Typically, legal bill auditing involves analysis of the time and expenses contained in legal bills to determine if the time and expenses are accurate, appropriately billed, and, in some cases, reasonable. But the nature and extent of the review will vary from auditor to auditor.
Unlike in financial accounting, there are no "generally accepted" legal bill auditing principles promulgated by some recognized organization. There are, however, various practices which are typically looked for by auditors as reflective of potential billing abuse and excessive fees or expenses. Many of these have been referred to and relied on in court decisions.
Audits are used to analyze legal fees and expenses in a number of different areas. The most common are:
1) when fees are in dispute between a client and its own law firm;
2) when the losing party in litigation has to pay the winning parties' legal fees (often called "fee-shifting" cases);
3) when a third party (such as an insurance company) is obligated to pay a party's fees on some or all claims in litigation;
4) where an allocation needs to be made as to fees attributable to various claims or parties in litigation; and
5) when a court needs assistance in assessing legal fees presented to the court for compensation.
The general areas looked at in audits are:
1) whether the bills are accurate;
2) whether there are improper time or expenses being billed; and sometimes
3) whether the amounts billed are reasonable.
Other analyses may be undertaken depending on the nature of the project, such as allocating time and expenses spent among different claims in a case where fees are recoverable on some, but not all, of the claims in the case.
Different auditors use different processes. Often, one of the initial steps is to take the billing entries from the legal bills–both the time entries and expense, disbursement or cost entries–and input them into a computer file. That allows some initial analyses through database and spreadsheet techniques. Some analyses stop there. Additional steps can include organizing the various entries into categories (how the categories are chosen, what goes into them and who chooses them has a lot to do with the value of the audit), review of the file of the case, interviews of the billing or other law firm personnel, and preparation of a written report or other analysis.
To some extent. Although there is no such thing as a "standard" legal bill audit, many legal bill auditors generate similar types of reports from the bill database, such as reports showing all time entries in date order, all time entries organized by biller, a summary of total time and fees by biller, and a summary of all disbursements/expenses. There are also variations of the foregoing (for example, the summary of total time by biller might categorize the billers by partner, associate, paralegal, etc.)
Often, the auditor will also generate reports that break the time entries down into various categories that the auditor has chosen (such as all time entries for preparing "correspondence".)
What are the reports used for? How reliable are they?
When done properly, the reports from the bill database are important tools that the auditor uses to analyze information in the bills that cannot realistically be extracted from the bills by a manual review of the bills themselves. Their reliability depends on the care, skill and experience of the auditor.
It is important to recognize that while the bill database and reports are important tools, they are just tools. Knowing what conclusions can–and cannot–be drawn from them is critical, and it is not unusual for erroneous conclusions to be drawn from reports because of the lack of litigation experience of the auditor or sometimes just carelessness.
To be of value, a legal bill audit requires someone with sufficient litigation experience (assuming it is litigation being analyzed) to understand what the bills and various computer analyses say – and don't say – and to know what needs to be done beyond generating computerized reports from the bill database. Experience is essential because the bills alone and the database often do not tell the whole story, and merely having done a lot of other legal bill audits does not supply that experience.
On the technical side, one should look for an auditor that has the capability to generate accurate computerized reports for both analysis and presentation. Just because a computer is being used to generate the reports does not mean they are accurate if incorrect assumptions are made, if the database file is not created properly or the reports not carefully generated. Errors are often made.
If testimony is a possibility, experience as an expert witness is important.
Some auditors charge a percentage of the fees and expenses under audit. Others charge a flat rate or by the hour. Some charge a percentage of any reductions found, but this raises serious credibility and ethical questions.
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