Former president Donald Trump or the trustees of the Trump Revocable Trust would bear ultimate responsibility for compliance with generally accepted accounting principles on the Trump Organization’s statements of financial condition, according to Eric Lewis, a professor of accounting at New York’s Cornell University.

As the Trump Organization’s former independent accountants Mazars were only conducting a compilation report rather than a review or audit, they were obligated to report any obvious red flags. However, they were not responsible for ensuring the organization’s SOFCs were GAAP compliant, Lewis said Wednesday as a rebuttal witness for the New York Attorney General’s office in response to questions from state attorney Kevin Wallace.

The state rested its $250 million civil fraud case against the former president at the close of court Wednesday, as defense attorneys for Trump — who has denied any wrongdoing — made another motion for a directed verdict on the case from presiding Judge Arthur Engoron.  

Putting GAAP under the spotlight 

Determining the parties which bear responsibility for the Trump Organization’s SOFCs has been a central question at the heart of the NY AG’s case, which alleges that Trump and key members of the Trump Organization, including his two eldest sons and ex-CFO Allen Weisselberg, fraudulently inflated his net worth to obtain bank loans at more favorable rates than would otherwise have been available.

Judge Engoron has already ruled the organization is liable for fraud, with the trial concerning the amount to be paid in damages and if the Trump Organization will be barred from conducting business in New York.

Both attorneys for the former president and the NY AG have dug deeper into GAAP standards over the trial’s final days as they try to gain the last word on that question of responsibility. Experts called both for the state and defense have testified about how to calculate estimated current value under Accounting Standards Codification 274, the provision which governs personal financial statements, and whether this standard was properly followed.

Much of Lewis’ rebuttal focused on refuting the testimony of Jason Flemmons in regards to GAAP.  A former Securities and Exchange Commission fraud enforcer, Flemmons previously testified for the defense to the wide-ranging ways that asset valuations can be calculated and to the subjectivity of appraisals, and stated that the organization’s accountants ultimately bore responsibility for the statements — which Lewis disagreed with in rebuttal Wednesday.                                                                    

While Lewis agreed with some of Flemmons’ statements — for example, that accountants bear certain obligations regarding compliance with GAAP — he disagreed with Flemmons’ assertion that simply picking a method for valuing an asset including in GAAP standards constitutes compliance on its own.  

“I don’t believe you are compliant with GAAP just for using one of the methods,” Lewis said, referring to the methods outlined in ASC 274 for determining estimated current value of an asset under consideration. “You still need to compare the method to the definition of estimated current value.”

Answering the value question 

Defense attorneys for the former president have argued that valuations are subjective, and that the figures the NY AG’s office allege are inflated on the Trump Organization’s financial statements do not constitute fraud. In testimony earlier this week, Eli Bartov an accounting professor at New York University’s Stern School of Business, testified that he found no evidence of fraud in the review of the organization’s SOFCs.

Bartov also testified that the ASC 274-10-55-6, which covers real estate, would automatically eclipse the general guidance for the presentation of assets and liabilities included in a financial statement outlined in ASC 274 10-55-1, an assertion Lewis disagreed with.

“Because they are specialty areas, they go back up to 55.1,” Lewis said in response to questions from Trump attorney Jesus Suarez on the matter. They still need to comply with the definition of estimated current value covered in the general guidance, Lewis said.

Jack Castonguay, an assistant professor of accounting at New York’s Hofstra University, noted that the estimated current value of an asset regardless of class still needs to match the definition given in ASC 274.

“That is the baseline that must apply regardless of the asset class and is the definition referenced in 55-1.,” he said in an email in response to questions from CFO Dive. “55-6 merely provides additional information that can also be used in determining the value if the asset is related to real estate. Either way, the standard definition applies.”

Offering thoughts on the trial overall, it appears as though the defense “frequently tried to highlight the gray areas in accounting guidance to indicate that the entire financial statement preparation process and its subsequent analysis by third parties is opaque and that the numbers presented in the statements don’t matter because each party always establishes their own valuations,” Castonguay said.

Though there are gray areas, there are also parameters accountants and users of financial statements operate under, including reasonableness the preparation of those statements in good faith. 

“If those barriers are removed, then the statements are functionally meaningless,” he said. 

Lewis’ rebuttal marked the close of a trial that has stretched on for months, with political undercurrents contributing to tensions and bursts of argument between the attorneys and Judge Engoron. The judge has sparred several times with Trump’s attorneys over the purported appearance of political bias, prompting the judge to issue a gag order preventing Trump or his attorneys from mentioning the judge’s staff.

The former president cited this gag order as the reason behind his decision not to testify for the second time at the trial for the defense at the start of the week, leaving Bartov as the defense’s final witness.

In a post on Trump-owned social media site Truth Social following the close of court proceedings Tuesday, former president Trump lambasted the case as a “total hit job” and claimed the judge has tried to get him to settle. Engoron has not addressed the possibility of settlement in court.

“In a strange way, I’m going to miss this case,” Engoron mused at the start of court proceedings Wednesday. “It’s been an experience.”