Legal Fees Paid by FDIC to Bayh, Connaughton & Malone

(Audit Report No. 98-056, June 12, 1998)

The Office of Inspector General (OIG) has completed an audit of legal fees paid to Bayh, Connaughton & Malone, a law firm hired by the FDIC. The audit was conducted by the independent public accounting (IPA) firm of Ollie Green & Company, through a contract with the former Resolution Trust Corporation OIG, and covered billings paid from January 1, 1990 through December 9, 1993.

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, Bayh, Connaughton & Malone'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 $1,161,856. The auditors identified questioned costs of $49,792 from an audit sample of $1,112,475.

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

In response to a draft of this report, management disallowed questioned costs totaling $11,003. Although management's corrective actions on all five of the recommendations 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.

Specifically, in recommendation 1, the OIG recommended disallowance of $25,508 for missing fee bills. Management allowed the questioned amount. The Legal Division has concluded that no sufficient basis exists to disallow the questioned costs. The OIG was unable to apply auditing procedures to satisfy itself as to the reasonableness of these charges since the supporting documentation was not available. Further, the law firm acknowledged a violation of its contract terms by not properly maintaining the documentation for the required period. Therefore, the OIG will continue to question the missing invoices as unsupported. However, the Legal Division identified $12,484 as being previously disallowed, so only $13,024 of the invoiced amount was actually paid to the firm. Therefore, the OIG will reduce questioned costs to $13,024.

In recommendation 2, the OIG recommended disallowance of $12,090 for unsupported expenses. Management allowed $1,522 of facsimile expenses and disallowed $10,568 of miscellaneous expenses. The firm's response documents that Bayh, Connaughton & Malone charged the FDIC a fixed rate per page instead of actual costs incurred for facsimiles. Actual costs are generally limited to the phone line charge. Therefore, the OIG will continue to question $12,090 as unsupported expenses.

In recommendation 3, the OIG recommended disallowance of $6,393 for photocopying charges in excess of cost. Management allowed the full amount. The OIG agrees with the Legal Division's decision to use the allowable rate of $.08 per page for calculating photocopying disallowances and, as a result, will reduce questioned costs to $0.

In recommendation 4, the OIG recommended disallowance of $4,983 for non- reimbursable overhead expenses. Management allowed $4,968 and disallowed $15. In response to the draft report, the law firm and the Legal Division provided explanations which support $4,968 of the questioned charges. As a result, the OIG will reduce questioned costs to $15.

In recommendation 5, the OIG recommended disallowance of $818 for unauthorized personnel. Management allowed $398 and disallowed $420. In response to the draft report, the law firm provided documentation which supports $398 of the questioned fees. As a result, the OIG will reduce questioned costs to $420.

Based on the IPA's work, $49,792 was questioned in the draft report. After considering management's comments on the findings, we will report questioned costs of $25,549, including $25,114 of unsupported costs, in our Semiannual Report to the Congress.