In a recently published Business Economic Loss Appeal Decision (2015-1232), the panelist held as follows:
“[T]he record is clear that five of the Policy 495 criteria for identifying mismatched claims were triggered by Claimant’s financial data. Claimant argues that, given the particular and seasonal activity of a charter fishing business, the Settlement Program accountants should have given more consideration to context and, in the exercise of due diligence, investigated to see if the tripped triggers were a result of the nature of the business instead of representing a real discrepancy. The panelist cannot accept that as a required approach because Policy 495 was designed after much analysis and input, and is fully court-approved, and to require ad hoc individualized probing behind the causes of an activated trigger (much less multiple triggers) would defeat the purpose of the policy as an objective, self-implementing process.” (emphasis added)
The P&Ls supporting the claim which is the subject of the above appeal may very well be insufficiently matched, yet that is not the point. Contrary to what this decision holds, “individualized probing behind the causes of an activated trigger” is in fact required by the plain language of Policy 495. Further, no one has ever suggested that Policy 495 is “self-implementing” nor “objective.” The policy is a nearly 100 page addendum to an existing 1,000+ page Settlement Agreement. Dozens (perhaps hundreds) of new Settlement Program accountants have had to be hired in order to process claims under the policy’s mandates. There is nothing self-implementing about it. And while the original Settlement Agreement was indeed objective, Policy 495 eviscerated that characteristic.
The seven tests, or screens, found in Policy 495, are designed to identify monthly revenue volatility and monthly variable expense volatility within P&Ls submitted in support of claim applications. Under the terms of Policy 495, these seven volatility screens are used to identify a pool of claims where “further matching analysis” is to be applied. See Policy 495, Page 5, Section (I)(A), third paragraph.
According to the precise terms of Policy 495, the seven volatility screens are not determinative of whether P&Ls are insufficiently matched. Indeed, only through the vendor accountant’s required application of professional judgment in the form of a “further matching analysis” (or put another way, through an “individualized probing behind the causes of an activated trigger”) may a P&L be deemed insufficiently matched.
P&Ls are routinely both volatile and sufficiently matched
Volatile monthly revenues and variable expenses are commonplace and to be expected in nearly every industry. For instance, most businesses are impacted to some degree by seasonality, and thus experience variances in monthly revenue and variable expenses as a matter of course. Additionally, and not insignificantly, BP’s Deepwater Horizon Disaster itself resulted in a great deal of volatility for regional business entities. But simply having volatile monthly revenues and expenses does not, by itself, equate to an insufficiently matched profit and loss statement.
Given that volatile revenue or variable expense is not necessarily determinative of an unmatched P&L, Policy 495 prescribes that claims triggering one or more of the seven volatility screens are not to be considered “insufficiently matched,” but instead those P&Ls “require further analysis” to make such a determination.
The Appeal Panel’s decision in Appeal 2015-1232 turns that requirement on its head.
Alone, volatile monthly operating results are not persuasive evidence that P&Ls are unmatched, particularly as to accrual based claims. This is true both within the context of the BP Court Supervised Settlement Program (CSSP) itself, and in the real world where accrual P&Ls are routinely both volatile and sufficiently matched.
Policy 495 assigns no predictive power to the outcome of the seven screens in determining whether P&Ls are “insufficiently matched.” To the contrary, there are many instances when perfectly matched P&Ls (not to mention merely sufficiently matched) will trip one or more of the seven tests. Hence Policy 495’s critical additional requirement to silo the triggering P&L for further matching analysis through the exercise of professional judgment.
Policy 495’s Definition of “Professional Judgment”
As stated above, if one or more of the seven volatility screens are triggered:
“then the claim shall be identified for a further matching analysis … [where] the CSSP Accounting Vendors will exercise their professional judgment to determine whether that 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.” (emphasis added) – Policy 495 at 6
By definition, the seven screens do not determine whether a P&L is “insufficiently matched.” When triggered, “professional judgment” is to be exercised, and professional judgment alone determines matching status. That judgment is to be based on a variety of activities including:
- An evaluation of the information submitted to the CSSP accountants.
- An evaluation of information available to the CSSP accountants.
- When applicable, an analysis of the nature and complexity of the industry in question.
- When applicable, an analysis of the nature and complexity of the business in question.
- “particularly with regard to claims based upon cash-basis accounting records”
If no “professional judgment,” as defined in Policy 495, is exercised, then the CSSP accountants have not followed the required rules of the policy. Without exercising “professional judgment,” program accountants may not deem a claim to be “insufficiently matched.”
Professional judgment requires that “further matching analysis” be performed. This analysis is an extra step and incremental to the application of the seven volatility screens.
After all, if the seven tests were intended to be the arbiter of determining matching status, then why have professionals involved at all? A computer could more efficiently complete such a rote task.
Further, the results of the seven volatility screens may not be used as an input into the “professional judgment” exercised to determine that a P&L is “insufficiently matched.” Using the results of the volatility screens as the basis to deem a P&L “insufficiently matched” defies the terms of Policy 495, is based on circular logic, and is intellectually indefensible.
What’s the solution?
We have requested on multiple occasions that the accounting vendors supply the following documentation to claimants when implementing Policy 495 methodologies:
- A list of the materials used by the CSSP accountants in exercising their “professional judgment.”
- Specific items or data upon which the CSSP accountant based his “Insufficiently Matched” designation.
- A list of materials that the claimant may provide that would be helpful in determining whether the P&Ls are sufficiently matched.
- Confirmation that the CSSP accounting vendor reviewed the claimant’s business model and industry.
- A conversation with the CSSP accountant who is conducting the mandatory “further matching analysis.”
- A written narrative describing the process of how the claimant was evaluated and a substantive description – beyond a regurgitation of which test was triggered – of why the P&Ls are “insufficiently matched” in the reviewing professional’s opinion.
Without the above listed minimal disclosure and documentation of the basis for a finding that a P&L is insufficiently matched, the claimant is left to guess on what grounds the accounting vendor relied (aside from the screens themselves). Failure to exercise professional judgment after a trigger is hit, coupled with a failure to appropriately document same, is clear error.