New Orleans, Louisiana

HomeLouisianaNew Orleans

Email Tom Young Tom Young on LinkedIn Tom Young on Twitter Tom Young on Facebook Tom Young on Avvo
Tom Young
Tom Young
Attorney • (813) 251-9706

BP Accounting Vendors Parting Ways With Judges Barbier, Clement?


As I have previously written, love it (BP) or hate it (everyone else), Policy 495 was designed to address profit and loss statements containing insufficiently matched expenses and revenues, and it appears to be here to stay. In the real world, and according to Judges Barbier and Clement, as well as BP, insufficient matching is a problem largely confined to “only very small and fledgling businesses [that] keep their primary financial records in accordance with cash accounting principles” (Judge Clement, October 2, 2013 Opinion in 13-30315 at 11). Yet judging by recent claim payment trends, as well as statements made by Deepwater Horizon accounting vendors, our esteemed jurists are simply wrong.

Program accountants have been hard pressed to find too many P&Ls which could not be *ahem* “perfected,” by the application of Policy 495 methodologies. According to the vendors, nearly every P&L that trips a trigger is insufficiently matched, both cash and accrual.

Publicly traded companies with teams of auditors following GAAP procedures and accrual accounting are routinely deemed “insufficiently matched.” I have even heard of a sophisticated accrual claimant whose own auditor is PwC, now being deemed insufficiently matched by guess who? Program accounting vendor PwC.

Such errant treatment of the overwhelming majority of accrual P&Ls as insufficiently matched is contrary to Judge Barbier’s Orders on the matter, the 5th Circuit Court of Appeals’ BEL Opinion, Policy 495’s requirements, BP’s own filings with the Court, all internationally accepted accounting conventions, and indeed, common sense. If not corrected, the error will likely cost claimants billions.

Professional judgment required

The accounting vendors are required by Policy 495 to use their learned professional judgment (not simply rely on the seven overly inclusive volatility screens) when determining whether a P&L is insufficiently matched. Special attention is to be paid to cash P&Ls, implying deference to accrual books:

“Accounting Vendors will exercise their professional judgment to determine whether [a] claim is ‘sufficiently matched’ based upon the evaluation of the information submitted and available to them, including, when applicable, the nature and complexity of the industry or business in question, particularly with regard to claims based upon cash-basis accounting records.” – Policy 495 at 6 (emphasis added)

Further, any shades of gray that arise during the matching analysis are to be resolved in a manner that most benefits the claimant, which typically favors applying Exhibit 4C rather than Policy 495’s various methodologies:

“The Claims Administration Vendors shall evaluate and process the information in the completed Claim Form and all supporting documentation under the terms in the Economic Damage Claim Process to produce the greatest economic damage compensation amount that such information and supporting documentation allows under the terms of the economic damage claim framework.” Settlement Agreement, Section 4.3.8 (emphasis added)

Judges: Most accrual P&Ls inherently matched

Both the trial Court and the 5th Circuit Court of Appeals have said that the majority of accrual P&Ls submitted in support of BP claims are inherently matched, and thus should be processed as per Exhibit 4C of the Settlement Agreement (not Policy 495’s AVM or other specialized methodologies). Judge Barbier has said that accrual P&Ls submitted in support of BP claims are “ordinarily” matched. Judge Clement found matching to be a “fundamental aspect of day-to-day record keeping on the accrual basis.” She went further, saying that claims based on accrual P&Ls are sufficiently matched in the “vast majority” of instances:

“[A]ccrual accounting has as a fundamental principle the recognition of revenue when the entity becomes entitled to receive payment, as opposed to when the payment is actually received. Expenses that can be readily traced to the recognized revenues are themselves recognized at the same time as those revenues. … This is sometimes referred to as ‘matching’ revenues and expenses, but in any case this procedure is a fundamental aspect of day-to-day record keeping on the accrual-basis.” – Judge Clement, October 2, 2013 Opinion in 13-30315 at 11 (emphasis added)

“…the parties apparently agree that matching is required and occurring with respect to the vast majority of accrual-basis claims.” – Judge Clement, October 2, 2013 Opinion in 13-30315 at 17 (emphasis added)

“Ordinarily, such ‘matching’ will occur naturally when a claimant maintains its accounting records on an accrual basis.” – Judge Barbier, Order & Reasons, December 24, 2013, Footnote 5

So it seems well settled that most BP claims supported by accrual P&Ls should be safe from Policy 495’s causation killing and claim value eroding formulas, as accrual P&Ls are by nature sufficiently matched. This should be an easy metric for the Claims Administration to confirm. Simply ask the vendors to report the percentage of accrual P&Ls they have deemed insufficiently matched – if it’s more than 50%, then something is afoot.

Not so fast say program accountants

The vendors assert that very few claimants understand “real” accrual accounting standards, and as such, claimants’ purported accrual P&Ls are not really bona fide, honest-to-goodness, accrual P&Ls. So, when asked for the percentage of accrual P&Ls they find to be insufficiently matched, the vendors balk, claiming one man’s perfect accrual is another man’s garbage accrual. We are told that even for those P&Ls that are represented in some fashion to be accrual, they are often not “truly” accrual in the vendors’ eyes, as such, they cannot provide such a percentage.

Sufficient matching is required, not perfect

But Judges Barbier and Clement never limited their observations to “truly” accrual books. Instead, Judge Clement refers to matching as being “fundamental” to “day-to-day” accrual accounting. In other words, in the work-a-day world of BP claimants, not in some theoretical, academic ivory tower.

Even BP argued to the 5th Circuit that the Settlement’s compensation formula “represents an agreement on a specific accounting methodology, based loosely on accrual accounting.” (Judge Clement, October 2, 2013 Opinion in 13-30315 at 19, emphasis added). Continuing, Judge Clement said the Settlement Agreement’s language “reasonably could imply an accrual-style framework” (Id. at 20, emphasis added). Phrases like “based loosely” and “accrual-style” suggest that the accounting vendors are not to apply some strict scrutiny inquisition when determining the sufficiency of BP claims supported by accrual P&Ls.

Sufficient matching is (or was) occurring

When Judge Clement said in her October 2013 BEL Opinion that “the parties apparently agree that matching is required and occurring with respect to the vast majority of accrual-basis claims,” (emphasis added) surely by “the parties” she meant BP and Class Counsel in the current litigation. By “and occurring” she meant matching was indeed occurring with regard to the vast majority of accrual P&Ls in the instant case. And what “claims” could she have been referring to aside from accrual claims submitted pursuant to this very Deepwater Horizon Economic & Property Damages Settlement program?

In other words, in 2013 Judge Clement said there were plenty, indeed a “vast majority” of, sufficiently matched accrual based claims actually being processed within the Court Supervised Settlement Program (CSSP). She was not talking in the abstract. Yet now, in 2015, sufficiently matched accrual based claims are suddenly in the minority within the same CSSP? What gives?

Bolstering Judge Clement’s position, BP itself told the Court that the matching problem did not typically occur in the processing of accrual claims, rather cash was the issue. BP reported this cash P&L phenomenon to the Court in December 2012, after spending over six months observing the claims processing program in action.

Judge Clement continues:

“For many of the BEL claimants who are the focus of this appeal, their contemporaneously recorded financial records, absent mere bookkeeping errors, will contain ‘matched’ revenues and expenses before they even submit their claims. In a December 2012 Memorandum, BP acknowledged that many claims presented data that ‘sufficiently match’ revenue and expenses. This is because they apply the accrual accounting … principles BP advances here as a matter of their ordinary recordkeeping. On the other hand, cash-basis claimants might present records that are not so matched.” October 2, 2013 Opinion in 13-30315 at 12 (emphasis added)

Again, Judge Clement and BP were clearly referring to the fact that a substantial number (somewhere between “many” and the “vast majority”) of accrual P&Ls – in this very claims processing program (“BEL claimants,” “this appeal,” “their claims”) – were, in 2012/2013, correctly being deemed matched by program accounting vendors.

What changed between 2012 & 2015?

According to Judge Clement, in October 2013 matching was definitively “occurring” within the BP claims processing environment with regard to the “vast majority” of accrual claims. Fast forward to 2015 – shouldn’t such matching still be naturally “occurring” in the “vast majority” of accrual claims within the CSSP? Absolutely.

And since in December 2012 “BP acknowledged that many claims presented data that ‘sufficiently match’ revenue and expenses … because they apply … accrual accounting,” shouldn’t “many claims” supported by accrual P&Ls still be sufficiently matched in 2015? Of course.

Since 2012, nothing has changed in the world of financial accounting, nor within the microcosm of this case, to render the universal truth that somewhere between “many” and “the vast majority” of BP claims supported by accrual P&Ls are inherently matched.

Nothing, that is, except for the failure of the program’s accounting vendors to follow the precise requirements of Policy 495’s professional judgment edict. When the vendors rely solely on the seven tests (rather than their professional judgment) to determine insufficiency – the seven tests which capture 90% of all accrual claims – that leaves 10% as sufficiently matched. 10% is far from BP’s “many” and very short of Judge Clement’s “vast majority.”

If the mere occurrence of one or more of the seven triggers is conclusive of an insufficiently matched accrual P&L, then there would be no need to engage the services of the highly educated, trained and paid accounting professionals at PricewaterhouseCoopers and Postlethwaite & Netterville. Rather, a basic computer program could do the job.

We need the statistic. STAT!

Simply put, the Court has directed the accounting vendors to leave the vast majority of accrual claims alone in the absence of error or some overwhelming evidence that such P&Ls are insufficiently matched. Claims Administration vendors do not seem to have received that message.

Make no mistake, the vendors’ failure to exercise professional judgment and document same, as required by Policy 495, will result in an egregious abuse of claimants, most of whom will see at least a 30% reduction in compensation. Worse, some will lose causation altogether, receiving $0.

The question is simple: “What percentage of accrual P&Ls (perfect or otherwise) do the accounting vendors deem insufficiently matched?”

If the response is greater than 50%, it will be a strong indication that the accounting vendors are taking the easy way out by rotely relying on the seven tests to determine insufficiency, not the exercise of their professional judgement as required by the Court and Policy 495.


Have an opinion about this post? Please consider leaving a comment or subscribing to the feed to have future articles delivered to your feed reader.

  1. Dave says:
    up arrow

    I think too many terms within the settlement agreement and especially 495 have made “objective” nearly impossible. “professional judgement ” lends to more of individual opinion and subjective. this is a process that is using information compiled using established practice rules. accounting principles have been in place for centuries, like math, and they are pretty clear. the agreement should have criteria in place based off of accounting principles and that’s that. for example, 1st red flag, do the P&Ls match the tax returns. if not, provide a detailed reconciliation. P&Ls on cash basis? then provide bank statements with a P&L to bank statement reconciliation. P&Ls on accrual, unless accompanied with an independent audit or review report, then provide supporting documents for unusual spikes and dips in revenue/expenses. A/R and A/P reconciliations to cash flow statements etc. These are numbers! This is grade school math problems, remember you got points off in school when you didn’t “show your work?” You don’t need all this “professional judgement” crap. I can fix all the head aches of this in a simple statement: ” Profit and Loss statements must match tax return, if not a detailed reconciliation must be provided. Monthly P&Ls can be on cash or accrual basis. No matter what basis, ALL P&Ls are to be compiled according to generally accepted accounting principles or in accordance with another comprehensive basis of accounting.”

    problem solved :)

    • Tom Young says:
      up arrow

      Dave, yes, the original objectivity of 4C is long gone, but we must not allow the “seven tests” to become the new “objective” standard. The effect of those overly inclusive volatility screens is supposed to be muted by the subjectivity inherent in 495’s requirement for the exercise of professional judgment.

      495 does not appear to be going anywhere. We now must simply insist that it is applied as written.

  2. Eyeswideopen says:
    up arrow

    And so it goes and where is the cartel, sorry I mean our PSC they have all moved on and assigned to new Class Actions cases.

  3. Tom Suplee says:
    up arrow

    Amen. Well written and on point as usual Tom.

Leave a Comment

Have an opinion? Please leave a comment using the box below.

For information on acceptable commenting practices, please visit Lifehacker's guide to weblog comments. Comments containing spam or profanity will be filtered or deleted.