[Federal Register Volume 64, Number 24 (Friday, February 5, 1999)]
[Proposed Rules]
[Pages 5728-5736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2762]


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LEGAL SERVICES CORPORATION

45 CFR Part 1641


Debarment, Suspension and Removal of Recipient Auditors

AGENCY: Legal Services Corporation.

ACTION: Proposed rule.

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SUMMARY: This proposed rule implements a provision in the Legal 
Services Corporation's (``Corporation'' or ``LSC'') fiscal year 1996 
and subsequent fiscal year appropriations acts which authorized the 
Office of Inspector General (``OIG'') to ``remove, suspend, or bar an 
independent public accountant, upon a showing of good cause, from 
performing audit services. * * * after notice to the auditor and an 
opportunity for hearing.'' This rule sets out the debarment, suspension 
and removal authority of the OIG and informs independent public 
accountants performing audit services for LSC recipients of their 
rights, and the standards that will apply, in connection with 
debarment, suspension and removal actions. The Corporation solicits 
public comment on the rule in anticipation of adoption of a final rule.

DATES: Comments must be submitted on or before April 6, 1999.

ADDRESSES: Comments should be submitted to the Office of Inspector 
General, Legal Services Corporation, 750 First St. NE., 11th Floor, 
Washington, DC 20002-4250. Comments may be submitted by electronic mail 
(e-mail) to LT[email protected].

FOR FURTHER INFORMATION CONTACT: Laurie Tarantowicz, Counsel, Office of 
Inspector General, (202) 336-8830, LT[email protected].

SUPPLEMENTARY INFORMATION: The Corporation's fiscal year 1996 
appropriations act authorized the LSC Inspector General (``IG'') to 
``remove, suspend, or bar an independent public accountant, upon a 
showing of good cause, from performing audit services. * * * after 
notice to the auditor and an opportunity for hearing.'' Public Law 104-
134, 110 Stat. 1321, Sec. 509(d) (1996). This provision has continuing 
effect in fiscal years 1997, Public Law 104-208, 110 Stat. 3009, 
Sec. 503(a) (1996) and 1998, Public Law 105-119, 111 Stat. 2440 (1997), 
and 1999, Public Law 105-277 (1998). In accordance with the statutory

[[Page 5729]]

direction to ``develop and issue rules of practice,'' 110 Stat. 1321, 
Sec. 509(d), the OIG issues this proposed rule.
    Pursuant to Executive Order, the Federal government has a 
government wide system of suspension and debarment. The Executive 
Office of the President, Office of Management and Budget, has issued 
guidance setting forth procedures for agencies to follow in 
establishing procedures for making suspension and debarment decisions. 
Policy Letter 82-1. Based on this guidance, agencies have promulgated 
regulations, all substantially similar, implementing suspension and 
debarment. These regulations have been developed after extensive public 
comment and have withstood considerable judicial scrutiny. This 
proposed rule is based on the government wide system, but includes some 
modifications based on the OIG's specific statutory authorization to 
debar, suspend and remove, and on the particular circumstances of 
independent public accountants and their relationship to LSC 
recipients.

Section-by-Section Analysis

Subpart A--General

Section 1641.1 Purpose/Applicability
    Recipients are required by statute to have an annual audit 
conducted by an independent public accountant (IPA). In order to assist 
in ensuring that recipients receive acceptable audits, the OIG is 
authorized to debar, suspend and remove IPAs from performing audit 
services for recipients. This proposed rule sets out that authority and 
informs IPAs of their rights, and the standards that will apply, in 
connection with debarment, suspension and removal actions. This 
proposed rule applies to IPAs performing audit services for entities 
which receive LSC funds. LSC recipients and subrecipients are required 
to have an audit performed in accordance with guidance promulgated by 
the OIG. This is consistent with LSC's general policy extending the 
requirements and restrictions which apply to recipients to entities 
which receive transfers of LSC funds from recipients, see 45 CFR 
1610.7, and with LSC's regulation governing subgrants, 45 CFR Part 
1627, which requires subrecipients to obtain an audit in accordance 
with LSC's audit policy, 45 CFR 1627.3(c).
Section 1641.2 Definitions
    This section defines the key terms used in the proposed rule. Many 
of the terms are defined in the proposed rule as they are defined in 
the government wide system.
    Paragraph (a) defines ``adequate evidence,'' which is the standard 
of proof for imposing a suspension, as information sufficient to 
support the reasonable belief that a particular act or omission has 
occurred. This is a less stringent standard than ``preponderance of the 
evidence,'' the standard applicable to debarment and removal actions.
    Paragraph (b) defines ``audit services'' as the annual financial 
statement audit of a recipient. This is the audit required by section 
509(a) of LSC's fiscal year 1996 appropriations act. (As discussed 
above, section 509 of the fiscal year 1996 appropriations act has been 
incorporated by reference in subsequent fiscal year appropriations acts 
and continues to be effective, see, e.g., Public Law 105-277 (1998). 
For ease of reference, this provision of law is hereinafter referred to 
as ``section 509.''
    Paragraph (c) defines ``contract'' as an agreement between a 
recipient and an IPA for an IPA to provide audit services to the 
recipient. Debarment and suspension affects future contracts between a 
recipient and an IPA; removal affects existing contracts.
    Paragraph (d) defines ``conviction'' as a judgment or conviction of 
a criminal offense by any court, whether entered upon a verdict or 
plea, including pleas of nolo contendere. An IPA may be debarred, 
suspended or removed if convicted of any offense indicating a breach of 
trust, dishonesty or lack of integrity, or conspiracy to do the same, 
by any court, whether federal, state, county or municipal. For examples 
of such offenses, see the discussion under section 1641.7(d) of this 
section-by-section analysis.
    Paragraph (e) defines ``debarment.'' Debarment is a decision by the 
debarring official to prohibit an IPA from soliciting or entering into 
new contracts to perform audit services for recipient(s). Debarment 
does not affect existing contracts between a recipient and an IPA. A 
debarment must be based on a finding, by a preponderance of the 
evidence, that any of the causes for debarment exist. Debarment may 
cover an IPA's contracts with all recipients or with one or more 
specific recipients.
    Paragraph (f) defines ``debarring official.'' This is the official 
responsible for debarment, suspension and removal actions. Under the 
proposed rule, the debarring official is the OIG legal counsel or 
person performing that function regardless of title or his or her 
designee. The IG may designate another staff person as the debarring 
official if the OIG legal counsel is unavailable.
    Because the debarring official may be called upon to render 
judgment on compliance with applicable auditing standards, some 
consideration was given to changing the debarring official from the OIG 
legal counsel to an OIG employee with professional experience in 
government auditing. Specifically, consideration was given to 
identifying the Assistant Inspector General for Audit (AIGA), a CPA, as 
the debarring official. The AIGA, however, will likely be the OIG 
official who initially identifies the facts giving rise to a possible 
cause for debarment and recommends that a debarment, suspension or 
removal action be pursued. The proposed rule identifies the OIG legal 
counsel as the debarring official because, weighing the two concerns, 
it was determined that fundamental fairness would require that the 
process allow for more reflection and some separation of the debarring 
official from the immediate audit work. Comments on this issue are 
specifically requested.
    Paragraph (g) defines ``indictment'' for a criminal offense. An 
information or other filing by competent authority charging a criminal 
offense shall be given the same effect as an indictment. An IPA may be 
suspended if indicted for any offense indicating a breach of trust, 
dishonesty or lack of integrity, or conspiracy to do the same.
    Paragraph (h) defines ``IPA,'' an independent public accountant.
    Paragraph (i) defines ``knowingly'' to mean that an act was done 
voluntarily and intentionally and not because of mistake or accident. 
This term is used in the proposed rule in the context of prohibiting 
recipients from knowingly awarding contracts to, extending or modifying 
existing contracts with, or soliciting proposals from IPAs that have 
been debarred or suspended.
    Paragraph (j) defines ``material fact'' as one which is necessary 
to determine the outcome of an issue or case and without which the case 
could not be supported. In certain respects, whether material facts are 
in dispute determines the extent of the procedures afforded the IPA 
under the proposed rule. For example, if the debarring official 
determines that the IPA's response to the notice of proposed debarment 
does not raise a genuine issue of material fact, the debarment 
proceeding will be conducted entirely by written submissions.
    Paragraph (k) defines ``preponderance of the evidence,'' which is 
the standard of proof for imposing a debarment or removal, as proof by 
information that, compared with that opposing it, leads to the 
conclusion that the fact at issue is more probably true than not. This 
is a more stringent standard than ``adequate

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evidence,'' the standard applicable to suspension actions.
    Paragraph (l) defines ``removal.'' Removal is a decision by the 
debarring official to prohibit an IPA from performing audit services in 
subsequent years of an existing contract. Suppose, for example, that a 
recipient has entered into a contract with an IPA under which the IPA 
will perform an audit of the recipient for years 1, 2 and 3. If the IPA 
is conducting the year-1 audit of the recipient when the IPA is removed 
by the OIG, removal of the IPA will not prohibit the IPA from 
completing the year-1 audit. Removal will prohibit the IPA from 
conducting the year-2 and year-3 audits. Removal must be based on a 
finding, by a preponderance of the evidence, that any of the causes for 
debarment exist. Removal may cover an IPA's contracts with one or more 
recipients.
    Paragraph (m) defines ``suspension.'' Suspension is a decision by 
the debarring official prohibiting an IPA from soliciting or entering 
into new contracts to perform audit services for recipient(s). 
Suspension does not affect existing contracts between recipients and 
IPAs. A suspension must be based on a finding, by adequate evidence, 
that any of the causes for debarment may exist. Suspension may cover an 
IPAs contracts with all recipients or with one or more specific 
recipients.
Section 1641.3 Scope of debarment, suspension and removal
    This section sets out the scope of debarment, suspension or 
removal; that is, the effect of such action on the IPA and, for 
example, the IPA's divisions and affiliates.
    Debarment, suspension or removal of an individual IPA prohibits 
that IPA from performing audit services as an individual or as an 
employee, independent contractor, agent or other representative of an 
IPA firm.
    Unless the decision is limited by its terms to specifically 
identified divisions or other organizational elements, debarment, 
suspension or removal of an IPA firm prohibits that firm and all its 
divisions and other organizational elements from performing audit 
services. The OIG intends to issue decisions which have an impact on 
only those organizational elements of an IPA firm which were materially 
involved in the relevant engagement because extending the debarment to 
other organization elements would go beyond what is necessary to 
achieve the purposes of debarment, suspension or removal.
    In addition, the OIG may include in its debarment, suspension or 
removal of an IPA firm any firm that is an affiliate, subcontractor, 
joint venturer, agent or representative of the IPA firm. Such 
affiliates, etc., may be included in the decision only if such firm was 
materially involved in the relevant engagement and only if such 
affiliate, etc., was specifically named and given notice of the 
proposed action and an opportunity to respond.
    Similarly, the OIG may include in its debarment, suspension or 
removal of an IPA firm an individual officer director or partner 
responsible for the engagement, or an individual employee, independent 
contractor, agent, representative or other individual associated with 
the IPA firm. Such individuals may be included in the decision only if 
specifically named and given notice of the proposed action and an 
opportunity to respond. If not named in the decision, such individuals 
would be prohibited from performing audit services only as a 
representative of the debarred firm. Otherwise, such individuals are 
not prohibited from performing audit services.
Section 1641.4 Duration of debarment, suspension and removal
    This section provides that a debarment, suspension or removal only 
becomes effective after the IPA has been provided the opportunity to 
avail itself of the procedures outlined in this rule (notice and an 
opportunity to be heard) and a decision is issued by the debarring 
official.
    Subsection (a) sets out the length of time that a debarment will be 
effective. Generally, a debarment should not exceed three years. 
Debarment may be effective for less than three years if appropriate 
after consideration of the evidence presented by the IPA. Debarment may 
exceed three years in extraordinary circumstances. A longer period may 
be appropriate, for example, if an IPA has been debarred by a Federal 
agency for a longer period, see section 1641.7(b), or if an IPA has 
been convicted of an offense referred to in section 1641.7(d) and will 
be incarcerated for a period exceeding three years. If a suspension 
precedes a debarment, the suspension period will be considered in 
determining the debarment period and the debarment may be effective for 
less than three years.
    After debarment for a specified period has been instituted, the 
debarring official may extend the debarment for an additional period if 
necessary to protect LSC funds. The debarment period may not be 
extended based solely on the facts and circumstances upon which the 
initial debarment was based, but must be based on new facts, not 
previously in the record, and will be effective only after the 
procedures outlined in the proposed rule have been followed.
    Subsection (b) defines the duration of suspension. A suspension is 
a temporary measure, which may be instituted while debarment 
proceedings are being conducted. In addition, an IPA may be suspended 
in anticipation of the initiation of debarment proceedings, for 
example, upon conclusion of an investigation conducted by either the 
OIG or other authority, upon completion of a debarment proceeding 
conducted by a Federal agency, pending the outcome of a criminal 
prosecution, or pending the outcome of proceedings conducted by a 
sanctioning or licensing body with authority over IPAs, such as the 
American Institute of Certified Public Accountants (AICPA) or a State 
Board of Accountancy. If debarment proceedings are not initiated within 
12 months after the date of the suspension notice, the suspension shall 
be terminated. However, if a law enforcement official, including the 
police or a prosecuting authority, an official from another OIG, a 
state licensing body or other organization with authority over IPAs, or 
a government agency requests an extension of the suspension in writing, 
the suspension may be extended. Unless a debarment has been initiated, 
a suspension may not be imposed for more than 18 months.
    Subsection (c) defines the duration of removal. A removal is 
effective for the years remaining on the existing contract between the 
IPA and the recipient. Because removal affects existing contracts, 
there is an obvious concern that removal not cause financial harm to 
the recipient. Although current contracts between recipients and their 
IPAs may vary, the sample contract included as an appendix to the Audit 
Guide for Recipients and Auditors (Audit Guide) contains a provision 
which may be interpreted to allow the recipient to end its relationship 
with the IPA in the event of removal, see Audit Guide, Appendix B. To 
clearly address removal (and recognize debarment and suspension), the 
OIG intends to publish an amendment to the sample agreement. The OIG 
also believes it would be advisable to send out a notice to recipients 
when this rule becomes final suggesting that recipients attempt to 
modify existing contracts if possible, to specifically address removal. 
Such a term would be required in future contracts between recipients 
and their IPAs. In the meantime, if a removal action is considered 
against an IPA with a current contract that does not include

[[Page 5731]]

such a term, the OIG will consider this when contemplating removal of 
the IPA.

Subpart B--Debarment

Section 1641.5  Debarment
    The OIG may debar an IPA from performing audit services to all 
recipients or may debar an IPA from performing audit services for one 
or more specific recipients. This section informs the IPA and 
recipients of the effect of both types of debarment. Recipients are 
prohibited from knowingly awarding contracts to, extending or modifying 
existing contracts with, or soliciting proposals from debarred IPAs. 
Although IPAs debarred from providing audit services to selected 
recipients may contract with other recipients, the IPA must give prior 
written notice to the debarring official before providing such services 
to other recipients. In addition, the debarred IPA is required to 
provide prior written notice of the debarment to any recipient seeking 
its services.
Section 1641.6  Procedures for Debarment
    This section sets out the general procedures for debarment. The 
specific procedures are set out more fully in subsequent sections. The 
OIG shall provide an IPA with an opportunity to be heard prior to 
debarring the IPA. Such hearing will be held entirely by written 
submissions unless the debarring official finds that there is a genuine 
dispute of material fact. In addition, an informal meeting may be held 
between the debarring official and the IPA.
Section 1641.7  Causes for Debarment
    The subsections in this section set out the causes for debarment. 
The causes are based on those set out in the government wide system, 
but have been modified to recognize the particular circumstances of 
IPAs performing audits of LSC recipients. The existence of a cause for 
debarment does not necessarily require that the IPA be debarred; the 
seriousness of the IPA's acts or omissions and any mitigating 
circumstances shall be considered in making any debarment decisions.
    Subsection (a) allows the OIG to debar an IPA that has failed 
significantly to comply with government auditing standards established 
by the Comptroller General of the United States, generally accepted 
auditing standards and/or OIG audit guidance. Under section 509, LSC 
recipients are required to have audits conducted in accordance with 
guidance established by the OIG. Such guidance appears in the OIG Audit 
Guide and audit bulletins issued by the OIG. The OIG audit guidance 
incorporates government auditing standards. Under the IG Act, the OIG 
is required to ensure that audits are conducted in accordance with 
government auditing standards (established by the Comptroller General).
    Subsection (b) allows debarment when an IPA is currently debarred 
or suspended from contracting with any Federal agency or entity 
receiving Federal funds. This would include, for example, where the IPA 
has been debarred consistent with the government wide system for 
debarment.
    Subsection (c) allows debarment if the IPA's license to practice 
accounting has been revoked, terminated or suspended by a state 
licensing body or other organization with authority over IPAs.
    Subsection (d) allows debarment if the IPA has been convicted of 
any offense indicating a breach of trust, dishonesty or lack of 
integrity, or conspiracy to do the same. Offenses indicating a breach 
of trust, dishonesty or lack of integrity include, for example, fraud, 
embezzlement, theft, forgery, bribery, falsification or destruction of 
records, making false statements, making false claims, or receiving 
stolen property.
    Subsection (e) allows debarment if the IPA has been found subject 
to a civil judgement for any action indicating a breach of trust, 
dishonesty or lack of integrity, or conspiracy to do the same.
Section 1641.8  Notice of Proposed Debarment
    This section sets out the information which must be included in the 
notice of proposed debarment sent to the IPA. Because the IPA will have 
a specified time from receipt of the notice to respond, see section 
1641.18, notice will be sent in such a way as to ensure that the OIG 
receives evidence of the IPA's receipt of the notice. Under this 
section, a copy of the notice is sent to any affected recipient and the 
recipient may comment on the proposed action within the time that the 
IPA has to respond under section 1641.9.
Section 1641.9  Response to Notice of Proposed Debarment
    This section gives the IPA 30 days from receipt of the notice 
within which to respond. Such response must be in writing and should 
include information and argument in opposition to the proposed 
debarment. The response may request a meeting with the debarring 
official to permit the IPA to discuss issues of fact or law relating to 
the proposed debarment or to otherwise resolve the matter. Although the 
meeting shall take such form as the debarring official deems 
appropriate, if requested, the meeting shall be an in person meeting at 
LSC headquarters. The meeting must be held within 20 days of the 
response.
    Under subsection (d), if the IPA fails to respond to the notice, 
this shall be deemed an admission of the existence of the cause(s) for 
debarment set out in the notice and an acceptance of the period of 
debarment, and the debarring official may enter a final decision 
without further proceedings.
Section 1641.10  Additional Proceedings as to Disputed Material Facts
    If the debarring official finds that the IPA's submission raises a 
genuine dispute of material fact and the action is not based on a 
conviction or civil judgment under section 1641.7(d) or (e), the IPA 
will be afforded an opportunity to appear (with counsel), submit 
documentary evidence, present witnesses, and confront any witnesses the 
OIG presents. Where there is no genuine dispute of material fact, an 
evidentiary hearing is not warranted. In the case of a conviction or 
civil judgment, the facts underlying the conviction or civil judgment 
would have been fully adjudicated in another forum and a hearing on 
those facts would be inappropriate. In addition, there should be no 
dispute about the existence of the conviction or civil judgment.
    If, on the other hand, the debarring official finds that the IPA's 
submission does not raise a genuine issue of material fact, no such 
additional proceedings will be provided and the hearing shall be held 
entirely by written submissions (except to the extent a meeting is held 
under section 1641.9(c)).
    If additional proceedings are to be held, the IPA shall be 
notified, and such notice shall identify the procedures under which the 
proceeding will be conducted. A transcribed record of such proceedings 
shall be prepared, with a copy provided to the IPA without cost. At the 
debarring official's discretion, disputed material facts may be 
referred to a fact finder for analysis and recommendation. Such fact 
finder need not be a member of the OIG staff.

Subpart C--Suspension

    The sections in this subpart set out the causes, procedures and 
effect of a suspension. Suspension procedures are similar to those for 
debarment. However, the procedures have been streamlined by shortening 
the time

[[Page 5732]]

periods and providing for a strictly show cause procedure, entirely by 
written submissions, except that an informal meeting may be held.
Section 1641.11  Suspension
    A suspension is for a temporary period pending the completion of an 
investigation or other legal, administrative or debarment proceedings. 
This section applies section 1641.5, regarding debarment, to 
suspension. The OIG may suspend an IPA from performing audit services 
to all recipients or may suspend an IPA from performing audit services 
for one or more specific recipients. This section informs the IPA and 
recipients of the effect of both types of suspension.
Section 1641.12  Procedures for Suspension
    Before suspending an IPA, the OIG will provide a show cause hearing 
held entirely by written submissions (except that a meeting between the 
IPA and the debarring official may be held). The specific procedures 
are set out more fully in subsequent sections.
Section 1641.13  Causes for Suspension
    The causes for suspension are the same as those for debarment. In a 
suspension, however, there must be adequate evidence that the cause(s) 
may exist, rather than a preponderance of the evidence that the 
cause(s) exist as in debarment. In addition, an indictment for the 
listed types of offenses, rather than a conviction, is sufficient cause 
for suspension.
Section 1641.14  Notice of Proposed Suspension
    The notice for suspension is the same as that for debarment, except 
a suspension notice includes a directive, returnable in 10 days, to 
show cause why a suspension should not be instituted.
Section 1641.15  Response to Notice of Proposed Suspension
    The IPA's response to the notice of suspension must be received 
within 10 days of receipt of the notice. The response should contain 
information similar to that discussed under section 1641.9 relating to 
debarment. Similar provisions allow for a meeting between the IPA and 
the debarring official and describe the effect of not responding.

Subpart D--Removal

Section 1641.16  Removal
    The OIG may remove an IPA from performing audit services for one or 
more recipients. This section informs the IPA and recipients of the 
effect of a removal. Recipients are prohibited from extending existing 
contracts with removed IPAs. It is likely that the OIG would 
simultaneously debar (or prohibit the IPA from entering into future 
contracts with recipients) and remove the IPA, see section 1641.17(b). 
Absent complete debarment, IPAs removed from providing audit services 
to selected recipients may contract with other recipients. The IPA, 
however, must give prior written notice to the debarring official 
before providing such services to other recipients. In addition, the 
removed IPA is required to provide prior written notice of the removal 
to any recipient seeking its services.
  Section 1641.17  Notice of Proposed Removal; Response to Notice; 
Additional Proceedings
    The notice, response and limited availability of additional 
proceedings are the same for removal as they are for debarment.

Subpart E--Decisions

Section 1641.18  Decisions of Debarring Official
    Subsection (a) sets out the standard of proof for debarment and 
removal (preponderance of the evidence) and for suspension (adequate 
evidence).
    Subsection (b) sets out the information that will be included in 
the administrative record, which will form the basis for the decision.
    Subsection (c) notifies IPAs that the failure of the OIG to meet a 
time requirement does not preclude the OIG from taking the debarment, 
suspension or removal action.
    Subsection (d) sets forth the information that will be contained in 
the debarring official's decision. Among other things, this includes 
notifying the IPA that the decision will become a matter of public 
record. In the government wide system for suspension and debarment, the 
General Services Administration (GSA) is required to maintain and 
distribute a current list of all entities debarred or suspended by 
Federal agencies or by the General Accounting Office (GAO). Although we 
cannot include IPAs which the OIG debars on this GSA list, the OIG 
plans to maintain a list of debarred, suspended and removed IPAs, to 
distribute the list to recipients, and to maintain the list on the OIG 
website.
    Subsection (e) sets out the debarring official's authority to 
withdraw the notice of debarment, suspension or removal, where 
appropriate, or to terminate the proceedings, and subsection (f) sets 
out the debarring official's authority to settle the action and to 
place appropriate conditions on the IPA.
Section 1641.19  Exceptions to Debarment, Suspension and Removal
    In unique circumstances, where there are compelling reasons to use 
a particular IPA for a specific task, the recipient requiring such 
services may submit to the OIG a request to except the IPA from the 
effects of the debarment, suspension or removal. The Inspector General 
may provide an exception for a particular contract upon a written 
determination that a compelling reason exists for using the IPA in a 
particular instance. Under certain circumstances, a compelling reason 
may be that the recipient is in a rural area and there are no other 
IPAs within a reasonable distance from the recipient.
Section 1641.20  Appeal and Reconsideration of Debarring Official 
Decisions
    This section allows for appeal or reconsideration of the debarring 
official's decision to debar, suspend or remove an IPA.
    Appeals are decided by the Inspector General, who may uphold, 
reverse or modify the debarring official's decision. A written appeal 
may be filed by a debarred or removed IPA within 30 days of receipt of 
the decision and by a suspended IPA within 15 days of receipt. At his 
discretion, the Inspector General may stay the effect of the debarring 
official's decision pending the conclusion of review, after determining 
that a compelling reason to do so exists.
    Requests for reconsideration are decided by the debarring official. 
Such requests must be in writing and supported by documentation 
justifying the action on reconsideration. Modification of the decision 
on reconsideration is appropriate only in the circumstances set out in 
the proposed rule.

List of Subjects in 45 CFR Part 1641

    Accounting, Grant programs, Hearing and appeal procedures, Legal 
services.

    For reasons set forth in the preamble, LSC proposes to amend 
Chapter XVI of Title 45 by adding part 1641 as follows:

PART 1641--DEBARMENT, SUSPENSION AND REMOVAL OF RECIPIENT AUDITORS

Subpart A--General

Sec.
1641.1  Purpose/Applicability.
1641.2  Definitions.
1641.3  Scope of debarment, suspension and removal.

[[Page 5733]]

1641.4  Duration of debarment, suspension and removal.

Subpart B--Debarment

1641.5  Debarment.
1641.6  Procedures for debarment.
1641.7  Causes for debarment.
1641.8  Notice of proposed debarment.
1641.9  Response to notice of proposed debarment.
1641.10  Additional proceedings as to disputed material facts.

Subpart C--Suspension

1641.11  Suspension.
1641.12  Procedures for suspension.
1641.13  Causes for suspension.
1641.14  Notice of proposed suspension.
1641.15  Response to notice of proposed suspension.

Subpart D--Removal

1641.16  Removal.
1641.17  Notice of proposed removal; response to notice; additional 
procedures.

Subpart E--Decisions

1641.18  Decisions of debarring official.
1641.19  Exceptions to debarment, suspension and removal.
1641.20  Appeal and reconsideration of debarring official decisions.

    Authority: 42 U.S.C. 2996e(g); Pub. L. No. 105-277 (1998), 
incorporating by reference Pub. L. No. 104-208, Sec. 503(a), 110 
Stat. 1321, Sec. 509(d) (1996).

Subpart A--General


Sec. 1641.1  Purpose/Applicability.

    In order to assist in ensuring that recipients receive acceptable 
audits, this rule sets out the authority of the Legal Services 
Corporation (``LSC'') Office of Inspector General (``OIG'') to debar, 
suspend and remove independent public accountants (``IPAs'') from 
performing audit services for recipients. This rule informs IPAs of 
their rights to notice and an opportunity to be heard on actions 
involving debarment, suspension and removal, and the standards upon 
which such actions will be taken. This part applies to IPAs performing 
audit services for recipients, subrecipients or other entities which 
receive LSC funds and are required to have an audit performed in 
accordance with guidance promulgated by the OIG.


Sec. 1641.2  Definitions.

    (a) Adequate evidence means information sufficient to support the 
reasonable belief that a particular act or omission has occurred.
    (b) Audit services means the annual financial statement audit of a 
recipient.
    (c) Contract means agreement between a recipient and an IPA for an 
IPA to provide audit services to the recipient.
    (d) Conviction means a judgment or conviction of a criminal offense 
by any court, whether entered upon a verdict or plea including pleas of 
nolo contendere.
    (e) Debarment means a decision by the debarring official to 
prohibit an IPA from soliciting or entering into new contracts to 
perform audit services for recipient(s) based upon a finding by 
preponderance of the evidence that any of the causes for debarment set 
out in Sec. 1641.7 exist. Debarment may cover an IPA's contracts with 
all recipients or with one or more specific recipients.
    (f) Debarring official is the official responsible for debarment, 
suspension and removal actions under this part. The OIG staff person 
performing the function of legal counsel or his or her designee is the 
debarring official. In the absence of an OIG legal counsel, the 
debarring official shall be the OIG staff person designated by the 
Inspector General.
    (g) Indictment means an indictment for a criminal offense. An 
information or other filing by competent authority charging a criminal 
offense shall be given the same effect as an indictment.
    (h) IPA means an independent public accountant.
    (i) Knowingly means that an act was done voluntarily and 
intentionally and not because of mistake or accident.
    (j) Material fact means one which is necessary to determine the 
outcome of an issue or case and without which the case could not be 
supported.
    (k) Preponderance of the evidence means proof by information that, 
compared with that opposing it, leads to the conclusion that the fact 
at issue is more probably true than not.
    (l) Removal means a decision by the debarring official to prohibit 
an IPA from performing audit services in subsequent years of an 
existing contract with one or more specific recipients based upon a 
finding by a preponderance of the evidence that any of the causes 
referred to in Sec. 1641.17 exist.
    (m) Suspension means a decision by the debarring official, in 
anticipation of a debarment, to prohibit an IPA from soliciting or 
entering into new contracts to perform audit services for recipient(s) 
based upon a finding of adequate evidence that any of the causes 
referred to in Sec. 1641.13 exist. Suspension may cover an IPA's 
contracts with all recipients or with one or more specific recipients.


Sec. 1641.3  Scope of debarment, suspension and removal.

    An IPA may be debarred, suspended or removed under this part only 
if the IPA is specifically named and given notice of the proposed 
action and an opportunity to respond in accordance with this part.
    (a) Actions against individual IPAs. Debarment, suspension or 
removal of an individual IPA, debars, suspends or removes that 
individual from performing audit services as an individual or as an 
employee, independent contractor, agent or other representative of an 
IPA firm.
    (b) Actions against IPA firms. (1) Debarment, suspension or removal 
of an IPA firm under this rule constitutes debarment, suspension or 
removal of all its divisions and other organizational elements, unless 
the decision is limited by its terms to one or more specifically 
identified divisions or other organizational elements.
    (2) The debarment, suspension or removal action contemplated in 
paragraph (b)(1) of this section may include any firm that is an 
affiliate, subcontractor, joint venturer, agent or representative of 
the IPA firm only if such firm was materially involved in the relevant 
engagement and is specifically named and given notice of the proposed 
action and an opportunity to respond in accordance with this part.
    (3) The debarment, suspension or removal action contemplated in 
paragraph (b)(1) of this section may include an individual officer, 
director, or, partner responsible for the engagement, or an individual 
employee, independent contractor, agent, representative or other 
individual associated with an IPA firm only if such individual is 
specifically named and given notice of the proposed action and an 
opportunity to respond in accordance with this part.


Sec. 1641.4  Duration of debarment, suspension and removal.

    A debarment, suspension or removal is effective as set out in the 
debarring official's decision to debar, suspend or remove, issued 
pursuant to Sec. 1641.18.
    (a) Debarment. (1) Debarment generally should not exceed three 
years, but may be for a shorter period based on a consideration of the 
evidence presented by the IPA. Debarment may exceed three years in 
extraordinary circumstances.
    (2) If a suspension precedes a debarment, the suspension period 
shall be considered in determining the debarment period.
    (3) The debarring official may extend an existing debarment for an 
additional period if the debarring official determines, based on 
additional facts not previously in the record, that an extension is 
necessary to protect LSC funds. The standards and procedures in

[[Page 5734]]

this part shall be applied in any proceeding to extend a debarment.
    (b) Suspension. (1) Suspension shall be for a temporary period 
pending the completion of an investigation or other legal or debarment 
proceedings, including a proceeding conducted by a state licensing body 
or other organization with authority over IPAs.
    (2) If debarment proceedings are not initiated within 12 months 
after the date of the suspension notice, the suspension shall be 
terminated unless a law enforcement official, an investigative or audit 
official from another OIG, a state licensing body or other organization 
with authority over IPAs, or a government agency requests its extension 
in writing. In such cases, the suspension may be extended for an 
additional six months. In no event may a suspension be imposed for more 
than 18 months, unless debarment proceedings have been initiated within 
that period.
    (3) OIG shall notify the appropriate official, state licensing body 
or other organization with authority over IPAs, or appropriate 
government agency, if any, of an impending termination of a suspension 
at least 30 days before the 12-month period expires to allow an 
opportunity to request an extension. Providing such notification 
follows Federal policy.
    (4) The limit on the duration of a suspension in paragraph (b)(2) 
of this section may be waived by the affected IPA.
    (c) Removal. Removal shall be effective for the years remaining on 
the existing contract(s) between the IPA and the recipient(s).

Subpart B--Debarment


Sec. 1641.5  Debarment.

    (a) IPAs debarred from providing audit services for all recipients 
are prohibited from soliciting or entering into any new contracts for 
audit services with recipients for the duration of the specified period 
of debarment. Recipients shall not knowingly award contracts to, extend 
or modify existing contracts with, or solicit proposals from, such 
IPAs. Debarred IPAs also are prohibited from providing audit services 
to recipients as agents or representatives of other IPAs.
    (b) IPAs debarred from providing audit services for one or more 
specific recipient(s) are prohibited from soliciting or entering into 
any new contracts for audit services with such recipient(s) for the 
duration of the period of debarment as determined pursuant to this 
part. The affected recipient(s) shall not knowingly award contracts to, 
extend or modify existing contracts with, or solicit proposals from, 
such IPAs. Debarred IPAs also are prohibited from providing audit 
services to the affected recipient(s) as agents or representatives of 
other IPAs, and are required to provide prior written notice to the 
debarring official before providing such services to other recipients 
Debarred IPAs also must provide prior written notice of the debarment 
to any such recipient.


Sec. 1641.6  Procedures for debarment.

    Before debarring an IPA, the OIG shall provide the IPA with a 
hearing in accordance with the procedures set out in Secs. 1641.7 
through 1641.9. Such hearing shall be held entirely by written 
submissions, except:
    (a) Additional proceedings shall be held under Sec. 1641.10 if the 
debarring official finds there is a genuine dispute of material fact; 
and/or
    (b) A meeting may be held under Sec. 1641.9(c).


Sec. 1641.7  Causes for debarment.

    The debarring official may debar an IPA from performing audit 
services in accordance with the procedures set forth in this part upon 
a finding by a preponderance of the evidence that:
    (a) The IPA has failed significantly to comply with government 
auditing standards established by the Comptroller General of the United 
States, generally accepted auditing standards and/or OIG audit 
guidance;
    (b) The IPA is currently debarred or suspended from contracting 
with any Federal agency or entity receiving Federal funds, including 
where the IPA has stipulated to such debarment or suspension;
    (c) The IPA's license to practice accounting has been revoked, 
terminated or suspended by a state licensing body or other organization 
with authority over IPAs;
    (d) The IPA has been convicted of any offense indicating a breach 
of trust, dishonesty or lack of integrity, or conspiracy to do the 
same; or
    (e) The IPA has been found subject to a civil judgment for any 
action indicating a breach of trust, dishonesty or lack of integrity, 
or conspiracy to do the same.


Sec. 1641.8  Notice of proposed debarment.

    (a) Before debarring an IPA, the OIG shall send it written notice 
of the proposed debarment. Such notice shall:
    (1) State that debarment is being considered;
    (2) Identify the reasons for the proposed debarment sufficient to 
put the IPA on notice of the conduct or transaction(s) upon which a 
debarment proceeding is based;
    (3) Identify the regulatory provisions governing the debarment 
proceeding; and
    (4) State that debarment may be for a period of up to three years 
or longer under extraordinary circumstances. If the OIG has determined 
that extraordinary circumstances warranting debarment in excess of 
three years may exist, the notice shall so state.
    (b) A copy of the notice also shall be sent to the affected 
recipient(s), if any, which may comment on the proposed action in the 
time frame set out in Sec. 1641.9.


Sec. 1641.9  Response to notice of proposed debarment.

    (a) The IPA shall have 30 days from receipt of the notice within 
which to respond.
    (b) The response shall be in writing and may include information 
and argument in opposition to the proposed debarment, including any 
additional specific information pertaining to the possible causes for 
debarment, and information and argument in mitigation of the proposed 
period of debarment.
    (c) The response may request a meeting with the debarring official 
to permit the IPA to discuss issues of fact or law relating to the 
proposed debarment, or to otherwise resolve the pending matters. Any 
such meeting shall take such form as the debarring official deems 
appropriate and shall be held within 20 days of the response. If 
requested by the IPA, such meeting shall be an in person meeting at LSC 
headquarters.
    (d) Failure to respond to the notice shall be deemed an admission 
of the existence of the cause(s) for debarment set forth in the notice 
and an acceptance of the period of debarment. In such circumstances, 
without further proceedings, the debarring official may enter a final 
decision stating the period of debarment.


Sec. 1641.10  Additional proceedings as to disputed material facts.

    (a) In actions not based upon a conviction or civil judgment under 
Sec. 1641.7(d) or (e), if the debarring official finds that the IPA's 
submission raises a genuine dispute of material fact, the IPA shall be 
afforded an opportunity to appear (with counsel, if desired), submit 
documentary evidence, present witnesses, and confront any witnesses the 
OIG presents. If the debarring official finds that the IPA's submission 
does not raise a genuine issue of material fact, additional proceedings 
will not be provided. In such case, the

[[Page 5735]]

hearing shall be held entirely by written submissions, except that a 
meeting may be held under Sec. 1641.9(c).
    (b) If the debarring official determines additional proceedings to 
be warranted, OIG shall notify the IPA. Such notice shall include 
notice of the procedures under which such proceedings shall be 
conducted.
    (c) A transcribed record of any additional proceedings shall be 
prepared and a copy shall be made available to the IPA without cost.
    (d) The debarring official may refer disputed material facts to a 
fact finder, who need not be a member of the OIG staff, for analysis 
and recommendation.

Subpart C--Suspension


Sec. 1641.11  Suspension.

    (a) A suspension shall be for a temporary period pending the 
completion of an investigation or such other legal, administrative or 
debarment proceedings as may ensue.
    (b) Section 1641.5 applies to a suspension action, except that the 
term ``suspension'' shall be substituted for the term ``debarment.''


Sec. 1641.12  Procedures for suspension.

    Before suspending an IPA, the OIG shall provide the IPA with a show 
cause hearing in accordance with the procedures set out in 
Secs. 1641.13 through 1641.15. Such hearing shall be held entirely by 
written submissions, except that a meeting may be held under 
Sec. 1641.15(c).


Sec. 1641.13  Causes for suspension

    The debarring official may suspend an IPA in accordance with the 
procedures set forth in this part upon adequate evidence that:
    (a) A cause for debarment under Sec. 1641.7 may exist; or
    (b) The IPA has been indicted for any offense described in 
Sec. 1641.7.


Sec. 1641.14  Notice of proposed suspension.

    (a) Before suspending an IPA, OIG shall send it written notice of 
cause to suspend. Such notice shall:
    (1) Include the information set out in Sec. 1641.8, except the term 
``suspension'' shall be substituted for the term ``debarment''; and
    (2) Include a directive to show cause, signed by the debarring 
official, which shall inform the IPA that unless the IPA responds 
within 10 days as provided in Sec. 1641.15, a suspension will be 
imposed.
    (b) A copy of the notice also shall be sent to the affected 
recipient(s), if any, who may comment on the proposed action in the 
time frame set out in Sec. 1641.15.


Sec. 1641.15  Response to notice of proposed suspension.

    (a) The IPA shall have 10 days from receipt of the notice within 
which to respond.
    (b) The response shall be in writing and may include information 
and argument in opposition to the proposed suspension, including any 
additional specific information pertaining to the possible causes for 
suspension, and information and argument in mitigation of the proposed 
period of suspension.
    (c) The response may request a meeting with the OIG official 
identified in the notice to permit the IPA to discuss issues of fact or 
law relating to the proposed suspension, or to otherwise resolve the 
pending matters.
    (1) Any such meeting shall take such form as the debarring official 
deems appropriate and shall be held within 10 days of the response.
    (2) No meeting will be held if a law enforcement official, an 
investigative or audit official from another OIG, a state licensing 
body or other organization with authority over IPAs, or a governmental 
agency has advised in writing that the substantial interest of a 
governmental unit would be prejudiced by such a meeting and the 
debarring official determines that the suspension is based on the same 
facts as pending or contemplated legal proceedings referenced by the 
law enforcement official.
    (d) Failure to respond to the notice shall be deemed an admission 
of the existence of the cause(s) for suspension set forth in the notice 
and an acceptance of the period of suspension. In such circumstances, 
the OIG may proceed to a final decision without further proceedings.

Subpart D--Removal


Sec. 1641.16  Removal.

    Removed IPAs are prohibited from performing audit services in 
subsequent years under an existing contract(s) with one or more 
specific recipients. The affected recipient(s) shall not extend 
existing contracts with such IPAs. Removed IPAs also are prohibited 
from providing audit services to the affected recipient(s) as agents or 
representatives of other IPAs, and are required to provide prior 
written notice to the debarring official before providing such services 
to other recipients. Debarred IPAs also must provide prior written 
notice of the removal to any such recipient.


Sec. 1641.17  Notice of proposed removal; response to notice; 
additional procedures.

    (a) Sections 1641.6 through 1641.10 apply in the case of a removal 
action, except the term ``removal'' shall be substituted for the term 
``debarment.''
    (b) A Notice of Proposed Removal normally will be accompanied by a 
Notice of Proposed Debarment, and the proceedings may be consolidated.

Subpart E--Decisions


Sec. 1641.18  Decisions of debarring official.

    (a) Standard of proof. (1) A debarment or removal must be based on 
a finding that the cause or causes for debarment or removal are 
established by a preponderance of the evidence in the administrative 
record of the case.
    (2) A suspension must be based on a finding that the cause or 
causes are established by adequate evidence in the administrative 
record of the case.
    (b) The administrative record consists of the portion of any 
information, reports, documents or other evidence identified and relied 
upon in the Notice of Proposed Debarment, the Notice of Proposed 
Suspension, or the Notice of Proposed Removal, together with any 
material portions of the IPA's response and any relevant material 
submitted by an affected recipient. In the case of debarment, when 
additional proceedings are necessary to determine disputed material 
facts, the debarring official shall base the decision on the facts as 
found, together with consideration of any information and argument 
submitted by the IPA or an affected recipient and any other information 
in the administrative record.
    (c) Failure of the OIG to meet a time requirement of this part does 
not preclude the OIG from debarring, suspending or removing an IPA.
    (d) Notice of decisions. IPAs shall be given prompt notice of the 
debarring official's decision. A copy of the decision also will be sent 
to the affected recipient. If the debarring official debars, suspends 
or removes an IPA, the decision shall:
    (1) Set forth the finding(s) upon which the decision is based;
    (2) Set forth the effect of the debarment, suspension or removal 
action and the effective dates of the action;
    (3) Refer the IPA to its procedural rights of appeal and 
reconsideration under Sec. 1641.20; and
    (4) Inform the IPA that a copy of the debarring official's decision 
will be a public document and the fact of debarment or suspension will 
be a matter of public record.
    (e) If the debarring official decides that a debarment, suspension, 
or removal is not warranted, the Notice may be withdrawn or the 
proceeding may be otherwise terminated.

[[Page 5736]]

    (f) If the debarring official deems it appropriate, the debarring 
official may, at any time, settle by agreement with the IPA a 
debarment, suspension, or removal action. Such a negotiated settlement 
may include the imposition of appropriate conditions on the IPA.


Sec. 1641.19  Exceptions to debarment, suspension and removal.

    Exceptions to the effects of debarment, suspension or removal may 
be available in unique circumstances, where there are compelling 
reasons to use a particular IPA for a specific task. Requests for such 
exceptions may be submitted only by the recipient requiring audit 
services. The Inspector General may except a contract from the effects 
of debarment, suspension or removal upon a written determination that a 
compelling reason exists for using the IPA in the particular instance.


Sec. 1641.20  Appeal and reconsideration of debarring official 
decisions.

    (a) A debarred, suspended or removed IPA may submit the debarring 
official's decision for appeal or reconsideration in accordance with 
this section. Within 60 days, IPAs shall be given notice of decisions 
on appeal and reconsideration.
    (b) Appeal. (1) A debarred, suspended or removed IPA may appeal the 
decision to the Inspector General, who may uphold, reverse or modify 
the debarring official's decision.
    (2) The appeal shall be filed in writing:
    (i) By a debarred or removed IPA, within 30 days of receipt of the 
decision;
    (ii) By a suspended IPA, within 15 days of receipt of the decision.
    (3) The Inspector General, at his or her discretion and after 
determining that a compelling reason exists, may stay the effect of the 
debarment, suspension or removal pending conclusion of his or her 
review of the matter.
    (c) Reconsideration. (1) A debarred, suspended or removed IPA may 
submit a request to the debarring official to reconsider the debarment, 
suspension or removal decision, reduce the period of debarment or 
removal or terminate the suspension.
    (2) Such requests shall be in writing and supported by 
documentation that the requested action is justified by:
    (i) Reversal of the conviction or civil judgment upon which the 
debarment, suspension or removal was based;
    (ii) Newly discovered material evidence;
    (iii) Bona fide change in ownership or management;
    (iv) Elimination of other causes for which the debarment, 
suspension or removal was imposed; or
    (v) Other reasons the debarring official deems appropriate.
    (3) A request for reconsideration based on the reversal of the 
conviction, civil judgment, or sanction may be filed at any time.
    (4) Requests for reconsideration based on other grounds may only be 
filed during the period commencing 60 days after the debarring 
official's decision imposing the debarment or suspension. Only one such 
request may be filed in any twelve month period.
    (5) The debarring official's decision on a request for 
reconsideration is subject to the appeal procedure set forth in 
paragraph (b) of this section.

    Dated: February 2, 1999.
Victor M. Fortuno,
General Counsel.
[FR Doc. 99-2762 Filed 2-4-99; 8:45 am]
BILLING CODE 7050-01-P