The Establishment of Alternative Corporations by Selected Legal Services Corporation Grant Recipients

HRD-85-51: Published: Aug 22, 1985. Publicly Released: Sep 16, 1985.

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Pursuant to a congressional request, GAO reviewed certain alternative corporations that were established by three Legal Services Corporation (LSC) grant recipients to determine: (1) how and why the alternative corporations were established; (2) whether the establishment of the corporations complied with the Legal Services Corporation Act and regulations; and (3) whether the grant recipients and alternative corporations have maintained close enough relationships to be considered single entities for purposes of compliance with the act.

GAO found that: (1) the act and regulations do not prohibit grant recipients from establishing alternative corporations as long as the funds transferred to the corporations are used in accordance with the act; and (2) LSC officials encouraged grant recipients to develop strategies, including the establishment of alternative corporations, to counter anticipated funding reductions and restrictions. However, the recipients established the corporations for different reasons, including to: (1) comply with the act's fund balance policy to ensure that the funds would remain in the state and not be recaptured or result in future deductions; (2) comply with the act's requirement that recipients involve private attorneys in delivering legal assistance; (3) reduce potential restrictions on recipient activities and the use of private funds; and (4) reduce future expenses in anticipation of funding cuts. GAO found that grant recipients and subrecipients in Texas and Connecticut maintained such close relationships that a true separation of the corporations did not exist, but in Maine, they operated independently and complied with regulations. GAO believes that LSC is justified in considering the two corporations as one under its authority, to ensure that recipients comply with the act, where the grantee and the subgrantee have so close an identity of interests.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: LSC revised its Audit and Accounting Guide to consider the fund balance of a grant recipient and alternative corporation as a single fund balance under LSC regulations. LSC has been unsuccessful in applying the regulations to the TRLA/TRLF fund balance. GAO is closing this recommendation because there has been no indication as to when LSC will gain TRLA and TRLF compliance.

    Recommendation: Beginning with the fiscal year ending September 30, 1985, the President, LSC, should consider the Texas Rural Legal Aid's and the Texas Rural Legal Foundation's (TRLA/TRLF) combined funds balance as a single fund balance and apply the procedures in the LSC fund balance regulation.

    Agency Affected: Legal Services Corporation

  2. Status: Closed - Not Implemented

    Comments: SCC and LAA notified LSC that they intended to merge, effective January 1, 1986, therefore, there was no longer an agreement between the two organizations.

    Recommendation: The President, LSC, should require the South Central Connecticut Legal Services Corporation (SCC) and the New Haven Legal Assistance Association (LAA) to include in their next agreement a provision prohibiting LAA from using private funds for activities restricted by the LSC act.

    Agency Affected: Legal Services Corporation


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