Compensation for bankruptcy engagements: how do CPAs fare?

What are accountants' payment experiences on bankruptcy engagements? James A. Vidmar, Jr., a partner of Linowes and Blocher, Silver Spying, Maryland, and head of its bankruptcy and creditors' rights group, describes one study's surprising findings.

Accountants who work on bankruptcy cases face special difficulties with compensation issues, according to a study commissioned bY the American Bankruptcy institute. The study, The National Report on Professional Compensation in Bankruptcy Cases, concluded accountants need to know more about the legal requirements of the bankruptcy compensation process because they now rely too heavily on lawyers to tell them how an seek compensation.

BANKRUPTCY CASE PAYMENT RISKS

The compensation study was done because of confusion in case law and in practice about proper compensation for various bankruptcy services offered by professionals. In bankruptcY cases, professionals employed by the debtor, trustee and creditors' committees, among others, must file detailed fee applications with courts in order to be paid. Other parties may object to the fees sought and ultimately the judge must determine what is appropriate compensation.

The study found accountants working on bankruptcy engagements are less likely than attorneys to receive prebankruptcy retainers and they face longer payment delays (see exhibit 1 below). G. Ray Warner, a professor at the Kansas City School of Law of the University of Missouri who prepared an official analysis of the study, speculated that lawyers may exercise greater influence over debtors than do accountants. In addition, lawyers may be more aware of chapter 11 risks and thus more likely to obtain retainers.

Of the accountants who did get retainers, 31% received less than $10,000. Another 31% averaged $10,000 to $25,000 and 39% received $25, 000 or more. The average retainers ranged from $1,500 to 100,000.

REASONABLE FEES?

The survey found the most difficult an least precise aspect of professional compensation in bankruptcy cases is determining a reasonable fee. The Bankruptcy Code of 1978 sought to attract competent professionals to bankruptcy practice by seeking to compensate them for this work on a par with fees for nonbankruptcy cases. The study rev a ed, though, that rather than being set by market forces, fees in bankruptcy cases often still are determined by the amount of estate assets available and the benefits creditors are able to reap from the professional's services.

Determining a reasonable fee for accounting services, the study found, is especially difficult for courts. Many judges surveyed frankly admit to an insufficient understanding of accountancy and the accounting standards needed to make appropriate decisions on accounting compensation issues.

Accountants' compensation in cases in which relevant accounting standards require them to perform multiple levels of review is another significant problem. Although one-half of judges generally allow compensation for all levels of review at regular billing rates, a significant minority reported they often cut such fees. The study suggested many accountants must absorb aU or part of the expense of multilevel reviews required by relevant accounting standards as a cost of doing business. This shows some judges don't understand the need for multilevel reviews.

OTHER PAYMENT ISSUES

Prudent business practices may not accelerate payment, the study showed. It found accountants are paid late even though they are far more likely than lawyers to have written employment agreements or engagement letters (see exhibit 2 above).

Among other study findings:

* Accountants face difficulty securing reimbursement for travel time-37% received no compensation at all.

* Judges frequently choose to pay accountants at local rates, or hourly rates prevailing at the case site, rather than at the rates charged in the accountants' own home areas.

* The courts generally don't approve computer charges unless they are incurred for tax returns or software consulting.

SOME BRIGHT SPOTS

Accountants didn't come up short in all compensation categories. They are far less likely than attorneys to be ordered to release funds received from a debtor as a result of problems such as failing to obtain prompt court approval of their employment or for unsatisfactory case results. Bonuses for extraordinary results are more likely to go to accountants than to attorneys. Unfortunately, however, accountants are just as likely as lawyers to face formal objections from creditors or other parties in interest to their fee requests.

EXECUTIVE SUMMARY

* ACCOUNTANTS FACE special compensation problems when working on bankruptcy cases, said one study.

* ACCOUNTANTS ARE less likely than attorneys to receive prebankruptcy retainers and they face longer payment delays. This may be because lawyers have greater influence over debtors and may be more aware of chapter 11 risks and thus more likely to obtain retainers.

* THE COURTS FIN it especially difficult to determine reasonable fees for accounting services, the study found. Many judges surveyed admit to an insufficient understanding of accountancy to make appropriate decisions.

* THE STUDY SUGGESTED accountants learn more about the legal requirements of the bankruptcy compensation process and not rely too heavily on lawyers in compensation matters.