- Our review of the USTP’s monitoring activities from FYs 2004 through 2007 found that the schedule and procedural framework of audits and reviews established by the USTP was adequate for ensuring the competency and integrity of panel trustees in discharging their fiduciary duties. However, we found that, in practice the reviews were not always performed in a timely manner. Specifically, we found that UST field examinations — one of the USTP’s primary oversight mechanisms — were not conducted timely for 26 percent of the trustees requiring field examinations during the review period. In several instances, field examinations were not conducted at all, due to delays in scheduling and performing field examinations. In these instances, the panel trustees were allowed to administer cases for up to 8 years without an on-site review of their operations. To the extent that the USTP does not conduct such reviews of panel trustees on a timely basis, it increases the risk that a panel trustee’s poor performance or misconduct may go undetected.
To assess the USTP’s effectiveness in monitoring panel trustees, we reviewed the program’s oversight activities from FYs 2004 through 2007. In assessing the effectiveness of oversight we sought to determine whether the frequency and thoroughness of review provided by the USTP was sufficient to ensure the competency and integrity of panel trustees in discharging their fiduciary duties. We focused our review on several primary oversight mechanisms used by the USTP: independent CPA audits, field examinations, reviews of trustee interim reports, and biennial panel trustee performance reviews.
We selected for detailed review 54 panel trustees in the 4 UST regions. Our selection was based on a judgmental sample of 10 panel trustees or 20 percent of the total panel trustees in the region visited, whichever was greater.20 We designed our selection to ensure that all field offices within each region visited were represented in our sample of panel trustees.21
For each of the panel trustees selected we reviewed files maintained at the regional UST office as well as files maintained by the EOUST in Washington, D.C. Specifically, our file reviews included evaluating whether: (1) CPA audits and field examinations were adequately documented, conducted in a timely manner, and deficiencies were adequately addressed; (2) annual trustee interim report reviews were performed by UST field staff and any discrepancies or problems were identified and resolved; and (3) biennial performance reviews were performed, adequately documented, and any performance issues were adequately addressed. In addition, our file reviews included an examination of available correspondence between the UST field offices and panel trustees. This included a review of formal correspondence such as notices of appointment or suspension, as well as informal correspondence such as e-mail or notes of telephone conversations.
The total number of CPA audits, field examinations, trustee interim report reviews, and biennial performance reviews that we examined by UST region visited is shown in the table below.
TABLE 2: FILE REVIEW RESULTS FOR SAMPLE OF
54 CHAPTER 7 PANEL TRUSTEES
AT THE 4 UNITED STATES TRUSTEE REGIONS VISITED
| Reviews of
| UST Region 9
| UST Region 16
(Los Angeles, California)
| UST Region 17
(San Francisco, California)
| UST Region 18
In addition to our file reviews, we analyzed data from the EOUST on all CPA audits and field examinations conducted between FYs 2004 and 2007. Our analysis included comparing the dates of the CPA audits and UST field examinations to when these reviews were required. In addition, we analyzed the results from the audits and examinations.
As of June 2007, there were 1,140 Chapter 7 panel trustees, of which 34 were appointed within the last 4 years and therefore were not required to have a CPA audit or field examination. Therefore, we reviewed the information provided by EOUST on the remaining 1,106 panel trustees to determine if the oversight reviews were being performed as required.
USTP policy requires that CPA audits and field examinations be conducted on a rotating basis every four years. Specifically, the policy requires that an independent CPA audit of a panel trustee’s operations occur every 8 years, with a field examination to be conducted in the interim. As previously mentioned, CPA audits and UST field examinations are similar in scope and methodology. Both involve an on-site review of a panel trustee’s case administration. However, field examinations are focused more on a panel trustee’s case administration, whereas CPA audits provide a greater emphasis on a panel trustee’s internal controls. Both CPA audits and field examinations result in the issuance of reports that render an opinion regarding the panel trustee’s ability to safeguard bankruptcy case assets. The opinion states that the trustee’s practices and procedures are either: (1) adequate; (2) adequate, except for select deficiencies that do not warrant an inadequate opinion; or (3) inadequate because of consequential deficiencies, repeat findings, weak internal controls, lack of supporting documentation, or non-compliance.22
According to USTP policy, a panel trustee must provide a written response to the regional UST within 45 days of the date of the written report confirming that any necessary corrective actions to address deficiencies has been taken and changes implemented, if necessary. If a CPA audit or UST field examination results in an inadequate opinion, USTP policy requires that the panel trustee be suspended from active rotation of handling bankruptcy cases. To be taken off rotation means that a panel trustee will not be assigned any new cases, but can continue to administer the cases already assigned. If the panel trustee that receives an inadequate opinion does not implement corrective actions to address the audit findings, the panel trustee may be removed.
CPA audits of Chapter 7 panel trustees are conducted by independent CPA firms under contract with the EOUST and involve an on-site review of the panel trustee’s operations. Currently, the EOUST has contracts with four national CPA firms that conduct audits of panel trustee operations throughout the country.
The scope of these CPA audits is modeled closely after the audits the OIG conducted of panel trustees from FY 1988 until FY 2003. In fact, according to the EOUST, the contracted CPA firms initially used the OIG’s Chapter 7 audit program to conduct their panel trustee audits. Further, our review of the current statement of work for the CPA audits showed that it retained all of the original language included in the prior statement of work used under the EOUST’s former reimbursable agreement with the OIG.
According to the current statement of work, the audits are to be conducted in accordance with government audit standards for performance audits except that: (1) the audit report is issued to the UST rather than the panel trustee; (2) the report contains no recommendations and is issued closed; and (3) findings are limited to identification of criteria and conditions.
The statement of work also provides that the objectives of the CPA audits are to: (1) determine if the trustee has established an appropriate system of internal controls to safeguard estate funds and property and to ensure integrity of financial recordkeeping and reporting; (2) determine if the trustee maintains an appropriate asset administration system to adequately and promptly collect, protect, and administer estate funds and property in keeping with the trustee’s fiduciary duties; and (3) verify that internal controls, recordkeeping and reporting procedures, and asset administration procedures are operating effectively to ensure that all estate funds and property are accounted for and adequately protected against loss.
Of the 54 panel trustees that we reviewed in this audit, 23 had CPA audits completed of their activities. We determined that each of these audits were completed in accordance with the statement of work and all 23 panel trustees received either an “adequate” or “adequate except for” opinion. The table below shows the distribution of opinions for the reports we reviewed.
TABLE 3: CPA AUDIT OPINIONS FOR SAMPLE
OF 54 PANEL TRUSTEES AT THE FOUR REGIONS VISITED
|16 (Los Angeles)||0||3||0||3|
|17 (San Francisco)||0||5||0||5|
We also confirmed that the individual deficiencies identified in the CPA audit reports supported the overall opinions. We found all opinions to be consistent with the deficiencies identified. Further, we verified that the UST field staff followed up in a timely manner on deficiencies identified in each report we reviewed in order to ensure that corrective action was taken by the panel trustee.
As shown in the table above, of the 23 CPA audits that we reviewed for the 54 sampled panel trustees, there were no reports with an inadequate opinion. In order to evaluate how well the UST field offices monitored panel trustees who received inadequate CPA opinions, we selected 3 CPA audits with inadequate opinions that were not related to the 54 panel trustees we sampled. For each of these CPA audit reports, we found that the panel trustee was given a letter of suspension and that corrective action on deficiencies identified in the reports was taken before the panel trustee was reinstated.
As stated earlier in this report, we obtained from the EOUST data on all CPA audits conducted from FYs 2004 through 2007 and the resulting opinions, as shown in the table below.
TABLE 4: OPINIONS RESULTING FROM CPA AUDITS
OF CHAPTER 7 PANEL TRUSTEES FROM FYs 2004 THROUGH 2007
|Fiscal Year||“Adequate” Opinions||“Adequate,
Except For” Opinions24
|“Inadequate” Opinions||TOTAL Audits|
We analyzed the information from the EOUST’s database related to these CPA audits by comparing the date of the most recent CPA audit to the date of the prior audit.26 The purpose of this comparison was to determine whether the audit was performed within the 8-year cycle as required by USTP policy. We found that all 649 CPA audits within our period of review were conducted within the required timeframe.
UST Field Examinations
UST field examinations are to be conducted by the regional UST in the interim between audits to ensure that each panel trustee receives either an audit or a field examination every 4 years. Field examinations are designed to verify that the trustee’s procedures for asset administration are adequate, case assets and funds are protected, and financial recordkeeping and reporting are adequate and in accordance with the Handbook for Chapter 7 Trustees and sound business practices.27
The objectives of the field examinations are to: (1) determine if the panel trustee maintains appropriate systems to adequately monitor asset administration and case progress, and promptly collect, protect, and administer case funds and property in keeping with the panel trustee’s fiduciary duties and in accordance with the Chapter 7 Handbook, Bankruptcy Code, local rules and sound business practices; (2) determine if the trustee has established appropriate procedures and internal controls to safeguard case funds and property, ensure the integrity of financial recordkeeping and reporting, and discourage employee theft in accordance with the Chapter 7 Handbook and sound business practices; and (3) verify that the trustee’s systems, procedures, and controls are operating effectively.
Of the 54 panel trustee files that we reviewed in the 4 regions we visited, 25 had field examinations performed during our review period, and each was completed in accordance with the USTP Manual. The table below shows the distribution of opinions for the field examinations we reviewed.
TABLE 5: FIELD EXAMINATION OPINIONS FOR SAMPLE
OF 54 PANEL TRUSTEES AT THE FOUR REGIONS VISITED
|FIELD EXAMINATION OPINIONS||TOTAL
|16 (Los Angeles)||1||5||0||6|
|17 (San Francisco)||1||3||0||4|
We also confirmed that the individual deficiencies identified in the field examinations supported the overall opinions. Further, we verified that the UST field staff followed up in a timely manner on deficiencies identified in
each field examination we reviewed in order to ensure that corrective action was taken by the panel trustee.
As shown in the table above, of the 25 field examinations that we reviewed for the 54 sampled panel trustees, one field examination resulted in an inadequate opinion. In order to determine how well the UST field offices handled panel trustees who received inadequate field examinations, we selected another 5 field examinations with inadequate opinions that were not related to the 54 panel trustees we sampled. For each of the inadequate field examinations, we found that the panel trustee was given a letter of suspension and that corrective action on deficiencies identified in the field examination was taken before the panel trustee was reinstated.
As stated earlier in this report, we obtained from the EOUST data on all field examinations conducted from FYs 2004 through 2007 and the resulting opinions, as shown in the table below.
TABLE 6: OPINIONS RESULTING FROM UST FIELD EXAMINATIONS
OF CHAPTER 7 PANEL TRUSTEES FROM FYs 2004 THROUGH 2007
Except For” Opinions29
We analyzed the information from the EOUST’s database related to these field examinations by comparing the date of the most recent field examination to the date of the preceding CPA or OIG audit. The purpose of this comparison was to determine whether the field examination was performed within 4 years of the preceding audit, as required by USTP policy. We identified 111 panel trustees (26 percent) for whom field examinations were either not conducted in a timely manner or were not conducted at all between CPA audits.30 In several instances, we found that the USTP had allowed panel trustees to operate for up to 8 years without an on-site review. As shown in the table below, untimely field examinations were noted in the following regions.
TABLE 7: UST FIELD EXAMINATIONS
NOT COMPLETED IN TIMELY MANNER
|Number of Field
Performed within 4
Years of Last Audit
The lack of timely oversight with regard to field examinations for 26 percent of panel trustees is troubling, in that the USTP relies on these on-site reviews to identify deficiencies in a panel trustee’s operation that indicate weaknesses in the internal control structure and the potential for fraud. Furthermore, field examinations are one of the primary mechanisms used by the USTP to identify panel trustees whose performance is inadequate in order to safeguard debtors’ assets. To the extent that the USTP does not conduct reviews of panel trustees on a timely basis, it increases the risk that a panel trustee’s poor performance may go undetected. Moreover, the lack of active timely oversight increases the possibility that a panel trustee’s poor performance or misconduct left unchecked may jeopardize the integrity of Chapter 7 bankruptcy administration.
EOUST officials explained that the untimely field examinations were caused in part by the new BAPCPA requirement related to means testing. Generally, bankruptcy analysts in field offices are responsible for conducting field examinations. However, with the implementation of the BAPCPA in 2006, bankruptcy analysts were given the added responsibility of conducting means tests and supervising others involved in the means test process. Both EOUST and regional UST officials characterized means testing as a labor-intensive process that has required a significant marshalling of resources at the field office level. In addition, EOUST officials stated that field examinations are one of several mechanisms that they use to monitor panel trustees and that if a field examination is not conducted in a timely manner the USTP has other means to detect poor performing panel trustees.
We agree with the EOUST that field examinations are one of several methods to monitor panel trustees. However, field examinations are one of only two oversight methods that involve on-site reviews of panel trustee operations. Just as with CPA audits, field examinations are valuable tools in identifying internal control weaknesses that can only be identified during a site visit. Therefore, we believe that the USTP should enhance its oversight and monitoring ability by ensuring that field examinations are conducted more consistently in a timely manner.
The USTP implemented the trustee interim report as part of its effort to create a uniform recordkeeping and reporting system for panel trustees. According to the USTP Manual, the trustee interim report provides information concerning a panel trustee’s financial management, internal controls, and case administration. The report, which is submitted annually unless the USTP requires that it be filed more frequently, consists of 3 distinct reports: the individual estate property record and report (Form 1), the cash receipts and disbursements record (Form 2), and the summary interim asset report (Form 3). Form 1 provides details on a case’s assets and the status of their disposition. Form 2 details the flow of cash in and out of each case account. Form 3 is an inventory of all cases expected or declared to be asset cases and summarizes information provided on Forms 1 and 2.31 Examples of Forms 1, 2, and 3 can be found in Appendices III through V.
The UST regional field offices are required to review each trustee interim report for accuracy and completeness and to ensure adherence to fiduciary standards in the administration of a panel trustee’s cases. Furthermore, findings should be documented in writing and discussed, if appropriate, with the panel trustee. Trustee interim report reviews are not performed in the same year as a CPA audit or UST field examination because both audits and field examinations include the trustee interim report review as part of their engagement. Therefore, a separate review is not necessary.
From our review of 54 panel trustee files at the UST field offices, we identified 156 trustee interim report reviews that should have been performed by UST field office staff. We found that 128 (82 percent) of the trustee interim report reviews in our sample were conducted and these reviews included verification of accuracy and completeness. In addition, we found evidence in the files to indicate that UST field office staff followed up with panel trustees to obtain explanations for any findings that were identified. The remaining 28 (18 percent) of the trustee interim reports in our sample were either not reviewed or there was no evidence of review.32 In the 3 regions represented by the missing 28 trustee interim reports, UST officials explained that the additional workload created by the implementation of means testing required a shifting of resources and therefore less staff was available to perform trustee interim report reviews.
Trustee performance reviews are performed by UST field staff, usually by a performance review team that consists of a staff attorney and bankruptcy analyst or paralegal. USTP policy requires that performance reviews be conducted at least once every 2 years. According to the UST Manual, the goal of the review is to provide panel trustees with a written assessment of their performance, including their overall competency, adherence to fiduciary standards, and commitment to pursue assets for the benefit of creditors.
The performance review is organized around 15 separate duties of the trustee, with rating factors that mirror the audit and field examination opinions of adequate, adequate except for, and inadequate. The performance review categories are: (1) No Distribution Reports; (2) Trustee Final Reports and Trustee Distribution Reports; (3) Meetings of Creditors (§341 Meetings); (4) Securing estate property; (5) Legal administration; (6) Annual financial reports and operating Chapter 7 reports; (7) Case progress; (8) Banking; (9) Bonding; (10) Distribution to creditors; (11) Response to audits; (12) Response to UST; (13) Investigation of and response to bankruptcy fraud and abuse; (14) Response to public complaints; and (15) Retention and compensation of professionals.
The USTP relies heavily on the trustee performance review as another method of oversight for panel trustees. We reviewed the case files of the 54 panel trustees selected in the 4 regions we visited and examined 90 performance reviews and found that the regional UST offices we visited maintained the written performance reviews. The table below shows the distribution of the overall ratings for the 90 performance reviews we examined; of which only one of the 54 panel trustees received an inadequate rating.
TABLE 8: BIENNIAL PERFORMANCE REVIEWS FOR SAMPLE
OF 54 PANEL TRUSTEES AT THE FOUR REGIONS VISITED
|PERFORMANCE REVIEW RATINGS||TOTAL
|16 (Los Angeles)||12||5||1||18|
|17 (San Francisco)||14||2||0||16|
In addition to our examination of the performance reviews for the sampled 54 panel trustees, we asked the EOUST whether any panel trustees were removed from the panel or had resigned during our review period due to poor performance. According to the EOUST, a total of 75 panel trustees were either terminated or resigned. Of that total, 48 (64 percent) were related to the panel trustees’ performance.34 These statistics underscore the importance of performance reviews and how the USTP utilizes these reviews as part of its oversight responsibilities.
According to the USTP, its oversight duties are an ongoing process that begins when a panel trustee is assigned to a case and continues throughout the administration and closure of the case. Toward that end, the USTP has established an oversight regimen that includes audits performed by independent CPAs, field examinations performed by UST field staff, trustee interim report reviews, and trustee performance reviews.
Overall, we determined that the USTP’s system of audits and reviews to monitor Chapter 7 panel trustees was generally adequate to ensure the integrity of the bankruptcy system. We found that CPA audits were conducted every 8 years, in accordance with USTP policy. However, in 26 percent of cases we found that field examinations were either not conducted timely or not completed at all. In several instances panel trustees operated for up to 8 years without any on-site review of their activities. Out of a total of 433 field examinations conducted or scheduled during the review period, the regional USTs failed to complete field examinations in a timely manner for 111 panel trustees or 26 percent. Both audits and field examinations are important oversight tools for the USTP in that they are designed to identify deficiencies in a panel trustee’s operation that indicate weaknesses in the internal control structure and the potential for fraud. These reviews are the primary tools used by the USTP to suspend or remove a panel trustee whose performance is found to be inadequate for the safeguarding of debtors’ assets. We also noted that annual trustee interim report reviews were not always performed or consistently documented. The trustee interim report reviews are important to the USTP in that they allow the regional field offices to assess panel trustee performance in the years between CPA audits and UST field examinations. Failure to complete field examinations and trustee interim report reviews in a timely manner may allow problems with a panel trustee’s case administration to go undetected.
We recommend that the EOUST:
Ensure that panel trustees receive either a CPA audit or a UST field examination every 4 years in accordance with USTP policy.
Ensure that regional USTs complete annual trustee interim report reviews for all panel trustees in accordance with USTP policy.
- To assess the USTP’s compliance with certain provisions of the BAPCPA, we reviewed the program’s implementation of means testing and debtor audits, both of which are requirements of the legislation. Based on our sample review of means tests and observation of the review process at the UST field offices, we concluded that the USTP had adequate controls in place to ensure that means testing was conducted on all Chapter 7 and Chapter 13 bankruptcy filings as required by the BAPCPA. Similarly, we found that debtor audits conducted by contract CPA firms were being conducted in accordance with the BAPCPA. Based on the work performed in both means testing and debtor audits, we concluded that the debtor oversight provided by the USTP was in accordance with requirements of the BAPCPA. However, with regard to means testing, we raise a caution that if bankruptcy filings rise to pre-BAPCPA levels it could require a significant reallocation of regional UST resources from other activities, including field examinations to means testing. Failure to plan for such an occurrence could compromise the USTP’s ability to provide oversight of panel trustee activities.
As noted earlier, most provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect on October 17, 2005. According to the EOUST, Congress enacted the BAPCPA, in part, to curtail perceived abuses of the bankruptcy system by debtors.35 To achieve this objective, Congress amended §707(b) of the Bankruptcy Code to change the pro-debtor presumption that existed prior to BAPCPA with an approach that is designed to identify debtors who are abusing the bankruptcy system.
The impact of the legislative changes on the USTP was largely in the area of debtor oversight and included a mandate requiring a screening mechanism known as “means testing” on debtor income and expenses to ensure that debtors qualified for bankruptcy protection. In addition, BAPCPA required independent audits of debtors’ bankruptcy filings to ensure that the information being submitted in a bankruptcy petition was accurate and supported.
According to the BAPCPA, all individuals filing for bankruptcy relief under Chapters 7 or 13 are required to complete a Statement of Current Monthly Income and Means-Test Calculation (SCMI), Official Form 22A, and submit it to the court along with the bankruptcy petition.36 The SCMI requires the debtor to provide the following information: (1) current monthly income, (2) allowable deductions such as living expenses and future payments on secured claims, and (3) the median family income for the state in which the debtor resides.37 Based on the information provided, a debtor makes a self-assessment of eligibility for relief using a basic mathematical formula that is built into the SCMI.
Means testing refers to the process through which the USTP reviews and, if necessary, verifies the information provided on the debtor’s SCMI, the debtor’s bankruptcy petition, and supporting schedules to make a determination as to whether the debtor qualifies for relief under Chapters 7 or 13 of the bankruptcy code. The BAPCPA requires that the USTP perform means testing on all bankruptcies filed under Chapters 7 and 13.
Our review of the means testing at the four regional UST offices we visited found that the USTP had implemented a semi-automated process to facilitate the performance of means testing. The Means Test Review (MTR) system was implemented at the field office level to document the means testing process for quality control purposes and to ensure the review of all Chapter 7 bankruptcies filed, in accordance with the BAPCPA.38 The MTR system is linked to the USTP’s Automated Case Management System (ACMS).
The MTR system is used by the USTP to track bankruptcy filings received from the U.S. Courts. Updated by the ACMS, the MTR system contains current copies of Chapter 7 bankruptcy documents filed with the court, including the debtors’ SCMI, bankruptcy petition, and supporting schedules. However, while the documents are maintained electronically through the MTR system, the actual review of the documents and analysis of the financial data contained in those documents is a manual process.
Means Testing Methodology
To address the large volume of bankruptcy filings requiring means testing, UST field offices have developed a triaged approach to means testing based on the complexity of the case. In applying this methodology, most regional UST field offices have established a two-tiered system of review.
The tier-one review is designed to quickly assess and eliminate from further analysis those means tests where the results clearly demonstrate that the debtor is eligible for protection under the bankruptcy code. The main determining factor in establishing a presumption of abuse is the debtor’s current monthly income as reported on the SCMI. Generally, if the debtor’s monthly income is less than that of the median family income as determined by the U.S. Census Bureau for the debtor’s state of residence, then a presumption of abuse does not exist and the means test is concluded.39 Because tier-one reviews require only a cursory analysis of the filing documents, the review is performed by support staff, usually paralegals and legal clerks. UST field staff stated that approximately 90 percent of all means tests are concluded at the tier-one level. We were not able to verify this percentage because the UST offices and the EOUST did not maintain statistics on how many means tests were completed after a tier-one review and how many were referred to the tier-two analysis.
The second-tier review includes all cases where additional analysis is required to make a determination as to whether a presumption of abuse exists on the part of the debtor. USTP policy requires that UST field staff performing tier-one reviews should confer with paralegals, bankruptcy analysts, or trial attorneys if any questions arise as to whether a case should be closed or referred for a tier-two review.
Tier-two reviews are performed primarily by USTP professional staff, usually bankruptcy analysts and attorneys. The reviews involve further fact finding, analysis, and usually require the reviewer to contact the debtor’s attorney, financial institutions, and other parties to the bankruptcy to obtain the necessary information to determine whether a presumption of abuse exists.
Under Section 704(b)(1)(A) of the Bankruptcy Code, the regional UST must file a statement with the court indicating that a case is presumed abusive within 10 days of the date on which the Section 341 Meeting of Creditors occurs.40 In order to meet the 10-day deadline, the USTP policy requires that field offices initiate their means testing no later than 7 calendar days following the Section 341 Meeting.
We sel ected a judgmental sample of 40 tier-two reviews in progress at the time of our field visits and followed up with the regional USTs to determine the outcome of the reviews.41
TABLE 9: DISPOSITION OF TIER-TWO MEANS TESTING
FOR SAMPLE SELECTED AT FOUR UNITED STATES TRUSTEE REGIONS
| Disposition of Tier-Two
(Los Angeles, California)
(San Francisco, California)
|Converted to Chapter 13||0||2||1||1||4|
|Motion to Dismiss||2||0||0||0||2|
When we asked UST field office staff how many means tests were completed at each tier level, UST staff said they believe approximately 90 percent of means tests are concluded at the tier-one level without a presumption of abuse. An additional 1 to 2 percent of filings at the tier-two level are found to be non-abusive upon further review. For the remaining 8 to 9 percent in which a presumption of abuse is concluded, the regional UST field office must file a statement with the court.
Effect of Means Testing Activities on Other Responsibilities
Based on our sample review of means tests and observation of the means testing process, we concluded that the USTP had adequate controls in place to ensure that means testing was conducted on all Chapter 7 and Chapter 13 bankruptcy filings, as required by the BAPCPA. However, during our review EOUST officials and UST field staff raised concerns regarding the level of resources that would be required to remain in compliance with the BAPCPA’s means testing requirements should bankruptcy filings return to their pre-BAPCPA levels (i.e., before FY 2006). The steady growth in bankruptcy filings up until passage of the BAPCPA in October 2005 are shown in the table below.
CHART 1: CHAPTER 7 AND 13 FILINGS FOR
FISCAL YEARS 2002 THROUGH 2007
As indicated in the above chart, bankruptcy filings in 2007 were roughly half the number of filings recorded in the 3 years leading up to passage of the BAPCPA in October 2005. Even at 2007’s historically low level of filings, however, efforts to achieve compliance with means testing requirements appear to have had an impact on the USTP’s panel trustee oversight responsibilities. As mentioned in Finding 1, one of the main reasons provided by both EOUST and regional UST officials for the failure to perform UST field examinations and trustee interim report reviews in a timely manner was the diversion of resources to means testing.
While we could not confirm EOUST and UST officials’ assertions, it appears to be a reasonable conclusion given that the bankruptcy analysts who are responsible for performing field examinations and trustee interim report reviews are also responsible for supervising tier-one means tests and for performing the more complicated tier-two level means tests. In addition, the fact that the decline in panel trustee oversight has coincided with the increase in debtor oversight mandated by the BAPCPA lends credence to the suggestion that there is a correlation. Therefore, return of bankruptcy filings to their pre-BAPCPA levels could have a significant impact on the USTP’s ability to provide effective oversight in key areas, specifically panel trustee operations. Some EOUST officials believe that the decline in bankruptcy filings is a short term phenomenon resulting from the passage of the BAPCPA and that ultimately bankruptcy filings will return to their pre-BAPCPA levels.
We asked EOUST management whether they had conducted any resource studies following implementation of means testing to determine their current resource requirements in order to plan for future resource requirements should filings return to pre-BAPCPA levels. We were told that no such studies had been conducted.
EOUST Efforts to Streamline the Means Testing Process
EOUST officials informed us that they were working with the Administrative Office of the U.S. Courts (AOUSC) to streamline the filing process through the introduction of standardized automated forms for debtors filing for bankruptcy. According to the EOUST, the use of automated forms would allow for the electronic sorting and analysis of the forms, which would significantly streamline what is currently a manual review process. EOUST officials explained that they had been working with the AOUSC to require mandatory use of the “data enabled form standard” developed jointly by the USTP and the AOUSC, which is compatible with the U.S. Bankruptcy Court system. In September 2005, a final standard was issued.43
We spoke to AOUSC officials involved in the project, who acknowledged that development of standardized automated forms would benefit the USTP’s case management. However, the AOUSC expressed concerns about the economic impact that the mandatory acquisition of the software necessary to generate such forms would have on the bankruptcy industry, in particular the smaller private firms that assist debtors in the filing process. Therefore, although the AOUSC agrees on a conceptual level that the USTP may benefit from the automated forms, on a practical level the AOUSC is hesitant to initiate a sweeping change out of concern for the economic effect this may have on debtors and debtors’ attorneys.
In our opinion, the EOUST needs to plan for the eventuality that bankruptcy filings may return to their pre-BAPCPA levels. If this occurs before the introduction of automated forms can be implemented, then UST regional field offices may be faced with the need to divert greater resources to means testing in order to remain in compliance with the BAPCPA. As mentioned previously, failure to plan for this possibility may compromise the USTP’s ability to provide effective oversight in other areas, in particular panel trustee oversight.
As part of our review, we attempted to quantify the impact of means testing on the USTP’s resource allocation. While USTP officials said tier-one reviews can be completed in 5 to 10 minutes, they could not provide estimates for tier-two means testing.44
Section 603(a)(1) of the BAPCPA required the USTP to establish a system of audits to determine the accuracy, veracity, and completeness of petitions, schedules, and other information that the debtor is required to provide in cases filed under Chapters 7 or 13, beginning with cases filed on or after October 20, 2006.45 Section 603 also requires that audits be performed by independent CPAs or independent licensed public accountants. At the time of our review, the EOUST had contracted with six CPA firms to perform debtor audits.46
Under the BAPCPA, the selection of audits for review is to be done on both a random and a non-random basis: (1) random audits are to be selected to ensure that not less than 1 out of every 250 cases in each federal judicial district is selected for audit, and (2) non-random audits are to be selected for cases where the debtor’s income or expenses deviate significantly from the statistical norm of the district in which the schedules were filed.
Once the selection is made, the EOUST notifies the CPA firm and the applicable regional UST. The regional UST then sends formal notification to the debtor’s attorney or the debtor in pro se cases that the case has been selected for audit, and identifies the documents to be provided to the CPA firm.47 Documents audited include the bankruptcy petition and accompanying schedules. Additional documentation may include tax returns, pay stubs, bank statements, and credit card statements. The CPA firm reviews the documents provided, giving the debtor time to provide a written explanation for any potential material misstatements before an audit report is issued to the regional UST.
Depending on the results of the audit, the independent auditor issues either a “report of audit” or a “report of no audit”. A report of no audit is issued when the audit firm receives no response from the debtor, an insufficient response from the debtor, or the case is dismissed before a sufficient response is received. Each report of audit is filed with the court and transmitted to the regional UST, and can include no findings or may include material misstatements. Material misstatements are generally defined as the underreporting or omission of a debtor's assets. This may include, but is not limited to monthly income, bank accounts, personal property, and real property.
The BAPCPA requires certain follow-up on the part of the regional UST in response to debtor audits. If the debtor does not cooperate or the nature of the findings warrant, the regional UST may seek a dismissal of a case or denial of a debtor’s discharge from bankruptcy. The regional UST is required to report material misstatements to the local United States Attorney when the regional UST office has reason to believe that a debtor is attempting to commit fraud.
We verified the process through which the audits were selected and concluded that they were selected in accordance with the criteria established by the BAPCPA. According to EOUST records, of the roughly 795,000 Chapter 7 and 13 filings recorded in FY 2007, the EOUST selected 4,095 cases for audit. The table below shows the number of cases that resulted in debtor audits.
TABLE 10: DEBTOR AUDITS SELECTED AND CONDUCTED IN FY 2007
|Cases Selected for Audit||3,161||934||4,095|
|Debtor Audits with Reports Issued||1,900||709||2,609|
|Debtor Audits in Progress||1,063||152||1,215|
|Reports of No Audit Filed50||198||73||271|
Of the 2,609 debtor audits that were completed in FY 2007, 780 (30 percent) included at least one material misstatement. In the 4 regions we visited, we selected a judgmental sample of 12 debtor audits that had resulted in audit reports with material misstatements. We verified that the regional UST offices were performing follow-up procedures in accordance with the BAPCPA.
According to the EOUST, CPA firms identified suspected criminal activity on the part of the debtor in 37 of the 2,609 debtor audits completed in FY 2007. When suspected criminal activity is identified, the regional UST is notified. After further review by the regional UST, the debtor’s case can be referred to the U.S. Attorney’s Office for possible prosecution. The table below shows the disposition of the 37 debtor audits identified by the CPA firms as having suspected criminal activity.
TABLE 11: DEBTOR AUDITS WITH SUSPECTED
|Description of Disposition|| Number of
| Cases Determined by Regional UST to have insufficient
evidence of suspected criminal activity
|Cases Still Under Review at Regional UST||10|
|Cases Referred to U.S. Attorney’s Office:|
|Prosecution declined by U.S. Attorney’s Office||2|
|With Investigative Agency||8|
|Under review in U.S. Attorney’s Office||5|
|Total Cases Referred to U.S. Attorney’s Office||15|
We reviewed the USTP’s oversight activities in the areas of means testing and debtor audits, both of which are mandated by the BAPCPA. We found that regional UST field offices were conducting means tests on bankruptcy filings in accordance with the legislation. We also found that the EOUST contracted with CPA firms to meet the BAPCPA requirement to conduct debtor audits. In FY 2007, 2,609 debtor audits were completed, of which 780 identified at least one material misstatement. According to the sample we selected, we were able to determine that the regional UST offices followed up on audits that included material misstatements.
We noted that the USTP’s effort to achieve compliance with means testing requirements is resource intensive. Should bankruptcy filings increase significantly and approach their pre-BAPCPA levels, the diversion of resources required to maintain means testing compliance may significantly affect the USTP’s ability to provide timely and comprehensive oversight of panel trustee operations.
We recommend that the EOUST:
Continue to work with the Administrative Office for United States Courts to require mandatory use of the jointly developed “data-enabled form standard.”
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.
Samples selected from the regional offices were as follows: Region 9: Cleveland, OH – 21 panel trustees; Region 16: Los Angeles, CA – 10 panel trustees; Region 17: San Francisco, CA – 10 panel trustees; and Region 18: Seattle, WA – 13 panel trustees.
UST field offices represented in our sample included: Region 9: Cleveland, Cincinnati, and Columbus, OH; and Detroit and Grand Rapids, MI. Region 16: Los Angeles, San Fernando Valley, Riverside, Santa Barbara, and Santa Ana, CA. Region 17: San Francisco, Oakland, San Jose, Sacramento, and Fresno CA; and Reno and Las Vegas, NV. Region 18: Seattle and Spokane, WA; Anchorage, AK; Boise, ID; Great Falls, MT; and Portland and Eugene, OR.
Region 9 had 15 trustee interim report reviews that were not completed (Detroit – 1, Grand Rapids – 3, Columbus – 1, and Cincinnati – 10) and 2 (Cleveland) where there was no evidence that the reviews were performed. Region 17 had 5 trustee interim report reviews not completed (Sacramento – 3, Oakland – 1, and San Jose – 1) and 1 (San Francisco) where there was no evidence that the review was performed. Region 18 had 1 trustee interim report review that was not completed (Montana) and 1 (Eugene) where there was no evidence that the review was performed.
5 – unresolved background checks, and 1 – inability to obtain sufficient bonding.
There are two exceptions to debtors who must file the Official Form 22A: (1) debtors whose debt is not primarily consumer debt; or (2) disabled veterans who incurred their debt while on active duty or engaged in a homeland defense activity. A copy of the Official Form 22A is shown in Appendix IX.
The BAPCPA defines current monthly income as “the average monthly income from all sources that the debtor receives without regard to whether such income is taxable income.” The average is based on the 6-month period preceding case commencement.
The USTP posts the median family income data published by the U.S. Census Bureau on its website at www.usdoj.gov/ust under Bankruptcy Reform - Means Testing Information.
The Section 341 Meeting of Creditors, sometimes referred to as “First Meeting of Creditors,” is intended to provide an opportunity early in the case for creditors, a panel trustee, and the United States Trustee (UST) to ask questions of the debtor. The regional UST appoints an interim panel trustee for the case, but creditors may have the right to elect a different individual for the duties.
“Discharged” means that the debts have been discharged and the case is being administered as a Chapter 7 case. “Dismissed” means that the debtor does not qualify for bankruptcy protection under Chapter 7. “Motion to dismiss” means that the UST has filed a motion before the U.S. Bankruptcy Court to dismiss the case, but there was no final ruling as of December 2007.
Section 603(a) of the BAPCPA required that audits be conducted in accordance with generally accepted auditing standards but allowed the Attorney General to develop “alternative auditing standards” not later than 2 years after the date of enactment. The EOUST developed alternative auditing standards, which were published in the Federal Register, Volume 71, No. 190, dated October 2, 2006.
Reports of no audit filed represents cases where the CPA firm does not receive requested information from the debtor or debtor’s attorney to allow for the audit of the debtor’s petition. As a result, the CPA firm files a “Report of No Audit” with the EOUST and the regional UST office follows up with the debtor or debtor’s attorney. If the debtor or debtor’s attorney does not provide the necessary documentation that is requested as part of a Debtor’s Audit, the case may be dismissed.