[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Notices]
[Pages 42786-42790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17737]
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LEGAL SERVICES CORPORATION
Accounting Guide for LSC Recipients (2010 Edition)
AGENCY: Legal Services Corporation.
ACTION: Notice.
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SUMMARY: The Legal Services Corporation (LSC) is revising the
Accounting Guide for LSC Recipients to reflect changes that have
occurred since the last publication of the Accounting Guide (the
``Guide'') in 1997. Notice was published in the Federal Register on
February 2, 2010, requesting public comments to proposed revisions to
the Guide. Following the receipt of comments from the public, the LSC
Office of the Inspector General and members of the LSC Board of
Directors, and making changes as deemed appropriate in response to
those comments, the LSC Board of Directors approved revisions to the
Guide at a meeting held on June 15, 2010.
The revisions incorporate: (1) New internal control provisions for
electronic banking transactions and contracting; (2) financial
oversight concepts from the Sarbanes Oxley Act of 2002; (3) references
to the accounting standards codification by the Financial Standards
Accounting Board (FASB) released on July 1, 2009; (4) key practices to
enhance fraud prevention; (5) provisions in other LSC regulations and
policies, including the LSC Property Acquisition and Management Manual
and LSC Program Letters; (6) revisions to accounting procedures and
internal controls to reflect current best practices; (7) updated and
new references to other sources of information; and (8) other changes
to clarify existing provisions. The Accounting Guide for LSC Recipients
(2010 edition) can be located by accessing LSC's Web site at http://www.lsc.gov/pdfs/accounting_guide_for_lsc_recipients_2010_edition.pdf.
DATES: Effective Date: August 23, 2010.
FOR FURTHER INFORMATION CONTACT: Chuck Greenfield, Program Counsel,
Legal Services Corporation, 3333 K St., NW., Washington DC 20007;
[email protected] (e-mail), (212) 295-1549 (phone) or (212) 337-6813
(fax).
SUPPLEMENTARY INFORMATION:
Background
Under the Legal Services Corporation Act, as amended, LSC ``is
authorized to require such reports as it deems necessary from any
recipient, contractor or person or entity receiving assistance'' 42
U.S.C. 2996g(a). LSC is also ``authorized to prescribe the keeping of
records with respect to funds provided by grant or contract and shall
have access to such records'' 42 U.S.C. 2996g(b). Further, LSC ``shall
conduct or require each recipient, contractor, person or entity
receiving financial assistance * * * to provide for an annual financial
audit.'' 42 U.S.C. 2996h(c)(1). In addition, ``funds received by any
recipient from a source other than the Corporation * * * shall be
accounted for and reported as receipts and disbursements separate and
district from Federal funds'' 42 U.S.C. 2996i(c).
Under authority of the Legal Services Corporation Act, LSC
published the Accounting Guide for LSC Recipients. The Guide sets forth
LSC's accounting, financial management and reporting guidelines. In
general, LSC requires recipients and subrecipients of its funding to:
(1) Manage LSC and non-LSC funds in a stewardship manner and pursuant
to the cost standards and procedures of 45 CFR Part 1630; and (2)
record transactions in accounting records and prepare annual financial
statements in accordance with generally accepted accounting principles
(GAAP). The current version of the Guide was last updated in 1997.
In an effort to update the Guide to reflect more current accounting
and financial oversight practices, as well as to respond to grantee
financial issues mentioned in a Government Accountability Office (GAO)
report, and as a result of the recommendations of the LSC Fiscal
Advisory Group, LSC developed a number of revisions to the Guide. The
revisions are in the following eight categories:
[[Page 42787]]
(1) New internal control provisions for electronic banking
transactions and contracting. The current Guide does not discuss in
detail electronic banking. Electronic banking arrangements and
transactions are now common. Many recipients of LSC funding conduct a
significant portion of their financial transactions electronically. LSC
itself transmits funds electronically to all recipients. The revisions
add a new section on electronic banking to the Fundamental Criteria and
include sections on the authorization process for electronic banking
activities, the authorization process for employees that initiate and
transmit electronic fund transactions, review and approval procedures
for electronic banking transactions, supporting documentation for
electronic banking transactions, recording electronic banking
transactions in the general ledger, bank reconciliations and
safeguards. Section 3-5.15. New sections on electronic transactions
have also been added to the Accounting Procedures and Internal Control
Checklist in Appendix VII. Sections G2, G3, and M of Appendix VII. In
addition, a new section was added in the Fundamental Criteria on
contracting and includes sections on types of contracts, documenting,
competition and approvals. Section 3-5.16.
(2) Financial oversight concepts from the Sarbanes Oxley Act of
2002. While only limited provisions of the Sarbanes Oxley Act of 2002
are required of non profit corporations, LSC has determined that
certain financial oversight concepts found in Sarbanes Oxley are
appropriate for recipients of LSC funds. An example is the current
Accounting Guide requirement that recipients of LSC funds have a
financial oversight committee of their board of directors, but not a
separate audit committee. The revisions require that recipients must
have a financial oversight committee(s) that engages in all the
activities of an audit committee, including: Hiring the auditor;
setting the auditor's compensation; overseeing the auditor's
activities; setting rules and processes for complaints about accounting
practices and internal control practices; reviewing the annual IRS Form
990 for completeness, accuracy, and on-time filing and providing
assurances of compliance to the full board; ensuring the recipient's
operations are conducted and managed in an ethical manner that complies
with all applicable laws, regulations and policies; ensuring effective
management of the recipient's resources and risks; and ensuring
accountability of persons within the organization. Section 1-7. In
addition, the revisions consider it a best practice for the board of
directors to have an audit committee separate from the finance
committee and for the board to have at least one member who is a
financial expert or for the board to have access to a financial expert.
Section 1-7.
(3) References to the accounting standards codification by the
Financial Standards Accounting Board (FASB). FASB released a new
codification of its accounting standards on July 1, 2009. The
standards, an authoritative listing of generally accepted accounting
principles (GAAP), are referred to in numerous sections of the Guide.
All references to the accounting standards in the Accounting Guide have
been updated and new references have been inserted to reflect new
section numbers in the FASB accounting standards codification.
(4) Key practices to enhance fraud prevention. While the current
Guide lists the elements of an adequate accounting and financial
reporting system, including the use of specific internal controls and
risk assessment, there is no separate section on fraud prevention. The
revisions add a fraud prevention section that details key practices to
help prevent fraud. Section 3-6.
(5) Provisions in LSC regulations and policies, including the LSC
Property Acquisition and Management Manual and LSC Program Letters. The
regulation on attorneys' fees (45 CFR Part 1642) was eliminated in a
final rule change effective April 26, 2010, to reflect changes
contained in the Consolidated Appropriations Act of 2010, Public Law
111-117. Accordingly, section 2-2.6 (Court-Awarded Attorney Fees) of
the Guide was modified. Further, subsequent to the publication of the
Guide in 1997, LSC issued other guidelines for recipients of LSC funds
that impact on the Guide. For example, the LSC Property Acquisition and
Management Manual (PAMM), issued in 2001, requires recipients to
capitalize and depreciate all nonexpendable property with a cost in
excess of $5,000 and a useful life of more than one year. However, the
current Guide uses $1,000 as the capitalization and depreciation
threshold. The revisions to the Guide change the threshold to $5,000 to
be consistent with the PAAM. Appendix IV, Section 1. In addition, LSC
has issued Program Letters 08-2 (March 20, 2008), 08-3 (December 18,
2008) and 09-3 (December 17, 2009) that contain guidance to recipients
on compliance and fiscal management issues. Those Program Letters have
been referenced in the revisions to the Guide. Section 2-3.1.
(6) Revisions to accounting procedures and internal controls to
reflect current best practices. Appendix VII of the current Guide
contains a checklist of accounting procedures and internal controls.
The revisions update the checklist to reflect current best practices.
(7) Updated and new references to other sources of information. The
Guide contains numerous references to other sources of information. The
revisions update and make new references where appropriate.
(8) Other changes to clarify existing provisions. The revisions
clarify existing sections to make the provisions easier to understand.
Comments Received to Proposed Revisions to Accounting Guide
Following the publication of notice of proposed revisions to the
Guide in the Federal Register on February 2, 2010, LSC received
comments from the public, the LSC Office of the Inspector General, and
from members of the LSC Board of Directors. The following is a summary
of comments received and LSC's response to those comments.
Responsibilities of the Financial Oversight Committee of Committees
(Section 1-7)
Section 1-7 sets forth the duties and responsibilities of financial
oversight committees, including the finance and audit committees. The
Georgia Legal Services Program raised a concern about the prospect of
being required to have separate board finance and audit committees.
Response: The proposed revisions do not require separate finance and
audit committees. Section 1-7 provides that ``it generally is
considered a best practice for governing bodies to have both a finance
committee and a separate audit committee.'' However, the proposed
revisions do provide that ``[t]he critical point is that all of the
finance and audit committee duties * * * must be performed by a
financial oversight committee(s).''
The Georgia Legal Services Program also expressed concern over the
use of the term ``financial statements'' in one of the specified roles
of the finance committee. The Georgia program mentions that the review
of full financial statements monthly would be time-consuming,
burdensome for the program, and potentially confusing. Response: In
response to this comment we have revised this section to use the term
``management reports'' rather than ``financial statements'' in role No.
2 of the finance committee, with a reference
[[Page 42788]]
to budgeted and actual expenses and income, variances, and a statement
of cash on hand. We have added sample management reports as Appendix IB
and a section entitled ``Statement of Cash on Hand'' to section 3-5.9
of the Fundamental Criteria (Management Reports).
The final comment from the Georgia Legal Services Program is that
the provision of financial reports on a quarterly basis, rather than
monthly as set forth in the proposed revision, has worked well for
their program. Response: While it is recognized that a number of
programs provide financial reports to the finance committee and/or the
board on a quarterly basis, it is the preferred practice to have these
reports produced and reviewed monthly thereby providing the finance
committee with as up-to-date information as possible on the financial
condition of the program. It should be noted that this provision does
not require monthly meetings of the finance committee, but that the
reports be reviewed monthly with the chief financial officer,
controller, and/or CPA. This review may occur by email or in some other
manner.
In addition, there were comments from several members of the LSC
Board of Directors that this section needs to have more focus on the
need for the duties of audit committees to be performed even if a
recipient does not have a separate audit committee and on the need of
having a financial expert on the financial oversight committee(s) or
access to a financial expert. One board member also mentioned that
there were too many ``or'' options in the language. Response: In
response to these comments, a new paragraph has been drafted which more
clearly emphasizes the critical points that all of the listed duties of
a finance and an audit committee must be performed by a financial
oversight committee(s) and that the financial oversight committee(s)
needs to have a financial expert or access to a financial expert.
LSC Board members recommended an expansion of the language in
Section 1-7 under role No. 6 of the Audit Committee. Response: Role No.
6 of the Audit Committee in Section 1-7 was expanded to more fully
describe the committee's duties in ensuring compliance with ethical
requirements, applicable laws, regulations and policies, effective
management of the recipient's resources and risks, and accountability
of persons within the organization.
Property (Section 2-2.4)
Section 2-2.4 sets forth certain principles for the treatment of
property, including the requirement that recipients capitalize and
depreciate all nonexpendable property with a cost in excess of $5,000
and a useful life of more than one year. A comment was received from
the LSC Office of the Inspector General (OIG) suggesting that it might
be necessary to include accounting for sensitive assets even when those
assets are valued at less than $5,000, as the program may want to track
them for other reasons. Response: A new sentence has been added to
Section 2-2.4 incorporating this suggestion.
Court-Awarded Attorneys Fees (Section 2-2.6)
Section 2-2.6 discusses court-awarded attorneys' fees. A comment
was received from the Chair of the Standing Committee on Legal Aid and
Indigent Defendants of the American Bar Association, suggesting that,
given the elimination of the restriction on the claiming, collection
and retention of attorneys' fees, it would be helpful if there would be
an explanation of what attorneys' fees are permitted. Response: It is
correctly noted that the restriction on claiming, collection and
retention of attorneys' fees (former 45 CFR 1642) has been eliminated
in a final rule change effective April 26, 2010, to reflect changes
contained in the Consolidated Appropriations Act of 2010, Public Law
111-117, and that there is no language in the change to 2-2.6 stating
in what situations attorneys' fees are permitted. The question of when
attorneys' fees are permitted to be collected from the opposing party
is generally a matter of state and federal law, as interpreted by the
judge deciding the case. LSC does not have a regulation that sets forth
when attorneys' fees are available. It is noted that the recipients of
LSC funds are subject to restrictions regarding accepting fee-
generating cases, as set forth in 45 CFR 1609. No change to 2-2.6 was
made in response to this comment.
There was also a comment from the Center on Law and Social Policy
recommending a reference in 2-2.6 to the provision on accounting for
attorneys' fees, now set forth in 45 CFR 1609.4. Response: In response
to this comment, 2.2-6 has been amended to include this reference.
Grant and Contract Costs (Section 2-3.1)
Section 2-3.1 addresses grant and contract costs. A comment
received from the LSC OIG questioned whether the Program Letter on
Compliance Guidance and Interim Guidance on Attorneys' Fees dated
December 17, 2009, was superseded by an interim final rule on
attorneys' fees issued by the LSC on March 15, 2010. Response: The
purpose of the reference to Program Letters in 2-3.1 is to let grantees
know that the letters themselves contain additional cost allocation and
financial management information. The Compliance Guidance and Interim
Guidance on Attorneys' Fees issued on December 17, 2009 as Program
Letter 09-03 mostly discusses issues unrelated to attorneys' fees. The
attorneys' fees discussion is limited to interim guidance and by its
terms applies only until LSC Board action on the issue. The interim
guidance remains applicable during the period until the Board acted.
After reviewing the Program Letter, there appears to be nothing
inconsistent between the interim guidance and the Board's later action.
Internal Control/Fundamental Criteria of an Accounting and Financial
Reporting System (Chapter 3)
The introduction to Chapter 3 discusses the responsibilities of a
recipient to maintain adequate accounting records and internal control
procedures. An LSC OIG comment recommended the addition of language
making clear that internal control is specifically a management
responsibility. Response: The first paragraph of Chapter 3 has been
modified to add that internal control is ``managed and maintained by
the recipient's board of directors and management.''
Fundamental Criteria (Section 3-5)
Section 3-5 contains the LSC Fundamental Criteria, which is a
listing of the elements of an adequate accounting and financial
reporting system. A comment from the LSC OIG noted that the discussion
on Enterprise Risk Management seemed to be misplaced and not fully
developed. Response: As a result of this comment, we have revised
section 3-5 to include a fuller discussion of Enterprise Risk
Management in the background section.
An additional comment from the OIG suggested that a section on
contracting should be included in the fundamental criteria. Response:
In response to this comment a new section on contracting has been added
to the Fundamental Criteria. See Section 3-5.16.
A further OIG comment stated that while allocation is covered in
Section 3-5.9(c) of the Fundamental Criteria, there is no specific
mention of
[[Page 42789]]
documenting the methodology. Response: New language has been added to
Section 3-5.9(c), under Criteria for Allocations to require adequate
written documentation of the allocation formula.
A follow-up comment from the OIG recommended that the OIG be
specifically mentioned in the new allocation formula language.
Response: The OIG has been added to Section 3-5.9(c), under Criteria
for Allocations.
An OIG comment recommended the addition of ``a sufficient level of
fidelity coverage'' in Section 3-5.13 (Bonding.) Response: In response
to the comment Section 3-5.13 has been changed to make specific
reference to the fidelity coverage requirements of 45 CFR 1629.1(a).
An OIG comment suggested adding a provision specifying that
documents to support competition should be retained and kept with the
contract files in Section 3.5.16 (Contracting.) Response: In response
to this comment language has been added to the competition section,
under criteria, to Section 3.5.16, that incorporates the suggestion.
Fraud Prevention (Section 3-6)
Section 3-6 contains a list of key practices that can help prevent
fraud. An LSC OIG comment suggested that there should be an addition to
No. 19 to address protection against retaliation for board members and
volunteers who report suspected fraud. Response: In response to this
comment the recommended language has been added to No. 19.
An LSC OIG comment recommended that board members should be
reminded that applicable federal and state laws also apply to them.
Response: In response to this comment new No. 22 has been added
incorporating this language.
A comment from the LSC OIG noted that item No. 23 was the only key
practice that did not start with a verb. Response: New No. 24 has been
changed to start with ``involve.''
A comment made by an LSC Board member recommended that more
specific guidance be given to recipients in the event fraud is
discovered. Response: In response to this comment language has been
added to provide more specific instructions to grantees in the event
fraud is discovered. See Section 3-6, No. 26. This same language is
found in LSC Grant Assurance No. 15 for 2010 grants, which is signed by
both the recipient's board chair and executive director.
Illustrative Financial Statements and Notes to the Financial Statements
(Appendix IA)
Appendix IA.1 provides a description of illustrative financial
statements. A comment from the LSC OIG suggests that the OIG be listed
in the first paragraph so that the OIG, as well as LSC, would be able
``to make comparison with budgeted amounts as well as accumulate
regional or national data for the legal services network.'' Response:
The suggested language has been added to the first paragraph in
Appendix IA.1.
Description of Accounting Records--Retention Times for Nonprofit
Records (Appendix II)
Appendix II contains a section on the retention times for nonprofit
records. A comment from a nominee to the LSC Board suggested that we
add a provision recognizing that state law may provide a longer
retention period for certain types of records. Response: In response to
this comment we have added a new sentence recognizing the possibility
that state law may require a longer retention period for particular
types of records.
A comment was also received from the LSC OIG recommending that all
financial and financial related information be retained for at least
five years, given the fact that questioned costs under 45 CFR 1630 can
go back five years. Response: In response to this comment we have
changed the retention period for the mentioned financial and financial
related information to seven years, to make this section consistent
with 45 CFR 1630 and the Grant Assurances.
Accounting for Property (Appendix IV)
Appendix IV sets forth procedures for accounting for property,
including the capitalization and depreciation of property and
equipment. We received comments from JAA & Associates, Hawaii, that the
proposed revisions to the illustrations of journal entries for
capitalization and depreciation are confusing, incomplete or
inaccurate. JAA & Associates also suggested changing the title of
Illustration 1.1 under Capitalization from ``To record equipment
purchased with cash'' to ``To record equipment purchased with cash or
credit.'' Response: We are also concerned that the proposed revisions
in the illustrations in the capitalization and depreciation sections
may be confusing. Further, the flow of journal entries can vary
somewhat depending on the accounting system used by each LSC grantee.
It was determined that while the recommended changes make sense if
journal entries are made in a certain way, there are other valid ways
to make entries and the proposed changes could cause confusion. Thus,
we have reverted to the 1997 language for the illustrations, which is
more easily understandable.
Other Regulatory Financial Requirements (Appendix VI)
Appendix VI contains provisions on other regulatory financial
requirements, including tax reporting. An LSC OIG comment recommended
that the language be altered to reflect that form 990 is required to be
filed and the failure to file for three consecutive years will
automatically result in the loss of a non profit's tax exempt status.
Response: In response to this comment the language has been changed in
Appendix VI.1 to specifically mention the mandatory requirement of
filing the 990 form and the automatic loss of tax-exempt status for the
failure to file a 990 for three consecutive years.
Accounting Procedures and Internal Control Checklist (Appendix VII)
Appendix VII provides a checklist for a grantee's internal
controls. An LSC OIG comment suggests requiring employees and officers
handling assets to be ``sufficiently bonded'' under Appendix VII A
(General.), No. 6. Response: In response to this comment Appendix VII
A, No. 6 has been changed to add a reference to the bonding
requirements found in 45 CFR 1629.
A comment from the LSC OIG questioned whether it was intended in
Appendix VII A (General) to have a monthly reporting requirement of a
cash flow statement to the finance committee of a recipient's board of
directors. Response: Monthly reporting to the finance committee was
intended and is consistent with the section 1-7 discussion about role
No. 2 of the finance committee. We have changed the second sentence in
No. 18 to add ``statement of cash on hand,'' which is also mentioned in
sections 1-7, 3-5.9(b), and Appendix IB.
We also received a comment from a nominee to the LSC Board that
Appendix VII B (Personnel and Payroll) should mention that it is a best
practice to include both a nondiscrimination policy and a signed
statement from every employee that they understand their roles in terms
of nondiscrimination. Response: In response to this comment a new No.
14 has been added to Appendix VII B incorporating this comment.
An LSC OIG comment suggested that Appendix VII D (Procurement)
contain
[[Page 42790]]
a requirement that each procurement action, above a reasonable level,
be fully documented by maintaining the bids received and the approvals
given. This would include written justification for sole source
purchases above a certain level. Response: In response to this comment
a new No. 12 has been added to Appendix D, incorporating the
suggestion.
Another LSC OIG comment questioned what ``properly executed'' means
in Appendix VII E (Legal Consultants/Contract Services.) Response: In
response to this comment we have changed No. 2. in Legal Consultants/
Contract Services from ``Are contracts written so that the services to
be rendered are clearly defined and properly executed?'' to the
following three sentences: ``Are contracts written so that the services
to be rendered are clearly defined?''; ``Are contracts properly signed
by authorized persons?'' and ``Have all contract terms and
modifications been complied with?''
An LSC OIG comment suggested adding to Appendix VII G1 No. 7 that
the check should be marked as void or defaced in a manner that would
prevent future use of the check. Response: In response to this comment
Appendix VII G1 No. 7 has been changed to include the recommended
language.
An LSC OIG comment pointed out that there was no reference in
Appendix VII H (Controls Over Cash Receipts) to cash received from an
individual while in the office, as opposed to receiving money through
the mail. Response: In response to this comment, we have added new Nos.
8-12 in Appendix VII H, to include the questions addressing cash
received from an individual while in the office.
The LSC OIG also commented that No. 15 should provide that the
client is entitled to a receipt for cash provided and that if a receipt
is not provided that the client should see a supervisor. Response: In
response to this comment Appendix VII H No. 15 was changed to include
the recommended language.
A comment received from the Legal Aid and Defender Association,
Detroit, Michigan, questions the segregation of duties guidelines found
in Appendix VII, Section J (Segregation of Duties). There is a fear
that if duties were assigned to staff outside the accounting
department, this staff person may have access to confidential
information. Response: Appendix VII J contains guidelines for the
management of a recipient's financial systems. The objective of Section
J is to provide the maximum safeguards possible under the
circumstances. Accounting duties should be segregated to ensure that no
individual simultaneously has both the physical control and the record
keeping responsibility for any asset, including, but not limited to,
cash, client deposits, supplies and property. Duties must be segregated
so that no individual can initiate, execute, and record a transaction
without a second independent individual being involved in the process.
In response to this comment and to clarify the inquiry, we have changed
the question to: ``Are checks, after being signed, controlled and
mailed out by an individual who does not have any other payables
duties?''
An LSC OIG comment suggested that Appendix VII K (Petty Cash
Controls) be changed to add procedures regarding access to and physical
control over the petty cash box during and after work hours. Response:
In response to this comment a new No. 14 has been added to Appendix VII
K to include language regarding access to and physical control over the
petty cash box during and after work hours.
Dated: July 13, 2010.
Victor M. Fortuno,
President, Legal Services Corporation.
[FR Doc. 2010-17737 Filed 7-21-10; 8:45 am]
BILLING CODE 7050-01-P