---------------------------------“A” Is For...

By Janean S. Johnston

It has taken awhile getting used to being treated like Hester Prynne. You remember her—the one with the scarlet letter “A”. It is not that my private life is so titillating; it instead reflects what I have chosen to do since leaving law school. My “A” stands for “Auditor”, although sometimes in my career of auditing law firms since 1987, I have felt like Hester--misunderstood and condemned to be separated from polite society.

That is why I was caught totally off guard while attending a 1993 conference dealing with Corporate Compliance issues arising out of the 1991 Federal Sentencing Guidelines when I was approached by two people and asked if I would consider auditing the internal law departments of their two respective companies. One request was made by the CEO of a large insurance company and the other was from the general counsel of a well-known food company.

I respectfully declined. I assumed both companies probably had well-run law departments as evidence by their attendance at the seminar. There was also very little time in my busy schedule, so I rationalized that private law firms needed my services much more than in-house law departments, since they were exposed to law suits by their clients when things went wrong, and no one could ever imagine those kinds of problems in an internal law department at that time. So I did not even give a second thought to saying no.

Several years later, the general counsel of a defense firm asked if I would conduct a review/audit of his law department. I said yes this time because I was beginning to understand some of the increasing pressures that internal law departments were starting to experience. After assenting, three questions came to mind: (1) Why would an in-house law department need or want an outside auditor? (2) What would I be reviewing? (3) How could I benefit the general counsel and the company through the audit process and final report?

At our first preliminary strategy session, the general counsel graphically laid out the situation that his Office of General Counsel (“OGC”) was operating under at the time. Try and imagine the scenario he described. His corporation had been caught up in the “buy-or-be-bought” frenzy among defense firms after the end of the Cold War and ensuing reductions in defense spending. As a result, his firm acquired an aerospace firm and several unexpected situations arose due to the consolidation. The first was a proxy fight and as a result, five “young Turks” were added to the board, shifting the balance of power and bringing in a new CEO, with a different corporate philosophy, to run the newly merged company. The new company now had many thousands more employees, but only two lawyers were brought from the acquired company’s law department to assist an already down-sized OGC, thereby doubling the already onerous workload. (Remember, “lean and mean” was the mantra of the times.) The entire company was struggling through a major reorganization, and the resulting turmoil. (The day I started my audit, two vice presidents were “let go” and one week prior, another vice president had resigned.) Not only did the general counsel have a new CEO and a different corporate culture, but his law department was responsible for providing the information, materials, and necessary supervision for training and assimilating thousands of new employees and bringing them up to speed on corporate compliance issues (since their old firm had provided no training about such areas as anti-trust concerns, insider trading or the importance of confidentiality, etc.), in addition to the considerable task of coordinating and consolidating all the benefits packages for the new members of the company. Also included on the “to do” list for the OGC was handling a “qui tam” lawsuit which came along with the acquired company, free of charge.

The general counsel had to try and mesh the two different corporate cultures among his own staff (he had a “hands-off” style and the new attorneys were used to a “hands-on” style), and develop systems and procedures that were consistent with everyone’s values and needs and that would be followed by all. Additionally, several of the existing policies created internal turf wars between various divisions in the law department over separate budgets, compensation issues, sharing of support staff, etc. Overriding all of these issues was a general feeling among the OGC members of confusion, mistrust, insecurity, and low morale.

No wonder I was approached to help. The general counsel then gave me the following tasks to accomplish as part of my audit: (1) Review internal departmental procedures, (2) Review their outside counsel management process, (3) Review the intra-department communication process, (4) Analyze the OGC’s organizational fit, and (5) Serve as an ad hoc check on the current health of the department. The purpose of the audit was to prevent “surprises” later for the general counsel.

The procedure I use for conducting an internal audit/review is fairly simple. Every member of the OGC (not just the lawyers, but law clerks, secretaries, etc.) participates in confidential interviews and responds to a set of questions relating to each of the five general areas being reviewed. This approach works best with an outside, objective party conducting the questioning and the review. It should also be noted that every audit is unique, and the questions developed are dependent upon the type of corporation and the scope of the review, as selected and determined in cooperation with the general counsel, and can vary greatly from one audit to another.

For example, in this particular audit, under the first category, Internal Departmental Procedures, questions were asked about calendaring and mail-opening procedures, filing procedures and records management (including document retrieval and security issues), knowledge of current business operating policies, computer usage and procedures, and performance review protocols, etc.

Questions relating to the second category, Outside Counsel Management Process, mainly revolved around the OGC’s current software program and determining its capability to track all of the necessary information. Since the legal department’s workload had doubled with the acquisition of the new entity, more legal work was being given to outside counsel. Therefore, it was extremely important that the work was being assigned to competent, cost-effective attorneys, who were being managed efficiently and paid promptly for their work.

Since the company had facilities all over the country, and lawyers in several locations, questions concerning the third area, Intra-departmental Communications, involved determining what mechanisms the OGC used to foster good communication with the legal department, and if they were sufficient. In addition to reviewing the various handbooks and manuals, the frequency of general staff and departmental meetings, who was required to attend (or who was excluded), questions were asked concerning job descriptions and performance evaluations and whether communication was facilitated in both directions through these processes. Members of the OGC were also queried whether satisfaction surveys were used with their client/business groups, and about the process for the orientation and training of new employees and temporary workers in their department. Final questions were asked about general communication within the company and whether they were kept informed as to the future goals and objectives of their company by the CEO or another senior executive, in order to learn whether they felt information flowed downwards as well as upwards.

The fourth category, Analyzing the Organizational Fit, disclosed a number of problems that were occurring because the OGC had recently been decentralized. Separate departmental budgets had created turf wars over support staff usage, as well as some conflicts over management roles. For example: Does one division/business group manager “manage” another division/business group manager and his or her decisions and expenditures when the costs for those expenditures comes out of the first manager’s budget? (Under the current system, when there is a lawsuit in the defense division involving a human resources problem, the HR attorney manages the outside counsel working on the case, but the money spent to handle the matter comes out of the defense group’s budget.) Also, the incentive plan that was part of the department heads’ compensation package set up conflict-of-interest situations because the attorneys were sometimes more concerned about meeting their individual goals and staying within or under budget than in doing what might be in the best interests of the entire company, e.g., settling a questionable case early in order to stay under budget rather than taking the time and money to reach a more desirable conclusion, especially when the litigation expenses would have been taken out of their individual budget.

The final category which needed to be analyzed was the “Current health (mental and attitudinal) of the OGC”. Questions were asked about the interaction of staff members, and whether the two cultures and different styles were blending, also about stress levels due to the increased workload and members’ perceptions of the change to a decentralized law department and whether problems which had arisen within the OGC were being handled to their satisfaction. The information gathered would help give the general counsel a clearer picture of the overall morale level of his law department and enable him to address any concerns in a timely and effective way.

At the end of all the information-gathering through personal, confidential interviews and collection and review of written policies, procedures, employee handbooks, etc., the data was analyzed and organized for my oral presentation to the general counsel. It had been initially stipulated that the majority of the reporting phase would be conducted verbally, especially for any sensitive information, and only a broad overview of the five principal categories and the ensuing recommendations would be captured in a written report.

The general counsel was gratified to find that both reports generally verified his assessment of how his law department was functioning. However, there were selected areas in which the audit/review provided new and quite valuable information, a different perspective, and some creative suggestions for improved policies and procedures that would greatly benefit operations within the OGC.

Some of the following issues from the five general categories were discussed during the reporting phase. Recommendations under the first category included: (1) Adding an office administrator (at least part-time) to assist the general counsel in managing and overseeing all the departmental procedures and systems; (2) Revising the calendaring procedures to achieve more conformity; and (3) Developing uniform filing procedures as well as a more efficient document retrieval system.

Category two comments addressed the fact that the training provided with the software program to manage the outside counsel data base was inadequate. Among other consequences, invoices were not being issued in a timely manner. Staff members clearly needed additional training and technical support to manage that area.

Under the third category, members of the OGC appreciated the “hands-off” but still accessible style of the general counsel, but generally wanted more information about the company and what was happening within the other divisions/business groups of the OGC. Suggestions from this category were: (1) Develop a communication procedure to facilitate the sharing of support staff back and forth from one business group to another; (2) Revise the job descriptions and make them specific to the individual; (3) Implement regular, annual performance evaluations in order to communicate expectations (on both sides) about what constituted a job well done and to motivate continued high performance; (4) Update the resource manual (which should contain all the primary procedures and processes used by the OGC) and provide a copy to every member of the OGC; and (5) Increase the orientation and training of new employees and temps, a function that had suffered due to a staff downsizing and the absence of an office administrator.

The recent decentralization of the legal department had created some tension. Category four recommendations included new procedures in order to reduce the possibility of turf wars, a phenomenon that was taking place with depressing regularity.

Reduced staffing levels and increased workload had created stress and debate over issues of “fairness” that were noted in the fifth category. The general counsel and I collaborated on solutions involving the use of part-time help in some areas and increasing communication and adding procedures in others to alleviate tension. It was also necessary to build a “team” mentality between attorneys and support staff. Tight budgets and a downsized staff made it even more important to provide adequate technology and training to maintain morale and general effectiveness.

At the conclusion of the report phase, at the request of the general counsel, I developed a proposal to help assist him and the OGC in implementing a number of the recommendations listed in the report. Due to budgetary limitations, I was able to provide hands-on assistance in creating, revising and implementing new procedures on a consulting basis which was more cost-effective than adding additional staff to manage changing the systems and procedures.

I always learn something new during every audit, and this was no exception. The general counsel suggested to me that other corporate law departments might need auditing services as much as his did, and told me that the defense industry was not the only one being targeted for corporate compliance issues by the government. Obviously, manufacturing companies were being closely scrutinized due to environmental concerns, but it was his perception that the healthcare industry would soon become the number one target for corporate compliance review, because of the increasingly large fraction of federal budget allocations to such expenditures, and the corresponding need for much greater oversight. Current events appear to corroborate his perceptions. Any readers involved in these industries should give serious consideration to whether your companies and respective in-house law departments might benefit from such a review/audit.

As Peter Drucker has intimated, it is fairly easy to be a good auditor, all you have to do is ask the right questions. You don’t need to know all of the answers! The collaborative part of the process is the most rewarding for me. I enjoy being used as a conduit by staff to voice their views and concerns while still maintaining confidentiality, and working as a team with the general counsel to solve creatively the problems that have emerged.

My job is especially fulfilling when I can work with a conscientious general counsel (such as this one), who has the drive and integrity to achieve the corporate goals set forth by his or her CEO, who at the same time is able to remain sensitive to the personal and professional needs of fellow OGC members.

My own follow-up to an audit involves sending the general counsel a “Client Satisfaction” survey form to complete. This provides me the input I need to revise and improve my own approach. While the general counsel gratefully acknowledged I had helped him sleep better at night, and assisted him in reaching his goal of “No surprises”, the best feedback I received was from the managing partner at my firm. He told me the general counsel related to him that his company would have been happy to pay three times what they had been charged for my services because of the value of the information they had received–to both the pleasure and chagrin of my managing partner.

As I said at the beginning, I am starting to get used to my own “A”. Hopefully, you can see that it stands not only for “Auditor”, but also for a valued “Assistant” (or Angel of mercy!) who can help you learn what is really going on within your own law department and provide you an early opportunity to change any deficient procedures and also to receive a vote of confidence with respect to those parts of your system that are working well.

DISCLAIMER: While this article is based on an actual audit/review performed by the author, all names, dates, and locations, etc. have been protected to preserve the confidentiality of the process.

About the Author

Janean S. Johnston, J.D. has a national law practice management consulting business. In addition to auditing and teaching on behalf of private firms, state bar organizations, and insurance companies, she has most recently been an ethics/LOMA auditor for the State Bar of California. She resides in Alexandria, Va.

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