quickly—and in un-redacted form—a sensitive letter from a once-trusted advisor that tends to corroborate the existence of the very financial improprieties the NYAG’s office has alleged.²
But someone gave the NYAG’s office a copy, almost as soon as it was sent. Who was it? Perhaps the most natural assumption is that Mazars itself, feeling pressure from the investigation, having made the fateful call to abandon its client, and seeking to distance itself from any potential wrongdoing, took an official decision to share this letter with the NYAG and simply emailed over a copy, anticipating that the full letter would quickly become public. On close inspection, I suspect this is not what happened. To be clear, I can’t firmly rule out the possibility that Mazars decided to share the letter, but there are several considerations that suggest this is not the case:
First and most obviously, like lawyers, Certified Public Accountants like Mazars are bound by law and professional standards to protect their client’s privacy. In the long run of litigation from Congress and the Manhattan District Attorney seeking access to Mazars’ files on Trump, it has taken the position that its relationship was confidential and it would turn over only what was legally required. Mazars’ statement to the New York Times after the letter came out yesterday—“under our standards of professional ethics, we cannot comment on any client services or relationships”—indicates the firm hasn’t officially altered this view.
Second, the NYAG’s office did not at any point in any of its filings or communications indicate how the letter came into its hands, suggesting they may have obtained it from a source or by a means that needs to be protected.
Third, the letter is addressed only to Garten and not expressly copied to the NYAG’s office or anyone else—a standard professional courtesy to indicate when what may appear to be a private correspondence is being shared with a third party.
Fourth and maybe most importantly, the letter says more than it is necessary for anyone outside the client relationship to know. The core message Mazars is trying to get out there, if you will, is the part about it considering the 2011-2020 financial statements unreliable. But in deference to the sensitivity of the confidential relationship, it’s asking the Trump Organization to spread the word. It specifically writes to Garten “you should inform any recipients thereof who are currently relying upon one or more of those documents that those documents should not be relied upon.” It would make a certain amount of sense to see that this advice got disseminated even if Garten refused to mention it to anyone else. (While it sits awkwardly beside accountants’ general obligation of confidentiality, getting this specific point out beyond the walls of their client relationship serves an ethical obligation that accountants take on to third parties who rely on the accountants’ assurances about their client’s financial condition.) However, several other parts of the letter—to wit, the parts about Mazars not providing any more work to Trump starting immediately, about Trump’s and his wife’s tax returns being imminently due and still incomplete, and about “the Matthew Calimari Jr. apartment” and Mazars’ difficulty in obtaining information about it from the Trump Org.—appear to cover sensitive, heretofore non-public matters that Mazars really has no business sharing with the NYAG or with the public at this time. While some people at Mazars might relish spreading hot gossip about a client they feel has wronged them, it would be reckless and unprofessional to craft what is in effect a public disclosure with so many surplus threads for investigators and reporters to pull upon. Bottom line: If Mazars as a firm had expected this letter to become fully public, as it has, it would probably have made the content substantially less dishy.³
For all these reasons, I suspect that the rapid disclosure of this letter does not demonstrate that the Trump Org.’s or Mazars’ cooperation with the NYAG’s investigation, but rather that it was leaked to or obtained by the investigation without either firm’s knowing consent. Accordingly, even though Mazars and Trump are clearly on the outs, I don’t think we can take this letter as evidence that Mazars has adopted or will adopt a more cooperative attitude toward leading the NYAG or other investigators through what it knows about Trump’s finances. (And of course, what further information, if any, the NYAG has developed or can develop from its potential source is impossible to predict, because we know so little about it.)
The Consequences
It’s probably not necessary to belabor the point that it’s fairly rare for an accounting firm to decide its ethical commitments require it to fire one of its long-term, high profile clients, effective immediately, and tell that client to spread the word that a decade of financial statements—documents the firm had a hand in preparing—should not be relied upon.⁴
Any business that receives an adverse determination about the reliability of its financial statements from its own accountants is living under a dark cloud. Such a determination may constitute or rapidly generate a default under the business’s existing loans and other financing arrangements; it could dissuade potential lenders from making new loans or potential counterparties from closing new deals; and it could prompt regulatory or investigative interest from governmental authorities. Moreover, the specifics of the Mazars letter cast the shadows even darker:
Mazars is a massive, global accounting firm. It claims to have over 44,000 employees worldwide and some 16,000 in what it calls its “North American alliance.” It’s not the sort of firm one would expect to make an off the cuff decision of this gravity, and clearly this decision received high level consideration. The letter is signed, not by some some operational level CPA, but by Mazars USA’s general counsel, its top lawyer in the country.
The wording of the letter confirms that Mazars’ reconsideration of the Trump financial statements corroborates the NYAG’s investigative findings. Specifically, the letter says Mazars’ conclusion is “based, in part, upon the filings made by the New York Attorney General on January 18, 2022, our own investigation, and information received from internal and external sources.” In other words, the accountants took notice of the NYAG’s accusations of impropriety, looked into them themselves, and found them credible enough to withdraw their confidence from a decade worth of financial statements.
The letter casts doubt on the Trump Org’s candor. As mentioned yesterday, an accounting firm’s statement that it is withdrawing support for financial statements it compiled, despite its finding that its own professionals did nothing untoward, amounts a declaration that those professionals were misled. Moreover, the letter highlights a specific instance (“the Matthew Calimari Jr. apartment”) where it has not been able to obtain necessary information from the Trump Org to complete the former president and his wife’s taxes, despite months of requests. While this information is provided to explain why the tax returns aren’t done yet, it paints a clear picture of the nature of the relationship between the accountants and their clients.
That said, the nature of the former president and his business may well mitigate some of the commercial adverse effects this letter would have on a more typical operation. Most businesses have a reputation for honest and fair dealing, which an adverse finding by an accounting professional can detract from. Trump, it’s fair to say, lost much of that reputation long before Mazars put pen to paper. Most lenders soured on the idea of lending to Trump during his 1990s career, which featured costly and scammy forays into Atlantic City casinos, junk bond issuance, and offloading unsustainable obligations onto public company investors. The principal lender who has stuck with him, Deutsche Bank, has a reputation of its own in North America—politely speaking, focusing on higher risk lending clients and charging them higher rates. If the Mazars letter triggers any defaults under the Trump Org’s loan documents, it could give DB or another lender an opening to take drastic action. However, if the lender wants to preserve its relationship with Trump, it could also be resolved relatively amicably, e.g. with a simple amendment and waiver, a small fee, etc. By the same token, many of Trump’s business partners appear to be interested in him for the strength of his brand and his obvious political power, and for that reason may be more tolerant of the appearance of improprieties than a typical counterparty.
On the governmental level, the consequences look a little worse for the Trump Org. As mentioned, this determination by Mazars amounts to independent corroboration of the NYAG’s publicly disclosed findings—a shot in the arm for the investigators and encouragement to the criminal prosecutors like the Manhattan DA’s office who appear to be working in parallel with the NYAG investigation or like the US Attorney who may be looking to ride in in its wake. While the NYAG’s investigation as it’s currently constituted cannot bring a criminal case, the office does have substantial powers—e.g. seeking a court-ordered dissolution of the Trump Org because of its illegal activities—and the growing momentum of the investigation may embolden AG James to wield some of those powers. In addition, this development may also pique the interest of someone at the Internal Revenue Service, which according to Trump and his lawyers’ have claims has been auditing these same financials all along. How could IRS auditors have missed what the NYAG and now the Trump Org’s accountants found? If anything ever blows away the fog of mystery that hangs over the IRS’s entanglements with Trump, perhaps this will be it.
The Mazars news is, in sum, an important but incremental development. It corroborates the work NYAG investigators have done so far, it shows they’ve made real progress, perhaps it also shows they’ve developed an important source, and it could well spur bolder investigative activity. However, more needs to happen before anyone is held accountable, and we should be careful not to overstate its significance.
1
The president’s other adult child, Eric, has already had his deposition and it was contentious. According to the NYAG’s January filing, after some brief opening interactions, Eric asserted his Fifth Amendment rights and refused to answer each question put to him for six hours straight.
2
The Trump Org has mostly taken a hostile attitude to the NYAG’s investigation and recently argued to the judge in its opposition to the motion to compel testimony from the former president, Don Jr., and Ivanka that the whole endeavor is a pretextual, meritless, political witch-hunt.
3
Cutting somewhat against this reading is the fact that Mazars letter hived off some specific information about the former president and his wife’s tax returns and their status for a separate correspondence, which has not yet been disclosed, suggesting Mazars may have decided to afford some information greater confidentiality.
4
Here is just a little belaboring: Professional services partnerships are, at their heart, about relationships. The partners, generally speaking, earn their positions in the firm and are sustained in them by the clients whose business they attract and retain. The commercial incentives all point most naturally toward to keeping clients happy, keeping them coming back for more services, growing alongside them, getting them to refer their friends to you, etc., and against blowing up a relationship and casting doubt on ten years or more of work that you once, to some extent, stood by. From a high-minded point of view, a firm usually only takes those drastic steps when required to by the ethical standards of the profession or by the law. Alternatively, from a coldly rational perspective, a firm would only do that when not doing it would endanger more valuable relationships or the firm’s reputation and ability to go on doing business. In a firm as large as Mazars, a global partnership that claims to have more than 44,000 employees, the decisions was likely imposed on the partner in charge of the Trump relationship by the head of the US firm overall or a committee charged with looking out for the firm’s broader interests.
—nycsouthpaw