Legal Services Corporation: Governance and Accountability Practices Need to Be Modernized and Strengthened
GAO-07-993
Published: Aug 15, 2007. Publicly Released: Sep 17, 2007.
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Highlights
The Legal Services Corporation (LSC) was federally created as a private nonprofit corporation to support legal assistance for low-income people to resolve their civil matters and relies heavily on federal appropriations. Due to its unique status, its governance and accountability requirements differ from those of federal entities and nonprofits. This report responds to a congressional request that GAO review LSC board oversight of LSC's operations and whether LSC has sufficient governance and accountability. GAO's report objectives are to (1) compare LSC's framework for corporate governance and accountability to others', (2) evaluate LSC's governance practices, and (3) evaluate LSC's internal control and financial reporting practices. We reviewed the LSC Act, legislative history, relevant standards and requirements, and LSC documentation and accountability requirements and interviewed board and staff.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Since the LSC Act was enacted in 1974 and last comprehensively amended and reauthorized in 1977, new laws governing federal agencies, U.S. government corporations, and public companies have been enacted to strengthen governance and accountability requirements. Therefore, Congress may wish to consider whether LSC could benefit from additional legislatively mandated governance and accountability requirements, such as financial reporting and internal control requirements, modeled after what has worked successfully at federal agencies or U.S. government corporations. There are different options available to Congress for such a mandate. Congress may wish to maintain LSC's current organizational structure as a federally chartered and federally funded, private, nonmembership, and tax-exempt D.C. nonprofit corporation and enact permanent legislation to require LSC to implement additional governance and accountability requirements. | While GAO continues to believe this would improve LSC, a substantial amount of time has passed since the report's issuance and there has not been recent discussion about this legislation, so GAO is closing this matter for congressional consideration as not implemented. | |
| Since the LSC Act was enacted in 1974 and last comprehensively amended and reauthorized in 1977, new laws governing federal agencies, U.S. government corporations, and public companies have been enacted to strengthen governance and accountability requirements. Therefore, Congress may wish to consider whether LSC could benefit from additional legislatively mandated governance and accountability requirements, such as financial reporting and internal control requirements, modeled after what has worked successfully at federal agencies or U.S. government corporations. There are different options available to Congress for such a mandate. Congress may wish to enact legislation to convert LSC to a federal entity (such as a U.S. government corporation subject to the Government Corporation Control Act) or an independent federal agency that is required to follow the same laws and regulations as executive branch agencies. In the statute establishing LSC as a federal entity, Congress could specifically exempt LSC from certain requirements that would otherwise apply to that type of federal entity in order to further special policy considerations particular to LSC. | While GAO continues to believe this would improve LSC, a substantial amount of time has passed since the report's issuance and there has not been recent discussion about this legislation, so GAO is closing this matter for congressional consideration as not implemented. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should establish and implement a comprehensive orientation program for new board members to include key topics such as fiduciary duties, Internal Revenue Service requirements, and interpretation of the financial statements. | In a 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that new LSC board member orientation did not include key information on oversight and fiduciary responsibilities, including Washington, D.C. law governing nonprofits; the Internal Revenue Service (IRS) regulatory requirements for nonprofit organizations; interpreting LSC's financial statements; managing sensitive documents; FOIA requirements; or travel expenditure limitations. New board member training is a basic tool used by well-functioning boards. Further, without comprehensive orientation, LSC board members may not be adequately prepared to effectively fulfill their oversight and governance...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should develop a plan for providing a regular training program for board members that includes providing updates or changes in LSC's operating environment and relevant governance and accountability practices. | In a 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that LSC's board did not have an ongoing (e.g., annual) training program for its board members. In general, it is a good management practice for such governing boards to stay current with changes in governance practices, its regulatory environment, and key management practices and requirements in such areas as risk assessment and mitigation, internal controls, and financial reporting. One way to achieve this objective is through requiring board members to receive annual training on current best practices in these areas. GAO recommended that LSC develop a plan for providing periodic training to...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should establish an audit committee function to provide oversight to LSC's financial reporting and audit processes either through creating a separate audit committee or by rewriting the charter of its finance committee. | As part of its 2007 review of the Legal Services Corporation (LSC), GAO recommended that the LSC establish an audit committee function to provide oversight to LSC's financial reporting and audit processes either through creating a separate audit committee or by rewriting the charter of its finance committee. On March 24, 2008, the LSC Board of Directors established an audit committee and adopted an audit committee charter. Under this charter, the audit committee is charged with assisting the Board in fulfilling its responsibility to ensure that the Corporation's assets are properly safeguarded; to oversee the quality and integrity of the Corporation's accounting, auditing, and reporting...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should establish a compensation committee function to oversee compensation matters involving LSC officers and overall compensation structure either through creating a separate compensation committee or by rewriting the charter of its annual performance review committee. | In our 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that LSC's board does not have a compensation committee to oversee LSC's overall compensation structure, including the compensation provided to LSC's officers. Such a compensation committee is an accepted practice for nonprofit corporations and required for public companies listed on the New York Stock Exchange. GAO recommended that the LSC establish a function to oversee its overall compensation structure, including compensation matters involving LSC officers, either through creating a separate compensation committee or by rewriting the charter of its performance review committee to include...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should establish charters for the Board of Directors and all existing and any newly developed committees to clearly establish committees' purposes, duties, and responsibilities. | In 2007, GAO reported the Legal Services Corporation (LSC) board and its committees did not have charters that established their purpose and responsibilities. A charter defines committee membership, and members' oversight duties and responsibilities. GAO found that this condition resulted from the LSC not keeping up with current practices for non profit corporations. LSC issued a board resolution in 1995 that provided descriptions of the committees, but the resolution does not contain the elements of a charter and the resolution has not been updated since it was issued in 1995 for three of the four committees. The fourth committee was established in 2003. GAO recommended that the LSC...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should implement a periodic self-assessment of the board's, the committees', and each individual member's performance for purposes of evaluating whether improvements can be made to the board's structure and processes. | In a 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that the LSC board did not assess the performance of the overall board, its committees, or the individual board members. Such periodic assessments assist the board in determining whether it is meeting its intended goals and fulfilling its duties, and enables the board to identify areas for improvement in the board's operating procedures, its committee structure, and its governance practices. Board assessments are a common practice for nonprofit corporation boards and a NYSE listing requirement for audit committees of public companies. An assessment can include (1) an overall self-assessment of...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should develop and implement procedures to periodically evaluate key management processes, including at a minimum, processes for risk assessment and mitigation, internal control, and financial reporting. | In a 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO reported that LSC management relies on a cycle memorandum prepared by LSC's external auditor as management's assessment of internal controls. The cycle memorandum contained process descriptions but did not identify internal controls, their objectives, or management's assertions (completeness, rights and obligations, valuation, existence, and presentation and disclosure) that the controls are intended to address. Instead, LSC's management conducted ongoing, informal assessments of selected financial processes on an ad hoc basis. However, these management assessments were not utilized as part of a...
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| Legal Services Corporation | In order to improve and modernize the governance processes and structure of LSC, the LSC Board of Directors should establish a shorter time frame (e.g., 60 days) for issuing LSC's audited financial statements. | In its 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that for the previous 5 years, LSC issued its audited financial statements in March or later, which is 6 months or more after its year-end of September 30th. GAO recommended that LSC establish a shorter time frame (e.g., 60 days) for issuing its audited financial statements. LSC's Board of Directors instructed LSC's Office of Inspector General (OIG) to deliver audited financial statements for the year ending September 30, 2007 earlier than the financial statements had been in previous years. Subsequently, the audited financial statements for the year ending September 30, 2007 were issued on...
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| Legal Services Corporation | In order to improve and modernize key management processes at LSC, the president and executive committee should conduct and document a risk assessment and implement a corresponding risk management program as part of a comprehensive evaluation of internal control. | In its 2007 review of the Legal Services Corporation (LSC), GAO found that Management had not established risk mitigation policies. According to the Standards for Internal Control in the Federal Government, internal control should provide for an assessment of the risks the agency faces from both external and internal sources. GAO recommended that LSC develop and implement a risk management program as part of a comprehensive evaluation of internal control. Subsequently, on January 31, 2009, LSC implemented a risk assessment and risk management plan in a document entitled "LSC Risk Management Program". Our review of LSC's Risk Management Plan showed it included appropriate risk management...
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| Legal Services Corporation | In order to improve and modernize key management processes at LSC, the president and executive committee should, with the board's oversight, evaluate and document relevant requirements of the Sarbanes-Oxley Act of 2002 and practices of the New York Stock Exchange and the American Bar Association that are used to establish a comprehensive code of conduct, including ethics and conflict-of-interest policies and procedures for employees and officers of the corporation. | In an August 2007 review of Legal Services Corporation (LSC) governance and accountability, GAO found that LSC did not have policies and procedures establishing a code of conduct for its employees concerning conflict-of-interest or ethics issues. Lacking such policies and procedures, the LSC Office of the Inspector General (OIG) found several instances of non-ethical conduct including using LSC funds to pay for non-LSC related travel expenses for its President. The LSC OIG also reported that LSC had hired special councils responsible for providing management with advice on policy who were also employees of organizations that receive LSC grant money, causing potential conflicts of...
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| Legal Services Corporation | In order to improve and modernize key management processes at LSC, the president and executive committee should establish a comprehensive and effective comprehensive continuity of operations program, including conducting a simulation to test the established program. | In a fiscal year 2007 review of the Legal Services Corporation (LSC), GAO found that although LSC does have a Comprehensive Continuity Of Operations Plan (COOP), the plan was not complete or comprehensive. For example, LSC's COOP did not provide information on essential functions for each office. In addition, GAO found that LSC had not conducted a comprehensive assessment to identify risks or identify acceptable levels of risk associated with LSC's current COOP. GAO recommended that LSC develop a comprehensive COOP and risk assessment and management program. Subsequently, in March 2008, LSC issued a two volume Continuity of Operations Plan. LSC's COOP consists of the Emergency Response...
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| Legal Services Corporation | In order to improve and modernize key management processes at LSC, the president and executive committee should conduct an evaluation to determine whether the Government Accounting Standards Board should be adopted as a financial reporting standard for LSC's annual financial statements. | In a 2007 review of Legal Services Corporation (LSC) governance and accountability (GAO-07-993), GAO found that LSC's management had not conducted an assessment of accounting standards--those promulgated by the Financial Accounting Standards Board (FASB), Government Accounting Standards Board (GASB), or Federal Accounting Standards Advisory Board--most applicable to LSC operations. GAO recommended that LSC conduct an evaluation to determine which set of standards should be adopted for preparing LSC's annual financial statements. Subsequently, in October of 2007, an LSC management assessment concluded LSC should use GASB as the financial reporting standard for LSC's financial statements....
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