All of which raises the question: Why would any CPA want to be involved in a bankruptcy practice?

 

I would give three reasons. First, the business can be profitable -- if you know what you're doing. Second, the work is interesting, challenging and dynamic, involving a variety of participants from different walks of life: debtors, creditors, bankruptcy trustees, other professionals and, of course, the Bankruptcy Court. Finally, in recent economic times, it has been a growth industry, as bankruptcy has become a more common occurrence in the lives of individuals and businesses.

 

The CPA's role in bankruptcy proceedings depends on which party he or she represents. Most cases that call for the services of a CPA involve businesses. The vast majority of businesses file under Chapter 11 or Chapter 7. In Chapter 11, a business is reorganized as it tries to emerge from bankruptcy. In Chapter 7, a business sells off its assets and distributes the money to creditors as established by the U.S. Bankruptcy Code.

 

Most Chapter 11s are later converted to Chapter 7 and liquidated. In some Chapter 11 cases -- and in all Chapter 7 cases -- the Bankruptcy Court appoints a trustee, who may hire his or her own CPA. In Chapter 11 cases, an unsecured-creditors committee generally is elected that also will hire a CPA. In larger cases, several committees may be appointed, each requiring financial expertise.

 

The Bankruptcy Court also may ask that an examiner be appointed to investigate certain affairs of the debtor, as was done in the Enron and WorldCom cases. CPAs routinely are appointed by the Bankruptcy Court to serve as examiner. Because of the complexity of and reporting requirements involved in bankruptcy, the company involved in bankruptcy (the debtor) also typically needs a CPA experienced in such matters.

 

Any experienced bankruptcy professional will tell you that the most important thing is to get yourself properly appointed before you do any work. If you want to be paid, the Bankruptcy Court must approve your appointment, your hourly rate and, in some cases, the number of hours you plan to put in, before you can begin incurring billable hours. Every bankruptcy professional has a war story about a case he or she worked on believing his or her appointment had been approved when in fact it was not. This usually happens only once, as the painful lesson is not easily forgotten.

 

To be appointed, the CPA must be "disinterested" as defined by the Bankruptcy Code. Simply put, you cannot have an interest in the case, be a creditor, represent a creditor or have any financial interest in the case. A CPA who has a client file bankruptcy can continue to represent that client if the CPA is not owed money and meets the other requirements for being disinterested.

 

Before getting appointed to a case, talk with the attorney about how professional fees will be paid. Fees can be paid only from the assets of the bankruptcy estate. No assets means no professional fees. Additionally, professional fees, while high on the payment-priority list, are not at the top; sales of encumbered assets require that secured creditors be paid first.

 

Also in a Chapter 11, there is a risk that the case will convert to a Chapter 7. Fees to professionals in a Chapter 7 take priority over Chapter 11 fees. In a Chapter 11 case, professional fees and other obligations incurred during the business operation in bankruptcy -- including items such as payroll, taxes and trade vendors -- may be paid pro rata if there are insufficient funds to satisfy everyone at this priority level.

 

Attorneys who specialize in Chapter 11 debtor work have two golden rules. Rule one: Get a retainer. Rule two: Don't forget rule one. The same applies to CPAs. When working on a Chapter 11, always try to get a retainer. If you can't, find out how you will be paid. The attorney may negotiate a "carve-out," in which the secured creditor agrees to allocate a portion of the money it receives for payment of professional fees from the liquidation of its collateral. If your fees will be paid from ongoing operations, be aware that if the case converts to a Chapter 7, your fee may be at risk.

 

The services a CPA provides in bankruptcy are broad. They include income tax matters, preparation or review of operating reports and financial statements, internal control reviews, insolvency analyses, forensic investigations, business and asset valuations and avoidance investigations. Although some issues are emergent, many can be spread throughout the year and scheduled around the tax-season crunch.

 

Testifying in Bankruptcy Court happens more often than it does in other areas of litigation and can be a real bonus. I say this since those of us who work on litigation matters know that only a small percentage of most litigation cases actually go to trial, limiting the number of opportunities a CPA has to testify as an expert. In a standard litigation case, a CPA may spend years preparing the expert report and attending depositions, and then months preparing for trial. In contrast, a bankruptcy case may have the same work compressed into months or weeks. In those cases requiring testimony, the preparation takes place the week (or even the day) before the trial. This greater exposure will sharpen your testifying skills.

 

If you are a "people person," bankruptcy work presents some unique opportunities. People from all walks are represented and many are under a great deal of stress. In these instances, it is not uncommon to feel more like a counselor than a CPA. And of course, there are always those cases that involve famous or high-profile people, making those cases especially interesting.

 

The number of bankruptcy filings has been increasing for several years; 2002 was a record year, with more than 1.5 million bankruptcy cases filed. For many years, business filings were low, but those have been increasing as more large public companies have filed and as others have been hit hard by the economy. Recent projections have indicated that this level of filings will continue for some time.

 

Accountants who specialize in bankruptcy may hold other certifications in addition to being a CPA. One credential is the Certified Insolvency and Restructuring Advisor (CIRA) administered by the Association of Insolvency and Restructuring Advisors (www.airacira.org). Before becoming a CIRA, an individual must be licensed as a CPA (or hold an equivalent credential) or have a bachelor's degree from an accredited college. He or she also must have five years of accounting or financial experience; 4,000 hours of experience in under-performing businesses, reorganization and insolvency; and pass an exam based on a three-part course. Currently, fewer than 500 professionals have satisfied all of the requirements and can call themselves CIRAs.

 

Others certifications that apply include Certified Fraud Examiner (CFE), Certified Valuation Analyst (CVA), Accredited in Business Valuation (ABV) and Certified Turnaround Professional (CTP). The New Jersey Society of CPAs also has an Insolvency Committee that meets every month on bankruptcy matters, providing an excellent opportunity to network with other CPAs who have many years of experience.

 

I started a bankruptcy practice in 1986 and have seen it grow significantly. One of the reasons is the increase in the number and size of the cases being filed. All in all, I have found the work to be rewarding and profitable. Like others who specialize in this area, I have taken my lumps along the way but have learned from them. In this age of easy credit, one can be assured that new cases will continue to be filed and that CPAs will be needed to provide their valuable expertise to attorneys, debtors, creditor committees, trustees and the Bankruptcy Court.

 

BARRY R. SHARER, CPA, is a Partner at Wagner Sharer Murtaugh & Petree in Voorhees. He is a member of the New Jersey Panel of Chapter 7 Trustees and President of the New Jersey Bankruptcy Trustee Association. He can be contacted at 856-435-3200, or barry@wagnersharer.com.