Friday, April 08, 2016

Time recording and internal controls

You may have noticed in the recent Insolvency Service annual report on regulation that they are reviewing the specific penalty bond requirements. This is just part of an ongoing problem within the profession, caused by insurers having to pay out for misconduct by IPs. In some circumstances they have to pay out, not only for the money lost from the estate, but also for the costs of investigating the losses and making the claims. Some of the resultant claims have been very significant.

Some of you will also have noticed that one of the bond providers is now asking for a lot more information in their renewal form and we anticipate that this approach will spread over the coming year. Many of the questions make sense and probably should have been asked a long time ago, but we would like to highlight two areas that we think could be significant in future.

First, we have noticed a shift in the approach to internal controls from that which had previously been the norm. In the past, the emphasis among the regulators has been on the IP retaining direct input and control over his cases, especially where financial transactions and asset protection and control were concerned. Recently, however, there have been several bond claims where a significant element of the claim arose because an individual had too much power. That individual held so much power within their firm that they could act unchallenged, allowing them to take money or charge time to cases without any restraint. As a result, our interpretation of the questions being asked in the expanded bonding renewal questionnaire is that the bond providers want to see a balance. The IP can retain control over his appointments, but he should be subject to substantial checks and balances within his firm to reduce the chances of him abusing his position. This will clearly be more difficult to achieve in a smaller firm. Even so, all practices should consider whether they can put systems in place to ensure that significant transactions have to be signed off or approved by someone in addition to the office holder, with that person given enough status to resist inappropriate pressure from the office holder and refuse to approve the payment.

The second area we have noted is that several bond claims have arisen from inaccurate time records. Ignoring the current high profile case that is generating a degree of finger-pointing within the profession, we have seen several smaller cases where an IP’s initial misconduct has led to an investigation across more cases and resulted in challenges to specific time lines. As a result, we are looking at time records in a lot more detail during our reviews this year, and we have also looked at the time records that arrive on our desks through other routes, such as in notices sent to creditors. We are doing this to help coach practices on potential improvements to their time recording. We are pretty sure that none of our clients is actively time dumping or acting improperly, and we do not expect any of them to be challenged by an IP-hunter any time soon, but we have noted some themes already that every IP in the profession should note and take steps to address.

Blocks of time – there is a marked difference between how well time is recorded when listed in small units and explained for in each line, and when it is blocked together into bigger parts of the day. Someone who records several small blocks across a morning and says what they were doing for each slice is much more likely to give an adequate explanation of their time than someone who blocks out the whole morning and gives a single narrative.

Consistency – if one person says that they were at a meeting or had a discussion with another member of staff, we often fail to find a corresponding entry in that member of staff’s time records. Part of this may be that what one person considered a significant discussion at a particular time of the day did not seem as significant to the other member of staff. The solution is likely to be for staff to only refer to each other in their individual time records where they have agreed that the meeting or discussion was significant and should be recorded.

Detail – we see some descriptions that lack detail, or appear to be routine tasks that should not be charged to the case. The Courts have indicated that items like “filing” could be practice overheads and it might not be appropriate to charge them to the case. You should therefore ensure that any description is sufficient to explain why the work done should be chargeable time rather than treated as part of your overheads.

Rounding – we occasionally see evidence, unfortunately commonly at more senior grades in a firm, of people rounding time to the nearest quarter, half, or even whole hour. Even if you are rounding down to the nearest block, that leaves you open to criticism. You have to record time in units of 6 minutes or less and although you may say that you are rounding down, there is every chance that this may be interpreted as you rounding up. We have seen cases where the Court deducted an arbitrary percentage of the charged time to account for perceived rounding.

Pre-appointment time and post-appointment time – we have seen pre-appointment work recorded to post-appointment codes and vice versa. You should have a review system to pick up errors like that and re-post them.

Change of case type – be careful when switching from ADM to CVL, or from a CVA to liquidation of some form. Set up separate charging codes for each case type and make sure that time is allocated to the correct case type. Make sure that you conduct a review of your time records before you raise an invoice, so that you cannot accidentally draw time in the wrong appointment.

Booking blocks of time that include different tasks – we have seen blocks of time recorded that include elements of different categories of work. The problem with this, especially if you are obtaining different fee approval bases for different tasks, is that you could inadvertently claim time costs for work done on a fixed fee or percentage basis. Like the first point about the accuracy of larger blocks of time, we suggest that you use smaller blocks with specific descriptions, making sure that the description is all from one category. You should also have a programme to review time records, both as part of your general practice management control, but also specifically when raising a fee note, to enable you to spot and correct any errors.

Delay in completing time records – we have seen examples in practices where staff complete their time records on a Monday morning for the previous week. I defy anyone to remember accurately what they were doing yesterday, let alone up to a week later. Time records should be completed by all staff, including IPs, as near contemporaneously as possible as that is the only way to ensure their accuracy.

Identical descriptions – we quite often see identical descriptions for different blocks of time, on occasions over several days. The worst example we ever saw was one IP’s time cut and pasted into every time block on a case, despite the original description referring to pre-appointment tasks and meeting the directors on site. Clearly, you should say what you did at that moment in time, not copy from another time, even if you did roughly the same work.

Abbreviations and jargon – Try to use plain English time narrative and avoid abbreviations. What may be an obvious short-cut to you may not be to someone else when reading your records. The description has to be plain enough for someone who is unfamiliar with your office, or possible not working in insolvency, to understand.

Blank lines – you should have supporting narrative for every block of time, but we often see gaps and, unfortunately, it is often those on higher charge out rates that fail to complete their records in enough detail.

At the end of the day, a determined fraudster will be able to manipulate things for a while, but by implementing effective controls and reviews, you can limit the chances of them succeeding and reduce subsequent claims for specific time line errors and the associated investigation costs. You will also be more likely to recover a high proportion of your booked time if your remuneration is challenged in Court. We would encourage you to remind staff of their duty to record time accurately, share these deficiencies and any others that you spot so that everyone can learn from them, and put regular reviews in place so that the detail of your time records and is checked and corrected if appropriate, throughout the life of the case.