Legal Fees Paid by FDIC to Rogers, Towers, Bailey, Jones & Gay

(Audit Report No. 98-037, March 31, 1998)

The Office of Inspector General (OIG) has completed an audit of the legal fees paid to Rogers, Towers, Bailey, Jones & Gay, a law firm hired by the FDIC to provide legal services. The former Resolution Trust Corporation (RTC) OIG performed the audit for the FDIC OIG under a Memorandum of Understanding dated March 3, 1993. The audit was conducted by the independent public accounting (IPA) firm of Ollie Green & Company through a contract with the RTC OIG.

The objective of the audit was to determine whether the fee bills submitted by the law firm present fairly the expenses and activities of the cases for which the fee bills were submitted. Accordingly, Rogers, Towers? fee bills were reviewed to determine whether they were (1) adequately supported by source documentation, (2) prepared in compliance with applicable FDIC cost provisions, (3) consistent with the terms and conditions of the governing agreements, and (4) representative of the cost of services and litigation which were approved in advance by the FDIC. The auditors identified net questioned costs of $71,984 from an audit sample of $105,459.

The report recommends that the Assistant General Counsel, Legal Operations Section, disallow the following:

(1) $47,899 for unsupported time charges,
(2) $17,435 for unsupported expenses,
(3) $15,651 for block billing,
(4) $2,206 for photocopying charges in excess of cost,
(5) $671 for mark-ups on long distance telephone charges,
(6) $625 for changes to the pre-bill memos,
(7) $360 for hourly rate variances,
(8) $240 for a clerical error,
(9) $110 for mark-ups on computer research expenses,
(10) $100 for billing unauthorized personnel, and
(11) $16 for non-reimbursable expenses.

The General Counsel, Legal Division, provided a response to the OIG's draft report dated September 26, 1997. Management disallowed a total of $3,595. Although management?s corrective actions on recommendations 1, 2, 3, 4, 5 and 10 differed from the recommended corrective actions, the OIG considers management?s response as providing the requisites for a management decision on each of the recommendations.

In recommendation 1, the OIG recommended disallowance of $47,899 for time charges not supported by original timesheets or other source documents. Management allowed all of the questioned costs. In response to the draft report, the law firm provided supplemental documentation which adequately supported $2,792 of the questioned fees. In addition, the law firm provided documentation which indicates an additional $522 of the questioned fees had previously been disallowed by the Legal Division. Therefore, the OIG will reduce its questioned costs by $3,314.

Because the Legal Division had never advised outside counsel of standards for electronic billing systems, the Legal Division has decided to accept the law firm?s computer generated records as adequate support for the fees billed. The law firm asserted that its computerized records were the original timesheets. However, in response to the draft report, the law firm acknowledged that the information entered into the electronic system comes from a variety of sources, including calendars, diaries, individual slips of paper, or ?obsolete times sheets.? The IPA concluded that the billing and timekeeping cycle controls would not ensure that the alternative computerized pre-bills would accurately support time charges. Therefore, the IPA only accepted the time charges supported by original timesheets. While the OIG agrees that the Legal Division?s response meets the requisites of a management decision, the OIG will continue to question $44,585, which represents the amount of professional fees not supported by original timesheets.

In general, for audit purposes, the OIG has found that electronic systems do not contain adequate internal controls or audit trails to ensure data integrity. Due to the increased use of computerized records, the Legal Division entered into an effort with the OIG to study internal controls for electronic billing systems. The OIG and Legal Division jointly developed minimum standards for electronic billing systems which were distributed to all outside counsel on December 31, 1997.

In recommendation 2, the OIG recommended disallowance of $17,435 for unsupported expenses. In response to the draft report, the law firm provided supplemental information which adequately supported $15,661 for title and travel expenses. As a result, the OIG will reduce its questioned costs accordingly. The Legal Division disallowed $1,511 of the questioned amount.

Further, the Legal Division has allowed $263 for unsupported facsimile charges because it believes the facsimiles were sent for the benefit of the FDIC. The OIG will continue to question the $263 because sufficient detail is not present to determine the average price per copy. Therefore, the OIG agrees to reduce questioned costs to $1,774 ($1,511 + $263).

In recommendation 3, the OIG recommended disallowance of $15,651 for block billed time entries. In response to the draft report, the law firm provided additional documentation which clarifies the questioned entries. Therefore, the OIG agrees to reduce its questioned costs related to this condition to zero.

In recommendation 4, the OIG recommended disallowance of $2,206 for photocopying charges billed in excess of cost. Management disallowed $454. The OIG recognizes that the Legal Division has adopted the policy of allowing law firms to bill up to the maximum allowable rate without providing a cost study. Therefore, the OIG concurs with the Legal Division?s decision to allow amounts charged up to the maximum allowable rate. Also, through mutual agreement with the Legal Division, the OIG is excluding the projected overcharges of $1,296 from its questioned costs. The OIG accepts management?s response as a decision for this recommendation and agrees to reduce its questioned costs related to this condition to $454.

In recommendation 5, the OIG recommended disallowance of $671 for marked-up long distance telephone charges. Management disallowed $279. The OIG, through mutual agreement with the Legal Division, is excluding the projected overcharges of $392 from its questioned costs. Therefore, the OIG will reduce the questioned costs related to this condition to $279.

In recommendation 10, the OIG recommended disallowance of $100 for unauthorized personnel. In response to the draft report, the law firm and the Legal Division provided additional documentation and explanations which adequately supported the questioned charges. Therefore, the OIG will reduce the questioned costs related to this condition to zero.

After considering additional information submitted by the firm and management?s comments on the IPA?s findings, the OIG will report questioned costs of $48,443, including $46,359 of unsupported costs, in its Semiannual Report to the Congress.