City of Cadillac, Michigan

TABLE OF CONTENTS

ScopeofForensicAnalysis............................................................................................................................2 AnnualAgreementsIssuedbyMcCurdy,Wotila&Porteous.......................................................................3 NormalDutyWork........................................................................................................................................4 ExtraordinaryDutyWork..............................................................................................................................4 Expenses.......................................................................................................................................................6 Summary.......................................................................................................................................................8 ListofAppendices.........................................................................................................................................9 AppendixASummaryofAnnualNormalDutyFees AppendixBExtraordinaryWorkAtAnnualAgreementRates AppendixCExtraordinaryWorkatApprovedAgreementRates(1993and2010) AppendixDTimeNotBilledtoCityofCadillacatAnnualAgreementRates AppendixETimeNotBilledtoCityofCadillacatApprovedAgreementRates(1993and2010) AppendixFDiscountsReceivedAtAnnualAgreementRates AppendixGDiscountsReceivedatApprovedAgreementRates(1993and2010) AppendixHExpensesBilledtoCityofCadillacAtAnnualAgreementRates AppendixIExpensesBilledtoCityofCadillacatApprovedAgreementRates(1993and2010)

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ScopeofForensicAnalysis
Rehmann Corporate Investigative Services (RCIS) contracted with the City of Cadillac on February 20, 2012 to conduct a forensic audit of legal fee expenditures during the time period January 1, 1994 through June 30, 2010. The primary objective of the forensic analysis was to determine if the expendituresforlegalfeeswereinexcessofthelegalservicesagreementsissuedbythelawfirmswho contracted with the City. In order to perform the analysis, RCIS requested copies of all invoices pertainingtolegalfeesandtherelatedlegalservicesagreements,eachencompassingtheyearsunder audit. AninitialstepintheforensicauditprocesswastobecomefamiliarwiththeCityofCadillacprocesswith respect to external legal services. We were informed that the City had utilized numerous law firms during the period in question, however only the law firm of McCurdy, Wotila & Porteous (MWP) had issuedannualwrittenagreementstotheCityofCadillacregardingtheirfeestructure.Asaresult,our forensicanalysiswaslimitedtothelegalservicesinvoicesthatweresubmittedbyMWPtotheCityof Cadillac. Atanearlystageoftheforensicaudit,itwasdeterminedthattheCitywasunabletolocatenumerous MWP invoices. City personnel instructed RCIS to contact MWP to determine if they could provide invoices that the City identified as missing. At the request of RCIS, MWP was fully cooperative and provided numerous invoices that could not be located by the City. There still remained invoices that MWPcouldnotproduce.[OuranalysiscoversonlytheinvoicesthatwereprovidedbyeithertheCityor MWP.] ByJune2012,RCIShadmaintainedfrequentcorrespondencewithprimarilytheCityofCadillacDirector ofFinanceinanattempttoobtainthenecessaryrecordstoproceedtowardcompletionoftheforensic audit.ItwasconveyedatthistimetoRCISthattheCitycouldnotlocatethefollowingrecords: 1. Generalledgersfor1994through1997 2. Invoicesfor1998and1999 The City initiated a project to have all invoices which had been microfilmed during the years 1994 through 1997 converted to hard copy. Upon the receipt of these invoices, RCIS concluded that these invoice copies either lacked sufficient information to allow audit analysis or they were of such poor qualitythattheycouldnotbesufficientlyreadtoextractthenecessaryauditinformation. RCISfeltitnecessarytomeetwithrepresentativesoftheCityofCadillactodiscusstheaforementioned missingrecordsandthepoorqualityofselectedrecordsreceived.Duringthismeetingitwasdecidedto limitthescopeoftheforensicaudittotheperiodfromJanuary1,2000throughJune30,2010.Itwas also decided at this meeting that RCIS would create a report documenting the variance between the retaineramountcapturedintheDecember1993agreementbetweentheCityofCadillacandMWPand

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the actual retainer paid through the agreement ending June 30, 2010. RCIS also agreed to prepare a reportdocumentingallpaymentstooronbehalfofMWPthatwerenotcoveredintheagreements.

AnnualAgreementsIssuedbyMcCurdy,Wotila&Porteous
Rehmannwasprovidedwithcopiesoftheannuallegalserviceagreementsthatwereoriginallyissuedby McCurdy, Wotila & Porteous and its predecessor firms. These agreements, available in the Annual Agreementsbinderpertaintothefollowingtimeperiods: July1,2009throughJune30,2010..AgreementA July1,2008throughJune30,2009..AgreementB July1,2007throughJune30,2008..AgreementC July1,2005throughJune30,2006..AgreementD July1,2004throughJune30,2005..AgreementE July1,2003throughJune30,2004..AgreementF July1,2002throughJune30,2003..AgreementG July1,2001throughJune30,2002..AgreementH July1,2000throughJune30,2001..AgreementI July1,1999throughJune30,2000..AgreementJ January1,1994throughDecember31,1996AgreementK BasedontherecordsmaintainedbytheCityofCadillac,itdoesnotappearthataseparateagreement wasissuedforthetimeperiodofJuly1,2006throughJune30,2007.Asaresult,whenperformingour analysisforthistimeperiod,weutilizedtheratesthatwerelistedinAgreementD,whichcoveredthe periodofJuly1,2005throughJune30,2006. EachannualagreementincludedinourreportdividestheresponsibilitiesoftheCityAttorneyintotwo categoriesnormaldutiesandextraordinarydutiesanddescribesthetypesofservicesthatshouldbe considered normal duties as opposed to extraordinary duties. In addition, some of the annual agreementscommentonthetypesofexpensesthatarereimbursablebytheCitytoMWP. Based on our review of the Cadillac City Council Minutes, the initial agreement between the City of Cadillac and MWP, Agreement K, was approved by the City Council in their Special Meeting held on October 11, 1993, effective January 1, 1994. The next agreement which was approved by the City CouncilwasAgreementA,whichwasapprovedonJuly20,2009.OurreviewofCityCouncilMinutes revealed no documentation of City Council approval for the interim agreements. In our analysis, we calculatedbillingsbasedupontheratesinthetwoagreementsapprovedbyCityCouncilandthen,asa

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comparison,wecalculatedbillingsbasedupontheratesintheannualagreementsissuedbyMWPthat werenotapprovedbytheCityCouncil.

NormalDutyWork
AgreementsBKsetaflatannualfeefornormaldutywork.TheCityofCadillacmadeequalmonthly paymentsforthenormaldutyworkperformedbyMWP.FortheyearendedJune30,1994,theannual feefornormaldutyworkwas$40,000.00.Thisfeeroseto$77,880.00byJune30,2009. UnderAgreementA,thenatureofthefeestructurefornormaldutyworkwasmodified.Forthefirst time,normaldutyworkwasbilledatanhourlyrateof$120.00perhourwithtotalbillingsnottoexceed $77,880.00fornormaldutyservices. BasedoninformationprovidedbyCityofCadillacandMWPpersonnel,inmanyinstances,invoiceswere notissuedforservicesperformedaspartofthenormaldutyportionoftheagreement.Accordingly,itis not feasible to analyze the number of hours of work performed in conjunction with the normal duty servicesperformedbyMWP. RehmannCIShassummarizedtheannualfeesinAppendixASummaryofAnnualNormalDutyFees. BasedonourreviewoftheannualagreementsissuedbyMWP,annualfeesfortheyearsendedJune30, 2000throughJune30,2010totaled$810,440.00,andaresummarizedinAppendixA.Accordingtoour review of the City Council minutes, the Council had only approved annual fees totaling $477,880.00. Thisfigureisbasedontheapprovedratesfromthe1993and2010agreements(seeAgreementAand Agreement K). As a result, for the fiscal years June 30, 2000 through June 30, 2010, the City paid $332,560.00inexcessofapprovedratestoMWP.

ExtraordinaryDutyWork
UnderAgreementsAK,extraordinaryworkischargedatanhourlyrate.Theactualratevariesineach agreementaccordingtotheleveloftheattorneyandthetypeofextraordinaryworkperformed. ThehourlyratesforAgreementsBKaresummarizedbelow. Associate Partner Labor Time Time Environmental AgreementK AgreementJ AgreementI AgreementH AgreementG AgreementF $80.00 $100.00 $100.00 $100.00 $100.00 $100.00 $110.00 $125.00 $125.00 $125.00 $125.00 $125.00 $125.00 $145.00 $145.00 $145.00 $145.00 $145.00 Notchargedatadifferentrate $145.00 $145.00 $145.00 $145.00 $145.00

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AgreementE $100.00 $125.00 $145.00 $145.00 AgreementD $100.00 $125.00 $145.00 $145.00 AgreementC $100.00 $125.00 $145.00 $145.00 AgreementB $100.00 $125.00 $145.00 $145.00 ThehourlyratestructurewasmodifiedunderAgreementAandissummarizedbelow.Underthisnew agreement,thehourlyrateisdependentupontheattorneyperformingthework,notthenatureofthe workperformed. $200.00perHour $180.00perHour $165.00perHour DavidMcCurdy MikeFigliomeni NathanPiwowarski RogerWotila WendyDiVozzo TylerThompson DavidPorteous JasonElmore CindyWotila AnnePerillo PersonnelfromtheCityofCadillacrequestedthatwecomparetherateschargedforextraordinarywork oneachagreementissuedbyMWPandthenacomparisonbasedonlyonAgreementsapprovedbefore Council.Thecomparisonoftherateschargedontheinvoicestothemostrecentannualagreementcan be found at Appendix B Extraordinary Work At Annual Agreement Rates. The comparison of the rateschargedontheinvoicestothemostrecentagreementwhichwasapprovedbytheCouncilcanbe foundatAppendixCExtraordinaryWorkatApprovedAgreementRates(1993and2010). From January 1, 2000 through June 30, 2010, MWP billed the City of Cadillac $420,279.16 for extraordinarywork,excludingdisc.Accordingtotheannualagreementrates,thisamountshouldhave beenonly$356,737.25,resultinginanoverpaymentof$63,541.31.Atapprovedagreementrates(1993 and 2010 rates), this amount should have been only $309,817.70, resulting in an overpayment of $110,461.46. During our review of the invoices, we noted numerous instances where time was recorded on an invoice,buttheCitywasnotbilledforthetimeexpended.Thetotaloftimerecordedbutnotbilledwas 90.15hours.Thevalueofthistimeusingannualagreementratesis$12,510.25;detailofthiscalculation canbefoundatAppendixDTimeNotBilledtoCityofCadillacatAnnualAgreementRates.Thevalue of this time using approved agreement rates is $11,236.00. Detail of this calculation can be found at AppendixETimeNotBilledtoCityofCadillacatApprovedAgreementRates(1993and2010). During our review of the invoices, Rehmann CIS noted numerous invoices that included courtesy discounts. Based upon our review of the invoices, MWP granted courtesy discounts to the City of Cadillacfor115.01hourswhichwasvaluedontheinvoicesas$20,251.25.Inouranalysis,werevalued the hourly rate for the discounted service using the rates from the legal services agreements. These calculationsareincludedinourreportasAppendixFDiscountsReceivedatAnnualAgreementRates and Appendix G Discounts Received at Approved Agreement Rates (1993 and 2010). This time

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should be valued at $16,171.46 using annual agreement rates (See Appendix F) and $15,645.59 using approvedagreementrates(seeAppendixG).

Expenses
Based on our review of the invoices provided by City of Cadillac and MWP personnel, there were numerousinstanceswhereexpensesincurredbyMWPwerechargedbacktotheCityofCadillac.The treatmentofexpensesundertheannualagreementsvaries.Theexpensesareaddressedineachofthe annualagreements,asfollows: AgreementA:AgreementstatesthattherewillbeexpenseschargedbacktotheCityforfilingfees, mileage,travelrelatedexpenses,photocopies,facsimilesandsimilaritems. AgreementB:AgreementstatesthattheCitywillberesponsibleforreimbursingMWP$300.00per monthforlibraryexpenses. AgreementC:AgreementstatesthattheCitywillberesponsibleforreimbursingMWP$250.00per monthforlibraryexpenses. AgreementD:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementE:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementF:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementG:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementH:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementI:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementJ:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. AgreementK:AgreementissilentregardingwhichexpensesmaybechargedbacktotheCityofCadillac. Ascheduledetailingtheexpenses,usingtheannualagreementsasthebasisforanalysis,canbefound atAppendix H ExpensesBilledtoCityofCadillacAtAnnualAgreementRates. TheCityofCadillac was charged $30,079.99 for expenses from January 1, 2000 through June 30, 2010. Of this total, $21,938.03 was charged to the City in accordance with an annual agreement. A sum of $6,645.96 of expenseschargedtotheCitywasnotdefinedintheannualagreements.Finally,$1,496.00ofexpenses hadinsufficientdocumentationtodeterminewhetherornottheywereappropriatelycharged. A schedule detailing the expenses using the approved agreements (1993 and 2010) as the basis for analysis can be found at Appendix I Expenses Billed to City of Cadillac At Approved Agreement Rates. Using approved agreement rates, the City of Cadillac was charged for $30,079.99 of expenses

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from January 1, 2000 through June 30, 2010. Of this total, $15,338.03 was charged to the City in accordancewiththeapprovedagreements(1993or2010).Asumof$13,245.96ofexpenseschargedto theCitywasnotspecifiedintheapprovedagreements.Finally,$1,496.00ofexpenseshadinsufficient documentationtodeterminewhetherornottheywereappropriatelycharged.

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Summary
BelowisasummaryoftheamountsbilledtotheCityforeachtypeofserviceandacomparisonofthose amountstoagreementrates. AnnualAgreementRates 3 Amountsto InvoiceBased onAnnual Agreement Rates Undetermined $810,440.00 $0.00 356,937.25 0.00 12,510.25 0.00 (16,371.46) 0.00 21,938.03 1,496.00 $1,185,454.07 $1,496.00

Amounts Invoicedby MWP $810,440.00 420,279.16 0.00 (20,251.25) 30,079.99 $1,240,547.90

AmountsOver (Under)Billed byMWP $0.00 63,341.91 (12,510.25) (3,879.79) 6,645.96

NormalDuty Extraordinary ProBono Discounts Expenses Total

$53,597.83

Reference AppendixA AppendixB AppendixD AppendixF AppendixH

NormalDuty Extraordinary ProBono Discounts Expenses Total

Amounts Invoicedby MWP $810,440.00 420,279.16 0.00 (20,251.25) 30,079.99 $1,240,547.90

ApprovedAgreementRates Amountsto InvoiceBased onApproved Agreement Rates(1993 and2010) Undetermined $477,880.00 $0.00 309,817.70 0.00 11,236.00 0.00 (15,645.59) 0.00 15,338.03 1,496.00 $798,626.14 $1,496.00

AmountsOver (Under)Billed byMWP $332,560.00 110,461.46 (11,236.00) (4,605.66) 13,245.96 $440,425.76

Reference AppendixA AppendixC AppendixE AppendixG AppendixI

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List of Appendices
AppendixASummaryofAnnualNormalDutyFees AppendixBExtraordinaryWorkAtAnnualAgreementRates AppendixCExtraordinaryWorkatApprovedAgreementRates(1993and2010) AppendixDTimeNotBilledtoCityofCadillacatAnnualAgreementRates AppendixETimeNotBilledtoCityofCadillacatApprovedAgreementRates(1993and2010) AppendixFDiscountsReceivedAtAnnualAgreementRates AppendixGDiscountsReceivedatApprovedAgreementRates(1993and2010) AppendixHExpensesBilledtoCityofCadillacAtAnnualAgreementRates AppendixIExpensesBilledtoCityofCadillacatApprovedAgreementRates(1993and2010)

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