Legal Fees Paid by FDIC to Morgan, Lewis & Bockius

(Audit Report No. 98-068, June 26, 1998)

The Office of Inspector General (OIG) has completed an audit of Morgan, Lewis & Bockius, a law firm hired to provide legal services to the Federal Deposit Insurance Corporation (FDIC). 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 FDIC during the period January 1, 1990, through December 9, 1993.

The objective of the audit was to determine whether Morgan, Lewis & Bockius' legal bills present fairly the expenses and activities of the cases for which the fee bills were submitted. Accordingly, Morgan, Lewis & Bockius' 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 law firm for FDIC-related work during the audit period were $217,403. The audit sample covered $175,960, or 81 percent of the total. The audit resulted in net questioned costs of $17,572.

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

The General Counsel'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 $8,068. Although management's corrective actions on recommendations 1, 2, and 4 through 7 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 $1,958 for photocopying charges in excess of allowable amounts. Management allowed $1,532 and disallowed $426. The Legal Division only disallowed questioned costs following January 5, 1993, which was the date of the firm's legal services agreement (LSA). The Legal Division concluded that FDIC did not have any contractual right before the LSA to disallow questioned costs.

In recommendation 2, the OIG recommended that FDIC disallow $4,614 for unsupported expenses. Management allowed $2,084 and disallowed $2,530. Management allowed certain questioned charges that were paid more than 4 years before the audit commenced and, therefore, were beyond the firm's document retention requirements. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $2,530.

In recommendation 4, the OIG recommended that FDIC disallow $3,734 for unauthorized personnel. Management allowed all the questioned charges because the unauthorized charges occurred before the firm had executed its LSA with FDIC, thereby rendering the concept of authorized versus unauthorized personnel meaningless. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $0.

In recommendation 5, the OIG recommended that FDIC disallow $1,694 for unsupported time charges. Management allowed all the questioned charges. The firm stated that it used a computerized system in which attorneys entered their time into a computer and discarded their notes memorializing their time. The Legal Division stated that FDIC guidelines in effect during the period in which costs were questioned did not require the firm to use and retain handwritten time sheets.

However, in the absence of original time records, the IPA could not independently satisfy itself that the $1,694 in computerized time charges were appropriately supported. Therefore, for recommendation 5, the OIG will continue to question $1,694.

In recommendation 6, the OIG recommended that FDIC disallow $1,047 for non-reimbursable overhead expenses. Management allowed $27 and disallowed $1,020. The Legal Division allowed $27 related to questioned internal courier charges because it was the practice of the FDIC and former RTC Legal Divisions to reimburse for actual delivery charges. The OIG accepts management's explanation and, accordingly, reduced questioned costs to $1,020.

In recommendation 7, the OIG recommended that FDIC disallow $479 for facsimile charges in excess of costs. Management allowed $433 and disallowed $46. The Legal Division only disallowed questioned costs following the January 5, 1993, LSA effective date. Nonetheless, FDIC guidelines provided that FDIC would only pay the actual cost of long distance telephone calls for facsimiles. Therefore, the OIG will continue to question $479 for excess facsimile charges.

Based on the IPA's audit work, $17,572 was questioned in the draft report transmitted to management. After considering $8,068 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $11,727 (including $4,224 in unsupported costs) in our Semiannual Report to the Congress.