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"Audit" Your Law Firm's Bills
Before Your Client Does

by John W. Toothman

9(11) Accounting for Law Firms (Leader Publ. Nov. 1996)

    WHAT LAW FIRM does not have its share of partners too busy to submit their time records or examine their draft bills, associates trying to impress others with lots of billable time, Pyrrhic victories, over-optimistic estimates, unexpected losses, clerical staff looking for overtime and so on? Yet each of these may become significant liabilities if the firm's bills are audited.

These days, most law firms of any size are bound to encounter an occasional "legal bill audit." Though bill audits are more similar to what accountants would call a "review" or a "performance audit" than to the exhaustive financial statement audit, they can nevertheless be an uncomfortable and costly experience, even for careful, ethical law firms.

Part of Quality Control

Many institutional clients, especially insurance companies, now review all or some fraction of their bills as part of their cost and quality control programs -- the audit may be nothing personal or the firm's bills may have been specially flagged for review. The initial negative reaction of many firms to notice of a proposed audit only makes things worse if they refuse to cooperate with the audit. In addition to triggering potential ethical violations, especially if the audit is requested by a current client, resistance leads many people to conclude -- rightly or wrongly -- that the law firm has something to hide. Yet, for lawyers in shaky financial circumstances or whose lifestyles require them to bill incredible amounts year after year, resisting the audit may seem like the only hope. Audits have uncovered, for example, everything from firm-wide fraud to schemes within a firm that the firm's own accounting systems failed to catch.

Firms managing their billing systems to minimize self-inflicted wounds prefer to avoid future problems by identifying and remedying their causes within the firm. Some firms have even found it helpful to audit themselves or consult with an auditing firm as a prophylactic measure or to substantiate their fees either in a fee dispute or when the opportunity arises to shift fees to an opponent.

What to Expect

There is no single method or procedure by which legal bill audits are conducted. They may range from a simple review of the bills alone -- which can be accomplished without the knowledge, let alone cooperation, of the law firm -- to a full-scale audit, with verification of expenses, on-site examination of firm systems and records and examination of work product and underlying records to substantiate time and expense entries. The scope and depth of the audit depend on such factors as the firm's cooperation, the records available for review, the client's objectives (management information for future decisions versus substantial billing disputes) and the client's budget.

In addition to considering the bills themselves, our reviews typically include examination of the published credentials of the lawyers, review of published information on local hourly rates, review of work product (quality as well as quantity) and consideration of legal performance, strategy, tactics and results.

Standard of Measurement

In a typical audit, the primary standard against which the law firm's bills will be measured is the lawyer-client retention or billing agreement, if there is one. This may be affected as well by the course of their dealings, such as client instructions and lawyer estimates. Billing agreements are subject to more judicial or bar second-guessing than most commercial contracts anyway, especially if entered into or modified after the lawyer-client relationship exists, but a lawyer's failure to adhere to the agreement will catch an auditor's eye. In other words, it is necessary but not necessarily sufficient for the lawyer to comply with the billing agreement.

With or without the agreement, another layer of standards against which to audit is provided by law, including common law and the lawyer's professional ethical duties. These may vary slightly from jurisdiction to jurisdiction, but are surprisingly uniform. See, e.g., Model Rule of Professional Conduct 1.5 (stating a laundry list of subjective and objective factors). There are also standards provided by statute or regulation, e.g., in fee-shifting statutes or with regard to compensation of bankruptcy lawyers. Ultimately, the lawyer has the burden to properly document his or her bills and demonstrate that the agreement and resulting fee are both reasonable. If the auditor cannot verify each entry, the lawyer may be denied payment.

While the entire list of problems identified by one authority or another would be prohibitively long, some of the most common problems are outlined in the accompanying chart (see below).

Sometimes two or more problems may exist within the same entry, e.g., because there is duplication of effort and the work was clerical in nature. In those situations, we normally code the entry for all problems and count each nonsegregated entry in the subtotal for each issue. Timekeepers who fail to break time down by task or mix various tasks risk disallowance of the entire entry.

This list is not exhaustive, but elimination of these problems would save 90 percent of the law firms we review 90 percent of the problems they might encounter. Catching these problems before they leave the office should therefore limit the impact of an audit.

Aside from minimizing the impact of audits themselves, many of these problems are the ones that clients notice on their own. Clients who hire an auditor are just the tip of the client-dissatisfaction iceberg -- the rest simply take their next piece of legal business elsewhere or refuse to pay the last few bills.

What To Look For

Issue Comment Examples
Administrative or Overhead Time Time not properly billable to a client because not for professional services. Bill preparation, discussing billing issues with clients. Staffing discussions.
Clerical time Time billed for nonprofessional services, especially services that could be performed by non-billing clerical personnel. Part of the firm's overhead. Photocopying, typing, faxing. Opening or closing files. Organizing or indexing documents. Preparing notebooks. Making routine calls to courts, clerks, government agencies.
Chipping (multiple small entries) A project or task is broken down into numerous small tasks adding up to more time than the task should have taken. 0.2 to call office, 0.3 to write internal memo about call, 0.3 to call clerk, 0.3 for confirming letter to clerk, 0.2 to pull and attach exhibit to letter.
Cryptic Entry An ambiguous, vague, illegible or incomplete entry without sufficient detail to determine whether it is properly billable to this client and matter. Conf. JWT (re?) Research (re?) Telephone call (re? who?)
Note: This rule catches those who are lazy or trying to hide other problems.
Double Charge Possible double charge for time or expense, i.e., the same thing appears to have been entered twice on the bill. Two entries on same day for same timekeeper where general firm practice is to have one entry per day.
Delegable Task An activity by a more senior timekeeper that could be delegated to a junior (cheaper) individual, making the charge inefficient or unnecessary. Attorneys digesting, summarizing or indexing depositions. A senior attorney performing legal research.
Duplicative Two or more people doing the same task. 2+ timekeepers @ meeting.
2+ timekeepers @ deposition.
Excessive Time Time for the stated task or activity appears excessive. May also be due to excessive repetition of the task. 0.8 for routine phone call.
0.5 to prepare a cover letter.
High Rate Hourly or other rate appears high. Based on benchmarks, surveys or experience.
Internal Conference or Communication An internal, i.e., usually within the firm (or team), conference. Includes internal meetings, telephone calls or other communication. IC or Conf. with others in firm.
TC or Telephone Conf. with others in firm.
Team meetings.
Long Days Total time entries by timekeeper for that day exceed a reasonable amount, usually 8.0 hours. Even if the time was worked, value likely suffered. ABC bills 2.5 hours on five matters in same day.
ABC has 2 entries of 4.5 each for same day and matter.
Mixed Time Entry Time entry contains mixture of tasks or activities, not all of which may be a problem or which may have multiple problems. (Sometimes so prevalent that virtually every entry would be flagged.) Research legal issue; o/c JWT re issue.
Draft letter & fax to opponent.
Note: Consequence is typically to flag the entire entry, even if parts would not be objectionable but cannot be segregated.
Non-Prevailing Issue Where a party is entitled only to compensation for work on some aspects of matter, e.g., issues on which it prevailed, this entry relates to something else. 2.3 on res judicata research, when that motion was lost.
2.8 for "Jones deposition" when Jones was relevant to the unsuccessful affirmative defense.
Off- or Over-Budget The fees (or some portion) are over the budgeted amount or were not provided for in the budget (i.e., off-budget). Firm provides a budget of $50,000 to handle the case, then bills $55,000. Firm budgets case, but provides no budget for discovery motions, then files one.
Over-Staffing Staff appears to be larger than necessary, causing unnecessary internal communication, etc. May also result in duplication, excessive time, etc. Two attorneys work on routine brief. One attorney billing just 50 hours per month, yet second added to matter.
Questionable Expense Expense (out-of-pocket cost) item that is or may be questionable, e.g., because excessive, unnecessary, marked up, etc. Meals or other personal items.
Photocopies @15/page.
Faxes @ $1/page.
Rate Change Hourly or other rate changes. JWT bills at $105 in June, then $110 in July.
Travel Time Time spent in transit, regardless of transportation mode. May depend upon whether local or not. JWT bills for time going to and from client meeting.
JWT bills for entire day to fly to Chicago before deposition.
Training Time Time spent training staff or attorneys, learning time. May also apply where second timekeeper's experience and role are limited, indicating on-the-job training. Especially common for junior attorneys, paralegals, or summer associates. Attend seminar, workshop, lecture, CLE. Prepare internal memos of limited use or value. Extensive review of basic literature. Sending unnecessary personnel to same event.
Violates Billing Agreement, Client Instruction or Other Standard The firm is acting contrary to a billing policy, ethical rule, procedural rule or the client's instructions, for example. Client's engagement letter states that new staff must be approved, expenses over $1,000 pre-approved or only one timekeeper at a deposition.
Wrong Bill or Client Entry appears to relate to another matter or client. Entry references names or events that are out of place, e.g., "Smith deposition," when there was no Smith deposition in this matter.

Copyright 1996, 1998 John W. Toothman




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