America’s Businessman Donald Trump has some pretty faulty work ethics. The Donald was audited because he failed to honor his agreement to issue New York City $3 million in rent payment. City auditors described the behavior of the Trump Organization officials and his Grand Hyatt hotel as “unusual and unheard of.”
On April 22, 1987, Trump signed off on a 3 sentence letter issuing a series of accounting changes that allowed his first hotel to fleece New York City nearly $3 million in rental payments.
Years prior, Trump proposed quite an unorthodox deal freeing the hotel of $160 million in property taxes over the span of 40 years. While guaranteeing the city a percentage in the hotel’s success, New York City received annual rent payments tied to Donald’s renovated Grand Hyatt Hotel profits.
In 1986, the hotel had its best year, making nearly $80 million. City officials expected to receive at least as much as $3.7 million of that profit. But a month after Trump and his partners signed off on the accounting changes, all the city was paid was just $667,155.
What followed was an ongoing 2 year back-and-forth battle between the Trump Organization and city officials. City auditors stated that they had to deal with stonewalling, disorganization, and bewilderment in every direction. The Hyatt case offers a rare insight on what an audit with Donald Trump looks like.
Karen Burstein was the city’s auditor general at the time. She said that the Grand Hyatt was a substantial case that she will always remember:
‘Something was fishy here’ she said, referring to the hotel’s owners. ‘This is was not the behavior of an innocent party. I think that’s what became evident to us.’
The experts who reexamined her report said it detailed failures in basic bookkeeping, the seemingly sudden adoption of irregular accounting methods, and efforts to hinder officials.
It was almost a year before city officials were able to step foot in the hotel before beginning the auditing process. A date was agreed for the audit to begin, but was cancelled the day before by Trump’s hotel lawyers. Dreyer and Traub, represented Trump throughout the 1980s.
Robert Tobey, a partner at Perelson Weiner LLP (a firm that audits corporations) said that this is an issue that should be resolved immediately and one you wouldn’t want lingering over your head.
Tobey, a certified public accountant said:
‘Stonewalling auditors is not a common practice. you want to make them go away.’
Dreyer and Traub challenged city officials before they even began, stating that the city doesn’t have the right to examine the Hotel’s records. Ultimately the law firm gave in, but it was a warning sign to the officials that this wouldn’t be a normal case.
Accountants are usually in charge during the early stages of the audit because they manage and keep track of the money, and the attorneys only show up at the end, if there’s a disagreement, said certified public accountant John Lieberman, also of Perelson Weiner.
‘I would say in 35 years I have never seen that type of thing.’
It wasn’t until the city auditors went inside the hotel and unveiled something that dumbfounded forensic accountant Rumbi Petrozzello.
The amount of financial information that was missing was utterly mind-boggling.
For just the year 1986 alone, the hotel managed by Hyatt’s Corporation failed to produce
Three of 12 detailed ledgers
Seven of 12 monthly ledgers
One of five payroll cycles
26 of 84 expense vouchers
25 of 87 income journals
Maintaining such basic information would be a “herculean task” the hotel wrote in its response to the city’s audit. The hotel also argued that its contract with the city did not require it to keep those records.
‘That’s the stuff you’re expected to hold on to, for various reasons,
said Rumbi Petrozzello, of Rock Financial Forensics, who along with Lieberman and Tobey, is a member of the New York State Society of Certified Public Accountants IRS audits.
Accountants were primarily concerned about the missing monthly ledgers; which should have detailed more than half a year of expenses and income. The hotel said they stored the ledgers off-site in a room in New Jersey, that had been flooded. Computerized files were sent to an office in Chicago, but were lost.
Generally Unacceptable Accounting Principles
Businesses typically use either the cash or accrual method to calculate their revenue and expenses.
In 1987, the Grand Hyatt decided to retroactively use both for the year before — accounting for revenues on a cash basis and expenses on an accrual basis.
Auditors said the decision allowed the hotel to misrepresent its profits, an accusation the hotel denied, arguing that its contract with the city didn’t require it to follow GAAP which is Generally Accepted Accounting Principles (GAAP), a set of standards that guide the accounting field.
In January, Laventhol and Horwath, accountants of the hotel, initially calculated and certified the rent due to New York City, known as the percentage rental, at $3.3 million. Roughly in keeping with the amount the Grand Hyatt had paid previously during the 1980s. But just days after they arrived at the $3.3 million figure, the hotel’s ownership partners — Trump’s Wembley Realty and Grand Hyatt’s Refco Properties — requested the accounting firm suggest ways to lower their tax and rent payments, according to a letter from Laventhol and Horwath included in the auditor’s final report.
Laventhol and Horwath disregarded the GAAP and used their misleading accounting methods to lower the hotel’s reported profits enough to cut $1.1 million from the $3.3 million they originally certified.
Unfortunately that still wasn’t enough. The firm then suggested a series of changes in the way the hotel expensed assets, such as furniture. Similar changes were made for expensing freight charges, sales taxes, and labor costs. Ultimately, Laventhol and Horwath revised the hotel’s 1986 financial report three times before the rent was lowered down to the amount that the Trump-Hyatt partnership would approve of before sending it to the city. The amount they settled on was only $667,115.
Then Laventhol and Horwath violated GAAP one last time by sending an altered financial report in May 1987, but keeping the original January certification date. GAAP states that accountants are supposed to certify financial reports when they are totally complete and no more changes are made.
Lawyers for New York City would later call the decision to keep the January certification date “a deliberate attempt” to conceal accounting changes and “a fraud against the public,” a claim both the accountants and the Trump Organization subsequently denied.
State officials reviewed Burstein’s auditing report in 1989 and determined it was accurate. They ordered the hotel to pay New York City about $2.9 million. A month later, in January 1990, a Trump Organization official signed for the ownership partners on a lawsuit against the city and state.
The government responded with a countersuit, and added Laventhol and Horwath as a defendant. A year later the accounting firm filed for bankruptcy. A judge ordered the case to be continued during the bankruptcy proceedings, but a city clerk accidentally marked the case as disposed, according to court documents.
The case was forgotten about until 2000, when another clerk noticed the mistake. The case was continued and in 2004 the opposing sides reached a settlement.
Years later, Donald Trump said in an interview with CBS news that he didn’t recall the audit.
‘I sold the hotel many years ago for a tremendous profit. By building the hotel I created thousands of jobs, saved the Grand Central area, and helped to revive a dying, at the time, New York City. The city was extremely happy with that development and you’re now bringing up something thirty years later that I’ve never heard about.’