Spotting weaknesses: Why your law firm needs a risk audit

 

Many law firm audits are offered (or sometimes imposed) from outside the firm as part of its lawyers’ professional liability insurance programme. 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, may have the wherewithal to manage an internal audit of the firm, but often neglect to do so.

This article will explore:?

1. what constitutes a risk audit in a law firm context;

2. whether it can be carried out effectively without the aid of a third party; and

3. the value of risk audits.

1. Audit scope

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 lawyers’ 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 a law firm, but the four most obvious areas are:?

a. evaluations of potential new matters ?and clients;

b. conflicts of interest determinations;

c. calendaring of dates; and

d. billing and collections.

 

a. New matters and clients

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 beginning.

Most importantly, this is where the lawyer(s) determine: ?

• whether they should accept the representation;

• whether they can meet client expectations in fulfilling the assignment; and

• whether the client can afford the services involved.?

It cannot be stressed enough to say that this is not just a decision based on the legal issues involved. The determination here, for audit purposes, includes every aspect of the examination for the potential acceptance of new representation: does the firm have the expertise, time and experience to handle the matter involved? Can it meet client expectations?

 

b. Conflicts of interest

Evaluating the potential for conflicts is more than just simply using a ‘lookup’ ?table of names or quizzing partners about their recollections (lawyer memory is still used exclusively by some smaller law firms). Conflicts issues attach to a number of factors, some of which are more obvious, such as whether 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. 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 the matter was first introduced all the way through to the point where the firm accepts representation. At the end of the day, whatever process is used, is it adequate to protect the interests of ?the firm?

 

c. 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.

But, despite the software that is available and the importance of calendaring in law firms, almost half of the professional liability claims against US law firms still relate in some manner to missing a particular date by which they should have performed 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. This isn’t as simple as it sounds, because there are so many factors involved in determining whether the process is of the highest calibre.

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 at which the mail is first brought into the firm, to the means by which email is collected and categorised, to the methodologies used by which the dates are calendared.

Whatever calendaring process is used, it must be managed and the dates controlled for the safety and security of the firm – not the convenience or comfort of the lawyers involved.

 

d. Billing and collections

The overall effectiveness of the firm in handling billing and collections 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 is not.

The determination here involves the proclivities of individual lawyers, the software program used (and the information it provides), the method the firm uses to collect the data, the discipline involved in assuring others that invoices are sent in a timely manner and the process of follow-up to ensure the client has received and paid its 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 interest is important, arguments about ?the importance of billing and collections in a disciplined and effectual manner often fall on deaf ears.

For that reason, this is a particularly difficult category around which a law firm is able to conduct an internal audit.

2. Internal vs. external control

This leads us to the second question: ?can a risk audit, involving at the very least the four categories described above, ?be carried out effectively without the aid of an experienced external third party? The short answer is that it is very difficult to accomplish.

Lawyers sometimes conduct risk audits, but they are no more or less capable of this task than they are of managing law firms: the job is always best done by an individual who has management training and experience, because of the subject matter involved.

Generally, those firms that would be best able to conduct meaningful internal audits would be assumed to be those of some size. That doesn’t mean, however, that the effort which is made is effectual. The dynamic of the office involved (in multiple-office law firms), the genesis of the office, the lawyers who constitute the population of the office, and so on, all determine whether the audit can be ?a success.

In 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 published those standards in such a way that everyone is on notice of the requirement that those standards must be met each and every time.
The standards cannot simply be put in a ring binder and placed on the shelves of the library (as has been the case on more than one occasion). They must be in evidence and imposed every day by those who are charged with controlling risk within the firm. This means that the risk management partner/shareholder, general counsel, and/or 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.

However, even those firms that attempt and complete such a process 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 an external ?third party conduct the audit on ?a periodic basis.

3. Value of risk audits

So, moving on to the third question, what is the value of a risk audit? The answer is that an audit which focuses on the ability of the firm to manage the most important aspects of its practice overlay will be the most effectual.

A risk audit is critical in determining a firm’s ability to manage its practice, not solely to resist professional liability claims and complications, but also to be profitable and comfortable in the practice of law.

The law firms that know themselves and are prepared to make the changes necessary to aid their effectiveness and profitability are those that will survive and prosper in the next ten years. Firms which do not have this capacity to see themselves as they truly are will have an increasingly difficult time in the new practice environment.

?Thomas Berman has been advising law firms on practice management and professional liability issues for over ?20 years (www.bermanassociates.net)