Random Audit Quota

• S. 256 § 603
Section 603 of S. 256 sets out an uncodified duty, imposed on the Attorney General (in districts served by United States trustees) and on the Judicial Conference of the United States (in districts served by bankruptcy administrators) to conduct audits (1) of all information provided by the debtors in at least 0.4% of individual Chapter 7 and 13 cases, randomly selected, and (2) of any schedules of income and expenses “which reflect greater than average variances from the statistical norm of the district in which the schedules were filed if those variances occur by reason of higher income or higher expenses than the statistical norm of the district in which the schedules were filed.” The audits are to “determine the accuracy, veracity, and completeness of petitions, schedules, and other information” that the debtor is required to provide under §§ 521 and 1322 of the Code.

The audits are to be conducted by certified or licensed public accountants in accordance with generally accepted auditing standards, or under regulations adopted by the Attorney General (and the Judicial Conference in areas served by bankruptcy administrators). Provision is made for aggregate reports of the results of the audit and for criminal referrals in the event of material misstatements. A new § 727(d)(4) creates as a ground for revocation of discharge the failure by the debtor to cooperate with the auditor or to “explain satisfactorily a material misstatement in an audit.” The latter phrase presumably refers to misstatements in filings of a debtor reflected in the audit, rather than misstatements in the audit itself; however, it is not clear what would constitute a “satisfactory” explanation of such a misstatement. There is no deadline for motions to revoke discharge based on § 727(d)(4).

The Attorney General and the Judicial Conference are given two years from enactment of S. 256 to develop bankruptcy auditing standards. However, the auditing provisions themselves become effective 18 months after enactment, thus requiring earlier
development of bankruptcy auditing standards to avoid the need to conduct the required audits under generally accepted auditing standards.