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Hiding external fees in capitalized expenses

In a previous post (July 30, 2005), I discussed outside counsel fees that are borne by insurance carriers and that do not show up on a law department’s budget. Other expenses are kept off-budget when a project’s legal costs are capitalized, such as when there is an acquisition.

My view is that all cash laid out by a company to law firms should be included in the law department’s budget. Accounting treatments, tax considerations, reserve management, and the payments of other functions to law firms – claims and risk management, tax, human resources, for example – should not conceal or mislead total spending by a company on law firms. Otherwise, how can a company know and manage end-to-end its total legal expenditures?