Legal Services Corporation:

Improvements Needed in Governance, Accountability, and Grants Management and Oversight

GAO-08-833T: Published: May 22, 2008. Publicly Released: May 22, 2008.

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This testimony discuss GAO's recent reviews of Legal Services Corporation's (LSC) governance, accountability and grants management practices. LSC's mission is to make federal funding available to provide legal assistance in civil matters to low-income people throughout the United States on everyday legal problems. LSC pursues this mission by providing financial assistance, mostly through 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, which made up about 99 percent of its total funding. In 2007, LSC served clients through 137 grantees with more than 900 offices serving all 50 states, the District of Columbia, and current and former U.S. territories. LSC uses the majority of its funding to provide grants to local legal-service providers. Funds are distributed based on the number of low-income persons living within a service area, with some grantees maintaining several offices within their service area. LSC management is responsible for ensuring that grant funds are used for their intended purposes and in accordance with laws and regulations. Thus, LSC is accountable for the effectiveness of its own internal controls and for providing oversight and monitoring of grantees' internal controls, use of grant funds, and compliance with laws and regulations. LSC's Board of Directors is responsible for carrying out fiduciary responsibilities in overseeing LSC management's operations and use of appropriated funds. In recent years, governance and accountability processes have received increased scrutiny and emphasis in the nonprofit, federal agency, and public company sectors as a result of governance and accountability breakdowns. Public companies now operate under strengthened governance and accountability standards, including requirements for ethics policies and improved internal controls. The federal government and nonprofit sectors have followed this lead and established new standards and requirements for improved internal control reporting and governance and accountability. For nonprofit corporations using funding from taxpayers and donors, effective governance, accountability, and internal control are key to maintaining trust and credibility. Governance and accountability breakdowns result in a lack of trust from donors, grantors, and appropriators, which could ultimately put funding and the organization's credibility at risk. The current period of economic hardship for many workers and their families' highlights the importance of LSC's mission and the efficient and effective use of taxpayers' dollars to achieve that mission. This testimony highlights our key findings on LSC's governance and accountability practices, as well as the internal control improvements needed in LSC's grants management and oversight to increase assurance that federal funds are being properly spent and its operations are effectively carried out to meet its mission of providing legal assistance to low-income people.

Although LSC has stronger federal accountability requirements than many nonprofit corporations, it is subject to governance and accountability requirements that are weaker than those of independent federal agencies and U.S. government corporations. Congress issued LSC's federal charter over 30 years ago. We found that LSC has not kept up with evolving reforms aimed at strengthening internal control over an organization's financial reporting process and systems. As noted in our reports, a properly implemented governance and accountability structure may have prevented recent incidents of compensation rates in excess of statutory caps, questionable expenditures, and potential conflicts of interest. In addition, LSC has not kept up with current management practices. Of particular importance are key processes in risk assessment, internal control, and financial reporting. Also at the time or our review management had not formally assessed the risks to the safeguarding of its assets and maintaining the effectiveness and efficiency of its operations, nor had it implemented internal controls or other risk-mitigation policies. We also 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. We also found poor fiscal practices and improper and potentially improper expenditures by grantees. As a result of our two reviews, we made a total of 9 recommendations to LSC's Board of Directors and 8 recommendations to LSC management. Those recommendations dealt with fundamental management and governance practices needed in the current environment in light of LSC's mission. Both LSC's Board and management accepted our recommendations and expressed a commitment to move diligently to implement the recommendations. LSC's most recent progress report indicates that LSC is starting to take action to address many of our recommendations and is planning to take action on the remaining recommendations with responsibility for corrective action already assigned. LSC has indicated that it will provide us with a final update by September 1, 2008 to document completion of its implementation of our recommendations. We look forward to receiving LSC's final report and reviewing the progress LSC Board and management have made on these issues.

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