Page 2 - More Bankruptcies, More Opportunities and Challenges for CPAs

COLUMNS I The Financial Advisor

More Bankruptcies, More Opportunities

and Challenges for CPAs

By Sidney Kess, Alan Gassman, and Aaron Slavutin

rom name-brand corporations like JCPenney and CPAs will need to look to one of three sets of AICPA stan-
Neiman Marcus to small and mid-sized companies, dards for guidance in the performance of their services. The
Fbusinesses of all sizes are responding to pandemic-relat- Statement on Standards for Consulting Services (SSCS-1), the
ed lockdowns by seeking refuge in bankruptcy. Legal services Statement on Standards for Forensic Services (SSFS-1), or
provider Epiq has reported that June 2020 commercial Chapter the Statement on Standards for Valuation Services (SSVS-1).
11 filings were up 43% from one year earlier; for the first half Services in bankruptcy are typically covered by SSFS-1. SSFS
of 2020, total commercial Chapter 11 filings were up 26%, applies in circumstances where there is actual or potential legal
to 3,604 new filings. or regulatory proceedings before a trier of fact or an investiga-
This spate of bad news may be good news for accounting tion in response to specific concerns of wrongdoing. It provides
firms that become actively involved in bankruptcy proceed- for additional standards that CPAs must adhere to, as well as
ings. Debtors, creditors, and other interested parties are likely certain limitations on fee arrangements and engagements.
to seek help from knowledgeable CPAs to help get them When a CPA begins an engagement involving bankruptcy
through tumultuous times with the best possible outcomes. or insolvency issues, a decision must be made regarding
application of the attestation standards or SSFS using the two-
prong test in the standard. Attestation standards do not apply in
connection with litigation services. Accordingly, any financial
statements that might be issued from the services rendered
under SSFS do not need to be accompanied by a CPA’s report.
Bankruptcy services provided by CPAs are generally
accepted as a form of litigation services. If it is determined
that the analysis or report to be issued comes as a form of lit-
igation 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
noting the limited use of the statement.

Accounting and Financial Reporting Prior to Enter-
ing Bankruptcy
According to PricewaterhouseCoopers’ comprehensive
CPAs looking to practice in this area need a unique skill set Bankruptcies and Liquidations guide (https://pwc.to/3jCQvnU),
focused not only on accounting, but have also demonstrated the following is a selection of items to consider when a report-
command of the forensic issues that arise in litigated matters. ing entity encounters significant financial difficulties that could
result in a bankruptcy filing.
Reporting Requirements in Bankruptcy in General Debt. Companies under stress might violate covenants
CPAs often issue reports and schedules as part of services (financial and nonfinancial) in existing debt agreements.
rendered in the bankruptcy and insolvency area. Many of When there is a covenant violation, the debt may become
these reports or schedules would generally be classified as due on demand or callable by the lender. Corresponding
financial statements. Because financial statements are issued, debt obligations may need to be classified as current,
a CPA must determine if a compilation, review or audit report unless the lender has waived or lost the right to demand
must be issued, or if the service that generated the statements repayment for more than a year. If the long-term obli-
is exempted from the attestation standards. (For more infor- gation agreement contains a grace-period provision, the
mation, see Reporting Requirements in Bankruptcy Cases, obligation may need to be classified as current unless it
American Bankruptcy Institute, https://www.abi.org/abi-journal/ is probable that the debtor will cure the violation within
reporting-requirements-in-bankruptcy-cases.) the grace period.

80 OCTOBER/NOVEMBER 2020 | THE CPA JOURNAL

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