Accountants often issue various types of reports and schedules as part of services rendered in the bankruptcy and insolvency area. These services include the evaluation or development of a business plan, valuation of the business, search for preferences and the preparation of operating reports. Many of the reports or schedules produced generally would be classified as financial statements. Because financial statements are issued, the accountant must determine if a compilation, review or audit report must be issued, or if the service that generated the statements is exempted from professional standards related to the compilation of financial statements from the records and the attestation standards. This issue has created considerable controversy among accountants that practice in the bankruptcy and insolvency area.

When the accountant begins an engagement involving bankruptcy or insolvency issues, a decision needs to be made as to application of the attestation standards. Section 9100.48 of Attestation Engagements Interpretation, "Applicability of Attestation Standards to Litigation Services," excludes litigation services that "involve pending or potential formal legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between two or more parties..." Guidance in this area is provided by the American Institute of Certified Public Accountants (AICPA) Management Consulting Division, in Consulting Services Special Report 93-1, "Application of AICPA Professional Standards in the Performance of Litigation Services" ("CSSR 93-1"). This report concludes in paragraph 71/105.03 that "[b]ankruptcy, forensic accounting, reorganization or insolvency services, as practiced by CPAs, generally are acceptable as forms of litigation services."

Litigation Services

CSSR 93-1 notes that the role of the accountant in a litigation engagement is different from the role in an attestation services engagement. When involved in an attestation engagement, the CPA firm expresses "a conclusion about the reliability of a written assertion of another party." In the performance of litigation services, the accountant helps to "gather and interpret facts and must support or defend the conclusions reached against challenges in cross-examination or regulatory examination and in the work product of others."

Appendix 71/B of CSSR 93-1 describes the delivery of reorganization services to include items such as the following:

• Preparing or reviewing valuations of the debtor's business.
• Analyzing the profitability of the debtor's business.
• Preparing or reviewing the monthly operating reports required by the bankruptcy court.
• Reviewing disbursements and other transactions for possible preference payments and fraudulent conveyances.
• Preparing or reviewing the financial projections of the debtor.
• Performing financial advisory services associated with mergers, divestitures, capital adequacy, debt capacity, etc.
• Consulting on strategic alternatives and developing business plans.
• Providing assistance in developing or reviewing plans of reorganization or disclosure statements.¹

CSSR 93-1 then concludes that bankruptcy services similar to those listed above that are provided by CPAs are generally accepted as a form of litigation services. For example, bankruptcy cases frequently include actions related to claims for preferential payments and fraudulent conveyances; negligence of officers, directors or professionals engaged by the debtors; or other allegations common to commercial litigation. The above guidelines according to CSSR 93-1 should also apply to services rendered in an out-of-court workout, because out-of-court restructuring holds the potential for litigation. CSSR 93-1 notes that the settlement process is generally conducted with the same scrutiny, due diligence and intense challenge as that of a formal court-administered process. Also, affected parties have the opportunity to question, challenge and provide input to the bankruptcy findings and process.

For services to be exempted, they must be rendered in connection with the litigation, and the parties to the proceeding must have an opportunity to analyze and challenge the work of the accountant. For example, when the CPA expresses a written conclusion about the reliability of a written assertion by another party, and the conclusions and assertions are for the use of others who will not have the opportunity to analyze and challenge the work, the professional standards would apply. Also, when the CPA is specifically engaged to perform a service in accordance with the attestation standards or accounting services standards (SAARS), professional standards are applicable.

Disclosure Requirements

If it is determined that the analysis or report to be issued comes under the guidelines as a form of litigation services, it is advisable to explain both the association and the responsibility, if any, through a transmittal letter or a statement affixed to documents distributed to third parties. Appendix 71/B of CSSR 93-1 suggests the following format for a statement that would explain the association of the CPAs and their responsibility, if any:

The accompanying schedules (projected financial information, debt capacity analysis, liquidation analysis) were assembled for your analysis of the proposed restructuring and recapitalization of ABC Company. The aforementioned schedules were not examined or reviewed by independent accountants in accordance with standards promulgated by the AICPA. This information is limited to the sole use of the parties involved (management, creditors' committee, bank syndicate) and is not to be provided to other parties.

If it is determined that the service does not qualify as litigation service, any financial statements that might be issued from the services rendered should be accompanied by the accountant's report based on the compilation of the financial statements. Prior to the issuance of a compilation report, the format and nature of the report must be cleared with the firm administrator.

Operating Reports

Another area where there is considerable uncertainty is in the issuance of operating reports. All regions of the U.S. Trustee's office require monthly and annual operating reports to be submitted to the court. Among those items listed in CSSR 93-1 that might fall under litigation services is the preparation or review of the monthly operating reports required by the bankruptcy court. These reports, especially for larger public companies, are often prepared in accordance with generally accepted accounting principles, including SOP 90-7. For example, in the region of New York, Connecticut and Vermont, the U.S. Trustee has issued guidelines that require the statements to conform to SOP 90-7. Other U.S. Trustees have, at the accountant's request, allowed the statements to be prepared in the format that conforms to the manner in which the accountant normally prepares monthly financial statements. Additionally, the accountant is asked to prepare supplemental data not generally presented in monthly financial statements, such as an aging schedule of post-petition payables and a schedule of post-petition taxes paid and accrued.

As noted above in CSSR 93-1, the professional standards would apply under two conditions:

• When the CPA expresses a written conclusion about the reliability of a written assertion by another party, and the conclusions and assertions are for the use of others who will not have the opportunity to analyze and challenge the work.
• When the CPA is specifically engaged to perform a service in accordance with the SAARS.

In most situations the second requirement—specifically engaged to perform attestation or compilation services—is not satisfied. Thus, based on this condition the professional standards would not apply. CPAs generally are engaged to prepare the operating reports that the U.S. Trustee and the bankruptcy court require, and not specifically to perform an audit or review of the financial records or even compile the financial statements in accordance with the professional standards.

It is the first requirement—expressing a written conclusion about the reliability of a written assertion by another party who will not have the opportunity to analyze and challenge the work—that needs further consideration by the profession. While no specific hearing is scheduled to review the reports, creditors or other parties in interest might raise objections to the content of the reports. Objections to the operating reports have been raised, but rarely. The preparation or the review of monthly operating reports that are required by the court is one of the items listed in the services that are rendered by accountants in the performance of reorganization services. CSSR 93-1 notes that "[b]ankruptcy services provided by CPAs generally are accepted as a form of litigation services."

Since operating reports are considered a form of litigation services, a compilation report should not be issued on the reports. Rather, the following statement should be included in a transmittal letter or affixed to the operating reports:

The accompanying operating reports for the month of ________ were assembled for your analysis of the proposed restructuring of the ABC Company under chapter 11 of the Bankruptcy Code. The aforementioned operating reports were not examined or reviewed by independent accountants in accordance with the standards promulgated by the AICPA. This information is limited to the sole use of the parties in interest in this chapter 11 case and is not to be provided to other parties.

On the other hand, if it is determined in a particular engagement that professional standards are applicable and the CPA is associated with the financial statements, then a compilation report should be issued based upon the prescribed form as set forth in SAARS No. 3. As noted above, prior to the issuance of a compilation report, the format and nature of the report must be reviewed for conformity to applicable standards.

Investigative Services

Preference analysis or other special investigative services performed in a bankruptcy proceeding, receivership or out-of-court settlement are considered a litigation service. As a result, the accountant is not required to issue an agreed-upon procedures report. This would not preclude the professional from issuing a report that describes the procedures performed and the results ascertained from the performance of the stated procedures. For example, using the above format, a report issued to a trustee based upon an analysis of preferences might be worded as follows:

The accompanying analysis of preferential payments was assembled (or prepared) for your analysis (or consideration) in conjunction with the proposed reorganization of ________ under chapter 11 of the Bankruptcy Code. The aforementioned analysis of preferential payments was not examined or reviewed by independent accountants in accordance with standards promulgated by the AICPA. This information is limited to the sole use of the trustee in this chapter 11 case and is not to be provided to other parties.

If it is desirable to include in the report a description of the procedures performed and the results ascertained from the performance of the stated procedures, the format of the report might be as follows:

Opening Paragraph
The accompanying findings from the performance of the agreed-upon procedures were assembled for your analysis of the reorganization of ____________ under chapter 11 of the Bankruptcy Code. The aforementioned findings were not examined or reviewed by independent accountants in accordance with standards promulgated by the AICPA. This information is limited to the sole use of ____________ and is not to be provided to other parties.

Agreed-upon Procedures and Findings
A description of the procedures and findings arranged by major categories or topics.

Financial Projections

Section 200.03 of the AICPA Statements on Standards for Attestation Engagements states that the standards for prospective financial statements do not apply to engagements involving prospective financial statements used solely in connection with litigation support services. CSSR 93-1 clearly indicates that prospective financial information qualifies as a litigation service. CSSR 93-1 states that parties-in-interest can challenge prospective financial information during negotiations or during bankruptcy court hearings often dealing with the plan's feasibility and adequacy of disclosure. Projections that are included in a disclosure statement would not be subject to the attestation standards since there is a hearing on the disclosure statement and the court must approve the disclosure statement before votes for the plan can be solicited. Parties-in-interest have an opportunity to challenge the prospective information included. Any projection provided for the debtor or creditors' committee that is used in the negotiation of the plan also would not fall under the attestation standards.

CSSR 93-1 does, however, indicate that in situations where the users of the prospective financial information cannot challenge the CPA's work, the attestation standards apply. CSSR 93-1 suggests that the attestation standard might apply in situations where exchange offers are made to creditors and stockholders with whom the company has not negotiated or who are not members of a creditor group represented by a committee. Section 200.03 of the AICPA Statements on Standards for Attestation Engagements indicates that if the prospective financial statements are used by third parties that do not have the opportunity to analyze and challenge the statements, the litigation exception does not apply.

Section 200.02 of the AICPA Statements on Standards for Attestation Engagements indicates that when an accountant submits, to his client or others, prospective financial statements that he has assembled (or assisted in assembling), or reports on prospective financial statements that might be expected to be used by third parties, a compilation, examination or agreed-upon procedures engagement should be performed. Thus, for prospective financial statements that do not qualify for the litigation exception, the engagement must be in the form of a compilation, examination or agreed-upon procedures if the accountant is associated with the financial statements.

The determination of the reorganization or liquidation values to be included in the disclosure statement or to be used by the debtor or creditors' committee in the negotiation of the terms of a plan, as well as other services that involve financial projections, would fall under the litigation exception. If it is determined that the report regarding the issuance of financial projections would not fall under litigation services, the format and nature of the report must be reviewed for conformity to applicable standards.

The following wording might be in the transmittal letter or in a statement affixed to the documents:

The accompanying projected financial statements (or information) were assembled for your analysis of the proposed restructuring and reorganization of ___________ under chapter 11 of the Bankruptcy Code. The aforementioned statements were not examined or reviewed by independent accountants in accordance with standards promulgated by the AICPA. This information is limited to the sole use of ____________ and is not to be provided to other parties.

For years, there has been considerable uncertainty as to the type of report an accountant should issue for services rendered for the debtor or creditors' committee of a company in bankruptcy. By issuing CSSR 93-1, the AICPA has provided guidance that will be helpful to accountants and financial advisors.

Footnotes

¹ CSSR 93-1 notes that the words review and reviewing are not intended to have the same meaning as they do in the AICPA SSARSs. Return to article