Legal Services Corporation: Improved Internal Controls Needed in
Grants Management and Oversight (28-DEC-07, GAO-08-37).
The Legal Services Corporation (LSC) was created as a private
nonprofit to support legal assistance for low-income people to
resolve their civil legal matters and relies heavily on federal
appropriations. In 2006, LSC distributed most of its $327 million
in grants to support such assistance. Effective internal controls
over grants and oversight of grantees are critical to LSC's
mission. GAO was asked to determine whether LSC's internal
controls over grants management and oversight processes provide
reasonable assurance that grant funds are used for their intended
purposes. GAO analyzed key records and interviewed agency
officials to obtain an understanding of LSC's internal control
framework, including the monitoring and oversight of grantees,
and performed limited reviews of internal controls and compliance
at 14 grantees.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-37
ACCNO: A79228
TITLE: Legal Services Corporation: Improved Internal Controls
Needed in Grants Management and Oversight
DATE: 12/28/2007
SUBJECT: Federal funds
Federal grants
Financial analysis
Financial institutions
Financial management
Grant monitoring
Internal controls
Legal opinions
Program evaluation
Program management
Requirements definition
Risk management
Strategic planning
Government agency oversight
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GAO-08-37
* [1]Results in Brief
* [2]Background
* [3]Internal Control Weaknesses Impede LSC's Ability to Adequate
* [4]Control Environment Weakened by Unclear Roles and Responsibi
* [5]Timing and Scope of Grantee Site Visits Is Not Based on a Ri
* [6]LSC's Control Activities for Monitoring Grantees Do Not Prov
* [7]LSC's Control Activities for Monitoring Grantee Fiscal Compl
* [8]LSC's Delays in Reporting Findings Prevented Grantees from C
* [9]LSC Oversight Did Not Identify Control Weaknesses at Nine Gr
* [10]Example 1--Systemic Weakness: Insufficient Supporting Documen
* [11]Example 2--Unusual Contractor Arrangement: Questionable Indep
* [12]Conclusions
* [13]Recommendation for Board Action
* [14]Recommendations for Executive Action
* [15]Agency Comments and Our Evaluation
* [16]Example 1--Potential Improper Uses of Grant Funds: Alcohol Pu
* [17]Example 2--Potentially Improper Uses of Grant Funds: Employee
* [18]Example 3--Improper Uses of Grant Funds: Lobbying Fees
* [19]Example 4--Improper Uses of Grant Funds: Late Fees
* [20]Example 5--Improper Uses of Grant Funds: Earnest Money
* [21]GAO Contact
* [22]Acknowledgments
* [23]GAO's Mission
* [24]Obtaining Copies of GAO Reports and Testimony
* [25]Order by Mail or Phone
* [26]To Report Fraud, Waste, and Abuse in Federal Programs
* [27]Congressional Relations
* [28]Public Affairs
Report to Congressional Requesters
United States Government Accountability Office
GAO
December 2007
LEGAL SERVICES CORPORATION
Improved Internal Controls Needed in Grants Management and Oversight
GAO-08-37
Contents
Letter 1
Results in Brief 2
Background 4
Internal Control Weaknesses Impede LSC's Ability to Adequately Assure
Grant Funds Are Used as Intended and in Compliance with Laws and
Regulations 8
LSC's Control Activities for Monitoring Grantees Do Not Provide Reasonable
Assurance That Grant Funds Are Being Used Properly and in Compliance with
Laws and Regulations 14
LSC Oversight Did Not Identify Control Weaknesses at Nine Grantees 18
Example 1--Systemic Weakness: Insufficient Supporting Documentation 19
Example 2--Unusual Contractor Arrangement: Questionable Independent
Contractors 19
Conclusions 20
Recommendation for Board Action 20
Recommendations for Executive Action 21
Agency Comments and Our Evaluation 21
Appendix I Objectives, Scope, and Methodology 25
Appendix II Summary of GAO Findings at Grantees 27
Appendix III Regulatory Provisions of Legal Services Corporation's Fiscal
Compliance Review of Grantees 31
Appendix IV Comments from the Legal Services Corporation Board of
Directors 32
Appendix V Comments from the Legal Services Corporation 33
Appendix VI GAO Contact and Staff Acknowledgments 36
Figure
Figure 1: Legal Services Corporation Federal Funding between Fiscal Years
1991 and 2006 7
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Abbreviations
1996 Act Appropriations Act of 1996
IG Inspector General
IG Act Inspector General Act
IPA independent public accountant
IT information technology
LSC Legal Services Corporation
LSC Act Legal Services Corporation Act of 1974
OCE Office of Compliance & Enforcement
OIG Office of Inspector General
OMB Office of Management & Budget
OPP Office of Program Performance
United States Government Accountability Office
Washington, DC 20548
December 28, 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 grants1 to legal service providers
(grant recipients or grantees) who serve low-income members of the
community who would otherwise not be able to afford legal assistance
(clients). Established by a federal charter2 in 19743 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 and $326.6 million in fiscal year
2006.4 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. In 2006, LSC served clients through 138
grantees with more than 900 offices serving all 50 states, the District of
Columbia, and current and former U.S. territories.
LSC is responsible for ensuring that grant funds are being used for their
intended purposes and in accordance with laws and regulations. Thus, LSC
is accountable for the effectiveness of the internal controls over the
grants process and for providing oversight and monitoring of grantees'
internal controls, use of grant funds, and compliance with laws and
regulations.
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 or grantee
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 2996-29961 (LSC
Act).
4Revised Continuing Appropriations Resolution, 2007, Pub. L. No. 110-5,
121 Stat. 8, 44 (Feb. 15, 2007); Science, State, Justice, Commerce, and
Related Agencies Appropriations Act, 2006, Pub. L. No. 109-108, 119 Stat.
2290, 2330, 2347 (Nov. 22, 2005), which was subject to the 1 percent
across-the-board rescission in Pub. L. No. 109-148, S 3801, 119 Stat.
2680, 2791-92 (Dec. 30, 2005).
This report responds to your request that we review internal controls over
LSC's grants management and oversight processes and assess whether those
controls provide reasonable assurance that grant funds are being used for
their intended purposes and in accordance with laws and regulations. You
also asked us to conduct limited reviews of grantees' internal controls
and fiscal practices. In performing our work, we (1) evaluated LSC's
internal controls related to its grants management and oversight
organizations and (2) performed limited reviews at 14 grantees. To
identify and assess LSC's internal controls, we obtained an understanding
of LSC's grants management processes and the roles and responsibilities of
the three organizational components of LSC that participate directly in
grantee oversight. We also observed LSC site visits at two grantees. In
our reviews of controls and compliance at 14 LSC grantee offices, we
interviewed grantee officials; reviewed grantee policies and procedures;
and performed walkthroughs of transactions. We also reviewed supporting
documentation for selected grantee expenditures and performed follow-up
activities with grantee officials regarding selected transactions and
grantee activities. While we identified some improper or potentially
improper expenditures, our work was not designed to identify all improper
or potentially improper expenditures or to estimate their extent. Appendix
I provides a more detailed discussion of our scope and methodology. We
conducted our work from September 2006 through September 2007 in
accordance with generally accepted government auditing standards.
Results in Brief
We found weaknesses in LSC's controls over grants management and oversight
that negatively affected LSC's ability to monitor and oversee grants and
left grant funds vulnerable to misuse. We also found poor fiscal practices
and improper or potentially improper expenditures at grantees we visited
that LSC could have identified with more effective grants oversight.
Weaknesses in LSC's control environment include the lack of a clear
definition of the authority and responsibilities between two of the three
organizational units--the Office of Program Performance (OPP), the Office
of Compliance and Enforcement (OCE), and the Office of Inspector General
(OIG)--that oversee the work of grantees. Currently, LSC management shares
fiscal oversight and monitoring of grantees with the OIG. Roles and the
division of responsibilities are not clearly communicated between the OIG
and OCE. The result has been staff confusion about the types and scope of
grantee fiscal reviews that LSC management can undertake on its initiative
and strained relationships between management and the OIG. In addition,
communication and coordination between OCE and OPP is not sufficient to
prevent gaps and unnecessary duplication between the offices' respective
oversight activities. In addition, the scope of LSC's control activities
for monitoring grantee fiscal compliance is limited, and feedback to
grantees is not timely. In determining the timing and scope of grantee
site visits conducted as part of OCE and OPP's oversight responsibilities,
LSC does not employ a structured or systematic approach for assessing the
risk of noncompliance or financial control weaknesses across its 138
grantees. Without an analytically sound basis for assessing risk and
distributing its oversight resources, LSC does not have a basis for
knowing whether its oversight resources are being used effectively to
mitigate and reduce risk among its grantees.
The LSC control activities performed by OCE and monitoring of grantee
internal control systems need to be strengthened. We found that OCE's
fiscal reviews were not sufficient in scope of work in assessing grantee
internal control and compliance for purposes of achieving effective
oversight. In the OCE site visits we observed, staff did not follow up on
questionable transactions and relied heavily on information obtained
through interviews. LSC also did not follow up timely on an investigation
into an alleged instance of noncompliance referred to it by the OIG.
Feedback to grantees was often slow. As of September 2007, LSC had not yet
issued reports to grantee management for almost 19 percent (10 out of 53)
of the 2006 site visits. Absent timely communications about the results of
site visits, grantee management does not have information about
deficiencies and the related corrective actions needed. In a grantee exit
conference we observed, the LSC review team did not communicate a number
of findings they had concluded were significant and in need of immediate
attention. Effective grantee monitoring is especially important for LSC
because LSC has limited options for sanctioning poorly performing
grantees.
In limited reviews at 14 grantees we visited, we identified internal
control weaknesses at 9 grantees that LSC could have identified with more
effective oversight reviews. While control deficiencies at the grantees
were the immediate cause of the improper and potentially improper
expenditures we found, weaknesses in LSC's controls over its oversight of
grantees did not assure effective monitoring of grantee controls and
compliance. Among the improper or potentially improper expenditures we
found were grantee use of LSC grant funds for expenditures with
insufficient supporting documentation and for unusual contractor
arrangements, alcohol purchases, employee interest-free loans, lobbying
fees, late fees, and earnest money.
We are making five recommendations to LSC to improve its internal control
and oversight of grants by: (1) clarifying organizational roles and
responsibilities for overseeing grantee internal controls and compliance
among LSC units, (2) improving information sharing and coordination among
LSC oversight organizations, (3) using risk-based criteria to select
grantees for internal control and compliance reviews, (4) improving the
effectiveness of the current fiscal compliance reviews, and (5) following
up on each of the improper or potentially improper uses of grant funds
that we identified.
We received written comment letters from the Chairman on behalf of LSC's
Board of Directors and the LSC President on behalf of LSC's management.
Both the Chairman and the President expressed their full commitment to
making the improvements noted in the report, accepted all of our
recommendations, and outlined the actions that LSC's board and management
plan to take in response to our recommendations. LSC management also
separately provided technical comments that we incorporated into the
report as appropriate.
Background
In carrying out LSC's mission, local legal-service providers (the grant
recipients) 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.
To be eligible, clients must meet certain requirements. First, individual
applicants for legal assistance supported by LSC funds must meet financial
eligibility requirements. LSC has statutory authority to assist only
"eligible clients," which are defined as "any person financially unable to
afford legal assistance." LSC's regulations include additional criteria to
help determine whether a potential client is eligible for assistance from
LSC. These regulations require that organizations receiving LSC grants
adopt financial eligibility policies within the income limits set by LSC,
which is at or below 125 percent of the current Federal Poverty Guidelines
amounts5--an income of approximately $25,000 for a family of four. Second,
there are also legal restrictions on access to LSC-supported legal
assistance by aliens.6
The LSC Act prohibits LSC personnel and grant recipients or their
employees from engaging in certain prohibited activities, such as
providing legal assistance with respect to any fee-generating case,
providing legal assistance related to a criminal proceeding, supporting or
conducting training programs for the purpose of advocating particular
public policies or encouraging political activities, providing legal
assistance in civil actions to persons who have been convicted of a
criminal charge, or participating in litigation related to an abortion. In
addition, LSC cannot provide funds for legal services for a proceeding
related to a violation of the Military Selective Service Act.
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 established the LSC Board and specified that the
board members shall annually select a Chairman7 and appoint an LSC
President.8 The D.C. Nonprofit Corporation Act, which generally applies to
LSC as a D.C. nonprofit corporation, provides that the affairs of the
corporation shall be managed by the board of directors and permits the
board of directors to delegate some of the authority to perform management
duties to corporate officers.9 Our recently issued report, Legal Services
Corporation: Governance and Accountability Practices Need to Be Modernized
and Strengthened, discusses LSC, its unique status, and the rigorous
controls necessary to protect the heavily federally funded entity.10
545 C.F.R. S 1611.3(c)(1).
6These restrictions have been imposed each year since 1996 in LSC's annual
appropriations act. See, for example, Department of State and Related
Agencies Appropriations Act, 1996, Pub. L. No. 104-134, tit. IV, S
504(a)(11), 110 Stat. 1321, 1321-55 (Apr. 26, 1996). LSC has issued
implementing regulations imposing restrictions on legal assistance to
aliens at 45 C.F.R. pt. 1626.
7LSC Act, 42 U.S.C. S 2996c(a), (d).
8LSC Act, 42 U.S.C. S 2996d(a).
942 U.S.C. S 2996e(a); D.C. Code S 29-301.18, -301.24(d).
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.11 Also, LSC is subject to congressional oversight
through the annual appropriations process as well as responding to
congressional inquiries and participating in hearings.
As shown in figure 1, since 1991 LSC's annual federal funding has ranged
from a high of $401.6 million in 1995 to a low of $279.1 million in 1996,
with recent years' appropriations (which makeup most of the federal
funding) remaining fairly consistent at around $330 million. In the
appropriation for LSC, Congress regularly designates a specific amount for
the OIG. For example, the resulting allocations for the OIG were about
$2.97 million in fiscal year 200712 and about $2.51 million in fiscal year
2006.13
10GAO, Legal Services Corporation: Governance and Accountability Practices
Need to Be Modernized and Strengthened, [29]GAO-07-993 (Washington, D.C.:
Aug. 15, 2007).
11Inspector General Act of 1978, codified, as amended, in part at 5 U.S.C.
app. SS 4, 8G.
12Revised Continuing Appropriations Resolution, 2007, Pub. L. No. 110-5,
SS 104, 20918, 121 Stat. 8, 9, 44 (Feb. 15, 2007). In 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); see also
[30]GAO-07-993 , at 9.
13LSC Appropriations Act for Fiscal Year 2006, Pub. L. No. 109-108, 119
Stat. 2290, 2330, 2347 (Nov. 22, 2005); Science, State, Justice, Commerce,
and Related Agencies Appropriations Act, Pub. L. No. 109-148, S 3801, 119
Stat. 2680, 2791-92 (Dec. 30, 2005) (enacting a 1 percent across-the-board
rescission that affected LSC).
Figure 1: Legal Services Corporation Federal Funding between Fiscal Years
1991 and 2006
Note: Although annual appropriations constitute most of LSC's annual
federal funding, the total amount includes revenue from other sources,
such as grants from the U.S. Department of Veterans Affairs.
LSC uses the majority of its funding to provide grants to local
legal-service providers. Most of LSC's approximately $330 million in
annual federal funding of recent years has been designated for grants.
Funds are distributed based on the number of low-income persons living
within a service area,14 and some grantees maintain several offices within
their service area.
Beginning in 1996, the administrative provisions included each year in the
acts making appropriations to LSC have required that grants be awarded
through a system of competition and that LSC management issue regulations
to implement this requirement.15 According to LSC management, one purpose
of the competitive grants process is to encourage the economical and
effective delivery of assistance to eligible clients. This represented a
major change in the legal-services delivery system, eliminating the
automatic renewal of funding as permitted by the LSC Act and practiced by
LSC. After a final decision has been issued by LSC management terminating
financial assistance to a recipient in whole for any service area, LSC
management is required to implement a new competitive bidding process for
the affected service area pursuant to implementing regulations.16
14Under 45 C.F.R S 1634.2(c), the service area is the geographic area
defined by LSC to be served by grants or contracts to be awarded on the
basis of a competitive bidding process.
15See Pub. L. No. 104-134, S 503; see also implementing regulations in 45
C.F.R. pt. 1634.
Internal Control Weaknesses Impede LSC's Ability to Adequately Assure Grant
Funds Are Used as Intended and in Compliance with Laws and Regulations
We found weaknesses in LSC's internal controls that negatively affected
LSC's ability to monitor and oversee grants and left grant funds
vulnerable to misuse. We also found poor fiscal practices and improper or
potentially improper expenditures at grantees we visited. LSC's control
environment contains several weaknesses, including the lack of clearly
defined roles and responsibility among the three different organizational
units providing for oversight of grantees--OPP, OCE, and the OIG. In
addition, OIG and OCE's shared authority to oversee grantee financial
internal controls and fiscal compliance has resulted in confusion about
responsibility for grantee financial oversight. Poor communication and
coordination between the oversight offices further impedes LSC's ability
to effectively oversee grantees. Furthermore, LSC's control activities for
monitoring grantee fiscal compliance are limited in scope and do not
result in timely feedback to grantees. In addition, LSC does not utilize a
structured or systematic approach for assessing risk across its 138
grantees when determining the timing and scope of its grantee oversight
visits.
Control Environment Weakened by Unclear Roles and Responsibilities and
Inadequate Communication and Coordination among Grantee Oversight Organizations
LSC management monitors grantees through site visits and reviews conducted
by two offices: the Office of Program Performance (OPP) and the Office of
Compliance and Enforcement (OCE). OPP is responsible for designing and
administering the competitive grant process and program evaluation. OCE is
responsible for grantee compliance with the LSC Act and other laws,
regulations, instructions, guidelines, and grant requirements. In
addition, OCE and the OIG share responsibility for overseeing grantee
financial controls and compliance.
The current roles and division of responsibilities between the OIG and OCE
for oversight of grantee financial controls and compliance are not clearly
defined or communicated to the two offices. We also found that
communication and coordination of grantee site visits between OCE and OPP
need improvement in order to achieve effective oversight and avoid gaps
and duplication in oversight. Management and employees should establish
and maintain an environment throughout the organization that sets a
positive and supportive attitude toward internal control and conscientious
management.
1645 C.F.R. SS 1634.10, 1634.11.
Another factor affecting an entity's control environment is the entity's
organizational structure. It provides management's framework for planning,
directing, and controlling operations to achieve agency objectives. A good
internal control environment requires that the agency's organizational
structure clearly define key areas of authority and responsibility and
establish appropriate lines of reporting.
In 1988 Congress subjected LSC to the Inspector General Act of 1978, as
amended (IG Act).17 The IG Act provides that each designated federal
entity, in this case LSC, shall transfer to the OIG "the offices, units,
or other components, and the functions, powers, or duties thereof, that
such head determines are properly related to the functions of the Office
of Inspector General."18 For example, the IG Act transferred to the
Inspector General responsibility for providing policy direction for, and
conducting, supervising, and coordinating audits of entity programs, such
as LSC's legal assistance grants program.19 Further, in April 1996,
Congress enacted the appropriations act funding LSC for fiscal year 199620
(1996 Act) and included a number of administrative provisions
supplementing the LSC Act requirements, including those related to grantee
audits (S 509).21 The 1996 Act clarified that the grantees are responsible
for contracting for audits with independent public accountants (IPA), the
OIG is responsible for overseeing the quality and integrity of the audit
process, and LSC is responsible for resolving deficiencies and
noncompliance identified in the audits and sanctioning grantees for
unacceptable audits. Under the 1996 Act, IPAs follow OIG guidance and
generally accepted government auditing standards in conducting their
audits. These audits include an independent auditor's opinion about
whether the financial statements are fairly presented in accordance with
generally accepted accounting principles, along with auditors' reports on
internal control and compliance. The 1996 Act also authorizes the OIG to
conduct additional on-site monitoring, audits, and inspections. If the OIG
reports to LSC management that a grantee IPA found significant reportable
conditions, findings, or recommendations, then the 1996 Act provides that
LSC is responsible for ensuring that these are timely resolved, including
performing appropriate follow-up. In the event that the OIG were to
determine that a grantee's IPA audit were unacceptable, then the 1996 Act
authorizes LSC, consistent with OIG recommendations, to sanction the
grantee by withholding some or all its funding until the grantee completes
an acceptable audit. Thus, the OIG plays an important role in LSC grantee
oversight.
175 U.S.C. app.
185 U.S.C. app. S 8G(g)(b).
195 U.S.C. app. SS 8G(g)(1),(4)(a)(1).
20Department of State and Related Agencies Appropriations Act, 1996, Pub.
L. No. 104-134, tit. IV, S 509, 110 Stat. 1321, 1321-58 (Apr. 26, 1996).
21These administrative provisions have been reenacted each fiscal year in
the annual appropriations act for LSC. See, for example, Science, State,
Justice, Commerce, and Related Agencies Appropriations Act, 2006, Pub. L.
No. 109-108, 119 Stat. 2290, 2330-31 (Nov. 22, 2005).
OPP is specifically responsible for designing and administering the
competitive grants process. In addition, OPP is responsible for (1)
program evaluation and supportive follow-up; (2) developing strategies to
improve program quality, including identifying areas of grantee weaknesses
and following up with individual recipients; (3) promoting enhanced
technology to improve client community access to services; and (4)
encouraging "best practices" through the legal resource Web site,
specialized help with intake and rural area delivery, and pilot projects
such as loan repayment and mentoring. OPP also performs grantee program
site visits. OPP's staff totals 22 members, comprised of a Director, a
Deputy Director, a senior program counsel, eight program counsels, seven
program analysts, one grants coordinator, and three administrative
assistants.
OCE is responsible for overseeing grantee compliance with various federal
laws and regulations that recipients of LSC funds must follow, including
specific LSC regulations pertaining to LSC accountability. In particular,
OCE reviews grantee compliance with various regulatory provisions,
including the following related to fiscal accountability: fee generating
cases; use of non-LSC funds and transfers of LSC funds; private attorney
involvement; subgrants; membership fees; dues; timekeeping requirements;
and attorney's fees. A summary of these provisions in the fiscal component
of OCE reviews is included in appendix III.
In 2006, OCE conducted fiscal compliance site visits at 24 of these
grantees, OPP conducted program review site visits at 32, and 3 were
performed jointly. LSC presents the grantees with any findings arising
from the site visits in its exit meetings and a later written report and
subsequently monitors grantee actions to resolve them. OCE's staff totals
15 members, comprised of a Director, 10 attorneys, two fiscal program
analysts and two administrative assistants.
According to OCE officials, prior to 1994, LSC staff in the OCE
predecessor organization conducted internal control reviews and detailed
financial statement-related audits. After the transfer of many oversight
functions concerning grantees' financial statement audit responsibilities
to the IPAs and the OIG, OCE stopped its financial statement audits as
well as its internal control reviews of grantees, even though oversight of
grantee financial controls is a basic management responsibility. OCE
instead implemented a limited fiscal review of grantee compliance with
selected fiscal provisions of LSC regulations. The number of staff
performing this function was reduced from 12 to 2. OCE management told us
that the reason for this was that fiscal oversight of grantees had become
the responsibility of the OIG, which oversees IPA audits that include
testing of grantee internal controls. However, LSC management has the
responsibility for overseeing grantee financial controls and compliance
even if it relies on the IPA audits as the sole basis for its assurance
about grantee controls. Further, even LSC management's reduced oversight
role has been further questioned by the OIG. Despite LSC's shift to a
limited compliance oversight role, the OIG recently reported22 that OCE's
reviews of grantee compliance were duplicative of IPA testing and
concluded that most of the LSC regulations tested by OCE are already
covered by the OIG's own guidance and the reviews conducted by IPAs as
part of the financial statement audits of grantees.
With compliance oversight and monitoring responsibilities divided between
OCE and the OIG and program oversight activities being performed by OPP,
strong coordination and communication between the three offices and
clarity in the roles and responsibilities is critical for achieving
effective grantee and program oversight. Under GAO's Standards for
Internal Control in the Federal Government,23 "For an entity to run and
control its operations, it must have relevant, reliable, and timely
communications relating to internal as well as external events." Our
discussions with both OIG and LSC management indicated that working
relationships and communications between them were strained. OCE staff
have expressed confusion about their own roles and responsibility for the
more limited fiscal compliance reviews they perform, and there is
contention between OCE and OIG over unclear areas of responsibility that
dates back to 1995.24 OCE and OIG officials indicated that to the best of
their knowledge no memorandum of understanding or any other documentation
implementing the board resolution to clarify the roles and
responsibilities of each unit was ever drafted or implemented.
22LSC OIG, Interim Report on Management Oversight of Grantees--Office of
Compliance and Enforcement, Report No. AU06-02 (Washington, D.C.: March
2006).
23[31]GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
We also found communication and coordination weaknesses between OPP and
OCE based on interviews with LSC oversight staff, correspondence with the
grantee and other documentation related to the joint OCE/OPP oversight
visit that we observed, and our own observations of that joint oversight
visit. As an example, during our visit to a Las Vegas grantee, we noted a
lack of coordination and information sharing between OCE and OPP staff.
Specifically, we found conflicting conclusions resulting from the OPP and
OCE site visits to that grantee, and a lack of awareness between OPP and
OCE about their respective site visits to that grantee. In reporting on an
earlier April 2006 site visit in Las Vegas, OPP reported, "Overall, this
program is in very good shape. Its delivery structure is sound, its
management is excellent, and its case handling staff are performing at a
high level." During our February 2007 observation visit to the same
grantee, OCE found it necessary to open an investigation after discovering
several significant deficiencies with respect to the grantee's compliance
with LSC regulations. In addition, the OCE team leader on the visit stated
that he was unaware of OPP's programmatic visit. LSC's Vice President of
Program and Compliance stated that both OPP and OCE are required to share
summary memorandums of their visits to grantees so that staff are aware of
all visits made by both OPP and OCE and properly consider the results of
the prior site visit in their own visits when conducting their own
reviews. However, as discussed in a later section of this report, LSC's
grantee site visit reports were not being completed in a timely manner,
and, therefore, were not available to the respective teams or to LSC
management for use in communications and coordination of grantee oversight
activities. In response to our finding, LSC officials acknowledged the
need to further enhance internal communications and coordination between
OPP and OCE to improve the overall efficiency and effectiveness of their
oversight visits.
24In 1995, the LSC Board of Directors issued a resolution revising its
implementation of the IG Act at LSC and transferring certain
responsibilities then performed by LSC management to the OIG. LSC,
Resolution of the Legal Services Corporation Board of Directors Regarding
Transfer of Certain Audit Responsibilities to the Office of Inspector
General (Washington, D.C.: May 12, 1995).
Timing and Scope of Grantee Site Visits Is Not Based on a Risk Assessment
LSC does not utilize a structured or systematic approach for assessing
risk associated with its 138 grantees as a basis for determining the
timing and scope of its grantee oversight visits. According to GAO's
Standards for Internal Control, risk assessment requires identifying and
analyzing relevant risks associated with achieving the organization's
objectives and determining how risks should be managed. In determining
which grantees to visit, both OPP and OCE use an approach based primarily
on time between site visits and the respective office director's
judgments. The director of OCE stated that additional factors OCE
considered include: complaints of noncompliance, referrals from the OIG,
and discrepancies in reporting case closures. In response to a draft of
this report, LSC's President stated that other risk factors considered by
OCE include the results of grantee self-inspections and potential
compliance issues identified in OPP program visits and other discussions.
The director of OCE also said OCE attempts to visit every grantee on a 5
1/2-year cycle. However, this time-based cycle is not consistently
followed. For example, the second largest grant recipient, receiving over
$13 million in 2006, has not been visited by OCE since at least 1996. In
addition, we noted there was a 7-year lapse between OCE visits to a
grantee in Las Vegas, for which OCE, as previously discussed, recently
opened an investigation after discovering several significant
compliance-related findings. Management has indicated it believes
additional grantee reviews are needed but stated that LSC does not have
sufficient personnel to do this. OCE occasionally supplements its staff of
two analysts that conduct fiscal reviews with an additional contract
staff, and officials told us they plan to hire additional staff to conduct
site visits on a 3- to 3 1/2-year cycle by 2009.
In 2006, LSC had 138 different grantees with more than 900 offices serving
all 50 states, the District of Columbia, and current and former U.S.
territories and had conducted fiscal compliance reviews at 24 of these
grantees (17 percent). With this scope of grantee operations and a limited
LSC oversight staff, an approach based on elapsed time and informal
judgments is not adequate because it lacks analytical rigor and does not
provide adequate assurance that risks are being properly addressed.
Specifically, risk analysis should make a reasonable effort to identify
risk, including inherent risk, based on all information sources available,
assess the significance and likelihood of occurrence of the risk, and
factor this in to the decision about scope and timing of oversight visits.
However, LSC's processes are not designed to identify risk in a
comprehensive manner by not considering relevant risk factors including,
for example, inherent risks due to program size or changes in grantee
management or systems. Without a more structured process for selecting
grantees to review, LSC does not have an analytical basis to know whether
it is has the proper level of staff resources assigned to the grantee
review function or whether it is gaining an adequate level of assurance
for the number of staff assigned to grantee review activities.
LSC's Control Activities for Monitoring Grantees Do Not Provide Reasonable
Assurance That Grant Funds Are Being Used Properly and in Compliance with Laws
and Regulations
LSC's control activities for monitoring grantee internal control systems
do not reasonably assure that grant funds are being used properly and that
grantees are in compliance with laws and regulations. OCE's fiscal
oversight was limited in scope, and feedback was not provided to the
grantees. At both of our observation visits, we noted that staff did not
follow-up on questionable transactions and relied too heavily on
information obtained through interviews without corroborating the
information. We also noted that LSC did not perform timely follow-up on an
investigation into an alleged instance of noncompliance referred to it by
the OIG. In addition, LSC has not consistently provided grantees the
opportunity to take corrective actions based on findings arising out of
the OCE/OPP site visits in a timely manner. As of September 17, 2007, LSC
had not yet issued to grantee management almost 19 percent (10 out of 53)
of the 2006 LSC reports for which grantee site visits had been completed.
In one case we noted that, for unexplained reasons, the review team
presented negative findings in a positive light to a grantee and omitted
some negative findings from its feedback. Effective grantee monitoring is
especially important for LSC because it has limited options for
sanctioning poorly performing grantees.
LSC's Control Activities for Monitoring Grantee Fiscal Compliance Were
Ineffective Due to Scope and Implementation Weaknesses
LSC's fiscal reviews did not contain sufficient scope of work to
adequately assess grantee internal control or fiscal compliance for
purposes of achieving effective oversight. In addition to IPA audits, LSC
management relies on its site visits and grantee reviews as a key control
activity to monitor grantee fiscal compliance. The fiscal component of an
OCE review is limited, and the reviews we observed left out important
follow-up to issues that surfaced during interviews and did not address
outstanding IPA findings.
OCE staff use an OCE guide called Policies and Procedures for On-Site
Fiscal Reviews for the fiscal component of OCE reviews. However, the guide
is very limited in its scope. During our observation of an OCE site visit,
we were told that no previsit preparation is needed and no formalized work
program exists for the fiscal component of OCE reviews. The guide's focus
is assessing compliance with selected regulatory provisions and is not a
review of grantee internal controls, so it would not, for example, require
a review of whether expenditures were properly authorized. In addition,
although the fiscal component of an OCE review involves a compliance
review of seven LSC regulations, the guide provides a framework for
conducting fiscal reviews related to only three of the seven required
regulations. Furthermore, the guide does not provide an overall objective
of the fiscal compliance review nor does it provide a clear scope or
detailed steps for performing the oversight visitation. The approach to
OCE site visits relies almost entirely on grantee oral responses to
questions and did not include follow-up lines of questioning or requests
for supporting evidence. For example, the OCE analyst did not question
Greensburg, Pennsylvania, grantee officials about a $30,000 payment to a
subgrantee that lacked supporting documentation. When GAO asked the
grantee Executive Director about the payment, she stated that the previous
Executive Director entered into the subgrant agreement and she did not
know anything about the agreement other than the fact that she continued
to pay the bill every year. The Executive Director was not able to support
the payment, nor did she know the reasons for the payment. The OCE visit
did not include review of important documents such as policy and procedure
manuals, or verification of crucial financial information. In addition,
OCE did not review invoices, perform internal control reviews, or
scrutinize questionable items.
Our review of information that OCE had also reviewed found that staff did
not always follow up on questionable transactions. In reviewing documents
already reviewed by the OCE fiscal program analyst during a site visit to
Las Vegas, we discovered an improper transaction involving the sale of the
grantee's building that was partially purchased using LSC funds. The
analyst did not question the sale or the reason the LSC share of the
proceeds from the sale was not returned to the LSC restricted funds
account. The grantee had entered into an agreement to sell the building to
a developer for $3.6 million. The developer gave the grantee $310,000 as
earnest money, and the grantee withdrew $30,000 to use as earnest money
towards the expected purchase of a new property. The remaining $280,000
was deposited in an escrow account. However, when the sale of the building
fell through, the grantee transferred the funds from the escrow account
into its unrestricted general funds account. According to an official at
the grantee, this transfer was made to avoid the funds being subjected to
LSC regulations. Furthermore, the grantee official stated that he
considered it an "enhancement of money." However, the OCE site visit did
not question this unusual transaction, nor was it disclosed in the
independent public accountant's (IPA) annual financial audit. As a result
of our bringing this transaction to the attention of OCE, LSC has
concluded that the funds should have been designated and spent as LSC
restricted income.
LSC's Delays in Reporting Findings Prevented Grantees from Correcting
Deficiencies in a Timely Manner
LSC's reports of site visits are crucial to communicating and resolving
instances of noncompliance in grantee internal controls. LSC, though, has
not provided grantees the opportunity to address findings arising out of
the OCE/OPP site visits in a timely manner because LSC has been slow to
communicate its findings to them. As of September 2007, LSC had not yet
issued to grantee management almost 19 percent (10 out of 53) of the 2006
LSC reports for which site visits had been completed. One such visit dates
back to January 2006. LSC management stated that this occurs because there
is not enough staff to conduct oversight visits and complete reports in a
timely manner. Absent timely communications about findings from its site
visits, grantee management does not have information about deficiencies
and corrective actions needed to address identified deficiencies in their
use of funds and improve controls. Furthermore, LSC cannot monitor the
status of grantee corrective actions.
During OCE compliance visits and in follow-up reviews, OCE attorneys and
fiscal program analysts gather and analyze data on grantee compliance with
both nonfinancial and financial LSC regulations and conduct an exit
meeting with grantee management to present the findings. LSC then develops
a report with recommendations that is to be provided to the grantee. OCE
officials stated that although LSC policy requires reports to be issued
within 90 days of site visits, they generally take much longer. One
official also told us that OCE staff do not have the opportunity to
complete one report before having to go on another site visit. The
official told us that staff do summarize their findings in a memorandum,
which is used internally at LSC. One fiscal program analyst told us that
not only was he still working on a report which was due last year, but
that he also had three other visits he was still working on, and he was
planning on visiting three additional sites as well. It will be important
to clear up the backlog of unissued reports, especially since LSC's Vice
President for Programs and Compliance stated that LSC plans to increase
OCE and OPP staff levels to increase the number of site visits per year.
We also found an instance where timely follow-up action was not taken when
alleged instances of noncompliance and misuse of funds existed. On
November 30, 2004, OCE received a referral from a state comptroller's
office, which reported that an LSC grantee's Executive Director had
misused LSC grant funds. OCE referred the case to the OIG. The OIG found
that the Executive Director used LSC grant funds for time and travel
unrelated to grantee operations and contributions of LSC funds to other
charitable organizations. On November 3, 2005, the OIG referred the
results of its investigation back to OCE for follow-up action. LSC
management told us that this case has yet to be resolved and attributes
the delay to other priorities, including staff shortages.
In one case, we noted that, for unexplained reasons, the LSC review team
presented mostly positive findings to a grantee during the exit conference
when in fact other significant findings were negative. Without a complete
report of the instance of noncompliance and potential weaknesses found by
the reviewers, grantee management was not afforded the opportunity to
respond to those findings, nor did they have the information needed to
correct the deficiencies in a timely manner. An exit conference is the
standard forum for presenting site visit results prior to issuing the
final report. It gives LSC the opportunity to inform grantee management,
once the team has finished its planned interviews, tests, and other
data-collection activities, about the findings and observations discovered
during the visit. It also gives grantee management an opportunity to
timely begin addressing problems. However, in an exit conference held to
close out a joint OCE-OPP oversight visit in Greensburg, Pennsylvania, we
found that the attorneys and fiscal program analyst that performed the
review focused on the few positive points that had been observed during
the week-long visit. A number of findings that the review team had
characterized as significant and in need of immediate attention during the
previous day's meeting to prepare for the exit conference were not
communicated as such at the exit conference. In contrast to the discussion
regarding the need for improvements at the exit conference, the memorandum
prepared for the LSC files to summarize the visit characterizes the
grantee as a weak program that faces many challenges. In effect, the exit
conference focused on a few positive points rather than the substantial
number of significant findings.
LSC oversight staff cited staff shortages as the cause for some of the
weaknesses in the quality of site visits. Currently, there are only two
fiscal program analysts in OCE, and in order to ensure that there is a
program analyst available to participate in every OCE grantee visit, it is
sometimes necessary to contract with an outside analyst for coverage.
Effective grantee monitoring is especially important for LSC because it
has limited options for sanctioning or replacing poor-performing grantees.
Although LSC has the authority to temporarily suspend funding or terminate
all or part of a recipient's grant, LSC rarely uses this authority.
According to LSC, termination is seldom used because it is difficult to
find a replacement organization to provide the service. Although the LSC
Act provides general enforcement authority to the corporation,25 LSC must
take all practical steps to ensure the continued provision of legal
assistance. After a final decision has been issued by LSC terminating
financial assistance to a grantee, LSC must implement a new competitive
bidding process for the affected service area. In fiscal year 2006, only 5
out of 71 potential grants received multiple bids during the grant renewal
process. Because there are few competitors for LSC grants in a given
service area, LSC's competition process does not provide a practical
solution for competitive selection when quality issues arise in some
cases. Therefore, it is particularly important that LSC effectively and
efficiently oversee its grantees to ensure that grant funds are used for
intended purposes in accordance with laws and regulations so that grantee
weaknesses do not develop into serious weaknesses that would normally call
for termination of funding for the grantee.
LSC Oversight Did Not Identify Control Weaknesses at Nine Grantees
Based on our limited reviews, we identified internal control weaknesses at
9 of the 14 grantees we visited that LSC could have identified with a more
effective oversight review regimen. While control deficiencies at the
grantees were the immediate cause of improper and potentially improper
expenditures, weaknesses in LSC's oversight controls discussed above
negatively affected the effectiveness of its monitoring of grantees'
controls and compliance. Among the control weaknesses we found were
grantee use of LSC grant funds for expenditures with insufficient
supporting documentation, and for unusual contractor arrangements, alcohol
purchases, employee interest-free loans, lobbying fees, late fees, and
earnest money. The following two examples show the types of weaknesses we
found at the grantees we visited.
2542 U.S.C. S 2996e(b)(1)(A); Departments of Commerce, Justice, and State,
the Judiciary, and Related Agencies Appropriations Act, 1998, Pub. L. No.
105-119, S 501, 111 Stat. 2440, 2510 (Nov. 26, 1997).
Example 1--Systemic Weakness: Insufficient Supporting Documentation
At 7 out of the 14 grantees we visited, we identified systemic issues
involving payments that lacked sufficient supporting documentation. At one
grantee, many payments were processed for travel despite the lack of
supporting documentation. The lack of documentation made it impossible to
determine whether the expenditures were accurate, allowable, and
appropriate. At another grantee, certain travel expenses appeared to be
improper. At a third grantee, the grantee underwent a change in management
in August 2006, and the current Executive Director was unable to locate
many of the records and invoices related to payments made under the
previous Executive Director. At a fourth grantee, we reviewed six monthly
credit card payments and determined that less than 50 percent of the
charges had any supporting documentation. At this same grantee, many of
the credit card charges that had support lacked sufficient information to
determine whether they were a valid use of grant funds. At a fifth
grantee, we identified a $30,000 payment to a subgrantee that lacked any
supporting documentation. When questioned about the payment, the grantee's
Executive Director stated that the previous Executive Director entered
into the agreement and that she did not know anything about the agreement
other than the fact that she continued to pay the bill every year.
Example 2--Unusual Contractor Arrangement: Questionable Independent Contractors
At one grantee, we identified an individual who provided services to the
grantee as an information technology (IT) contractor who was paid
approximately $750,000 between 2004 and 2006. The individual was engaged
to operate the organization's IT servers and maintain the network. The
individual told us that he had worked at the grantee since 2001. When we
inquired as to why he did not work at the grantee as an employee, he
stated that there were benefits to being an independent contractor. We
noted the following facts that cause us to question the contractor
arrangement:
o The contractor's office and mailing address was located in the
same office space as the grantee.
o The grantee could not locate its contract with the individual
for 2005 and 2006.
o The contractor's business card was identical to other employees
working at the grantee.
o Two grantee employees worked for and were supervised by the
contractor.
o The contractor indicated that the organization occasionally
reimburses him for work-related training costs.
See appendix II for additional detailed information related to our
findings at the grantees we visited.
We presented LSC management with the results of our analysis supporting
each of our findings related to our grantee visits. LSC management
expressed commitment to take action to resolve these matters in
coordination with the grantees.
Conclusions
Effective internal controls over grants and grantee oversight are critical
to LSC as its very mission and operations rely extensively on grantees to
provide legal services to people who otherwise could not afford to pay for
adequate legal counsel. Effective grants-oversight procedures and
monitoring, including a structured, systematic approach based on risk, are
necessary given LSC's limited resources and the scope of its
responsibilities for many widely dispersed entities. In addition, the
shared responsibilities for grantee oversight between LSC management and
OIG presents risks that can be mitigated with clear lines of authority and
responsibility and effective communications and coordination across
oversight offices to avoid unnecessary duplication where possible.
Finally, given the number of grantees, a sound risk-based approach for
determining timing and scope of site visits is key to prioritizing
resource allocations to reflect the varying risks presented by grantees.
To maximize the effectiveness of each site visit, LSC needs to conduct its
oversight visits with sufficient scope to target areas of greatest risk,
follow up on information and results of prior reviews and audits, and
employ a review scope and approach that is tailored to specific risks.
With high-quality targeted reviews and management that promptly informs
grantees about findings and provides them an opportunity to correct them,
risk can be mitigated.
Recommendation for Board Action
To help LSC improve its internal control and oversight of grantees, we
recommend that the LSC Board of Directors develop and implement policies
that clearly delineate organizational roles and responsibilities for
grantee oversight and monitoring, including grantee internal controls and
compliance.
Recommendations for Executive Action
To help LSC improve its internal control and oversight of grantees, we
recommend that LSC management develop and implement the following:
o Policies and procedures for information sharing among the OIG,
OCE, and OPP and coordination of OCE and OPP site visits.
o An approach for selecting grantees for internal control and
compliance reviews that is founded on risk-based criteria, uses
information and results from oversight and audit activities, and
is consistently applied.
o Procedures to improve the effectiveness of the current LSC
fiscal compliance reviews by revising LSC's current guidelines to
provide
o a direct link to the results of OPP reviews and OIG
and IPA audit findings,
o guidance for performing follow-up on responses from
grantee interviews, and
o examples of fiscal and internal control review
procedures that may be appropriate based on
individual risk factors and circumstances at
grantees.
In addition to the above improvements to LSC's oversight of grantees, we
also recommend that LSC management perform follow-up on each of the
improper or potentially improper uses of grant funds that we identified in
this report.
Agency Comments and Our Evaluation
We received written comments on a draft of this report from the Chairman
on behalf of LSC's Board of Directors and LSC's President on behalf of
LSC's management (which are reprinted in apps. IV and V). Both the
Chairman and the President expressed their full commitment to making the
improvements noted in the report, concurred with all of our
recommendations, and outlined the actions that LSC's board and management
plan to take in response to our recommendations. LSC management also
separately provided technical comments that we incorporated into the
report as appropriate.
LSC's President also suggested three clarifications to our report. First,
LSC management stated that "the draft report does not sufficiently address
the fact that in 1996 Congress mandated that the LSC OIG have oversight
responsibility for all audit work performed by independent public
accountants (IPA) and the report should include a fuller discussion of the
role of the IPAs in the financial oversight of grantees." We added
language to our report to augment our discussion of how the 1996 Act
clarified that grantee financial statement and compliance audits are
performed by IPAs and overseen by OIG. While these audits serve as an
accountability mechanism, they are performed after the fact, and do not
include all the grantee oversight objectives and procedures that would be
expected of LSC management as part of its responsibilities to manage the
affairs of the corporation, such as its grants program and to monitor its
grantees to ensure compliance with all applicable laws, regulations, and
grant terms.
Second, LSC's President states that "the draft report supports its
conclusion about limited coordination of the work of OCE and OPP with an
isolated example from one grantee visit and fails to note the range of
communication and coordination that actually exists between these
offices." We provide the example in the report to illustrate the effect on
grantee oversight. Our conclusion about the need for improved
communication and coordination were also based on interviews with LSC
staff and our assessment of LSC's control environment during the course of
our work. Third, the LSC President stated that while LSC can and will
expand its criteria and use of a risk-based approach for assessing risk of
weaknesses at its grantees, the draft report did not include all of the
risk-based criteria that LSC currently uses in selecting grantees for
on-site reviews. We modified our report to add language recognizing that
LSC considers the results of grantee self-inspections and potential
compliance issues identified in OPP program visits and other discussions
in selecting grantees for on-site reviews.
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://www.gao.gov.
If you or your staff have any questions concerning this report, please
contact me at (202) 512-9471 or [32][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 IV.
Jeanette M. Franzel
Director
Financial Management and Assurance
List of Requesters
List of Requesters:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael B. 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: Objectives, Scope, and Methodology
This report contains the results of our review of internal controls over
the Legal Services Corporation's (LSC) grantee monitoring and oversight
function and our limited visits to grantees. In performing our work, we
(1) evaluated LSC's control environment, information and communications,
and risk assessment procedures related to its grants management and
oversight organizations; (2) reviewed LSC's control activities for
monitoring grantee management and compliance, and (3) performed limited
reviews at 14 grantees.
To evaluate LSC's control environment, information and communications, and
risk assessment procedures related to its grants management and oversight,
we interviewed LSC and Office of Inspector General (OIG) management
officials and reviewed board meeting minutes and LSC policy documents. To
obtain an understanding of LSC's internal control framework, including the
oversight of grantees, we reviewed LSC policies and procedure manuals and
reviewed LSC OIG, Office of Program Performance (OPP), and Office of
Compliance and Enforcement (OCE) reports. In addition, we accompanied LSC
staff on oversight visits to Las Vegas, Nevada, and Greensburg,
Pennsylvania. During these visits, we reviewed grant agreements, observed
LSC interviews with entity officials and external parties, evaluated
grantee policies and procedure manuals, discussed the objectives of each
visit with the LSC team leader, attended the grantee entrance and exit
conferences, and observed testing performed by OCE.
We also conducted fieldwork at LSC, observed LSC staff on 2 of their
grantee oversight visits, and conducted 12 of our own grantee site visits.
Specifically, we systematically selected 8 of our grantee site visits
using a dollar unit sample of LSC's calendar year 2006 grants. The
grantees selected were located in Oakland, California; Tampa, Florida;
Chicago, Illinois; Detroit, Michigan; Camden, New Jersey; New York, New
York; Cleveland, Ohio; and Seattle, Washington. In addition, in order to
include additional small grantees in our site visits, we randomly selected
2 additional grantees with 2006 grant amounts below the median grant
amounts for 2006. The grantees selected were Window Rock, Arizona, and
Philadelphia, Pennsylvania. Finally, we selected Washington, D.C., as a
pilot program for our visits due to its proximity to GAO, and we selected
Casper, Wyoming, because it had received month-to-month funding as a
disciplinary sanction in 2006. At all of these locations, we analyzed key
records and interviewed entity officials to obtain an understanding of
LSC's internal control framework, including the oversight of grantees, and
assessed compliance of expenditures. Our grantee site reviews were limited
in scope and were not sufficient for expressing an opinion on the
effectiveness of grantee internal controls or compliance.
To assess the appropriateness of grantee expenditures, we performed
expenditure testing during our grantee site visits. The testing included
reviewing invoices, vendor lists, and general ledger details. The
appropriateness of grantee expenditures was based on the grant agreements
and applicable laws. We classified expenditures as improper or potentially
improper if they were not supported by sufficient documentation to enable
an objective third party to determine if the expenditure was a valid use
of grant funds or if the expenditure was specifically prohibited by
applicable laws and regulations. For the findings we classified as
improper or potentially improper, we found as applicable one or more of
the following: (1) systemic issues with insufficient supporting
documentation for the goods or services LSC money was paying for, (2)
unusual contractor arrangements without sufficient support or
justification, and (3) improper use of grant funds.
We conducted our work from September 2006 through September 2007 in
accordance with generally accepted government auditing standards.
Appendix II: Summary of GAO Findings at Grantees
Examples of our findings from our limited visits to 14 grantees are
presented in this appendix. These examples are not all-inclusive of the
findings we identified and are not necessarily representative of the
population of expenditures from which they were selected.
Example 1--Potential Improper Uses of Grant Funds: Alcohol Purchases
We identified three grantees that used Legal Services Corporation (LSC)
funds to purchase alcoholic beverages. LSC grantees are required by law to
use LSC funds only for allowable purposes, and LSC management has issued
implementing regulations on cost standards and procedures. LSC regulations
do not directly address alcoholic beverages, but they permit LSC
management to resolve issues arising from questioned costs by looking to
Office of Management and Budget (OMB) circulars, such as OMB Circular No.
A-122, Cost Principles for Non-Profit Corporations, when such circulars
contain relevant policies or criteria that are not inconsistent with LSC
statutes, regulations, and guidance.1 Appendix B of OMB Circular No.
A-122, Selected Items of Cost, provides guidance on the allowability of
the direct or indirect cost of the selected items.2 Appendix B's item no.
3, Alcoholic Beverages, states that the costs of alcoholic beverages are
unallowable and provides for no exceptions. Because this guidance is not
mandatory for LSC, LSC management must make the final decision on whether
alcohol purchases are allowable. The Executive Director at one grantee
stated that the program would never use LSC funds to purchase alcohol
during trips or other organizational functions. When we provided her
copies of invoices showing alcohol purchases, she indicated that she was
not aware of the expenditures and would have to investigate. She later
explained that one of the invoices totaling $2,800 was a payment to
another organization for the cost of beer and wine for an annual spring
reception held for college student interns. In addition, she explained
that the $128 in alcohol on a second invoice was part of a $725 staff
dinner party in Washington D.C., and that, to the best of her knowledge,
those funds were reimbursed to the grantee. At another grantee, we
identified invoices containing wine purchases for company events. The
Executive Director immediately recognized that this was an issue and
stated that he would ensure that LSC funds are no longer used to purchase
alcohol.
1 45 C.F.R. S 1630.3(i).
2 OMB Circular No. A-122, codified at 2 C.F.R. pt. 230, app. B.
Example 2--Potentially Improper Uses of Grant Funds: Employee Interest-Free
Loans
We identified a grantee that was using LSC funds to provide interest-free
loans to employees upon request as an employee benefit. The use of the
loans included, but was not limited to, paying college tuition, making
down payments on personal residences, and purchasing personal computers.
According to the grantee's Controller, employees are not required to sign
a contract, but the grantee does try to have the employees pay off the
loans through payroll deductions to ensure collection. Furthermore, she
stated that the total amount of loans outstanding at any one time
typically does not exceed $10,000.
When asked to provide support for the loans, the Controller stated that
she did not believe any specific supporting documentation existed. During
our site visit, the Controller prepared a list of employee loans
outstanding as of December 31, 2006. Since controls over the loans are
nonexistent, we were unable to determine the completeness of this list.
LSC grant funds are required by law to be used to support the provision of
legal assistance in civil matters to low-income people for everyday legal
problems. We identified no authority to use LSC grant funds for
interest-free or other loans to grantee employees.
Example 3--Improper Uses of Grant Funds: Lobbying Fees
We identified two instances in which one grantee was using LSC funds to
pay for lobbyist registration fees. The Legal Services Corporation Act
imposes a broad limitation on LSC grantees using LSC funds in a manner
that would directly or indirectly influence legislation or other official
action at the local, state, or federal government levels and requires LSC
management to ensure that these limitations are not violated.3 With only
limited exceptions, LSC grantees cannot use LSC funds to pay for any costs
related to lobbying, including lobbying registration fees. The
registration fee in each instance we identified was $50. The Executive
Director of the program agreed that in this instance using LSC funds for
lobbyist registration fees was a violation of the grant agreement. In
addition, he stated that he would take additional steps to ensure that LSC
funds are no longer used for expenses related to lobbying.
3 42 U.S.C. SS 2996f(a)(5)-(6), 2996f(b)(4)-(7).
Example 4--Improper Uses of Grant Funds: Late Fees
Three of the grantees that we visited used LSC funds to pay late fees on
overdue accounts for goods and services purchased. LSC regulations on cost
standards and procedures provide that expenditures by a grantee are only
allowable if the grantee can demonstrate that the expenditures were
reasonable and necessary for performance of the grant, meaning that they
were the type that would have been performed by a prudent person in
similar circumstances at the time the decision to incur the cost was
made.4 One grantee routinely failed to make payments on time, creating
tension with several of its vendors. We found numerous communications from
vendors regarding late payments. In one instance, the vendor sent a third
notice of action to this grantee stating that the rent for the grantee's
unit or office space remained unpaid. The vendor threatened to place a
lien against the goods in the unit and sell them at a public auction to
satisfy the overdue balance if the overdue balance was not paid within 15
days. Systemic failure to pay bills on time is an indication of weak
internal controls. All three Executive Directors agreed that there was no
excuse for the inability to make payments on time. We view payments made
under these circumstances as imprudent and unreasonable and, therefore,
unallowable.
Example 5--Improper Uses of Grant Funds: Earnest Money
We discovered an improper transaction at one grantee involving the sale of
a grantee building that was purchased using both LSC and non-LSC funds.
The grantee had entered into an agreement to sell the building to a
developer for $3.6 million. The developer gave the grantee $310,000 as
earnest money, and the grantee withdrew $30,000 to use as earnest money
towards the expected purchase of a new building. The remaining $280,000
was deposited in an escrow account. However, when the sale of the building
fell through, the grantee transferred the funds from the escrow account
into its unrestricted general funds account. According to an official at
the grantee, this transfer was made to avoid the funds being subjected to
LSC regulations. Furthermore, the grantee official stated that he
considered it an "enhancement of money." As a result of our bringing this
transaction to the attention of the Office of Compliance and Enforcement,
LSC has concluded that the funds should have been designated and spent as
LSC restricted income.
4 45 C.F.R. S 1630.3(a)(2), (b).
Appendix III: Regulatory Provisions of Legal Services Corporation's Fiscal
Compliance Review of Grantees
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1609;
Summary of provision: Prohibits LSC grantees from accepting most fee-
generating cases.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1610;
Summary of provision: Prohibits LSC grantees from using non-LSC funds
for any purpose prohibited by the Legal Services Corporation Act in
most situations.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1614;
Summary of provision: Requires that LSC grantees involve private
attorneys in their programs for the delivery of legal assistance to
financially eligible clients.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1627;
Summary of provision: Sets out rules under which LSC funds may be
transferred by grantees to other organizations.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1630;
Summary of provision: Provides uniform standards for the allowability
of costs and process for resolving questioned costs.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1635;
Summary of provision: Sets out timekeeping requirements for documenting
time spent by attorneys and paralegals on each case or matter.
Legal Services Corporation regulatory provision in CFR, Title 45: Part
1642;
Summary of provision: Prohibits grantees or employees of grantees from
claiming, or collecting and retaining, attorneys' fees available under
any federal or state law permitting or requiring the awarding of
attorneys' fees in most situations.
Source: GAO.
Appendix IV: Comments from the Legal Services Corporation Board of
Directors
LSC:
Legal Services Corporation:
America's Partner for Equal Justice:
President:
Helaine M. Barnett:
Board of Directors:
Frank B. Strickland:
Atlanta, GA:
Chairman:
Lillian R. BeVier:
Charlottesville, VA:
Vice Chairman:
Jonann C. Chiles:
Little Rock, AR:
Thomas A. Fuentes:
Lake Forest, CA:
Herbert S. Garten:
Baltimore, MD:
David Hall:
Boston, MA:
Michael D. McKay:
Seattle, WA:
Thomas R. Meites:
Chicago, IL:
Bernice Phillips:
Buffalo, NY:
Sarah M. Singleton:
Santa Fe, NM:
November 30, 2007:
Ms. Jeanette M. Franzel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Ms. Franzel:
Thank you for the opportunity to provide written comments on the
Government Accountability Office (GAO) draft report entitled Legal
Services Corporation � Improved Internal Controls Needed in Grants
Management and Oversight. This is the Board of Directors' response to
your draft report. Management is responding separately.
We accept the one recommendation to the Board and we are fully
committed to making the improvements noted.
GAO recommends: To help LSC improve its internal control and oversight
of grantees, we recommend that the LSC Board of Directors develop and
implement policies that clearly delineate organizational roles and
responsibilities for grantee oversight and monitoring, including
grantee internal controls and compliance.
The Board will ask LSC management and the Office of Inspector General
to review existing policies and procedures and establish additional
policies and procedures, as necessary, to address the division of
responsibilities between and among the OIG, OCE and OPP for both fiscal
and regulatory oversight and monitoring of LSC grantees, including
grantee internal controls and compliance. We will ensure that, where
appropriate, such practices and policies are adopted as written Board
policy so that LSC personnel and OIG personnel will be fully informed
of the need to conform to these policies and procedures.
We would like to invite the GAO's attention to that part of
management's response that discusses some potential inaccuracies in the
report. The Board has not fully investigated these facts, but we are in
general agreement with management's observations about the split role
of the OIG and LSC management and of the IPA system.
Thank you for the opportunity to comment upon the draft report.
Sincerely,
Signed by:
Frank B. Strickland:
Chairman:
3333 K Street, NW 3rd Floor:
Washington, DC 20007-3522:
Phone 202.295.1500:
Fax 202.337.6797:
[hyperlink, http://www.lsc.gov]:
[End of section]
Appendix V: Comments from the Legal Services Corporation
LSC:
Legal Services Corporation:
America's Partner for Equal Justice:
President:
Helaine M. Barnett:
Board of Directors:
Frank B. Strickland:
Atlanta, GA:
Chairman:
Lillian R. BeVier:
Charlottesville, VA:
Vice Chairman:
Jonann C. Chiles:
Little Rock, AR:
Thomas A. Fuentes:
Lake Forest, CA:
Herbert S. Garten:
Baltimore, MD:
David Hall:
Boston, MA:
Michael D. McKay:
Seattle, WA:
Thomas R. Meites:
Chicago, IL:
Bernice Phillips:
Buffalo, NY:
Sarah M. Singleton:
Santa Fe, NM:
November 30, 2007:
Ms. Jeanette M. Franzel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Franzel:
Thank you for the opportunity to provide written comments on the
Government Accountability Office (GAO) draft report entitled Legal
Services Corporation � Improved Internal Controls Needed in Grants
Management and Oversight. This is Management's response to your draft
report. The Board of Directors is responding separately.
We accept the four recommendations and we are fully committed to making
the improvements noted.
Recommendation: GAO recommends that LSC management perform follow- up
on each of the improper or potentially improper uses of grant funds
identified in this report.
LSC had already begun investigating one grantee cited by GAO prior to
receiving the draft report. We have followed up on the other issues
identified by GAO by referring the identified grantees and the related
allegations to the Office of Inspector General (OIG). The OIG has
accepted Management's referral of these matters and has indicated that
they will conduct internal controls reviews at the grantees identified.
Recommendation: GAO recommends that LSC management develop and
implement policies and procedures for information sharing among the
01G, OCE, and Office of Program Performance (OPP) and coordination of
OCE and OPP site visits.
LSC will review existing policies and procedures and establish
additional policies and procedures, as necessary, to address
information sharing between OCE and OPP. We will ensure that all
current and new procedures will be in writing and that staff will be
fully informed of their responsibilities to conform to these policies
and procedures.
LSC maintains substantial coordination of work efforts between OPP and
OCE. We will assess our current practices regarding site visits to
grantees and, where needed, will create additional avenues of
coordination. We will put in writing the full range of coordination
activities and procedures, including those we have been using as well
as any new procedures, to ensure that information concerning grantee
visits is more easily shared among staff in the two offices.
With regard to information sharing between the OIG and LSC program
offices, we will consult with the OIG and insure that appropriate
policies and procedures are in place.
Recommendation: GAO recommends that LSC management develop and
implement an approach for selecting grantees for internal control and
compliance reviews that is founded on a risk-based criteria, and uses
information and results from oversight and audit activities, and is
consistently applied.
LSC will assess the risk-based criteria that we currently apply when
selecting grantees for program visits, add appropriate criteria as
necessary, and document the process. We will continue to work with the
OIG to make improvements in the system used to refer audit findings to
ensure that all appropriate audit findings are being referred to
Management for follow up.
Recommendation: GAO recommends that LSC management develop and
implement procedures to improve the effectiveness of the current LSC
fiscal compliance reviews by revising its current guidelines.
LSC will document in its written guidance for the fiscal component of
OCE's regulatory compliance reviews the required links to OIG and IPA
audit findings. We will provide guidance for following up on grantee
interviews. We will work with the LSC Board of Directors and the OIG to
develop and implement policies that clearly delineate organizational
roles and responsibilities and appropriate fiscal and internal controls
review procedures for grantee oversight and monitoring.
In addition to accepting your recommendations, we recommend that the
following clarifications be made to your draft report to insure its
overall accuracy.
First, the draft report does not sufficiently address the fact that in
1996 Congress mandated that the LSC OIG have oversight responsibility
for all audit work performed by independent public accountants (IPAs)
and the report should include a fuller discussion of the role of IPAs
in the financial oversight of grantees. Management understood that as a
result of the congressional action, the OIG would be responsible for
financial audits of grantees, including internal controls reviews, and
that LSC management would be responsible for regulatory compliance
reviews with a limited fiscal component. Since that time, LSC
management has looked to the OIG and the IPA audit process to provide
the primary financial oversight of grantees. The LSC Board, the OIG,
and LSC Management have all expressed concerns about the need for
clarification of roles with respect to financial oversight
responsibilities for LSC grantees. We will work together to review how
LSC should improve our overall financial oversight.
Second, the draft report supports its conclusion about limited
coordination of the work of OCE and OPP with an isolated example from
one grantee visit and fails to note the range of communication and
coordination that actually exists between these offices. LSC management
has made it a priority and has worked hard during the past few years to
assure effective communication and coordination between OCE and OPP.
The directors of these two offices as well as their respective deputy
directors are in constant communication with each other. Staff from
each office routinely seek and provide input to each other regarding
upcoming grantee visits and other programmatic projects. All reports
from each office, in draft and final form, are shared with staff of
both offices. A written summary of the preliminary findings issued at
each exit conference is shared with staff of both offices. The monthly
written reports prepared by OCE regarding current OCE projects are
shared between the directors, deputy directors and staff of both
offices. Decisions on which grantees will receive oversight visits are
the result of both offices coming together to discuss application of a
variety of risk-based criteria.
Finally, despite the finding in the draft report that LSC does not
employ a structured or systematic approach for assessing the risk of
noncompliance or financial control weaknesses across its 138 grantees,
the draft report refers to the following factors considered by OCE in
selecting grantees for on-site reviews: complaints of noncompliance,
referrals from the 01G, discrepancies in reporting case closures, and
the time that has passed since the last visit. All of these are risk-
based criteria. In addition, included in the OCE risk-based factors are
the results of grantee self-inspections and potential compliance issues
identified in OPP program visits and other discussions. While we can
and will expand our criteria and document their use, the draft report
does not adequately credit the risk-based criteria currently in use by
LSC.
Thank you for the opportunity to comment upon the draft report.
Sincerely,
Signed by:
Helaine M. Barnett:
President:
3333 K Street, NW 3rd Floor:
Washington, DC 20007-3522:
Phone 202.295.1500:
Fax 202.337.6797:
[hyperlink, http://www.lsc.gov]:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments
GAO Contact
Jeanette M. Franzel, (202) 512-9471 or [33][email protected]
Acknowledgments
In addition to the contact named above, Paul Caban, Blake M. Carpenter,
Bonnie L. Derby, Lisa M. Galvan-Trevino, Maxine Hattery, Erik S. Huff,
Keith H. Kronin, and Margaret Mills made key contributions to this report.
F. Abe Dymond and Lauren S. Fassler provided technical assistance.
(194698)
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Highlights of [42]GAO-08-37 , a report to congressional requesters
December 2007
LEGAL SERVICES CORPORATION
Improved Internal Controls Needed in Grants Management and Oversight
The Legal Services Corporation (LSC) was created as a private nonprofit to
support legal assistance for low-income people to resolve their civil
legal matters and relies heavily on federal appropriations. In 2006, LSC
distributed most of its $327 million in grants to support such assistance.
Effective internal controls over grants and oversight of grantees are
critical to LSC's mission. GAO was asked to determine whether LSC's
internal controls over grants management and oversight processes provide
reasonable assurance that grant funds are used for their intended
purposes. GAO analyzed key records and interviewed agency officials to
obtain an understanding of LSC's internal control framework, including the
monitoring and oversight of grantees, and performed limited reviews of
internal controls and compliance at 14 grantees.
[43]What GAO Recommends
GAO makes recommendations to the LSC board and LSC management to improve
internal control and oversight of grants by, among other things, (1)
clarifying responsibilities for overseeing grantee internal controls and
compliance among LSC units, (2) improving coordination and communication
among LSC's oversight functions, and (3) using risk-based criteria to
select grantees for internal control and compliance reviews. In comments
on a draft of this report, LSC's board and management agreed with the
recommendations.
GAO found weaknesses in LSC's internal controls over grants management and
oversight of grantees that negatively affect LSC's ability to provide
assurance that grant funds are being used for their intended purposes in
compliance with applicable laws and regulations. Effective internal
controls over grants and grantee oversight are critical to LSC as its very
mission and operations rely extensively on grantees to provide legal
services to people who otherwise could not afford to pay for adequate
legal counsel. GAO also found poor fiscal practices and improper and
potentially improper expenditures at grantees it visited.
Weaknesses in LSC's control environment include the lack of clear
definition in the responsibilities of two of the three organizational
units that oversee the work of grantees. GAO also found that communication
between oversight units and coordination of grantee site visits is not
sufficient to prevent gaps or duplication of effort, or both. The timing
and scope of site visits is not based on a systematic analysis of the risk
of noncompliance or financial control weakness across LSC's 138 grantees,
so LSC cannot determine whether its resources are being used effectively
and efficiently to mitigate risk among its grantees.
LSC control activities performed in the monitoring of grantee internal
control were not sufficient in scope to achieve effective oversight, and
GAO noted implementation weaknesses. For example, in the site visits GAO
observed, staff did not follow up on questionable transactions and relied
heavily on information obtained through interviews. Feedback to grantees
was often delayed, preventing grantees from correcting deficiencies in a
timely manner. As of September 2007, LSC had not yet issued reports to
grantee management for about 19 percent (10 out of 53) of the 2006 site
visits.
LSC grantee reviews missed potential control deficiencies at grantees that
could have been detected with more effective oversight as evidenced by
weaknesses GAO found at 9 of the 14 grantee sites it visited. While
control deficiencies at the grantees were the immediate cause of the
problems GAO found, weaknesses in LSC's controls over its oversight of
grantees did not assure effective monitoring of grantee controls and
compliance. Among the questionable expenditures GAO found were grantee use
of funds for expenditures with insufficient supporting documentation,
unusual contractor arrangements, alcohol purchases, employee interest-free
loans, lobbying fees, late fees, and earnest money.
References
Visible links
29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-993
30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-993
31. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
32. mailto:[email protected]
33. mailto:[email protected]
34. http://www.gao.gov/
35. http://www.gao.gov/
36. http://www.gao.gov/fraudnet/fraudnet.htm
37. mailto:[email protected]
38. mailto:[email protected]
39. mailto:[email protected]
40. http://www.gao.gov/cgi-bin/getrpt?GAO-08-37
41. mailto:[email protected]
42. http://www.gao.gov/cgi-bin/getrpt?GAO-08-37
*** End of document. ***