Processing Recipient Audit Reports

Audit Requirements

Recipients of grants from the Legal Services Corporation (LSC) are responsible for preparing annual financial statements and arranging for audits of those statements by Independent Public Accountants (IPAs). These audits are to be conducted in accordance with Government Auditing Standards promulgated by the Comptroller General of the United States, Office of Management and Budget (OMB) 2 CFR 200, Uniform Guidance (Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards) Subpart F and the LSC OIG "Audit Guide for Recipients and Auditors (Audit Guide)."

Recipients are required to arrange for audit reports to be submitted to the LSC Office of Inspector General (OIG) within 120 days of the recipients' fiscal year ends. IPAs should follow the requirements of Government Auditing Standards, OMB Uniform Guidance, and the American Institute of Certified Public Accountants (AICPA) professional standards for guidance on the form and content of reports. Such IPA reports include an opinion on the financial statements, a report on the internal control structure, a report on compliance with laws and regulations, and a management letter, when appropriate.

In addition, IPAs are required to submit a Summary Report Form on Noncompliance with Laws and Regulations, Questioned Costs and Reportable Conditions (SRF). IPAs must submit SRFs via the Internet by completing a form residing on the OIG website. The SRF must be submitted regardless whether there are any audit findings to report. The IPA reports on the SRF any instances of noncompliance, material reportable conditions and additional findings. For reported findings, the IPA provides the findings description and findings code, the sample size and instances noted, the recipient response, and the amount of any questioned costs. A Findings Code is a general classification of the type of critical finding reported, as listed in the Legend of Non-Compliance & Reportable Conditions Codes found on the LSC OIG website. Questioned Costs pursuant to 45 CFR §1630.2, is defined as a charge or a proposed charge to a recipient's LSC funds which could be determined to be ineligible. In determining whether a charge may be ineligible, the IPA should also consider the following definition: an incurred cost that is found by an IPA to: (1) be a possible violation of a provision of a law, regulation, contract, or other agreement or document governing the use of LSC funds; (2) lack adequate supporting documentation; or (3) be unnecessary or unreasonable and does not reflect the actions a prudent person would take in the circumstances given the intent of the expenditure. Furthermore, Unsupported Costs are costs reported as questioned because of a lack of supporting documentation.

Under certain circumstances, the recipient is required to submit to the LSC OIG a special report, commonly referred to as a 5-Day letter. When a determination has been made, based on sufficient competent evidential matter, that an instance of noncompliance has occurred, IPAs are to report immediately to the recipient. The report must contain a description of the instances of noncompliance and the circumstances. The recipient is required to submit to the OIG, with a copy to the IPA, a Recipient 5-Day "Special Report to the OIG on Noncompliance with Laws and Regulations" within five business days after issuance of the IPA's special report to the recipient. If the IPA does not receive a copy, the IPA must submit a copy of the report directly to the OIG within five business days of the recipient's failure to provide the required copy.

Recipients must submit corrective action plans for all recommendations and findings which include material reportable conditions in internal control, material noncompliance with laws and regulations identified in the LSC Compliance Supplement, and questioned costs including those of sub-recipients. Recipients are required to develop corrective action plans describing the corrective action taken or planned in response to the audit findings and recommendations identified by the IPA. If the recipient disagrees with the finding or believes that corrective action is not required, it must provide an explanation and specific reasons. The recipient must submit the corrective action plan directly to LSC Management within 30 days of submission of the audit report. Alternatively, the recipient has the option of incorporating the corrective action plans into the audit reports as part of its response to the IPA's findings and recommendations, but this option does not extend the due date for audit reports.


Processing Recipient Audit Reports

The following is a summary of the process carried out by LSC from receipt of the Summary Report Form (SRF) through implementation of corrective action.

The LSC OIG developed an Audit Information Management System (AIMS) to support the audit review team in performing a desk review of the grant recipient audit reports by tracking and collecting the SRF, audit reports, 5-day letters, audit costs, and management letters. In addition, AIMS facilitates an OIG focused review, tracks the status, and documents the resolution and corrective action process of audit findings and recommendations.

Once the SRF is received, OIG staff validates the correctness of the SRF submission before it is accepted for entry into AIMS. The SRF can be accepted, edited or deleted. This approach allows the OIG to avoid redundant data entry by transferring the accepted SRF data into AIMS electronically. After the audit reports are received, OIG staff review each of them for completeness.


Focused Review

Next, the OIG conducts a focused review of audit findings and recommendations for SRF entries which have been accepted and have findings. The OIG auditors can create new findings or amend existing ones based on the SRF, the 5-Day letter, the audit reports, and the management letter. The auditor reviews the findings and recommendations and determines his or her recommended action, which is either to "invoke A-50" or to "close to inventory." The LSC grantee audit follow up process incorporates the concepts of OMB Circular A-50 "Audit Follow up," and hence the use in AIMS of the term "invoke A-50." The auditor then writes a justification for the recommended action. The recommended action is then approved or revised by OIG audit management.

If the decision is to invoke A-50, OIG audit management refers the audit findings and recommendations to LSC management for follow up action. The referral is made through AIMS by approving the finding for follow up and establishing a project code to track the follow up process through resolution and corrective action.

If the decision is to close to inventory, the findings and recommendations issued to grantees by their IPAs are retained in the AIMS system in an inventory of non-critical findings. These findings are provided to LSC management by the OIG for information only and no follow up action is required. However, under Government Auditing Standards, the IPAs are required to follow up on these findings in the next fiscal year audit. If the IPAs report that these findings are still uncorrected, A-50 will be invoked at that time.  A Critical Finding is a reportable condition that meets the definition of a material weakness, or any material instance of noncompliance with any LSC law or regulation.

The decision of whether to invoke A-50 or to close to inventory rests on whether or not the finding is significant. A significant finding is one deemed by the OIG to require management=s attention based on quantitative and/or qualitative conditions contained in the finding and, thus, is referred to LSC management. The following types of findings and recommendations by grantee IPAs will be referred to LSC management for follow up: instances of noncompliance with laws and regulations which have a material impact on the LSC program, instances of questioned or unsupported costs, instances of material weaknesses, reportable conditions that taken in whole or in part are indicative of a systemic problem, and uncorrected findings from prior reports.

LSC management has the responsibility for follow up on significant findings found by grantee IPAs and referred by the OIG 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 corrective action plans directly to LSC Management.


Resolution

The next step is the resolution process. Resolution is the point at which LSC management agrees with the grantee's proposed corrective action plan or accepts the grantee's disagreement with a reported finding and the OIG concurs in the management decision. If agreement cannot be reached, resolution is reached when the LSC Audit Follow Up Official, designated by the LSC President, issues a decision on the matter. LSC management reviews each referred finding and recommendation along with the corrective action plan proposed by the grantee to determine if it is satisfactory. If the proposed corrective action is deemed unsatisfactory, LSC management communicates with the grantee to ensure a satisfactory corrective action plan.

LSC management ensures that proposed corrective actions are consistent with law, regulations, and LSC policy. When accepting the grantee's disagreement with a reported finding or recommendation, LSC management ensures that the grantee provides an adequate written justification containing the legal and factual basis for the disagreement. LSC management notifies the OIG of the corrective action agreed upon by LSC management and the grantee, or of LSC management's acceptance of the grantee's disagreement within 30 days of receipt of the referred finding.

The OIG notifies LSC management within 15 days of its concurrence or non-concurrence. If the OIG concurs, the finding is considered resolved. If the OIG does not concur, the Audit Follow Up Official has 15 days to seek agreement between LSC management and the OIG. If no agreement is reached within the 15 days, the Audit Follow Up Official issues a decision within 7 days, and the finding is considered resolved.


Corrective Action

After resolution has been obtained, LSC management ensures that corrective actions have been taken by the grantee within six months of the date on which a finding is referred. LSC requires the grantee to provide sufficient documentation to ensure that the corrective action has been fully implemented. In addition, the grantee is required to certify in writing that all corrective actions have been implemented. LSC management then notifies the OIG of all completed corrective actions and provides the OIG with copies of the grantee certifications. Upon receipt of the notification of completion, the OIG closes the respective findings and recommendations. IPAs will also verify completion of corrective actions during the next fiscal year audit.


Quality Control Process

The OIG conducts a review of every audit report submitted to ensure adherence to LSC reporting standards. In addition, on a test basis, the OIG reviews the IPAs' working papers to ensure conformity with applicable auditing standards and the LSC OIG Audit Guide and Compliance Supplement requirements.