How to protect the firm from
inside flim-flam: fraudulent billing
by Law Office Administrator: The
Newsletter for Legal Office Managers
Copyright © 1996 Law Office Administrator
Fraudulent billing can expose the firm to
litigation and embarrassment.
Plus, it's downright wrong.
Billing fraud usually results from pressure to
meet billing quotas, says billing consultant JOHN TOOTHMAN. And he should know. Toothman
is president of a company called The Devil's Advocate, a legal fee management and
litigation consulting firm that audits legal bills in firms accused of billing fraud.
One attorney's billing fraud can put the
entire firm in jeopardy, Toothman says. For that reason, every administrator needs to know
the signs of when it's a possibility. "Be pragmatic. I'm not suggesting that you act
like big brother and look over everybody's shoulder, but pay attention to special
Billing fraud is "any padding or
increasing of time without disclosure to and consent of the client," Toothman says.
It can go from simple to sophisticated. He
cites one firm, for example, that systematically increased the time billed to one client
by a certain percentage.
At first, the attorney made individual changes
to the bill. "He wasn't only marking up the bottom of the bill, he was marking up
each time entry." That fooled the client.
Then the attorney got tired of making the
changes himself, so he went to the accounting department and had it create a special
accounting program to make the markups automatically. Eventually, the client became
suspicious and discovered the fraud.
In another firm Toothman investigated,
creative billing extended to staff hours as well.
"I sat in the firm to examine its billing
documents, and the paralegal who was babysitting me didn't know who I was or why I was
there. A co-worker came in and said 'Joe Bloe the partner wants you to go up to Capitol
Hill and get a copy of a document.' The paralegal said, 'Why not have a messenger do it?'
And the answer was 'if you do it, it gets billed.'
"They didn't realize they were talking in
front of a bill auditor," Toothman says. "I made notes on that, and I will
testify about it."
THE USUAL SUSPECTS
As to where to look for billing fraud,
Toothman watches the people who have the greatest reason to do it. "The people who
are most susceptible to it are the people whose jobs depend on who's doing the most
work," he says. For that reason, he views billing quotas as bad policy for any firm.
But even in firms that don't have quotas,
there is often peer pressure see who can to bill the most hours. And in that situation,
the attorneys who are going home early are likely candidates for billing fraud.
Paralegals can also be suspects of billing
fraud, Toothman says, because "some think that working time is billing time." If
a paralegal bills 7.5 hours every day, "that's a tip-off."
Watch the junior associates closely as well,
because they are usually aggressive and competitive. And keep a close eye on the
associates who have been passed over for partnership or who don't have portfolios.
"They're the firm's driftwood," Toothman says, and they're a high risk category,
because they equate their billing with their ability to stay in the firm.
THE BILL SHOWS THE CLUES
No system of checks and balances is
guaranteed, but the firm can do several things to minimize its risks.
Start with the bill. Add up the items and make
sure the hours match the total at the bottom, Toothman says.
Surprisingly, they don't always add up. He
found one attorney, for example, who marked up the time on the bottom of the client's bill
but failed to adjust the time entries before the invoice was mailed. "On a million
dollar bill, it was about 1%. It wasn't a lot of money, but it was enough money to be a
very serious violation."
Watch too for the attorney who bills fairly
close to the same amount of time every day. Some attorneys try to randomize the last
digits, but don't be fooled. Toothman finds that almost invariably, "they fall into
patterns. A '.3' habit or .3, .7, .3, .7 - they think they're randomizing it, but it's not
He adds that in billing fraud detection, the
tenths and the quarters of an hour are almost as important as the whole hour, not because
they make a lot of difference in the money but because they hint that something is amiss.
Some attorneys, particularly senior partners,
don't even try to fool anyone. "They always bill full hours or half hours. That's
kind of an arrogant pattern to look out for."
MORE CREATIVE BILLING...
Pay careful attention also to the attorney who
depends heavily on one or two clients for the bulk of the work.
In that situation, an attorney can feel pressured to find tasks that don't
necessarily need to be done or to prolong the work, Toothman says.
To increase the billable hours, a partner
might give a lot of research or drafting assignments to a junior associate who is not
experienced enough to handle the tasks in a timely manner.
"You'll see associates work on projects
for two or three weeks when it should only have taken two or three days."
The result is the billing attorney makes money
off the client.
Though that may not be actual billing fraud,
it's definitely an ethical and business issue for the inhouse counsel to address.
LONG DAYS AT THE OFFICE
Another clue of billing fraud is an attorney's
consistent billing of 10 or 12 hours a day.
"That's one of the classics,"
Toothman says, and it stands out because it's impossible. To bill seven to eight hours, an
attorney needs to be in the office about 10 hours.
One firm Toothman worked with eliminated that
risk by making it a rule that no one could bill more than seven and a half hours a day,
even when the attorneys had worked 10 to 15 hours.
That prevented the attorneys, and particularly
the associates, from billing more hours than they actually worked. It also gave the
clients confidence in the billing process.
Another clue to billing fraud is what Toothman
terms "cryptic entries," or descriptions on the bill that aren't clear.
When the bill doesn't list the exact services
provided, "it's a tip-off that the attorney is hiding fraud. It doesn't mean every
entry is fraudulent, but it's something to look for."
An attorney who is trying to pad a bill will
"move stuff around, mix several things together on the same day, and bill it all
Not only is that an indication of fraud but by
law, the client does not have to pay the bill unless the services are sufficiently
STILL MORE HUSTLES
There are other things besides the bill to
watch for when trying to determine if billing fraud is happening in the firm.
One is internal memos. Is the client being
charged for them? If so, do they communicate something that could just as easily have been
related orally? "There are reasons for documentation, but it's more expensive to
write, polish, and print out a memo" than it is to talk.
Another point to watch is drafting time.
Expect a complicated draft to take about two hours a page. "Beyond two hours, we get
a little nervous," Toothman says.
Phone calls and conferences are also worth
Compare the phone record to the time billed.
"I guarantee you, the attorney's time is almost always higher."
A way to check conference times is to compare
the hours the attorney bills to what the paralegals and associates bill. Paralegals and
associates tend to keep more accurate hourly accounts of conferences, because they're
usually surrounded by the heavyweights in the firm.
"They're the ones who are the most
impressed by the meetings." If the attorney's time is much higher than what's on
record, the attorney may be padding the bill.
This article was written by, and appeared in Law Office Administrator,
Volume V, Number 10 (October 1996).