Legal Fees Paid by RTC to Testa, Hurwitz & Thibeault

(Audit Report No. 98-054, June 12, 1998)

The Office of Inspector General (OIG) has completed an audit of Testa, Hurwitz & Thibeault, a law firm hired to provide legal services to the Resolution Trust Corporation (RTC). The audit was conducted by the independent public accounting firm (IPA) of Urbach Kahn & Werlin, P.C. through a contract with the OIG, and covered billings paid by RTC from January 1, 1990, through December 9, 1993. The objectives of the audit were to determine whether Testa, Hurwitz & Thibeault'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 $2,550,000. The audit sample covered $1,275,377, or 50 percent of the total. The IPA identified net questioned costs of $302,514.

That the Assistant General Counsel (AGC), Legal Operations Section, Legal Division, should disallow:

In addition, the OIG recommended that the AGC (recommendation 10) assess the appropriateness of the unaudited billings and disallow the costs deemed inappropriate. In recommendations 3 and 6 the OIG recommended that the AGC review block-billed charges to determine whether additional disallowances should be made for excessive time charges and inadequately described charges, respectively.

The AGC's response to a draft of this report provided the requisites for a management decision on each of the recommendations. Management disallowed a total of $11,161. In addition, the Legal Division decided to allow all the questioned costs associated with the block-billed recommendations. Management's corrective actions on recommendations 1, 2, 4, 5, 8, and 9 also differed from the recommended corrective actions. Nonetheless, we consider management's response as providing the requisites for a management decision.

The AGC's response was critical of the audit methodology and presentation of items questioned in the draft audit report exhibits. However, the audit methodology and reporting process for this audit were consistent with other audits conducted by the IPA firm for the RTC OIG. Further, the draft report exhibits were clearly labeled and supported by the IPA's working papers.

In recommendation 1, the OIG recommended that FDIC disallow $76,820 for unallowable time charges. Management allowed $73,251 and disallowed $3,569. The OIG accepts management's explanation for the amounts allowed and disallowed. Therefore, for recommendation 1, the OIG will reduce questioned costs to $3,569.

In recommendation 2, the OIG recommended that FDIC disallow $51,352 for excessive time charges. Management allowed all the questioned charges. The OIG accepts management's explanation for the amount allowed except for $2,217. The Legal Division only reviewed $1,530 of the $3,747 questioned overstaffing charges. Therefore, for recommendation 2, the OIG will continue to question the $2,217 not specifically reviewed.

In recommendation 4, the OIG recommended that FDIC disallow $60,231 for unsupported time charges. Management allowed all the questioned charges. The OIG accepts management's explanation regarding matter numbers and differences between descriptions and will reduce those questioned charges, but will continue to question computerized time charges that lacked original support. Therefore, for recommendation 4, the OIG will question $28,511.

In recommendation 5, the OIG recommended that FDIC disallow $43,280 for vague descriptions. Management allowed all the questioned charges. The OIG accepts management's explanation and will reduce questioned costs to $0.

In recommendation 8, the OIG recommended that FDIC disallow $30,179 for unallowable expenses. Management allowed $22,587 and disallowed $7,592. The OIG accepts management's explanation for the amounts allowed and disallowed except for $210. The Legal Division only reviewed $702 of the $912 questioned for miscellaneous unallowable expenses. The OIG will continue to question the $210 not specifically reviewed by the Legal Division. Therefore, for recommendation 8, the OIG will question $7,802 ($7,592 + $210).

In recommendation 9, the OIG recommended that FDIC disallow $16,591 for unsupported expenses. Management allowed all the charges. The OIG accepts management's explanation but will continue to question $11,554 for photocopying, $2,885 for airfare and travel expenses, and $341 for facsimile charges. Therefore, for recommendation 9, the OIG will question $14,780.

Based on the IPA's audit work, $302,514 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 7, the the Legal Division ratified $24,061 for unauthorized billers. The OIG accepts the action taken by management and, accordingly, reduced questioned costs to $0. After considering $11,161 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $56,879 (including $43,291 of unsupported costs) in our Semiannual Report to the Congress.