Auditing in Legal Services
Author:
Richard G. Stock – Lexpert (October 2003)
Scott Fargason maintains that lawyers waste considerable
resources. As a lawyer and a CPA in the US, he claims that “there
is ample opportunity for auditors to dramatically improve the efficiency
and effectiveness of in-house and external legal counsel.” He has
collaborated with the Institute
of Internal Auditors
to produce a development and practice aid for the IIA, as part of its
Preferred Practices Framework for Internal Auditing.
The
author is careful to declare the audit as one that is directed at the legal
process, and in particular its efficiency and effectiveness. Still, the
very presence of the handbook and the review processes it represents helps
explain why banks, insurance companies, and different levels of government
have been more focused and structured in the use of legal resources.
Neither internal nor external exempt. Fargason claims that “organizations that do not
employ the use of written “ right to audit “ clauses
for both internal and external counsel are embracing the high risk that the
legal process will be sub-optimal and characterized by excessive cost
overruns.
Like most audits (of
other resources), the methodology of the review process is straightforward
and includes a walkthrough (or flow-charting) of the legal process,
interviews of key personnel, an evaluation of internal resources, external
counsel trends and ratios, analyses of legal services, and benchmarking.
There is one feature of the “test for controls” – the
contract for legal services - which is seldom seen in corporate and
government law departments. Fargason suggests
that the “contract” between legal (internal and external) and
internal clients be documented to allow easy analysis by the client. A few
of the characteristics are familiar, but several are noteworthy and
evasive:
the contract be written;
clear and defined scope of representation;
a specified term;
routine legal matters billed by the product, not the hour;
non-routine legal matters negotiated at the time of the engagement,
with clearly defined budgets and anticipated outcomes;
standard coding for legal services rendered on behalf of the
organization;
standard billing format, with a summary bill augmented by detailed,
itemized billing; and
a right to audit clause, and coding of legal services and legal
personnel.
Case /
matter budgeting, uniform task-based management systems, timekeeping and
billing protocols, and management reporting systems are the tools of the
trade. One anonymous CEO is quoted as saying “I want data that shows
whether the resources spent by the law department are focused on the right
priorities and generate value we can measure. Until I get that data, my
best option is to keep pushing for lower costs.
The IIA framework is
a useful beginning for any law department, and in turn for the law firms
that work with them. But effectiveness is also about doing “ the right stuff at the right
time. ” It has been almost two years since a group of 20 General
Counsel met in New York City
to identify 17 factors critical to the success of a law department. The
factors were published along with a lengthy discussion piece by Stephen E. Nowlan in the fall 2002 edition of the Chief Legal
Executive. More than a listing of factors several key elements or
indicators were defined for each factor and can serve
as the milestones for a self audit. Here are three examples:
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Critical
Success Factor #1
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Key
Elements
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The CLO has frequent dialogue with the CEO
Executive officers are briefed on steps law
department is taking to align with the company objectives
CLO creates opportunities for lawyers to work
with executive officers
CLO monitors quality of relationships between
attorneys and executive clients
Client satisfaction surveys.
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Critical
Success Factor #4
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Key
Elements
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Significant business-unit management teams
include a lawyer as a participating member
Formalized role in the new product development
process
Lawyers review and contribute to annual business
plans
Legal team reviews major policy decisions before
announcements
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Critical
Success Factor #15
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Key
Elements
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Tracking and reporting on high-risk matters,
attainment of preventive law goals, resources to support company growth
initiatives, and other non-spending-based performance measures
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Effectiveness requires
innovation and innovation is about asking the right questions, thinking
clearly about the answers, and applying common sense. In the last quarter
of 2003, this means being accountable and measurable for effectiveness and
for efficiency in the use of resources to deliver the results.
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