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BP Business Economic Loss Claim Appeal 2016-195: CPA firm properly treated under AVM, not professional services


The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

The Claims Administrator awarded $177,980.06 to this CPA firm in Rayville, Louisiana (Zone D). Policy 495 criteria were triggered and the AVM methodology was used restate the financials. BP appeals, arguing that the Administrator erred in failing to apply the Professional Services Methodology.

BP makes two primary arguments in support of its appeal. First, BP says that Policy 495 sets forth a dedicated list of NAICS codes to which the Professional Services Methodology must be applied. These include codes beginning with 5412, a category that includes accounting, tax preparation and payroll businesses. The Administrator assigned NAICS Code 541211 – Offices of Certified Public Accountants. BP urges that this NAICS Code left the program accountant with no discretion in determining the methodology for matching revenue and expenses.

BP also argues that Claimant’s revenue recognition was inconsistent from year to year as demonstrated by its P&Ls. Because a significant portion of Claimant’s revenues were recorded 30-45 days after the services were performed, the Professional Services Methodology should have been used to correct this time lag according to BP. BP therefore seeks remand or alternatively submits a Final Proposal of $83,472.00 based on its calculation of the award utilizing the PSM.

Claimant argues that as an accounting firm, it operates on a short revenue cycle due to key dates when income tax returns are due. For example, much of Claimant’s tax services are performed between February 1 and April 15 of a given year. The majority of payments for these services are st h received within 30-45 days of the April 15 tax deadline. Claimant therefore argues that the program accountant was correct in employing the AVM methodology under these circumstances.

The Calculation Notes demonstrate that the accounting vendor looked closely at Claimant’s revenue cycle before selecting the AVM methodology:

The claimant provided insight into their revenue (Doc ID: [XXXXX]).

Revenue is earned only when the services for the preparation of tax returns, monthly bookkeeping, preparation of financial statements, etc. is completed. Revenue is recorded when the client pays for the completed services as the Claimant uses the cash basis of accounting for recording its financial transactions. The cash basis is used in the ordinary course of business for financial statement preparation, management decisions, monthly bookkeeping, and filling of the annual Federal and State Income Tax Returns.

The vast majority of the Claimant’s engagements are very short in duration, lasting generally from a few hours to only a few days to complete. The majority of the Claimant’s revenue is from tax services that generally can be completed within a few hours to no more than two or three days for large clients. Monthly bookkeeping generally is done within one to two days. Financial statement preparation is generally completed within one or to two days, except for a very few isolated engagements (generally no more than three to six per year, which take two to four months to complete). As the engagements are so short, the client is billed at completion of the engagement.

In the majority of engagements, the client generally pays within 30 to 45 days of invoicing. However, there are a few larger engagements where full payment of the invoice may take 90 days. As with any business, there are a few isolated clients that take longer.

DWH accountant noted an increase in 0income0 in May 2007-2009, and January 2010. The major source of revenue for the Claimant involves the annual preparation of Federal and State income tax return engagements. These engagements generally begin each year in February and end on April 15. Billing is generally done after April 15, with most clients payment the billing invoices in May and June. The increase in revenue that occurred in January 2010 was either from expanded services provided to existing clients, new clients, or clients paying for billed services at a different time than other years.

As described above, the claimant bills and records revenue when it is received, which is typically 30-45 days after work is completed. Due to the following two factors, the DWH Accountant has not made an adjustment to revenue; 1) the claimant’s billing and revenue 2 3/4/16 recognition process is performed consistently year over year and month over month and 2) restating revenue to account for the revenue recognition time lag would be insignificant to the claimant’s compensation amount. Therefore as further documented below, the DWH Accountant has applied the Annual Variable Margin (AVM) for this claim.

The NAICS code associated with the claim is identified in Policy 495 Attachment A as one likely requiring the application of the Professional Services Methodology, as outlined in Attachment F of Policy 495. DWH Accountant noted: a) the business operates on a short earnings cycle; and b) the description and length of time of the services provided. Accordingly, services are rendered on a more consistent monthly basis and therefore, based on such factors, the AVM methodology was applied.

Although Attachment A to Policy 495 includes a list of NAICS codes presumed applicable for a given methodology, the accounting vendor is clearly afforded the latitude to exercise professional judgment in determining the applicable methodology:

To the extent that in the professional judgment of the CSSP accounting vendors assignment to a methodology by such NAICS code is inappropriate based on that claimant’s particular business activities, the CSSP reserves the right to revise the applicable methodology to achieve sufficient matching as ordered by the court. See Policy 495, Sec. IIA.

This principle is also embodied in Attachment A:

However, it is important to note that a claimant with a given NAICS code will not automatically be assigned to a given methodology by virtue of the NAICS code if, in the judgment of the Claims Administrator’s office, there are factors that indicate that revenues and expenses would be more sufficiently matched by applying an alternative methodology. As a result, some businesses with a certain three – digit NAICS subsector may be treated under a different methodology than others in the same subsector.

This is a classic example of a program accountant’s documented exercise of professional judgment. BP has not demonstrated an abuse of that judgment in the selection of the AVM methodology. There is no basis for remand. The award is therefore affirmed in all respects.

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