Legal Services Corporation: Governance and Accountability
Practices Need to Be Modernized and Strengthened (15-AUG-07,
GAO-07-993).
The Legal Services Corporation (LSC) was federally created as a
private nonprofit corporation to support legal assistance for
low-income people to resolve their civil matters and relies
heavily on federal appropriations. Due to its unique status, its
governance and accountability requirements differ from those of
federal entities and nonprofits. This report responds to a
congressional request that GAO review LSC board oversight of
LSC's operations and whether LSC has sufficient governance and
accountability. GAO's report objectives are to (1) compare LSC's
framework for corporate governance and accountability to others',
(2) evaluate LSC's governance practices, and (3) evaluate LSC's
internal control and financial reporting practices. We reviewed
the LSC Act, legislative history, relevant standards and
requirements, and LSC documentation and accountability
requirements and interviewed board and staff.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-993
ACCNO: A74489
TITLE: Legal Services Corporation: Governance and Accountability
Practices Need to Be Modernized and Strengthened
DATE: 08/15/2007
SUBJECT: Accountability
Federal corporations
Federal funds
Financial management
Financial statement audits
Financial statements
Fund audits
Funds management
Internal controls
Professional ethics
Reporting requirements
Risk assessment
Accounting standards
Policies and procedures
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GAO-07-993
* [1]Results in Brief
* [2]Background
* [3]LSC Is Subject to Weaker Governance and Accountability Requi
* [4]Governance Structures
* [5]Funds Control and Budgeting
* [6]Performance and Financial Reporting
* [7]Internal Control Systems Requirements
* [8]LSC's Board Members Are Actively Engaged, but the Board's Go
* [9]LSC's Board Members Have Actively Engaged through Meeting At
* [10]Board Orientation and Training Do Not Provide Key Informatio
* [11]LSC's Board Has Not Updated Its Committee Structure to Inclu
* [12]Audit Committee
* [13]Compensation Committee
* [14]Ethics Committee
* [15]The Board and Its Individual Committees Do Not Have Charters
* [16]LSC's Board of Directors Has Not Assessed Its Performance
* [17]LSC Management Practices Have Not Kept Up with Current Pract
* [18]LSC Management Has Not Thoroughly Assessed Internal Controls
* [19]Code of Conduct and Ethics
* [20]LSC Management Has Not Designed and Implemented a Comprehens
* [21]LSC Management Has Not Assessed the Propriety of Its Financi
* [22]Conclusions
* [23]Matter for Congressional Consideration
* [24]Recommendations
* [25]Recommendations for Board Action
* [26]Recommendations for Executive Action
* [27]Agency Comments and Our Evaluation
* [28]Grants Management
* [29]Acquisition and Management of Property and Services
* [30]Human Resources Management
* [31]Recordkeeping and Public Access to Information
* [32]GAO Contact
* [33]Acknowledgments
* [34]GAO's Mission
* [35]Obtaining Copies of GAO Reports and Testimony
* [36]Order by Mail or Phone
* [37]To Report Fraud, Waste, and Abuse in Federal Programs
* [38]Congressional Relations
* [39]Public Affairs
Report to Congressional Requesters
United States Government Accountability Office
GAO
August 2007
LEGAL SERVICES CORPORATION
Governance and Accountability Practices Need to Be Modernized and
Strengthened
GAO-07-993
Contents
Letter 1
Results in Brief 2
Background 5
LSC Is Subject to Weaker Governance and Accountability Requirements Than
Federal Entities but More Federal Oversight Than Nonprofit Corporations 12
LSC's Board Members Are Actively Engaged, but the Board's Governance
Practices Fall Short of Current Practices of Nonprofit Corporations 25
LSC Management Practices Have Not Kept Up with Current Practices for Key
Processes in the Areas of Risk Assessment, Internal Control, and Financial
Reporting 35
Conclusions 41
Matter for Congressional Consideration 42
Recommendations 42
Agency Comments and Our Evaluation 44
Appendix I Origin and Creation of the Legal Services Corporation 47
Appendix II Examples of Corporate Governance Guidelines 51
Appendix III Comparison of Other Key LSC Requirements 56
Appendix IV Comparison of Key LSC Governance and Accountability
Requirements 68
Appendix V Comments from the Legal Services Corporation Board of Directors
72
Appendix VI Comments from the Legal Services Corporation 74
Appendix VII GAO Contact and Staff Acknowledgments 76
Tables
Table 1: Key Statutory Governance Structures 13
Table 2: Key Statutory Funds Control and Budgeting Requirements 16
Table 3: Key Statutory Provisions for Performance and Financial Reporting
19
Table 4: Key Statutory Internal Control Systems Requirements 23
Table 5: Legal Services Corporation Committees and Their Functions 29
Table 6: Key Statutory Provisions for Grants Management 57
Table 7: Key Acquisition and Management of Property and Services
Requirements 60
Table 8: Key Human Resources Management Structures 63
Table 9: Key Recordkeeping and Public Access to Information Structures 65
Figure
Figure 1: Legal Services Corporation Federal Funding between Fiscal Years
1991 and 2006 10
This is a work of the U.S. government and is not subject to copyright
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separately.
United States Government Accountability Office
Washington, DC 20548
August 15, 2007
Congressional Requesters
The Legal Services Corporation's (LSC) mission is to make federal funding
available to support the provision of legal assistance in civil matters to
low-income people throughout the United States on everyday legal problems.
LSC pursues this mission by making grants^1 to legal service providers
(grant recipients) who serve low-income members of the community who would
otherwise not be able to afford legal assistance (clients). Established by
a federal charter^2 in 1974^3 as a federally funded, private nonprofit
corporation, LSC is highly dependent on federal appropriations for its
operations. LSC received $348.6 million in appropriations for fiscal year
2007.^4 For fiscal year 2006, LSC received 99 percent of its funding from
federal appropriations and approximately 1 percent from grants through the
Department of Veterans Affairs.
This report responds to your request that we review how LSC's Board of
Directors has been carrying out its fiduciary duties^5 in overseeing LSC's
operations and use of appropriated funds and whether LSC has sufficient
governance and accountability structures and practices in place. The
specific objectives of this report are to (1) compare LSC's statutory
framework for corporate governance and accountability to those of other
organizations; (2) evaluate the governance practices that LSC has adopted,
including the board's operations and responsibilities; and (3) evaluate
LSC's internal control and financial reporting practices in comparison to
current practices of other organizations.
^1As used in this report, the term grant encompasses all of the agreements
LSC uses to distribute federal funding to providers of civil legal
assistance to low-income persons, and the term grant recipient refers to
those who enter into such agreements. Although LSC distributes most
financial assistance through grants, it sometimes uses contracts.
^2As used in this report, the term federal charter refers to a
congressional act, or the written instrument documenting this act as in a
statute, that establishes or authorizes the establishment of a corporation
and includes requirements governing the corporation's operations.
^3Legal Services Corporation Act of 1974, Pub. L. No. 93-355, 88 Stat. 378
(July 25, 1974), codified, as amended, at 42 U.S.C. SS 2996 - 2996l (LSC
Act).
^4Revised Continuing Appropriations Resolution, Pub. L. No. 110-5, 121
Stat. 8, 44 (Feb. 15, 2007); see also the LSC appropriations act for
fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330 (Nov. 22,
2005).
^5The highest standard of duty implied by law, a fiduciary duty is a duty
imposed by law on a person in a position of trust to act for someone
else's benefit and not to further one's personal interests. As a corporate
board member, this means a duty to use a high level of care to manage the
corporation to best promote the corporation's interests. See, e.g.,
Friends of Tilden Park, Inc. v. District of Columbia, 806 A.2d 1201,1210
(App. D.C. 2002).
To address these objectives, we reviewed information from a variety of
sources, including the Legal Services Corporation Act of 1974 (LSC Act)
and LSC annual appropriations acts; the LSC Act's legislative history,
relevant legislative and regulatory standards and requirements for
financial reporting and internal control, and research and studies on
corporate governance. We compared LSC's governance, accountability, and
oversight requirements with those for independent federal agencies headed
by a board or commission, U.S. government corporations,^6 and D.C.
nonprofit corporations, including the Corporation for Public Broadcasting
(CPB), which, like LSC, was established by Congress and receives federal
appropriations. To obtain information on the current policies and
practices of LSC and its Board of Directors, we interviewed current
members of LSC's board, management, and staff, and staff in LSC's Office
of the Inspector General (OIG) and the audit firm the OIG employs. We also
reviewed relevant documentation of the design and implementation of LSC's
and the LSC board's governance and accountability practices and conducted
a survey of all board members.
We conducted our work in Washington, D.C., from November 2006 through June
2007 in accordance with generally accepted government auditing standards.
Results in Brief
In recent years, governance and accountability processes have received
increased scrutiny and emphasis in the nonprofit, federal government, and
public company sectors as a result of governance and accountability
breakdowns, most notably in the public company financial scandals that led
to the enactment of the Sarbanes-Oxley Act of 2002. Public companies^7 now
operate under strengthened governance and accountability standards,
including requirements for ethics policies and improved internal controls.
The federal government and nonprofit sectors have also strengthened
governance and internal control requirements and practices. As a result,
commonly accepted governance, accountability, and management practices for
federal entities and nonprofit corporations have significantly evolved in
recent years. LSC's authorizing legislation was last comprehensively
reviewed and reauthorized in the Legal Services Corporation Amendments Act
of 1977, and LSC's governing statutes have undergone only limited changes
since then.
^6Unless otherwise noted, we use the term U.S. government corporation to
refer to those corporations subject to Chapter 91 of the U.S. Code
(commonly known as the Government Corporation Control Act). See 31 U.S.C.
S 9101 for the list, which includes both wholly owned and mixed-ownership
government corporations.
Although LSC has stronger federal accountability requirements than many
nonprofit corporations, it is subject to governance and accountability
requirements that are weaker than those of independent federal agencies
headed by boards or commissions and those of U.S. government corporations.
The LSC Act includes provisions providing that LSC shall be treated like a
federal agency for purposes of specified statutes that existed in the
1970s. In addition, as with federal agencies, virtually all of LSC's
annual revenues come from its annual appropriations from Congress.
Further, with the creation of an OIG within LSC, it is subject to an OIG
governance structure comparable to those of federal agencies and U.S.
government corporations. LSC also submits its budget through the
congressional appropriations process and is subject to other congressional
oversight. In other respects, LSC is not subject to the standard
governance and accountability requirements for federal entities, including
provisions related to performance and financial reporting, internal
controls, and funds control.
The governance practices of LSC's board fall short of the modern practices
employed by boards of nonprofit corporations and public companies. By
updating and strengthening its governance and accountability structures,
LSC can increase assurance that federal funds are spent properly and
effectively in order to meet the needs of grant recipients. The board
members have demonstrated active involvement in LSC through their regular
board meeting attendance and participation. There are several areas,
however, where LSC's governance practices can be strengthened, including a
more comprehensive orientation program for new board members and an
ongoing training program that enables board members to stay current on
governance practices, the regulatory environment, and key management
practices. Keeping current with governance practices is especially
important for the LSC board because the board composition changes
significantly with each new presidential administration, and thus the
board does not generally have the benefit of experienced board members.
Although the LSC board has four committees, including finance and
operations and regulations, it does not have audit, ethics, or
compensation committee, important governance mechanisms commonly used in
corporate governance structures. Finally, the board has not assessed the
performance, collectively or individually, of its board members. Until it
incorporates many practices currently considered necessary for effective
governance, LSC's Board of Directors is at risk of not fulfilling its role
of effective governance and oversight in keeping with its fiduciary
duties. Recent incidents of compensation rates that exceed a statutory
limitation, questionable expenditures, and potential conflicts of interest
may have been prevented by a properly implemented governance structure.
^7Public company is a general term used to refer to a corporation owned by
shareholders whose securities are sold to the general public, typically
through the stock exchange, and governed by the requirements of the
securities laws.
LSC's management practices have not kept up with the current practices for
key processes in the areas of risk assessment, internal control, and
financial reporting. We found that management has not implemented a
systematic or formal risk assessment that evaluates the risks the
corporation faces from both external and internal sources. Such an
assessment provides a structure for implementing internal control and
other risk mitigation policies. Without an effective program of risk
assessment and internal control, LSC management does not have adequate
assurance that it is using organizational resources effectively and
efficiently, nor reasonable assurances that LSC's assets and operations
are protected. In addition, senior management has not established
comprehensive policies or procedures regarding conflicts of interest or
other issues of ethical conduct. Without such policies and procedures, LSC
is at risk of not identifying potential conflicts of interest and taking
appropriate actions to avoid potentially improper transactions or actions
on the part of LSC personnel and the resulting loss of credibility to LSC
as an organization. Also, management has not conducted its own assessment
or analysis of accounting standards to determine the most appropriate
standards for LSC to follow. Consequently, it is not clear which standards
are most relevant for LSC to follow and which would provide the best
financial information to LSC's management and financial statement users.
In this report we have included a matter for congressional consideration
concerning whether LSC should have additional legislatively mandated
governance and accountability requirements modeled after what has worked
successfully at federal agencies or U.S. government corporations. These
requirements could be established either by amending LSC's current
governing statutes or by converting LSC to a federal entity, such as a
U.S. government corporation or an independent federal agency. We are also
making recommendations to LSC's board for modernizing and strengthening
its governance and oversight, including action directed at formalizing a
comprehensive orientation program and an ongoing training program,
conducting a performance assessment, creating audit and compensation
committees, developing and implementing an approach to evaluate certain
key management processes periodically, and ensuring that LSC's audited
financial statements are issued more promptly. We are also making
recommendations to LSC management directed at improving its accountability
by conducting a risk assessment and implementing a corresponding risk
management program as part of a comprehensive evaluation of internal
control, including establishing policies for handling conflicts of
interest (ethics) and evaluating accounting standards.
We received written comment letters from the Chairman on behalf of LSC's
Board of Directors and the President on behalf of LSC's management. Both
the Chairman and President expressed their commitment to achieving strong
governance and accountability and outlined actions that LSC's board and
management plan to take in response to our recommendations. Both LSC's
Chairman and President commented on the matter that we presented for
congressional consideration and provided their views that LSC's governing
statutes are appropriate and have worked well and stated that many of the
governance recommendations could be accomplished without changing the
statutory framework of LSC. We presented the options of amending LSC's
governing statutes to improve governance and accountability requirements
or converting LSC to a federal entity, which would include compliance with
related governance and accountability requirements, since federal agencies
and government corporations have been subject to strengthened governance
and accountability requirements over recent years and LSC has not kept up
with evolving reforms.
Background
LSC is a private, nonprofit corporation that is federally funded for the
purpose of making federal resources available to support local providers
of civil legal services for low-income people, with the goal of providing
equal access to the justice system "for individuals who seek redress of
grievances" and "who would be otherwise unable to afford adequate legal
counsel." Since LSC was federally chartered by statute over three decades
ago in the LSC Act, Congress has been making annual appropriations to LSC
to provide grants to eligible legal service providers to carry out the
purposes of the LSC Act's requirement "to provide the most economical and
effective delivery of legal assistance."^8 Since 1996, LSC has been
required to select its grant recipients through a competitive award
process.^9 Today, LSC funds grant recipients in all 50 states, as well as
the District of Columbia and all five U.S. territories. In fiscal year
2006, LSC reported distributing a total of $313.9 million in grants.
Local legal service providers employ staff attorneys to assist eligible
clients in resolving their civil legal problems, often through advice and
referral. According to LSC, in a typical year the largest portion of total
cases (38 percent) concern family matters, followed by housing issues (24
percent), income maintenance (13 percent), and consumer finance (12
percent). LSC reported that most cases are resolved out of court. In 2007,
LSC reported that three out of four clients were women, most of them
mothers. Most clients were at or below 125 percent of the federal poverty
threshold, currently an income of approximately $25,000 a year for a
family of four. The type of legal assistance that LSC funding supports is
subject to certain legal restrictions. By law, for example, LSC cannot
provide funds for legal services for a proceeding related to a violation
of the Military Selective Service Act or participation in litigation
related to abortion or a criminal proceeding.
In 1974, Congress enacted the LSC Act to transfer the functions of the
Legal Services Program from the Executive Office of the President into a
private corporation.^10 Through the LSC Act, Congress chartered LSC in the
District of Columbia as a private, nonmembership,^11 nonprofit corporation
that would not be considered a department, agency, or instrumentality of
the federal government. Under its federal charter (the LSC Act), LSC may
only pursue activities consistent with the corporate purpose of "providing
financial support for legal assistance in noncriminal proceedings or
matters to persons financially unable to afford legal assistance."
^8See, e.g., the LSC appropriations act for fiscal year 2006, Pub. L. No.
109-108, 119 Stat. 2290, 2330 (Nov. 22, 2005); see also the LSC Act, at 42
U.S.C. S 2996f(a)(3).
^9The competitive award requirement was first enacted in administrative
provisions included in the LSC appropriations act for fiscal year 1996 and
has been annually reenacted since then. See, e.g., Department of State and
Related Agencies Appropriations Act, 1996, Pub. L. No. 104-134, tit. IV, S
503, 110 Stat. 1321, 1321-52 (Apr. 26, 1996). LSC has issued implementing
regulations at 45 C.F.R. pt. 1634.
^10For more information about the origin and creation of LSC, see app. I.
^11A nonmembership corporation is a corporation without shares and
shareholders, meaning that nobody owns a property interest in the
corporation.
To direct the corporation, the LSC Act provides for a bipartisan Board of
Directors consisting of 11 voting members who are appointed by the
President of the United States with the advice and consent of the U.S.
Senate. Neither the President nor the Senate has the power to remove a
director. A director can only be removed for cause, such as a persistent
neglect of duties, by a vote of at least 7 directors. Although the LSC Act
does not require board members to possess management or financial
expertise, it does include some membership requirements: no director may
be a full-time U.S. government employee, a majority of the directors must
be attorneys belonging to the bar of the highest court of a U.S. state,
and at least one director must be from the legal service client community.
The LSC Act requires the board to meet at least four times each calendar
year and prohibits board members from participating in any decision,
action, or recommendation related to a matter that directly benefits the
board member or pertains specifically to any entity with which the board
member has been associated in the past 2 years.^12 The LSC Act prohibits
LSC personnel and grant recipients from engaging in certain prohibited
activities, such as legal assistance related to a criminal proceeding or
participation in litigation related to an abortion, and the LSC Board of
Directors, which is charged with managing the affairs of the corporation,
is responsible for ensuring compliance with these restrictions.
The LSC Act requires the Board of Directors to appoint the LSC President
and any other necessary officers,^13 and provides that the LSC President
may appoint any employees necessary to carry out LSC's purposes. LSC
officers and employees can be fairly easily appointed and removed,
creating essentially at-will employment^14 relationships. In addition to
the power to appoint and remove LSC employees and to serve as an
ex-officio,^15 nonvoting member of the Board of Directors, the LSC
President, who is the only officer specifically provided for in the LSC
Act, is authorized to make grants and enter into contracts that bind LSC.
^12The LSC Act provides no similar conflict-of-interest provision for its
officers, employees, or other agents, such as outside consultants.
^13Similarly, the D.C. Nonprofit Corporation Act calls for a nonprofit
corporation's board of directors to appoint a president, secretary,
treasurer, and any other necessary officers and assistant officers, as
provided in the corporation's bylaws. D.C. Code S 29-301.24.
As a D.C. nonprofit corporation, LSC generally possesses all the powers
conferred on such corporations under the D.C. Nonprofit Corporation Act,
which includes a number of general corporate powers,^16 such as the power
to sue and be sued in its corporate name, exercise a number of rights
related to real and personal property, enter into contracts, and borrow
money and issue debt obligations. Other corporate powers include investing
and lending money, appointing officers and agents and defining their
duties and fixing their compensation, making bylaws to administer and
regulate corporate affairs, and "hav[ing] and exercis[ing] all powers
necessary or convenient to effect any or all of the purposes for which the
corporation is organized." LSC's exercise of such corporate powers,
however, is restricted where inconsistent with the LSC Act. For example,
the LSC board's discretion in fixing its officers' and employees'
compensation is limited by an LSC Act provision prohibiting LSC from
compensating its personnel at rates in excess of the rate of level V of
the Executive Schedule.^17
Unlike most D.C. nonprofit corporations, LSC's exercise of its corporate
powers has received additional oversight since 1988 when Congress
subjected LSC to the Inspector General Act of 1978, as amended (IG
Act).^18 As an independent office within LSC, the LSC OIG is authorized to
carry out audits and investigations of LSC programs and operations,
recommend policies to improve program administration and operations, and
keep the LSC board and Congress fully and currently informed about
problems in program administration and operations and the need for and
progress of corrective action.^19 Also, unlike most D.C. nonprofit
corporations, LSC is subject to congressional oversight through the annual
appropriations process as well as responding to congressional inquiries
and participating in hearings. In its annual appropriation for LSC,
Congress regularly appropriates a specific amount for the OIG. For
example, Congress appropriated about $2.54 million for the LSC OIG in
fiscal years 2006 and 2007.^20 Because in fiscal year 2007 LSC received an
increase in its annual appropriation of about $17.78 million that was not
allocated for a specific purpose, LSC officials told us that LSC,
consistent with congressional guidance,^21 used $430,000 of this amount to
increase funding for the OIG from about $2.54 million in fiscal year 2006
to $2.97 million in fiscal year 2007. (See fig. 1.)
^14At-will employment is a common term used in labor law to refer to the
relationship established when an employer hires an employee for an
indefinite term without a written employment contract that allows the
employer to terminate the employee for any reason, with or without cause,
so long as it is not an illegal reason, such as racial discrimination
prohibited under a state's wrongful termination laws or retaliation for
whistleblowing under state or federal whistleblower laws, state employer
retaliation laws, or both.
^15An ex-officio board member is a member not by appointment but by virtue
of holding a certain corporate office, such as being the president of the
corporation.
^16D.C. Code S 29-301.05.
^17The LSC Act, 42 U.S.C. S 2996d(d), incorporates by reference 5 U.S.C. S
5316, which provides the pay cap provided for federal employees paid at
level V of the Executive Schedule. Each calendar year, the Office of
Personnel Management publishes the new amount of the pay cap for level V,
such as $133,900 for calendar year 2006.
^185 U.S.C. appx.
It has been three decades since LSC was last comprehensively reviewed and
reauthorized in the Legal Services Corporation Amendments Act of 1977,^22
and LSC's statutory framework has undergone only limited changes since
then. Today LSC is governed by the powers and restrictions in its federal
charter (the LSC Act) and, where not inconsistent, the D.C. Nonprofit
Corporation Act,^23 as well as the IG Act, the federal tax law
requirements for tax-exempt status for nonprofit corporations, and LSC's
annual appropriations acts, which since 1996 have included a number of
administrative provisions imposing additional grants management duties.
^195 U.S.C. appx. S 4(a).
^20Revised Continuing Appropriations Resolution, Pub. L. No. 110-5, S 104,
121 Stat. 8, 9 (Feb. 15, 2007); see also the LSC appropriations act for
fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330 (Nov. 22,
2005).
^21In their reports associated with the fiscal year 2007 appropriations
for LSC, the House and Senate Committees on Appropriations both directed
LSC to allocate $2.97 million for the LSC OIG. See H.R. Rep. No. 109-520,
at 136 (June 22, 2006); S. Rep. No. 109-280, at 137 (July 13, 2006).
^22Legal Services Corporation Act Amendments of 1977, Pub. L. No. 95-222,
91 Stat. 1619 (Dec. 28, 1977).
^23D.C. Code, tit. 29, ch. 3.
Figure 1: Legal Services Corporation Federal Funding between Fiscal Years
1991 and 2006
Unlike most private, nonprofit corporations, the vast majority of LSC's
funding comes from annual federal appropriations, which originally were
authorized under the LSC Act. The LSC Act specifies that the appropriated
funds authorized under the act are available until expended and shall be
paid to LSC in one annual installment at the start of the fiscal year.
Although annual appropriations for LSC have not been authorized since
fiscal year 1980 under the LSC Act, Congress has continually enacted
annual appropriations to be paid to LSC to carry out the purposes of the
LSC Act. For fiscal year 2007, Congress appropriated almost $349 million
for LSC. The LSC Act permits LSC to receive and retain nonfederal funds,
but LSC's recent audited financial statements show that for fiscal years
1991 through 2006, approximately 99 percent of LSC's revenues came from
federal appropriations.^24 In addition to direct funding through annual
appropriations, the LSC Act makes certain indirect federal support
available to LSC by providing that the President of the United States may
make support functions of the federal government available to LSC.^25
^24See, e.g., Legal Services Corporation, Financial Statements and
Independent Auditors' Report, September 30, 2006 and 2005 (Washington,
D.C.: June 6, 2007), which shows that about 99 percent of LSC's revenues
in fiscal year 2006 came from federal appropriations.
For both governmental and nonprofit entities, governance can be described
as the process of providing leadership, direction, and accountability in
fulfilling the organization's mission, meeting objectives, and providing
stewardship of public resources, while establishing clear lines of
responsibility for results. Accountability represents the processes,
mechanisms, and other means--including financial reporting and internal
controls--by which an entity's management carries out its stewardship and
responsibility for resources and performance. To provide accountability to
Congress, the LSC Act provides for Senate advice and consent on the
selection of board members, annual appropriations that constitute
virtually all of LSC's annual revenues, and treatment of LSC as a federal
entity in limited situations either by directly subjecting LSC to certain
federal laws or indirectly by modeling provisions in the LSC Act after
provisions in laws existing in the 1970s. For example, the LSC Act makes
LSC subject to provisions in the Freedom of Information Act (FOIA) and the
Government in the Sunshine Act, compensation limits imposed on officers
and employees at level V of the Executive Schedule, and employer
contribution requirements for participation in certain employee benefits
programs, as well as requiring LSC to engage in notice-and-comment rule
making and to provide us with access to its records.
^25The LSC Act also provides indirect federal support by providing that
LSC personnel are eligible to participate in federal employee benefits
programs related to the Civil Service Retirement System (CSRS), group life
insurance, health insurance, and work-related injuries. A later-enacted
statute, however, eliminated eligibility for participation in the first
three programs for all LSC personnel except those hired before October 1,
1988. See Pub. L. No. 100-238, S 108, 101 Stat. 1744, 1747-48 (Jan. 8,
1988), codified, at 5 U.S.C. SS 8347(o) [retirement], 8713 [life
insurance], 8914 [health insurance]. LSC personnel eligible to participate
in CSRS are also eligible to make contributions to the Thrift Savings
Plan, a federal employee defined-contribution retirement plan. See 5
U.S.C. S 8351. According to an LSC official, however, today all LSC
personnel remain eligible for benefits for work-related injuries under the
Federal Employees' Compensation Act, codified, as amended, at 5 U.S.C. ch.
81.
LSC Is Subject to Weaker Governance and Accountability Requirements Than Federal
Entities but More Federal Oversight Than Nonprofit Corporations
Although LSC is subject to more statutory governance and accountability
requirements than most private, nonprofit corporations, it is subject to
governance and accountability requirements that are weaker than those of
most independent federal agencies^26 headed by boards or commissions and
U.S. government corporations. In chartering a private, nonprofit
corporation to perform a public assistance role with federal funding,
Congress in the 1970s included certain provisions in the LSC Act to
provide for governance and accountability. The LSC Act includes provisions
providing that LSC shall be treated like a federal agency for purposes of
specified statutes that existed in the 1970s when the LSC Act was first
enacted and amended. In 1988, Congress created an OIG within LSC.
Therefore, LSC is subject to some governance and accountability
requirements that are comparable to those of federal entities, including
the presence of an OIG in the governance structure and submission of its
budget for the congressional appropriations process. Nonprofit
corporations typically are subject to limited federal requirements related
to governance and accountability; however, as discussed later, nonprofit
corporations have voluntarily chosen to incorporate many practices in
these areas. In other respects, LSC is not subject to standard governance
and accountability requirements for federal entities including provisions
related to performance and financial reporting, internal controls, and
funds control. Additional management areas are discussed in appendix III,
and an expanded table is in appendix IV.
Governance Structures
Similar to most independent federal agencies and U.S. government
corporations, LSC is headed by a multiperson body (i.e., commission or
board of directors) consisting of presidentially appointed and
Senate-confirmed members^27 and has an OIG. (See table 1.)
^26Independent agencies are federal agencies separate from larger agencies
or departments and are labeled "independent" by law or are controlled by a
multiperson body. Thus, the Social Security Administration (SSA) is an
independent agency, but the Food and Drug Administration, which is part of
the Department of Health and Human Services, is not an independent agency.
Unlike the Securities and Exchange Commission or the National Science
Foundation, however, SSA is not headed by a multiperson body, such as a
commission or a board.
^27Independent federal agencies headed by a multiperson body have
commissioners or directors, while LSC and U.S. government corporations
have only directors.
Table 1: Key Statutory Governance Structures
Independent U.S.
federal government D.C. nonprofit
LSC agencies corporations corporations
Inspector IG Act IG Act IG Act Generally not
general applicable, but
IG Act applies to
the Corporation
for Public
Broadcasting
(CPB)
Committees D.C. Code S Committees Committees D.C. Code S
authorized 29-301.22 neither neither 29-301.22
prohibited nor prohibited nor
required required
Governing Board of Independent Board of Board of
body directors: federal directors: directors: D.C.
presidential agencies Mostly Code SS
appointment headed by a presidential 29-301.18,
with Senate multiperson appointment 29-301.19; CPB
approval and body: with Senate Act, presidential
for cause approval, appointment with
removal by vote Commission or often silent Senate approval,
of seven board of on removal silent on removal
directors directors:
Mostly
presidential
appointment
with Senate
approval,
often silent
on removal
Source: GAO.
A common form of governance for independent federal agencies and U.S.
government corporations is a multiperson body consisting of either a board
of directors (agencies and corporations) or a commission (only agencies),
both of whose members are generally appointed by the President of the
United States and confirmed by the U.S. Senate. For example, the President
appoints and the Senate confirms the members of the boards of directors
for the Federal Deposit Insurance Corporation (FDIC) and Pension Benefit
Guaranty Corporation (PBGC) (both U.S. government corporations),^28 the
National Science Foundation (NSF) and the Federal Housing Finance Board
(both independent federal agencies),^29 as well as the commissioners of
the Securities and Exchange Commission (SEC) and the Nuclear Regulatory
Commission (NRC) (both independent federal agencies).^30
The directors of LSC may only be removed for cause by a vote of seven
other directors. This level of statutory removal protection is unique in
two ways. First, it restricts the reasons for removal to only those listed
in the statute, and second, it precludes removal by the President of the
United States or Congress. In many cases, the board or commission members
of a federal entity have less tenure protection and serve at the will of
the President of the United States, such as the PBGC directors, who are
the Secretaries of Labor, the Treasury, and Commerce. Nonprofit
corporations incorporated in the District of Columbia are required to be
managed by a board of directors, consisting of at least three directors,
who serve for the terms specified in the articles of incorporation or
bylaws. A director of a D.C. nonprofit corporation may be removed by any
procedure provided in the articles of incorporation or bylaws. If not so
provided, then removal with or without cause is permitted upon a vote that
would suffice for the election of a director for the organization.^31
^28See 12 U.S.C. S 1812(a); 29 U.S.C. S 1302(d).
^29See 42 U.S.C. S 1863(a); 12 U.S.C. 1422a(b).
^30See 15 U.S.C. S 78d(a); 42 U.S.C. S 5841(b).
No federal law specifically requires the board of directors of a U.S.
government corporation or a board of directors or commission of an
independent federal agency to designate audit or other committees, but
neither does any law prohibit the establishment of such committees. The
D.C. Nonprofit Corporation Act expressly authorizes, but does not require,
boards of nonprofit corporations to designate and delegate authority to
committees.^32 In certain instances, the statutes establishing federal
entities may authorize the designation and delegation of authority to
committees, such as the statute governing NSF (an independent federal
agency).^33
Since 1977, there has been only one governmentwide management law that
specifically included LSC as a covered entity and thus required a change
to LSC's governance structure. In 1988, Congress amended the IG Act^34 to
add OIGs to additional entities receiving significant federal funding,
including "designated federal entities" (DFE), which are statutorily
defined. ^35 LSC was listed as a DFE, along with such other entities as
PBGC, SEC, and Amtrak, which are, respectively, a wholly owned U.S.
government corporation, an independent federal agency, and a federally
established private, for-profit corporation that receives some federal
funding.^36 The only other private, nonprofit corporation included as a
DFE was CPB. Like the other OIGs of DFEs that are independent federal
agencies and U.S. government corporations, the LSC OIG was created as an
"independent and objective" office to carry out audits and investigations
of LSC programs and operations, recommend policies to improve program
administration and operations, and keep the LSC board and Congress fully
and currently informed about problems in program administration and
operations and the need for and progress of corrective action.^37 In its
annual appropriation for LSC, Congress regularly appropriates a specific
amount for the OIG. For example, Congress appropriated about $2.54 million
for the LSC OIG in fiscal years 2006 and 2007.^38 Because in fiscal year
2007 LSC received an increase in its annual appropriation of about $17.78
million that was not allocated for a specific purpose, LSC officials told
us that LSC, consistent with congressional guidance,^39 used $430,000 of
this amount to increase funding for the OIG from about $2.54 million in
fiscal year 2006 to $2.97 million in fiscal year 2007.
^31D.C. Code SS 29-301.18, -301.19.
^32D.C. Code S 29-301.22.
^3342 U.S.C. S 1863(i).
^34The Inspector General Act Amendments of 1988, Pub. L. No. 100-504, 102
Stat. 2515 (Oct. 18, 1988), which amended the Inspector General Act of
1978, Pub. L. No. 95-452, 92 Stat. 1101 (Oct. 12, 1978), which together
are codified, as amended, at 5 U.S.C. appx.
^355 U.S.C. appx. S 8G(a)(2).
Funds Control and Budgeting
Like other private, D.C. nonprofit corporations, LSC is not subject to
federal funds control laws that generally apply to independent federal
agencies and many U.S. government corporations, including the
Antideficiency Act, the Purpose Statute, and laws governing liability of
accountable officers for improper or illegal uses of funds; however, LSC
is required to submit an annual budget request to Congress. (See table 2.)
^3649 U.S.C. S 24301. Also known as the National Railroad Passenger
Corporation, Amtrak was established by the Railroad Passenger Act of 1970,
Pub. L. No. 91-518, S 301, 84 Stat. 1327, 1330 (Oct. 30, 1970). Amtrak
depends on annual appropriations for some of its funding. See, e.g.,
Department of Transportation Appropriations Act, 2006, Pub. L. No.
109-115, 119 Stat. 2396, 2413-14, which appropriates $495 million to the
Secretary of Transportation to make quarterly operating subsidy grants to
Amtrak (Nov. 30, 2005).
^375 U.S.C. appx. SS 2, 6, 8G, 11.
^38Revised Continuing Appropriations Resolution, Pub. L. No. 110-5, S 104,
121 Stat. 8, 9 (Feb. 15, 2007); see also the LSC appropriations act for
fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330 (Nov. 22,
2005).
^39In their reports associated with the fiscal year 2007 appropriations
for LSC, the House and Senate Committees on Appropriations both directed
LSC to allocate $2.97 million for the LSC OIG. See H.R. Rep. No. 109-520,
at 136 (June 22, 2006); S. Rep. No. 109-280, at 137 (July 13, 2006).
Table 2: Key Statutory Funds Control and Budgeting Requirements
Independent D.C.
federal U.S. government nonprofit
LSC agencies corporations corporations
Limitation on None Antideficiency Wholly owned None
amount of Act U.S. government
funds corporations:
available for Antideficiency
use Act
Use of funds None Purpose Statute Purpose Statute None
for (31 U.S.C. S (31 U.S.C. S
authorized 1301(a)) 1301(a))
purposes only
Annual budget LSC Act 31 U.S.C. SS Wholly owned Generally not
(request made 1105, 1108 U.S. government applicable;
directly to (agency budget corporations: CPB prepares
Congress): no submitted to 31 U.S.C. S an annual
content or the President 1105 and 31 budget
form for inclusion U.S.C. S 9103
requirements; in the Budget (Government
Office of of the U.S. Corporation
Management and Government) Control Act)
Budget comment
and review
allowed)
Liability of None 31 U.S.C. SS Some wholly None
accountable 3528, 3325 owned U.S.
officers for government
improper or corporations:
illegal use 31 U.S.C. SS
of funds 3528, 3325
Source: GAO.
Like many independent federal agencies and wholly owned government
corporations, most of LSC's annual revenues come from federal funds made
available through annual appropriations; however, LSC is not required by
law to control its use of those funds as are independent federal agencies
and wholly owned U.S. government corporations.^40 The Antideficiency Act,
among other things, prohibits officers and employees of the government
from obligating or expending funds in advance of or in excess of
appropriations.^41 This applies to the officers and employees of
independent federal agencies and wholly owned U.S. government
corporations, where personnel are officers and employees of the
government. The Purpose Statute requires federal agencies and all U.S.
government corporations, both mixed ownership and wholly owned, to use
appropriated funds only for the purposes provided in law.^42 Further, for
most federal agencies and some wholly owned U.S. government corporations,
such as the Tennessee Valley Authority and the Federal Prisons Industries
Incorporated,^43 accountable officers^44 are financially liable for
improper or illegal payments.^45 None of these funds control statutes
apply to LSC or, in general, other nonprofit corporations that receive
federal funds.^46 The LSC Act does contain a number of provisions that
restrict the use of LSC's appropriated funds for certain purposes, such as
an activity that would influence the passage or defeat of any legislation
at the local, state, or federal level or that would support any political
party or campaign of any candidate for public office.^47
^40For a discussion of the application of funds control laws to U.S.
government corporations, see GAO, Principles of Federal Appropriations
Law, vol. IV, 2d ed., [40]GAO-01-179SP (Washington, D.C.: March 2001),
17-130 to 17-152.
^4131 U.S.C. S 1341.
^4231 U.S.C. S 1301(a).
Unlike D.C. nonprofit corporations in general, and like independent
federal agencies and wholly owned U.S. government corporations, each year
LSC must prepare a new budget request as part of the annual appropriations
process. The LSC Act requires LSC to submit a budget request to Congress,
but provides no requirements related to the form and content of the budget
request. For federal agencies and wholly owned U.S. government
corporations, the Office of Management and Budget (OMB) prescribes the
form and content of budget requests, consistent with specified statutory
requirements, that are submitted through the President to Congress.^48
Under the LSC Act, LSC submits that budget request directly to Congress,
with OMB's role limited to submitting comments to Congress if it chooses
to review LSC's budget. As a federally chartered, private nonprofit D.C.
corporation, CPB also must annually prepare a budget request as part of
the annual appropriations process. Unlike LSC, however, CPB requests and
receives funding for 2 years (i.e., funding for fiscal 2008 was provided
in the fiscal year 2006 appropriations act.)^49 Once the level of the
annual appropriations act is enacted, CPB's appropriation is paid into the
Public Broadcasting Fund, which is a fund established in the Treasury and
administered by the Secretary of the Treasury. In accordance with CPB's
federal charter, CPB determines how to allocate amounts in the fund.^50
^4316 U.S.C. S 831h(c); 18 U.S.C S 1426(d).
^44Accountable officers are government officials and employees who are
subject to personal pecuniary liability for the receipt, possession, or
use of federal funds. Examples of accountable officers include (1)
disbursing officers, who draw federal funds from the U.S. Treasury to make
payments, usually based on certified payment vouchers, and account for
those funds, and (2) certifying officers, who review and certify payment
vouchers for legality, propriety, and accuracy for a disbursing officer.
See GAO, Principles of Federal Appropriations Law, vol. II, 3d ed,
[41]GAO-06-382SP (Washington, D.C.: February 2006), 9-11 to 9-20, for a
discussion of who is an accountable officer.
^4531 U.S.C. SS 3325, 3528.
^46See B-308037, Sept. 14, 2006; B-241591, Mar. 1, 1991; B-204886, Oct.
21, 1981.
^47LSC Act, at 42 U.S.C. SS 2996e(c)(2), 2996e(d)(3).
^48See 31 U.S.C. SS 1105, 1108, 9103.
Performance and Financial Reporting
Unlike D.C. nonprofit corporations in general but like CPB, the LSC Act
requires LSC to have its accounts audited annually. By contrast,
independent federal agencies and U.S. government corporations are subject
to more detailed financial and performance planning and reporting
requirements. When the LSC Act was enacted in the 1970s, audited financial
statements were not prepared for federal agencies and LSC as a private,
nonprofit corporation was not subject to the financial audit requirements
imposed on public companies and U.S. government corporations. The LSC Act
requires LSC to have its accounts audited by an independent public
accountant annually in accordance with generally accepted auditing
standards (GAAS). The LSC Act does not detail what must be included in the
report or which accounting standards to use. The LSC Act requires LSC to
file this annual audit report with us and make the audit report available
for public inspection at LSC headquarters during normal business hours.
(See table 3.)
^49See, e.g., Departments of Labor, Health and Human Services, and
Education, and Related Agencies Appropriations Act, 2006, Pub. L. No.
109-149, 1990 Stat. 2833, 2874 (Dec. 30, 2005). ("For payment to the
Corporation for Public Broadcasting, as authorized by the Communications
Act of 1934, an amount which shall be available within limitations
specified by that Act, for the fiscal year 2008, $400,000,000....")
^5047 U.S.C. S 396(k).
Table 3: Key Statutory Provisions for Performance and Financial Reporting
U.S.
Independent government D.C. nonprofit
LSC federal agencies corporations corporations
Financial Annual report Annual audited Annual D.C. Code S
statements or on financial audited 29-301.26
report corporation statements: 31 financial (keep correct
accounts: LSC U.S.C. S 3515 statements: and complete
Act (report 31 U.S.C. SS books and
of annual (Chief Financial 9105, 9106 records of
audit of Officers Act of (Government account); CPB
LSC's 1990, Government Corporation required to
accounts) Management Reform Control Act) prepare annual
Act of 1994, audit report
Accounta-bility on CPB
of Tax Dollars accounts
Act of 2002)
Accounting No generally Federal Some FASAB FASB GAAP
standards accepted Accounting GAAP; some
applied in accounting Standards Financial
practice principles Advisory Board Accounting
(GAAP) (FASAB) GAAP Standards
specified; Board (FASB)
LSC now using GAAP
Government
Accounting
Standards
Board GAAP
Performance None Strategic plans: Strategic D.C. Code S
and strategic 5 U.S.C. S 306; plans: 5 29-301.26
plans and performance plans U.S.C. S 306; (keep minutes
reports and reports: 31 performance of board
U.S.C. SS plans and proceedings);
1115-1116 reports: 31 CPB required
(Government U.S.C. SS to submit
Performance and 1115-1116 annual report
Results Act of (Government to President
1993) Performance and Congress
and Results
Act of 1993)
Source: GAO.
The LSC Act requirements for financial reporting are more rigorous than
the requirements for D.C. nonprofit corporations in general but less than
those for CPB. Most D.C. nonprofit corporations are only required to keep
correct and complete books and records of account and minutes of the
proceedings of their boards of directors. This information is not required
to be published or made available for public inspection.^51 Similar to
LSC, CPB is required to annually have its accounts audited by an
independent public accountant in accordance with GAAS.^52 CPB's audit
report must be included in its annual report on its operations and
activities, which it must submit to the President for transmittal to
Congress.^53 Like most D.C. nonprofit corporations, LSC is not required to
submit a similar annual report on its operations and activities to the
President or Congress.^54
^51D.C. Code S 29-301.26.
^5247 U.S.C. S 396(l)(1)(B).
^5347 U.S.C. S 396(i), (1)(1)(B).
Independent federal agencies and U.S. government corporations have
stronger financial and performance reporting requirements than LSC. The
Chief Financial Officers Act of 1990 (CFO Act), as amended by the
Government Management Reform Act of 1994 (GMRA), requires the major 24
agencies^55 of the federal government, including some independent federal
agencies such as NSF and NRC, to submit annual audited financial
statements to OMB and Congress.^56 These financial statements must be
prepared in accordance with generally accepted accounting principles and
audited in accordance with applicable generally accepted government
auditing standards (GAGAS). The Accountability of Tax Dollars Act of 2002
(ATDA) expanded this requirement^57 to include most other federal
executive agencies.^58 U.S. government corporations had been subject to
financial reporting requirements for many years under the Government
Corporation Control Act.^59 Chapter 91 of Title 31 of the U.S. Code,
commonly known as the Government Corporation Control Act, requires both
mixed-ownership and wholly owned U.S. government corporations to submit
annual management reports to Congress (with copies to the President, OMB,
and GAO) no later than 180 days after the end of the government
corporation's fiscal year. OMB has accelerated the submission deadline to
no later than 45 days after the end of the government corporation's fiscal
year.^60 Annual management reports are required to include a
^54Under the LSC Act, LSC had been required to publish an annual report to
be filed with the President and Congress. See 42 U.S.C. S 2996g(c).
However, this reporting requirement was terminated on May 12, 2000, under
the Federal Reports Elimination and Sunset Act of 1995, Pub. L. No.
104-66, S 3003, 109 Stat. 707, 734-36 (Dec. 21, 1995) (reprinted, as
amended, in 31 U.S.C. S 1113 note).
^55The current 24 CFO Act agencies are the Departments of Agriculture,
Commerce, Defense, Education, Energy, Health and Human Services, Homeland
Security, Housing and Urban Development, the Interior, Justice, Labor,
State, Transportation, the Treasury, and Veterans Affairs as well as the
Environmental Protection Agency, National Aeronautics and Space
Administration, Agency for International Development, General Services
Administration, National Science Foundation, Nuclear Regulatory
Commission, Office of Personnel Management, Small Business Administration,
and Social Security Administration. 31 U.S.C. S 901(b).
^56See 31 U.S.C. S 3515 (a). The Reports Consolidation Act of 2000, Pub.
L. No. 106-531, S 4(a), 114 Stat. 2537, 2539 (Nov. 22, 2000), added a
requirement that the audited financial statements shall also be submitted
to Congress.
^57The requirement for submitting annual audited financial statements to
OMB and Congress under the CFO Act, GMRA, and ATDA has been codified, as
amended, at 31 U.S.C. S 3515.
^5831 U.S.C. S 3515(f). OMB specifically identified 76 agencies to which
ATDA expanded the annual financial reporting requirement in Appendix A of
M-04-22, a July 2004 memorandum titled "Amendments to OMB Bulletin No.
01-02, Audit Requirements for Federal Financial Statements." This bulletin
and related memorandum have been superseded by OMB Bulletin No. 06-03,
Audit Requirements for Federal Financial Statements (Aug. 23, 2006), which
in Appendix C identifies 75 entities to which the ATDA expanded the annual
financial reporting requirement.
o statement of financial position;
o statement of operations;
o statement of cash flows;
o reconciliation to the budget report of the corporation, if
applicable;
o statement of internal accounting and administrative control
systems by the head of corporation management, consistent with the
requirements under amendments to the act made by 31 U.S.C. S 3512
(c), (d), commonly referred to as the Federal Managers' Financial
Integrity Act of 1982 (FMFIA);
o a financial statement audit report prepared in accordance with
GAGAS; and
o any other information necessary to inform Congress about the
operations and financial condition of the corporation.^61
Under OMB Circular No. A-136, Financial Reporting Requirements (rev. July
24, 2006), annual performance and accountability reports (PAR) issued by
federal executive agencies consist of the annual performance report
required by the Government Performance and Results Act of 1993^62 with
audited financial statements and other disclosures, such as agencies' (1)
assurances on internal control, (2) accountability reports by agency
heads, and (3) inspectors general's assessments of the agencies' most
serious management and performance challenges.^63 OMB Circular No. A-136
states that PARs are intended to provide financial and performance
information to enable the President, Congress, and the public to assess
the performance of a federal agency relative to its mission and to
demonstrate the federal agency's accountability.
^59Requirements for annual management reports for government corporations
have been codified, as amended, at 31 U.S.C. SS 9105, 9106.
^60OMB Circular No. A-136, Financial Reporting Requirements, pt. I.5 (rev.
July 24, 2006).
^6131 U.S.C. S 9106(a)(2).
^62The annual program performance report, required by 31 U.S.C. S 1116,
shall reflect, among other things, the agency's or corporation's progress
in achieving the performance goals set out in its annual performance plan,
required by 31 U.S.C. S 1115, which implements a mandatory longer-term
strategic plan, required by 5 U.S.C. S 306.
LSC follows a fiscal year starting on October 1, and for the past 5 years
has issued its financial statements in March or later, which is 6 months
after its year-end. As noted, federal agencies are required to issue their
financial statements 45 days following their year-ends, which is
mid-November.
Internal Control Systems Requirements
LSC's statutory requirements for internal control systems are less
rigorous than those for independent federal agencies or U.S. government
corporations; D.C. nonprofit corporations have no such statutory
requirements. (See table 4.) The LSC Act requires LSC to account for
federal funds separately from nonfederal funds, but otherwise includes no
specific requirements for the establishment of accounting and internal
control systems. The LSC Act imposes some program management duties on the
LSC directors to promote good stewardship of federal taxpayer dollars by
requiring that the directors manage LSC's programs economically,
effectively, and efficiently. For example, the LSC Act requires the LSC
board to ensure that LSC makes grants "so as to provide the most
economical and effective delivery of legal assistance to persons in both
urban and rural areas." The LSC Act also requires the board to ensure that
grant recipients adopt procedures for determining priorities on how to
allocate their assistance among eligible clients. Additionally, the LSC
Act imposes a program evaluation requirement on the board, requiring it to
monitor, evaluate, and provide for independent evaluations of
LSC-supported programs to ensure that the programs comply with the LSC
Act; bylaws; and implementing rules, regulations, and guidelines.
^63The Reports Consolidation Act of 2000 (Pub. L. No. 106-531, 114 Stat.
2537 (Nov. 22, 2000) (codified at 31 U.S.C. S 3516) permits agencies to
submit combined reports in implementing statutory requirements for
financial and performance management reporting to improve the efficiency
of executive branch performance. These reports are combined in the PAR. In
its guidance on financial reporting in OMB Circular No. A-136, OMB
converted the PAR option into a mandatory requirement.
Table 4: Key Statutory Internal Control Systems Requirements
Independent federal U.S. government D.C. nonprofit
LSC agencies corporations corporations
System of None 31 U.S.C. S 31 U.S.C. S 9106 None
internal control 3512(c), (d) (Government
and assurances (Federal Managers' Corporation
Financial Integrity Control Act)
Act of 1982)
Information None Federal Information Federal None
system security Security Management Information
Act of 2002 Security
Management Act of
2002
Source: GAO.
Although the LSC Act includes program management requirements, these are
much less rigorous than requirements for systems of internal control, to
which federal entities are subject. Managers of federal entities depend on
sufficient internal control to achieve desired results through effective
stewardship of organizational resources. Internal control, which supports
performance-based management, involves the methods and procedures
management uses to have reasonable assurance that objectives, such as the
following, are being met: effectiveness and efficiency of operations,
reliability of financial reporting, and compliance with applicable laws
and regulations. Federal agencies are subject to the following legislative
and regulatory requirements that promote and support effective internal
control.
o FMFIA, or 31 U.S.C. S 3512(c), (d), provides the statutory basis
for management's responsibility for and assessment of internal
control. OMB Circular No. A-123, Management's Responsibility for
Internal Control (rev. Dec. 21, 2004), sets out the guidance for
implementing the statute's provisions, including agencies'
assessment of internal control under the standards prescribed by
the Comptroller General. Agencies are required to annually provide
a statement of assurance on the effectiveness of internal control.
U.S. government corporations are not subject to FMFIA, but they
are subject to similar requirements under the Government
Corporation Control Act, which incorporates by reference the FMFIA
standards in requiring U.S. government corporations to include in
their annual management reports a statement on internal accounting
and administrative control systems.
o The CFO Act requires the 24 CFO Act agencies' chief financial
officers (CFO), including the CFOs of such independent federal
agencies as NSF and NRC, to maintain an integrated accounting and
financial management system that includes financial reporting and
internal controls.^64
o The Federal Financial Management Improvement Act of 1996,^65 as
implemented by OMB Circular No. A-127, Financial Management
Systems (rev. Dec. 1, 2004), requires the 24 CFO Act agencies to
implement and maintain integrated financial management systems
that comply substantially with federal financial management system
requirements, applicable federal accounting standards, and the
U.S. Government Standard General Ledger at the transaction level.
Recent federal governmentwide initiatives have contributed to improvements
in financial management and placed greater emphasis on implementing and
maintaining effective internal control over financial reporting. In
December 2004, OMB issued a significant update to its Circular No. A-123,
which is the implementing guidance for FMFIA. The update requires the 24
CFO Act agencies to include the FMFIA annual report in their PARs, under
the heading "Management Assurances." The FMFIA annual report must include
a separate assurance on internal control over financial reporting, along
with a report on identified material weaknesses and actions taken by
management to correct those weaknesses.
FMFIA and OMB Circular No. A-123 apply to each of the three objectives of
internal control outlined in GAO's Standards for Internal Control in the
Federal Government^66: effective and efficient operations, reliable
financial reporting, and compliance with applicable laws and regulations.
OMB Circular No. A-123 calls for internal control standards to be applied
consistently toward each of the objectives. The circular's new Appendix A,
which is a requirement only for the 24 CFO Act agencies, requires
management to document the process and methodology for applying A-123
standards when assessing internal control over financial reporting.
One important area of internal control today for both independent federal
agencies and U.S. government corporations is the development and
implementation of an entitywide information security program, as required
by the Federal Information Security Management Act of 2002 (FISMA).^67 As
part of that program, FISMA requires entity heads to periodically (1)
perform risk assessments of the harm that could result from information
security problems, such as the unauthorized disclosure or destruction of
information; (2) test and evaluate the effectiveness of elements of the
information security program; and (3) provide security awareness training
to personnel and contractors. FISMA also requires the federal entity to
annually have its OIG or an external auditor perform an independent
evaluation of the entity's information security programs and practices to
determine their effectiveness and to annually submit a report on the
adequacy and effectiveness of information systems to OMB, GAO, and
Congress.^68 Because it is not a federal entity, LSC, like CPB and other
D.C. nonprofit corporations, is not subject to FISMA and has no special
information security requirements.^69
^6431 U.S.C. S 902(a).
^65Federal Financial Management Improvement Act of 1996, Pub. L. No.
104-208, div. A., S 101(f), tit. VIII, 110 Stat. 3009, 3009-389 (Sept. 30,
1996) (reprinted in 31 U.S.C. S 3512 note).
^66GAO, Standards for Internal Control in the Federal Government,
[42]GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
LSC's Board Members Are Actively Engaged, but the Board's Governance Practices
Fall Short of Current Practices of Nonprofit Corporations
LSC board members are actively engaged in the board meeting process as
they consistently attend and prepare for board and committee meetings.
Board meetings are generally attended by all board members. Board members
are provided with an agenda and related materials prior to each board
meeting. In addition, board members have interaction with both management
and the Inspector General (IG).
Nevertheless, the current board governance practices of LSC's board fall
short of current accepted practices employed by boards of nonprofit
corporations and public companies. Although LSC has an informal
orientation program for its members, the board does not have a
comprehensive, formal orientation or an ongoing training program for board
members. Keeping up with current practice is especially important for the
LSC board because board composition changes significantly with each new
presidential administration, resulting in a board that generally does not
have the benefit of experienced members. Also, although the board has four
established committees, it has not updated its committee structure to
include an audit committee or other committees commonly found in nonprofit
corporations or public companies today. In addition, the board's current
committees do not have charters that identify their purposes and duties,
which boards of similar organizations would typically have. Finally, the
board does not assess its own performance. Because it has not incorporated
many practices currently considered necessary for effective governance,
LSC's Board of Directors is at risk of not fulfilling its role in
effective governance in keeping with its fiduciary duties. In fact, recent
incidents of compensation rates that exceed statutory limitations,
questionable expenditures, and potential conflicts of interest may have
been prevented by a properly implemented governance structure.
^67Pub. L. No. 107-347, tit. III, S 301(b)(1), 116 Stat. 2946, 2949 (Dec.
17, 2002), codified at 44 U.S.C. S 3544.
^6844 U.S.C. SS 3545 (a), (b), 3544(c).
^69Certain federal contractors, including nonprofit corporations, can be
required by statute to implement information security programs consistent
with FISMA standards in 44 U.S.C. S 3544. See, e.g., 42 U.S.C. S
1395kk-1(e), which imposes such requirements on Medicare administrative
contractors.
LSC's Board Members Have Actively Engaged through Meeting Attendance and
Participation
The current LSC board's 10 members^70 have attended most or all of the
board meetings in recent years. A few board members indicated that their
LSC board member role has been more time consuming than they had expected
or had experienced as board members with other organizations. According to
our survey, most board members are satisfied or very satisfied with the
frequency of the board meetings as well as the timeliness and completeness
of the information provided (in the board books) to the board members to
prepare for meetings. Board members are provided with an agenda and a
package of related materials to assist them in preparing for each board
meeting. During interviews with us, board members indicated that they also
receive information regularly through e-mails and mailings in addition to
the board books--primarily from the LSC President. Board members were
generally satisfied with their interaction with management, according to
our survey, while board members interviewed indicated a range of
interaction with the IG--some members only receive information such as the
IG reports while others directly discuss issues with the IG. The LSC board
has established a conflicts-of-interest policy that requires board members
to annually file financial, ownership, and relationship disclosure
reports.
LSC's current board of directors carries out its activities primarily
during the quarterly meetings of the full board and individual committees.
Although the board has established committees with specific members, the
committee meetings are typically not held concurrently and most, if not
all, board members attend all of the committee meetings, which one board
member felt was redundant. The annual board meeting is typically held in
January in Washington, D.C., while the remaining three board meetings take
place during site visits, most recently at Little Rock, Arkansas, in April
2007. As needed, the board and committees hold additional meetings or
teleconference calls to handle necessary business. Semiannually, the board
issues a report to Congress that discusses LSC's accomplishments. The
board's most recent activities have included the finance committee
reviewing financial results and discussing the budget, the annual
performance committee completing its performance appraisal of the LSC
President and IG, and the operations and regulations committee reviewing
the proposed employee handbook, approving the handbook, and providing the
handbook to the board for its review and approval.
^70The act provides for a board with 11 voting members, but currently LSC
has a vacancy on the board, leaving a current board of 10 members.
Board Orientation and Training Do Not Provide Key Information on Oversight and
Fiduciary Responsibilities
The LSC board currently has an informal orientation program whereby its
members are introduced briefly to the LSC program and legal requirements,
but the orientation does not include key information on oversight and
fiduciary responsibilities. LSC's orientation program also does not
provide specific information on Washington, D.C. law governing nonprofits;
the Internal Revenue Service (IRS) regulatory requirements for nonprofit
organizations; interpreting LSC's financial statements; managing sensitive
documents; FOIA requirements; or travel expenditure limitations. New
director training is a basic tool used by well-functioning boards. It
takes time for board members to learn about the responsibilities of their
positions and the workings of the organization. If board members do not
receive a comprehensive orientation about their responsibilities and the
unique requirements of the organization they are responsible for
directing, then they must learn as they serve, potentially reducing their
effectiveness in fulfilling their governance roles and responsibilities as
they learn. Current practice for public companies and nonprofit
corporations is to provide board members with a broad-based orientation
that encompasses the organization's mission, vision, and strategic plan;
its history; the members' obligations and performance objectives, and
board policies on meetings and attendance; and board member job
descriptions, including their performance expectations and their fiduciary
obligations. The purpose of such a program is to prepare board members for
effectively fulfilling their oversight and governance role in the
organization.
Most (7 out of 10) of the current board members, in responding to our
survey, indicated that they received orientation or training on their
responsibilities as a board member. During interviews, some board members
who had attended orientation said it consisted of a day of individual
meetings, which was helpful. Our review of the orientation materials
provided to us by management indicated that topics covered included the
role of the IG and the General Counsel. During interviews, board members
who did and did not receive orientation indicated that LSC could improve
board member orientation. For instance, one board member said that the
1-day orientation provided an understanding of what LSC does, but did not
necessarily provide general training on how to be a board member.
The LSC board also does not have an ongoing (e.g., annual) training
program for its board members. A board needs to stay current with
information on changes in governance practices and in its regulatory
environment. Additionally, a board needs to be kept up-to-date on key
management practices and requirements in such areas as risk assessment and
mitigation, internal controls, and financial reporting so that the board
can oversee management's key processes. As the environment that a board
operates in changes, new issues--whether regulatory, current practice, or
industry specific--emerge with the changes. For instance, although most of
the requirements of the Sarbanes-Oxley Act of 2002 do not apply to a
nonprofit corporation or its board, it has had a significant impact on the
operating environment, and many of its requirements have become current
practice for nonprofit corporations. An ongoing training program enables a
board to stay abreast of current governance practices and fiduciary
duties. When we interviewed board members, some noted that they stay
current on governance practices by reading materials provided by
professional associations, LSC management, or the IG, as well as through
seminars they may attend as part of their role on LSC or other boards.
While this individual initiative is valuable, board members' experience
and knowledge varies, and without an ongoing training program that can
equip all members with the same knowledge, board members risk being unable
to work together as an efficient and effective body.
LSC's Board Has Not Updated Its Committee Structure to Include Important
Committees
A board establishes committees to aid the board's organization and
facilitate accomplishing the board's work. Depending upon the board's
needs, committees may be either standing (permanent) or ad hoc (for a
particular activity). Committees handle specific issues or topics and make
policy recommendations for the full board to consider. LSC's board has
four standing committees. However, it does not have an audit committee,
compensation committee, or ethics/compliance (ethics) committee--all of
which are commonly found in public companies and nonprofit organizations.
Table 5 lists LSC's current board committees and the responsibilities of
each committee.
Table 5: Legal Services Corporation Committees and Their Functions
Committee Functions
Annual performance o Conduct annual performance reviews of the LSC
reviews President and IG.
Finance o Assist in the preparation and transmission of
appropriations requests.
o Recommend an operating budget for LSC and advise
on any adjustments.
o Provide information as necessary to Congress and
the executive branch.
o Report to the board on status of appropriations
bills or other legislative proposals that may affect
LSC.
o Recommend to the board procedures and mechanisms
for internal audit of expenditures.
Operations and o Recommend proposed bylaws for the board's
regulations consideration and adoption.
o Recommend proposed regulations.
o Receive reports from counsel on litigation and
recommend action to the board.
o Report to the board concerning how the board
should carry out its future rule making
responsibilities.
o Address policy questions regarding the
corporation's organizational structure and the
internal operations of the corporation, including
policies related to personnel.
Provision for the o Assist the board in implementing Section 1007(g)
delivery of legal of the LSC Act, 42 U.S.C. S 2996f(g), by developing
services proposals for improvements in the provision of legal
services to the poor.
o Recommend methods for achieving the most efficient
and effective delivery of legal services, and assist
the board in evaluating the performance of the
delivery system.
o Address policy issues regarding grant recipient
audits, including performance evaluations and
compliance monitoring.
o Study the special legal needs faced by certain
groups.
o Address other issues regarding the type, quality,
and method of delivering legal services.
Source: GAO based on LSC board resolutions.
Audit Committee
LSC's board does not have an audit committee, which is a key element in
effective corporate governance today. According to the National Council on
Nonprofits Association, an audit committee provides independent oversight
of the organization's accounting and financial reporting and oversees the
organization's annual audits. An audit committee is generally responsible
for the appointment, compensation, and oversight of the external auditor;
handling board communication with the external auditor regarding financial
reporting matters; and overseeing the entity's financial reporting and the
adequacy of internal control over financial reporting. The audit committee
also serves the important role of assuring the full board of directors
that the entity has the appropriate culture, personnel, policies, systems,
and controls in place to safeguard entity assets and to accurately report
financial information to internal and external users. Under the
Sarbanes-Oxley Act of 2002, public companies are required to have an audit
committee made up of independent directors, including at least one
financial expert, to oversee the company's financial reporting and audit
processes.^71
Although LSC's board has a finance committee, the finance committee's
responsibilities do not include those responsibilities required of public
company audit committees or those recommended for nonprofit organizations'
audit committees. In general, the LSC board's finance committee is
responsible for reporting on legislation and LSC's appropriations as well
as monitoring LSC's budget. Given LSC's status as a federally funded
nonprofit corporation, these are important activities that are
appropriately handled by a board-level committee. However, the finance
committee's current functions do not include overseeing the audit process
or communicating with the auditor about financial reporting matters, which
generally are the responsibilities of the IG. The finance committee chair
indicated to us that he has had minimal interaction--primarily discussion
about the annual meeting presentation--with the independent auditor. New
auditing standards^72 reinforce the importance of communication between
the auditor and those overseeing governance of an entity--typically the
audit committee representing the board. FDIC, a mixed-ownership U.S.
government corporation, which like LSC, has an IG who is responsible for
appointing the external auditor, established an audit committee with the
responsibility of ensuring that IG recommendations get appropriately
implemented by the organization. An audit committee at LSC could enhance
the governance structure by representing the board in communicating with
the external auditor and the IG, and ensuring that IG recommendations and
any weaknesses found during the financial audit process are appropriately
addressed by LSC's management. In addition, an audit committee's oversight
of LSC's financial reporting on behalf of the board would enhance the
board's effectiveness.
^71Pub. L. No. 107-204, SS 301, 407, 116 Stat. 745, 775, 790 (July 30,
2002), codified at 15 U.S.C. SS 78j-1(m), 7265.
^72American Institute of Certified Public Accountants, Statement on
Auditing Standard (SAS) No. 112, Communicating Internal Control Related
Matters Identified in an Audit, effective for financial statements ending
on or after December 15, 2006, and No. 114, The Auditor's Communication
With Those Charged With Governance, effective for financial statements
ending on or after December 15, 2006.
Compensation Committee
LSC's board does not have a compensation committee. A compensation
committee is an accepted current practice for nonprofit corporations and
required for public companies listed on the New York Stock Exchange
(NYSE). A compensation committee of a board monitors the compensation
structure of the organization. According to the publication Corporate
Governance Best Practices,^73 the compensation committee's
responsibilities should include overseeing the organization's compensation
structure, policies, and programs; establishing or recommending to the
board performance goals and objectives for members of senior management;
and establishing or recommending to the independent directors compensation
for the chief executive officer. For LSC, this would include approving the
LSC President's contract, which includes the length of the contract and
amount of compensation, and providing oversight for LSC's compensation and
structure. LSC currently does have an annual performance review committee
that is responsible for annually evaluating the performance of the LSC
President and IG, but it is not responsible for the compensation structure
and policies for the organization.
For advice on complex compensation matters, board compensation committees
frequently use outside consultants. One such matter is tracking the total
cost of senior management's compensation packages so the board has a full
understanding of the organization's executive compensation. For LSC, an
outside consultant could assist the board in understanding the statutes
and regulations that specifically apply to LSC officer and employee
compensation. It is also a current practice that the minutes of the
compensation committee reflect and record arm's length negotiations with
the executive and his or her attorney, including each proposal and counter
offer. Current practice also has the internal auditor verify that
compensation paid to senior management did not exceed what the board
approved.
During our work, we noted that the fiscal year 2006 salaries of all five
LSC officers, three LSC OIG personnel (including the IG), and four LSC
employees exceeded the statutory compensation limitation. Each affected
officer's or employee's total salary in fiscal year 2006 exceeded the
annual limitation on the rate of compensation established by the LSC Act
as the rate of level V of the Executive Schedule. Because the compensation
of LSC personnel is limited by the LSC Act to this rate, we questioned why
certain personnel received higher rates of pay. LSC officials told us that
the total salary included basic pay and a locality pay adjustment. The
locality portion of their compensation caused the compensation limitation
to be exceeded for the affected LSC personnel.^74 After we asked LSC
officials to justify this practice, they told us that during 2007 LSC's
board had engaged outside legal counsel to issue an opinion on whether LSC
violated the statutory compensation limitation. In May 2007, the outside
counsel issued an opinion to LSC concluding that LSC had not complied with
the statutory limitation on the rate of compensation.^75 We agree with
outside counsel's conclusion. Although LSC senior management did not state
whether it agrees with the outside counsel's conclusion in its legal
opinion, LSC management told us that it is working with the LSC Board of
Directors and LSC's appropriations and authorizing committees to take
appropriate corrective action.
^73Frederick D. Lipman and L. Keith Lipman, Corporate Governances Best
Practices - Strategies for Public, Private, and Not-for-Profit
Organizations (Hoboken, N.J.: John Wiley & Sons, 2006).
We also noted that during the board's most recent contract renewal
negotiations with LSC's President, the Chairman of the board conducted
contract renewal negotiations, based on a delegation of this
responsibility from the full board. However, the contract renewal
negotiations were conducted before the annual performance committee had
given the LSC President her annual review in January 2007 and, thus,
without the benefit of information from the performance evaluation.
Exceeding the limitations on the annual rate of compensation for certain
LSC personnel and conducting negotiations of the president's contract
renewal without relevant performance evaluation information could have
been avoided with properly designed and implemented procedures for
overseeing LSC's compensation structure and policies. Without a properly
designed and implemented process for overseeing compensation, LSC remains
at risk of not complying with related laws and regulations and engaging in
imprudent management practices.
^74In a September 2006 report to Congress on certain LSC fiscal practices,
the LSC IG stated that, after including locality pay, the LSC president's
compensation exceeded the compensation limitation and the "authority to
pay locality pay over the LSC pay cap" was unclear. Legal Services
Corporation, Office of the Inspector General, Report on Certain Fiscal
Practices at the Legal Services Corporation (Washington, D.C.: Sept. 25,
2006), 26.
^75According to LSC's general counsel, the outside counsel's legal opinion
relied on a Comptroller General opinion, B-279095, June 16, 1998, which
dealt with the Washington, D.C., Financial Responsibility and Management
Assistance Authority and circumstances similar to those of LSC.
Ethics Committee
While operating in an ethically sensitive environment, the LSC board does
not have an ethics committee. An ethics committee is responsible for
ensuring that the corporation has systems in place to provide assurance
over employee compliance with the corporation's code of conduct and
ethics, which LSC also does not have. Ethics is important as a component
of the control environment that helps to set the tone at the top of an
organization. According to Standards for Internal Control in the Federal
Government,^76 a positive control environment includes integrity and
ethical values that are provided by leadership through setting and
maintaining the organization's ethical tone, providing guidance for proper
behavior, removing temptations for unethical behavior, and providing
discipline when appropriate. Having an ethics committee on the board is
emerging current practice for providing independent oversight over the
organization's code of conduct and systems in place to help ensure
employee compliance with the code.
In recent years, LSC management has engaged in practices that may have
been prevented through effective implementation of strong ethics policies.
In September 2006, LSC's OIG issued a report detailing these practices at
LSC, based on a request from Congress.^77 The OIG found that food costs at
meetings exceeded per diem allotments by 200 percent and that LSC used
funds to pay travel expenses for its president for business related to her
positions with outside organizations. The OIG also found that LSC hired
acting special counsels from grant recipient organizations causing
potential conflicts of interest. The special counsels are responsible for
providing LSC management with advice on policy while also being employees
of organizations that receive LSC grant money. The OIG--based on a
complaint from a confidential source--began investigating one acting
special counsel's organization but reported that it had been unable to
complete the investigation because the organization had failed to provide
documentation required by federal law and LSC grant agreements.^78 Without
the presence of a strong ethics committee providing effective oversight in
the development, implementation, updating, and training for the code of
ethics, the corporation is at increased risk of fraud or other ethical
misconduct.
^76 [43]GAO/AIMD-00-21.3.1 .
^77Legal Services Corporation, Office of the Inspector General, Report on
Certain Fiscal Practices at the Legal Services Corporation (Washington,
D.C.: Sept. 25, 2006).
^78Legal Services Corporation, Office of the Inspector General, Report to
the Subcommittee on Commercial and Administrative Law of the House
Committee on the Judiciary Regarding Activities of the California Rural
League Assistance, Inc. (Washington, D.C.: Sept. 14, 2006).
The Board and Its Individual Committees Do Not Have Charters
The LSC board and its committees do not have charters that establish their
purpose and responsibilities. A charter is used to define the committee's
purpose, membership, and members' oversight duties and responsibilities.
LSC has a board resolution that provides descriptions of the committees,
but the resolution does not contain the elements of a charter and the
resolution has not been updated since it was issued in 1995 for three of
the four committees. The fourth committee was established in 2003. Current
practice is for boards and their committees to each have a written charter
that outlines responsibilities, structure, membership criteria, and
processes. Current practice also includes reevaluating the charter
periodically to see if it needs updating. A charter benefits the board by
providing a foundation and focal point for board activities. In addition,
the board's activities can periodically be checked against the charter to
ensure that they continue to conform to the charter and, if necessary, to
update the charter. If the board and committees do not have charters with
the appropriate descriptions of their purposes and responsibilities, the
board is at increased risk that the board's members will not be effective
in carrying out their specific oversight responsibilities.
LSC's Board of Directors Has Not Assessed Its Performance
The LSC board does not assess the board or committee performance
collectively, or the individual performance of its board members. A
board's self-assessment allows the board to periodically determine whether
it is meeting its intended goals and fulfilling its duties and provides
information needed by the board to make adjustments to its processes and
its oversight of management. Board assessments are common practice for
nonprofit corporation boards and a NYSE listing requirement for audit
committees of public companies. An assessment can include (1) an overall
self-assessment of the entire board, (2) an assessment of the separate
board committees, (3) individual board member assessments, or (4) all
three. If a board does not assess its performance, it is missing a key
opportunity for input from its own members for improving the board's
operations and governance policies. A self-assessment enables the board to
identify areas for improvement in the board's operating procedures, its
committee structure, and its governance practices. Many of the issues we
explored during the course of this audit could be evaluated through a
board self-assessment. In addition, some board members told us that
documents are not provided well enough in advance to allow a thorough
review of the information prior to the meetings or that board members are
not receiving the information that they need to fulfill their duties. Such
situations could be identified and addressed by the board in a
self-assessment. Without a feedback and assessment mechanism, the board
runs the risk of not being aware of issues that need to be addressed to
improve the board's functioning.
LSC Management Practices Have Not Kept Up with Current Practices for Key
Processes in the Areas of Risk Assessment, Internal Control, and Financial
Reporting
LSC's management practices have not kept up with current practices in key
areas. Specifically, we found that management has neither conducted a risk
assessment nor implemented a risk management program to mitigate
identified risks, which should include a comprehensive continuity of
operations plan (COOP). Risk assessment programs identify the risks the
corporation faces and risk mitigation allows management to implement
policies that mitigate the risks. A well-designed and tested comprehensive
COOP helps mitigate risks from unexpected incidents that can cause great
damage and disruptions to operations. Also, senior management has not
conducted an assessment of the organization's internal controls and has
not evaluated the financial reporting standards that should be used for
its financial statements. Internal control assessment and monitoring are
important because they provide reasonable assurance that internal control
failures will be prevented or promptly detected. Financial reporting
standards determine how an organization records its financial transactions
and presents the financial statements. Without an internal control
assessment and financial reporting standards, LSC management does not have
adequate assurance that the assets and operations are protected, that
funds are being used appropriately, and that related risks are being
mitigated. A key role of the board is to oversee management practices in
the areas of risk assessment and mitigation, internal control, and
financial reporting.
LSC Management Has Not Thoroughly Assessed Internal Controls or Conducted a Risk
Assessment
Management has not completed a thorough assessment of its internal
controls or implemented risk mitigation policies in response to a
systematic or formal risk assessment. According to the Standards for
Internal Control in the Federal Government,^79 internal control should
provide for an assessment of the risks the agency faces from both external
and internal sources. Management of public companies is required under the
Sarbanes-Oxley Act of 2002 to annually assess and report on the
effectiveness of the company's internal controls over financial
reporting.^80 Since fiscal year 2006, management of the 24 CFO Act
agencies has also been required by OMB guidance^81 to assess and report on
the effectiveness of the agencies' internal controls over financial
reporting and compliance with laws and regulations as part of an overall
internal control assurance process. As noted earlier, 31 U.S.C. S
3152(c),(d), or FMFIA, required federal agencies to establish internal
accounting and administrative control. Assessing and reporting on the
effectiveness of internal controls over financial reporting has become an
accepted practice among nonprofit corporations.
^[44]79GAO/AIMD-00-21.3.1 .
Internal control is an integral component of an organization's management
that provides reasonable assurance that the following objectives are being
achieved: effectiveness and efficiency of operations, reliability of
financial reporting, and compliance with applicable laws and
regulations.^82 Internal controls serve as the first line of defense in
safeguarding assets and preventing and detecting errors and fraud.
The following are the five standards of internal control, which define
elements of internal control and provide the basis against which internal
control is to be evaluated.
o Control environment. Management and employees should establish
and maintain an environment throughout the organization that sets
a positive and supporting attitude toward internal control.
o Risk assessment. Internal control should provide for an
assessment of the risks the entity faces from both external and
internal sources.
o Control activities. Internal control activities help ensure that
management's directives are carried out. The control activities
should be effective and efficient in accomplishing the entity's
control objectives.
o Information and communication. Information should be recorded
and communicated to management and others within the entity who
need it and in a form and within a time frame that enables them to
carry out their internal control and other responsibilities.
o Monitoring. Internal control monitoring should assess the
quality of performance over time and ensure that the findings of
audits and other reviews are properly resolved.
^80Pub. L. No. 107-204, S 404, 116 Stat. 745, 789 (July 30, 2002),
codified at 15 U.S.C. S 7262.
^81OMB Circular No. A-123, Management's Responsibility for Internal
Control (rev. Dec. 21, 2004).
^82 [45]GAO/AIMD-00-21.3.1 .
The chief executive officer generally has primary responsibility for risk
assessment and risk management under the direction of the board of
directors. A risk assessment process includes such areas as operations,
compliance, and financial reporting, in which management comprehensively
identifies risks, and considers significant interactions between the
entity and external parties as well as internal risks at both the
entitywide and activity level. Risk assessment is also an integral part of
the Committee of Sponsoring Organizations of the Treadway Commission
internal control framework^83 and an entity's effective implementation of
internal controls. All entities, regardless of size, structure, nature, or
industry, encounter risks at all levels within their organizations.
Through the risk assessment process, management determines how much risk
is to be prudently accepted and strives to maintain risk within these
levels.
Auditing standards that became effective on or after December 15, 2006,^84
cite ineffective oversight of the entity's financial reporting and
internal control by those charged with governance, as well as an
ineffective control environment, as indicators of control deficiencies and
strong indicators of material weaknesses in internal control. The
standards include the following examples of deficiencies in the design of
controls that may be control deficiencies, significant deficiencies, or
material weaknesses that would be reported by the auditor: (1) inadequate
documentation of the components of internal control, (2) inadequate design
of monitoring controls used to assess the design and operating
effectiveness of the entity's internal control over time, and (3) the
absence of an internal process to report deficiencies in internal control
to management on a timely basis.
^83Committee of Sponsoring Organizations of the Treadway Commission,
Internal Control - Integrated Framework (1992 and 1994).
^84American Institute of Certified Public Accountants, Statement of
Auditing Standards No. 112, Communicating Internal Control Related Matters
Identified in an Audit, and Statement of Auditing Standards No. 114, The
Auditor's Communication with Those Charged with Governance.
According to LSC management, it relies on a cycle memorandum^85 prepared
by LSC's external auditor as management's assessment of internal controls.
However, the cycle memorandum contains process descriptions and does not
identify internal controls, their objectives, or the assertions
(completeness, rights and obligations, valuation, existence, and
presentation and disclosure) that the controls are intended to ensure and
the risks that need to be addressed through controls. LSC's
Treasurer/Controller told us that LSC management has not conducted its own
formal assessment of internal controls. The Treasurer does conduct
ongoing, informal assessments of certain financial processes on an ad hoc
basis. However, these assessments are not utilized as part of a
comprehensive internal control evaluation. Without comprehensive internal
control assessment and monitoring, LSC is at risk that it will not prevent
or promptly detect internal control failures, including unauthorized or
improper use of federal funds or violations of laws or regulations in its
operations.
Code of Conduct and Ethics
LSC currently does not have a code of conduct that establishes a
conflict-of-interest or ethics policy for its employees. A
conflict-of-interest policy is intended to help ensure that when actual or
potential conflicts of interest arise, the organization has a process in
place under which the affected individual will recognize the potential
conflict and advise management or the governing body about the relevant
facts so that potential conflicts of interest can be resolved. Ethics
provisions in the LSC Act^86 and elaborated on in the LSC bylaws (S 3.05)
pertain only to the outside interests of the Board of Directors. LSC
bylaws give the board authority to adopt rules and regulations regarding
the conduct of officers and employees in matters of any adverse interest
to LSC. At the time of our review, the only conflict-of-interest policy
affecting employees was a prohibition against gifts, fees, and honoraria
greater than $50. LSC policy also states that officers of the corporation
must have any outside compensation approved by the board.
Federal employees are subject to various statutes and regulations that
govern ethical conduct, including public financial disclosure requirements
and outside earned income and activities limitations under the Ethics in
Government Act of 1978, as amended,^87 and restrictions on gifts to
federal employees and acceptance of travel and related expenses from
nonfederal sources enacted by the Ethics Reform Act of 1989.^88 The Office
of Government Ethics provides leadership for executive branch agencies and
departments to prevent conflicts of interest on the part of government
employees and to resolve conflicts that do arise.
^85A cycle memorandum documents a significant accounting process, such as
revenue or purchasing, and includes the significant accounting
application, financial statements line items, general ledger accounts, and
the policies and procedures related to the cycle being documented.
^86LSC Act, 42 U.S.C. S 2996d(c).
The NYSE and the other stock exchanges have adopted corporate governance
requirements to aid their listed companies in complying with ethics
requirements contained in the Sarbanes-Oxley Act of 2002.^89 NYSE-listed
companies must adopt codes of business conduct and ethics for directors,
officers, and employees, and post the codes on their Web sites. Under the
Sarbanes-Oxley Act and the related implementation guidance, codes of
conduct and ethics should address conflicts of interest, confidentiality,
protection and proper use of an organization's assets, and compliance with
laws and regulations, and encourage reporting of illegal or unethical
behavior. The American Bar Association (ABA) encourages nonprofit
organizations to adopt similar policies.
During the LSC operations and regulations committee meeting in April 2007,
a board member suggested that a future agenda item should be development
of a compliance program that includes a code of conduct. Without such a
program that includes conflict-of-interest and ethics policies, LSC is at
risk of personnel being unaware of their responsibility in the area of
ethics and conflicts of interest, including incidents of illegal or
unethical behavior occurring and not being detected.
LSC Management Has Not Designed and Implemented a Comprehensive Continuity of
Operations Plan
Although LSC does have a COOP, the plan is not complete or comprehensive.
It is the policy of the U.S. government for each agency to have in place a
comprehensive and effective program to ensure the continuity of essential
federal functions under all circumstances. Today's changing threat
environment and the potential for no-notice emergencies, including
localized acts of nature, accidents, technological emergencies, and
terrorist attacks, have increased the need for COOP capabilities. In this
environment, preparing for disasters is an integral part of mitigating
risk. Federal Preparedness Circular No. 65 identifies the required
characteristics of an effective COOP program, which includes maintaining
and testing plans for responding to likely catastrophic events.
^875 U.S.C. appx. SS 101-111, 501-505.
^885 U.S.C. S 7353; 31 U.S.C. S 1353.
^89Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, S 406, 116 Stat. 747,
789-90 (July 30, 2002).
LSC's Office of Information Technology (OIT) does perform a full, weekly
backup of data and an incremental daily backup. At the end of each month,
the most recent full weekly backup is stored off site; the most recent 12
months are retained. According to LSC's current COOP description provided
by LSC, OIT would need to relocate its systems to a remote location should
the LSC building not be accessible. Also, from this description, it
appears that system hardware first needs to be retrieved from the LSC
building and then transported and installed in another location. However,
there is no specific implementation plan or remote location specified in
the plan. LSC provided us with meeting agendas from May 2006 and June 2006
regarding emergency responses, but did not provide any additional COOP
program information. Furthermore, there is no indication that OIT
conducted any simulations of disruptions to test its established plans. An
organization that does not have a tested, comprehensive COOP is vulnerable
to unexpected incidents capable of causing great damage. Finally, because
LSC does not have a comprehensive risk assessment process, management and
the board have not assessed the risks or identified the acceptable levels
of risk associated with LSC's current COOP.
LSC Management Has Not Assessed the Propriety of Its Financial Reporting
Standards
LSC's management has not conducted its own assessment or analysis to
determine which set of accounting standards--those promulgated by the
Financial Accounting Standards Board (FASB), Government Accounting
Standards Board (GASB), or Federal Accounting Standards Advisory
Board--are most applicable for LSC to use. The accounting standards that
an entity uses determine how the entity records its financial transactions
and how the entity presents the financial statements. According to LSC
management, in the mid-1990s, the former IG determined that LSC's
financial reporting should follow the standards issued by GASB, which
establishes standards of financial accounting and reporting for state and
local governmental entities. However, management, not the OIG, is
responsible for the financial statements and for adopting the related
accounting policies and for maintaining an adequate and effective system
of accounts that will, among other things, help ensure the production of
proper financial statements.
In response to our inquiries about LSC's selection and use of those
standards in its accounting and preparation of its financial statements,
neither LSC management nor the current IG were able to provide us with an
analysis or the primary technical reasons why LSC is currently using GASB
standards, which are normally intended for use by state and local
governments. During the April 2007 meeting of the finance committee, a
discussion was held on whether the corporation should be using GASB or
FASB standards for its accounting. The Treasurer informed the committee
members that his current opinion was that LSC should be using the FASB
standard, instead of GASB. It was agreed that further discussion would
take place between the Treasurer and OIG staff and that the committee
would receive an update at the next committee meeting in July 2007.
Conclusions
In recent years, governance and accountability processes have received
increased scrutiny and emphasis in the nonprofit, federal agency, and
public company sectors as a result of governance and accountability
breakdowns, most notably in the public company financial scandals that led
to the enactment of the Sarbanes-Oxley Act of 2002. Public companies now
operate under strengthened governance and accountability standards,
including requirements for ethics policies and improved internal controls.
The federal government and nonprofit sectors have followed this lead and
established new standards and requirements for improved internal control
reporting and governance and accountability. For nonprofit corporations
using funding from taxpayers and donors, effective governance,
accountability, and internal control are key to maintaining trust and
credibility. Governance and accountability breakdowns result in a lack of
trust from donors, grantors, and appropriators, which could ultimately put
funding and the organization's credibility at risk.
Since its inception over 30 years ago, LSC's governance and accountability
requirements, including its financial reporting and internal control, have
not changed significantly. Further, LSC's board and management have not
kept pace with evolving governance and accountability practices. As a
result, LSC's current practices have fallen behind those of federal
agencies, U.S. government corporations, and other nonprofit corporations.
The current accepted practices of federal agencies, U.S. government
corporations, and nonprofit corporations provide a framework for
identifying standards that can most effectively be used for strengthening
LSC's governance and accountability. Effectively utilized, current,
accepted governance and accountability practices are necessary to provide
strong board oversight and effective day-to-day management of LSC's
performance. In addition, NYSE listing standards and the Conference Board
provide widely accepted governance standards that can be applied to public
companies and nonprofit corporations to improve governance structures and
practices. Because LSC's board and management have not kept pace with the
modernization of practices in federal entities and other nonprofit
corporations, many opportunities exist to improve and modernize existing
processes. By updating and strengthening its governance and accountability
structures, LSC can increase assurance that federal funds are being
properly spent and its operations are effectively carried out to meet its
mission.
Matter for Congressional Consideration
Since the LSC Act was enacted in 1974 and last comprehensively amended and
reauthorized in 1977, new laws governing federal agencies, U.S. government
corporations, and public companies have been enacted to strengthen
governance and accountability requirements. Therefore, Congress should
consider whether LSC could benefit from additional legislatively mandated
governance and accountability requirements, such as financial reporting
and internal control requirements, modeled after what has worked
successfully at federal agencies or U.S. government corporations. There
are different options available to Congress for such a mandate.
o Congress could maintain LSC's current organizational structure
as a federally chartered and federally funded, private,
nonmembership, and tax-exempt D.C. nonprofit corporation and enact
permanent legislation to require LSC to implement additional
governance and accountability requirements.
o Alternatively, Congress could enact legislation to convert LSC
to a federal entity (such as a U.S. government corporation subject
to the Government Corporation Control Act) or an independent
federal agency that is required to follow the same laws and
regulations as executive branch agencies. In the statute
establishing LSC as a federal entity, Congress could specifically
exempt LSC from certain requirements that would otherwise apply to
that type of federal entity in order to further special policy
considerations particular to LSC.
Recommendations
Through our evaluation of LSC's governance and accountability practices,
we identified opportunities for the LSC board and management to improve
their current governance and accountability practices.
Recommendations for Board Action
In order to improve and modernize the governance processes and structure
of LSC, we recommend that the LSC Board of Directors take the following
eight actions:
o establish and implement a comprehensive orientation program for
new board members to include key topics such as fiduciary duties,
IRS requirements, and interpretation of the financial statements;
o develop a plan for providing a regular training program for
board members that includes providing updates or changes in LSC's
operating environment and relevant governance and accountability
practices;
o establish an audit committee function to provide oversight to
LSC's financial reporting and audit processes either through
creating a separate audit committee or by rewriting the charter of
its finance committee;
o establish a compensation committee function to oversee
compensation matters involving LSC officers and overall
compensation structure either through creating a separate
compensation committee or by rewriting the charter of its annual
performance review committee;
o establish charters for the Board of Directors and all existing
and any newly developed committees to clearly establish
committees' purposes, duties, and responsibilities;
o implement a periodic self-assessment of the board's, the
committees', and each individual member's performance for purposes
of evaluating whether improvements can be made to the board's
structure and processes;
o develop and implement procedures to periodically evaluate key
management processes, including at a minimum, processes for risk
assessment and mitigation, internal control, and financial
reporting; and
o establish a shorter time frame (e.g., 60 days) for issuing LSC's
audited financial statements.
Recommendations for Executive Action
In order to improve and modernize key management processes at LSC, the
president and executive committee should take the following four actions:
o conduct and document a risk assessment and implement a
corresponding risk management program as part of a comprehensive
evaluation of internal control;
o with the board's oversight, evaluate and document relevant
requirements of the Sarbanes-Oxley Act of 2002 and practices of
NYSE and ABA that are used to establish a comprehensive code of
conduct, including ethics and conflict-of-interest policies and
procedures for employees and officers of the corporation;
o establish a comprehensive and effective COOP program, including
conducting a simulation to test the established program; and
o conduct an evaluation to determine whether GASB should be
adopted as a financial reporting standard for LSC's annual
financial statements.
Agency Comments and Our Evaluation
We provided copies of the draft report to LSC's Board of Directors and
management for comment prior to finalizing the report. We received written
comment letters from the Chairman on behalf of LSC's Board of Directors
and LSC's President on behalf of LSC's management (see apps. V and VI).
Both the Chairman and President expressed their commitment to achieving
strong governance and accountability and outlined the actions that LSC's
board and management plan to take in response to our recommendations. LSC
management provided technical comments that were incorporated into the
report as appropriate.
The Chairman of LSC's board expressed the board's agreement to take action
to address each of the recommendations we made to the board. LSC's
president on behalf of management provided a comment letter where
management fully agreed with our recommendations dealing with financial
reporting standards, COOP, and code of conduct, and expressed commitment
to further action "in the spirit of" our recommendation dealing with
conducting and documenting a risk assessment and implementing a
corresponding risk management program as part of a comprehensive
evaluation of internal control.
LSC's President also included some clarifications to our draft report.
First, LSC management stated that "the draft report does not address the
existence of congressional oversight," and provided additional context
regarding LSC's congressional oversight. Our draft report included a
discussion of congressional oversight through LSC's budget process and the
appropriations process. In our final report, we included a broader
description of LSC's congressional oversight. Second, LSC management
points out that LSC provides certain whistleblower protection statements
in its employee handbook regarding communicating with the OIG. We added
language to our final report to reflect the existence of such protection
under the IG Act. Third, the LSC President stated that the OIG did not
find conflicts of interest related to the acting special counsel and was
troubled by the references in our report to potential conflicts of
interest. In our report, we included information about the IG's finding
that LSC's hiring of acting special counsels from grantee organizations
represented a potential conflict of interest. Our report also noted that
the board currently does not have an ethics committee and there is no code
of conduct for LSC employees.
Both LSC's Chairman and President commented on the matter that we
presented for congressional consideration--that Congress should consider
whether LSC could benefit from additional legislatively mandated
governance and accountability requirements. In addition, in their
respective letters, LSC's Chairman and President both provided their views
that LSC's governing statutes are appropriate and have worked well and
stated that many of the governance recommendations could be accomplished
without changing the statutory framework of LSC. As we noted, Congress
chartered LSC over 30 years ago as a private corporation for certain
policy reasons with governance and accountability requirements that
existed at that time as a unique private corporation in response to
certain policy considerations. While federal agencies and government
corporations have been subject to strengthened governance and
accountability requirements over recent years, LSC has not kept up with
evolving reforms aimed at strengthening internal control over an
organization's financial reporting process and systems, with LSC's board's
practices falling short of modern board practices and LSC not keeping up
with current management practices. Therefore, we presented the options of
amending LSC's governing statutes to improve governance and accountability
requirements or converting LSC to a federal entity, which would include
compliance with related governance and accountability requirements.
As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. We will then send copies to other appropriate
congressional committees, the president of LSC, and the LSC Board of
Directors. We will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site at
http:// [46]www.gao.gov .
If you or your staff have any questions concerning this report, please
contact me at (202) 512-9471 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made key contributions to this
report are listed in appendix VII.
Jeanette M. Franzel
Director, Financial Management and Assurance
List of Requesters
The Honorable Edward M. Kennedy
Chairman
The Honorable Michael E. Enzi
Ranking Member
Committee on Health, Education, Labor, and Pensions
United States Senate
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable Chris Cannon
Ranking Member
Subcommittee on Commercial and Administrative Law
Committee on the Judiciary
House of Representatives
The Honorable F. James Sensenbrenner, Jr.
House of Representatives
Appendix I: Origin and Creation of the Legal Services Corporation
Although low-income people since the 19^th century had been turning to
local legal aid societies throughout the United States for assistance with
their civil legal problems, in the 1960s President Lyndon B. Johnson
declared poverty to be a national problem and initiated a "War on Poverty"
to make federal resources available to support local antipoverty programs,
such as the legal assistance provided by legal aid societies. The first
War on Poverty legislation, the Economic Opportunity Act of 1964,^1
established the now-defunct Office of Economic Opportunity (OEO) within
the Executive Office of the President to administer the War on Poverty
programs, including what would become the Legal Services Program, the
predecessor to the current Legal Services Corporation (LSC).
The OEO's Legal Services Program activities soon generated political
controversy, and by the early 1970s there was a general consensus that the
OEO's Legal Services Program should be moved out of the Executive Office
of the President.^2 A number of different structures were proposed.^3 For
example, there were proposals to move the Legal Services Program into an
executive department, such as the Department of Justice, the Department of
Housing and Urban Development, or the predecessor to the current
Department of Health and Human Services. In addition to raising concerns
about political interference, critics of placing the function in an
executive department raised concerns about decreased program visibility,
reduced responsiveness to client needs, and the objectives of the program
being subordinated to the department's mission. Another proposed
organizational home was the Judiciary, especially the Administrative
Office of the United States Courts, but critics argued that the Judiciary
was already overburdened with work and faced frequent funding problems.
Four alternative organizational structures were suggested that took into
consideration accountability to Congress and the public while promoting
political independence, permanence, program stability, operational
flexibility, and attorney independence to represent clients consistent
with high professional standards. The four alternative organizational
structures proposed were a federal block grant program, an independent
agency in the executive branch, a U.S. government corporation, or a
private nonprofit corporation. Examples of such organizations today
include, respectively, (1) the Temporary Assistance for Needy Families
Program and the Community Development Block Grant Program, (2) the
National Science Foundation and the National Foundation on the Arts and
the Humanities, (3) the Millennium Challenge Corporation and the
Corporation for National and Community Service (Americorps), and (4) the
Corporation for Public Broadcasting (CPB).
^1Economic Opportunity Act of 1964, Pub. L. No. 88-452, 78 Stat. 508 (Aug.
20, 1964).
^2See, e.g., H. Rep. No. 93-247 (June 4, 1963), 1974 U.S.C.A.A.N. 3872,
3873-75 (report on H.R. 7824, a bill to establish an independent
corporation to replace the Legal Services Program).
^3See, e.g., The Legal Services Corporation: Curtailing Political
Influence, 81 Yale L. J. 231, 261 n. 106 (1971-72), which cites American
Bar Association, Joint Information Report: The Corporation for Legal
Services (1971), and Edgar Cahn and Jean Cahn, Legal Services: Alternative
Organizational Models. Report to the President's Advisory Council on
Executive Organization (June 9, 1970).
Ultimately, consensus in the early 1970s coalesced around an entity
modeled after the CPB, which was a private, nonmembership, nonprofit
corporation in the District of Columbia with federal funding that was
federally chartered by the Public Broadcasting Act of 1967^4 to
"facilitate the development of public telecommunications and to afford
maximum protection from extraneous interference and control." The CPB
federal charter created a nine-member, bipartisan board of directors that
is appointed by the President of the United States with the advice and
consent of the U.S. Senate. The board manages^5 CPB to accomplish its
primary mission of providing federal funding via grants and contracts to
public telecommunications and production entities in order to promote the
expansion and development of public telecommunications with high-quality,
diverse programming responsive to local needs and furthering
instructional, educational, and cultural purposes. CPB, which was last
reauthorized in 1992,^6 is also funded through annual appropriations.
^4Public Broadcasting Act of 1967, Pub. L. No. 90-129, tit. II, 81 Stat.
365, 367-73 (Nov. 7, 1967), codified, as amended, at 52 U.S.C. S 396.
^5The D.C. Nonprofit Corporation Act vests the board of directors with
responsibility for managing the affairs of the corporation, but permits
the board to delegate some of this responsibility to officers or other
agents. See D.C. Code SS 29-301.18, 29-301.24(d). Many boards delegate
day-to-day duties but retain the oversight duties of the management
function.
^6Public Telecommunications Act of 1992, Pub. L. No. 102-356, S 8106, 106
Stat. 949, 951 (Aug. 26, 1992), codified at 47 U.S.C. S 396(k)(1)(C). The
1992 act authorized funding levels through fiscal year 1996. Since then,
CPB has been funded in annual appropriations acts, which have provided
2-year advanced funding. Thus, for example, CPB was appropriated funding
for fiscal year 2008 in the fiscal year 2006 appropriations act. See
Departments of Labor, Health and Human Services, and Education, and
Related Agencies Appropriations Act, 2006, Pub. L. No. 109-149, 119 Stat.
2833, 2874 (Dec. 30, 2005).
By transferring the Legal Services Program to a federally funded, private
nonprofit corporation modeled after CPB, supporters of this type of
organizational entity hoped to achieve the goal of greater operational
flexibility and protection from political pressure from all levels of
government while retaining accountability to Congress and the public.
Supporters also hoped to encourage private donations to LSC, so unlike
CPB's federal charter, the Legal Services Corporation Act of 1974 (LSC
Act) provides that LSC shall be eligible to be treated as a charitable
corporation exempt from federal taxation.
Under the Internal Revenue Code, tax-exempt status basically means that
the corporation is operated and organized exclusively for charitable
purposes, does not attempt to influence legislation, does not campaign on
behalf of candidates for public office, and does not allow any of its net
inure earnings to inure to the benefit of any individual.^7 To maintain
tax-exempt status, organizations must annually file with the Internal
Revenue Service (IRS) a Form 990, Return of Organization Exempt From
Income Tax, which is available for public inspection and includes such
information as the organization's gross income, assets and liabilities,
and compensation paid to high-level managers.^8 A number of the provisions
in the LSC Act are consistent with IRS's requirements for tax-exempt
status. For example, the LSC Act's purpose of providing civil legal
assistance to low-income people qualifies as charitable, and the LSC Act
prohibits LSC from engaging in certain political activities, such as
activities that would influence the passage or defeat of any legislation
at the local, state, or federal level or from making LSC resources
available to support any political party or campaign of any candidate for
public office. The LSC Act also states that LSC has no power to issue
stocks and prohibits any LSC income or assets from inuring to the benefit
of any director, officer, or employee, except as reasonable compensation
for services or reimbursement for expenses. By making and keeping LSC a
tax-exempt organization, the LSC Act prevents federal tax dollars from
being spent on paying federal taxes and thus permits LSC to use its funds
for the charitable purpose set out in the LSC Act.^9
^7See 26 U.S.C. SS 170(c)(2), 501(a), 501(c)(3); 26 C.F.R. SS 1.501(a)-1,
1.501(c)(3)-1.
^8See 26 U.S.C. SS 6104, 6033.
^9See, e.g., Warren E. George, Development of the Legal Services
Corporation, 61 Cornell L. Rev. 681 (1975-76).
Congress enacted the LSC Act in 1974 to transfer the functions of the
Legal Services Program from the Executive Office of the President into a
private, nonmembership, nonprofit corporation with tax-exempt status that
would be federally chartered in the District of Columbia and be authorized
to receive annual federal appropriations to fund its operations supporting
civil legal assistance to low-income people in communities throughout the
United States.
Appendix II: Examples of Corporate Governance Guidelines
Corporate practices Corporate governance guidelines
Board's fiduciary duties In carrying out their functions, corporate
directors must fulfill fiduciary duties of care,
loyalty, and good faith. Boards may delegate the
day-to-day management of the company to the chief
executive officer (CEO) and other senior
management, but board members retain
responsibilities for oversight and monitoring of
any delegated functions.
Under state corporate law, directors owe
fiduciary duties to the corporation and its
shareholders:
o the duty of care, which is the duty to
exercise appropriate diligence and make
decisions that are informed;
o the duty of loyalty, which is the duty to
act without conflict and always put the
interests of the corporation before those of
the individual director or other individuals
or organizations the individual director is
affiliated with; and
o the duty to act in good faith, which is the
duty to act with honesty of purpose and in
accordance with evolving corporate governance
best practices.
Roles of board and A strong and effective board of directors should
management clearly have a clear view of its role in relationship to
defined management. How the board organizes itself and
structures its processes will vary with the
nature of the business, business strategy, the
size and maturity of the company, and the talents
and personalities of the CEO and directors.
Circumstances particular to the corporate culture
may also influence the board's role. The board
focuses principally on guidance and strategic
issues, the selection of the CEO and other senior
executives, risk oversight and performance
assessment, and adherence to legal requirements.
Management implements the business strategy and
runs the company's day-to-day operations with the
goal of increasing shareholder value for the long
term.
Corporate governance The board should have a set of written guidelines
guidelines in place in place to articulate corporate governance
principles and the roles and responsibilities of
the board and management. These guidelines should
be reviewed at least annually. By elaborating on
directors' basic duties, the guidelines help the
board and its individual members understand their
obligations as well as the general boundaries
within which they should operate.
Board access to The effectiveness of the board ultimately depends
information and conduct on the quality and timeliness of information
of board meetings received by directors. Each board and management
should agree on the type of information the board
needs to make informed decisions and perform its
oversight function. This should include material
on business and financial performance, strategic
issues, and information about material risks and
other significant matter facing the company.
Information for board meetings should be
distributed enough in advance of the meetings to
permit directors to read, absorb, and consider
it. Besides formal processes, board and
management should develop informal communication
and reporting channels.
Boards should consider the following best
practices to help ensure effective decision
making and exchange of information and ideas at
meetings of the full board or its committees:
o Independent directors should be able to
place issues on the board agenda, with time
for adequate discussion and consideration, and
determine the type and quality of information
flow required for effective board action. Last
minute add-ons to the agenda, especially for
weighty issues, should be discouraged.
o The lead/presiding director, if there is
one, should take responsibility to surfacing
issues that impact the business and need to be
presented to the board for discussion and/or
action, whether in regular or executive
sessions.
o Management should provide information that
effectively explains the company's operating
and financial status, as well as other
significant issues facing the company and the
board. Appropriate feedback mechanisms between
management and the board should be developed
to ensure that the materials are useful,
timely, and of adequate depth. Meeting
materials should contain a cover letter
highlighting the most important issues for
directors' consideration.
o Meetings should be structured to encourage
participation and dialogue among the
directors.
o Directors have an obligation to ensure
near-perfect attendance at meetings and
actively participate in the meetings,
including asking the hard questions.
o The CEO should expose directors to senior
management team members and operation (line)
management at meetings and field trips so that
directors can, with knowledge informally
acquired from management, further delve into
issues necessary to carry out their functions.
According to New York Stock Exchange (NYSE)
rules, executive sessions should
1. be held without management present;
2. be regularly scheduled to prevent negative
inferences;
3. disclose the name of the director presiding
at the executive sessions, if one is chosen,
in the annual proxy statement or the procedure
by which the director presiding at meetings is
selected; and
4. disclose mechanisms for interested parties
to make their concerns known to the
nonmanagement directors as a group. NASDAQ's
rules require regularly convened executive
sessions of the independent directors.
In addition, according to best practices
identified by the Conference Board Directors'
Institute, executive sessions should
o promote open dialogue among the independent
members and free exchange of ideas,
perspectives, and information;
o have a feedback mechanism to the CEO for
important issues that may surface (the lead or
presiding director can take the lead in
providing the CEO feedback);
o be scheduled at regular intervals (most
commonly following each full board meeting,
even though some boards may also hold a short
pre-meeting executive session) to eliminate
any negative inferences from convening these
sessions; and
o be supplemented by additional off-line
informational channels (such as dinners before
board meetings) to help build trust and
relationships among the independent directors.
Board independence An independent, vigorous, and diligent board of
directors is crucial to good corporate
governance. Boards must move from their
traditional advisory roles to become active
fiduciaries in the exercise of their oversight
responsibilities. From this standpoint,
independence is essential. Although defined by
legislative and regulatory standards, a
director's independence (in thought and action)
from management influence should always be
evaluated qualitatively and on a case-by-case
basis.
For the past few years, issuers have been
required to disclose information in Securities
and Exchange Commission filings regarding
director independence and other corporate
governance matters. The commission has recently
consolidated these requirements under new Item
407 of Regulation S-K. Registrants must disclose
information about director independence;
nominating, audit, and compensation committees;
and shareholder communications by the following
means:
o Identifying each independent director of the
company (and the nominees for director when
the information is being presented in a proxy
or information statements) as measured by the
company's definition of independence.
o Identifying any members of the compensation,
nominating, and audit committees whom the
company has not identified as independent
under such definition.
o Describing, by specific category or type,
any related party transactions, relationships,
or arrangements not disclosed pursuant to Item
404 that were part of the board of directors'
consideration in determining that the
independence standard has been met as to each
independent director or director nominee.
o Providing the number of board meetings
during the fiscal year and certain attendance
information, including the board's policy on
attendance at annual shareholder meetings and
attendance information with respect to the
last annual meeting.
o Identifying any standing audit, nominating,
and compensation committees; their membership
composition; and the number of meetings,
together with certain descriptive information
regarding such committees.
o Disclosing information about the audit
committee's independence and expertise, and
about the process for shareholders to send
communications to the registrant's board of
directors. If there is no process, the basis
for the board's view that it is appropriate
not to have such a process and, if all
shareholder communications are not sent
directly to board members, a description of
the process for determining which
communications will be provided to board
members.
Board composition, size, The composition and skill set of a board should
and director be linked to the company's particular challenges
qualifications and strategic vision. As companies develop and
experience changed circumstances, the desired
composition of the board may be different and
should be reviewed.
The composition of the board should be tailored
to meet the needs of the company and its stage of
development. There should be a mix of director
knowledge and expertise in
o accounting and finance,
o risk management,
o strategic and business planning,
o legal and compliance,
o human resources,
o marketing,
o technology,
o international markets, and
o industry knowledge.
As with any group working together, boardroom
relationships are difficult to predict, but an
effective director
o asks the hard questions,
o works well with others,
o possesses valuable input,
o is available when needed,
o is alert and inquisitive,
o has business knowledge,
o contributes to committee work,
o attends meetings,
o challenges management's assumptions when
needed and speaks out appropriately at board
meeting,
o prepares for meetings,
o makes contributions to long-range planning,
and
o provides an overall contribution to the
board and committees on which he or she
serves.
According to the 2006 edition of the annual
Directors' Compensation and Board Practices
report by the Conference Board, the median board
size, depending on the industry, ranges from 9 to
11 members. The median number for outside
directors varies from 8 to 10. The 2007 edition
of Board Practices/Board Pay report noted that 72
percent of Standards & Poor's 1,500 companies had
9-member boards in 2005, down from 12 in 2003.
Boards need to be large enough to accommodate the
necessary skill sets, but still small enough to
promote cohesion, flexibility, and effective
participation. "When you've got a 20- or
30-person corporate board," argued one member of
the Conference Board Directors' Institute, "it's
one way of ensuring that nothing is ever going to
happen that the CEO doesn't want to happen. If
you've got a small board--8 to 10 people--people
do get involved."
The NYSE requires that a list of director
qualification standards be included in the
company's corporate governance guidelines. These
standards should, at a minimum, reflect the NYSE
independence requirements. Companies may also
address other substantive qualifications
requirements, including policies limiting the
number of boards on which a director may sit and
specifying director tenure, retirement, and
succession criteria. All directors must devote
the proper amount of time and attention to
develop the broad-based and specific knowledge
required to fulfill their obligations.
In order to ensure a high level of commitment,
directors should
o assess carefully and guard against potential
entanglements, such as service on an excessive
number of boards;
o prepare for and attend all board and
committee meetings and consider travel
requirements for these meetings (in particular
for foreign-based directors);
o participate actively and effectively at
meetings;
o develop and maintain a high level of
knowledge about the company's business;
o keep current in the director's own specific
field of expertise; and
o develop broad knowledge about the role and
responsibilities of directors, including legal
responsibilities.
Board leadership Boards should adopt a structure providing
nonmanagement directors with the leadership
necessary for them to act independently and
perform effectively. This structure could include
separating the positions of chairman and CEO;
creating a lead independent director; or in case
of a former employee acting as chairman,
appointing a presiding director from among the
independent directors.
Any structural alternative a board wishes to
adopt should
o strengthen the independence and oversight
role of the board,
o provide the nonmanagement directors with the
ultimate authority over information flow to
the board, and
o improve the relationship and flow of
information between the board, CEO, and senior
management.
Board committee Boards should establish committees (e.g.,
structure nominating/governance, audit, compensation) that
will enhance the overall effectiveness of the
board by ensuring focus on and oversight of
matters of particular concern. Statutory law, SEC
rules, and stock exchange listing standards
require that committees must be composed solely
of directors who meet specified independence
standards.
An effective committee structure should require
that
o each committee have a charter delineating
the committee's jurisdiction, duties, and
responsibilities;
o each charter include only duties that can
actually be accomplished; and
o each charter be reviewed at least annually.
Succession planning and Hiring the CEO and planning for CEO succession
leadership development are two of the most important responsibilities of
the board. The board should institute a CEO
succession plan and selection process overseen by
one of its independent committees or by a
designated director or group of directors.
A successful succession planning process will
o be continuous,
o be driven and controlled by the board,
o involve inputs from the CEO and other key
employees,
o be easily executed in the event of a crisis,
o be tied to the corporate strategy,
o be geared toward finding the right leader at
the right time,
o develop talent pools throughout the
managerial ranks of the company, and
o avoid a "horse race" mentality that may lead
to the loss of key officers when the new CEO
is chosen.
Source: Reproduced by permission from Matteo Tomello and Carolyn K.
Brancato, Corporate Governance Handbook, 2007: Legal Standards and Board
Practices (New York, N.Y.: 2007).
Appendix III: Comparison of Other Key LSC Requirements
Grants Management
LSC is subject to grants management requirements that are stronger than
those of other Washington, D.C., nonprofit corporations, but somewhat less
rigorous than those governing federal entities, including requirements
related to the grantor's audits of grant recipients, administration of
grants, and application of cost principles to grants. (See table 6.) In
1996, Congress amended the LSC Act on a fiscal year basis through certain
administrative provisions included in the fiscal year 1996 appropriations
act for LSC (LSC 1996 Amendments).^1 The LSC Act requires the LSC board to
ensure that each grant recipient is subject to an annual financial audit
and to maintain a copy of that audit report at its headquarters for at
least 5 years. The LSC 1996 Amendments added additional requirements
related to grant recipient audits.^2 The LSC 1996 Amendments require the
grant recipient audit to be conducted in accordance with generally
accepted government auditing standards (GAGAS) and guidance established by
the LSC Office of Inspector General (OIG). The grant recipient audit
report must state whether (1) the grant recipient's financial statements
fairly present its financial position and results of operations in
accordance with generally accepted accounting principles (GAAP); (2) the
grant recipient has internal control systems that provide reasonable
assurance that it is managing its funds, LSC and otherwise, in compliance
with federal laws and regulations; and (3) that the grant recipient has
complied with federal laws and regulations applicable to funds received
from LSC or other sources.
^1With only minor changes, the text of these amendments has been reenacted
in each subsequent fiscal year's LSC appropriations act.
^2Department of State and Related Agencies Appropriations Act, 1996 (1996
Appropriations Act), Pub. L. No. 104-134, tit. IV, S 509(a), 110 Stat.
1321 (Apr. 26, 1996).
Table 6: Key Statutory Provisions for Grants Management
D.C.
Independent U.S. government nonprofit
LSC federal agencies corporations corporations
Audits of 1996 LSC Single Audit Act; Single Audit None
grant Amendments OMB Cir. No. A-133 Act; OMB Cir.
recipients on audits of grant No. A-133 on
recipients audits of grant
recipients
Grant 1996 LSC OMB Cir. Nos. OMB Cir. Nos. None
management Amendments A-102 and A-110 on A-102 and A-110
requirements administrative on
requirements for administrative
grant recipients requirements for
grant recipients
Cost None OMB Cir. Nos. OMB Cir. Nos. None
principles for A-21, A-87, and A-21, A-87, and
grant A-122 on cost A-122 on cost
recipients principles for principles for
grant recipients grant recipients
Source: GAO.
The LSC 1996 Amendments include other grant management provisions. For
example, the LSC 1996 Amendments require the board to select LSC grant
recipients through the implementation of a system of competitive awards,
including such selection criteria as (1) the demonstration of an
understanding of client legal needs and capability of serving such needs;
(2) the quality, feasibility, and cost-effectiveness of the proposed plan
for delivery of legal assistance; and (3) LSC's past experience with the
applicant, including the record of past compliance with LSC requirements.
The LSC 1996 Amendments require the board to ensure that no grant
recipient uses LSC funds for any litigation activity in providing client
legal services unless certain recordkeeping requirements are met. For all
cases or matters, the LSC 1996 Amendments require the board to obtain the
grant recipient's agreement to maintain timekeeping records. Additionally,
the LSC 1996 Amendments require the board, before providing funding to a
grant recipient, to ensure that the grant recipient enters into a
contractual agreement to be subject to all federal laws relating to the
proper use of federal funds (i.e., not using federal funds for fraud,
waste, or abuse) and that for such purposes LSC shall be considered a
federal agency and its grant funds shall be considered federal funds.^3
Finally, LSC has issued regulations on its administration of grants,
including provisions establishing cost standards and procedures.^4
^3See 1996 Appropriations Act, SS 503, 504(a)(8), (a)(10)(A), (a)(19).
^4See 45 C.F.R. ch. 16.
Requirements for audits of grants provided by federal agencies and U.S.
government corporations are found in the Single Audit Act, as amended,^5
which established uniform audit requirements for state and local
governments and nonprofit organizations that receive grants or other forms
of federal financial assistance. In addition to uniform audit
requirements, the Single Audit Act is intended to "promote sound financial
management, including effective internal controls, with respect to Federal
awards administered by non-Federal entities" and "promote the efficient
and effective use of audit resources."^6 The Office of Management and
Budget (OMB) has issued implementing regulations on the Single Audit Act
in OMB Circular No. A-133, Audits of States, Local Governments, and
Non-Profit Organizations (rev. June 27, 2003).
Under the Single Audit Act and implementing regulations, generally grant
recipients must annually arrange for an independent auditor to conduct an
audit in accordance with GAGAS and prepare a report on the grant
recipient's financial statements and schedule of expenditures, internal
controls, and compliance with laws and regulations. The auditor must
report whether (1) the financial statements are presented fairly in all
material respects in conformity with GAAP and (2) the schedule of
expenditures of the grants is presented fairly in all material respects in
relation to the financial statements taken as a whole. With respect to
internal controls, the auditor must obtain an understanding of each of the
grant recipient's major programs, assess control risk, and perform tests
of the controls. The auditor must also determine whether the grant
recipient has complied with the provisions of laws, regulations, and
contracts or grants related to the grant that have a direct and material
effect on each major program. The Single Audit Act requires each grantor
federal entity to assess the quality of such audits and monitor the grant
recipient's use of the federal funds received pursuant to the grant. The
Single Audit Act also requires any auditor of a grant recipient to provide
access to the auditor's workpapers in response to a request from the
grantor federal entity or the Comptroller General as part of either's
activities in furthering their oversight responsibilities.
In addition to providing guidance on audits of grant recipients of federal
entities, OMB uses the authority it possesses under a number of statutes
to issue guidance on uniform administrative requirements for federal
grants that each federal agency and U.S. government corporation must
implement by promulgating entity-specific regulations. OMB has issued two
different circulars for grants to different types of entities: OMB
Circular No. A-102 applies to grants to state and local governments and
OMB Circular No. A-110 applies to grants to institutions of higher
education, hospitals, and other nonprofit organizations.^7 These circulars
provide for the use of common forms, such as applications, and common
standards, such as grant recipient financial reporting, socioeconomic
policies, and grantor monitoring and oversight responsibilities. OMB has
also issued guidance providing cost principles for federal entities to use
in administering their grants. In three separate circulars, OMB sets out
principles to determine the applicability of costs incurred by three
groups of entities to federal grants. OMB Circular No. A-87 establishes
cost principles for state, local, and tribal governments; whereas OMB
Circular Nos. A-21 and A-122 establish such principles, respectively, for
institutions of higher education and nonprofit organizations.^8
^5 31 U.S.C. SS 7501-7507.
^6Single Audit Act Amendments of 1996, Pub. L. No. 104-156, S 1(b), 110
Stat. 1396 (July 5, 1996) (reprinted in 31 U.S.C. S 7501 note).
Acquisition and Management of Property and Services
Unlike most independent federal agencies and wholly owned government
corporations, LSC is not subject to a wide range of federal laws and
regulations that govern the acquisition and management of property and
services, such as the Federal Acquisition Regulation (FAR) or the Federal
Travel Regulation (FTR). (See table 7.) As a D.C. nonprofit corporation,
LSC has few limitations on its acquisition, management, disposition, and
contract activities in relation to real and personal property and
services. Under the D.C. Nonprofit Corporation Act,^9 it can acquire any
interest in real or personal property by purchase, gift, lease, or
contract and then "own, hold, improve, use and otherwise deal in and with"
such property. LSC can also dispose of any property interest through sale,
mortgage, lease, exchange, transfer, or any other suitable method.^10 LSC
also has the power to acquire services through making contracts and
incurring liabilities.
^7See OMB Circular No. A-102, Grants and Cooperative Agreements With State
and Local Governments (rev. Aug. 29, 1997), and OMB Circular No. A-110,
Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations, which is now codified at 2 C.F.R. pt. 215.
^8The guidance in these circulars has now been codified at 2 C.F.R. pt.
225 (A-87), pt. 220 (A-21), and pt. 230 (A-122).
^9D.C. Code S 29-301.05.
Table 7: Key Acquisition and Management of Property and Services
Requirements
Independent U.S. government D.C. nonprofit
LSC federal agencies corporations corporations
Property None Public Buildings Wholly owned U.S. None
management Act of 1959; government
Federal Property corporations:
and Administrative Public Buildings
Services Act of Act of 1959;
1949; Federal Federal Property
Management and Administrative
Regulation Services Act of
1949; Federal
Management
Regulation
Procurements None Federal Property Wholly owned U.S. None
and acquisition and Administrative government
management Services Act of corporations:
1949; Office of Federal Property
Federal and Administrative
Procurement Policy Services Act of
Act; Federal 1949; Office of
Acquisition Federal Procurement
Regulation; Policy Act; Federal
Competition in Acquisition
Contracting Act of Regulation;
1984 Competition in
Contracting Act of
1984
Information None Clinger-Cohen Act Wholly owned U.S. None
technology of 1996 government
acquisition corporations:
management Clinger-Cohen Act
of 1996
Travel None 5 U.S.C. ch. 57, Wholly owned U.S. None
management travel statute; government
Federal Travel corporations: 5
Regulation U.S.C. ch. 57,
travel statute;
Federal Travel
Regulation
Source: GAO.
In procuring property and services, most independent federal agencies and
wholly owned U.S. government corporations^11 are subject to a number of
laws and regulations, including the Public Buildings Act of 1959,^12 the
Federal Property and Administrative Services Act of 1949,^13 the Office of
^10In B-308037, Sept. 12, 2006, GAO concluded that LSC, exercising powers
authorized by the D.C. Nonprofit Corporation Act related to real property,
had the legal authority to create a wholly owned subsidiary nonprofit
corporation to acquire, hold, and manage assets for LSC's use and to lease
property from that subsidiary.
^11A limited number of mixed-ownership U.S. government corporations, such
as the Federal Deposit Insurance Corporation, are subject to the Public
Buildings Act of 1959 under its definition for "executive agency." See 40
U.S.C. S 3301(a)(3).
^1240 U.S.C. ch. 33 (acquisition and management of real property).
^1340 U.S.C. subtit. I (acquisition of real and personal property and
services) and relevant portions of Title 41 of the U.S. Code.
Federal Procurement Policy Act,^14 the Competition in Contracting Act of
1984,^15 the FAR,^16 and the Federal Management Regulation (FMR).^17 These
laws and regulations set out authorities, requirements, and standards for
most independent federal agencies and U.S. government corporations to
manage their acquisition and property systems.
Information technology and travel services are important types of property
and services that federal and nonprofit entities need to acquire. Federal
agencies and wholly owned U.S. government corporations, but not LSC, are
subject to federal governmentwide management laws in these areas. The
Clinger-Cohen Act of 1996,^18 governs information technology acquisitions
by federal agencies and wholly owned U.S. government corporations,
requiring, among other things, the design and implementation of a process
for maximizing the value, and assessing and managing the risks of the
entity's information technology acquisitions, as well as the creation of a
chief information officer position to help manage this process.^19 Federal
agencies and wholly owned U.S. government corporations, but not LSC, are
also subject to statutory requirements for travel by federal civilian
employees, as well as the implementing the FTR, promulgated by the General
Services Administration,^20 which are intended to regulate travel "in a
manner that balances the need to assure that official travel is conducted
in a responsible manner with the need to minimize administrative
costs."^21 For example, the FTR provides rules on when government
employees may use first-class or business-class airline accommodations.^22
^14 41 U.S.C. ch. 7 (acquisition policies).
^15Pub. L. No. 98-369, div. B, tit. VII, 98 Stat. 1175 (July 18, 1984)
(standards and requirements for competitively awarding contracts), which
has been codified, in relevant part, in 10 U.S.C. S 2304 and 41 U.S.C. S
253.
^16FAR, Title 48 of the U.S. Code of Federal Regulations.
^17FMR, 41 C.F.R. ch. 102.
^18 40 U.S.C. subtit. III (requirements and standards for acquiring and
managing information technology).
^19 40 U.S.C. SS 11312, 11315.
^20See federal civilian travel statutes at 5 U.S.C. ch. 57; FTR, 41 C.F.R.
ch. 300-304.
^21FTR, 41 C.F.R. S 300-1.2(a).
Human Resources Management
Under the D.C. Nonprofit Corporation Act, the LSC board possesses broad
powers in relation to its officers, employees, and other agents with only
limited restrictions imposed on this power by the LSC Act and other D.C.
statutes.^23 (See table 8.) Unlike federal agencies, LSC is not subject to
the laws in the U.S. Code relating to the executive branch workforce.^24
For example, like directors of other private nonprofit, tax-exempt
corporations, the LSC directors have the power to determine the rates of
compensation of LSC's officers and employees so long as the compensation
is not so high that it might constitute prohibited personal inurement.^25
In one of its few human resources restrictions, however, the LSC Act
specifically makes LSC subject to certain laws governing pay and benefits
for civilian employees of federal agencies and wholly owned U.S.
government corporations. The LSC Act does so by imposing a ceiling on
compensation for any LSC officer or employee who is linked to a federal
pay schedule under federal law: level V of the Executive Schedule, which
in calendar year 2006 was $133,900.^26 The LSC Act also treats LSC as a
federal entity for purposes of personnel participation in specified
federal employee benefits programs to which LSC is required to make
contributions at the same rates applicable to federal employers.
^22FTR, 41 C.F.R. SS 301-10.123, - 10.124.
^23Title 31 of the D.C. Code includes separate chapters that regulate
wages, occupational health and safety, parental leave, and family and
medical leave, among other matters.
^24Title 5 of the U.S. Code includes a comprehensive statutory framework
for the relationship between federal agencies and their officers and
employees.
^25Personal inurement would constitute an excess benefit transaction
subject to special excise taxes. See 26 U.S.C. S 4958, and implementing
regulations at 26 C.F.R. S 53.4958-1.
^26See Office of Personnel and Management, 2006 Salary Tables and Related
Information, available at [47]http://www.opm.gov/oca/06tables/index.asp
(last visited Apr. 19, 2007). For federal employees paid under the
Executive Schedule, there is no eligibility for a locality pay adjustment.
See 42 U.S.C. S 5304(h).
Table 8: Key Human Resources Management Structures
Independent D.C.
federal U.S. government nonprofit
LSC agencies corporations corporations
Employment D.C. Code, Title 5 of the Title 5 of the D.C. Code,
Title 32; LSC U.S. Code U.S. Code (most Title 32
Act provisions apply
to wholly owned
U.S. government
corporations,
but only some
provisions apply
to
mixed-ownership
U.S. government
corporations)
Whistleblower Inspector Whistleblower Whistleblower If disclosure
Protection General Act Protection Act Protection Act results in
(IG Act) for (certain termination:
disclosures provisions) Wrongful
made to the discharge
IG. If cause of
disclosure action under
results in D.C. law's
termination: public policy
Wrongful exception to
discharge at-will
cause of employment
action under doctrine; CPB
D.C. law's also subject
public policy to IG Act for
exception to disclosures
at-will made to the
employment IG
doctrine
Source: GAO.
Unlike the employees of LSC and other Washington, D.C., nonprofit
corporations, employees of federal agencies and, to a limited extent, U.S.
government corporations, enjoy certain protections under the Whistleblower
Protection Act^27 when they engage in "whistleblowing," which involves
reporting evidence of illegal or improper federal employer activities to
the relevant authorities. For example, federal agency and U.S. government
corporation supervisors may not take disciplinary action against an
employee for disclosing information that the employee reasonably believes
evidences gross mismanagement, a gross waste of funds, an abuse of
authority, or a substantial and specific danger to public health or
safety.^28 There is no equivalent statutory provision for employees of
Washington, D.C., nonprofit corporations, such as LSC or CPB. Under
Washington, D.C., law, however, if a D.C. nonprofit corporation terminates
an employee because he or she disclosed information of employer
misconduct, such as illegal activities, then the terminated employee can
sue the corporation for wrongful discharge under D.C. law's public policy
exception to the at-will employment doctrine that at-will employees can be
terminated at any time for any reason.^29 Furthermore, LSC employees, like
those of CPB and federal entities subject to the IG Act, enjoy additional
protections not available to employees of typical D.C. nonprofit
corporations. Under the IG Act the IG must not, without the employee's
consent, disclose the identity of an employee who informs the IG about the
possible existence of an activity at LSC constituting a violation of law,
rules, or regulations, or mismanagement, gross waste of funds, abuse of
authority, or a substantial and specific danger to the public health and
safety. The IG Act also prohibits the LSC employee's manager from
retaliating, or threatening to retaliate, against the employee for this
communication with the IG, unless the employee provided the information to
the IG with knowledge that it was false or with willful disregard for its
truth or falsity.^30
^27 5 U.S.C. S 2302.
^28 5 U.S.C. S 2302(b)(8)(A). This provision is similar to a recently
enacted whistleblower protection statute applicable to public companies
under the Sarbanes-Oxley Act. Under 18 U.S.C. S 1514A, public companies
and their officers, employees, and agents are prohibited from taking
certain actions against a public company's employee if that employee
discloses information to designated entities about violations of certain
criminal laws or securities rules or regulations. The District of Columbia
also has enacted whistleblower protections for its employees and employees
of its contractors. See D.C. Code SS 1-615.51--1-615.59. These
protections, however, do not apply to employees of D.C. nonprofit
corporations if their employer is not a contractor with the D.C.
government.
Recordkeeping and Public Access to Information
Large organizations such as LSC generate print and electronic records and
conduct executive meetings as part of their regular course of business.
LSC's statutory requirements for access to information are similar to
those of federal entities, but its recordkeeping requirements are not as
rigorous. However, LSC's requirements for access to information and
recordkeeping are stronger than those for other Washington, D.C.,
nonprofit corporations. (See table 9.)
^29See, e.g., Liberatore v. Melville Corp., 168 F.3d 1326 (D.C. Cir.
1999), in which the appellate court found that the employee had stated a
cause of action under D.C. law for wrongful discharge related to his
employer's firing him in retaliation for his threat to disclose to the
Food and Drug Administration the unlawful condition in which his employer
was storing pharmaceutical drugs.
^30IG Act, 5 U.S.C. appx. S 7.
Table 9: Key Recordkeeping and Public Access to Information Structures
Independent U.S. D.C.
federal government nonprofit
LSC agencies corporations corporations
Recordkeeping LSC Act: 3-year Federal Wholly owned D.C. Code S
retention for Records U.S. 29.301-26
records supporting Management government (keeping of
financial audit laws and corporations: books,
regulations Federal accounts,
Records and minutes
Management of board
laws and meetings);
regulations CPB
required;
CPB subject
to
requirement
of 3-year
retention
for records
supporting
financial
audit
Public information Freedom of FOIA FOIA None; CPB
Information Act required to
(FOIA) keep certain
records in
its offices
available
for public
inspection
and copying
Open meetings Government in the Government in Government in None; CPB
Sunshine Act the Sunshine the Sunshine subject to
Act (if headed Act open
by a meetings
multiperson requirement
body) resembling
Sunshine
Act's
Notice-and-comment LSC Act: Administrative APA None
rule making Administrative Procedures Act
Procedures Act (APA)
-like
notice-and-comment
rule making
Source: GAO.
The LSC Act imposes some limited recordkeeping requirements on LSC, such
as a 3-year retention period for records that support its annual financial
audit and a requirement to keep copies of reports on grantees. CPB is
subject to a similar 3-year retention period for records supporting its
annual financial audit,^31 but other Washington, D.C., nonprofit
corporations are subject to only minimal recordkeeping requirements,
including keeping correct and complete books and records of account and
minutes of board proceedings, which do not have to meet any particular
standard.^32 Under the Federal Records Management laws,^33 however, the
heads of independent federal agencies and wholly owned U.S. government
corporations have much broader recordkeeping duties: the creation of
records to document all "essential transactions" and retention of these
records for specified time periods depending on the type of transaction
documented.
^31 47 U.S.C. S 396(l)(4)(A).
^32D.C. Code S 29.301-26.
^33Federal Records Management laws are codified in Title 44 of the U.S.
Code in chapter 21 (National Archives and Records Administration), chapter
25 (National Historical Publications and Records Commission), chapter 29
(Records Management by the Archivist of the United States and by the
Administrator of General Services), chapter 31 (Records Management by
Federal Agencies), and chapter 33 (Disposal of Records). Of particular
interest, the National Archives and Records Administration has issued
implementing regulations in Title 36 of the U.S. Code of Federal
Regulations.
For any records that LSC, federal agencies, and U.S. government
corporations retain, they must provide the public with access to these
records as required by the Freedom of Information Act (FOIA). FOIA
requires that federal entities make their records available for public
inspection and copying unless one of the listed FOIA exemptions apply,
such as the exemptions for records pertaining to medical files, internal
personnel practices, or trade secrets.^34 This is one of the handful of
provisions in the LSC Act in which the LSC Act provides that LSC shall be
treated as a federal agency. There is no comparable public right to access
corporate records under the D.C. Nonprofit Corporation Act. While CPB is
not subject to FOIA, it does include a records access provision requiring
CPB to maintain certain records at its office and to make them available
for public inspection and copying.^35
LSC is also subject to the Government in Sunshine Act (Sunshine Act),^36
which means that all board meetings, including meetings of any executive
committee of the board, must be open to public observation. In following
the Sunshine Act, the LSC board must follow the procedural requirements
for providing adequate notice of meetings, as well as for closing all or a
portion of a meeting based on discussion of exempted subject matter, such
as personnel matters or pending litigation. In this respect, LSC is no
different from other entities subject to the Sunshine Act, which are U.S.
government corporations and federal agencies headed by a collegial body,
and very different from most D.C. nonprofit corporations that are subject
to no similar requirement. Although not subject to the Sunshine Act, the
CPB board has an open meetings requirement that resembles Sunshine Act
requirements.^37
^34FOIA, Pub. L. No. 89-487, 80 Stat. 250 (July 4, 1976), codified, as
amended, at 5 U.S.C. S 552.
^35 47 U.S.C. S 396(l)(4)(A).
^36Government in the Sunshine Act, Pub. L. No. 94-409, 90 Stat. 1241
(Sept. 13, 1976), codified, as amended, at 5 U.S.C. S 552b.
^37See 47 U.S.C. SS 396(g)(4), (k)(4).
While LSC is not subject to the "notice-and-comment rule making" under the
Administrative Procedures Act of 1946 (APA), ^38 LSC must provide
interested parties with "notice and a reasonable opportunity for comment"
on all proposed rules, regulations, and guidelines, and must publish these
requirements in the Federal Register at least 30 days prior to their
effective date. Federal agencies and U.S. government corporations are
subject to similar requirements in APA, whereas D.C. nonprofit
corporations have no similar rulemaking requirement for public
participation.
^38APA, codified, as amended, at 5 U.S.C. S 553.
Appendix IV: Comparison of Key LSC Governance and Accountability
Requirements
LSC Independent federal U.S. government D.C. nonprofit
agencies corporations corporations
Governance Inspector general: IG Act Inspector general: IG Act Inspector Inspector general:
structures general: IG Act Generally not
applicable, but IG
Act applies to CPB
Committees Committees authorized: Committees authorized: Committees
authorized: D.C. Committees neither Committees neither authorized: D.C.
Code S 29-301.22 prohibited nor required prohibited nor required Code S 29-301.22
Governing body: Governing body: Governing body: Board of Governing body:
Board of Independent federal directors: mostly Board of
directors: agencies headed by a presidential appointment directors: D.C.
presidential multiperson body: with Senate approval, often Code SS 29-301.18,
appointment with commission or board of silent on removal 29-301.19, CPB
Senate approval, directors: mostly Act, presidential
for cause removal presidential appointment with
by vote of 7 appointment with Senate senate approval,
directors approval, often silent silent on removal
on removal
Funds control Limitation on amount of Limitation on amount of Limitation on Limitation on amount
and budgeting funds available for use: funds available for use: amount of funds of funds available
None Antideficiency Act available for for use: None
use: wholly owned
U.S. government
corporations:
Antideficiency
Act
Funds used only Funds used only for Funds used only for Funds used only
for authorized authorized purposes: authorized purposes: for authorized
purposes: None Purpose Statute (31 Purpose Statute (31 U.S.C. purposes: None
U.S.C. S 1301(a)) S 1301(a))
Annual budget: LSC Annual budget: 31 Annual budget: Wholly owned Annual budget:
Act (request made U.S.C. SS 1105, 1108 U.S. government Generally not
directly to (agency budget corporations: 31 U.S.C. S applicable; CPB
Congress: no submitted to the 9103 (Government prepares an annual
content or form President for inclusion Corporation Control Act) budget
requirements; OMB in the Budget of the
comment and review U.S. Government)
allowed)
Liability of Liability of Liability of accountable Liability of
accountable accountable officers officers for improper or accountable
officers for for improper or illegal illegal payment of funds: officers for
improper or payment of funds: 31 some wholly owned U.S. improper or
illegal use of U.S.C. SS 3528, 3325 government corporations: 31 illegal use of
funds: None U.S.C. SS 3528, 3325 funds: None
Performance Financial statements and Financial statements and Financial Financial statements
and financial reports: Annual report on reports: Annual audited statements and and reports:
reporting corporation accounts: financial statements: 31 reports: Annual Financial reports:
U.S.C. S 3515 audited financial D.C. Code S 29-301.26
LSC Act (report of annual statements: 31 (keep correct and
audit of LSC's accounts) (Chief Financial Officers U.S.C. SS 9105, complete books and
Act of 1990, Government 9106 (Government records of account);
Management Reform Act of Corporation CPB required to
1994, Accountability of Tax Control Act) prepare annual audit
Dollars Act of 2002) report on CPB
accounts
Accounting Accounting standards Accounting standards Accounting
standards applied: applied: FASAB GAAP applied: Some FASAB GAAP; standards applied:
No GAAP specified; some FASB GAAP FASB GAAP
LSC now using GASB
GAAP
None Strategic plans: 5 Strategic plans: 5 U.S.C. S Performance
U.S.C. S 306; 306; Performance plans and reports: D.C. Code
Performance plans and reports: 31 U.S.C. SS S 29-301.26 (keep
reports: 31 U.S.C. SS 1115-1116 (Government minutes of board
1115-1116 (Government Performance and Results Act proceedings); CPB
Performance and Results of 1993) required to submit
Act of 1993) annual report to
President and
Congress
Accounting System of internal control System of internal control System of System of internal
and internal and Assurances: None and Assurances: 31 U.S.C. S internal control control and
control 3512(c), (d) (Federal and Assurances: Assurances: None
systems Managers' Financial 31 U.S.C. S 9106
Integrity Act of 1982) (Government
Corporation
Control Act)
Information system Information system Information system Information system
security: None security: Federal security: Federal security: None
Information Security Information Security
Management Act of 2002 Management Act of 2002
Grants Audits of grant recipients: Audits of grant recipients: Audits of grant Audits of grant
management 1996 LSC Amendments Single Audit Act; OMB recipients: recipients: None
Circular No. A-133 on Single Audit Act;
audits of grant recipients OMB Circular No.
A-133 on audits
of grant
recipients
Grant management Grant management Grant management Grant management
requirements: 1996 requirements: OMB requirements: OMB Circular requirements: None
LSC Amendments Circular Nos. A-102 and Nos. A-102 and A-110 on
A-110 on administrative administrative requirements
requirements for grant for grant recipients
recipients
Cost principles Cost principles for Cost principles for grant Cost principles
for grant grant recipients: OMB recipients: OMB Circular for grant
recipients: None Circular Nos. A-21, Nos. A-21, A-87, and A-122 recipients: None
A-87, and A-122 on cost on cost principles for
principles for grant grant recipients
recipients
Acquisition Property management: None Property management: Public Property Property management:
and Buildings Act of 1959; management: None
management of Federal Property and Wholly owned U.S.
property and Administrative Services Act government
services of 1949; Federal Management corporations:
Regulation Public Buildings
Act of 1959;
Federal Property
and
Administrative
Services Act of
1949; Federal
Management
Regulation
Procurements and Procurements and Procurements and Procurements and
acquisition acquisition management: acquisition management: acquisition
management: None Federal Property and Wholly owned U.S. management: None
Administrative Services government corporations:
Act of 1949; Office of Federal Property and
Federal Procurement Administrative Services Act
Policy Act; Federal of 1949; Office of Federal
Acquisition Regulation; Procurement Policy Act;
Competition in Federal Acquisition
Contracting Act of 1984 Regulation; Competition in
Contracting Act of 1984
Information Information technology Information technology Information
technology acquisition management: acquisition management: technology
acquisition Clinger-Cohen Act of Wholly owned U.S. acquisition
management: None 1996 government corporations: management: None
Clinger-Cohen Act of 1996
Travel management: Travel management: 5 Travel management: Wholly Travel management:
None U.S.C. ch. 57, travel owned U.S. government None
statute; Federal Travel corporations: 5 U.S.C. ch.
Regulation 57, travel statute; Federal
Travel Regulation
Human Employment: D.C. Code, Title Employment: Title 5 of the Employment: Title Employment: D.C.
resources 32; LSC Act U.S. Code 5 of the U.S. Code, Title 32
management Code (Most
provisions apply
to wholly owned
U.S. government
corporations, but
only some
provisions apply
to
mixed-ownership
government
corporations)
Whistleblower Whistleblower Whistleblower protection: Whistleblower
protection: IG Act protection: Whistleblower Protection protection: If
for disclosures Whistleblower Act (certain provisions) disclosure results
made to the IG. If Protection Act in termination:
disclosure results Wrongful discharge
in termination: cause of action
Wrongful discharge under D.C. law's
cause of action public policy
under D.C. law's exception to
public policy at-will employment
exception to doctrine; CPB,
at-will employment also subject to IG
doctrine Act for
disclosures made
to the IG
Recordkeeping Recordkeeping: LSC Act: Recordkeeping: Federal Recordkeeping: Recordkeeping: D.C.
and access to 3-year retention for records Records Management laws and Wholly owned U.S. Code S 29.301-26
information supporting financial audit regulations government (keeping of books,
corporation accounts, and minutes
Federal Records of board meetings);
Management laws CPB required; CPB
and regulations subject to
requirement of 3-year
retention for records
supporting financial
audit
Public Public information: Public information: Freedom Public
information: Freedom of Information of Information Act information: None;
Freedom of Act CPB required to
Information Act keep certain
records in its
offices available
for public
inspection and
copying
Open meetings: Open meetings: Open meetings: Government Open meetings:
Government in the Government in the in the Sunshine Act None; CPB subject
Sunshine Act Sunshine Act (if headed to open meetings
by a multiperson body) requirement
resembling
Sunshine Act's
Notice-and-comment Notice-and-comment rule Notice-and-comment rule Notice-and-comment
rule making: LSC making: APA making: APA rule making: None
Act: APA-like
notice-and-comment
rulemaking
Source: GAO.
Appendix V: Comments from the Legal Services Corporation Board of
Directors
Appendix VI: Comments from the Legal Services Corporation
Appendix VII: GAO Contact and Staff Acknowledgments
GAO Contact
Jeanette M. Franzel (202) 512-9471 or [email protected]
Acknowledgments
In addition to the person named above, F. Abe Dymond; Lauren S. Fassler;
Joel I. Grossman; Maxine L. Hattery; Stephen R. Lawrence; Kimberley A.
McGatlin; and Matthew P. Zaun made key contributions to this report.
(194643)
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[54]transparent illustrator graphic
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Highlights of [56]GAO-07-993 , a report to congressional requesters
August 2007
LEGAL SERVICES CORPORATION
Governance and Accountability Practices Need to Be Modernized and
Strengthened
The Legal Services Corporation (LSC) was federally created as a private
nonprofit corporation to support legal assistance for low-income people to
resolve their civil matters and relies heavily on federal appropriations.
Due to its unique status, its governance and accountability requirements
differ from those of federal entities and nonprofits. This report responds
to a congressional request that GAO review LSC board oversight of LSC's
operations and whether LSC has sufficient governance and accountability.
GAO's report objectives are to (1) compare LSC's framework for corporate
governance and accountability to others', (2) evaluate LSC's governance
practices, and (3) evaluate LSC's internal control and financial reporting
practices. We reviewed the LSC Act, legislative history, relevant
standards and requirements, and LSC documentation and accountability
requirements and interviewed board and staff.
[57]What GAO Recommends
Congress should consider mandating additional LSC governance and
accountability requirements modeled after federal agencies or government
corporations. GAO also makes recommendations to LSC's board for
modernizing and strengthening its governance and to LSC management for
improving its practices. LSC's board and management agreed with the
recommendations.
Although LSC has stronger federal accountability requirements than many
nonprofit corporations, it is subject to governance and accountability
requirements that are weaker than those of independent federal agencies
and U.S. government corporations. Congress issued LSC's federal charter
over 30 years ago. Established with governance and accountability
requirements as they existed at the time, LSC has not kept up with
evolving reforms aimed at strengthening internal control over an
organization's financial reporting process and systems. Rigorous controls
are important for the heavily federally funded LSC. During fiscal year
2007, LSC is responsible for the safeguarding and stewardship of $348.6
million of taxpayer dollars. Although no single set of practices exists
for both private and public entities, current accepted practices of
federal agencies, government corporations, and nonprofit corporations
offer models for strengthening LSC's governance and accountability,
including effective board oversight of management; its performance; and
its use of federal funds and resources.
The board members demonstrated active involvement in LSC through their
regular board meeting attendance and participation in LSC oversight.
Although LSC's Board of Directors was established with provisions in law
that may have supported effective operation over 30 years ago, its
practices fall short of modern board practices. The LSC board generally
provides each new member an informal orientation to LSC and the board, but
it does not have consistent, formal orientation and ongoing training with
updates on new developments in governance and accountability standards and
practice. The current board has four committees, but none are specifically
targeted at providing critical audit, ethics, or compensation functions,
which are important governance mechanisms commonly used in corporate
governance structures. Because it has not taken advantage of opportunities
to incorporate such practices, LSC's Board of Directors is at risk of not
being able to fulfill its role of effective governance and oversight. A
properly implemented governance and accountability structure may have
prevented recent incidents of compensation rates in excess of statutory
caps, questionable expenditures, and potential conflicts of interest.
LSC also has not kept up with current management practices. Of particular
importance are key processes in risk assessment, internal control, and
financial reporting. Management has not formally assessed the risks to the
safeguarding of its assets and maintaining the effectiveness and
efficiency of its operation, nor has it implemented internal controls or
other risk mitigation policies. LSC is also at increased risk that
conflicts of interest will occur and not be identified because senior
management has not established comprehensive policies or procedures
regarding ethical issues that are aimed at identifying potential conflicts
and taking appropriate actions to prevent them. Finally, management has
not performed its own assessment or analysis of accounting standards to
determine the most appropriate standards for LSC to follow.
References
Visible links
40. http://www.gao.gov/cgi-bin/getrpt?GAO-01-179SP
41. http://www.gao.gov/cgi-bin/getrpt?GAO-06-382SP
42. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
43. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
44. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
45. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
46. http://www.gao.gov/
47. http://www.opm.gov/oca/06tables/index.asp
48. http://www.gao.gov/
49. http://www.gao.gov/
50. http://www.gao.gov/fraudnet/fraudnet.htm
51. file:///home/webmaster/infomgt/d07993.htm#mailto:[email protected]
52. file:///home/webmaster/infomgt/d07993.htm#mailto:[email protected]
53. file:///home/webmaster/infomgt/d07993.htm#mailto:[email protected]
55. http://www.gao.gov/cgi-bin/getrpt?GAO-07-993
56. http://www.gao.gov/cgi-bin/getrpt?GAO-07-993
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