Legal Fees Paid by RTC to Frandzel & Share

(Audit Report No. 98-036, April 17, 1998)

The Office of Inspector General (OIG) has completed an audit of Frandzel & Share, 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 Ollie Green & Company 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 Frandzel & Share'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 $2,244,064. The audit sample covered $1,118,574, or 50 percent of the total. The IPA identified net questioned costs of $372,208.

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

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 $100,870. Although management's corrective actions on recommendations 1 and 14 differed from the recommended corrective actions, we consider management's response as providing the requisites for a management decision.

Specifically, in recommendation 1, the OIG recommended that FDIC disallow $232,402 for fees not supported by time sheets. Management allowed $185,922 and disallowed $46,480. Management acknowledged that the firm was required to maintain supporting documentation, including original time sheets, for at least 4 years after payment. However, management did not believe that the firm's failure to maintain required documentation was a no cost alternative to outside counsel. Accordingly, after considering other factors, management determined that $46,480 was an appropriate disallowance. In the absence of time sheets, the OIG could not independently verify the questioned time charges. Therefore, for recommendation 1, the OIG will continue to question $232,402.

In recommendation 14, the OIG recommended that FDIC disallow $23,333 for photocopying charges that exceeded the firm's actual costs. Management allowed $20,594 and disallowed $2,739. Management stated that it has been the practice of both the FDIC and former RTC Legal Divisions to permit firms to bill at the maximum cap rate applicable for the time period involved. The FDIC specifically incorporated this policy into its December 1991 Guide for Outside Counsel, and it was not the intent of the RTC to impose a differing standard on its outside counsel with the February 1992 RTC Guide for Outside Counsel. Therefore, based on an analysis of the firm's LSA during the period in question, the Legal Division calculated that only $2,739 of the $23,333 exceeded the applicable cap rate.

However, RTC guidelines provided that photocopy charges be billed at actual documented costs or at a standard cost based on a documented cost study. The IPA determined that the firm's actual photocopy rate ranged from $.0230 to $.0281 per page, while the firm billed from $.08 to $.20 per page. The Legal Division subsequently revised its guidelines to allow firms to charge up to $.08 per page for photocopying. In view of the subsequent change to guidelines, the amount disallowed by the Legal Division does not appear to be unreasonable. Nonetheless, the IPA appropriately questioned the photocopying costs given the guidelines in effect at that time. Therefore, for recommendation 14, the OIG will question $23,333.

Based on the IPA's audit work, $372,208 was questioned in the draft report transmitted to management. In addition to the recommendations previously discussed, in recommendation 2, the OIG recommended that FDIC evaluate $61,662 in fees and expenses billed during the period in which the firm did not have an effective LSA and ratify amounts deemed reasonable and disallow any of the charges not approved. Management ratified all $61,662. Also, in recommendation 3, the OIG recommended that FDIC analyze the qualifications of employees working on RTC matters but not listed on the firm's LSA, determine how much of the $3,160 in questioned costs should be ratified, and disallow any of the charges not approved. Management ratified all $3,160. The OIG accepts the actions taken by management on recommendations 2 and 3 and, accordingly, reduced questioned costs to $0. After considering $100,870 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $307,386 (including $244,634 in unsupported costs) in our Semiannual Report to the Congress.