The Legal Audit: A How To Manual - Part II

Written by Annette S. Biesecker, Executive Vice President, Accountability Services, Inc., reprinted with permission by The Financial Management Network.


In the first installment of The Legal Audit, we examined the various billing problems and irregularities that auditors should be aware of when conducting a legal audit. Now, we will look at the personnel policies and internal practices of law firms that should be investigated to uncover unfair billing and exorbitant legal costs. The key to cost effective legal representation is assigning the smallest number of attorneys and support staff to a project. When this is done, timekeepers will bill at the lowest rates consistent with the skills and experience needed for the job. Following the suggestions below, you can evaluate the staffing and internal operating decisions made by your law firm:

A. Evaluate the Size and General Functions of the Legal Staff.

  • Summarize the size and composition of the staff. Prepare a chart listing all the timekeepers, their billing rates, status, approximate hours and fees and the time period worked. This will help you avoid being billed for regular administrative costs, contract attorneys, unnecessary experts, summer associates, and other expenses that should be absorbed by the law firm.
  • Eliminate fees for clerical and administrative functions: The work of support staff, including librarians, data processors, and document managers, should be treated as firm overhead and not billed to the client.
  • Adjust for travel time: Some attorneys bill travel time as a lost opportunity cost, not as a positive value to the client. Failure of the firm to bill travel at reduced rates is an ungenerous, if not an inappropriate, billing practice.

B. Isolate the Skill Levels for Designated Tasks and Potential Duplication in Efforts for Review by the Legal Department.

  • Duplicate attendance at hearings, meetings and depositions: Watch for multiple conferees at conference calls, internal meetings and witness prep sessions.
  • Multiple tiers of authority and review: Check to see how many people are drafting and reviewing the same document, or are preparing for the same deposition or hearing.
  • Projects of limited relevance: Check to see if there were any lengthy research projects. If so, note the topic and the approximate number of hours taken to complete this project.
  • Also, calculate: The blended billing rate of your matter by phase. Remember: Blended rates are the weighted average rate for a firm to do a task or project. The weighting is based on the hours worked by attorneys at each billing level.

C. Check Expenses and Disbursements for Mark Ups and Questionable Charges.

  • American Bar Association ethics opinions, although non-binding on attorneys, prohibit a law firm from deriving a profit on its expenses and disbursements. The copy center, fax machines and computer research accounts are to compensate the firm for its costs, not to generate income.
  • Determine unit costs for faxes and photocopies: Some firms will provide only a summary of certain expenses. Protest charges in excess of $.10 per page for copies, charges for local faxes and any mark ups on other routine costs like telephone, postage, messenger services and express mail.
  • Eliminate charges for firm overhead costs: Some firms will try to pass obvious overhead costs to their clients, such as conference room rental, weekend HVAC or rental changes for firm equipment such as large screen TVs, laptop computers or VCRs. More common are charges for after hours meals, transportation, and support staff overtime.
  • Uncover hidden marketing costs: If your law firm picks up the tab at a business dinner or serves you coffee and rolls at a breakfast meeting, the costs should not show up on the next bill.
  • Insist on reasonable computer research, software and library expenses: Whether to bill clients for computerized research at all is the subject of debate. Some firms and more clients consider it so fundamental to the practice of law that it should be an overhead cost to be built into the rate schedule of the firm. This is certainly true for other research materials owned or leased by the firm, whether they take the form of CDs, videos, or printed matter.
  • Pay for only reasonable travel expenses. Airline fares vary widely, as do the costs of quality hotels. Also, avoid paying for personal expenditures (dry cleaning, room service meals, alcoholic beverages, etc.).


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.

You may like these other stories...

IRS audits less than 1 percent of big partnershipsAccording to an April 17 report from the Government Accountability Office (GAO), the IRS audits fewer than 1 percent of large business partnerships, Stephen Ohlemacher of the...
Is it time to consider a value added tax?Forbes contributor Joseph Thorndike wrote yesterday that he believes the tax reform proposal by House Ways and Means Committee Chairman Dave Camp (R-MI) was dead on arrival. But he...
Read more from Larry Perry here and in the Today's World of Audits archive.The planning phase of an audit engagement of an entity using US GAAP or a special purpose framework will, with minor differences, include similar...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.