The United States Trustee Program's Oversight of Chapter 7 Panel Trustees and Debtors

Audit Report 08-19
March 2008
Office of the Inspector General

Appendix X
Auditee Response

March 10, 2008


TO: Raymond J. Beaudet
Assistant Inspector General for Audit
Office of the Inspector General

FROM: Clifford J. White III

SUBJECT: United States Trustee Program's Oversight of Chapter 7 Panel Trustees and Debtors

Thank you for the opportunity to review and comment on the Office of the Inspector General's (OIG) draft report on the U.S. Trustee Program's (Program) Oversight of Chapter 7 Panel Trustees and Debtors. The report determined that the Program's system of audits and reviews of chapter 7 trustees, and its implementation of key provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), were both adequate. The report also recognized the challenges that the Program faces as a result of the additional responsibilities assigned to it by the BAPCPA and the expected rise in case filings over the next few years. The report reflects careful analysis and offers constructive recommendations which we endorse.

Pursuant to your memorandum dated February 28, 2008, we provide the following comments and list of actions we will take in response to your recommendations.


    1. Key Findings and Conclusions

    2. Chapter 7 panel trustees are responsible for liquidating well in excess of $2 billion in bankruptcy estate assets annually and distributing funds to creditors in accordance with the priority scheme set forth in the Bankruptcy Code. Importantly, the OIG report found that the Program has developed a comprehensive system to monitor the performance of chapter 7 trustees in meeting their statutory and fiduciary responsibilities.

      The report examined four key mechanisms the Program employs to monitor trustees: onsite audits conducted by certified public accountants (CPA audits), onsite United States Trustee field examinations (UST field exam), annual trustee interim report reviews, and biannual trustee performance reviews. OIG staff determined that the totality of the Program’s oversight measures are adequate to ensure the competency and integrity of the panel trustees. Among other things, the report found that CPA audits and UST field exams are valuable tools in identifying internal control weaknesses and that Program staff take appropriate corrective action to insure that identified problems are resolved.

      The report appropriately notes that while all CPA audits were performed on a timely basis, there were instances when UST field exams were not completed within the normal four year cycle. Compliance with established oversight protocols is important, and the report’s identification of deviations from these protocols will help us to ensure proper performance by our field offices. It is important to point out, however, that almost half of the untimely reviews were completed within one year of their scheduled date. In fact, in 28 instances, there had been both a CPA audit and a UST field exam within the eight year cycle but, because the CPA audit was completed early, the UST field exam was technically late. Moreover, in almost all the cited matters, trustee interim report reviews and performance reviews – two key means of monitoring trustee performance – were conducted timely. Finally, none of the trustees who were subject to a delayed UST field exam were high risk trustees (i.e., trustees with a history of significant deficiencies) and, notably, none were found deficient when they ultimately received their field exam.

      As the report notes, many of our offices are under strain because the Program absorbed substantial new responsibilities under the BAPCPA. This is particularly true with regard to conducting a means test review in consumer cases. This task is extremely resource intensive. It is not surprising that the majority of trustee oversight issues arose in regions with the largest number of consumer filings or in those with significant numbers of time-consuming chapter 11 cases. For example, 60 percent of the trustee interim reports that were not reviewed were in Region 9, which carries the heaviest chapter 7 caseload in the country.

    3. Recommendations

    4. The report makes two recommendations:

      1. Ensure that panel trustees receive either a CPA audit or a UST field examination every 4 years in accordance with USTP policy.

      2. Ensure that regional USTs complete annual trustee interim report reviews for all panel trustees in accordance with USTP policy.

      The Program supports both of these recommendations and will take the following steps to implement the OIG’s recommendations within the next 120 days.

      1. Issue guidance to the field to reinforce extant policies, including the importance of satisfying deadlines contained in our trustee oversight protocols.

      2. Design a tracking system patterned on the one employed for CPA audits to ensure the timely scheduling of UST field exams by the field offices, as well as completion of the reviews.

      3. At the next meeting of United States Trustees scheduled in April 2008 discuss the OIG report and our actions in response to the recommendations. The United States Trustees responsible for the 21 regions will be briefed on the tracking system and the importance of completing either a CPA audit or a UST field exam every four years will be stressed.

      4. Modify the performance work plans of Program managers to specifically address compliance with trustee oversight protocols.

      5. Issue a memorandum to chapter 7 trustees addressing our commitment to timely and adequate oversight of their performance. This topic will also be addressed in regular liaison meetings of the Program and the National Association of Bankruptcy Trustees.

      6. Incorporate trustee oversight into applicable training courses for Program staff and chapter 7 trustees.

      7. Ensure that trustee oversight is a prominent part of the agendas for the periodic regional performance review meetings that the Deputy Director and Associate Director conduct with each United States Trustee.

    1. Key Findings and Conclusions

    2. The OIG staff conducted the first formal review of the Program's implementation of two important provisions of the BAPCPA – means testing and debtor audits. We are pleased that the report concludes that we have successfully implemented effective systems for these two important mandates of the BAPCPA. Implementation of any new, complex statute presents daunting challenges, and it is particularly gratifying that the OIG's comprehensive review has ratified our efforts.

      The report correctly notes that the implementation of the BAPCPA, particularly the means testing provision, has been extremely time and staff intensive. Although bankruptcy filings dropped after the statute became effective, they have been rising steadily and calendar year 2008 case filings may exceed those of 2007 by 25 percent. We concur with the OIG that if filings were to continue to rise, the Program would face great difficulty in meeting all of its core responsibilities, while maintaining its current efforts to implement means testing. This problem will be exacerbated by our current down-sizing required by the 2008 appropriations level which is $22 million below our current services base. In fiscal year 2008, we will freeze hiring of about 100 authorized positions, eliminate 20 additional staff positions, and reduce resources available for automation improvements.

      As reflected in the report, several years ago, the Program began working with the Administrative Office of the United States Courts (AOUSC) to develop a process for “data tagging” forms filed by debtors. With data tagging, financial information filed with the court could be sorted electronically, thus obviating the need for much of the manual analyses now required. The two agencies jointly developed a technical standard for such forms, but the AOUSC did not issue it as a mandatory standard. The report cites AOUSC officials as acknowledging the benefit of data-enabled forms, but expressing concern that it would have an adverse economic impact on the bankruptcy community, particularly pro se debtors and smaller law firms. When that concern was first raised, the Program responded that it did not believe that the new software would be a substantial expense for most bankruptcy practitioners who already utilize bankruptcy forms software. Moreover, to mitigate the AOUSC's concerns, the Program proposed two options: (1) approve two technical standards, including a fillable forms solution already available on the U.S. Trustee Program’s Web site for use by pro se filers, low-volume filing firms, and public interest groups; or (2) exempt pro se filers, low-volume filing firms, and public interest groups from the mandatory use of the data-enabled form standard. The Program continues to believe that cost is not a critical issue.

      We understand that the Judicial Conference of the United States will address the issue of data-enabled form standard in a report later this month, but we are not aware of the conclusion the Conference may have reached. At this point, however, we believe that there will not be any additional automated support for our staff for at least the remainder of this fiscal year.

    3. Recommendations

    4. The report makes two sound recommendations concerning the Program's oversight of debtors:

      1. Continue to work with the Administrative Office for United States Courts to require mandatory use of the jointly developed “data-enabled form standard.”

      2. Formulate a plan addressing allocation of resources, prioritization of duties, and streamlining of processes in order to meet means testing requirements in the event of a significant increase in bankruptcy filings.

      The Program supports both of these recommendations and either has taken or will take the following steps to implement the OIG recommendations within the next 120 days.

      1. Continue to cooperate with the AOUSC and to encourage the courts to adopt the jointly developed data-enabled form standard as a mandatory standard.

      2. Provide a formal plan describing the steps we have taken or intend to take to optimize resources in an environment of expanded responsibilities and diminished resources.

      3. Continue to emphasize to field staff two important policy memoranda from the Director pertaining to streamlining operations and maximizing the use of available resources. Several months ago, guidance was provided to field managers on how to target their means testing efforts to increase effectiveness while expending fewer resources. Shortly after that, a working group was formed to review office procedures and practices in light of Program experience in enforcing the BAPCPA and to offer further recommendations for streamlining activities. Based on that group’s work and extensive discussions with the United States Trustees, additional guidance was recently issued on how to enhance effectiveness while reducing the workload of staff. For example, offices are to limit their review of the bankruptcy documents of debtors with below median income absent indices of abuse.

      4. Devote a significant portion of the April meeting of the United States Trustees to the issue of streamlining by, among other things, assessing the impact of the recent policy changes and exploring other opportunities to reduce the time demands on staff.

      5. Conduct a study to assess the steps of the means test review and the amount of time involved in each step to help determine the areas that are the most ripe for future efficiencies.

      6. Incorporate an evaluation of compliance with streamlining initiatives into the Program’s peer review process. Through peer review, managers and employees from offices around the country assess the practices of other offices and, among other things, identify best practices to share with all offices.

      I would like to express my appreciation for the hard work of the team that conducted the audit, their perceptiveness, and their collegiality. I look forward to working with your office as we move forward with the implementation of the report’s recommendations.

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