6 Important Points CPAs Need to Know About Chapter 11 Bankruptcies

CPAs are an integral part of a debtor’s team to navigate a chapter 11 bankruptcy. If its the CPA’s first foray into the arena, he/she may be surprised at some of the nuances to the path and may not now the particular tasks he/she will be called upon. Here are 6 of the most important points in learning the chapter 11 ropes:

• Employment – the first surprise may be that a debtor (or trustee) actually has to seek authorization to employ professionals including CPAs from the bankruptcy court. The debtor will file an application pursuant to Section 327 which sets forth the specific scope of employment, the anticipated fee structure and any concerns or connections which should be vetted.
• Fees – going hand in hand, the second surprise is that the debtor has to likewise seek authorization to pay its professionals including CPAs. Again, the debtor will file a fee application seeking interim and/or final approval of fees under Sections 330 and 331. A CPA should be mindful of this when entering into the employment agreement and budget accordingly.
• Cash Collateral Budgets – budgets, particularly cash collateral budgets, are the first of four major areas where CPAs can bring tremendous value to the debtor. When cash or cash equivalents are pledged as security to a lender the debtor must actually move for authorization and present a budget. Working with the debtor to develop a feasible budget is one of the lynchpins to a successful case.
• MORs – the flipside to that are monthly operating reports or MORs. Here, the debtor reports on the cash in and cash out from the last month along with other important aspects to its operations. Ensuring that the debtor is accurately and fully reporting its case is an essential duty of a debtor in possession.
• Plan Projections – a chapter 11 case culminates in a plan which is essentially the debtor’s offer to the world for how it will emerge from bankruptcy. Creditors and other interested parties get to scrutinize the plan before its confirmed. One of the most critical pieces to a plan is its projections, typically on a 5 year basis, for future operations. Understanding the assumptions and variables that go into the projections once again are incredibly important to the debtor.
• Preference Actions – finally, the Bankruptcy Code bestows upon the debtor certain powers and in some cases responsibilities to investigate certain transactions. This analysis is greatly aided by the help of a financial professional such as a CPA to look through the numbers.