1.) For fiscal year 2007, Congress appropriated almost $349 million  for LSC. LSC Is Subject to Weaker Governance and Accountability Requirements Than Federal Entities but More Federal Oversight Than Nonprofit Corporations

Although LSC is subject to more statutory governance and accountability  requirements than most private, nonprofit corporations, it is subject to  governance and accountability requirements that are weaker than those of  most independent federal agencies headed by boards or commissions and  U.S. government corporations. Although LSC has an informal  orientation program for its members, the board does not have a  comprehensive, formal orientation or an ongoing training program for  board members. Because it  has not incorporated many practices currently considered necessary for  effective governance, LSC’s Board of Directors is at risk of not fulfilling its  role in effective governance in keeping with its fiduciary duties. In fact,  recent incidents of compensation rates that exceed statutory limitations,  questionable expenditures, and potential conflicts of interest may have  been prevented by a properly implemented governance structure. LSC’s board has  four standing committees. Given LSC’s status as a  federally funded nonprofit corporation, these are important activities that  are appropriately handled by a board-level committee. The OIG also found that LSC hired  acting special counsels from grant recipient organizations causing  potential conflicts of interest. LSC Management Has Not Thoroughly Assessed Internal Controls or Conducted a Risk Assessment

Management has not completed a thorough assessment of its internal  controls or implemented risk mitigation policies in response to a  systematic or formal risk assessment. LSC Management Has Not Assessed the Propriety of Its Financial Reporting Standards

LSC’s management has not conducted its own assessment or analysis to  determine which set of accounting standards—those promulgated by the  Financial Accounting Standards Board (FASB), Government Accounting  Standards Board (GASB), or Federal Accounting Standards Advisory  Board—are most applicable for LSC to use. Since its inception over 30 years ago, LSC’s governance and accountability  requirements, including its financial reporting and internal control, have  not changed significantly. The current accepted practices of federal agencies, U.S. government  corporations, and nonprofit corporations provide a framework for  identifying standards that can most effectively be used for strengthening  LSC’s governance and accountability. Because LSC’s board and  management have not kept pace with the modernization of practices in  federal entities and other nonprofit corporations, many opportunities exist  to improve and modernize existing processes. By updating and  strengthening its governance and accountability structures, LSC can  increase assurance that federal funds are being properly spent and its  operations are effectively carried out to meet its mission. Recommendations for Board Action

In order to improve and modernize the governance processes and  structure of LSC, we recommend that the LSC Board of Directors take the  following eight actions:    establish and implement a comprehensive orientation program for new  board members to include key topics such as fiduciary duties, IRS  requirements, and interpretation of the financial statements;    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;    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;    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;    establish charters for the Board of Directors and all existing and any  newly developed committees to clearly establish committees’ purposes,  duties, and responsibilities;    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;    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;  and    establish a shorter time frame (e.g., 60 days) for issuing LSC’s audited  financial statements. While federal agencies and  government corporations have been subject to strengthened governance  and accountability requirements over recent years, LSC has not kept up  with evolving reforms aimed at strengthening internal control over an  organization’s financial reporting process and systems, with LSC’s board’s  practices falling short of modern board practices and LSC not keeping up  with current management practices. We will then send copies to other appropriate congressional  committees, the president of LSC, and the LSC Board of Directors.
Why GAO Did This Study

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.

What GAO Found

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. Established with governance and accountability requirements as they existed at the time, LSC has not kept up with evolving reforms aimed at strengthening internal control over an organization's financial reporting process and systems. Rigorous controls are important for the heavily federally funded LSC. During fiscal year 2007, LSC is responsible for the safeguarding and stewardship of $348.6 million of taxpayer dollars. Although no single set of practices exists for both private and public entities, current accepted practices of federal agencies, government corporations, and nonprofit corporations offer models for strengthening LSC's governance and accountability, including effective board oversight of management; its performance; and its use of federal funds and resources. The board members demonstrated active involvement in LSC through their regular board meeting attendance and participation in LSC oversight. Although LSC's Board of Directors was established with provisions in law that may have supported effective operation over 30 years ago, its practices fall short of modern board practices. The LSC board generally provides each new member an informal orientation to LSC and the board, but it does not have consistent, formal orientation and ongoing training with updates on new developments in governance and accountability standards and practice. The current board has four committees, but none are specifically targeted at providing critical audit, ethics, or compensation functions, which are important governance mechanisms commonly used in corporate governance structures. Because it has not taken advantage of opportunities to incorporate such practices, LSC's Board of Directors is at risk of not being able to fulfill its role of effective governance and oversight. 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. LSC also has not kept up with current management practices. Of particular importance are key processes in risk assessment, internal control, and financial reporting. Management has not formally assessed the risks to the safeguarding of its assets and maintaining the effectiveness and efficiency of its operation, nor has it implemented internal controls or other risk mitigation policies. LSC is also at increased risk that conflicts of interest will occur and not be identified because senior management has not established comprehensive policies or procedures regarding ethical issues that are aimed at identifying potential conflicts and taking appropriate actions to prevent them. Finally, management has not performed its own assessment or analysis of accounting standards to determine the most appropriate standards for LSC to follow.