[Federal Register Volume 61, Number 157 (Tuesday, August 13, 1996)]
[Notices]
[Pages 42064-42070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20525]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
SUMMARY: The Legal Services Corporation (LSC) hereby publishes for
comment by interested parties proposed revisions to the November 1995
LSC Audit Guide for Recipients and Auditors. The proposed revisions
incorporate the audit requirements and additional provisions imposed by
Congress through 110 Stat. 1321 (1996). There will be seven appendices
to the revised Audit Guide, which in themselves establish no new rules,
regulations or guidelines for recipients and auditors.
DATES: Comments should be received in writing on or before September
12, 1996. Late comments will be considered to the extent practicable.
Where possible comments should reference applicable paragraph numbers
in the proposed revision. To facilitate conversion of the comments in
computer format for analysis, respondents are asked to send a copy of
the comments on either a 3.5 or 5.25 inch diskette in ASCII format.
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 U.S.C. 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 addition, 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,
section 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, section 509(a); (3) increased
the restrictions and prohibitions on the types of activities in which
recipients may engage, 110 Stat. 1321, sections 504-508; and (4)
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'
[[Page 42065]]
compliance with laws and regulations, 110 Stat. 1321, sec. 509(b).
Congress also 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). The proposed
revisions to the Guide incorporate these requirements. The proposed
revisions 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.
There will be seven appendices to the Audit Guide. One of the
appendices to the Audit Guide will be a revised Compliance Supplement
which will identify additional regulations that the auditor should
examine in the course of the recipient's annual audit and will contain
suggested audit procedures for the auditor to assess compliance with
applicable laws and regulations. The other appendices will 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. Because the appendices themselves establish
no new rules, regulations, or guidelines for recipients, they are not
published for comment and will be promulgated without formal adoption
by the Corporation's Board of Directors.
For the reasons set forth above, LSC proposes the Audit Guide 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 original 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 Circular A-133, Audits of Institutions
of Higher Education and Other Nonprofit Institutions.
In 1996, pursuant to 110 Stat. 1321 (1996) (Pub. L. 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(c) 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 LSC recipients may participate in, 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. 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.
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--The Auditor Notification on Cessation of Services.
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 on Audit Matters.
I-7 Revisions to the Guide.
I-8 Cumulative Status of Revisions.
I-9 Financial Responsibilities of Recipients.
II. Audit Performance Requirements.
II-1 Auditor 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'')
[[Page 42066]]
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 U.S.C. 2996g (a) and (b));
Sec. 1009(c)(1), (42 U.S.C. 2996h(c)(1)); and Sec. 1010(c), (42
U.S.C. 2996i(c)); The Inspector General Act of 1978, as amended, 5
U.S.C. App. 3, Sec. 4(a)(1); and Sec. 4(b)(1); 110 Stat. 1321
Secs. 501-509 (1996).
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 section 1009(c). This Guide
incorporates those requirements. The OIG will examine the audits to
identify noncompliance with laws and regulations, questioned costs and
reported control deficiencies. Program-related findings and issues
identified in the review of the audit reports will be forwarded to
management for action.
I-1. Purpose
This 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 judgement in determining the audit
steps necessary to accomplish audit objectives, and do not supplant the
auditor's judgment of the audit work required in particular situations.
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. The
suggested procedures included in the Compliance Supplement do not cover
all the circumstances or conditions likely to be encountered during the
course of an audit.
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 it also includes 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 does not apply to LSC funds. Each
recipient of LSC funds is required to have a financial audit in
accordance with the requirements of this Guide, and such audit shall
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. Exceptions to these
audit requirements will be determined by the OIG in consultation with
LSC 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):
Records and Reports--LSC Act section 1008:
(a) The Corporation is authorized to require such reports as it
deems necessary from any recipient, contractor, or person or entity
receiving financial assistance under this title regarding activities
carried out pursuant to this title.
(b) The Corporation is authorized to prescribe the keeping of
records with respect to funds provided by grant or contract and shall
have access to such records at all reasonable times for the purpose of
insuring compliance with the grant or contract or terms and conditions
upon which financial assistance was provided.
Audit--LSC Act section 1009(c)(1):
The Corporation shall conduct or require each recipient,
contractor, or person or entity receiving financial assistance under
this title to provide for an annual financial audit.
Recipients' Non-LSC Funds--LSC Act section 1010(c):
Non-Federal funds received by the Corporation, and funds received
by any recipient from a source other than the Corporation, shall be
accounted for and reported as receipts and disbursements separate and
distinct from Federal funds. . . .
Duties and Responsibilities--IG Act sections 4(a)(1) and 4(b)(1):
4(a) It shall be the duty and responsibility of each Inspector
General, with respect to the establishment within which his Office is
established--(1) to provide policy direction for and to conduct,
supervise, and coordinate audits * * * relating to the programs and
operations of such establishment.
4(b)(1) In carrying out the responsibilities specified in
subsection (a)(1), each Inspector General shall * * * take appropriate
steps to assure that any work performed by non-Federal auditors
complies with the standards established by the Comptroller General * *
*.
Audit Requirements--Section 509 of 110 Stat. 1321, Public Law 104-
134 (1996):
(a) An audit of each person or entity receiving financial
assistance from the Legal Services Corporation under this Act (referred
to in this section as a `recipient') shall be conducted in accordance
with generally accepted government auditing standards and guidance
established by the Office of the Inspector General and shall report
whether--
(1) The financial statements of the recipient present fairly its
financial position and the results of its financial operations in
accordance with generally accepted accounting principles;
(2) The recipient has internal control systems to provide
reasonable assurance that it is managing funds, regardless of source,
in compliance with Federal laws and regulations; and
(3) The recipient has complied with Federal laws and regulations
applicable to funds received, regardless of source.
(b) In carrying out the requirements of subsection (a)(3), the
auditor shall select and test a representative number of transactions
and report all instances of noncompliance to the recipient. The
[[Page 42067]]
recipient shall report in writing any noncompliance found by the
auditor during the audit under this section 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.
(c) The audits required under this section shall be provided for by
the recipients and performed by independent public accountants. The
cost of such audits shall be shared on a pro rata basis among all of
the recipient`s funding providers and the appropriate share shall be an
allowable charge to the Federal funds provided by the Legal Services
Corporation. No audit costs may be charged to the Federal funds when
the audit required by this section has not been made in accordance with
the guidance promulgated by the Office of the Inspector General. If the
recipient fails to have an acceptable audit in accordance with the
guidance promulgated by the Office of the Inspector General, the
following sanctions shall be available to the Corporation as
recommended by the Office of the Inspector General:
(1) The withholding of a percentage of the recipient's funding
until the audit is completed satisfactorily.
(2) The suspension of recipient's funding until an acceptable audit
is completed.
(d) The Office of the Inspector General may remove, suspend, or bar
an independent public accountant, upon a showing of good cause, from
performing audit services required by this section. Any such action to
remove, suspend, or bar an auditor shall be only after notice to the
auditor and an opportunity for hearing.
The Office of the Inspector General shall develop and issue rules
of practice to implement this paragraph.
(e) Any independent public accountant performing an audit under
this section who subsequently ceases to be the accountant for the
recipient shall promptly notify the Office of the Inspector General
pursuant to such rules as the Office of the Inspector General shall
prescribe.
(f) Audits conducted in accordance with this section shall be in
lieu of the financial audits otherwise required by section 1009(c) of
the Legal Services Corporation Act (42 U.S.C. 2996h(c)).
(g) The Office of the Inspector General is authorized to conduct
on-site monitoring, audits, and inspections in accordance with Federal
standards.
(h) Notwithstanding section 1006(b)(3) of the Legal Services
Corporation Act (42 U.S.C. 2996e(b)(3)), financial records, time
records, retainer agreements, client trust fund and eligibility
records, and client names, for each recipient shall be made available
to any auditor or monitor of the recipient, including any Federal
department or agency that is auditing or monitoring the activities of
the Corporation or of the recipient, and any independent auditor or
monitor receiving Federal funds to conduct such auditing or monitoring,
including any auditor or monitor of the Corporation, except for reports
or records subject to the attorney-client privilege.
(i) The Legal Services Corporation shall not disclose any name or
document referred to in subsection (h), except to--
(1) A Federal, State, or local law enforcement official; or
(2) An official of an appropriate bar association for the purpose
of enabling the official to conduct an investigation of a rule of
professional conduct.
(j) The recipient management shall be responsible for expeditiously
resolving all reported audit reportable conditions, findings, and
recommendations, including those of sub-recipients.
(k) The Legal Services Corporation shall--
(1) Follow-up on significant reportable conditions, findings, and
recommendations found by the independent public accountants and
reported to Corporation management by the Office of the Inspector
General to ensure that instances of deficiencies and noncompliance are
resolved in a timely manner, and
(2) Develop procedures to ensure effective follow-up that meet at a
minimum the requirements of Office of Management and Budget Circular
Number A-50.
(l) The requirements of this section shall apply to a recipient for
its first fiscal year beginning on or after January 1, 1996.
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 additional
communications needs. We are currently expanding the use of electronic
reporting by electronic mail through 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;
Fax--(202) 336-8955; E-Mail--XXX; Internet--http://oig.lsc.gov/
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 available on the LSC
OIG World Wide Web page.
I-8. Cumulative Status of Revisions
------------------------------------------------------------------------
Effective date Description
------------------------------------------------------------------------
August 1976............................ Original Edition of ``Audit and
Accounting Guide for
Recipients and Auditors''
issued.
June 1977.............................. Revised Original Edition of
Audit and Accounting Guide
issued.
September 1979......................... Revision to Pages 4-1 and 6-6.
September 1981......................... Revision to Pages ii, 4-1, 6-6,
VIII-3, and addition of Page 4-
2.
January 1, 1986........................ Revised 1986 Edition of Audit
and Accounting Guide
Effective.
August 13, 1986........................ Regulation 1630 Replaces
Chapter 4 of both the Original
and 1986 Edition of the Audit
and Accounting Guide.
December 31, 1995...................... Chapter 6 of both Original and
1986 Audit and Accounting
Guide replaced by Audit Guide.
[[Page 42068]]
December 31, 1996...................... Revision to November 1995 Audit
Guide to adopt audit
provisions of 110 Stat. 1321
(1996).
------------------------------------------------------------------------
I-9. Responsibilities of Recipients
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 is found in both LSC's Original and 1986 Edition of
the ``Audit and Accounting Guide for Recipients and Auditors,''
referred to in I-8, above.
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.
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 90 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 in Section II-1 of this Audit Guide (Subsections A through
H). 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, 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).
C. Requirements for Recipient 5-Day Reporting 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 all 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.G of this Guide. 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 should include a transmittal letter,
and a copy of the auditor's report to the recipient on the
noncompliance (See Appendix E for Recipient 5-Day Letter). Reports
submitted pursuant to the requirements of this section must be sent to
the OIG by facsimle, E-mail 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 (facsimilie, E-mail
or registered mail).
D. Corrective Action Plans
Consistent with Section 509(j) of 110 Stat. 1321 (1996), recipient
management shall be responsible for expeditiously resolving all
recommendations and audit findings which include: (1) 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 action plan must specifically
describe the corrective action taken or planned in response to the
recommendations and audit findings 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 reasons (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 time frame, 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 reported 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. Auditor Requirements
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
[[Page 42069]]
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.
B. Reports
The IPA will prepare the audit reports required by GAS and OMB
Circular A-133. Recipients should ensure that the 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.G. for interim
reporting of noncompliance with certain laws and regulations.
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.
D. 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.
E. 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's 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.
F. 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 management letter for LSC's
consideration. If such items relate to the recipient's capabilities to
safeguard and account for LSC funds, the IPA shall notify immediately
the Office of Inspector General at (202) 336-8812. The reporting
requirements under this section are separate and distinct from the
special reporting requirements discussed at Section II.1.G below.
G. Requirements for Auditor 5-Day Reporting 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 all 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 all
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 of
this Audit Guide. 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 has
occurred, IPAs are to report immediately to the recipient. The IPA's
report to the recipient shall be generated at such a point during the
course of the audit that sufficient competent evidential matter has
been obtained by the auditor to reach a conclusion on the particular
instance of noncompliance. The IPA's report to the recipient pursuant
to this section should not await completion of the audit reports
identified in Section III of this Audit Guide. 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 of this
Guide, 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, within five (5) business days of the recipient's failure to
provide the required copy of its report to the OIG, submit a copy of
the report directly 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, E-mail or registered
mail.
H. 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
[[Page 42070]]
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 are part of
the audit. As stated in Section I-1 of this Guide, Congress increased
the restrictions and prohibitions on the types of activities in which
recipients may engage. In addition, there are special requirements for
the recipient and auditor to report to the OIG on noncompliance with
laws and regulations. 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 objectives 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 to decide 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. Some procedures require a review and evaluation of
internal controls. If the reviews and evaluations were 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, 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 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 90 days of the recipient's year end.
III-2. Extension Requests for Audit Submissions
Under exceptional circumstances, an extension of the 90-day
requirement may be granted. Requests for extensions must be in writing,
and directed to the Office of Inspector General. Extension requests
must be made at least two (2) weeks prior to the date the audits are
due, and will only be granted for unforeseen, extraordinary and
compelling reasons. All other requests will be denied.
III-3. Views of Responsible Officials
Consistent with GAS paragraph 7.38, auditors are encouraged to
report the views of responsible program officials concerning the
auditors' findings, conclusions, and recommendations, as well as
corrections planned, 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.
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 Statement of Position (SOP) 92-9, Audits of Not-For-Profit
Organizations Receiving Federal Awards, December 28, 1992.
I. 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: August 7, 1996.
Victor M. Fortuno,
General Counsel.
[FR Doc. 96-20525 Filed 8-12-96; 8:45 am]
BILLING CODE 7050-01-P
