Taking An Attack Column To Task

Where's The Beef??

I follow Francine McKenna (@Retheauditors on Twitter) and am a free subscriber to her blog. She’s sharp on accounting and often brings up things that you didn’t think about. I met her years ago via Allan Schoenberg when he was at CME.

She is a newly minted Professor of Accounting at Wharton. Wharton is a fantastic top tier business school. She was an auditor for a public accounting firm back in the day and has a CPA to prove it. Unlike most people that are in the business journalism space, she actually practiced.

Former CNBC anchor Ron Insana said he didn’t know what SWIFT was until a few days ago ought to illuminate the amount of practical business intelligence the people sitting on business channel anchor desks have. There is little to none.

When Francine writes something she has the credibility and understanding that one needs to explain sometimes difficult topics to the masses that don’t have her experience. She has been there, done that, and speaks from experience. It’s a voice to listen to.

Yesterday, she published a blog about how the auditors for the Trump International organization stepped away. Instead of the blog post being a good lesson on accounting, it is a great lesson in politically biased writing. She makes a lot of innuendos that have no merit in fact.

Trump is being investigated by the NY Attorney General. It is a politically motivated investigation. This is more of a former Russian strongman Josef Stalin, “Show me the man and I will show you the crime” type investigation. If you don’t accept that, or see that this investigation is about politics and not merit, you need to take a step back and try to gain some objectivity.

The presumption of innocence is core to the American legal system but journalists all over America have tossed that principle into the dustbin of history since it doesn’t suit their agenda. Trump Derangement Syndrome still persists everywhere. I think Francine is affected by it and it shows in her piece.

The Democratic and hard-left New York Attorney General is leading a legal lynching. It’s designed to get Trump not to run again and to help Democrats win the midterms.

Francine starts out:

A little more than a year ago, on February 9th, 2021, the U.S. general counsel for global public accounting firm Mazars wrote to Trump Organization EVP and Chief Legal Officer Alan Garten that the firm was advising that its Statement of Financial Condition for Donald J. Trump for the years ending June 30, 2011 through June 30, 2020 “should no longer be relied upon”and that Trump Organization should inform anyone who received those documents and may be relying on them to no longer do so.

Oh my gosh, so scary!

Mazars wrote that although the firm had not “as a whole” found material discrepancies between the information the Trump Organization provided and the actual value of Mr. Trump’s assets, “the totality of circumstances” that include Mazars’ own investigation required it to now notify anyone who had received the statements that they should no longer rely on them.

Wait, you mean they hadn’t found any material discrepancies, but because they were trying to stay out of the political firestorm the NY AG is kindling, they’d like to step away and ethically it is their duty to notify anyone who received a statement that they won’t stand behind them?

This is not a big deal at all, but it’s a big deal to the press that doesn’t understand business.

The “non-reliance” letter and evidence of Mazars’ resignation as a service provider to the Trump Organization and Donald Trump, personally, were revealed in a filing by Letitia James, the Attorney General of the State of New York in the Supreme Court of the State of New York on January 18, 2022. (The filing was made public in open court on Feb. 14.)

Some points:

• Did it occur to anyone that perhaps the accountants are afraid of the NY AG and don’t want to be unintentionally drawn into a biased political firestorm?

• Knowing what we know about the radical left-wing and their endless pursuit of Trump based on fallacies if I was the CEO of that accounting firm I’d try to avoid being drawn in as well.

Francine correctly points out that Trump’s organization is a private company. They aren’t public. There are no public shareholders. When it raises debt or equity, those are arms-length transactions where due diligence is done independently by the opposite side.

I know CEOs of private companies that were CEOs of public companies. They never want to be the CEO of a public company again. Not only are standards different, but board meetings themselves run differently too.

The people who do business with Trump International wouldn’t rely on the last ten years of financial statements either. They’d do their own diligence. Certainly, Trump might give them to a counterparty as a way to start a transaction. But, that party would engage in its own audit to see how the statements jived with the actual numbers on the ground.

It’s also helpful to have a look at internal financials so you can have a conversation about how an organization views things. It gives you a sense of perspective and culture.

Francine then goes a tear of innuendo.

She eventually compares Trump’s organization to the Russian oil company Yukos. It’s convenient since people with Trump Derangement Syndrome want desperately to believe Hillary lost because of Trump being tied to Putin. However, the facts so far show that it was Hillary who was working with the Russians to derail Trump, not the other way around.

It’s also a convenient piece since Putin is now persona non grata everywhere with his invasion of Ukraine. Conveniently everyone forgets that Putin seemed to respect Trump. He didn’t respect Obama and he certainly doesn’t respect Biden. Just look at his actions during each Presidential term.

Let’s get a few facts straight.

If you own a private company, what is the value of that company? It’s whatever you say it is until you have to go into the market and:

1. Sell it

2. Borrow using the assets and cash flows of the company

3. Issue equity securities

4. Hire employees and strike options for them

That’s when the value of the company is determined in a negotiation between your company and the counterparty.

Francine points out that AICPA publishes the standards for private companies. Private companies don’t always follow AICPA because it doesn’t fit the market they are in. But, they are good guidelines.

Most companies follow generally accepted accounting principles, but GAAP varies from company to company. Even in the same industry, it can differ. I bet ICE doesn’t calculate the value of assets and expenses the exact same way CME or NASDAQ do. I know United and American view things differently. You see it in the notes to financial statements and the corresponding schedules.

Public accounting firms aren’t King Solomon. They make mistakes. Just because a company is public versus private doesn’t make it more secure or better. I’d rather own shares of Cargill than ADM I think.

A bit away from the topic but you will get the gist to understand why AICPA rules aren’t iron clad law.

There are several ways to value a startup company. One way is through a classic business school discounted cash flow analysis. But, does that make sense for a venture-backed firm? Most of the time, those firms don’t have EBIT or anything resembling a profit to do a classic DCF analysis. What about the valuation those venture capitalists? They put a valuation on a company when they invest. In each funding round, a valuation is negotiated. But, often they aren’t realistic and follow rules of thumb. Is that valuation right? How about a 409.a valuation done by an independent auditor? They can be good, but those are often incorrect too when you actually go to market. 409.a valuations can also give you huge headaches with the IRS.

By the way, if Trump International went belly up tomorrow what’s the fallout in the market? The market won’t care because Trump is private. Some public companies that do business with Trump, or lend money to Trump would see the effect in their stock price. Employees of Trump would be compromised. But, in sum it wouldn’t even cause a ripple on the pond.

Trump can say his hotel and real estate enterprise is worth any dollar number. He can create some fantastic number, be realistic, or even be aggressively conservative and undervalue it. It doesn’t matter until Trump International does an independent transaction with someone.

Francine cites the fact banks like DeutschBank are making loans to Trump. The fact that banks are lending money to Trump International ought to be a sign to the market that things are working at Trump and the bank is comfortable with their balance sheet, income statement, and statement of cash flows. It’s not as if they aren’t doing their own independent work. However, in Francine’s piece, she makes it all seem suspicious.

You know, because DeutscheBank is “German”. It’s foreign. Not like JP Morgan Chase. You know the Germans have a close relationship with the Russians. As my Norwegian ancestors say, “Uff Da”.

Ladder Capital loaned money to Trump. I know a lot of private funds that are raised to loan money to private companies. This happens all the time since debt capital is often cheaper than raising equity capital. Companies also will utilize leverage to grow rather than grow from cash flow. Debt is not a four-letter word in business if you can pay it.

Ladder isn’t talking about their transactions with Trump. Do you blame them? They don’t want to be involved in a politically motivated investigation either. Plus, it’s a private transaction and if Ladder got chatty, what happens to their competitive position in the market? What happens to Trump’s competitive position in the market? How will other clients view Ladder? I suspect they won’t be beating down Ladder’s doors to raise capital with them.

Ladder doesn’t own the loans they made and hold them on their books. So what? This is not a big deal. Organizations like Ladder routinely originate loans and sell them in secondary markets. There are several tiers of what’s known as mezzanine capital that buys and sells private debt. You might have gotten a home mortgage at your local bank, but the odds are pretty good they don’t own the loan today.

Francine also speculates on deals done between banks and private parties being consummated because of a relationship. No kidding! Stop the presses! That’s why great bankers are also great networkers. They get out and meet people. They build client relationships so that when the day comes and you need capital they are top of mind.

Francine then mentions Russia. Russia! Russia! Russia! Democrats can’t stop talking about Russia. Except Eric Swalwell. He fancies China.

Relying on the whole Yukos debacle to make your point about Trump is specious, to say the least. Do we recall what happened there?

• Didn’t the original CEO run afoul of Putin, get stuck in a gulag, and the company given to a crony?

• Wasn’t it a Putin shot across the bow to the oligarchs he had a hand in making to keep their opinions and comments out of politics?

I recall stories about the “largest IPO in history” and it was all a scam. Does anyone think that Russian, or Chinese, finance is on the level? Especially in the Russian oil industry? Putin’s cronies get the money.

Trump scares the left shitless because he can relate to common people. He says what’s on everyone else’s mind. Have you seen the table discussion with NATO when Trump asks everyone why they aren’t fulfilling their end of the NATO bargain? People in the US have been thinking that for years. “It’s about time our President said something like that”, people thought.

Trump was confrontational. That’s uncomfortable. It’s disquieting. But, sometimes people have to be confronted. He can speak extemporaneously without handlers. He isn’t dumb and hasn’t gently been massaged by consultants into a type. He’s rough around the edges.

When you are on the opposite side of the Trump bluster, you get pissed off. But, was he wrong about anything when it came to Hillary? No. As the facts came out about Covid, he wasn’t wrong about them.

I certainly disagreed with some of Trump’s policies, but he is not our President anymore. He is in the rear view mirror until at least 2023.

One thing I wonder about. When you have the level of knowledge that Francine and few others like her have, why aren’t they putting Hunter Biden under the microscope?

There is tangible evidence that Hunter Biden is corrupt. That corruption extends directly to his father, the sitting President of the United States. Mr “10% for the Big Guy.” Joe Biden’s brother was in on the game. The Biden Family Business wasn’t private. It was about crony capitalism and influence peddling.

There are plenty of loose ends and strings to pull on that an enterprising reporter might have a nice hooked fish on the end of them along with a Pulitzer Prize and deity-like recognition for the rest of your natural-born life. See Woodward and Bernstein.

Isn’t Hunter a big story? Isn’t that the story people like Francine should be pursuing today if they possessed objectivity and journalistic integrity? Where are they?