Program Letter 17-1

Compliance Guidance
James J. Sandman, President
November 21, 2017


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.

Responsibilities of the Financial Oversight Committee or Committees of Your Board of Directors:

Each recipient’s governing body has a fiduciary responsibility to the program and must establish a financial oversight committee or committees.

  • The duties and responsibilities of the financial oversight committee or committees should be defined in the recipient’s bylaws or a governing body resolution. LSC Accounting Guide for LSC Recipients (2010 Ed.) ("LSC Accounting Guide"), § 1-7.
  • Each recipient’s governing body must appoint/elect a financial oversight committee or committees and identify the duties of the committees in writing.  LSC Accounting Guide, § 3-5.2(b).
  • As a best practice, the financial oversight committee or committees should have at least one member who is a financial expert, or the board should have access to a financial expert. 
    • 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.

Fiscal Management Issues:

45 C.F.R. Part 1630—Cost Standards and Procedures

  • 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

  • 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.

Internal Controls and LSC Accounting Guide Concerns

  • 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.
  • Electronic Banking. Electronic banking has made the transfer of funds much easier, while increasing the risk that funds could be redirected or misappropriated. All processes and procedures related to wire transfers, on-line transfers, and telephone transfers should be fully documented and include an authorized listing of approved types of electronic banking, as well as a listing of employees authorized to initiate and transmit electronic transactions.  LSC Accounting Guide, § 3.5.15.
  • Bank Statement Reconciliation. Bank statement reconciliations to the general ledger should be conducted monthly by an individual who has no access to cash, is not a check signer, and has no cash bookkeeping duties. LSC Accounting Guide, § 3-5.2(d).

The reconciliation must be reviewed and approved by a responsible individual. The review must be appropriately documented by signature and date. LSC Accounting Guide, § 3-5.2(d).

  • Property Inventory. A physical inventory of property should be conducted at least once every two years. The results should be reconciled to property records, and any difference(s) identified should be investigated to determine the cause(s) for the difference. Material variances must be included in a note to the financial statements. LSC Accounting Guide, § 2-2.4 and Appendix VII, § C.
  • 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.

Specific Regulatory Concerns:

45 C.F.R. § 1610.5 —Notification (Regarding Prohibitions and Restrictions that Apply to Funds)

  • 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.
  • Notification should be provided before the recipient accepts the funds. Thus, notice should be given during the course of soliciting funds or applying for a grant or contract. For unsolicited donations where advance notice is not feasible, notice should be given in the recipient’s letter acknowledging the contribution. See 62 Fed. Reg. 27695, 27696 (May 21, 1997).

45 C.F.R. Part 1611—Financial Eligibility

  • 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.
  • Recipients must sufficiently document the basis for financial eligibility under 45 C.F.R. Part 1611. Special attention should be paid to the requirement in 45 C.F.R. § 1611.5(b) that, “[i]n the event that a recipient determines that an applicant is financially eligible pursuant to this section and is provided legal assistance, the recipient shall document the basis for the financial eligibility determination [and] shall keep records as may be necessary to inform the Corporation of the specific facts and factors relied on to make such determination.”
  • Recipients should ensure that intake staff make reasonable inquiry of a client’s assets, including cash on hand and household items that do not fall under a specific exception under 45 C.F.R. § 1611.3(d)(1).

45 C.F.R. Part 1612—Restrictions on Lobbying and Certain Other Activities

  • Pursuant to 45 C.F.R. § 1612.10, recipients must maintain separate recordkeeping and accounting records for any legislative and rulemaking activities undertaken with non-LSC funds. LSC recipients must track and maintain information in a way that provides sufficient separation to permit them to clearly and easily provide information to LSC "documenting the expenditure of non-LSC funds" for legislative and rulemaking activities for which they can use only non-LSC funds. 45 C.F.R. § 1612.10(b).

45 C.F.R. Part 1614—Private Attorney Involvement (“PAI”) – PAI cost allocations

  • Non-personnel costs related to the recipient’s administrative, overhead, staff and support costs related to PAI should be allocated on the basis of reasonable operating data. See 45 C.F.R. § l614.7(a)(1).  Reasonable operating data that can be used to allocate such non-personnel costs include total direct salaries and wages; total number of cases; or total attorney hours.  For example, using this data to determine how to allocate audit and payroll services, would have the following results and would be considered to have been based on reasonable operating data:
    • Total PAI direct salaries and wages /Total direct salaries and wages ($30,000/$250,000 = 12%)
      Audit and payroll services allocated to PAI ($20,000 X 12% = $2,400);
    • Total PAI attorney hours/Total attorney hours (1,000/7,280 = 14%)
      Audit and payroll services allocated to PAI ($20,000 X 14% = $2,800)
    • Total PAI cases/Total Cases (300/1,200 = 25%)
      Audit and payroll services allocated to PAI ($20,000 X 25% = $5,000)
  • 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.

45 C.F.R. Part 1626—Restrictions on Legal Assistance to Aliens

  • Pursuant to 45 C.F.R. §§ 1626.6 and 1626.7, recipients must ensure that applicants and clients who are seen in person, as well as clients receiving extended services, execute a citizenship attestation or demonstrate alien eligibility and that all files contain the necessary documentation pursuant to CSR Handbook (2017 Ed.), § 5.5. This requirement also applies to clinics staffed by recipient staff and to PAI clinics supported by a recipient where legal assistance is provided. Pursuant to Program Letter 16-2, issued on May 19, 2016, recipients may accept LSC-required signatures in electronic form when the recipient can document that the e-signature meets the three elements of ESIGN. Recipients must also comply with any other applicable laws regarding the use of e-signatures.
  • 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.

45 C.F.R. Part 1635—Timekeeping Requirement

  • Time spent by attorneys and paralegals must be documented by contemporaneous time records that record the amount of time spent on each case, matter, or supporting activity. 45 C.F.R. § 1635.3(b).

Property Acquisition and Management Manual:

  • Recipients owning LSC-funded real property are required to adhere to certain recordkeeping provisions under Section 8 of LSC’s Property Acquisition and Management Manual. In most instances, recipients are also required through their property interest agreements with LSC to maintain an accounting of LSC funds paid into the property and to report that accounting to LSC annually. As a best practice, all recipients owning property in which LSC has an interest should contemporaneously document property-related expenses and track the amount of LSC funds used over the life of the investment.

Additional Information

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.