Source: https://www.lsc.gov/program-letter-17-1
Timestamp: 2019-04-20 14:13:49+00:00

Document:
This Program Letter describes the most common compliance issues that the Legal Services Corporation’s (“LSC”) Office of Compliance and Enforcement (“OCE”) has observed during compliance oversight visits in the past 15 months, or which have otherwise been brought to LSC Management’s attention. We highlight these issues so that you can avoid or mitigate compliance risks. More extensive guidance, including examples of how LSC recipients have implemented the compliance requirements listed below, can be found in OCE Final Reports from visits to LSC-funded legal aid programs, which are available at http://www.lsc.gov/grants-grantee-resources/our-grantees/assessment-visit-reports.
I encourage you to share this guidance, along with the guidance we have provided in previous years, with your staff. See Program Letter 16-7, released August 19, 2016, Program Letter 15-5(1), released August 17, 2015, Program Letter 14-1, released on February 24, 2014, and Program Letter 13-1, released on February 15, 2013.
A financial expert should (1) an understanding of Generally Accepted Accounting Principles (GAAP) and financial statements, (2) the capacity to apply GAAP in connection with preparing and auditing financial statements, (3) familiarity with developing and implementing internal financial controls and procedures, and (4) the capacity to understand the implications of different interpretations of accounting rules. LSC Accounting Guide, § 1-7. LSC recognizes that the board composition requirements of 45 C.F.R. Part 1607 can limit a board’s ability to recruit board members with certain expertise. (e.g., finance, fundraising). LSC encourages grantees to add financial experts, as non-voting members, to its finance and/or audit committee(s) to the extent allowed by state law.
Expenditures by a recipient are allowable under the recipient’s LSC grant only if the recipient can demonstrate that the cost was, among other things, “reasonable and necessary for the performance of the grant” and “allocable to the grant.” See 45 C.F.R. § 1630.3(a)(2) and (3). In determining the reasonableness of a given cost, consideration is given to, among other factors, “whether the cost is of a type generally recognized as ordinary and necessary for the operation of the recipient or the performance of the grant.” 45 C.F.R. § 1630.3(b). Common costs determined to be unallowable by LSC include: flowers; alcohol; holiday cards; and gifts for staff, board members, and/or private attorneys such as cakes, shot glasses, or other promotional items or tokens of appreciation such as pens, t-shirts, or coffee mugs.
Recipients are reminded that a cost is allocable to a particular cost objective, such as a grant, project, service, or other activity, only if the recipients can demonstrate that the cost was actually incurred in the performance of the grant or contract. For example, direct costs that should be charged to a particular grant include the salaries and wages of staff who are working on cases or matters that are identified with specific grants or contracts. Salary and benefits charged directly to LSC funds or contracts must be supported by personnel activity reports. Indirect costs are those incurred for common objectives and include, but are not limited to, the costs of operating and maintaining facilities, and the costs of general program administration, such as the salaries and wages of recipient staff whose time is not directly attributable to a particular grant or contract. Recipients should look to 45 C.F.R. §§ 1630.3(d), (e), (f), and (g) when determining how to allocate and document direct and indirect costs.
Recipients should confirm that policies and procedures are in place to ensure that LSC funds are only used for costs that are “reasonable and necessary for the performance of the grant or contract.” See 45 C.F.R. § 1630.3(a)(2).
Derivative income resulting from an activity supported in whole or in part with funds from LSC must be allocated and recorded in the same proportion as funds were expended. 45 C.F.R. § 1630.12(a). In order to ensure the proper allocation of these cash receipts, recipients should have formal written policies and procedures describing how each of its derivative income sources (i.e., interest, rental income, etc.) should be allocated between LSC and non-LSC funds to ensure that the expenditure of these funds is in compliance with LSC regulations. See LSC Accounting Guide, §§ 1-8, 2-2.1, 2-2.6, 2-2.7, 3-4, 3-5.1, and 3-5.4.
LSC Management and LSC’s Office of Inspector General (“OIG”) continue to encounter instances in which the LSC recipient failed to account for attorneys’ fees or other derivative income properly. When a recipient is awarded attorneys’ fees from a case funded in whole or in part with LSC funds, the proper calculation is to allocate the attorneys’ fees to the fund in which the LSC grant is recorded in the same proportion as the amount of LSC funds expended to support the representation bears to the total amount expended by the recipient to support the representation. See 45C.F.R. § 1630.12, which requires proportional allocation of income derived from LSC-funded activities. Examples of derivative income include attorneys’ fees awarded where LSC funds were used in whole or in part to support case work, rental or sales income from real property supported in whole or part by LSC funds, and interest on LSC funds.
Segregation of Duties. To maintain sufficient internal controls, accounting duties should be segregated to ensure that no single employee has the authority to initiate, execute, and record financial transactions without the involvement of a second, independent individual in the process. LSC Accounting Guide, § 3-4.3. For example, someone other than the initial preparer should be responsible for reviewing journal entries, and the review should be properly documented with a signature and date. LSC Accounting Guide, Appendix VII, § A.
Oversight of Executive Director Expenses. Approval should be required at an appropriate level of management before any commitment of resources is made. LSC strongly recommends that written policies be adopted and approved by the Board to ensure adequate oversight of Executive Director expenses so that theExecutive Director’s expense reports, credit card statements, and travel reimbursements are approved by a member of the Board of Directors and not by a subordinate of the Executive Director. See LSC Accounting Guide, §§ 3-5.1 and 3-5.4(a).
Budget Tracking for Technology Initiative and Pro Bono Innovation Fund Grants. Revenue and expenses relating to LSC’s Technology Initiative Grants and Pro Bono Innovation Fund grants must be reported separately in the recipient’s annual audited financial statements. This may be accomplished by establishing a separate fund or by providing a separate supplemental schedule of revenue and expenses in the audited financial statements. LSC Accounting Guide, § 2-2.1.
Fixed Assets Policy. Written policies and procedures regarding the treatment of fixed assets should include accounting for sensitive electronics, guidance on disposal of fixed assets, and fully capture all the property record elements required by LSC’s Fundamental Criteria. See LSC Accounting Guide, §§ 3-5.4 and 3-5.14 and Appendix II.
Recipients may not accept funds in the amount of $250 or more from any source other than the Corporation unless the recipient provides written notification of the prohibitions and the conditions that apply to such funds.45 C.F.R. § 1610.5.
LSC continues to find that recipients’ financial eligibility policies do not reflect the current version of 45 C.F.R. Part 1611, which was last updated in 2005. Failure to update financial eligibility policies in a timely manner places recipients at risk of improperly using LSC funds to serve clients who do not meet LSC’s income and asset guidelines. Pursuant to 45 C.F.R. § 1611.3, recipients must periodically review their Part 1611 policy and revise it as necessary to ensure compliance with LSC regulatory requirements. Special attention should be paid to the exclusive list of allowable asset exceptions in 45 C.F.R. § 1611.3(d)(1). OCE staff are available to review proposed policy changes and provide comments.
Direct or indirect time of staff attorneys or paralegals allocated as a cost to PAI must be documented by time sheets. Personnel cost allocations for non-attorney or non-paralegal staff should be based on other reasonable operating data which is clearly documented. 45 C.F.R. § 1614.7(a)(1). Recipients should also look to 45 C.F.R. §§ 1630.3(d) and (e) when determining how to document direct and indirect costs.
The written policies that guide recipient staff in complying with 45 C.F.R. Part 1626 must be updated to conform with revisions made to the regulation effective May 19, 2014. In particular, recipients should update their policies to reflect changes to Part 1626 which made its provisions consistent with the provisions of the Victims of Trafficking and Violence Protection Act of 2000 (VTVPA), the Trafficking Victims Protection Reauthorization Act of 2003 (TVPRA), the Violence Against Women and Department of Justice Reauthorization Act of 2015 (VAWA), and the Fiscal Year 2008 LSC appropriation expansion of eligibility for legal assistance to include alien forestry workers admitted to the United States as temporary workers under the H-2B program of the Immigration and Nationality Act (INA). See 45 C.F.R. §§ 1626.4 and 1626.11.
If you have a concern or a question regarding compliance with LSC regulations or directives, particularly the compliance areas noted in this Letter, please contact Lora M. Rath, the OCE Director, at rathl@lsc.gov or 202-295-1524. In addition, OCE is available to provide training upon request. In most cases, training will be done via webcast. Training requests should also be submitted to Ms. Rath.

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