Internal Controls Come for Trump

At long last, we have an internal controls and compliance angle on Donald Trump’s courtroom drama! When Trump was ordered last week to pay $355 million in damages for his civil fraud trial in New York, the judge in the case also ordered the Trump Organization to hire a director of financial compliance. 

This person, to be hired in coming months, will actually be the second independent compliance executive appointed to help oversee the train wreck otherwise known as the Trump Organization. A former federal judge was appointed in 2022 to be an independent compliance monitor, and by coincidence that monitor recently published her first report — which said Trump’s financial records have more holes than a block of Swiss cheese.

So clearly this director of financial compliance will have lots to do.

The history here is that last Friday, New York judge Arthur Engoron ordered Trump to pay $355 million in damages for Trump’s civil fraud trial. With pre-judgment interest, the total amount is closer to $455 million. Trump has vowed to appeal, of course; but to pursue that course he will need to put roughly 110 percent of the damages award into an escrow account while the case continues. Whether he has the cash to do so, or could find someone to post a bond for that much money on his behalf, remains to be seen.

Meanwhile, the rest of Engoron’s judgment — the part dealing with oversight of the Trump Organization — proceeds. Engoron had originally considered revoking Trump’s business license (which would have meant a swift end of the Trump Organization operating in New York), but stopped short of that step last week, reasoning that the appointment of two independent compliance executives would provide enough oversight to let the Trump Organization keep running. 

Independent Director of Compliance

Exactly what will this director of compliance do, you ask? Engoron’s ruling spelled that out, and it’s short enough that we can quote the entire thing:

The court hereby orders that an independent director of compliance be installed at the Trump Organization, who shall be responsible for ensuring good financial and accounting practices, shall establish internal written protocols for financial reporting, and shall also approve any financial disclosures to third parties in advance of submission. 

The independent director of compliance shall report directly to [the compliance monitor], and the Trump Organization shall pay such person reasonable compensation. Within 30 days of this decision and order, [the compliance monitor] shall submit to the court a proposed order including, without limitation, a list of proposed persons who may fulfill this role, and the specifics of the role itself.

Here in the corporate world, we would call that role a director of financial compliance, similar to a director of SEC reporting or Sarbanes-Oxley compliance. Indeed, it’s important to make that distinction so we don’t confuse this role with the independent compliance monitor who’s already there at the Trump Organization, acting in a capacity that the corporate world would understand more as a head of legal compliance. 

The salary for a job like this should be somewhere around $150,000 to $180,000, based on a quick search for similar jobs I found on LinkedIn. Then again, a well-qualified candidate would pretty much have the Trump Organization over a barrel since the company must fill this role; and you’ll have to deal with the disorder and dysfunction of the Trump family, which seems like it should command a salary premium to me. I’d hold out for at least $200,000 if I were you.

Engoron’s order says that the independent compliance monitor is supposed to draw up a list of proposed candidates (within 30 days!) for court approval. That monitor is Barbara Jones, a former federal prosecutor and district court judge who these days is a partner at the Bracewell law firm. 

Jones could solicit individual people to fill that director of compliance role. It’s also possible that she might recruit a financial compliance consulting firm instead, and that consulting firm would then send a senior person on a secondment or some arrangement.

Which firms could do this sort of work? Any of the Big 4 audit firms, plus the second-tier audit firms such as BDO, Grant Thornton, or Crowe. We might also see some specialty consulting firms such as Protiviti, CFGI, or Forensic Risk Alliance. Or maybe Jones already has a list of preferred candidates tucked away in her desk drawer, and she’ll surprise us all.

Jones’ First Monitor Report

Jones released her first monitor report at the end of January. “While the defendants have been cooperative,” she wrote, information that the Trump Organization was required to provide to her “has, at times, been lacking in completeness and timeliness.” Jones said she had reviewed those shortcomings with the Trump team and they promised to improve their processes for accuracy, timeliness, and transparency. (Fun fact: the Trump Organization also has a history of using pretaliation language in its employment contracts, because of course it would.)

A fair bit of Jones’ report is devoted simply to describing the legal structure of the Trump Organization, since that structure sounds like something drawn up by a bunch of second-year law firm associates high on cocaine. 

When Jones arrived in late 2022 the business was a collection of 521 distinct legal entities, all held within the Donald Trump Revocable Trust. Since then, the Trump Organization has slimmed down to 415 entities. Some are revenue-generating businesses, some exist solely to enter into licensing agreements, some exist to enter into management agreements, and nearly 100 that seem to have no purpose at all. Those entities that generate cash transfer their income to other entities to centralized accounts under the Trump Trust, and the managers of the Trust then distribute funds as necessary to the entities that need cash. 

I explain that convoluted legal structure to give a sense of the financial reporting challenges here, since those challenges will occupy a big part of the financial compliance director’s time. Not only will that financial compliance director need to implement financial reporting processes that can bring accuracy to such chaos; this person will also need to implement processes that can support accurate financial disclosures. 

This matter about accurate disclosures is important. In her report, Jones expressly states that her appointment does not require or permit advanced approval of the Trump Organization’s preparation of financial information to third parties. As such, Jones writes, “I am not in a position to conclude whether fraudulent activity occurred.” 

Fair enough, but remember that Engoron’s order says the director of financial compliance “shall also approve any financial disclosures to third parties in advance of submission” — and yes, that emphasis is in Engoron’s ruling.

So building anti-fraud controls into the Trump Organization’s financial processes seems like it will be a crucial part of the job. Be warned, ye who ends up in this role.

Speaking of Third Parties

This question about the accuracy of financial disclosures to third parties is also important because Trump and those 415 legal entities have all manner of arrangements with lenders and business partners. That means a lot of financial disclosures flitting back and forth — many of them incomplete or inconsistent, Jones said.

For example, some of Trump’s loan agreements require him to provide annual or quarterly certifications about the accuracy of the company’s financial statements; the Trump Organization “has not consistently provided these certifications,” Jones wrote. Other agreements require the company to supply an accurate description of its financial condition, but in 2022 the company switched up its annual reporting to a more vague list of “Material Assets and Material Liabilities.” 

The Trump Organization also changed up how it calculated supposedly standard disclosures such as EBITDA, and made various errors in calculating cash flow and other important metrics. 

So, as Jones correctly notes, the internal controls at the Trump Organization are inadequate, inconsistent, incomplete, and in serious need of attention. One would like to hope that with Jones and a competent financial compliance director, the Trump Organization might stand a chance at rectifying its enormously fraudulent and shaggy ways — but with you know who at the top of the organization, somehow I doubt it.

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