Most large companies have an in-house legal staff that helps the company deal with current and pending legal matters. Often the legal staff’s efforts are assisted by outside counsel, especially when specialized technical issues are involved. The legal department is growing in importance for some firms, as the firms attempt to deal with new government regulations. For management accountants, the regulatory changes have been dramatic, as a result of the Sarbanes-Oxley Act of 2002 which increased the responsibilities of financial managers in publicly held firms. One portion of the act, for example, requires a company to maintain a code of ethics.

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Most companies allocate the cost of legal services to their SBUs on the basis of some measure of size, such as the total assets or total revenues of the SBU. What is the likely effect of this allocation approach on the desired motivation and behavior within the SBUs? What approach would you propose for allocating legal costs, and why?