Attachment 2 SOW USTP Chapter 7 Audits_09.02.25.pdf

Statement of Work (SOW) for Audits of Chapter 7 Trustee Bankruptcy Estate Administration

1. General Information

1.1 Background

The Executive Office for U.S. Trustees for the United States Trustee Program (“EOUST”) is in Washington, D.C. The EOUST provides national administrative, legal, and technical support to United States Trustees who are appointed to supervise trustees and trustee administration of cases in 21 regions of the United States Trustee Program (“USTP”). The United States Trustees and EOUST are collectively referred to as the USTP in this document, except to the extent a specific component or other USTP person is referenced. The Office of Oversight, a component within EOUST, is charged with the national oversight of trustees and support to the regional United States Trustees in trustee oversight and case administration.

Under 28 U.S.C. § 586, a U.S. Trustee is charged with responsibility for establishing, maintaining and supervising panels of trustees, supervising individual trustees, and supervising cases under chapter 7 of title 11 of the U.S. Code (“Bankruptcy Code”).1 A chapter 7 trustee, as the estate representative for the recovery, preservation, liquidation, and distribution of chapter 7 estates, is a fiduciary responsible to the various parties who have an interest in the case. The USTP’s goal is to establish a system that allows for the complete, economical, equitable, and expeditious administration of chapter 7 cases, while allowing the trustee to exercise business and professional judgment in performing fiduciary duties.

In a chapter 7 case, also known as a “liquidation” case, debtors give up any non-exempt property or value in property that is not protected by an exemption2 at the time of filing bankruptcy, to be released from any further personal liability for certain pre-bankruptcy debts.3 This type of bankruptcy is available to individuals, partnerships and corporations.

When a debtor files for bankruptcy under chapter 7, the case is considered voluntary; when creditors file, the case is considered involuntary. Chapter 7 cases also result from the conversion of a case from another chapter to chapter 7 (e.g., chapter 11 to chapter 7).

1.2 Definitions

• Asset case - a chapter 7 case is considered an asset case for the purpose of the record keeping and reporting requirements when either (i) the trustee is in possession of property or funds, or expects to receive property or funds, or (ii) a no-asset report has not been filed

1 Unless otherwise noted, all section references (e.g., § 101) pertain to the Bankruptcy Code.

2 Exemptions (that is, the value the debtor is entitled to keep) are defined by federal and/or state statutes. Corporate and partnership debtors are not entitled to exemptions.

3 Some debts are nondischargeable in bankruptcy. In addition, corporate and partnership debtors do not receive a discharge.

SOW for Audits of Chapter 7 Trustee Bankruptcy Estate Administration with the U.S. Trustee and the court, and 120 days have passed since the initial examination of the debtor at the § 341(a) meeting.

• Audit Firm or Contractor - The terms audit firm and contractor refer to the firm performing work for the USTP under this SOW.

• Audit period - The period covered by the trustee’s most recent TIR.

• Notice - Whenever this document refers to the giving of notice, such notice shall be in writing and delivered by email to the appropriate USTP contact.

• Office of Oversight - Office of Oversight refers to the Office of Trustee Oversight, at the EOUST. When this SOW requires notice upon, approval of, or otherwise references delivery to the Office of Oversight, any such communications shall be delivered in writing by email to or from ch7trusteeoversight@usdoj.gov.

• Trustee Interim Report (TIR) - It consists of the Form 3, which lists all pending asset cases, a Form 1 for each listed case, and a Form 2 for every estate bank account (Form 2s are only required for cases with bank accounts or investments). Forms 1 and 2 are not required if: (i) a final account (TDR) was submitted during the current reporting period;

(ii) a no-asset report (NDR) was filed in a case that has been open longer than 120 days after the initial examination of the debtor at the § 341(a) meeting (no-asset cases in which an NDR was filed within 120 days of the initial examination of the debtor at the § 341(a) meeting are not listed on Form 3); and (iii) a case open longer than 120 days after the initial examination of the debtor at the § 341(a) meeting was converted to another chapter, dismissed, or reassigned during the current reporting period. See the Forms and Instructions of the Supplementary Materials.

• Trustee’s estate or case file - As used in this SOW, estate file or case file includes all paper and electronic documentation maintained by the trustee concerning administration of the case. This includes traditional financial, correspondence, and pleading files kept in paper form, as well as electronic information wherever stored on the trustee’s computer system including: data and notes in the trustee’s case management system, e-mails, electronic calendar or similar software, and time records. When asking for files, be sure to specify that all paper and electronic estate files are needed. Note that some records must be kept in paper form – see Handbook Chapter 5.G.5.b.

• USTP COR – Refers to the individual who serves as the Contracting Officer’s Representative (or COR). The USTP COR is the Deputy Assistant Director for Trustee Oversight, located in the Office of Oversight. The current Acting Deputy Assistant Director for Trustee Oversight is Jason B. Shorter, available for contact via (202) 503- 6967 (ph) or jason.b.shorter@usdoj.gov (email). Except where the USTP COR is specifically designated, communications to the Office of Oversight shall take the form previously stated.

• UST Representative - The individual designated by the U.S. Trustee to serve as the mailto:ch7trusteeoversight@usdoj.gov mailto:jason.b.shorter@usdoj.gov auditor’s point of contact for the duration of the audit. Generally, the UST Representative will be a person who regularly monitors the trustee and is, therefore, familiar with the trustee’s financial operations, interim reports, and prior audits and reviews.

• Local rules - The procedures or rules promulgated by the Court.

• Regional or local practices - Local implementation of the Handbook, that is quite often stricter than the Handbook.

1.3 Objective

The purpose of the audit is to assess the quality of the trustee’s accounting for, and safeguarding of, bankruptcy estate assets and related internal controls and cash management practices and procedures, in accordance with the Handbook for Chapter 7 Trustees (“Handbook”), effective October 1, 2012.

The Chapter 7 trustee is a fiduciary charged with protecting the interests of estate beneficiaries (creditors) as well as the debtor(s). The trustee collects funds from the liquidation of estate assets for distribution to creditors. The trustee should administer the estate to maximize the amount to be distributed.

Among the duties set forth in § 704, the Chapter 7 trustee must:

• Collect and reduce to money the property of the estate and close the estate as expeditiously as is compatible with the best interests of the parties in interest;

• Be accountable for all property received;

• Investigate the financial affairs of the debtor;

• If a purpose would be served, examine proofs of claim and object to the allowance of any claim that is improper; and

• Make final reports and final accounts of estate administration with the U.S. Trustee and the court.

Property of the estate is defined in § 541. All legal and equitable interests of the debtor, wherever located and by whomever held, are property of the estate. Property of the estate includes any property that the debtor acquires or becomes entitled to acquire within 180 days after the petition date by way of inheritance, property settlement or divorce decree, or life insurance. See Handbook Chapter 4.C.

The trustee has the duty and responsibility to insure and safeguard all estate property and property that comes into the trustee’s hands by virtue of his or her appointment. In those cases where the property appears to have value for the estate, the trustee should obtain control over the property (which may include changing locks at the premises, hiring guards, etc.) and determine the extent and value of the property.

The trustee should also either determine that the property is adequately insured or immediately obtain insurance in an amount sufficient to protect the estate property (which may include insurance against fire, theft, vandalism, liability and other possible hazards) and take any other steps which may be reasonably necessary to preserve the assets. The trustee should request proof of insurance from the debtor and should ensure that it is continued for the benefit of the estate. See Handbook Chapter 4.C.3.

Abandonments of property are governed by § 554. A trustee should abandon any estate property that is burdensome or of inconsequential value to the estate. Property listed by the debtor in the petition, schedules, and statement of financial affairs (i.e., scheduled property) that is not administered before the case is closed is deemed abandoned upon entry of the order closing the estate. See § 554(c). The trustee should not rely upon the deemed abandoned provisions of § 554(c) if the property may expose the estate to some kind of liability. In that event, the trustee should formally abandon the property pursuant to § 554(a). See Handbook Chapter 4.C.3.e.

Recovery, preservation, liquidation, and distribution of estate assets are covered in Chapter 4 of the Handbook. See Chapter 4.C.9.

Deposit and investment of estate funds are covered by § 345. The trustee may deposit or invest estate funds as will yield the maximum reasonable net return on such money, considering the safety of such deposit or investment. In appropriate situations, the trustee may maintain money of the estate in non-interest-bearing accounts. Chapter 5 of the Handbook provides detailed information regarding the types of accounts and investments that a trustee may use. In addition, Chapter 5 covers the USTP’s policies and requirements regarding financial record keeping and reporting by chapter 7 trustees.

The trustee’s compensation, which is subject to the maximum percentages in § 326, and the reimbursement of actual, necessary expenses are governed by § 330. The U.S. Trustee reviews the trustee’s fee applications and objects when appropriate. A court order is required prior to interim or final payments of trustee compensation. See Handbook Chapter 4.C.11.

To properly perform the trustee’s duties and effectively administer asset cases, the trustee must establish an appropriate accounting system and maintain financial records on a contemporaneous basis for each bankruptcy estate. The USTP developed a uniform record keeping and reporting system that each Chapter 7 trustee must use. It is described in Chapter 5 of the Handbook and in the Forms and Instructions and Sample Case sections of the Handbook’s Supplementary Materials.

The financial recordkeeping and reporting system consists of the uniform transaction codes (UTCs), akin to a uniform chart of accounts, and three primary records: (i) the Individual Estate Property Record and Report (Form 1), (ii) the Cash Receipts and Disbursements Record (Form 2), and (iii) the Summary Interim Asset Report (Form 3). See Handbook Chapter 5.A. The trustee prepares Form 1 to summarize the status of asset administration in a bankruptcy case. See Forms and Instructions in the Supplementary Materials for a complete description of Form 1. Form 2 serves as a check register and accounts for the deposits and disbursements in the case. See Forms and Instructions in the Supplementary Materials for a complete description of Form 2. Finally, Form 3 lists the asset cases administered by the trustee during the reporting period. Further information about Form 3 can be found in the Forms and Instructions section of the Supplementary Materials. Utilizing these records, the trustee provides an interim report (also known as the Trustee Interim Report or TIR) to the U.S. Trustee annually or for such period designated by the U.S. Trustee and upon request.

Preparation of the TIR is the responsibility of the chapter 7 trustee.

A typical Chapter 7 trustee operation consists of the trustee and one or two trustee assistants.

As a result, there are some special considerations regarding segregation of duties (see Handbook Chapters 5.B and 5.C). Since it is not possible to adequately segregate duties in many Chapter 7 trustee operations, the trustee is required to: (i) actively supervise the employees and independent contractors who perform bankruptcy-related duties; and (ii) segregate the record keeping and cash handling duties, to the extent possible, so that estate assets are safeguarded.

The computer systems used by the trustees also impact the ability to segregate duties. In these systems, receipts and disbursements are recorded in the case accounting records as part of the deposit and check writing process. The computer systems do, however, afford the trustee the ability to set up security access features which can limit an employee’s access to certain parts of the software. For more information on trustee computer systems, see Handbook Chapters 5.B and 5.G.

In general, estate files may be maintained in paper or electronic form. See Chapter 5.G.5 of the Handbook for specific requirements. A dditionally, a “Guide for Chapter 7 Trustee Auditors– Examples of Supporting Documentation and Authorization for Transactions” is provided at Exhibit 2.

1.4 Scope of Services

The Contractor shall provide all services necessary to support the USTP as specified herein.

All work and services shall be performed in accordance with the terms and conditions of the resulting contract. Any additional service disciplines will be addressed and negotiated as needed between the Contractor and Contracting Officer (CO).

2. Statement of Work

2.1 General Requirements

The audit affords an opportunity to review the trustee’s estate files and to test the trustee’s internal controls and accounting procedures. It is not the intent of the audit to second-guess the trustee’s business or professional judgment. The audit objectives are to:

1. Determine if the trustee has established an appropriate system of internal controls to safeguard estate funds and property and to ensure integrity of financial record keeping and reporting;

2. Determine if the trustee maintains an appropriate asset administration system to adequately and promptly collect, protect and administer estate funds and property in keeping with the trustee’s fiduciary duties; and

3. Verify that internal controls, record keeping and reporting procedures, and asset administration procedures are operating effectively to ensure that all estate funds and property are accounted for and adequately protected against loss.

Generally, the audit period encompasses the twelve-month period covered by the trustee’s most recent TIR, unless a longer period is designated by the Office of Oversight.

At the discretion of and upon written notice issued by the USTP, fieldwork may be conducted remotely. In such event, the USTP will set forth separate procedures for the conduct of remote audit fieldwork depending on the circumstances. However, for purposes of this SOW, it is presumed that all audit fieldwork will be conducted at the trustee’s office,4 and such fieldwork shall occur over contiguous days. Audit fieldwork should be scheduled no earlier than 45 days after the end of the Trustee Interim Report (TIR) reporting period.

To the extent possible, the fieldwork should be performed no later than 120 days after the end of the TIR reporting period. The trustee should be given no less than two and no more than four weeks advance notice of the audit.

The local U.S. Trustee’s office (OUST) will provide a copy of the TIR that will be audited.

The TIR is due to the OUST no later than 30 days after the end of the reporting period, unless an extension is granted. The auditor should request the report from the OUST just prior to or concurrent with scheduling the audit.

The scope of the audit generally encompasses a review of the trustee’s: (i) asset administration and case progress review; (ii) receipts and disbursements; (iii) segregation of duties; (iv) banking; (v) computer operations and file maintenance; and (vi) domestic support obligations.

The auditors will select samples of cases, assets, and transactions to test. Because the focus of the audit is on the trustee’s current procedures and recent transactions, the transaction sample, in general, is limited to transactions that occurred within two years of the TIR ending date.

The sample of assets is used for testing certain of the trustee’s asset administration procedures and for testing the accuracy of selected information on Form 1. The auditor will determine whether the information provided on Form 1 accurately reflects the status of the case as depicted in the trustee’s files.

4 For audit fieldwork, the location must be where the trustee operation is based (i.e., where the trustee is located).

If there are any difficulties in arranging this, contact the Office of Oversight.

The sample of transactions is used for testing certain of the trustee’s internal controls and for testing the accuracy of information on both Form 1 and Form 2. The auditor will determine whether Form 1 and Form 2 accurately depict the financial transactions that have occurred in the case.

The audit is to be conducted in accordance with generally accepted government audit standards for performance audits, except that: (i) the Audit Report is to be issued to the U.S.

Trustee rather than the trustee (auditee); (ii) the report contains no recommendations and is issued closed; and (iii) findings are limited to identification of criteria and conditions.

Based on the work performed as outlined in the SOW, the auditor shall express an opinion on the: (i) adequacy of the trustee’s internal controls over bankruptcy estate assets; (ii) the adequacy and accuracy of the bankruptcy estate records and reports; and (iii) compliance with the Handbook, Code, FRBP, and local rules and practices (to the extent that these laws, rules and requirements apply to the areas covered by the audit).

The opinion will state that the trustee’s practices and procedures are either “adequate,” “adequate, except for” certain listed deficiencies, or “inadequate” because of certain listed deficiencies. Sample opinion language and some suggested guidelines for determining the opinion are presented in Exhibit 4. The probable audit opinion should not be discussed with the Chapter 7 trustee.

Whenever it is determined that an “inadequate” opinion will be issued for a Chapter 7 trustee, an audit firm representative should notify the UST Representative and the Office of Oversight. This notice should be given as soon as possible after fieldwork is completed;

preferably, notice should be given as soon as the determination is made and well before the issuance of the Audit Report.

A sample Audit Report is attached in Exhibit 5.

2.1.1 Engagement Team

The engagement team refers to the individuals that will perform work, including fieldwork and preparing the report, for the audit of each individual trustee audited pursuant to this SOW. Additionally, the work of the engagement team for each individual audit, including the final report, shall be supervised by, reviewed, and signed by a CPA member of the audit firm.

A. Minimum Qualification of Audit Firm: At least one person supervising each audit that holds a valid Certified Public Accountant credential and has at least 5 years’ experience performing audits of bankruptcy trustees appointed under chapter 7, 12, or 13 of the Bankruptcy Code. In the discretion of the Office of Oversight, Executive Office for U.S. Trustees, similar experience auditing fiduciaries or working on bankruptcy-related matters may be accepted as substitute experience.

B. Audit Fieldwork: At least one member of the fieldwork team shall be a member of the audit firm that is a Certified Public Accountant, unless exception is granted by the Office of Oversight, Executive Office for U.S. Trustees, upon request in writing by the audit firm to the Office of Oversight. For other members of the fieldwork team, such members must hold, at a minimum, a bachelor’s degree in accounting or a closely related field.

2.1.2 Staffing

The Contractor shall provide a trained and experienced staff with extensive expertise and knowledge as required herein to perform the work specified in this SOW under the terms and conditions of the contract. All Contractor personnel must be familiar with technology, equipment, and software used in an office environment, specifically using Microsoft Office Products, and other programs operating on a Microsoft Windows 11 Enterprise.

Contractor personnel shall also have demonstrated high proficiency in ability to communicate orally and in writing and implementing/executing instructions.

Contractor shall continuously monitor, manage, and control the work.

The Contractor must ensure the continued assignment of personnel from project start to project finish. In the event an individual becomes incapacitated or leaves the company, the Contractor shall notify the USTP COR promptly. It is the responsibility of the Contractor to have qualified and/or cleared (if required) individuals on staff to accomplish the task with a minimal learning curve.

The Government reserves the right to review the qualifications of all staff selected to work on the contract before assignment. The Government reserves the right to judge the qualifications and acceptability of any individual proposed by the contractor for any position and may require the contractor to replace an individual whose qualifications and suitability are judged deficient with written notification.

During the contract, the Contractor shall provide individuals that are fully qualified for each relevant position. The Government may request to review qualifications to include experience and education if the position requires such.

When requested by the USTP COR, the Contractor shall attend briefings, other meetings, and/or on-the-job training provided by the USTP. Briefings are normally held during normal working hours (EST).

The Government reserves the right to request in writing that the Contractor reassign Contractor personnel whose services are no longer required by the Government for such reasons as quality of performance, changes in project requirements, etc. An official request for such a reassignment will be provided to the Contractor in writing by the USTP COR.

2.1.3 Contractor Primary Point of Contact (POC)

The Contractor shall designate a central point of contact who has the full authority to act for the Contractor and is accountable for the technical correctness, timeliness and quality of all services performed and items delivered. The USTP COR shall alert the Contractor POC of any problems related to technical correctness, timeliness and quality of all services and products at the earliest opportunity.

2.2 Task Areas

To perform the contract, the Contractor must provide personnel that are able to fill the duties that correspond with the task areas described in the statement of work.

2.2.1 Audit Planning

A. Contact the trustee to arrange a mutually convenient date for fieldwork and notify the UST Representative of the date. Note the timing constraints and deadlines described under General Requirements.

B. Send a confirming letter to the trustee with the Internal Control Questionnaire (ICQ), with a two-week deadline for returning it to the auditor (see Exhibit 1). The ICQ is further described under Pre-Fieldwork. Send copies of the letter (without attachments) to the UST Representative and a blind copy to the Office of Oversight.

C. Confer with the UST Representative prior to the commencement of fieldwork regarding any concerns or unusual items noted by the U.S. Trustee’s staff. Ask if the U.S. Trustee would like any specific cases included in the audit sample.

D. Request the following from the UST Representative:

1. The most recent TIR (Forms 1, 2, and 3) submitted by the trustee. Generally, the trustee submits an electronic version (in PDF), and a spreadsheet version suitable for sorting and sample selection is also available.

2. The web address for the applicable bankruptcy court and the e-mail address and phone number for the auditor’s local point of contact.

3. The quarterly bank report(s) (as of the interim report period ending date) from the authorized depositories used by the trustee.

4. Copies of the local court rules and regional U.S. Trustee practices (if any), including any policies regarding disbursements that do not require court orders;

auctioneers (e.g., bonding, timely remittance of auction proceeds, U.S. Trustee’s or court’s list of qualified auctioneers (if any)); securing, inventorying, and insuring estate assets; and investing estate funds. The auditor may be able to review and download the local rules from the bankruptcy court’s website.

5. The report from the most recent audit or U.S. Trustee field exam of the trustee’s operation. If there is no prior audit or field exam, request the prior TIR review letter or Case Administration Review report.

6. A list of cases in which final reports (TFRs) were filed after the interim reporting period.

2.2.2 Pre-Fieldwork

A. Prior Reviews of the Trustee’s Operation

1. Review the most recent audit, U.S. Trustee field exam, TIR review letter, or Case

Administration Review report. While it is not necessary to verify that prior findings have been corrected, be alert for deficiencies that are repeated in the current audit.

2. The presence of recurring or “repeat” deficiencies should be mentioned in the Background section of the audit report and specifically identified in the body of the Audit Report.

B. Internal Controls

1. Review the Internal Control Questionnaire (ICQ).

2. When looking for opportunities to strengthen internal controls, keep in mind the practicalities of efficiently running a small trustee operation. For example, the trustee’s active involvement can mitigate the risks associated with a lack of segregation of duties. Further, it is acceptable for the trustee to personally perform all the accounting and record keeping duties (see Handbook Chapter 5.B for the minimum accounting procedures that the trustee is expected to perform).

C. Case Reporting

1. Verify the accuracy of the trustee’s case reporting by comparing Form 3 to the bank report obtained from the UST Representative. The objective is to verify that Form 3 includes all cases with funds. Note that because the trustee’s caseload is not confirmed with the Clerk of the Court, the auditor cannot verify that all cases assigned to the trustee were accounted for in Form 3. (If the bank report is not available from the UST Representative, contact the Office of Oversight.)

2. Identify all cases with funds that are excluded from Form 3 and any estate bank balances that differ substantially from the Form 3 balances and obtain an explanation from the trustee. However, if the case disposition in Column 7 of Form 3 is TFR, it is not necessary to investigate a substantial difference in the bank balance between Form 3 and the bank report. If appropriate, report the omitted cases and account balance differences in the Audit Report.

• It is not necessarily a deficiency if the bank balance per Form 3 does not match the balance on the bank report. These are often timing differences due to deposits in transit or outstanding checks. Also, a bank report may list a case in which the trustee is serving as a chapter 11 trustee. Unless such a case was converted to chapter 7 during the reporting period, it is proper for the trustee to have excluded the case from Form 3.

3. If Column 7 on Form 3 reflects that a case with funds has an NDR or TDR, or has been converted, dismissed, or reassigned, report the case numbers and account balances in the Audit Report.

4. Annotate Form 3 so that all cases with funds are listed.

D. Sample Selection for Audit Fieldwork

1. Three samples (case, transaction, and asset) are selected for testing during the audit. Do not disclose the sample cases, transactions, and assets to the chapter 7 trustee or UST Representative prior to the start of fieldwork.

2. Form 3, as modified above, is the starting point for determining the population from which the case sample is selected. The following cases are excluded from the population:

a. Each no-asset case that shows a date in column 7 of Form 3 for the trustee’s report of no distribution (NDR) – each case with an NDR should have a zero balance in column 4 (total funds on deposit or invested).

b. Each asset case for which the trustee has filed a final report (TFR) or final account (TDR). Cases with estimated TFR dates (designated with an “e” in column 7 of Form 3) are not eliminated from the universe unless a TFR was filed after the reporting period (check the list provided by the UST Representative);

c. Each case that was an operating chapter 7 case during the reporting period;5 and

d. Each case that was converted to another chapter, dismissed, or reassigned to another trustee (designated by C, D, or R, respectively, in Column 7 of Form 3).

5 If a case is excluded because the trustee is operating a business in chapter 7, ensure there is an operating order from the court (except certain rental property where collecting rents is incidental to the administration of the case).

The collection of rents for a single-family home is not considered to be an operating chapter 7 case for the purpose of this audit.

3. From the population derived above, select 15 sample cases based on the criteria listed below. (If, however, the population is less than 15 cases, the case sample shall comprise the total population.)

a. The sample cases should contain a variety of assets, including, if present, those listed in Step D.4.b (below).

b. Six of the sample cases should have the highest remaining value in Column 6 of Form 1. Another six should be selected from among those cases having the highest cash balances. The final three sample cases should be selected from the remaining cases.

c. Include any cases requested by the UST Representative. (However, if a TFR has been filed in the case, ask the UST Representative if the case should still be included in the sample.)

• It is recommended that the auditor select several alternate cases if a TFR was filed for a sample case after the reporting period.

4. Review Form 1 from the cases selected above and choose 15 assets for the asset sample.

a. The assets selected for testing should have value to the estate, as determined by reviewing Column 3 and the Notes section on Form 1.

• Value to the estate generally means that the liquidation of the asset is expected to result in a meaningful distribution to creditors. The auditor should review Column 3 and the Notes section on Form 1 to determine if an asset has value to the estate. (See Handbook Chapter 4.C for further information.)

b. The sample of assets must include at least two of each of the following, if present:

1) Personal property with value to the estate (to test inventorying, insurance, and sale procedures), with priority given to an asset that has been or will be sold by auction;

2) Preference, fraudulent conveyance, or personal injury action (to test supervision of professionals and other procedures);

3) An asset with payments over time (e.g., accounts receivable, notes receivable, sale of asset on an installment basis); and

4) Real property with value to the estate.

c. The sample of assets must include a mix of assets that have already been liquidated, assets that the trustee is pursuing, and assets that are being liquidated (e.g., collection of receivables or installment payments, an auction to be held in the future, real property held for sale, pending litigation). The sample cannot consist solely of assets that are fully administered as of the TIR reporting date.

d. Choose one asset that was formally abandoned, as indicated with an OA in

Form 1, Column 4, if present.

e. Do not choose assets that are exempt, have no equity, or have a nominal value as determined by the trustee on Form 1, Column 3.

5. The transaction sample is drawn from the sample cases. The sample should consist primarily of Form 2 transactions that occurred within two years of the TIR ending date and should include the following:

a. All transactions related to the sample assets within the two-year period (e.g., real estate sale, personal property auction, payment to a professional, and collection of receivables, rent payments and preferences); and

• If there are no transactions for a particular sample asset that occurred within the past two years, select transactions that occurred after the most recent audit or field exam.

b. Additional 10 substantive transactions.

• A substantive transaction is, for example, a receipt from the sale or liquidation of an asset or a check written to a professional. A substantive transaction may be a small, recurring charge such as storage fees. Do not include items such as bank interest, bank account transfers, bank service charges, court filing fees, and bond premiums.

• If the trustee is serving as the successor trustee in a case, do not review transactions that occurred during the prior trustee’s administration.

• If the case converted from chapters 11, 12 or 13, do not review transactions that occurred prior to the conversion to chapter 7.

E. Review the bankruptcy petitions and schedules, dockets, and court orders on-line, prior to the start of fieldwork. (As noted elsewhere, the auditor needs a PACER account to access the bankruptcy court’s electronic information.).

2.2.3 Audit Fieldwork

A. Entrance Conference for Fieldwork:

1. Conduct an entrance conference with the trustee to explain the purpose and scope of the audit. Inquire about the trustee’s office hours and the availability of a copy machine. Plan to work within the trustee’s normal office hours and minimize usage of the trustee’s copy machine, telephone, and other office equipment to a minimum. Ask about the trustee’s availability during fieldwork.

2. Interview the trustee about his or her internal controls and procedures by discussing any potential problems or unclear responses to the ICQ. Refer to the Pre-Fieldwork section for additional information pertaining to the ICQ.

3. Inquire about access to the trustee’s paper and electronic estate files and the location of supporting documentation. Be sure to mention that access is needed to all estate files, including bank files, financial files, and case files. Some trustees prefer to retrieve the files for the auditor; other trustees allow the auditor to pull the files as needed. Acceptable audit evidence will exist in a variety of formats, such as notations in the computer software’s note and memo fields; notes to the file; notations on the petitions and schedules, notes written on correspondence;

records of telephone conversations; e-mails; and time records prepared by the trustee to document the time spent administering the case.

a. If something cannot be located, ask the trustee or the trustee’s assistant, as the item may be stored in a separate location or currently in use.

b. Many trustees have converted to paperless offices. Auditors may find that many traditional paper records have been replaced with electronic versions.

The trustee is not required to print copies and keep them in a paper file (see Handbook Chapter 5.G.5 for records that must be maintained in a paper format).

c. If PACER access is needed while at the trustee’s office, the auditor should use his or her own PACER ID and password so that the trustee does not bear the cost.

d. If a paperless filing system is maintained, ask the trustee to download the files for the sample cases to electronic media for use while at the trustee’s office.

Documents may be copied from the electronic source if deemed necessary for the working papers

B. Asset Administration and Case Progress Review (References: 11 U.S.C. §§ 522, 554 and 704(a)(1); FRBP 2015(a)(2); Handbook Chapter 4, esp. 4.C.3, 4.C.9, 4.C.10, and 4.C.13; Handbook Chapter 5; Supplementary Materials: Forms and Instructions and Sample Cases).

1. For each of the sample cases, review the docket, the debtor’s schedules and statement of financial affairs (original and amended, if any), and the trustee’s estate files (as defined above), with particular attention to any unscheduled assets or assets that have not been pursued (i.e. tax refunds, pending lawsuits, fraudulent transfers, preference and/or assets in the hands of third parties).

a. Does Form 1 list all the assets identified in the estate file, on the court docket, and in the debtor’s schedules?

b. Does the docket or estate file indicate any assets not on Form 1?

c. For scheduled assets, are the asset descriptions in Column 1 and the asset values in Column 2 of Form 1 consistent with the originally filed Schedule A/B? If the asset values on the original Schedule A/B were amended by the debtor, has Form 1 been updated? Asset descriptions on the schedules may be shortened for Form 1 but must accurately and clearly describe the asset.

d. For unscheduled assets (those assets added by the debtor on amended

Schedule A/B and those assets discovered by the trustee), are the asset descriptions in Column 1 and the asset values in Column 2 consistent with the documentation in the estate files or, when applicable, the amended Schedule A/B filed by the debtor? Do not report as an audit finding any unscheduled assets that have not been identified with a “u”.

e. For cases converted from Chapter 11, the Form 1 must report the assets remaining in the case at the time of conversion. Hence, the Form 1 columns 1 and 2 will likely not match the debtor’s originally filed Schedule A/B. The trustee should maintain a record in the estate file describing how the remaining assets in the case were determined. This determination will preferably be based on the FRBP 1019(5) report. However, if the FRBP 1019(5) report does not exist, the trustee is required to have other documented means to determine the remaining assets. Verify Form 1 against these records.

In addition, verify that the trustee opened new bank accounts when the case converted. Form 2 should not contain transactions that occurred prior to conversion. (See Handbook Chapter 4.N and the Forms and Instructions in the Supplementary Materials)

f. Do the trustee’s files reflect any offers or delinquencies that the trustee has not followed up on?

g. Is case administration moving along in an expeditious manner as determined by activity on the docket, transactions on Form 2, and notes under Major Activities Affecting Case Closing?

h. Are there any undeposited checks in the estate files or other location (e.g., a safe)? If such checks are found, determine whether they are being held in accordance with Handbook Chapter 5.D:

1) Verify that the funds have been recorded in the receipts log.

2) Determine that the funds are properly safeguarded.

3) Verify that the trustee is promptly and properly handling the funds (e.g., the funds should have been received within the past 30 days and the trustee should be actively seeking a court order or researching the appropriate disposition of the funds).

i. If the review of the estate files indicates that estate property was lost, stolen or damaged, did the trustee promptly notify the U.S. Trustee and make an insurance claim? (Handbook, Chapters 4.C.3 and 4.C.10.g. Appropriate evidence could include a record of a phone conversation and a copy of the claim.)

2. Review the trustee’s system for reviewing case progress (Handbook Chapter

4.C.13). While evaluating the adequacy of the trustee’s procedures is beyond the scope of the audit, verify that the review is conducted at least quarterly. Evidence could consist of an annotated Form 3 or set of Form 1s or dated notations in the estate files or case management system. If the trustee maintains the quarterly case progress review records by individual case rather than in the aggregate (e.g., on Form 3), review the sample cases for evidence of regular and ongoing notations and administration.

3. For each sample asset:

a. If an asset has been sold or liquidated, does the proper amount appear in

Column 5?

b. If an asset was formally abandoned pursuant to § 554(a), does “OA” appear in Column 4?

c. If an asset is fully administered, does “FA” appear in Column 6?

d. If an asset is still being administered, does Column 6 reflect the gross value remaining to be recovered and is the status of administration accurately described under “Major Activities Affecting Case Closing”?

4. If a professional6 has been employed to help the trustee administer the sample asset:

6 For purposes of the audit, professionals include attorneys, accountants, appraisers, auctioneers, collection agents, brokers, private investigators, farm managers, etc. Handbook Chapter 4.C.10. Internet auction providers may be

a. Has the retention of the professional been authorized by court order?

(Handbook Chapters 4.C.9 and 4.C.10.)

b. Is it evident that the trustee is supervising the professional? (Handbook

Chapter 4.C.10.a.)

Examples: the untimely receipt of the proceeds from an auction sale may indicate the trustee is not adequately supervising the auctioneer. The absence of email, correspondence, or other evidence of current or recent communication with an attorney employed to recover receivables or preferences may indicate the trustee is not adequately supervising the attorney employed by the estate.

c. Is the trustee aware of the status of the matter?

d. Have any funds been collected by the professional? If so, were they promptly turned over to the trustee (i.e., within 30 days or in accordance with a written agreement)? If not, has the trustee followed up? (Handbook Chapters 4.C.9, 4.C.10, 5.D, 5.G.)

Some professionals may deduct their fees from the funds collected and remit the net proceeds to the trustee. If you encounter this situation, ensure it complies with the court order when completing Disbursements Step D.2.b.

• Funds paid to the trustee or attorney for the trustee pursuant to a pending sale or settlement require special consideration. They may not be held, undeposited, nor commingled with personal, business, or law firm accounts, with one exception. The funds may be deposited to the trustee’s or outside counsel’s attorney trust account only if pursuant to a written escrow agreement or court order. The trustee must disclose on Form 1 where the funds are being held. Absent this written agreement or court order, the funds must be held in a segregated escrow account or in a trust account established for this purpose. (See Handbook Chapter 5.D.3 for further information.)

• The trustee is responsible for supervising the professional and promptly obtaining the funds collected by the professional.

5. If there was a sale or settlement in connection with a sample asset, or it is pending, verify that it has been properly noticed and authorized by court order, if required.

professionals as well. See Handbook Chapter 4.C.9.e.

6. If the trustee sold the sample asset directly to the buyer via the Internet, did the trustee ensure that the sales proceeds were received and cleared the bank before shipping or releasing the goods to the buyer? (Handbook 5.G.2.d.)

7. If the purchase price of the sample asset is or was paid in installments, is the repayment period reasonable? If appropriate, did the trustee obtain and perfect a security interest in the estate assets sold or take other suitable precautions to protect the estate against default by the purchaser? (Handbook 4.C.9.h.)

8. If a sample asset was or will be sold by traditional or Internet auction:

a. Is/was the auctioneer bonded and insured (if applicable)?

• Look for evidence of a phone call or letter to the U.S. Trustee inquiring about the adequacy of the auctioneer’s bond or for other efforts to check the bond prior to allowing the auctioneer to take possession of the estate property.

• Also, look for a certificate of insurance or other evidence that the trustee verified that the auctioneer maintained such insurance. (Handbook Chapters 4.C.9.e, 4.C.10.g, and 5.G.2.c.)

b. If the auctioneer held, or is holding the asset, longer than 60 days, what is the reason for exceeding 60 days and does it seem reasonable? What steps has the trustee taken to determine that the assets are intact and secure? Do the trustee’s actions seem sufficient? (Handbook Chapters 4.C.3.a and 4.C.10.g.)

c. If a sample asset is an accounts, notes, or mortgage receivable:

• Did the trustee promptly obtain the debtor’s records regarding the asset?

• Is/did the trustee promptly and actively attempt to collect or sell the receivables?

• Does/did the trustee maintain a tracking system to monitor receivables and does the tracking system comply with Handbook Chapter 5.A and 5.G.1?

Note that Form 1 and Form 2 may be an acceptable receivables tracking system for a single receivable if the forms contain all the elements described in the Handbook.

• Are/were payments received on schedule? If applicable, are payments current at the time of fieldwork or, if not, has the trustee taken action to collect the delinquent payments?

• If the value of the receivables appears to exceed the security interest (if any), did the trustee pursue the excess value?

d. If a collection agent is pursuing receivables on behalf of the trustee:

1) Did the trustee send the initial demand letters? (Handbook Chapter 5.G.1.)

2) Does the trustee get regular updates from the collection agent regarding the status of the collection efforts?

9. If Form 1 indicates that a sample asset was formally abandoned by the trustee pursuant to § 554(a):

a. Is there an allowed Notice of Abandonment, and is the abandonment properly supported? (Handbook Chapter 4.C.3.e.)

b. If the asset appears to have equity, after deducting the exemption and secured interest (if any), and there is no documentation in the trustee’s estate files to support the decision to abandon, ask the trustee to explain how the decision was reached. (Handbook Chapter 4.C.3.e.)

10. If a sample asset is real or personal property with value to the estate:

a. Did the trustee obtain the keys, change the locks, or hire security guards, if appropriate? (Handbook Chapter 4.C.)

• Generally, the trustee should exercise discretion and general business judgment in determining when to exercise physical control over assets.

The trustee or designee should physically secure real estate and other tangible assets that have material value to the estate when there is a significant risk of dissipation of value from damage, theft or other type of loss.

For example, in a business case with significant inventory and incoming receivables where the principals are uncooperative, it may be necessary to change the locks immediately, remove all books and records, stop mail deliveries and have mail forwarded to the trustee, and hire a guard to watch the premises.

In a small business case where the business debtor was a service provider that operated from the owner’s home, it may be adequate to remove books and records, forward business mail and personally inspect the premises for undisclosed assets.

b. If the asset involved business operations, did the trustee verify that operations ceased upon the filing or conversion of the case under chapter 7?

(See Handbook Chapter 4.C.)

c. Did the trustee inventory the property, when applicable? (See Handbook

Chapter 4.C.3.a, which was updated effective April 1, 2017.)

• The trustee should exercise discretion and general business judgment in determining when a detailed inventory of personal property is necessary.

• Generally, the trustee or designee should conduct an inventory of personal property when the trustee believes there may be some material value to the estate. For some assets, the trustee should conduct the inventory and secure the assets within a few days of being appointed to the case. In other circumstances, it might be appropriate for the trustee to wait until the § 341(a) meeting, or shortly thereafter, to take an inventory. An expeditious inventory could be expected for a business inventory or for items with a high dollar value. Time records can be used as supporting documentation as to when the trustee acted. (See Handbook Chapter 4.C.3.a.)

• Note that the trustee may document the inventory by making notations on the schedules or in some other fashion. It is not necessary to create a separate inventory list if there is some documentation in the file which indicates when the trustee made the examination and which items are being acknowledged as “received” by the estate. The inventory must be sufficient to enable the trustee to later verify whether an auctioneer or other liquidator has accounted for all property turned over for sale. (See Handbook Chapter 4.C.3.a and 4.C.10.a.)

1) Examine the trustee’s documentation of the inventory to determine if it complies with the Handbook.

2) Determine if the inventory was completed timely.

3) Does it appear that the trustee took steps to reconcile the inventory to the debtor’s schedules or otherwise took steps to determine that all listed assets were received from the debtor?

4) If an auctioneer, appraiser, or other type of liquidator took the inventory, did the trustee have a reasonable method for supervising them? (See Handbook 4.C.10e and 4.C.10.g.)

d. Did the trustee obtain casualty insurance or ensure it was continued for the benefit of the estate, when applicable? If the asset could not be insured, was it liquidated as quickly as possible in a reasonable manner?

• The trustee should exercise discretion and…