The Legal Audit: A How To Manual For Internal Auditors
No one can dispute that law firms sometimes engage in outright billing fraud. Consider:
Webster Hubbell, once third in command at the United States Justice Department, plead guilty to charges that he had billed his legal clients fraudulently. Maureen Fairchild of Chapman & Cutler was charged with inflating fees, doctoring bills, charging subordinate hours as her own and charging personal expenses to clients. Richard A. Solomon, formerly with Mayer, Brown & Platt, was alleged to have altered a dozen bills to clients over a four year period.
Such tales of overbilling can make an internal audit department crave control over the company legal budgets. However, internal auditors should realize that outright billing fraud is rare, and seldom does it affect the bottom line. Rather, subtle billing abuses, as well as inefficiency, poor case management and general disregard of costs, are what drive legal fees up and create real losses.
How can the internal audit department help control and reduce legal costs? Auditors can start by using the techniques of legal auditing. These methods can help to quantify objective problems and isolate subjective problems that can then be reviewed by the legal department.
The legal audit equivalent of the traditional internal audit control function is an on site audit. In an on site audit, the legal auditor compares time records to the underlying work product on a day to day basis. This is done by checking phone records, court files, discovery indexes, deposition transcripts, final and draft versions of documents, chron files and email to confirm that work billed was, in fact, performed. The on site audit is a time consuming and expensive process and one that most legal auditors will not recommend unless their preliminary review reveals the likelihood of fraud. Instead, the internal auditor first tries a desk audit or legal bill review, which is a careful examination of law firm billing and staffing patterns for the purpose of detecting billing errors, abuses and inefficiencies.
Following the suggestions below, an internal auditor can quantify objective problems and highlight questionable practices that may have unnecessarily increased legal costs:
- Gather Your Materials To begin your legal audit, you will need:
- A copy of the itemized legal bills that contains the daily description of activities of the timekeepers (attorneys, paralegals and other support staff billing to your matters) and the hours billed each day. These may be referred to as the time sheets, billing logs, or diaries. If the legal bills do not identify the individual timekeepers and their billing rates (which they usually do), you will need to obtain that information from the law firm.
- A copy of the invoices (if separate from the legal bills) and cover letters accompanying the legal bills.
- A copy of the retainer agreement and/or any billing policy or reimbursement guidelines that your company expects its outside firms or vendors to follow.
- Check for Compliance with the Retainer Agreement or Billing Guidelines Do not be surprised if you learn that there is no written contract with the law firm or that your company has no formal policy on law firm billing practices. For established attorney/client relationships, a written retainer agreement is the exception rather than the rule. If there is no billing policy, you might want to suggest creating one as part of your audit report recommendations. If there is one, evaluate whether its terms are being complied with.
- Check Bills for Accuracy Most billing inaccuracies can be uncovered by looking for the following irregularities:
- Undisclosed bonuses: Confirm that the amount invoiced is the same as the bottom line on the itemized legal bills.
- Billing errors: Check for duplicate entries or double charges. Look for entries with identical wording on the same day or consecutive days.
- Delayed billing: Look for delayed charges or "recaptured time," i.e. time billed in a later month than the work was performed.
- Excessive rate increases: Check for billing rate increases or fluctuations.
- Mystery entries: Make sure that you are not being billed for some other client work. Question an entry or a portion of an entry that does not seem to fit.
- Billing to multiple files: If your law firm is working on multiple matters for your company, add up the time billed during the same period for all company matters. You may discover that the same trip to court was billed to more than one case or that the same status conference with the home office appears on the time sheets of multiple matters.
- Examine Record Keeping Practices of your Firm When billed on an hourly basis, a client is entitled to an accurate accounting of the time spent on its matters. Contemporaneous time records should be kept by each attorney and paralegal and should specify the date the work was performed, the hours expended and the nature of the work done. Look for the following signs of poor record keeping practices:
- Vague billing descriptions. A legal bill should provide enough detail to inform the reasonably knowledgeable bill reviewer what is going on. Any entry that contains a statement of hours worked with no description should be deducted from the bills. Also, watch for meaningless entries such as worked on case or reviewed file.
- Formulaic descriptions. Determine whether certain timekeepers use the same vague phrases over and over. (i.e., conference with team members re strategy or review, analyze and digest privileged documents).
- Formulaic time entries. Do certain attorneys always charge the same (large) unit of time for certain tasks? Most phone calls are brief and most letters should not take more than half an hour.
- Use of large billing increments. Your firm should bill in small minimum increments, preferably no higher than .1 hours (six minutes). Remember: an extra 10 minutes a day, 200 days a year at $300/hour is $10,000/year.
- Pattern of long days. Not every event in an attorney's day is billable. If timekeepers are billing their full time to your matter or frequently billing days of 8, 9 or 10 hours or more, this could indicate heavy handed timekeeping or an attorney who lets work expand to fill the time available.
- Inconsistent time records. Perform a spot check to see if the timekeepers consistently report interoffice conferences or record the same time for meetings, court appearances and depositions.
About the Author: Annette Sanderson Biesecker is a cofounder of Accountability Services, Inc., a legal cost control and auditing center. She received her B.A. from Harvard University and her law degree from New York University Law School. She is a certified mediator and a member of the arbitration panel of the American Arbitration Association.
This article is reprinted from TranMISsion Online, with permission by the MIS Training Institute. Founded in 1978, MIS Training Institute is the international leader in audit and information security education. MIS offers leading-edge seminars, topical conferences, on-site training, and Web-based training at www.misti-online.com