[Federal Register Volume 61, Number 205 (Tuesday, October 22, 1996)]
[Notices]
[Pages 54816-54823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27059]
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LEGAL SERVICES CORPORATION
Audit Guide for LSC Recipients and Auditors
AGENCY: Legal Services Corporation.
ACTION: Proposed Revisions to the LSC Audit Guide for Recipients and
Auditors.
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SUMMARY: The Legal Services Corporation (LSC) hereby publishes as final
the revisions to the November 1995 LSC Audit Guide for Recipients and
Auditors. The revisions incorporate the audit requirements and
additional provisions imposed by Congress through 110 Stat. 1321
(1996). There are seven appendices to the revised Audit Guide, which in
themselves establish no new rules, regulations or guidelines for
recipients and auditors, and therefore are not published herein.
EFFECTIVE DATE: The requirements of this Audit Guide are effective for
audits
[[Page 54817]]
of fiscal years ending on or after December 31, 1996 except as
otherwise directed by the Corporation.
ADDRESSES: Comments should be submitted to the Office of Inspector
General, Legal Services Corporation, 750 First St., N.E., 10th Floor,
Washington, DC 20002-4250.
FOR FURTHER INFORMATION CONTACT: Karen M. Voellm, Chief of Audits (202)
336-8812.
SUPPLEMENTARY INFORMATION: Section 1009(c)(1) of the Legal Services
Corporation Act, 42 USC Sec. 2996h(c)(1), requires that the Corporation
either directly ``conduct, or require each grantee, contractor, or
person or entity receiving financial assistance'' from the Corporation
to provide for an annual financial audit. LSC's FY 1996 appropriation
act, 110 Stat. 1321 (1996), declared that audits conducted pursuant to
the provisions of Section 509 of that Act shall be in lieu of the
financial audits otherwise required by Section 1009(c) of the LSC Act.
In Section 509, Congress: (1) mandated that routine on-site monitoring
of grantee compliance be accomplished through annual audits conducted
by independent public accountants (IPAs or auditors), 110 Stat. 1321,
Sec. 509(a) and (c); (2) provided that such audits be conducted in
accordance with Government Auditing Standards, issued by the
Comptroller General of the United States, under the guidance
established by the OIG, 110 Stat. 1321, Sec. 509(a); (3) established
special requirements for interim reporting by recipients on
noncompliance with laws and regulations identified by their IPAs during
the course of the audit, thereby placing special emphasis on
recipients' compliance with laws and regulations, 110 Stat.
1321,Sec. 509(b); and (4) made sanctions available to the Corporation
and the OIG for audits that were not conducted in accordance with the
guidance established by the OIG, 110 Stat.1321, Sec. 509(c). Congress
also increased the restrictions and prohibitions on the types of
activities in which recipients may engage, 110 Stat. 1321, Sec. 504-
508. The revisions to the Guide incorporate these requirements and
include, but are not limited to: (1) interim reporting requirements by
the recipient on instances of noncompliance found by the auditor during
the course of the audit; (2) changes to the submission date for audit
reports; and (3) additional reports/notifications from the auditor.
On August 13, 1996 the OIG published in the Federal Register for
public notice and comment the revisions to the November 1995 Audit
Guide for LSC Recipients and Auditors. (61 FR 42064-42070). The notice
provided for a thirty-day comment period. Comments were received from
eight respondents: the American Institute of Certified Public
Accountants (AICPA), Center for Law and Social Policy (CLASP), a
certified public accounting firm, and five recipients. The comments
were analyzed and addressed as follows. Some respondents opposed the
proposed 90-day due date for the audit reports, one requested a
clarification as to the reason for the change in the due date of audit
reports from 150 days to 90 days. The LSC Board and senior management
also expressed concerns about the revision to the 90-day time period
for audit report submission. The 90-day time period had been in effect
prior to promulgation of the November 1995 Audit Guide which changed
the time period to 150 days.
The OIG believes its operational responsibilities for reviewing
audit reports and ensuring compliance with reporting standards, as well
as the timely resolution of audit findings support a shorter turn-
around. However, upon careful consideration, the OIG has determined
that a 120-day reporting requirement reasonably accommodates the
concerns of the OIG and recipients.
One respondent stated that the Guide should clarify the
relationship between the LSC Audit Guide and Office of Management (OMB)
Circular A-133 requirements as some of the requirements of the Audit
Guide are not requirements of OMB Circular A-133, e.g special reporting
on noncompliance. In addition, the respondent noted that the Audit
Guide should address situations where the LSC program may be determined
to be ``low risk'' under the criteria of OMB Circular A-133, and not be
audited as a ``major program''.
In order to clarify the relationship between A-133 and the Audit
Guide, the language in the Audit Guide under the Section labeled
``PURPOSE'' has been revised to clarify that Section 509(a) of 110
Stat. 1321 (1996) mandates the objectives of the audit of each
recipient of LSC funds. Those provisions and, hence, the Audit Guide,
take precedence over the requirements of OMB Circular A-133. Stated
another way, regardless of the particular criteria in A-133, the LSC
program should always be considered a ``major program.''
A new Section II-1.D, Auditor Access to Records, has been added to
make clear that, in performing the audit, the IPA will have access to
all records of the recipient that the IPA believes are reasonably
necessary to the performance of the audit. This was implicit in the
proposed revisions but, because the OIG received some comments
indicating that there may have been some confusion on this point, an
explicit statement of access has been included.
It is axiomatic that IPAs cannot conduct an adequate audit if
unable to obtain sufficient documentation regarding compliance with the
requirements to be audited. Access to such documentation should not be
impeded as it is well established that recipient IPAs in conducting
audits are within the attorney-client privilege. See ABA Informal
Opinion No. 1443 (December 10, 1979); c.f., ABA Model Rules of
Profession Conduct, Rule 5.3. Section 509 of the appropriations act was
intended to reduce barriers to government auditors and monitors. It
does not apply to the IPAs hired by the recipient. IPAs, of course,
must abide by professional standards of conduct and, except if
permitted to disclose such information, must keep confidential the
information obtained in the course of the audit. AICPA Code of
Professional Conduct, Sec. 301.01.
One respondent viewed references to the laws and regulations
subject to interim reporting as confusing. The criteria for reporting
apply to any instances of noncompliance found by the auditor with
respect to the practice restrictions identified in the Compliance
Supplement. The language was revised to clarify the requirement.
The proposed revisions quoted under Section I-4, Authority, are
those statutory provisions relied upon as authority to promulgate the
Guide. The OIG deleted the quotations and simply cited the relevant
statutory provisions. Full quotations are not only unnecessary, their
inclusion in the Guide caused some confusion among respondents.
Respondents recommended that notification to the OIG be required
only when there is disagreement between the recipient and the auditor
resulting in the auditor's resignation or a termination of services
during the course of the audit. The OIG views all notifications on
change of auditors as important to its management information systems
and its communication with recipients and auditors. No exceptions were
made to the reporting requirement.
Some of the respondents suggested that the Audit Guide address the
allocation of audit costs among funding sources, in light of the
provision of Section 509(c) of 110 Stat. 1321 (1996), and current
limitations imposed by some funding sources on the allocation of audit
costs to the respective grants, e.g. Administration on Aging grants.
The OIG and Corporation management
[[Page 54818]]
view the issue of audit cost allocation as an accounting rather than an
auditing issue. Allocation of audit cost is a subject of the LSC
Accounting Guide for Recipients and Auditors and 45 C.F.R Part 1630
(Cost Standards and Procedures) and is therefore not addressed in this
Audit Guide. Management will provide guidance to recipients in the near
future.
One respondent commenting on the statutory language that requires
the auditor to select a representative number of transactions for
testing compliance suggested that the Audit Guide provide information
on minimum number of transactions to be tested for compliance. Auditors
are required to refer to the AICPA's Statements on Auditing Standards,
Government Auditing Standards, and OMB Circular A-133, and to use their
own judgement in determining sample sizes for testing. No changes were
made to the Audit Guide to address this comment.
One respondent commented that the auditor's reporting
responsibility to the OIG under Section II-1.G, Disclosure of
Irregularities, Illegal Acts, and Other Noncompliance, was unclear and
not adequately distinguished from the recipient's reporting
responsibility. The language was revised to clarify the recipient's
responsibility for reporting to the OIG under the LSC grant assurance,
and to recognize the auditor's responsibility to report to specified
external parties (including the OIG) under Government Auditing
Standards, Chapter 5.
There are seven appendices to the Audit Guide. One of the
appendices to the Audit Guide is a revised Compliance Supplement which
identifies regulations that the auditor should examine in the course of
the recipient's annual audit, compliance requirements prepared by
management, and audit procedures developed by the OIG for the auditor's
use in assessing compliance with applicable laws and regulations. The
other appendices include a sample audit agreement, a Guide for
Procurement of Audit Services, a summary findings form, the recipient's
and the auditor's 5-day notification to the OIG of the auditor's
special report on noncompliance with laws and regulations, and the
auditor's notification on cessation of services. Recipients and
interested parties have been provided an opportunity to comment on the
Compliance Supplement before final adoption. Because the appendices
themselves establish no new rules, regulations, or guidelines for
recipients, they are not published for comment.
For the reasons set forth above, the Audit Guide is revised to read
as follows:
Legal Services Corporation
Audit Guide for Recipients and Auditors
Foreword
Under the Legal Services Corporation (LSC) Act, LSC provides
financial support to organizations that furnish legal assistance to
eligible clients. Section 1009(c) of the LSC Act requires that LSC
either conduct or require each recipient of LSC funds to provide for an
annual financial statement audit. In 1995, LSC promulgated an Audit
Guide to replace the audit portions of both the 1981 and the 1986 LSC
Audit and Accounting Guide for Recipients and Auditors. The 1995 Guide
required that recipient audits be conducted in accordance with Office
of Management and Budget (OMB) Circular A-133, Audits of Institutions
of Higher Education and Other Nonprofit Institutions.
In 1996, pursuant to 110 Stat. 1321 (1996) (Public Law 104-134),
Congress:
1. Mandated that routine on-site monitoring of grantee compliance
be accomplished through annual audits conducted by independent public
accountants (IPAs or auditors);
2. Provided that such audits be conducted in accordance with
Government Auditing Standards issued by the Comptroller General of the
United States under the guidance established by the OIG;
3. Declared that audits conducted pursuant to the provisions of
Section 509 shall be in lieu of the financial audits otherwise required
by Section 1009'' of the LSC Act;
4. Increased the restrictions and prohibitions on the types of
activities in which recipients may engage; and
5. Established special requirements for interim reporting by
recipients on noncompliance with laws and regulations identified by
their IPAs during the course of the audit, thereby placing special
emphasis on recipients' compliance with laws and regulations.
This legislation contains substantial and fundamental changes in
the law governing grants to LSC recipients. It incorporates
restrictions in the legal work in which LSC recipients may participate,
and changes the way compliance with these restrictions will be
monitored. The IPA's special attention is directed to Appendix A, the
Compliance Supplement, in planning the audit. The Compliance Supplement
identifies by asterisk (*) practice restrictions that are considered
material to the LSC program. Because of the increased reliance on IPAs
for assessing recipients' compliance with these restrictions, the OIG
is planning a heightened quality assurance review program. The overall
objective of the quality assurance review program is to ensure the
quality of the auditor's work, and it will focus on, among other
things, the auditor's testing of compliance with laws and regulations
and related internal controls.
Pursuant to the audit requirements of 110 Stat. 1321 (1996), LSC is
promulgating this revised Audit Guide. Seven appendices have been
attached to this Audit Guide for use by recipients and auditors, as
follows:
Appendix A--The Compliance Supplement provides notice to both
recipients and their auditors of the specific LSC regulations which are
to be tested for compliance. The Compliance Supplement will change as
LSC rules, regulations and guidelines are adopted, amended or revoked,
but it establishes no new rules, regulations or guidelines itself.
Appendix B--A Sample Audit Agreement contains mandatory and
suggested provisions which recipients should consider incorporating
into their audit agreements.
Appendix C--A Guide for Procurement of Audit Services prepared by
the LSC Office of Inspector General (OIG) in the spring of 1994 and
revised in 1995 and 1996. This Guide is intended to assist recipients
in planning and procuring audit services.
Appendix D--A Summary Findings Form on Noncompliance with Laws and
Regulations, Questioned Costs and Reportable Conditions, along with
instructions. This form provides a summary of the audit findings
contained in the audit reports and financial data concerning the LSC
support, fund balance and expenditures on Private Attorney Involvement
(PAI).
Appendix E--The Recipient 5-day Letter to the OIG of the IPA's
``Special Report on Noncompliance with Laws and Regulations''
(``Recipient 5-day Letter''). This is the recipient's transmittal
letter to the OIG accompanying the auditor's report.
Appendix F--The Auditor 5-Day Letter to the OIG of the IPA's
``Special Report on Noncompliance with Laws and Regulations'' not
Reported by Recipient (``Auditor 5-Day Letter''). This is the auditor's
transmittal letter to the OIG accompanying the auditor's report.
Appendix G--The Auditor Notification on Cessation of Services. This
a form letter notifying the OIG that there has been a change in audit
firms.
[[Page 54819]]
Table of Contents
I. Introduction
I-1 Purpose
I-2 Required Standards and Guidance
I-3 Applicability
I-4 Authority
I-5 Effective Date
I-6 Communicating with the OIG Regarding Audit Matters
I-7 Revisions to the Guide
I-8 Cumulative Status of Revisions
I-9 Responsibilities of Recipients
II. Audit Performance Requirements
II-1 Audit Requirements
II-2 Review of Internal Controls
II-3 Assessing Compliance with Laws and Regulations
II-4 Audit Follow-up
III. Audit Reporting Requirements
III-1 Audit Reports and Distribution
III-2 Extension Requests for Audit Submissions
III-3 Views of Responsible Officials
IV. Reference Materials
Appendix A--Compliance Supplement
Appendix B--Sample Audit Agreement
Appendix C--Guide for Procurement of Audit Services by Legal
Services Corporation Recipients
Appendix D--Summary Findings Form on Noncompliance with Laws and
Regulations, Questioned Costs and Reportable Conditions
Appendix E--The Recipient 5-day Letter to the OIG of the IPA's
``Special Report on Noncompliance with Laws and Regulations''
(``Recipient 5-day Letter'')
Appendix F--The Auditor 5-Day Letter to the OIG of the IPA's
``Special Report on Noncompliance with Laws and Regulations'' not
Reported by Recipient (``Auditor 5-Day Letter'')
Appendix G--Auditor Notification on Cessation of Services
Note: Appendixes A-G do not appear in the Federal Register. See
SUPPLEMENTARY INFORMATION.
Authorities: The Legal Services Corporation Act of 1974, as
amended, Sec. 1008 (a) and (b), (42 USC 2996g (a) and (b));
Sec. 1009(c)(1), (42 USC 2996h(c)(1)); and Sec. 1010(c), (42 USC
2996i(c)); The Inspector General Act of 1978, as amended, 5 USC App.
3, Sec. 4(a)(1); and Sec. 4(b)(1); 110 Stat. 1321 Secs. 501-509
(1996).
LSC Audit Guide for Recipients and Auditors
I. Introduction
The Office of Inspector General (OIG) of the Legal Services
Corporation (LSC) is responsible for establishing and interpreting LSC
audit policy pursuant to the Inspector General Act of 1978, as amended,
and the LSC Board of Directors' resolution of May 13, 1995. In 1996,
pursuant to the requirements of Section 509 of 110 Stat. 1321 (1996),
Congress: (1) mandated that routine on-site monitoring of grantee
compliance be accomplished through annual audits conducted by IPAs; (2)
increased the restrictions and prohibitions on the types of activities
in which recipients may engage; (3) increased the OIG responsibility
for oversight; and (4) declared that the audits conducted pursuant to
Section 509 of 110 Stat. 1321 (1996) were in lieu of the financial
audits otherwise required by the LSC Act Sec. 1009(c). This Guide
incorporates those requirements. The OIG will examine the audits to
identify reported instances of noncompliance with laws and regulations,
questioned costs and control deficiencies, and will refer the findings
and recommendations to management for action.
I-1. Purpose
The Audit Guide provides a uniform approach for audits of LSC
recipients and describes recipients' responsibilities with respect to
the audit. The Audit Guide is to be used in conjunction with the
Compliance Supplement (Appendix A). The Audit Guide and the Compliance
Supplement provide the auditor flexibility in planning and performing
the audit, encourage professional judgment in determining the audit
steps necessary to accomplish audit objectives, and do not supplant the
auditor's judgment. Auditors should be aware that all practice
restrictions identified in the Compliance Supplement by asterisk (*)
are considered material to the program, and the failure of a recipient
to comply with the requirements may affect the recipient's eligibility
for funding.
I-2. Required Standards and Guidance
Audits of recipients, contractors, persons or entities receiving
financial assistance from LSC (all hereinafter referred to as
``recipients'') are to be performed in accordance with Government
Auditing Standards (GAS or GAGAS) issued by the Comptroller General of
the United States; Office of Management and Budget (OMB) Circular A-
133, Audits of Institutions of Higher Education and Other Nonprofit
Organizations; and this Audit Guide.
For purposes of OMB Circular A-133, the LSC Compliance Supplement
is to be followed for LSC funds and includes the restrictions and
prohibitions on the use of non-LSC funds. Accordingly, the OMB
Compliance Supplement for Audits of Institutions of Higher Education
and Other Nonprofit Institutions (OMB Compliance Supplement) does not
apply to LSC funds. If the non-LSC funds (Federal or state) of a
recipient are subject to consideration under the OMB Circular A-133
audit, the OMB Compliance Supplement may otherwise apply to those
funds.
Each recipient of LSC funds is required to have an audit in
accordance with the requirements of this Guide. Such audit shall meet
the objectives outlined in Section II-1.A, ``Objectives'', which
include an assessment of the recipient's compliance with the laws and
regulations identified in the Compliance Supplement (Appendix A).
I-3. Applicability
The requirements of this Audit Guide apply to all recipients and
subrecipients of LSC funds, except where specific provisions have been
otherwise made through grant or subgrant agreements. This Audit Guide
does not apply to grants to law schools, universities or other special
grants, which are covered by special provisions of the respective grant
agreements. Exceptions to these audit requirements are determined by
the OIG in consultation with management.
I-4. Authority
This Audit Guide has been prepared under the authority provided by
the following sections of the LSC Act, the IG Act and 110 Stat. 1321
(1996): LSC Act Sec. 1008 (a), (b), 42 U.S.C Sec. 2996g (a), (b); LSC
Act Sec. 1009(c)(1), 42 U.S.C Sec. 2996h(c)(1); and LSC Act
Sec. 1010(c), 42 U.S.C Sec. 2996i(c). IG Act Sec. 4(a)(1), 4(b)(1), 5
U.S.C APP 3 Sec. 4(a)(1), 4(b)(1). 110 Stat. 1321 (1996) Secs. 509 (a)
to (l).
I-5. Effective Date
This Audit Guide is effective for audits of LSC programs for
periods ending on or after December 31, 1996, except as otherwise
authorized by the Corporation.
I-6. Communicating with the OIG Regarding Audit Matters
Recent legislation has brought a number of changes in the
communication needs of recipients, IPAs, and the OIG. Because of these
changes, the OIG is making special efforts to facilitate the additional
communications needs. We are currently expanding reporting capabilities
through electronic mail on the Internet, as well as providing a World
Wide Web page for interactive ``Questions and Answers.''
In addition, the OIG also has a staff of auditors available to
answer questions, or address audit issues by telephone or facsimile.
The phone numbers and addresses are:
Telephone--(202) 336-8812
Email_audits@smtp.lsc.gov
Fax--(202) 336-8955
Web Site--http://oig.lsc.gov/
[[Page 54820]]
I-7. Revisions to the Guide
The OIG will periodically revise the Audit Guide and its appendices
through bulletins or replacement sections. Revisions may reflect
changes to public law, corporate regulations, auditing standards, or
other guidelines. Revisions should be incorporated into the recipient's
copy of the Audit Guide, and furnished to the Independent Public
Accountant (IPA) by the recipient. Questions relating to any revisions
should be directed to the OIG. Information concerning the Audit Guide
and any revisions will be posted periodically and will be available on
the LSC OIG World Wide Web page.
I-8. Cumulative Status of Revisions
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Effective Date Description
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Aug. 1976............................. Original Edition of ``Audit and
Accounting Guide for Recipients
and Auditors'' issued.
June 1977............................. Revised Original Edition of
Audit and Accounting Guide
issued.
Sept. 1979............................ Revision to Pages 4-1 and 6-6.
Sept. 1981............................ Revision to Pages ii, 4-1, 6-6,
VIII-3, and addition of Page 4-
2.
Jan. 1, 1986.......................... Revised 1986 Edition of Audit
and Accounting Guide Effective.
Aug. 13, 1986......................... Regulation 1630 Replaces Chapter
4 of both the Original and 1986
Edition of the Audit and
Accounting Guide.
Dec. 31, 1995......................... Chapter 6 of both Original and
1986 Audit and Accounting Guide
replaced by Audit Guide.
Dec. 31, 1996......................... Revision to November 1995 Audit
Guide to adopt audit provisions
of 110 Stat. 1321 (1996).
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I-9. Responsibilities of Recipients
I-9.A. Maintain Adequate Internal Controls
Recipients, under the direction of their boards of directors, are
required to establish and maintain adequate accounting records and
internal control procedures. Until revised, guidance relating to these
responsibilities may be found in both LSC's 1981 and 1986 editions of
the ``Audit and Accounting Guide for Recipients and Auditors,''
referred to above in Section I-8, ``Cumulative Status of Revisions.''
Internal Control is defined as the process put in place by the
recipient's board of directors, management, and other personnel
designed to provide reasonable assurance of achieving objectives over:
1. Reliability of financial reporting;
2. Compliance with laws and regulations that have a direct and
material effect on the program; and any other laws so identified in the
Compliance Supplement; and
3. Safeguarding of assets against unauthorized use or disposition.
I-9.B. Provide Audited Financial Statements
Recipients are responsible for preparing annual financial
statements and arranging for an audit of those statements to be
completed and submitted to the OIG within 120 days of the recipients'
fiscal year ends. While the recipients' boards of directors have the
final responsibility for the appointment of the auditor, pursuant to
Section 509(d) of 110 Stat. 1321 (1996), the OIG has direct authority
to ``* * * remove, suspend, or bar an independent public accountant,
upon showing of good cause, from performing audit services required by
this section * * *'', based upon rules of practice to be promulgated by
the OIG.
Pursuant to Section 509(c) of 110 Stat. 1321 (1996), the
recipient's failure to provide an acceptable audit in accordance with
the guidance promulgated by the OIG may result in the following
sanctions: (1) the withholding of a percentage of the recipient's
funding until the audit is completed satisfactorily; or (2) the
suspension of the recipient's funding until an acceptable audit is
completed.
A written agreement between the recipient and the IPA must be
executed and, at a minimum, should specifically include all matters
described below in Section II-1, Audit Requirements (Subsections A
through I). Contracts or engagement letters should also contain an
escape clause that would allow, without significant penalty,
modification or cancellation made necessary by changes in law.
Appendix B is a sample audit agreement that includes the required
matters described in Section II-1, Audit Requirements, and additional
provisions which can be used to document the understanding between the
recipient and the IPA. Recipients should consider incorporating these
additional provisions in their audit agreements.
In procuring audit services, recipients may refer to the Guide for
Procurement of Audit Services (Appendix C).
I-9.C. Requirements for Recipient 5-Day ``Special Report'' to the OIG
on Noncompliance with Laws and Regulations
Section 509(b) of 110 Stat. 1321 (1996) states that recipients
``shall report in writing any noncompliance found by the auditor during
the audit * * * within 5 business days to the Office of the Inspector
General and shall provide a copy of the report simultaneously to the
auditor. If the recipient fails to report the noncompliance, the
auditor shall report the noncompliance directly to the Office of the
Inspector General within 5 business days of the recipient's failure to
report. The auditor shall not be liable in a private action for any
finding, conclusion, or statement expressed in a report made pursuant
to this section.''
In fulfilling this requirement, recipients are required to report
to the OIG any instances of noncompliance with respect to the practice
restrictions identified in the Compliance Supplement as reported by the
auditor in accordance with Section II-1.H, Requirements for Auditor 5-
Day ``Special Report'' to the OIG on Noncompliance with Laws and
Regulations. The recipient must report to the OIG within five (5)
business days after receiving the report of noncompliance from the IPA.
The recipient's submission to the OIG pursuant to this section is to
include a transmittal letter, and a copy of the auditor's ``Special
Report on Noncompliance with Laws and Regulations'' (See Appendix E for
Recipient 5-Day Letter). Reports submitted pursuant to the requirements
of this section must be sent to the OIG by facsimile, Email or
registered mail. The recipient is also required to simultaneously
provide a copy of its report to the OIG to the auditor using the same
manner of communication (facsimile, Email or registered mail).
I-9.D. Corrective Action Plans
Consistent with Section 509(j) of 110 Stat. 1321 (1996), recipient
management is responsible for expeditiously resolving all
recommendations and audit findings which include: (1) material
reportable conditions in internal control; (2) material noncompliance
with laws and regulations identified in the LSC Compliance Supplement
(Appendix A); and (3) questioned costs, including those of sub-
recipients. Recipients are required to develop and submit to the
Corporation corrective action plans within 30 days of submission of the
audit report to the OIG. The corrective
[[Page 54821]]
action plan must describe the corrective action taken or planned in
response to the audit findings and recommendations identified by the
IPA. The corrective action plan must identify: (1) each finding as
reported by the IPA; and (2) the action that will be taken and the date
by which it will be taken or completed. If the recipient disagrees with
the finding or believes corrective action is not required, it shall
provide an explanation and specific reason(s) (e.g. regulatory or legal
requirements) that corrective action is not required. If practical, and
as an option, a recipient may incorporate its corrective action plan in
its response to the auditor's findings and recommendations. However,
selection of this option shall not preclude submission of the audit
reports within the required timeframe, nor serve as a basis for an
extension request.
Pursuant to the requirements of Section 509(k)(1) of 110 Stat. 1321
(1996), LSC management has the responsibility for follow-up on ``* * *
significant reportable conditions, findings and recommendations found
by the independent public accountants and [referred] to the Corporation
management by the Office of Inspector General to ensure that instances
of deficiencies and noncompliance are resolved in a timely manner * *
*'' To facilitate the responsibilities of LSC management and the OIG,
recipients are required to submit the corrective action plans to the
OIG; the corrective actions plans will be forwarded to LSC management
by the OIG.
II. Audit Performance Requirements
II-1. Audit Requirements
II-1.A. Objectives
The primary audit objectives are to determine whether:
1. The financial statements are presented fairly, in all material
respects, in conformity with Generally Accepted Accounting Principles
(GAAP), or other Comprehensive Basis of Accounting;
2. The internal control structure provides reasonable assurance
that the recipient is managing funds, regardless of source, in
compliance with applicable Federal laws and regulations, and controls
are in place to ensure compliance with the laws and regulations which
could have a material impact on the financial statements; and
3. The recipient has complied with applicable provisions of Federal
law, Corporation regulations and grant agreements, regardless of source
of funds, which may have a direct and material effect on its financial
statement amounts and on the LSC program.
II-1.B. Reports
The IPA will prepare the audit reports required by GAS and OMB
Circular A-133. Recipients should ensure that management letters are
included with the report submissions to LSC, as well as the Summary
Findings Form on Noncompliance with Laws and Regulations, Questioned
Costs and Reportable Conditions (See Appendix D for form and content).
The IPA has additional responsibility under Section II-1.H,
Requirements for Auditor 5-Day ``Special Report'' to the OIG on
Noncompliance with Laws and Regulations, for interim reporting of
noncompliance with certain laws and regulations.
II-1.C. Qualifications of the IPA
The comprehensive nature of auditing performed in accordance with
GAS places on the IPA the responsibility for ensuring that: (1) the
audit is conducted by personnel who collectively have the necessary
skills; (2) independence is maintained; (3) applicable standards are
followed in planning and conducting audits and reporting the results;
(4) the IPA has an appropriate internal quality control system in
place; and (5) the IPA undergoes an external quality control review.
IPAs must meet the qualifications stated in GAS.
II-1.D. Auditor Access to Records
The IPA will be provided access to all records of the recipient the
IPA reasonably believes to be necessary to the performance of the
audit.
II-1.E. Audit Working Papers
The audit working papers are to be prepared in accordance with GAS,
and are to be retained by the IPA for at least three years from the
date of the final audit report.
II-1.F. Access to Audit Working Papers
The audit working papers are to be available for examination upon
request by representatives of LSC and the Comptroller General of the
United States. The LSC Act, Sec. 1009(d), prohibits access by the
Corporation and the Comptroller General to any reports or records
subject to the attorney-client privilege. To the extent not protected
by the attorney-client privilege, the Corporation, including the OIG,
is provided with access by Section 509 (h) of 110 Stat. 1321 (1996) to
``* * * financial records, time records, retainer agreements, client
trust fund and eligibility records, and client names * * *'' The audit
working papers are subject to Quality Assurance Review by the LSC OIG.
II-1.G. Disclosure of Irregularities, Illegal Acts and Other
Noncompliance
During an audit, if matters are uncovered relative to actual,
potential, or suspected defalcations, or other similar irregularities,
the IPA will comply with Statement on Auditing Standards (SAS) Number
53, ``The Auditor's Responsibility to Detect and Report Errors and
Irregularities,'' and SAS Number 54, ``Illegal Acts by Clients.'' While
the auditor may contract directly with the recipient for audit
services, it is emphasized that any items considered by the auditor to
justify reporting to the recipient's program director and/or board of
directors, should also be included in the auditor's reports or
management letter for LSC's consideration. IPAs should be aware that
the recipient, by grant assurance, has a responsibility to report to
the OIG within specified time periods on matters involving
misappropriation, theft, embezzlement of any funds (LSC, non-LSC and
client escrow funds) and property, regardless of recovery. IPAs should
also follow Government Auditing Standards, Chapter 5, for guidance on
direct reporting of irregularities and illegal acts to the OIG. The
reporting requirements under this section are separate and distinct
from the special reporting requirements discussed at Section II.1.H
below.
II-1.H. Requirements for Auditor 5-Day ``Special Report'' to the OIG on
Noncompliance with Laws and Regulations
Section 509(b) of 110 Stat. 1321 (1996):
(1) Recognizes the auditor's responsibility to select and test a
representative number of transactions and report any instances of
noncompliance with laws and regulations;
(2) Provides that the auditor shall not be liable in a private
action for any finding, conclusion, or statement expressed in a special
report on noncompliance made pursuant to this section; and
(3) Places additional responsibility on the auditor to report any
instances of noncompliance directly to the OIG, in the event the
recipient fails to notify the OIG within five (5) business days of
receipt of the auditor's interim report on noncompliance.
The IPA is responsible for providing sufficient information to the
recipient on the findings of noncompliance to facilitate the recipient
meeting its interim reporting responsibilities under Section I-9.C,
Requirements for Recipient 5-Day ``Special Report'' to the
[[Page 54822]]
OIG on Noncompliance with Laws and Regulations. The laws and
regulations requiring special reporting are defined in the Compliance
Supplement (Appendix A). When a determination has been made that an
instance of noncompliance based on sufficient competent evidential
matter has occurred, IPAs are to report immediately to the recipient.
The IPA's report to the recipient pursuant to this section should not
await completion of the audit reports identified below in Section III,
Audit Reporting Requirements. The IPA's special report to the recipient
shall be in letter format and shall specifically contain, at a minimum,
the following: (1) a description of the particular instance(s) of
noncompliance discovered during the course of the audit; and (2) the
circumstances surrounding the instance(s) of noncompliance.
Within five (5) business days after issuance of the IPA's special
report to the recipient, and in accordance with Section I-9.C,
Requirements for Recipient 5-Day ``Special Report'' to the OIG on
Noncompliance with Laws and Regulations, the auditor should receive
from the recipient a copy of the recipient's 5-day letter to the OIG.
If no such copy is received, the IPA shall submit a copy of the report
directly to the OIG, within five (5) business days of the recipient's
failure to provide the required copy of its report to the OIG. This
statutory procedure thus ensures that the OIG will receive a copy of
the IPA's special report on noncompliance within ten (10) business days
after the recipient's receipt of the report from its auditor (See
Appendix F for the Auditor 5-Day Letter to the OIG). The auditor's
submission to the OIG under this section must be transmitted by
facsimile, Email or registered mail.
II-1.I. IPA Notification to OIG on Cessation of Audit Services
Pursuant to Section 509(e) of 110 Stat. 1321 (1996), the IPA is
required to notify the OIG when it ceases to provide audit services to
the recipient. The IPA shall notify the OIG within five (5) business
days of its termination or cessation of services to the recipient. (See
Appendix G for the notification form.)
II-2. Review of Internal Controls
In accepting LSC funds, recipient management asserts that its
accounting system is adequate to comply with LSC requirements. As part
of the review of internal controls, the auditor is required to evaluate
the effectiveness of the recipient's accounting system and internal
controls. The primary objectives of this evaluation are to ensure that
resources are safeguarded against waste, loss and misuse, and that
resources are used consistent with LSC regulations and grant
conditions.
II-3. Assessing Compliance with Laws and Regulations
The requirements set out in the Compliance Supplement (Appendix A)
are those which could have a material impact on the LSC program.
Accordingly, examination of these compliance requirements is part of
the audit. As stated in Section I-1, ``Purpose'', Congress increased
the restrictions and prohibitions on the types of activities in which
recipients may engage. The failure of a recipient to comply with the
practice restrictions contained in the Compliance Supplement may affect
the recipient's eligibility for LSC funding.
The Compliance Supplement specifies the compliance requirements and
provides suggested procedures to be considered in the auditor's
assessment of a recipient's compliance with laws and regulations. The
suggested procedures can be used to test for compliance with laws and
regulations, as well as to evaluate the related controls. Auditors
should use professional judgement in deciding which procedures to
apply, and the extent to which reviews and tests should be performed.
Auditors are required to select and test a representative number of
transactions. If the reviews and evaluations are performed as part of
the internal control structure review, audit procedures should be
modified to avoid duplication. Auditors should also refer to the grant
agreements for additional requirements.
In certain cases, noncompliance may result in questioned costs.
Auditors are to ensure that sufficient information is obtained to
support the amounts questioned. Working papers should adequately
document the basis for any questioned costs and the amounts reported.
II-4. Audit Follow-up
Consistent with GAS paragraph 4.10, Audit Follow-up, the auditor is
required to follow-up on known material findings and recommendations
from previous audits that could affect the financial statement audit
and, in this case, the program. The objective is to determine whether
timely and appropriate corrective action has been taken. Auditors are
required to report the status of uncorrected material findings and
recommendations from prior audits. These requirements are also
applicable to findings and recommendations issued in a management
letter.
III. Audit Reporting Requirements
III-1. Audit Reports and Distribution
IPAs should follow the requirements of GAS, OMB Circular A-133,
Statement on Auditing Standards (SAS) 74 and Statement of Position
(SOP) 92-9 (and any revisions thereto) for guidance on the form and
content of reports. The OMB Circular A-133 reports must reference the
LSC Audit Guide and its Compliance Supplement. In addition to the
reports required under OMB Circular A-133, IPAs are required to submit
a Summary Findings Form on Noncompliance with Laws and Regulations,
Questioned Costs and Reportable Conditions (Appendix D). Three copies
of the audit reports, Summary Findings Form on Noncompliance with Laws
and Regulations, Questioned Costs and Reportable Conditions and the
management letter, where applicable, are to be submitted to the LSC OIG
within 120 days of the recipient's year end.
III-2. Extension Requests for Audit Submissions
Under exceptional circumstances, an extension of the 120-day
requirement may be granted. Requests for extensions must be submitted
in writing not later than two weeks prior to the report due date, and
directed to the Office of Inspector General. Requests not submitted in
the required time frame will be granted only under unforeseen,
extraordinary and compelling reasons.
III-3. Views of Responsible Officials
Consistent with GAS paragraph 7.38, Views of Responsible Officials,
auditors are encouraged to report the views of the responsible program
officials concerning the auditors' findings, conclusions, and
recommendations, as well as planned corrective action, where practical.
IV. Reference Materials
A. Title X--Legal Services Corporation Act of 1974, 42 USC 2996, to
2996.l.
B. 45 Code of Federal Regulations Part 1600 to 1642.
C. Government Auditing Standards, issued by the Comptroller General
of the United States, 1994 Revision.
D. OMB Circular A-133, Audits of Institutions of Higher Education
and Other Nonprofit Institutions.
E. AICPA Professional Standards, Volume I.
[[Page 54823]]
F. AICPA Integrated Practice System, Not-For-Profit Organizations
Audit Manual.
G. Practitioners Publishing Company Guide to Audits of Nonprofit
Organizations, Seventh Edition (June 1994).
H. AICPA Audit and Accounting Guide for Not-for-Profit
Organizations, June 1, 1996.
I. AICPA Statement of Position (SOP) 92-9, Audits of Not-for-Profit
Organizations Receiving Federal Awards, December 28, 1992.
J. Pursuant to LSC Regulations, 45 C.F.R. 1630.4(g):
The Circulars of the Office of Management and Budget shall provide
guidance for all allowable cost questions arising under this part when
relevant policies or criteria therein are not inconsistent with the
provisions of the Act, applicable appropriations acts, this part, the
Audit and Accounting Guide for Recipients and Auditors, and Corporation
rules, regulations, guidelines, and instructions.
Among the OMB Circulars which should be referred to if not
inconsistent with LSC policies are:
Office of Management and Budget (OMB) Circular A-50, Audit Follow-up.
OMB Circular A-110, Uniform Administrative Requirements for Grants and
Agreements with Institutions of Higher Education, Hospitals, and Other
Nonprofit Organizations.
OMB Circular A-122, Cost Principles for Nonprofit Organizations.
OMB Circular A-123, Internal Control Systems.
OMB Circular A-127, Financial Management Systems.
Dated: October 17, 1996.
Victor M. Fortuno,
General Counsel.
[FR Doc. 96-27059 Filed 10-21-96; 8:45 am]
BILLING CODE 7050-01-P
