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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. According to the precise terms of Policy 495, the seven volatility screens are not determinative of whether P&Ls are “insufficiently matched.”

Accrual 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.

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 accrual 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.

Appeal panelists need guidance on this issue

Regretfully, evidence suggests that even the neutral, third-party appeal panelists are misinformed about the role the seven volatility screens play. Presumably this misunderstanding is exacerbated by poor lawyering on the part of some claimant lawyers. On numerous occasions appeal panelists have lamented the failure of claimant’s counsel to provide briefing support. If a claimant’s attorney cannot be bothered to file an appellate brief in the first place, you can bet that same attorney has no idea how Policy 495 is supposed to work. Hence, we are left with a corpus of appeal panel decisions that wrongly elevate the importance of the seven screens.

The following is an excerpt from Appeal 2015-346, released in March 2015 by the Claims Administration. One will never know whether this particular claim was supported by truly insufficiently matched P&Ls, as it appears that the claimant’s counsel in this instance either conceded the issue or failed to educate the appeal panelist on the proper application of Policy 495’s seven volatility screens. This panelist appears to be under the impression that matching status is governed by if / then logic – if a trigger is hit, then the P&Ls are insufficiently matched. As discussed above, as well as here, here and here, this is incorrect.

Appeal 2015-346
The decision in Appeal 2015-346 is but one of dozens of appeal decisions where a panelist misunderstands the importance, or lack thereof, of the seven volatility screens. Only through the application of professional judgment and the documentation of same may a P&L be deemed insufficiently matched. The occurrence of one or more triggers is not sufficient to support such a finding.

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.

UPDATE 7/27/15:

Additional examples of appeal panelists misunderstanding the precise requirements of Policy 495:

 

Appeal 2015-359
In Appeal 2015-359, the appeal panelist misstates the proper application of Policy 495. Triggering one or more of the seven screens is not definitive of an insufficiently matched P&L.

 

In Appeal 2015-260, the appeal panelist misstates the proper application of Policy 495. Triggering one or more of the seven screens is not definitive of an insufficiently matched P&L. Rather, such trigger simply means the claim shall be siloed for "further matching analysis" to determine if in fact the P&Ls are sufficiently matched.
In Appeal 2015-260, the appeal panelist misstates the proper application of Policy 495. Triggering one or more of the seven screens is not definitive of an insufficiently matched P&L. Rather, such trigger simply means the claim shall be siloed for “further matching analysis” to determine if in fact the P&Ls are sufficiently matched.

 

In Appeal 2015-201 the appeal panelist believes that IF a trigger is hit THEN one of the Policy 495 correcting methodologies must be applied.
In Appeal 2015-201 the appeal panelist believes that IF a trigger is hit THEN one of the Policy 495 correcting methodologies must be applied.

 

Appeal 2015-21
Appeal 2015-21

UPDATE 12/22/2015:

The recent appeal panel decision in Appeal 2015-1682 affirming the Claims Administration’s application of the original Exhibit 4C compensation methodology rather than Policy 495’s AVM methodology when two triggers were hit may signal that vendors are beginning to properly apply Policy 495.

Appeal 2015-1682
Appeal 2015-1682

See also Appeal 2015-1743:

Appeal 2015-1743
Appeal 2015-1743

Update 2/22/2016:

Policy 495 does not require the use of AVM or one of the specialized matching methodologies if a trigger is implicated. If there is a trigger event, Policy 495 does require that the vendor set the offending P&L aside for “further matching analysis.” If after such analysis the P&L is deemed sufficiently matched through the use of the vendor’s professional judgement, then the original 4C compensation scheme should be employed, not AVM (or specialized methodologies).

Unfortunately, appeal panelists continue to issue conflicting, and (respectfully) we believe erroneous, decisions. See Appeal 2015-1854:

Appeal 2015-1854
Appeal 2015-1854

But see Appeal 2015-1857 where the appeal panelist correctly recognized that

“where matching is ‘determined to be an issue’ upon application of the seven criteria, the Program accountants are to exercise their professional judgment to determine whether the claim is sufficiently matched based on an evaluation of the available information, including ‘the nature and complexity’ of the business in question.”

Appeal 2015-1857
Appeal 2015-1857

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