Legal Fees Paid by FDIC to Haynes & Boone

(Audit Report No. 98-051, June 15, 1998)

The Office of Inspector General (OIG) has completed an audit of the legal fees paid to Haynes & Boone, a law firm hired by the FDIC. The former Resolution Trust Corporation (RTC) OIG initiated 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, and covered billings paid by the FDIC during the period January 1, 1990 through December 9, 1993.

The objective of the audit was to determine whether Haynes & Boone's legal bills were adequately supported and in compliance with the cost limitations set forth by the FDIC and that charges for legal services were reasonable. The total fees paid to the law firm during the audit period were $2,777,619. The IPA identified net questioned costs of $395,420 from an audit sample of $1,145,822.

The draft report recommended that the Assistant General Counsel (AGC), Legal Operations Section, Legal Division, disallow the following:

Management disallowed questioned costs totaling $60,703. Although management's corrective actions for recommendations 1, 2, 4, 5, and 7 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision on each of the recommendations.

In recommendation 1, the OIG recommended disallowance of $346,038 for unsupported time charges. The AGC's response disallowed $14,627, allowed $277,913 and did not opine on payments of $53,498 occurring more than four years prior to the audit. The law firm represented that its practice is to dispose of time sheets or electronic records after 18 months. The Guide requires that law firms retain time sheets for at least 4 years after final payment. The Legal Division acknowledges the firm's responsibility to retain time and billing records. After interviewing four supervisory attorneys and considering other factors, the Legal Division believes that a $14,627 disallowance is appropriate. The OIG acknowledges the 4-year record retention period and reduces questioned costs to $290,325 ($346,038 less $53,498, less $2,215 for overlapping amounts). The OIG will continue to question $277,913 because it could not independently verify the questioned time charges.

In recommendation 2, the OIG recommended disallowance of $43,388 for unsupported expenses. The AGC's response disallowed $32,595, allowed $9,714 based on the firm's response and allowed $1,079 based on the 4-year record retention period. Of the allowed amounts, the OIG will continue to question $8,426 for unsupported photocopy and facsimile charges. Therefore, the OIG will continue to question $41,021.

In recommendation 4, the OIG recommended disallowance of $3,877 for mark-up on expenses. The AGC's response disallowed $1,295 and allowed $2,582 using the $.08 a page standard for reproduction costs. The OIG accepts management's explanation and will reduce questioned costs to $1,295.

In recommendation 5, the OIG recommended disallowance of $1,129 for non-billable expenses. The AGC's response disallowed $139 and allowed $990 based on the firm's response and review of the questioned entries. The OIG agrees with management's explanation and will reduce questioned costs to $139.

In recommendation 7, the OIG recommended disallowance of $277 for unauthorized personnel. The AGC's response disallowed $152 and allowed $125 based on the firm's response and review of the questioned entries. The OIG accepts management's explanation and will reduce questioned costs to $152.

In addition, the OIG recommended in recommendation 8 that the AGC review the total fees and expenses paid by the FDIC to the firm during two periods where no LSA was in effect, ratify those amounts deemed reasonable and disallow any charges not approved. Management ratified the post-LSA fees and expenses to the extent that they were in accordance with the firm's LSA expired on February 1, 1993 and took no action on the pre-LSA fees and expenses as the firm was inherited counsel during this period. The OIG accepts management's explanation. Also, the OIG recommended in recommendation 9 that the AGC reject and return to the firm any future invoices received that contain block billed entries. The Legal Division agreed to this recommendation. Based on the IPA's audit work, $395,420 was questioned in the draft report transmitted to management. After considering additional information provided by the firm and management's comments on the IPA's findings, we will report questioned costs of $344,827 (including $331,346 of unsupported costs) in our Semiannual Report to the Congress.