Legal Fees Paid by RTC to Buchalter, Nemer, Fields & Younger
(Audit Report No. 98-018, February 24, 1998)
The Office of Inspector General (OIG) has completed an audit of Buchalter, Nemer, Fields & Younger, a law firm hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the independent public accounting (IPA) firm of Urbach Kahn & Werlin P.C. through a contract with the OIG, and covered billings paid by RTC during the period January 1, 1990, through December 9, 1993.The objectives of the audit were to determine whether Buchalter, Nemer, Fields & Younger's legal bills were adequately supported and in compliance with the cost limitations set forth by RTC and the Federal Deposit Insurance Corporation (FDIC) and that charges for legal services provided to RTC were reasonable. The total fees paid to the law firm for RTC-related work during the audit period were $1,895,443. The audit sample covered $1,148,579, or 61 percent of the total. The IPA identified net questioned costs of $978,943.
That the Assistant General Counsel (AGC), Legal Operations Section, Legal Division, should disallow the following questioned costs:
(1) $174,971 for unallowable time charges
(3) $104,429 for unauthorized rate differences,
(4) $137,274 for unauthorized billers,
(5) $54,400 for excessive time charged to case matters,
(7) $175,030 for vague descriptions,
(9) $7,040 for travel time not discounted by 50 percent,
(11) $277,282 for time charges unsupported by time sheets,
(12) $8,814 for unauthorized/excessive research,
(13) $14,792 for unallowable expenses, and
(14) $24,911 for unsupported reimbursable expenses.
block-billed charges to determine the appropriateness of the charges. Block billing is the term used to describe the practice of aggregating an attorney's time charges for different tasks or In the remaining recommendations (2, 6, 8 and 10), the OIG recommended that the AGC review activities, rendering reasonableness reviews of time charges difficult or impossible. Subsequent to the preparation of a draft of this report, the OIG decided not to question block-billed charges for services rendered prior to the time that RTC provided the firm with specific billing guidance. Therefore, we accept Legal Division's response not to undertake a review of the block-billed charges for recommendations 2, 6, 8 and 10.
In addition, the OIG recommended (recommendation 15) that the AGC assess the appropriateness of the unaudited billings and take disallowance for improper charges. The Legal Division agreed to conduct an assessment of the unaudited billings.
In response to a draft of this report, management disallowed a total of $149,899. Although management's corrective actions on recommendations 1, 5, 7, 9, 11, 12, and 14 differed from those recommended, we consider management's response as providing the requisites for a management decision on each of the recommendations.
Specifically, in recommendation 1, the OIG recommended disallowance of $174,971 for unallowable time charges. Management allowed $170,592 and disallowed $4,379. Based on a review of sampled entries and the firm's response, management decided to allow $170,592. The OIG accepts management's explanation and will reduce questioned costs to $4,379.
In recommendation 5, the OIG recommended disallowance of $54,400 for excessive time. Management allowed $54,400. For $5,005 in questioned costs for meetings attended by more than one attorney, the Legal Division stated that it was unable to ascertain a basis for determining if the presence of a second attorney was justified because of insufficient detail in the report. The OIG will continue to question $5,005 because the Legal Division did not review questioned costs entries and the law firm did not provide additional documentation. Therefore, the OIG will reduce questioned costs to $5,005.
In recommendation 7, the OIG recommended disallowance of $175,030 for services not adequately detailed and billed. Management allowed $175,030. The OIG will continue to question $175,030 because the Legal Division sampled only 5 of approximately 800 questioned entries from only 1 of 67 fee bills identified to contain vague entries. This limited analysis resulted in reviewing less than 1 percent ($858 of $175,030) of the questioned costs. Further, the firm did not provide additional documentation. Detailed descriptions have traditionally served as a basis for assessing the need, level, and quality of services actually rendered by a firm. To meet the FDIC's billing requirements, a charge must be sufficiently detailed to ensure that the criteria for allowable fees and expenses are met. Consequently, the OIG will continue to question $175,030 related to inadequate description of services.
In recommendation 9, the OIG recommended disallowance of $7,040 for travel time not discounted by 50 percent. Management allowed $1,251 and disallowed $5,789. The Legal Division reviewed all questioned cost items to determine allowable charges. The OIG accepts management's explanation and reduced questioned costs to $5,789.
In recommendation 11, the OIG recommended disallowance of $277,282 for unsupported time charges. Missing original time sheets amounted to $275,534 of $277,282 in questioned costs. However, applying the four year requirement to retain original records asserted by the firm, $107,214 remains for bills paid after July 31, 1991. The OIG agrees to reduce questioned costs to $107,214. Management allowed $96,493 and disallowed $10,721. Management believes that the firm's failure to maintain required documentation was not a "no cost" alternative. Accordingly, after considering other factors, management considered $10,721 as an appropriate disallowance. For $1,748 in questioned costs where time sheets descriptions did not match the fee bill detail, the Legal Division stated that it was unable to ascertain the reasonableness of the charges because of insufficient detail in the report.
The OIG will continue to question $108,962 ($107,214 + $1,748) because the OIG could not independently verify the questioned time charges. Also, the firm did not provide copies of the time sheets to support its position that the IPA was in error.
In recommendation 12, the OIG recommended disallowance of $8,814 for unauthorized/excessive research charges. Management allowed $8,814 because the firm submitted an FDIC/RTC letter that provided the firm access to the FDIC library for research on RTC matters as of January 8, 1992. The firm also stated that prior authorization was obtained for each project and the fees for the work were either approved or disallowed by the RTC oversight attorney. The OIG will reduce questioned costs by $6,491 for charges billed after January 1992. However, the OIG will continue to question $2,323 because the firm did not provide documentation to support that authorization to perform research prior to January 1992 was obtained from the RTC oversight attorney. Therefore, the OIG will reduce questioned costs to $2,323.
In recommendation 14, the OIG recommended disallowance of $24,911 for unsupported reimbursable expenses. Management allowed $15,558 and disallowed $9,353. Given the four year requirement to retain original records, the Legal Division allowed $15,558 for bills paid after July 31,1991. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $9,353.
Lastly, in recommendation 4, the OIG recommended that the Legal Division analyze the qualifications of staff and either ratify or disallow a total of $137,274 primarily associated with unauthorized billers. The Legal Division ratified $136,838 and disallowed $436. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $436.
Based on the IPA's audit work, $978,943 was questioned in the draft report transmitted to management. After considering additional information provided by the firm, $149,899 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $430,498 (including $293,345 of unsupported costs) in our Semiannual Report to the Congress.
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