BP appeals McGladrey audit findings, says auditor should release interim reports on Deepwater Horizon payment investigation

NEW ORLEANS – BP PLC is demanding to see the work product of an independent audit of the Deepwater Horizon claims operation, saying the $14 million investigation overlooked serious flaws in the court appointed claims administrator's operation.

The appeal to the U.S. Fifth Circuit Court of Appeals seeks more information and earlier drafts of the audit performed by McGladrey LLP, which was initially budgeted at about $1.4 million but ballooned in cost to 10 times that. Though BP paid for the audit, U.S. District Judge Carl Barbier rejected the oil giant's request to make information underpinning the investigation part of the court record, maintaining it would serve no public purpose. BP has long claimed the Deepwater Horizon settlement fund is administered poorly and is open to fictitious and fraudulent claims. The company says that Claims Administrator Patrick Juneau is unfit to administer the settlement and should be removed.

Though the McGladrey audit was critical of Juneau's operation and found dozens of failures in the system related to poor internal financial controls, Juneau and the senior trial lawyers in the case lauded the audit's findings that the claims facility had achieved a 99.5 percent accuracy rate in calculating award amounts. In its appeal, BP says the accuracy rate cited by McGladrey and touted by Juneau amounts to little more than a math checking exercise, since it says nothing about the quality of the claims themselves.

"No audit by McGladrey was necessary to check the math,'' BP said in its appeal. "Math checking was not the main purpose of the exercise.''

In fact, for many claims categories, McGladrey criticized Juneau's staff for failing to properly document proof of loss. In the category of business losses, for example, McGladrey said about 20 percent of its sample of settlements lacked sufficient documentation. The lack of proof adds up as across the sample size – only a tiny fraction of paid claims – McGladrey said it found $528 million worth of damages were paid out to claimants who failed to properly document their losses.

The appeal contains a sworn statement from Jeffrey Hanhan, BP finance operations manager, who said the McGladrey audit was essentially worthless without more information on what the accounting firm actually investigated.

Hanhan said McGladrey's accountants appeared to simply average overpayments and underpayments together.

"[T]wo errors of $1,000, each in opposite directions, would net to $0, and thus appear to suggest perfection in [Juneau's] processing, even though the opposite is true,'' BP said in its appeal.

In the appeal Hanhan identifies several mistakes it says Juneau’s office made in calculating and paying out claims, including a single claim worth $44 million that was later reversed after it was found that the claimant was actually not entitled to any compensation. Altogether, Hanhan identifies 1,100 awards by the CSSP worth more than $700 million that he says were improperly paid out by Juneau.

Hanhan also found that erroneous awards later overturned by an internal appeals board were not taken into McGladrey’s audit findings.

“In calculating the CSSP's claims processing error rate, it appears McGladrey failed to account tor the large volume and magnitude of errors that have been identified to date,'' Hanhan said in his statement.

McGladrey officials said as a matter of policy they do not comment on legal or client matters.

Juneau’s office did not respond to a request for comment on this story.