Auditing attorney's bills: legal and ethical pitfalls of a growing trend.

• Author: Matturro, Claire Hamner
• Position: Florida

Legal and Ethical Pitfalls of a Growing Trend

Auditing of attorneys' bills by professional legal auditors--often former attorneys themselves--represents a new trend in the practice of law. This practice is ripe with potential legal and ethical pitfalls for attorneys. Perhaps the most common problem to date in Florida concerns insurance defense attorneys whose bills are audited at the request of the insurance company. Such an audit might involve an unethical violation of the client's right to confidentiality. However, even when the client requests an audit, and presumably agrees to any disclosure of information to the auditor, such an audit might well result in a loss of the evidentiary protection of the attorney-client privilege.

This article addresses the reasons for the growth of legal audits and what an attorney might expect in a legal audit, along with legal and ethical issues raised by such an audit.

Why Audits Are on the Increase: Fear of Fraud, Cost Cutting, and Enforcing Billing Guidelines

Commentators have noted that the majority of attorneys are ethical in their billing practices.[1] However, the entertainment industry and recent news reminds the public that irregularities occur in legal billing. The client faced with a substantial legal bill might well remember that Tom Cruise finally brought down "The Firm" not because of its Mafia activities but because of the firm's fraudulent overbilling. Such popular fiction both helps create and reflects a public perception that ethical legal billing might be an oxymoron.

Not only did Tom Cruise bring down "The Firm" for its overbilling practices, but real-life lawyers also have fallen from lofty places for similar practices. Popular legal fiction aside, Webster Hubbell's well publicized ordeal with fraudulent billing certainly fed the public perception of lawyers padding and manipulating their bills. Reports of lesser publicized criminal convictions for fraudulent billing practices as well as civil repercussions are sprinkled throughout the media with recurring and disturbing frequency these days.[2]

Despite such publicity, research and surveys conclude that the majority of lawyers do not engage in fraudulent billing.[3] In fact, as one author noted, most lawyers are "so busy with necessary work that they would have no reason to pad their hours or to perform make-work assignments even if they lacked moral scruples."[4] As observed by the Wall Street Journal, "Many of America's 864,000 lawyers keep scrupulous time records, work as efficiently as possible and never inflate charges."[5] Yet, this last quote appeared in a Wall Street Journal article titled: "Ten Ways (Some) Lawyers (Sometimes) Fudge Bills."[6] After all, it is "only human nature to exaggerate in hindsight, especially when law firms demand a minimum number of billable hours in a year from associates,"[7] according to one attorney turned legal auditor. "If one is expected to bill more than 2,000 hours per year, there are bound to be temptations to exaggerate the hours actually put in," according to Chief Justice William Rehnquist.[8]

One repercussion of such a perception is the growing trend of auditing attorneys' bills. In fact, the Wall Street Journal reports legal auditing is one of the fastest growing offshoots of the legal profession.[9] "Growing concern about overbilling has in turn spawned an entire new industry: legal auditing," according to Jim Schratz, lawyer turned legal auditor.[10]

Within this environment, individual clients, corporate clients, and insurance companies which hire "insurance defense attorneys" to represent their insured are increasingly seeking outside audits of the legal bills submitted by their attorneys. This trend is likely to increase rather than decrease.[11] The Wall Street Journal reported that "one of the fastest growth industries in the legal business is made up of entrepreneurs claiming they can find the fat in law-firm invoices."[12]

This new industry has sought to capitalize on this fear of billing fraud. A casual search on the Internet for legal auditors reveals a number of websites advertising for business. These advertisements include vague, undocumented, or unfootnoted references to surveys and studies about legal overbilling.[13]

Fear of fraudulent billing is not the only motive for an audit: Monitoring and controlling costs certainly are common goals of a legal bill audit.[14] In the insurance defense arena, an insurance company might audit bills to "closely monitor its law firms and more accurately benchmark the performance of each firm [and to see if it] received value, quality and efficiency in the delivery of its legal services."[15] Cost cutting in corporate America seems to be an across-the-board mantra of the 1990s and insurance companies are no different in that desire than any other business.

Thus, an individual or corporate client, or an insurance company, may request to audit an attorney's bills due to fear of irregularities or for the purpose of general cost cutting and evaluation.

What to Expect in an Audit: Paper, People, Prying, and Computerized Programs

"A legal audit is a careful examination of the legal bills and the underlying documents for the purpose of detecting billing errors, abuses and inefficiencies," says Judith Bronsther, lawyer turned legal auditor, writing in Accountability Services, Management Analysis of Legal Services Rendered to ABC Insurance Company, 561 PRACTICING L. INST./LITIGATION 99, 157 (1997).[16]

Such a legal audit may take many forms, from superficial to a comprehensive audit involving a visit to the law firm and questioning of personnel involved in the bills. Many audits will involve some sort of computer program, though the cost of such computerized audits may encourage some customers to ask for a less thorough manual audit.[17]

Auditor Schratz describes four basic types of legal audits. The "most comprehensive," which involves both a computerized program and an on-site visit, includes a review of "all fee and expense entries, law firm work product, expense documentation, pre-bills and time sheets. Key law firm personnel are also interviewed."[18] Bookkeepers, secretaries, and paralegals may be questioned by private investigators in such intense audits and at least one case of fraudulent billing was discovered by an interview of a legal secretary.[19]

The next level of audit includes a study of the paper minus the interviews and the on-site visit. This "less comprehensive" audit reviews "all the firm's fee and expense entries, and a review of any expense documentation, work product, pre-bills, and time sheets that can be provided by the client."[20] At the next level of scrutiny, an auditor can review "the law firm's fee and expense billing" without reviewing "any expense documentation, work product, pre-bills or time sheets." Finally, the least comprehensive audit is a letter report that simply analyzes "specific concerns or issues that can be identified from the client's billing entries or statements."[21]

What an attorney might expect in an audit can be gleaned from legal auditors' representative samples and commentary.[22] Audits often catch such discrepancies as attorney A billing one hour for an interoffice conference with attorney B, who in turn billed two hours for the same conference.[23] Catching math errors also is common in audits.[24] "Consecutive days billing more than 10 hours each is generally a red flag for legal auditors," noted an American Bar Association Journal article.[25]

Beyond that, what is involved might well depend upon the purpose of the audit. A "fraud" audit essentially seeks to determine if the work billed was actually performed by the billing attorney.[26] In such a fraud audit, the auditor compares documentation against the actual bill, reviews invoices, and checks documents and correspondences which were billed.[27] Another type of an audit, the "efficiency" audit, reviews the bill for "staffing efficiencies and other factors that adversely affect the legal costs."[28] Such an efficiency audit might also combine the same review as a "fraud" audit.[29]

Accountability Services, a legal auditing firm, produced a "Management Analysis of Legal Services," published by the Practicing Law Institute, which specifically illustrates what an audit might involve, what it might reveal, and what the auditor might then recommend to the insurance company requesting an audit.[30] Using charts and graphs, for example, the auditor analyzed the discovery costs, phone call charges, legal research, motion practices, and trial preparation charges of various firms doing legal work for the "ABC Insurance Company."[31] Based upon this sample analysis, the auditor herself a former attorney--recommended "less discovery."[32] Further, she recommended better use of phone calls to avoid motion practice.[33] Yet while suggesting picking up...