Risk Management Audits: Value Added

What’s the value of an audit? Can it be done internally?

Many law firm audits are imposed from outside the firm as part of the firm’s Lawyers Professional Liability Insurance Program. Smaller law firms are not really equipped to handle an internal audit. Larger firms which have a risk management partner/shareholder, General Counsel or Risk Management Committee do have the wherewithal to manage an internal audit of the firm but oftentimes neglect to do so. So, the question here is first, “What do we mean by a law firm audit?” and secondly, “Can such an audit be carried out effectively without the aid of an experienced outside third party?”

The definition of an audit used here is the action of evaluating the important processes which a law firm uses as an overlay to the supervision and management of its practice.  This is distinguished from peer review or lawyer evaluation where a subjective examination is being made of the actual quality of an individual lawyer’s work. Here, we are speaking of important facets of a law practice. In fact, risk management concerns permeate everything that happens in the firm but for purposes of this very short discussion, we’re just picking four of the most obvious topics. They are:

New matter and potential client evaluation: very often the methodologies used by lawyers and law firms to evaluate the legal issues attached to potential client representation determine the success or failure of the engagement from the git-go. Most importantly, this is where an attorney or attorneys determine(s) whether or not they should accept the representation; whether they can meet client expectations in fulfilling the assignment and whether or not the client can afford the services involved. This is not just a decision based upon the legal issues involved. The determination here, for audit purposes, includes every aspect of the examination for the potential acceptance of new representation.

Conflicts of Interest Determinations: evaluating the potential for conflicts is more than just simply using a “lookup” table of names. Conflicts issues attach to a number of factors, some of which are more obvious, such as whether or not the firm has represented a party involved in the instant issues, previously. For an intellectual property firm, for example, conflicts have very much to do with the landscape of the practice. Taking the most apocryphal example, if a law firm represents Google®, there may be no exact conflict of interest in representing Yahoo® but that does not mean that the former is going to be happy about the law firm representing the latter. So, the conflicts determination process that is used must cover far more than just simply the names of the parties involved. The determination here, for audit purposes, is an evaluation of the entire process from the time that the matter was first introduced all the way through to the point where the firm accepts representation.

Calendaring of Dates: very few activities in a law firm are unrelated to date keeping. Of course, for firms dealing with issues involving statutes of limitation, the significance is even more pronounced. And, it’s interesting to note that despite the software that’s available and the underscoring of the importance of calendaring in a law firm, according to the latest statistics, almost half of the professional liability claims against law firms still relate in some manner to missing a particular date by which to perform a specific act. For that reason, any kind of evaluation of the quality of a practice management overlay involves a determination as to the quality of the calendaring process inside the firm. Again, this isn’t as simple as it sounds, because there are so many factors involved in determining whether or not the process is of the highest caliber. The determination includes the individuals who are involved most directly (which are almost always non lawyer staff), the software that is used by the firm in which to set the calendar dates, and the flow of information inside the firm between the various parties involved. The determination here, for audit purposes, is an evaluation of the entire process again from the point where the mail is first brought into the firm, to the means by which e-mail is collected and categorized , to the methodologies used by which the dates are calendared.

Billing and Collections: the overall effectiveness of the handling of this category determines whether or not the firm will survive and prosper. From the Stone Age it would seem that lawyers have tracked their time and activities, sent out their invoices and received their payments. It again seems so simple, but of course it is not. The determination here involves the proclivities of individual attorneys, the software program, the method the firm uses to collect the data, the discipline involved in assuring others that invoices are sent on a timely manner and the process of follow-up to ensure that the client has received and has paid their invoices. For many lawyers, this is a particularly difficult process and while it is easy to make the argument to most lawyers that calendaring dates, evaluating new clients and checking for conflicts of interests is important, arguments about the importance of billing and collections in a disciplined, effective and effectual manner often fall on deaf ears. The determination here then involves the entire process by which time is first entered, data is collected, invoices are sent and collections are made. For that reason, this is a particularly difficult category around which a law firm is able to conduct an internal audit.

This leads us to the second question posed by this commentary, namely, “Can such an audit, involving at the very least the four categories described above, be carried out effectively without the aid of an experienced outside third party?” Without trying to feather the nest of the consulting world, the short answer to that question is that it is very difficult to accomplish.

Generally, those firms that would be best able to carry on a meaningful internal audit would be assumed to be those of some size. That doesn’t mean, however, that the effort which is made is effectual. There are so many factors that are involved in making these determinations that the dynamic of the office involved (in multiple office law firms), the genesis of the office, the lawyers that constitute the population of the office and other factors, are all involved in a determination as to whether or not the audit can be a success. In point of fact, it might be easily asserted that the chance for such an audit to be a success is largely determined by the extent to which the partnership or corporation has articulated the standards of the practice and publish those standards in such a way that everyone is on notice of the requirement that those standards be met each and every time. The standards cannot be simply put in a three ring binder and placed on the shelves of the library  either. They must be in evidence and they must be imposed on an everyday basis by those who are chartered to control risk within the firm. This means that the risk management partner/shareholder, the general counsel, and/or the risk management committee must be fairly dynamic in its leadership and must involve itself in virtually every aspect of the practice management of the firm. Even those firms that attempt and complete such a process, though, will tell you that as good as they may be, it is still of real value, largely due to the difficulties involved in making objective evaluations relating to some of the lawyers involved, to have a third party outsider conduct the audit on a periodic basis.

So, to respond to the questions posed in this commentary, the answer is that audits which focused upon those most important aspects of the practice overlay will be those that are most effectual; that the audits are a critical factor involved in determining the ability of a firm to resist professional liability claims and complications, and that utilizing an experienced outside third party to conduct the audits or to assist in those efforts is of real value to every firm.