Program Letter 18-3
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.
Responsibilities of the Financial Oversight Committee or Committees of Your Board of Directors
Each recipient’s governing body must establish a financial oversight committee or committees.
- 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).
- 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.
- 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 have (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. § 1630.5(a)(2) and (3). In determining the reasonableness of a given cost, consideration must be 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)(1).
- Please remember that 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.
- 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. §§ 1630.5(d), (e), (f), and (g) when determining how to allocate and document direct and indirect costs.
- LSC permits recipients of Basic Field Grants to allocate a proportional share of another funding source’s share of an indirect cost to LSC funds, where the other funding source “refuse[s] to allow the allocation of certain indirect costs to an award.” 45 C.F.R. § 1630.5(g). A refusal can take several forms, such as a cap on the amount of indirect costs that can be allocated to a grant or a statement from a funding source that including indirect costs in the application budget will cause the application not to be competitive. Program Letter 18-2, issued on August 29, 2018.
Internal Controls and LSC Accounting Guide Concerns
- Written Policies and Procedures. Many of the compliance concerns OCE has noted relate to improving fiscal-related written policies and procedures. Please ensure that accounting manuals or other staff guidance contain written policies that comply with LSC regulations and guidance and reflect current recipient practices. LSC Accounting Guide, § 3-4.
- Oversight of Executive Director Expenses. LSC strongly recommends that written policies be adopted and approved by each recipient’s board of directors to ensure adequate oversight of Executive Director expenses. The Executive Director’s expense reports, credit card statements, and travel reimbursements should be approved by a member of the Board of Directors and not by a subordinate of the Executive Director or by the Executive Director himself or herself. See LSC Accounting Guide, §§ 3-5.1 and 3-5.4(a).
- 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).
- Petty Cash. Petty cash should be reconciled upon replenishment. Occasional surprise counts should be conducted by an independent person to reduce the opportunities for misuse of petty cash. LSC Accounting Guide, § 3-5.4(c).
- 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 and guidance on disposal of fixed assets, and should 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
- Recipients must screen applicants regarding income prospects and record the responses appropriately, regardless of intake method. 45 C.F.R. § 1611.7(a)(1); see also Office of Legal Affairs (“OLA”) Advisory Opinion #AO-2009-1006, available at http://www.lsc.gov/sites/default/files/LSC/lscgov4/AO_2009_1006.pdf.
- 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
- 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 that is clearly documented. 45 C.F.R. § 1614.7(a)(1). Recipients should also look to 45 C.F.R. §§ 1630.5(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 1629 – Bonding Requirement for Recipients
- Recipients must supply fidelity bond coverage for all employees, officers, directors, agents, and volunteers.
- If a recipient uses a third party for payroll, billing, or collection services, the recipient must either supply bond coverage covering the third party or ensure that the third party has a fidelity bond or similar insurance coverage.
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).
45 C.F.R. Part 1631 – Purchasing and Property Management
- Recipients owning LSC-funded real property are required to adhere to certain recordkeeping provisions under 45 C.F.R. Part 1631. Recipients must maintain an accounting of LSC funds related to the purchase or maintenance of real property purchased with LSC funds. The accounting must include the amount of LSC funds used to pay for acquisition costs, financing, and capital improvements. This accounting must be provided to LSC annually, no later than April 30 of the following year or in a recipient’s annual audited financial statements submitted to LSC. 45 C.F.R. § 1631.19. 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.
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, Director of LSC’s Office of Compliance and Enforcement, at firstname.lastname@example.org or 202-295-1524. In addition, LSC can provide training upon request. In most cases, training will be done via webcast. Training requests should also be submitted to Ms. Rath.