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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 situations."


           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."


           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.


           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 random."

           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."


           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.


           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 together."

           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 described.


           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 checking out.

           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).



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