Legal Services Corporation: Improved Internal Controls Needed in Grants Management and Oversight
Published: 2007-12-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: The Legal Services Corporation’s (LSC) mission is to make federal funding  available to support the provision of legal assistance in civil matters to  low-income people throughout the United States on everyday legal  problems. LSC pursues this mission by making grants 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 charter in 1974 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.  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.
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.
subsections: section_title: Background
paragraphs: 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 amounts— 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.
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 Chairman and appoint an LSC  President. 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. 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.
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. 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 2007 and about $2.51 million in fiscal year  2006.
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, 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. 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.
section_title: Internal Control Weaknesses Impede LSC’s Ability to Adequately Assure Grant Funds Are Used as Intended and in Compliance with Laws and Regulations
paragraphs: 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.
subsections: section_title: Control Environment Weakened by Unclear Roles and Responsibilities and Inadequate Communication and Coordination among Grantee Oversight Organizations
paragraphs: 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.
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).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.” 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. Further, in April 1996, Congress enacted  the appropriations act funding LSC for fiscal year 1996 (1996 Act) and  included a number of administrative provisions supplementing the LSC  Act requirements, including those related to grantee audits (§ 509). 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.
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 reported 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, “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. 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.
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.
section_title: Timing and Scope of Grantee Site Visits Is Not Based on a Risk Assessment
paragraphs: 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 5½-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 3½-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.
section_title: 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
paragraphs: 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.
subsections: section_title: LSC’s Control Activities for Monitoring Grantee Fiscal Compliance Were Ineffective Due to Scope and Implementation Weaknesses
paragraphs: 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.
section_title: LSC’s Delays in Reporting Findings Prevented Grantees from Correcting Deficiencies in a Timely Manner
paragraphs: 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, 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.
section_title: LSC Oversight Did Not Identify Control Weaknesses at Nine Grantees
paragraphs: 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.
section_title: Example 1—Systemic Weakness: Insufficient Supporting Documentation
paragraphs: 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.
section_title: Example 2—Unusual Contractor Arrangement: Questionable Independent Contractors
paragraphs: 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:    The contractor’s office and mailing address was located in the same  office space as the grantee.
The grantee could not locate its contract with the individual for 2005  and 2006.
The contractor’s business card was identical to other employees  working at the grantee.
Two grantee employees worked for and were supervised by the  contractor.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendation for Board Action
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: To help LSC improve its internal control and oversight of grantees, we  recommend that LSC management develop and implement the following:    Policies and procedures for information sharing among the OIG, OCE,  and OPP and coordination of OCE and OPP site visits.
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.
Procedures to improve the effectiveness of the current LSC fiscal  compliance reviews by revising LSC’s current guidelines to provide    a direct link to the results of OPP reviews and OIG and IPA audit    guidance for performing follow-up on responses from grantee    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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 franzelj@gao.gov. 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
section_title: Appendix II: Summary of GAO Findings at Grantees
paragraphs: 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.
subsections: section_title: Example 1—Potential Improper Uses of Grant Funds: Alcohol Purchases
paragraphs: 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. 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. 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.
section_title: Example 2— Potentially Improper Uses of Grant Funds: Employee Interest- Free Loans
paragraphs: 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.
section_title: Example 3—Improper Uses of Grant Funds: Lobbying Fees
paragraphs: 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. 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.
section_title: Example 4—Improper Uses of Grant Funds: Late Fees
paragraphs: 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.  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.
section_title: Example 5—Improper Uses of Grant Funds: Earnest Money
paragraphs: 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.
section_title: Appendix III: Regulatory Provisions of Legal Services Corporation’s Fiscal Compliance Review of Grantees
subsections: section_title: Legal Services Corporation regulatory provision in CFR, Title 45
section_title: Appendix IV: Comments from the Legal Services Corporation Board of Directors
section_title: Appendix V: Comments from the Legal Services Corporation
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: 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.