LSC uses the majority of its funding to provide grants to local legal-service  providers. Internal Control Weaknesses Impede LSC’s Ability to Adequately Assure Grant Funds Are Used as Intended and in Compliance with Laws and Regulations

We found weaknesses in LSC’s internal controls that negatively affected  LSC’s ability to monitor and oversee grants and left grant funds vulnerable  to misuse. We also found poor fiscal practices and improper or potentially  improper expenditures at grantees we visited. LSC’s control environment  contains several weaknesses, including the lack of clearly defined roles  and responsibility among the three different organizational units providing  for oversight of grantees—OPP, OCE, and the OIG. We also found that  communication and coordination of grantee site visits between OCE and  OPP need improvement in order to achieve effective oversight and avoid  gaps and duplication in oversight. Timing and Scope of Grantee Site Visits Is Not Based on a Risk Assessment

LSC does not utilize a structured or systematic approach for assessing risk  associated with its 138 grantees as a basis for determining the timing and  scope of its grantee oversight visits. LSC’s Control Activities for Monitoring Grantees Do Not Provide Reasonable Assurance That Grant Funds Are Being Used Properly and in Compliance with Laws and Regulations

LSC’s control activities for monitoring grantee internal control systems do  not reasonably assure that grant funds are being used properly and that  grantees are in compliance with laws and regulations. At both of our observation visits, we noted that staff did not  follow-up on questionable transactions and relied too heavily on  information obtained through interviews without corroborating the  information. As of September 17, 2007, LSC had  not yet issued to grantee management almost 19 percent (10 out of 53) of  the 2006 LSC reports for which grantee site visits had been completed. LSC’s Delays in Reporting Findings Prevented Grantees from Correcting Deficiencies in a Timely Manner

LSC’s reports of site visits are crucial to communicating and resolving  instances of noncompliance in grantee internal controls. LSC Oversight Did Not Identify Control Weaknesses at Nine Grantees

Based on our limited reviews, we identified internal control weaknesses at  9 of the 14 grantees we visited that LSC could have identified with a more  effective oversight review regimen. While control deficiencies at the  grantees were the immediate cause of improper and potentially improper  expenditures, weaknesses in LSC’s oversight controls discussed above  negatively affected the effectiveness of its monitoring of grantees’ controls  and compliance. Among the control weaknesses we found were grantee  use of LSC grant funds for expenditures with insufficient supporting  documentation, and for unusual contractor arrangements, alcohol  purchases, employee interest-free loans, lobbying fees, late fees, and  earnest money. Conclusions

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. At all of these locations, we analyzed key  records and interviewed entity officials to obtain an understanding of  LSC’s internal control framework, including the oversight of grantees, and  assessed compliance of expenditures. LSC grant funds are required by law to be used to support the provision of  legal assistance in civil matters to low-income people for everyday legal  problems.
Why GAO Did This Study

The Legal Services Corporation (LSC) was created as a private nonprofit to support legal assistance for low-income people to resolve their civil legal matters and relies heavily on federal appropriations. In 2006, LSC distributed most of its $327 million in grants to support such assistance. Effective internal controls over grants and oversight of grantees are critical to LSC's mission. GAO was asked to determine whether LSC's internal controls over grants management and oversight processes provide reasonable assurance that grant funds are used for their intended purposes. GAO analyzed key records and interviewed agency officials to obtain an understanding of LSC's internal control framework, including the monitoring and oversight of grantees, and performed limited reviews of internal controls and compliance at 14 grantees.

What GAO Found

GAO 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. GAO also found poor fiscal practices and improper and potentially improper expenditures at grantees it visited. Weaknesses in LSC's control environment include the lack of clear definition in the responsibilities of two of the three organizational units that oversee the work of grantees. GAO also found that communication between oversight units and coordination of grantee site visits is not sufficient to prevent gaps or duplication of effort, or both. The timing and scope of site visits is not based on a systematic analysis of the risk of noncompliance or financial control weakness across LSC's 138 grantees, so LSC cannot determine whether its resources are being used effectively and efficiently to mitigate risk among its grantees. LSC control activities performed in the monitoring of grantee internal control were not sufficient in scope to achieve effective oversight, and GAO noted implementation weaknesses. For example, in the site visits GAO observed, staff did not follow up on questionable transactions and relied heavily on information obtained through interviews. Feedback to grantees was often delayed, preventing grantees from correcting deficiencies in a timely manner. As of September 2007, LSC had not yet issued reports to grantee management for about 19 percent (10 out of 53) of the 2006 site visits. LSC grantee reviews missed potential control deficiencies at grantees that could have been detected with more effective oversight as evidenced by weaknesses GAO found at 9 of the 14 grantee sites it visited. While control deficiencies at the grantees were the immediate cause of the problems GAO found, weaknesses in LSC's controls over its oversight of grantees did not assure effective monitoring of grantee controls and compliance. Among the questionable expenditures GAO found were grantee use of funds for expenditures with insufficient supporting documentation, unusual contractor arrangements, alcohol purchases, employee interest-free loans, lobbying fees, late fees, and earnest money.