ICAEW.com works better with JavaScript enabled.

Findings from recent monitoring visits

QAD’s Alison Timperley has just finished a round of talks for R3 on some of the common issues from ICAEW’s recent monitoring visits. Here are the headline points from those sessions.

Fees, SIP 9 and reporting


Over recent years we haven’t seen too many cases of unauthorised fees or expenses, but the last 12 months have bucked that trend.

It’s not unusual for the firm or IP to have a fee checklist in place but these don’t always have appropriate prompts to make sure that fees are drawn correctly.

We’ve seen some issues with pre-appointment fees and expenses in administrations, and the fee checklists used haven’t avoided the errors.

In one example, the IP’s proposals commented that legal fees incurred pre-appointment, with a view to the administration, didn’t need separate approval under rule 2.67. Accordingly, the IP had paid the costs post-appointment from asset realisations without valid authority.

We have also seen some relatively basic errors, such a relying on oral approval and not getting a formal resolution and also reporting that a resolution was passed when the meeting was inquorate.

We are now starting to see instances where IPs are seeking approval for an increase in fees compared to the previous estimate. However, the IP hasn’t always explained the reasons for the excess or provided details of the additional work required.

SIP 9 and reporting

SIP 9 compliance has probably been one of the main recurrent themes over the last few years. There have been numerous changes to the SIP; the current version (from December 2015) has more focus on principles and narrative and it seems that many IPs find it challenging to comply fully, no matter what steps they take.

Regardless of the specific disclosure requirements, it’s always useful to ask yourself whether your report tells the stakeholder what’s happened in the period, how it was achieved and what’s left to be done. Also ensure that it provides an adequate commentary on expenses incurred, such as legal fees.

We have seen some reports that simply repeat narrative included in previous reports, which can be an attempt to mask a lack of activity and progression in the period.

We have also seen a number of basic errors including incorrect details of time spent, or misallocation of it. On one case the time summary was understated by 227 hours as it didn’t include any partner or manager time, which was easy to spot from a quick glance at the time analysis.

On another recent visit, no time had been allocated to investigatory matters or asset realisation work, although there had been work in both categories.

With regards to investigatory work, quite often the first progress report after the IP has completed their initial SIP 2 assessment, says that the IP has carried out the relevant duties but that confidentiality prevents further disclosure. While there may be potential prejudice to recoveries by disclosing too much, it’s often possible to say a bit more without prejudicing any ongoing work. For example you could say that you have completed an initial assessment which included gathering the company’s books and records and reviewing bank statements – that’s just normal procedure. And remember that paragraph 16 of SIP 2 specifically requires an IP to give creditors information about investigations; so we’d expect you to say that either no action is being contemplated or that work is continuing. Saying either shouldn’t prejudice the outcome of any investigations while remaining compliant with both SIPs 9 and 2.

Some IPs choose to provide links to guidance on fees and creditors’ rights. We have seen numerous examples of broken weblinks, especially those to third parties‘ webpages such as the ICAEW or R3 sites. If you are using a third party website you need to make sure that you check the links periodically. Updated guidance notes have recently been issued by R3 and are available on our website.

Cost doesn’t necessarily equate to value. SIP 9 requires that payments to an office holder or associates, and expenses incurred by an office holder, should be fair and reasonable reflections of the work necessarily and properly undertaken and you should consider this when billing. In some circumstances it may well be appropriate to write off some time costs or discount your time charges.

Notably in certain sectors expenses appear to have escalated in recent years resulting in concerns from the Insolvency Service, creditors and RPBs. This is bringing new focus to the principles-based requirements of SIP 9 and what it may or may not be reasonable for the estate to pay. If the work is part of the IP’s normal duties and responsibilities, then it may be unreasonable to outsource this and pay additional costs from the estate, just because you’re on a fixed or percentage based fee. You will need to be able to justify such approaches on a case-by-case basis.

Financial controls

Over the last few years we have seen a handful of cases where IPs or their staff have misappropriated estate funds and, as a result, the IPs’ licences have been withdrawn.

Generally in each of the instances we’ve seen, there has been some action that has triggered suspicions within the firm and which eventually resulted in the misappropriation being discovered. In some cases it had been enabled because a senior member of staff had asked others to override existing procedures and policies, which, if adhered to, could have avoided the problem.

It’s important that firms have a whistle-blowing policy in place, that staff are aware of it, and know who to contact with any concerns. If you’re in a small firm, that policy could include telling us as the IP’s authorising body.

It’s also useful for IPs to consider whether their processes remain fit for purpose. This could be looked at as part of your Insolvency Compliance Review. As an example, cheque logs used to be commonplace and would list all cheques received in the post so that clearance of funds to the correct estates could be confirmed. Cheques are becoming obsolete and have for some time been replaced by BACS remittances and electronic transfers. However, IPs don’t seem to maintain a BACS log to monitor remittances received and check that the funds are received in to the correct accounts. We have seen one example where funds were remitted to an IP’s private account instead of the insolvent estate. In this instance, if the firm had kept a BACS remittance log in the same way it kept cheque logs, it would have identified the missing funds much sooner.

Ethical and take-on issues

As with SIP 9 compliance, this area is one that regularly features when we feedback the issues we see on our monitoring visits.

It’s not uncommon for the pre-appointment work to be completed after appointment, or at least signed off post-appointment. In court work cases this might be because the IP is waiting for OR handover papers. But at least some of the work can usually be done with the knowledge in hand. It’s rare that the papers would add anything materially different and in any event, the pre-appointment documentation could be amended and updated as needed. We would always expect to see the ethical checks completed pre-appointment.

Some ethical considerations focus just on conflicts, forgetting that there are five fundamental principles.

Others refer to all five fundamental principles and conclude that there aren’t any threats to any of them at all. In some instances though, there have been actual or perceived threats but the IP hasn’t documented why they wouldn’t prevent them accepting the appointment.

Conversely, we see some very detailed ethical considerations justifying why previous fee paying engagements don’t present unmanageable threats. IPs should remember the perception of the situation. While fees earned may not be deemed material to the firm as a whole, on an individual basis, the quantum may still be significant to an outside observer.

Finally on ethics, while you can outsource your marketing, paragraph 400.65 of Part D of the code of ethics makes it clear that you remain responsible for marketing or publicity carried out on your behalf. We would expect IPs to be checking the websites of referrers periodically and documenting those checks. If you don’t like what you see, then you should be asking that the website be changed or giving some serious thought as to whether you should be working with that organisation.

Finally, we are sometimes asked if the IP’s licence allows the IP to accept an appointment in a particular geographical location. If you don’t know the answer, then it’s arguable that you aren’t sufficiently experienced in that regime to administer the case effectively.

Easy wins

Finally there are some easy wins that can help.

When we question the lack of a particular disclosure it‘s not uncommon to find that staff haven’t used a current template, have over-written a previous report or indeed have deleted disclosures prompted by the firm’s standard documents. Staff need to be aware of the importance of using your current standard documents, not least because you have invested in them, but more so because they should help ensure compliance with statutory and SIP requirements.

Make sure you or your staff have an easy-to-use follow up system that enables you to chase up outstanding correspondence efficiently so that cases are progressed on a timely basis.

And document your decisions and strategies, not to make life easy for QAD, but so that the file can stand alone and reflect what’s been done, and why.

Alison Timperley, Insolvency Manager, ICAEW

Insolvency and Restructuring Group, July 2017