The Business of Bankruptcy

CPAs can’t make a bad economy go away, but they can provide value to clients on the ropes.

A CPA FIRM WITH A CLIENT filing for bankruptcy has a responsibility to serve the client as well as an opportunity to compete for some of the work on the case—and through it develop a specialty. The need for bankruptcy services is expected to grow for a while.

CPAs SOMETIMES ARE THRUST into the field when a client goes broke, but a firm that has time to plan can develop the niche strategically. The bulk of bankruptcy work comes from attorney referrals.

A PERUSAL OF THE PUBLIC RECORDS of your local bankruptcy court and the U.S. Trustee Office will identify the accountants, lawyers, trustees, examiners and other advisers who are players in your market.

THE EXACTING BILLING requirements of the court affect every novice in bankruptcy work and are a continual challenge even for seasoned practitioners. CPAs are at minimum risk because the court’s first administrative priority is to cover the expenses of a bankruptcy.

DURING A BANKRUPTCY, debtors, creditors’ committees, trustees and other entities need CPA services. A firm should look first for clients that need services it already provides, such as tax preparation or monthly reports.

CONFLICT-OF-INTEREST CONSIDERATIONS usually require the work to be parceled out to several accounting firms, which means attorneys are always looking for new CPAs with whom to work.

VICTORIA M. ZUNITCH is a freelance business writer based in New York. Her e-mail address is MICHAEL HAYES is a senior editor on the JofA . Ms. Hayes is an employee of the AICPA and her views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation.
here’s stimulating work for CPAs who assist with bankruptcies—and there’s going to be more of it. A number of firms are likely to soon find they need to help an existing client figure out a graceful, or at least methodical, retreat from a struggling business. Even if recovery from the economic setbacks of 2001 gets under way in the first quarter of 2002, it can take several quarters or years to turn around the performance of faltering companies. Because a financial dissolution can take a very long time to play out, the need for bankruptcy services is expected to continue for a while.
CPAs sometimes are thrust into the field when a client goes broke, but a firm that has time to plan can develop the niche strategically. Whether or not your clients still are hanging tough, this is a prudent moment to strengthen the bankruptcy-related skills your firm offers and to improve your access to the market for them (see “ Preparation Resources ,” at the end of this article). Here’s what firms of all sizes should consider when preparing to assist clients with Chapter 11 restructuring or Chapter 7 liquidation situations. Grim Peaks

Data released at the end of August 2001 showed the number of new bankruptcies filed in the second quarter of the year was 25% more than for the same period in 2000, and the total number—400,394—was the highest on record for any three-month period.

Source: Administrative Office of the U.S. Courts.


Bankruptcy work offers excellent earnings potential. CPAs specializing in bankruptcy engagements are reluctant to disclose what they are paid but say the fees compare favorably with the highest-yielding accounting consultancy work. To ensure that bankruptcies make their way through the courts in an orderly fashion, the bankruptcy code provides that the fees of attorneys and other service providers, including accountants, be paid first—even before the IRS—so the risks of nonpayment are few.

“The first priority is to pay the administrative expenses of the bankruptcy,” says Thomas Burrage, CPA, of Meyners & Co., Albuquerque, New Mexico.

Jean Goddard, CPA and sole practitioner of Goddard Accounting Associates in Carlsbad, California, says the work itself is intriguing and the chances of handling exciting cases are fairly high given the frequent suspicion of fraud when a company goes bankrupt. “It’s extremely interesting. You’re kind of a minidetective,” she says.

Bankruptcies create a public record in the U.S. Bankruptcy Court, and interested CPAs can consult it to review the fee structure in their market. The court approves all fees—which vary according to services provided and geographic location and which must meet stringent criteria for being reasonable. However, payment is slow (every 120 days), and the court requires that bills explain services in extraordinary detail. It scrutinizes invoices carefully and may require that tasks be itemized in time increments of as little as one-tenth of an hour. In bankruptcy work, be aware that you’ll need to do some of the best recordkeeping and most well-documented billing of your career.

The CPA must obtain court approval as a “bankruptcy professional” for each case (requirements vary between districts) as well as for specific, billable tasks. If you deviate in any way and “do work that’s not considered covered, you run the risk of not getting paid,” says Shel-lee Davidson, a partner of Squar, Milner, Reehl & Williamson LLP in Newport Beach, California.

The exacting billing requirements of the court mystify virtually every bankruptcy novice and are a continual challenge even for seasoned practitioners. CPA Larry Stockton, a shareholder of Stockton Scurry & Smith in El Paso, Texas, says he once had a portion of his fee denied because he had served the client both before and after the bankruptcy filing, and the judge was unable to determine with sufficient certainty whether the CPA had been working for the debtor or the estate at the time the services were rendered.

Regular court appearances on behalf of a firm’s fee applications also are part of such work, says Davidson. Her most dramatic example of defending an invoice to the court: She resubmitted $70,000 in fees that had been disallowed, and the judge approved $68,000 of that amount.

One caveat: If a Chapter 11 restructuring converts to a Chapter 7 liquidation bankruptcy, the original Chapter 11 advisers, including accountants, must wait in line for payment behind Chapter 7 advisers.


A CPA whose client files for bankruptcy must make a very painful decision (see “ If a Client Must Bite the Bullet ”). The advising CPA has not only a responsibility to that client but also an opportunity to compete for work on the case. The debtor—under the supervision of the court—has the right to choose the lawyers, accountants, bankers and other professionals that will guide the entity through the process. This opens a door into an exclusive club.

For example, Stockton got into the practice because one of his clients hired him when bankruptcy seemed a possibility, and they spent a year working on alternatives before the client filed. It was a large case with many creditors, and through it he met some of the attorneys and trustees active in the local bankruptcy bar. As a result, Stockton has spent the last 10 of his 21 years in accounting with a growing bankruptcy business. As a rule, bankruptcy work is really off the beaten path—or “out of the ordinary”—for accountants, he says.

Networking and a perusal of the public records of your local bankruptcy court and the U.S. Trustee Office will identify the accountants, lawyers, trustees, examiners and other advisers who are players in your market—and reveal who gets the most desirable assignments. If your firm’s partners or staff members have connections to any of those professionals—through clients, civic groups or school ties—use those relationships to explore your firm’s options. Let the contacts know about the firm’s interest and ask them for advice. Don’t ignore opportunities to invite your target professionals to firm events such as outings or sponsored conferences or to network incidentally in professional, civic or social settings.

If a Client Must Bite the Bullet

When a client is in dire financial straits and may have to file for bankruptcy, there are certain important steps that CPAs must take, say bankruptcy specialists.

The toughest job for the CPA is to first convince the client it’s time to file for bankruptcy protection, says David Ringer, CPA, partner with New York firm Richard A. Eisner & Co. “There is no set method for getting someone to swallow the advice,” he says.

Second, the practitioner has to determine whether the client’s cash position can weather a Chapter 11 process. Chapter 11 means reorganization and reemergence as a going concern, and it comes with expenses such as court costs as well as fees for legal and accounting services. If the client is not in a position to pay all the expenses, a Chapter 7 filing may be required.

Third, the CPA needs to advise the client to hire bankruptcy counsel and provide a referral. (This is the time the CPA can put in a word that his or her firm is available to handle some of the accounting work.)

The bankruptcy court requires that fees be reasonable, say Thomas Burrage, CPA, and attorney Steve Comeau of Meyners & Co., Albuquerque, New Mexico. Therefore, the CPA won’t be able to charge premium prices or run up unusually high bills in the months before the bankruptcy filing. Ringer points out that if the firm is owed back fees, it can’t be retained to handle bankruptcy work unless it is willing to forgo them.

The nature of bankruptcy, resulting as it does from a client’s inability to pay debts, might give the false impression that a CPA firm working for the debtor is at risk of not getting paid for bankruptcy-related services. However, most of the time exactly the opposite is the case.


Experienced CPAs and lawyers say there are three basic ways a CPA firm can add a bankruptcy niche. They are:

To buy a CPA firm with a successful bankruptcy practice. Although an acquisition is the fastest way to add comprehensive services, such practices tend to prefer to remain independent and purchase prices can be high.

To hire a CPA with bankruptcy skills, or an attorney with bankruptcy experience and a client base, and charge him or her with building up a niche. David Ringer, CPA, partner with New York firm Richard A. Eisner & Co., was brought in to expand his firm’s bankruptcy practice under such a plan.

To build the new business by learning as much as possible and using networking tactics to get client referrals from other bankruptcy professionals. Options include forming an alliance with a law firm or CPA firm that already has a foothold in the arena. Staff can spearhead the new niche, using reciprocal referrals and providing services to an alliance partner in your firm’s best specialty areas such as tax or business valuation.

Practitioners who want access to bankruptcy engagements should take these additional simple steps, adds Steve Comeau, Meyners & Co. attorney and manager in the litigation and valuation services department: They should identify the bankruptcy bar and then market to it.

“The real gatekeepers of the engagements in bankruptcy proceedings are the attorneys,” Comeau says. Almost all a CPA firm’s bankruptcy work comes from the referrals of lawyers acting as counsel to a debtor. These attorneys are a close-knit and specialized group that prefers to work with professionals they know, he says.

Conversely, a CPA with a client needing to file for bankruptcy may recommend the bankruptcy lawyer. A practitioner should be frank and tell the attorney he or she is interested in some of the accounting work at the time of the referral, says Comeau.


Burrage suggests that a firm make its initial pitch for bankruptcy work in its strongest service areas. Although his firm recently tried to get creditors’ committee work for the Furr’s Supermarkets bankruptcy petition (a chunk of business worth in the seven digits, he says), it lost that engagement to another firm. Instead, because of the firm’s expertise in taxes, “we wound up getting the role of filing the final tax returns for the debtor,” Burrage says. “That’s still quite a substantial engagement for us” and will be several years of work for the firm.

Goddard segued into bankruptcy from a tax position at Coopers & Lybrand. “I was in tax, but I did a lot of bankruptcy work and it just expanded,” she says.

It’s useful to remember that in bankruptcy the debtor still needs general accounting work such as monthly operating-report filings, ongoing bookkeeping or tax return preparation. Whether a debtor files for protection from creditors under Chapter 11 (which involves continued operation, reorganization and possible recuperation of the company) or under Chapter 7 (which liquidates assets, distributes them among creditors and dissolves the company), many CPA services—general and bankruptcy specific—are required en route. For example, a CPA can

Provide tax services. Several CPAs suggested that firms use tax expertise as a way into the bankruptcy business. Every entity “has to file tax returns,” says David W. Roberts, CPA, certified fraud examiner and insolvency and restructuring adviser with Andersen. He advises, “Obtain a list of the panel trustees (as many as 50 or more in a given district), and then market your bankruptcy tax-preparation services to those trustees, typically the nonaccountants.” Panel trustees are both CPAs and non-CPAs, and the U.S. Trustee approves them to serve, on a rotating basis in a given district, as trustees of individual Chapter 7 bankruptcy cases.

Become a panel trustee. A CPA who is willing to undergo a thorough background examination can apply to become a panel trustee in his or her district. It “requires some experience,” Roberts says, “so ask your local trustee’s office what the qualifications are.”

The trustee’s office assigns Chapter 7 cases. Panel trustee members are required to handle assigned cases even when there are no assets to pay their advisory fees. When there is truly nothing, the CPA gets a nominal statutory fee (and gains knowledge)—along with a chance to be assigned later to larger, more complex and more remunerative cases.

“Some view being a panel trustee as a loss leader because you get an opportunity to work on cases that require additional services that result in significant fees,” Roberts says.

Become an examiner. “Examiners are appointed by the court to report on the facts and circumstances surrounding the bankruptcy,” Roberts says. For example, if the parties to the bankruptcy disagree about whether it’s necessary to appoint a trustee in a particular case, a judge might ask an examiner to gather details about the case before making a decision. Examiners look for preferences (unacceptably large payments made within 90 days of the filing), fraudulent conveyances and anomalies important to the case.

Market to examiners. This can be another point of entry into bankruptcy work.

There are many other potential clients for accounting services, say bankruptcy-savvy CPAs and attorneys. They are

Companies that want planning help to avoid bankruptcy or that need a restructuring recommendation. (If those efforts are unsuccessful, the debtor still will need prebankruptcy accounting, referrals and handholding.)

The unsecured creditors’ committee or other nondebtor parties to the bankruptcy. (Those parties may need a review of the debtor’s projections.)

The debtor. (On behalf of the unsecured creditors, the debtor may obtain the help of a CPA to avert secured debt obligations. For example, a CPA examination of bank-loan covenants might reveal why part or all of a bank loan doesn’t have to be repaid.)

Any of the secured creditors.


Restructuring firms.

Employee associations including unions.

Investment bankers (those working on an asset sale need valuation services).

The trustee who may need a CPA to gather the debtor’s books and records, safeguard assets and collect receivables.

Clients also may need CPA services such as these:

Preparing projections.

Valuation analyses.

Claims review.

Reconciliations of creditors’ claims with the debtor’s records.

Assistance in evaluating and/or structuring deals for the plan to pay creditors.

Liquidation analyses for Chapter 7 cases.


The riskiest assignment may be working for the debtor under Chapter 11, which carries three nonpayment risks:

The debtor simply doesn’t pay the bill for whatever reason, which requires the CPA acting as adviser to dun the debtor or appeal to the bankruptcy court.

The debtor explicitly objects to paying the CPA for some reason, and the court upholds the objection.

A Chapter 11 bankruptcy gets converted to a Chapter 7 bankruptcy for purposes of liquidation.

“This happens more often than I’d like to talk about,” says Davidson.

The examiner role is a bit different with respect to risk, Roberts points out. Examiners know that recommending a conversion to Chapter 7 from Chapter 11 means they risk not being paid if they have to wait in line behind others creditors owed administrative fees first. Yet examiners can’t compromise their integrity by failing to recommend a conversion when it’s warranted. “There have been plenty of cases where the examiner doesn’t get paid,” Roberts says.


The participants in the world of bankruptcy services admit that most of the engagements are dispersed among a limited group of accountants and lawyers. They may work on the same side of the table for one client at the same time that they are adversaries for another. “You tend to see the same players over and over,” says Ringer. Although “it’s not as competitive as you might think,” Comeau adds.

Conflict-of-interest considerations usually require the work to be parceled out to several accounting firms, which means attorneys always are looking for new CPAs to whom they can turn. And because law firms also have such considerations, working on one case is like having an audition with the entire bankruptcy bar at one time. “Bankruptcy proceedings are resplendent with lawyers,” Comeau says.

Preparation Resources

CPAs can learn about the bankruptcy process and the services they can provide to clients by talking to attorneys and to other CPAs in the field; attending litigation consulting forums; examining the standardized forms in the district U.S. Bankruptcy Court office; and reading about bankruptcy in books, magazine and journal articles and newsletters from bankruptcy law firms and specialty CPA firms.

Other resources are

The Association of Insolvency and Restructuring Advisors, , a national not-for-profit organization serving insolvency and reorganization accounting practitioners that offers programs and literature. Membership information: 541-858-1665.

U.S. Bankruptcy Court, , with links to official bankruptcy forms.

Bankruptcy: An Overview, published by the Legal Information Institute of Cornell Law School, . An overview of bankruptcy with links to federal, state and private sources of information.

American Bankruptcy Institute, . A multidisciplinary, nonpartisan organization dedicated to research and education on insolvency matters.

AICPA, , and CPA2Biz, , which offer the consulting services practice aid Providing Bankruptcy and Reorganization Services, as well as selected special publications readings.

Practitioner’s Publishing Co., , a good source of bankruptcy publications. Phone: 800-323-8724.

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