Legal Fees Paid by RTC to Morgan, Lewis & Bockius

(Audit Report No. 98-070, June 30, 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 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 Morgan, Lewis & Bockius' legal bills were adequately supported and in compliance with the cost limitations set forth by RTC and the Federal Deposit Insurance Corporation 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 $3,290,390. Detailed audit procedures were applied to an audit sample of $1,570,098, or 48 percent, of the total. On a limited basis, audit procedures were applied to additional invoices. The IPA identified net questioned costs of $1,631,662.

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

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 $27,470. Specifically, management disallowed $18,449 for unsubstantiated expenses, $3,650 for administrative time charges, $3,407 for unauthorized rate charges, $1,466 for unauthorized personnel charges, and $498 for professionals performing secretarial/clerical activities.

Management allowed $1,604,192. Specifically, management ratified the $1,379,019 questioned during the period in which the firm did not have an LSA and $93,946 questioned for personnel working on RTC matters but not listed on an LSA. Management also allowed $58,615 for duplicate/overpayments because the firm provided additional information showing that it had previously credited RTC on other invoices for the duplicate/overpayments. Further, based on a review of the working papers and explanations provided by the firm, management allowed $6,035 for administrative time charges, $5,259 for unauthorized rate charges, $4,058 for review, revise, and edit charges, $2,524 for intra-office conferencing charges, and $1,132 for professionals performing secretarial/clerical activities. The OIG accepts management's explanations for these findings and reduced questioned costs by $1,550,588.

Management also allowed $53,604 of the $72,053 questioned unsubstantiated expenses. Specifically, because some invoices with questioned costs were paid more than 4 years before the audit commenced and, therefore, were beyond the firm's document retention requirements, management allowed $22,259. The OIG accepts management's explanation and reduced questioned costs by $22,259.

In addition, management allowed $7,549 of the $7,968 questioned facsimile charges because these charges preceded the firm's LSA date of January 5, 1993. However, RTC guidelines provided that RTC would only pay for the actual cost of long distance telephone calls for facsimiles. Therefore, the OIG will continue to question $7,968 for facsimile charges.

Finally, management allowed $23,796 of the $24,371 questioned in-house photocopying charges. Management allowed questioned in-house photocopying charges that preceded the firm's LSA date. Further, to the extent questioned photocopying charges occurred after the LSA date, management allowed the firm $.08 per page in accordance with the Legal Division's policy to allow charges up to the maximum cap rate in effect. In view of subsequent revisions to guidelines, the Legal Division's position does not appear unreasonable. However, the IPA appropriately questioned the photocopying costs for lack of support. Therefore, the OIG will continue to question $24,371.

Based on the IPA's audit work, $1,631,662 was questioned in the draft report transmitted to management. After considering $27,470 in disallowances taken by management and management's comments on the IPA's findings, we will report questioned costs of $58,815 (including $49,794 in unsupported costs) in our Semiannual Report to the Congress.