Legal Fees Paid by FDIC to Arter & Hadden

(Audit Report No. 98-065, June 29, 1998)

The Office of Inspector General (OIG) has completed an audit of legal fees paid by FDIC to Arter & Hadden. The audit was conducted by the OIG with assistance from the independent public accounting firm (IPA) of Checkers, Simon & Rosner, and covered billings paid from July 1, 1990 through September 30, 1994. For the purpose of assisting the OIG in evaluating the reasonableness of the legal services provided, the Legal Division participated with the OIG in evaluating the fair presentation of the fee bills selected for review during the audit.

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, Arter & Hadden's 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 total fees paid to the firm during the audit period were $16,541,683. The auditors identified net questioned costs of $2,699,416 from an audit sample of $15,076,353.

That the Assistant General Counsel, Legal Operations Section, Legal Division, disallow:

In response to a draft of this report, management agreed to resume collection efforts for the $873,472 in prior Accelerated Payment Program disallowances. This item is not included as a questioned cost because the disallowances had already been identified by management prior to the audit. Management also disallowed questioned costs totaling $477,999. In particular, management disallowed $307,318 in duplicate payments identified by the audit. The duplicate payments occurred because the firm submitted both summary statements for a batch of outstanding legal fee bills and subsequently the individual bills themselves. Although the firm had returned other duplicate payments, the amount identified by audit was not returned. Management also disallowed $116,555 for travel expenses to and from the state of Texas, though a May 1990 letter clearly shows the firm's agreement not to bill for such travel expenses. Finally, management disallowed $24,031 for non-billable and miscellaneous charges, mark-ups on disbursements, and miscellaneous fee overcharges.

Although management's corrective actions on recommendations 1, 5 and 6 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 $1,185,176 for missing fee bills. Specifically, the auditors were unable to test whether certain sampled payments were adequately supported because the invoice numbers were improperly recorded by the FDIC. As a result, attempting to identify the invoices would be a difficult and time-consuming process. The Legal Division has concluded that it would not be cost-effective to further pursue this issue. The OIG decided not to question these fees as unsupported. Rather, because the auditors were unable to apply auditing procedures to satisfy themselves as to the reasonableness of these fees, the OIG did not consider the scope of the work sufficient to enable us to express an opinion on these fees. Therefore, the OIG reduced questioned costs from $1,185,176 to $0.

In recommendation 5, the OIG recommended disallowance of $106,515 for inadequate descriptions for outside services. Management allowed the questioned amount based on additional information provided by the firm. The OIG accepted management's explanation and reduced questioned costs to $0.

In recommendation 6, the OIG recommended disallowance of $86,349 for unauthorized personnel. Management allowed $56,254 and disallowed $30,095. In response to the draft report, the law firm acknowledged that $5,184 of the questioned fees were billed to the FDIC in error. The law firm provided documentation which supports $3,610 of the questioned fees. In addition, the Legal Division, based upon a review of the questioned fees, has ratified $52,644 in fees billed by personnel prior to being approved on an LSA. As a result, the OIG will reduce questioned costs to $30,095.

Based on the auditor's work, $2,699,416 was questioned in the draft report. After considering management's comments on the findings, we will report questioned costs of $477,999 in our Semiannual Report to the Congress.