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entitled 'Legal Services Corporation: Governance and Accountability
Practices Need to Be Modernized and Strengthened' which was released on
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
August 2007:
Legal Services Corporation:
Governance and Accountability Practices Need to Be Modernized and
Strengthened:
Legal Services Corporation:
GAO-07-993:
GAO Highlights:
Highlights of GAO-07-993, a report to congressional requesters.
Why GAO Did This Study:
The Legal Services Corporation (LSC) was federally created as a private
nonprofit corporation to support legal assistance for low-income people
to resolve their civil matters and relies heavily on federal
appropriations. Due to its unique status, its governance and
accountability requirements differ from those of federal entities and
nonprofits. This report responds to a congressional request that GAO
review LSC board oversight of LSC’s operations and whether LSC has
sufficient governance and accountability. GAO’s report objectives are
to (1) compare LSC’s framework for corporate governance and
accountability to others’, (2) evaluate LSC’s governance practices, and
(3) evaluate LSC’s internal control and financial reporting practices.
We reviewed the LSC Act, legislative history, relevant standards and
requirements, and LSC documentation and accountability requirements and
interviewed board and staff.
What GAO Found:
Although LSC has stronger federal accountability requirements than many
nonprofit corporations, it is subject to governance and accountability
requirements that are weaker than those of independent federal agencies
and U.S. government corporations. Congress issued LSC’s federal charter
over 30 years ago. Established with governance and accountability
requirements as they existed at the time, LSC has not kept up with
evolving reforms aimed at strengthening internal control over an
organization’s financial reporting process and systems. Rigorous
controls are important for the heavily federally funded LSC. During
fiscal year 2007, LSC is responsible for the safeguarding and
stewardship of $348.6 million of taxpayer dollars. Although no single
set of practices exists for both private and public entities, current
accepted practices of federal agencies, government corporations, and
nonprofit corporations offer models for strengthening LSC’s governance
and accountability, including effective board oversight of management;
its performance; and its use of federal funds and resources.
The board members demonstrated active involvement in LSC through their
regular board meeting attendance and participation in LSC oversight.
Although LSC’s Board of Directors was established with provisions in
law that may have supported effective operation over 30 years ago, its
practices fall short of modern board practices. The LSC board generally
provides each new member an informal orientation to LSC and the board,
but it does not have consistent, formal orientation and ongoing
training with updates on new developments in governance and
accountability standards and practice. The current board has four
committees, but none are specifically targeted at providing critical
audit, ethics, or compensation functions, which are important
governance mechanisms commonly used in corporate governance structures.
Because it has not taken advantage of opportunities to incorporate such
practices, LSC’s Board of Directors is at risk of not being able to
fulfill its role of effective governance and oversight. A properly
implemented governance and accountability structure may have prevented
recent incidents of compensation rates in excess of statutory caps,
questionable expenditures, and potential conflicts of interest.
LSC also has not kept up with current management practices. Of
particular importance are key processes in risk assessment, internal
control, and financial reporting. Management has not formally assessed
the risks to the safeguarding of its assets and maintaining the
effectiveness and efficiency of its operation, nor has it implemented
internal controls or other risk mitigation policies. LSC is also at
increased risk that conflicts of interest will occur and not be
identified because senior management has not established comprehensive
policies or procedures regarding ethical issues that are aimed at
identifying potential conflicts and taking appropriate actions to
prevent them. Finally, management has not performed its own assessment
or analysis of accounting standards to determine the most appropriate
standards for LSC to follow.
What GAO Recommends:
Congress should consider mandating additional LSC governance and
accountability requirements modeled after federal agencies or
government corporations. GAO also makes recommendations to LSC’s board
for modernizing and strengthening its governance and to LSC management
for improving its practices. LSC’s board and management agreed with the
recommendations.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-993].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jeanette Franzel at (202)
512-9471 or franzelj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
LSC Is Subject to Weaker Governance and Accountability Requirements
Than Federal Entities but More Federal Oversight Than Nonprofit
Corporations:
LSC's Board Members Are Actively Engaged, but the Board's Governance
Practices Fall Short of Current Practices of Nonprofit Corporations:
LSC Management Practices Have Not Kept Up with Current Practices for
Key Processes in the Areas of Risk Assessment, Internal Control, and
Financial Reporting:
Conclusions:
Matter for Congressional Consideration:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Origin and Creation of the Legal Services Corporation:
Appendix II: Examples of Corporate Governance Guidelines:
Appendix III: Comparison of Other Key LSC Requirements:
Appendix IV: Comparison of Key LSC Governance and Accountability
Requirements:
Appendix V: Comments from the Legal Services Corporation Board of
Directors:
Appendix VI: Comments from the Legal Services Corporation:
Appendix VII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Key Statutory Governance Structures:
Table 2: Key Statutory Funds Control and Budgeting Requirements:
Table 3: Key Statutory Provisions for Performance and Financial
Reporting:
Table 4: Key Statutory Internal Control Systems Requirements:
Table 5: Legal Services Corporation Committees and Their Functions:
Table 6: Key Statutory Provisions for Grants Management:
Table 7: Key Acquisition and Management of Property and Services
Requirements:
Table 8: Key Human Resources Management Structures:
Table 9: Key Recordkeeping and Public Access to Information Structures:
Figure:
Figure 1: Legal Services Corporation Federal Funding between Fiscal
Years 1991 and 2006:
United States Government Accountability Office:
Washington, DC 20548:
August 15, 2007:
Congressional Requesters:
The Legal Services Corporation's (LSC) mission is to make federal
funding available to support the provision of legal assistance in civil
matters to low-income people throughout the United States on everyday
legal problems. LSC pursues this mission by making grants[Footnote 1]
to legal service providers (grant recipients) who serve low-income
members of the community who would otherwise not be able to afford
legal assistance (clients). Established by a federal charter[Footnote
2] in 1974[Footnote 3] as a federally funded, private nonprofit
corporation, LSC is highly dependent on federal appropriations for its
operations. LSC received $348.6 million in appropriations for fiscal
year 2007.[Footnote 4] For fiscal year 2006, LSC received 99 percent of
its funding from federal appropriations and approximately 1 percent
from grants through the Department of Veterans Affairs.
This report responds to your request that we review how LSC's Board of
Directors has been carrying out its fiduciary duties[Footnote 5] in
overseeing LSC's operations and use of appropriated funds and whether
LSC has sufficient governance and accountability structures and
practices in place. The specific objectives of this report are to (1)
compare LSC's statutory framework for corporate governance and
accountability to those of other organizations; (2) evaluate the
governance practices that LSC has adopted, including the board's
operations and responsibilities; and (3) evaluate LSC's internal
control and financial reporting practices in comparison to current
practices of other organizations.
To address these objectives, we reviewed information from a variety of
sources, including the Legal Services Corporation Act of 1974 (LSC Act)
and LSC annual appropriations acts; the LSC Act's legislative history,
relevant legislative and regulatory standards and requirements for
financial reporting and internal control, and research and studies on
corporate governance. We compared LSC's governance, accountability, and
oversight requirements with those for independent federal agencies
headed by a board or commission, U.S. government corporations,[Footnote
6] and D.C. nonprofit corporations, including the Corporation for
Public Broadcasting (CPB), which, like LSC, was established by Congress
and receives federal appropriations. To obtain information on the
current policies and practices of LSC and its Board of Directors, we
interviewed current members of LSC's board, management, and staff, and
staff in LSC's Office of the Inspector General (OIG) and the audit firm
the OIG employs. We also reviewed relevant documentation of the design
and implementation of LSC's and the LSC board's governance and
accountability practices and conducted a survey of all board members.
We conducted our work in Washington, D.C., from November 2006 through
June 2007 in accordance with generally accepted government auditing
standards.
Results in Brief:
In recent years, governance and accountability processes have received
increased scrutiny and emphasis in the nonprofit, federal government,
and public company sectors as a result of governance and accountability
breakdowns, most notably in the public company financial scandals that
led to the enactment of the Sarbanes-Oxley Act of 2002. Public
companies[Footnote 7] now operate under strengthened governance and
accountability standards, including requirements for ethics policies
and improved internal controls. The federal government and nonprofit
sectors have also strengthened governance and internal control
requirements and practices. As a result, commonly accepted governance,
accountability, and management practices for federal entities and
nonprofit corporations have significantly evolved in recent years.
LSC's authorizing legislation was last comprehensively reviewed and
reauthorized in the Legal Services Corporation Amendments Act of 1977,
and LSC's governing statutes have undergone only limited changes since
then.
Although LSC has stronger federal accountability requirements than many
nonprofit corporations, it is subject to governance and accountability
requirements that are weaker than those of independent federal agencies
headed by boards or commissions and those of U.S. government
corporations. The LSC Act includes provisions providing that LSC shall
be treated like a federal agency for purposes of specified statutes
that existed in the 1970s. In addition, as with federal agencies,
virtually all of LSC's annual revenues come from its annual
appropriations from Congress. Further, with the creation of an OIG
within LSC, it is subject to an OIG governance structure comparable to
those of federal agencies and U.S. government corporations. LSC also
submits its budget through the congressional appropriations process and
is subject to other congressional oversight. In other respects, LSC is
not subject to the standard governance and accountability requirements
for federal entities, including provisions related to performance and
financial reporting, internal controls, and funds control.
The governance practices of LSC's board fall short of the modern
practices employed by boards of nonprofit corporations and public
companies. By updating and strengthening its governance and
accountability structures, LSC can increase assurance that federal
funds are spent properly and effectively in order to meet the needs of
grant recipients. The board members have demonstrated active
involvement in LSC through their regular board meeting attendance and
participation. There are several areas, however, where LSC's governance
practices can be strengthened, including a more comprehensive
orientation program for new board members and an ongoing training
program that enables board members to stay current on governance
practices, the regulatory environment, and key management practices.
Keeping current with governance practices is especially important for
the LSC board because the board composition changes significantly with
each new presidential administration, and thus the board does not
generally have the benefit of experienced board members. Although the
LSC board has four committees, including finance and operations and
regulations, it does not have audit, ethics, or compensation committee,
important governance mechanisms commonly used in corporate governance
structures. Finally, the board has not assessed the performance,
collectively or individually, of its board members. Until it
incorporates many practices currently considered necessary for
effective governance, LSC's Board of Directors is at risk of not
fulfilling its role of effective governance and oversight in keeping
with its fiduciary duties. Recent incidents of compensation rates that
exceed a statutory limitation, questionable expenditures, and potential
conflicts of interest may have been prevented by a properly implemented
governance structure.
LSC's management practices have not kept up with the current practices
for key processes in the areas of risk assessment, internal control,
and financial reporting. We found that management has not implemented a
systematic or formal risk assessment that evaluates the risks the
corporation faces from both external and internal sources. Such an
assessment provides a structure for implementing internal control and
other risk mitigation policies. Without an effective program of risk
assessment and internal control, LSC management does not have adequate
assurance that it is using organizational resources effectively and
efficiently, nor reasonable assurances that LSC's assets and operations
are protected. In addition, senior management has not established
comprehensive policies or procedures regarding conflicts of interest or
other issues of ethical conduct. Without such policies and procedures,
LSC is at risk of not identifying potential conflicts of interest and
taking appropriate actions to avoid potentially improper transactions
or actions on the part of LSC personnel and the resulting loss of
credibility to LSC as an organization. Also, management has not
conducted its own assessment or analysis of accounting standards to
determine the most appropriate standards for LSC to follow.
Consequently, it is not clear which standards are most relevant for LSC
to follow and which would provide the best financial information to
LSC's management and financial statement users.
In this report we have included a matter for congressional
consideration concerning whether LSC should have additional
legislatively mandated governance and accountability requirements
modeled after what has worked successfully at federal agencies or U.S.
government corporations. These requirements could be established either
by amending LSC's current governing statutes or by converting LSC to a
federal entity, such as a U.S. government corporation or an independent
federal agency. We are also making recommendations to LSC's board for
modernizing and strengthening its governance and oversight, including
action directed at formalizing a comprehensive orientation program and
an ongoing training program, conducting a performance assessment,
creating audit and compensation committees, developing and implementing
an approach to evaluate certain key management processes periodically,
and ensuring that LSC's audited financial statements are issued more
promptly. We are also making recommendations to LSC management directed
at improving its accountability by conducting a risk assessment and
implementing a corresponding risk management program as part of a
comprehensive evaluation of internal control, including establishing
policies for handling conflicts of interest (ethics) and evaluating
accounting standards.
We received written comment letters from the Chairman on behalf of
LSC's Board of Directors and the President on behalf of LSC's
management. Both the Chairman and President expressed their commitment
to achieving strong governance and accountability and outlined actions
that LSC's board and management plan to take in response to our
recommendations. Both LSC's Chairman and President commented on the
matter that we presented for congressional consideration and provided
their views that LSC's governing statutes are appropriate and have
worked well and stated that many of the governance recommendations
could be accomplished without changing the statutory framework of LSC.
We presented the options of amending LSC's governing statutes to
improve governance and accountability requirements or converting LSC to
a federal entity, which would include compliance with related
governance and accountability requirements, since federal agencies and
government corporations have been subject to strengthened governance
and accountability requirements over recent years and LSC has not kept
up with evolving reforms.
Background:
LSC is a private, nonprofit corporation that is federally funded for
the purpose of making federal resources available to support local
providers of civil legal services for low-income people, with the goal
of providing equal access to the justice system "for individuals who
seek redress of grievances" and "who would be otherwise unable to
afford adequate legal counsel." Since LSC was federally chartered by
statute over three decades ago in the LSC Act, Congress has been making
annual appropriations to LSC to provide grants to eligible legal
service providers to carry out the purposes of the LSC Act's
requirement "to provide the most economical and effective delivery of
legal assistance."[Footnote 8] Since 1996, LSC has been required to
select its grant recipients through a competitive award
process.[Footnote 9] Today, LSC funds grant recipients in all 50
states, as well as the District of Columbia and all five U.S.
territories. In fiscal year 2006, LSC reported distributing a total of
$313.9 million in grants.
Local legal service providers employ staff attorneys to assist eligible
clients in resolving their civil legal problems, often through advice
and referral. According to LSC, in a typical year the largest portion
of total cases (38 percent) concern family matters, followed by housing
issues (24 percent), income maintenance (13 percent), and consumer
finance (12 percent). LSC reported that most cases are resolved out of
court. In 2007, LSC reported that three out of four clients were women,
most of them mothers. Most clients were at or below 125 percent of the
federal poverty threshold, currently an income of approximately $25,000
a year for a family of four. The type of legal assistance that LSC
funding supports is subject to certain legal restrictions. By law, for
example, LSC cannot provide funds for legal services for a proceeding
related to a violation of the Military Selective Service Act or
participation in litigation related to abortion or a criminal
proceeding.
In 1974, Congress enacted the LSC Act to transfer the functions of the
Legal Services Program from the Executive Office of the President into
a private corporation.[Footnote 10] Through the LSC Act, Congress
chartered LSC in the District of Columbia as a private,
nonmembership,[Footnote 11] nonprofit corporation that would not be
considered a department, agency, or instrumentality of the federal
government. Under its federal charter (the LSC Act), LSC may only
pursue activities consistent with the corporate purpose of "providing
financial support for legal assistance in noncriminal proceedings or
matters to persons financially unable to afford legal assistance."
To direct the corporation, the LSC Act provides for a bipartisan Board
of Directors consisting of 11 voting members who are appointed by the
President of the United States with the advice and consent of the U.S.
Senate. Neither the President nor the Senate has the power to remove a
director. A director can only be removed for cause, such as a
persistent neglect of duties, by a vote of at least 7 directors.
Although the LSC Act does not require board members to possess
management or financial expertise, it does include some membership
requirements: no director may be a full-time U.S. government employee,
a majority of the directors must be attorneys belonging to the bar of
the highest court of a U.S. state, and at least one director must be
from the legal service client community. The LSC Act requires the board
to meet at least four times each calendar year and prohibits board
members from participating in any decision, action, or recommendation
related to a matter that directly benefits the board member or pertains
specifically to any entity with which the board member has been
associated in the past 2 years.[Footnote 12] The LSC Act prohibits LSC
personnel and grant recipients from engaging in certain prohibited
activities, such as legal assistance related to a criminal proceeding
or participation in litigation related to an abortion, and the LSC
Board of Directors, which is charged with managing the affairs of the
corporation, is responsible for ensuring compliance with these
restrictions.
The LSC Act requires the Board of Directors to appoint the LSC
President and any other necessary officers,[Footnote 13] and provides
that the LSC President may appoint any employees necessary to carry out
LSC's purposes. LSC officers and employees can be fairly easily
appointed and removed, creating essentially at-will employment[Footnote
14] relationships. In addition to the power to appoint and remove LSC
employees and to serve as an ex- officio,[Footnote 15] nonvoting member
of the Board of Directors, the LSC President, who is the only officer
specifically provided for in the LSC Act, is authorized to make grants
and enter into contracts that bind LSC.
As a D.C. nonprofit corporation, LSC generally possesses all the powers
conferred on such corporations under the D.C. Nonprofit Corporation
Act, which includes a number of general corporate powers,[Footnote 16]
such as the power to sue and be sued in its corporate name, exercise a
number of rights related to real and personal property, enter into
contracts, and borrow money and issue debt obligations. Other corporate
powers include investing and lending money, appointing officers and
agents and defining their duties and fixing their compensation, making
bylaws to administer and regulate corporate affairs, and "hav[ing] and
exercis[ing] all powers necessary or convenient to effect any or all of
the purposes for which the corporation is organized." LSC's exercise of
such corporate powers, however, is restricted where inconsistent with
the LSC Act. For example, the LSC board's discretion in fixing its
officers' and employees' compensation is limited by an LSC Act
provision prohibiting LSC from compensating its personnel at rates in
excess of the rate of level V of the Executive Schedule.[Footnote 17]
Unlike most D.C. nonprofit corporations, LSC's exercise of its
corporate powers has received additional oversight since 1988 when
Congress subjected LSC to the Inspector General Act of 1978, as amended
(IG Act).[Footnote 18] As an independent office within LSC, the LSC OIG
is authorized to carry out audits and investigations of LSC programs
and operations, recommend policies to improve program administration
and operations, and keep the LSC board and Congress fully and currently
informed about problems in program administration and operations and
the need for and progress of corrective action.[Footnote 19] Also,
unlike most D.C. nonprofit corporations, LSC is subject to
congressional oversight through the annual appropriations process as
well as responding to congressional inquiries and participating in
hearings. In its annual appropriation for LSC, Congress regularly
appropriates a specific amount for the OIG. For example, Congress
appropriated about $2.54 million for the LSC OIG in fiscal years 2006
and 2007.[Footnote 20] Because in fiscal year 2007 LSC received an
increase in its annual appropriation of about $17.78 million that was
not allocated for a specific purpose, LSC officials told us that LSC,
consistent with congressional guidance,[Footnote 21] used $430,000 of
this amount to increase funding for the OIG from about $2.54 million in
fiscal year 2006 to $2.97 million in fiscal year 2007. (See fig. 1.)
It has been three decades since LSC was last comprehensively reviewed
and reauthorized in the Legal Services Corporation Amendments Act of
1977,[Footnote 22] and LSC's statutory framework has undergone only
limited changes since then. Today LSC is governed by the powers and
restrictions in its federal charter (the LSC Act) and, where not
inconsistent, the D.C. Nonprofit Corporation Act,[Footnote 23] as well
as the IG Act, the federal tax law requirements for tax-exempt status
for nonprofit corporations, and LSC's annual appropriations acts, which
since 1996 have included a number of administrative provisions imposing
additional grants management duties.
Figure 1: Figure 1: Legal Services Corporation Federal Funding between
Fiscal Years 1991 and 2006:
[See PDF for image]
Source: GAO based on LSC audited financial statements.
[End of figure]
Unlike most private, nonprofit corporations, the vast majority of LSC's
funding comes from annual federal appropriations, which originally were
authorized under the LSC Act. The LSC Act specifies that the
appropriated funds authorized under the act are available until
expended and shall be paid to LSC in one annual installment at the
start of the fiscal year. Although annual appropriations for LSC have
not been authorized since fiscal year 1980 under the LSC Act, Congress
has continually enacted annual appropriations to be paid to LSC to
carry out the purposes of the LSC Act. For fiscal year 2007, Congress
appropriated almost $349 million for LSC. The LSC Act permits LSC to
receive and retain nonfederal funds, but LSC's recent audited financial
statements show that for fiscal years 1991 through 2006, approximately
99 percent of LSC's revenues came from federal appropriations.[Footnote
24] In addition to direct funding through annual appropriations, the
LSC Act makes certain indirect federal support available to LSC by
providing that the President of the United States may make support
functions of the federal government available to LSC.[Footnote 25]
For both governmental and nonprofit entities, governance can be
described as the process of providing leadership, direction, and
accountability in fulfilling the organization's mission, meeting
objectives, and providing stewardship of public resources, while
establishing clear lines of responsibility for results. Accountability
represents the processes, mechanisms, and other means--including
financial reporting and internal controls--by which an entity's
management carries out its stewardship and responsibility for resources
and performance. To provide accountability to Congress, the LSC Act
provides for Senate advice and consent on the selection of board
members, annual appropriations that constitute virtually all of LSC's
annual revenues, and treatment of LSC as a federal entity in limited
situations either by directly subjecting LSC to certain federal laws or
indirectly by modeling provisions in the LSC Act after provisions in
laws existing in the 1970s. For example, the LSC Act makes LSC subject
to provisions in the Freedom of Information Act (FOIA) and the
Government in the Sunshine Act, compensation limits imposed on officers
and employees at level V of the Executive Schedule, and employer
contribution requirements for participation in certain employee
benefits programs, as well as requiring LSC to engage in notice-and-
comment rule making and to provide us with access to its records.
LSC Is Subject to Weaker Governance and Accountability Requirements
Than Federal Entities but More Federal Oversight Than Nonprofit
Corporations:
Although LSC is subject to more statutory governance and accountability
requirements than most private, nonprofit corporations, it is subject
to governance and accountability requirements that are weaker than
those of most independent federal agencies[Footnote 26] headed by
boards or commissions and U.S. government corporations. In chartering a
private, nonprofit corporation to perform a public assistance role with
federal funding, Congress in the 1970s included certain provisions in
the LSC Act to provide for governance and accountability. The LSC Act
includes provisions providing that LSC shall be treated like a federal
agency for purposes of specified statutes that existed in the 1970s
when the LSC Act was first enacted and amended. In 1988, Congress
created an OIG within LSC. Therefore, LSC is subject to some governance
and accountability requirements that are comparable to those of federal
entities, including the presence of an OIG in the governance structure
and submission of its budget for the congressional appropriations
process. Nonprofit corporations typically are subject to limited
federal requirements related to governance and accountability; however,
as discussed later, nonprofit corporations have voluntarily chosen to
incorporate many practices in these areas. In other respects, LSC is
not subject to standard governance and accountability requirements for
federal entities including provisions related to performance and
financial reporting, internal controls, and funds control. Additional
management areas are discussed in appendix III, and an expanded table
is in appendix IV.
Governance Structures:
Similar to most independent federal agencies and U.S. government
corporations, LSC is headed by a multiperson body (i.e., commission or
board of directors) consisting of presidentially appointed and Senate-
confirmed members[Footnote 27] and has an OIG. (See table 1.)
Table 1: Key Statutory Governance Structures:
Inspector general;
LSC: IG Act;
Independent federal agencies: IG Act;
U.S. government corporations: IG Act;
D.C. nonprofit corporations: Generally not applicable, but IG Act
applies to the Corporation for Public Broadcasting (CPB).
Committees authorized;
LSC: D.C. Code § 29-301.22;
Independent federal agencies: Committees neither prohibited nor
required;
U.S. government corporations: Committees neither prohibited nor
required;
D.C. nonprofit corporations: D.C. Code § 29-301.22.
Governing body;
LSC: Board of directors: presidential appointment with Senate approval
and for cause removal by vote of seven directors;
Independent federal agencies: Independent federal agencies headed by a
multiperson body:
Commission or board of directors: Mostly presidential appointment with
Senate approval, often silent on removal;
U.S. government corporations: Board of directors: Mostly presidential
appointment with Senate approval, often silent on removal;
D.C. nonprofit corporations: Board of directors: D.C. Code §§ 29-
301.18, 29- 301.19;
CPB Act, presidential appointment with Senate approval, silent on
removal.
Source: GAO.
[End of figure]
A common form of governance for independent federal agencies and U.S.
government corporations is a multiperson body consisting of either a
board of directors (agencies and corporations) or a commission (only
agencies), both of whose members are generally appointed by the
President of the United States and confirmed by the U.S. Senate. For
example, the President appoints and the Senate confirms the members of
the boards of directors for the Federal Deposit Insurance Corporation
(FDIC) and Pension Benefit Guaranty Corporation (PBGC) (both U.S.
government corporations),[Footnote 28] the National Science Foundation
(NSF) and the Federal Housing Finance Board (both independent federal
agencies),[Footnote 29] as well as the commissioners of the Securities
and Exchange Commission (SEC) and the Nuclear Regulatory Commission
(NRC) (both independent federal agencies).[Footnote 30]
The directors of LSC may only be removed for cause by a vote of seven
other directors. This level of statutory removal protection is unique
in two ways. First, it restricts the reasons for removal to only those
listed in the statute, and second, it precludes removal by the
President of the United States or Congress. In many cases, the board or
commission members of a federal entity have less tenure protection and
serve at the will of the President of the United States, such as the
PBGC directors, who are the Secretaries of Labor, the Treasury, and
Commerce. Nonprofit corporations incorporated in the District of
Columbia are required to be managed by a board of directors, consisting
of at least three directors, who serve for the terms specified in the
articles of incorporation or bylaws. A director of a D.C. nonprofit
corporation may be removed by any procedure provided in the articles of
incorporation or bylaws. If not so provided, then removal with or
without cause is permitted upon a vote that would suffice for the
election of a director for the organization.[Footnote 31]
No federal law specifically requires the board of directors of a U.S.
government corporation or a board of directors or commission of an
independent federal agency to designate audit or other committees, but
neither does any law prohibit the establishment of such committees. The
D.C. Nonprofit Corporation Act expressly authorizes, but does not
require, boards of nonprofit corporations to designate and delegate
authority to committees.[Footnote 32] In certain instances, the
statutes establishing federal entities may authorize the designation
and delegation of authority to committees, such as the statute
governing NSF (an independent federal agency).[Footnote 33]
Since 1977, there has been only one governmentwide management law that
specifically included LSC as a covered entity and thus required a
change to LSC's governance structure. In 1988, Congress amended the IG
Act[Footnote 34] to add OIGs to additional entities receiving
significant federal funding, including "designated federal entities"
(DFE), which are statutorily defined.[Footnote 35] LSC was listed as a
DFE, along with such other entities as PBGC, SEC, and Amtrak, which
are, respectively, a wholly owned U.S. government corporation, an
independent federal agency, and a federally established private, for-
profit corporation that receives some federal funding.[Footnote 36] The
only other private, nonprofit corporation included as a DFE was CPB.
Like the other OIGs of DFEs that are independent federal agencies and
U.S. government corporations, the LSC OIG was created as an
"independent and objective" office to carry out audits and
investigations of LSC programs and operations, recommend policies to
improve program administration and operations, and keep the LSC board
and Congress fully and currently informed about problems in program
administration and operations and the need for and progress of
corrective action.[Footnote 37] In its annual appropriation for LSC,
Congress regularly appropriates a specific amount for the OIG. For
example, Congress appropriated about $2.54 million for the LSC OIG in
fiscal years 2006 and 2007.[Footnote 38] Because in fiscal year 2007
LSC received an increase in its annual appropriation of about $17.78
million that was not allocated for a specific purpose, LSC officials
told us that LSC, consistent with congressional guidance,[Footnote 39]
used $430,000 of this amount to increase funding for the OIG from about
$2.54 million in fiscal year 2006 to $2.97 million in fiscal year 2007.
Funds Control and Budgeting:
Like other private, D.C. nonprofit corporations, LSC is not subject to
federal funds control laws that generally apply to independent federal
agencies and many U.S. government corporations, including the
Antideficiency Act, the Purpose Statute, and laws governing liability
of accountable officers for improper or illegal uses of funds; however,
LSC is required to submit an annual budget request to Congress. (See
table 2.)
Table 2: Key Statutory Funds Control and Budgeting Requirements:
Limitation on amount of funds available for use;
LSC: None;
Independent federal agencies: Antideficiency Act;
U.S. government corporations: Wholly owned U.S. government
corporations: Antideficiency Act;
D.C. nonprofit corporations: None.
Use of funds for authorized purposes only;
LSC: None;
Independent federal agencies: Purpose Statute (31 U.S.C. § 1301(a));
U.S. government corporations: Purpose Statute (31 U.S.C. § 1301(a));
D.C. nonprofit corporations: None.
Annual budget;
LSC: LSC Act (request made directly to Congress): no content or form
requirements;
Office of Management and Budget comment and review allowed);
Independent federal agencies: 31 U.S.C. §§ 1105, 1108 (agency budget
submitted to the President for inclusion in the Budget of the U.S.
Government);
U.S. government corporations: Wholly owned U.S. government
corporations: 31 U.S.C. § 1105 and 31 U.S.C. § 9103 (Government
Corporation Control Act);
D.C. nonprofit corporations: Generally not applicable;
CPB prepares an annual budget.
Liability of accountable officers for improper or illegal use of funds;
LSC: None;
Independent federal agencies: 31 U.S.C. §§ 3528, 3325;
U.S. government corporations: Some wholly owned U.S. government
corporations: 31 U.S.C. §§ 3528, 3325;
D.C. nonprofit corporations: None.
Source: GAO.
[End of table]
Like many independent federal agencies and wholly owned government
corporations, most of LSC's annual revenues come from federal funds
made available through annual appropriations; however, LSC is not
required by law to control its use of those funds as are independent
federal agencies and wholly owned U.S. government
corporations.[Footnote 40] The Antideficiency Act, among other things,
prohibits officers and employees of the government from obligating or
expending funds in advance of or in excess of appropriations.[Footnote
41] This applies to the officers and employees of independent federal
agencies and wholly owned U.S. government corporations, where personnel
are officers and employees of the government. The Purpose Statute
requires federal agencies and all U.S. government corporations, both
mixed ownership and wholly owned, to use appropriated funds only for
the purposes provided in law.[Footnote 42] Further, for most federal
agencies and some wholly owned U.S. government corporations, such as
the Tennessee Valley Authority and the Federal Prisons Industries
Incorporated,[Footnote 43] accountable officers[Footnote 44] are
financially liable for improper or illegal payments.[Footnote 45] None
of these funds control statutes apply to LSC or, in general, other
nonprofit corporations that receive federal funds.[Footnote 46] The LSC
Act does contain a number of provisions that restrict the use of LSC's
appropriated funds for certain purposes, such as an activity that would
influence the passage or defeat of any legislation at the local, state,
or federal level or that would support any political party or campaign
of any candidate for public office.[Footnote 47]
Unlike D.C. nonprofit corporations in general, and like independent
federal agencies and wholly owned U.S. government corporations, each
year LSC must prepare a new budget request as part of the annual
appropriations process. The LSC Act requires LSC to submit a budget
request to Congress, but provides no requirements related to the form
and content of the budget request. For federal agencies and wholly
owned U.S. government corporations, the Office of Management and Budget
(OMB) prescribes the form and content of budget requests, consistent
with specified statutory requirements, that are submitted through the
President to Congress.[Footnote 48] Under the LSC Act, LSC submits that
budget request directly to Congress, with OMB's role limited to
submitting comments to Congress if it chooses to review LSC's budget.
As a federally chartered, private nonprofit D.C. corporation, CPB also
must annually prepare a budget request as part of the annual
appropriations process. Unlike LSC, however, CPB requests and receives
funding for 2 years (i.e., funding for fiscal 2008 was provided in the
fiscal year 2006 appropriations act.)[Footnote 49] Once the level of
the annual appropriations act is enacted, CPB's appropriation is paid
into the Public Broadcasting Fund, which is a fund established in the
Treasury and administered by the Secretary of the Treasury. In
accordance with CPB's federal charter, CPB determines how to allocate
amounts in the fund.[Footnote 50]
Performance and Financial Reporting:
Unlike D.C. nonprofit corporations in general but like CPB, the LSC Act
requires LSC to have its accounts audited annually. By contrast,
independent federal agencies and U.S. government corporations are
subject to more detailed financial and performance planning and
reporting requirements. When the LSC Act was enacted in the 1970s,
audited financial statements were not prepared for federal agencies and
LSC as a private, nonprofit corporation was not subject to the
financial audit requirements imposed on public companies and U.S.
government corporations. The LSC Act requires LSC to have its accounts
audited by an independent public accountant annually in accordance with
generally accepted auditing standards (GAAS). The LSC Act does not
detail what must be included in the report or which accounting
standards to use. The LSC Act requires LSC to file this annual audit
report with us and make the audit report available for public
inspection at LSC headquarters during normal business hours. (See table
3.)
Table 3: Key Statutory Provisions for Performance and Financial
Reporting:
Financial statements or report;
LSC: Annual report on corporation accounts: LSC Act (report of annual
audit of LSC's accounts);
Independent federal agencies: Annual audited financial statements: 31
U.S.C. § 3515;
(Chief Financial Officers Act of 1990, Government Management Reform Act
of 1994, Accounta-bility of Tax Dollars Act of 2002);
U.S. government corporations: Annual audited financial statements: 31
U.S.C. §§ 9105, 9106 (Government Corporation Control Act);
D.C. nonprofit corporations: D.C. Code § 29-301.26 (keep correct and
complete books and records of account);
CPB required to prepare annual audit report on CPB accounts.
Accounting standards applied in practice;
LSC: No generally accepted accounting principles (GAAP) specified;
LSC now using Government Accounting Standards Board GAAP;
Independent federal agencies: Federal Accounting Standards Advisory
Board (FASAB) GAAP;
U.S. government corporations: Some FASAB GAAP;
some Financial Accounting Standards Board (FASB) GAAP;
D.C. nonprofit corporations: FASB GAAP.
Performance and strategic plans and reports;
LSC: None;
Independent federal agencies: Strategic plans: 5 U.S.C. § 306;
performance plans and reports: 31 U.S.C. §§ 1115-1116 (Government
Performance and Results Act of 1993);
U.S. government corporations: Strategic plans: 5 U.S.C. § 306;
performance plans and reports: 31 U.S.C. §§ 1115-1116 (Government
Performance and Results Act of 1993);
D.C. nonprofit corporations: D.C. Code § 29-301.26 (keep minutes of
board proceedings);
CPB required to submit annual report to President and Congress.
Source: GAO.
[End of table]
The LSC Act requirements for financial reporting are more rigorous than
the requirements for D.C. nonprofit corporations in general but less
than those for CPB. Most D.C. nonprofit corporations are only required
to keep correct and complete books and records of account and minutes
of the proceedings of their boards of directors. This information is
not required to be published or made available for public
inspection.[Footnote 51] Similar to LSC, CPB is required to annually
have its accounts audited by an independent public accountant in
accordance with GAAS.[Footnote 52] CPB's audit report must be included
in its annual report on its operations and activities, which it must
submit to the President for transmittal to Congress.[Footnote 53] Like
most D.C. nonprofit corporations, LSC is not required to submit a
similar annual report on its operations and activities to the President
or Congress.[Footnote 54]
Independent federal agencies and U.S. government corporations have
stronger financial and performance reporting requirements than LSC. The
Chief Financial Officers Act of 1990 (CFO Act), as amended by the
Government Management Reform Act of 1994 (GMRA), requires the major 24
agencies[Footnote 55] of the federal government, including some
independent federal agencies such as NSF and NRC, to submit annual
audited financial statements to OMB and Congress.[Footnote 56] These
financial statements must be prepared in accordance with generally
accepted accounting principles and audited in accordance with
applicable generally accepted government auditing standards (GAGAS).
The Accountability of Tax Dollars Act of 2002 (ATDA) expanded this
requirement[Footnote 57] to include most other federal executive
agencies.[Footnote 58] U.S. government corporations had been subject to
financial reporting requirements for many years under the Government
Corporation Control Act.[Footnote 59] Chapter 91 of Title 31 of the
U.S. Code, commonly known as the Government Corporation Control Act,
requires both mixed-ownership and wholly owned U.S. government
corporations to submit annual management reports to Congress (with
copies to the President, OMB, and GAO) no later than 180 days after the
end of the government corporation's fiscal year. OMB has accelerated
the submission deadline to no later than 45 days after the end of the
government corporation's fiscal year.[Footnote 60] Annual management
reports are required to include a:
* statement of financial position;
* statement of operations;
* statement of cash flows;
* reconciliation to the budget report of the corporation, if
applicable;
* statement of internal accounting and administrative control systems
by the head of corporation management, consistent with the requirements
under amendments to the act made by 31 U.S.C. § 3512 (c), (d), commonly
referred to as the Federal Managers' Financial Integrity Act of 1982
(FMFIA);
* a financial statement audit report prepared in accordance with GAGAS;
and:
* any other information necessary to inform Congress about the
operations and financial condition of the corporation.[Footnote 61]
Under OMB Circular No. A-136, Financial Reporting Requirements (rev.
July 24, 2006), annual performance and accountability reports (PAR)
issued by federal executive agencies consist of the annual performance
report required by the Government Performance and Results Act of
1993[Footnote 62] with audited financial statements and other
disclosures, such as agencies' (1) assurances on internal control, (2)
accountability reports by agency heads, and (3) inspectors general's
assessments of the agencies' most serious management and performance
challenges.[Footnote 63] OMB Circular No. A-136 states that PARs are
intended to provide financial and performance information to enable the
President, Congress, and the public to assess the performance of a
federal agency relative to its mission and to demonstrate the federal
agency's accountability.
LSC follows a fiscal year starting on October 1, and for the past 5
years has issued its financial statements in March or later, which is 6
months after its year-end. As noted, federal agencies are required to
issue their financial statements 45 days following their year-ends,
which is mid-November.
Internal Control Systems Requirements:
LSC's statutory requirements for internal control systems are less
rigorous than those for independent federal agencies or U.S. government
corporations; D.C. nonprofit corporations have no such statutory
requirements. (See table 4.) The LSC Act requires LSC to account for
federal funds separately from nonfederal funds, but otherwise includes
no specific requirements for the establishment of accounting and
internal control systems. The LSC Act imposes some program management
duties on the LSC directors to promote good stewardship of federal
taxpayer dollars by requiring that the directors manage LSC's programs
economically, effectively, and efficiently. For example, the LSC Act
requires the LSC board to ensure that LSC makes grants "so as to
provide the most economical and effective delivery of legal assistance
to persons in both urban and rural areas." The LSC Act also requires
the board to ensure that grant recipients adopt procedures for
determining priorities on how to allocate their assistance among
eligible clients. Additionally, the LSC Act imposes a program
evaluation requirement on the board, requiring it to monitor, evaluate,
and provide for independent evaluations of LSC-supported programs to
ensure that the programs comply with the LSC Act; bylaws; and
implementing rules, regulations, and guidelines.
Table 4: Key Statutory Internal Control Systems Requirements:
System of internal control and assurances; LSC: None; Independent
federal agencies: 31 U.S.C. § 3512(c), (d) (Federal Managers' Financial
Integrity Act of 1982); U.S. government corporations: 31 U.S.C. § 9106
(Government Corporation Control Act); D.C. nonprofit corporations:
None.
Information system security; LSC: None; Independent federal agencies:
Federal Information Security Management Act of 2002; U.S. government
corporations: Federal Information Security Management Act of 2002; D.C.
nonprofit corporations: None.
[End of table]
Source: GAO.
Although the LSC Act includes program management requirements, these
are much less rigorous than requirements for systems of internal
control, to which federal entities are subject. Managers of federal
entities depend on sufficient internal control to achieve desired
results through effective stewardship of organizational resources.
Internal control, which supports performance-based management, involves
the methods and procedures management uses to have reasonable assurance
that objectives, such as the following, are being met: effectiveness
and efficiency of operations, reliability of financial reporting, and
compliance with applicable laws and regulations. Federal agencies are
subject to the following legislative and regulatory requirements that
promote and support effective internal control.
* FMFIA, or 31 U.S.C. § 3512(c), (d), provides the statutory basis for
management's responsibility for and assessment of internal control. OMB
Circular No. A-123, Management's Responsibility for Internal Control
(rev. Dec. 21, 2004), sets out the guidance for implementing the
statute's provisions, including agencies' assessment of internal
control under the standards prescribed by the Comptroller General.
Agencies are required to annually provide a statement of assurance on
the effectiveness of internal control. U.S. government corporations are
not subject to FMFIA, but they are subject to similar requirements
under the Government Corporation Control Act, which incorporates by
reference the FMFIA standards in requiring U.S. government corporations
to include in their annual management reports a statement on internal
accounting and administrative control systems.
* The CFO Act requires the 24 CFO Act agencies' chief financial
officers (CFO), including the CFOs of such independent federal agencies
as NSF and NRC, to maintain an integrated accounting and financial
management system that includes financial reporting and internal
controls.[Footnote 64]
* The Federal Financial Management Improvement Act of 1996,[Footnote
65] as implemented by OMB Circular No. A-127, Financial Management
Systems (rev. Dec. 1, 2004), requires the 24 CFO Act agencies to
implement and maintain integrated financial management systems that
comply substantially with federal financial management system
requirements, applicable federal accounting standards, and the U.S.
Government Standard General Ledger at the transaction level.
Recent federal governmentwide initiatives have contributed to
improvements in financial management and placed greater emphasis on
implementing and maintaining effective internal control over financial
reporting. In December 2004, OMB issued a significant update to its
Circular No. A-123, which is the implementing guidance for FMFIA. The
update requires the 24 CFO Act agencies to include the FMFIA annual
report in their PARs, under the heading "Management Assurances." The
FMFIA annual report must include a separate assurance on internal
control over financial reporting, along with a report on identified
material weaknesses and actions taken by management to correct those
weaknesses.
FMFIA and OMB Circular No. A-123 apply to each of the three objectives
of internal control outlined in GAO's Standards for Internal Control in
the Federal Government[Footnote 66]: effective and efficient
operations, reliable financial reporting, and compliance with
applicable laws and regulations. OMB Circular No. A-123 calls for
internal control standards to be applied consistently toward each of
the objectives. The circular's new Appendix A, which is a requirement
only for the 24 CFO Act agencies, requires management to document the
process and methodology for applying A-123 standards when assessing
internal control over financial reporting.
One important area of internal control today for both independent
federal agencies and U.S. government corporations is the development
and implementation of an entitywide information security program, as
required by the Federal Information Security Management Act of 2002
(FISMA).[Footnote 67] As part of that program, FISMA requires entity
heads to periodically (1) perform risk assessments of the harm that
could result from information security problems, such as the
unauthorized disclosure or destruction of information; (2) test and
evaluate the effectiveness of elements of the information security
program; and (3) provide security awareness training to personnel and
contractors. FISMA also requires the federal entity to annually have
its OIG or an external auditor perform an independent evaluation of the
entity's information security programs and practices to determine their
effectiveness and to annually submit a report on the adequacy and
effectiveness of information systems to OMB, GAO, and
Congress.[Footnote 68] Because it is not a federal entity, LSC, like
CPB and other D.C. nonprofit corporations, is not subject to FISMA and
has no special information security requirements.[Footnote 69]
LSC's Board Members Are Actively Engaged, but the Board's Governance
Practices Fall Short of Current Practices of Nonprofit Corporations:
LSC board members are actively engaged in the board meeting process as
they consistently attend and prepare for board and committee meetings.
Board meetings are generally attended by all board members. Board
members are provided with an agenda and related materials prior to each
board meeting. In addition, board members have interaction with both
management and the Inspector General (IG).
Nevertheless, the current board governance practices of LSC's board
fall short of current accepted practices employed by boards of
nonprofit corporations and public companies. Although LSC has an
informal orientation program for its members, the board does not have a
comprehensive, formal orientation or an ongoing training program for
board members. Keeping up with current practice is especially important
for the LSC board because board composition changes significantly with
each new presidential administration, resulting in a board that
generally does not have the benefit of experienced members. Also,
although the board has four established committees, it has not updated
its committee structure to include an audit committee or other
committees commonly found in nonprofit corporations or public companies
today. In addition, the board's current committees do not have charters
that identify their purposes and duties, which boards of similar
organizations would typically have. Finally, the board does not assess
its own performance. Because it has not incorporated many practices
currently considered necessary for effective governance, LSC's Board of
Directors is at risk of not fulfilling its role in effective governance
in keeping with its fiduciary duties. In fact, recent incidents of
compensation rates that exceed statutory limitations, questionable
expenditures, and potential conflicts of interest may have been
prevented by a properly implemented governance structure.
LSC's Board Members Have Actively Engaged through Meeting Attendance
and Participation:
The current LSC board's 10 members[Footnote 70] have attended most or
all of the board meetings in recent years. A few board members
indicated that their LSC board member role has been more time consuming
than they had expected or had experienced as board members with other
organizations. According to our survey, most board members are
satisfied or very satisfied with the frequency of the board meetings as
well as the timeliness and completeness of the information provided (in
the board books) to the board members to prepare for meetings. Board
members are provided with an agenda and a package of related materials
to assist them in preparing for each board meeting. During interviews
with us, board members indicated that they also receive information
regularly through e-mails and mailings in addition to the board books-
-primarily from the LSC President. Board members were generally
satisfied with their interaction with management, according to our
survey, while board members interviewed indicated a range of
interaction with the IG--some members only receive information such as
the IG reports while others directly discuss issues with the IG. The
LSC board has established a conflicts-of-interest policy that requires
board members to annually file financial, ownership, and relationship
disclosure reports.
LSC's current board of directors carries out its activities primarily
during the quarterly meetings of the full board and individual
committees. Although the board has established committees with specific
members, the committee meetings are typically not held concurrently and
most, if not all, board members attend all of the committee meetings,
which one board member felt was redundant. The annual board meeting is
typically held in January in Washington, D.C., while the remaining
three board meetings take place during site visits, most recently at
Little Rock, Arkansas, in April 2007. As needed, the board and
committees hold additional meetings or teleconference calls to handle
necessary business. Semiannually, the board issues a report to Congress
that discusses LSC's accomplishments. The board's most recent
activities have included the finance committee reviewing financial
results and discussing the budget, the annual performance committee
completing its performance appraisal of the LSC President and IG, and
the operations and regulations committee reviewing the proposed
employee handbook, approving the handbook, and providing the handbook
to the board for its review and approval.
Board Orientation and Training Do Not Provide Key Information on
Oversight and Fiduciary Responsibilities:
The LSC board currently has an informal orientation program whereby its
members are introduced briefly to the LSC program and legal
requirements, but the orientation does not include key information on
oversight and fiduciary responsibilities. LSC's orientation program
also does not provide specific information on Washington, D.C. law
governing nonprofits; the Internal Revenue Service (IRS) regulatory
requirements for nonprofit organizations; interpreting LSC's financial
statements; managing sensitive documents; FOIA requirements; or travel
expenditure limitations. New director training is a basic tool used by
well-functioning boards. It takes time for board members to learn about
the responsibilities of their positions and the workings of the
organization. If board members do not receive a comprehensive
orientation about their responsibilities and the unique requirements of
the organization they are responsible for directing, then they must
learn as they serve, potentially reducing their effectiveness in
fulfilling their governance roles and responsibilities as they learn.
Current practice for public companies and nonprofit corporations is to
provide board members with a broad-based orientation that encompasses
the organization's mission, vision, and strategic plan; its history;
the members' obligations and performance objectives, and board policies
on meetings and attendance; and board member job descriptions,
including their performance expectations and their fiduciary
obligations. The purpose of such a program is to prepare board members
for effectively fulfilling their oversight and governance role in the
organization.
Most (7 out of 10) of the current board members, in responding to our
survey, indicated that they received orientation or training on their
responsibilities as a board member. During interviews, some board
members who had attended orientation said it consisted of a day of
individual meetings, which was helpful. Our review of the orientation
materials provided to us by management indicated that topics covered
included the role of the IG and the General Counsel. During interviews,
board members who did and did not receive orientation indicated that
LSC could improve board member orientation. For instance, one board
member said that the 1-day orientation provided an understanding of
what LSC does, but did not necessarily provide general training on how
to be a board member.
The LSC board also does not have an ongoing (e.g., annual) training
program for its board members. A board needs to stay current with
information on changes in governance practices and in its regulatory
environment. Additionally, a board needs to be kept up-to-date on key
management practices and requirements in such areas as risk assessment
and mitigation, internal controls, and financial reporting so that the
board can oversee management's key processes. As the environment that a
board operates in changes, new issues--whether regulatory, current
practice, or industry specific--emerge with the changes. For instance,
although most of the requirements of the Sarbanes-Oxley Act of 2002 do
not apply to a nonprofit corporation or its board, it has had a
significant impact on the operating environment, and many of its
requirements have become current practice for nonprofit corporations.
An ongoing training program enables a board to stay abreast of current
governance practices and fiduciary duties. When we interviewed board
members, some noted that they stay current on governance practices by
reading materials provided by professional associations, LSC
management, or the IG, as well as through seminars they may attend as
part of their role on LSC or other boards. While this individual
initiative is valuable, board members' experience and knowledge varies,
and without an ongoing training program that can equip all members with
the same knowledge, board members risk being unable to work together as
an efficient and effective body.
LSC's Board Has Not Updated Its Committee Structure to Include
Important Committees:
A board establishes committees to aid the board's organization and
facilitate accomplishing the board's work. Depending upon the board's
needs, committees may be either standing (permanent) or ad hoc (for a
particular activity). Committees handle specific issues or topics and
make policy recommendations for the full board to consider. LSC's board
has four standing committees. However, it does not have an audit
committee, compensation committee, or ethics/compliance (ethics)
committee--all of which are commonly found in public companies and
nonprofit organizations. Table 5 lists LSC's current board committees
and the responsibilities of each committee.
Table 5: Legal Services Corporation Committees and Their Functions:
Committee: Annual performance reviews;
Functions:
* Conduct annual performance reviews of the LSC President and IG.
Committee: Finance;
Functions:
* Assist in the preparation and transmission of appropriations
requests;
* Recommend an operating budget for LSC and advise on any adjustments;
* Provide information as necessary to Congress and the executive
branch;
* Report to the board on status of appropriations bills or other
legislative proposals that may affect LSC;
* Recommend to the board procedures and mechanisms for internal audit
of expenditures.
Committee: Operations and regulations;
Functions:
* Recommend proposed bylaws for the board's consideration and adoption;
* Recommend proposed regulations;
* Receive reports from counsel on litigation and recommend action to
the board;
* Report to the board concerning how the board should carry out its
future rule making responsibilities;
* Address policy questions regarding the corporation's organizational
structure and the internal operations of the corporation, including
policies related to personnel.
Committee: Provision for the delivery of legal services;
Functions:
* Assist the board in implementing Section 1007(g) of the LSC Act, 42
U.S.C. § 2996f(g), by developing proposals for improvements in the
provision of legal services to the poor;
* Recommend methods for achieving the most efficient and effective
delivery of legal services, and assist the board in evaluating the
performance of the delivery system;
* Address policy issues regarding grant recipient audits, including
performance evaluations and compliance monitoring;
* Study the special legal needs faced by certain groups;
* Address other issues regarding the type, quality, and method of
delivering legal services.
Source: GAO based on LSC board resolutions.
[End of table]
Audit Committee:
LSC's board does not have an audit committee, which is a key element in
effective corporate governance today. According to the National Council
on Nonprofits Association, an audit committee provides independent
oversight of the organization's accounting and financial reporting and
oversees the organization's annual audits. An audit committee is
generally responsible for the appointment, compensation, and oversight
of the external auditor; handling board communication with the external
auditor regarding financial reporting matters; and overseeing the
entity's financial reporting and the adequacy of internal control over
financial reporting. The audit committee also serves the important role
of assuring the full board of directors that the entity has the
appropriate culture, personnel, policies, systems, and controls in
place to safeguard entity assets and to accurately report financial
information to internal and external users. Under the Sarbanes-Oxley
Act of 2002, public companies are required to have an audit committee
made up of independent directors, including at least one financial
expert, to oversee the company's financial reporting and audit
processes.[Footnote 71]
Although LSC's board has a finance committee, the finance committee's
responsibilities do not include those responsibilities required of
public company audit committees or those recommended for nonprofit
organizations' audit committees. In general, the LSC board's finance
committee is responsible for reporting on legislation and LSC's
appropriations as well as monitoring LSC's budget. Given LSC's status
as a federally funded nonprofit corporation, these are important
activities that are appropriately handled by a board-level committee.
However, the finance committee's current functions do not include
overseeing the audit process or communicating with the auditor about
financial reporting matters, which generally are the responsibilities
of the IG. The finance committee chair indicated to us that he has had
minimal interaction--primarily discussion about the annual meeting
presentation--with the independent auditor. New auditing
standards[Footnote 72] reinforce the importance of communication
between the auditor and those overseeing governance of an entity--
typically the audit committee representing the board. FDIC, a mixed-
ownership U.S. government corporation, which like LSC, has an IG who is
responsible for appointing the external auditor, established an audit
committee with the responsibility of ensuring that IG recommendations
get appropriately implemented by the organization. An audit committee
at LSC could enhance the governance structure by representing the board
in communicating with the external auditor and the IG, and ensuring
that IG recommendations and any weaknesses found during the financial
audit process are appropriately addressed by LSC's management. In
addition, an audit committee's oversight of LSC's financial reporting
on behalf of the board would enhance the board's effectiveness.
Compensation Committee:
LSC's board does not have a compensation committee. A compensation
committee is an accepted current practice for nonprofit corporations
and required for public companies listed on the New York Stock Exchange
(NYSE). A compensation committee of a board monitors the compensation
structure of the organization. According to the publication Corporate
Governance Best Practices,[Footnote 73] the compensation committee's
responsibilities should include overseeing the organization's
compensation structure, policies, and programs; establishing or
recommending to the board performance goals and objectives for members
of senior management; and establishing or recommending to the
independent directors compensation for the chief executive officer. For
LSC, this would include approving the LSC President's contract, which
includes the length of the contract and amount of compensation, and
providing oversight for LSC's compensation and structure. LSC currently
does have an annual performance review committee that is responsible
for annually evaluating the performance of the LSC President and IG,
but it is not responsible for the compensation structure and policies
for the organization.
For advice on complex compensation matters, board compensation
committees frequently use outside consultants. One such matter is
tracking the total cost of senior management's compensation packages so
the board has a full understanding of the organization's executive
compensation. For LSC, an outside consultant could assist the board in
understanding the statutes and regulations that specifically apply to
LSC officer and employee compensation. It is also a current practice
that the minutes of the compensation committee reflect and record arm's
length negotiations with the executive and his or her attorney,
including each proposal and counter offer. Current practice also has
the internal auditor verify that compensation paid to senior management
did not exceed what the board approved.
During our work, we noted that the fiscal year 2006 salaries of all
five LSC officers, three LSC OIG personnel (including the IG), and four
LSC employees exceeded the statutory compensation limitation. Each
affected officer's or employee's total salary in fiscal year 2006
exceeded the annual limitation on the rate of compensation established
by the LSC Act as the rate of level V of the Executive Schedule.
Because the compensation of LSC personnel is limited by the LSC Act to
this rate, we questioned why certain personnel received higher rates of
pay. LSC officials told us that the total salary included basic pay and
a locality pay adjustment. The locality portion of their compensation
caused the compensation limitation to be exceeded for the affected LSC
personnel.[Footnote 74] After we asked LSC officials to justify this
practice, they told us that during 2007 LSC's board had engaged outside
legal counsel to issue an opinion on whether LSC violated the statutory
compensation limitation. In May 2007, the outside counsel issued an
opinion to LSC concluding that LSC had not complied with the statutory
limitation on the rate of compensation.[Footnote 75] We agree with
outside counsel's conclusion. Although LSC senior management did not
state whether it agrees with the outside counsel's conclusion in its
legal opinion, LSC management told us that it is working with the LSC
Board of Directors and LSC's appropriations and authorizing committees
to take appropriate corrective action.
We also noted that during the board's most recent contract renewal
negotiations with LSC's President, the Chairman of the board conducted
contract renewal negotiations, based on a delegation of this
responsibility from the full board. However, the contract renewal
negotiations were conducted before the annual performance committee had
given the LSC President her annual review in January 2007 and, thus,
without the benefit of information from the performance evaluation.
Exceeding the limitations on the annual rate of compensation for
certain LSC personnel and conducting negotiations of the president's
contract renewal without relevant performance evaluation information
could have been avoided with properly designed and implemented
procedures for overseeing LSC's compensation structure and policies.
Without a properly designed and implemented process for overseeing
compensation, LSC remains at risk of not complying with related laws
and regulations and engaging in imprudent management practices.
Ethics Committee:
While operating in an ethically sensitive environment, the LSC board
does not have an ethics committee. An ethics committee is responsible
for ensuring that the corporation has systems in place to provide
assurance over employee compliance with the corporation's code of
conduct and ethics, which LSC also does not have. Ethics is important
as a component of the control environment that helps to set the tone at
the top of an organization. According to Standards for Internal Control
in the Federal Government,[Footnote 76] a positive control environment
includes integrity and ethical values that are provided by leadership
through setting and maintaining the organization's ethical tone,
providing guidance for proper behavior, removing temptations for
unethical behavior, and providing discipline when appropriate. Having
an ethics committee on the board is emerging current practice for
providing independent oversight over the organization's code of conduct
and systems in place to help ensure employee compliance with the code.
In recent years, LSC management has engaged in practices that may have
been prevented through effective implementation of strong ethics
policies. In September 2006, LSC's OIG issued a report detailing these
practices at LSC, based on a request from Congress.[Footnote 77] The
OIG found that food costs at meetings exceeded per diem allotments by
200 percent and that LSC used funds to pay travel expenses for its
president for business related to her positions with outside
organizations. The OIG also found that LSC hired acting special
counsels from grant recipient organizations causing potential conflicts
of interest. The special counsels are responsible for providing LSC
management with advice on policy while also being employees of
organizations that receive LSC grant money. The OIG--based on a
complaint from a confidential source--began investigating one acting
special counsel's organization but reported that it had been unable to
complete the investigation because the organization had failed to
provide documentation required by federal law and LSC grant
agreements.[Footnote 78] Without the presence of a strong ethics
committee providing effective oversight in the development,
implementation, updating, and training for the code of ethics, the
corporation is at increased risk of fraud or other ethical misconduct.
The Board and Its Individual Committees Do Not Have Charters:
The LSC board and its committees do not have charters that establish
their purpose and responsibilities. A charter is used to define the
committee's purpose, membership, and members' oversight duties and
responsibilities. LSC has a board resolution that provides descriptions
of the committees, but the resolution does not contain the elements of
a charter and the resolution has not been updated since it was issued
in 1995 for three of the four committees. The fourth committee was
established in 2003. Current practice is for boards and their
committees to each have a written charter that outlines
responsibilities, structure, membership criteria, and processes.
Current practice also includes reevaluating the charter periodically to
see if it needs updating. A charter benefits the board by providing a
foundation and focal point for board activities. In addition, the
board's activities can periodically be checked against the charter to
ensure that they continue to conform to the charter and, if necessary,
to update the charter. If the board and committees do not have charters
with the appropriate descriptions of their purposes and
responsibilities, the board is at increased risk that the board's
members will not be effective in carrying out their specific oversight
responsibilities.
LSC's Board of Directors Has Not Assessed Its Performance:
The LSC board does not assess the board or committee performance
collectively, or the individual performance of its board members. A
board's self-assessment allows the board to periodically determine
whether it is meeting its intended goals and fulfilling its duties and
provides information needed by the board to make adjustments to its
processes and its oversight of management. Board assessments are common
practice for nonprofit corporation boards and a NYSE listing
requirement for audit committees of public companies. An assessment can
include (1) an overall self-assessment of the entire board, (2) an
assessment of the separate board committees, (3) individual board
member assessments, or (4) all three. If a board does not assess its
performance, it is missing a key opportunity for input from its own
members for improving the board's operations and governance policies. A
self-assessment enables the board to identify areas for improvement in
the board's operating procedures, its committee structure, and its
governance practices. Many of the issues we explored during the course
of this audit could be evaluated through a board self-assessment. In
addition, some board members told us that documents are not provided
well enough in advance to allow a thorough review of the information
prior to the meetings or that board members are not receiving the
information that they need to fulfill their duties. Such situations
could be identified and addressed by the board in a self-assessment.
Without a feedback and assessment mechanism, the board runs the risk of
not being aware of issues that need to be addressed to improve the
board's functioning.
LSC Management Practices Have Not Kept Up with Current Practices for
Key Processes in the Areas of Risk Assessment, Internal Control, and
Financial Reporting:
LSC's management practices have not kept up with current practices in
key areas. Specifically, we found that management has neither conducted
a risk assessment nor implemented a risk management program to mitigate
identified risks, which should include a comprehensive continuity of
operations plan (COOP). Risk assessment programs identify the risks the
corporation faces and risk mitigation allows management to implement
policies that mitigate the risks. A well-designed and tested
comprehensive COOP helps mitigate risks from unexpected incidents that
can cause great damage and disruptions to operations. Also, senior
management has not conducted an assessment of the organization's
internal controls and has not evaluated the financial reporting
standards that should be used for its financial statements. Internal
control assessment and monitoring are important because they provide
reasonable assurance that internal control failures will be prevented
or promptly detected. Financial reporting standards determine how an
organization records its financial transactions and presents the
financial statements. Without an internal control assessment and
financial reporting standards, LSC management does not have adequate
assurance that the assets and operations are protected, that funds are
being used appropriately, and that related risks are being mitigated. A
key role of the board is to oversee management practices in the areas
of risk assessment and mitigation, internal control, and financial
reporting.
LSC Management Has Not Thoroughly Assessed Internal Controls or
Conducted a Risk Assessment:
Management has not completed a thorough assessment of its internal
controls or implemented risk mitigation policies in response to a
systematic or formal risk assessment. According to the Standards for
Internal Control in the Federal Government,[Footnote 79] internal
control should provide for an assessment of the risks the agency faces
from both external and internal sources. Management of public companies
is required under the Sarbanes-Oxley Act of 2002 to annually assess and
report on the effectiveness of the company's internal controls over
financial reporting.[Footnote 80] Since fiscal year 2006, management of
the 24 CFO Act agencies has also been required by OMB guidance[Footnote
81] to assess and report on the effectiveness of the agencies' internal
controls over financial reporting and compliance with laws and
regulations as part of an overall internal control assurance process.
As noted earlier, 31 U.S.C. § 3152(c),(d), or FMFIA, required federal
agencies to establish internal accounting and administrative control.
Assessing and reporting on the effectiveness of internal controls over
financial reporting has become an accepted practice among nonprofit
corporations.
Internal control is an integral component of an organization's
management that provides reasonable assurance that the following
objectives are being achieved: effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with
applicable laws and regulations.[Footnote 82] Internal controls serve
as the first line of defense in safeguarding assets and preventing and
detecting errors and fraud.
The following are the five standards of internal control, which define
elements of internal control and provide the basis against which
internal control is to be evaluated.
* Control environment. Management and employees should establish and
maintain an environment throughout the organization that sets a
positive and supporting attitude toward internal control.
* Risk assessment. Internal control should provide for an assessment of
the risks the entity faces from both external and internal sources.
* Control activities. Internal control activities help ensure that
management's directives are carried out. The control activities should
be effective and efficient in accomplishing the entity's control
objectives.
* Information and communication. Information should be recorded and
communicated to management and others within the entity who need it and
in a form and within a time frame that enables them to carry out their
internal control and other responsibilities.
* Monitoring. Internal control monitoring should assess the quality of
performance over time and ensure that the findings of audits and other
reviews are properly resolved.
The chief executive officer generally has primary responsibility for
risk assessment and risk management under the direction of the board of
directors. A risk assessment process includes such areas as operations,
compliance, and financial reporting, in which management
comprehensively identifies risks, and considers significant
interactions between the entity and external parties as well as
internal risks at both the entitywide and activity level. Risk
assessment is also an integral part of the Committee of Sponsoring
Organizations of the Treadway Commission internal control
framework[Footnote 83] and an entity's effective implementation of
internal controls. All entities, regardless of size, structure, nature,
or industry, encounter risks at all levels within their organizations.
Through the risk assessment process, management determines how much
risk is to be prudently accepted and strives to maintain risk within
these levels.
Auditing standards that became effective on or after December 15,
2006,[Footnote 84] cite ineffective oversight of the entity's financial
reporting and internal control by those charged with governance, as
well as an ineffective control environment, as indicators of control
deficiencies and strong indicators of material weaknesses in internal
control. The standards include the following examples of deficiencies
in the design of controls that may be control deficiencies, significant
deficiencies, or material weaknesses that would be reported by the
auditor: (1) inadequate documentation of the components of internal
control, (2) inadequate design of monitoring controls used to assess
the design and operating effectiveness of the entity's internal control
over time, and (3) the absence of an internal process to report
deficiencies in internal control to management on a timely basis.
According to LSC management, it relies on a cycle memorandum[Footnote
85] prepared by LSC's external auditor as management's assessment of
internal controls. However, the cycle memorandum contains process
descriptions and does not identify internal controls, their objectives,
or the assertions (completeness, rights and obligations, valuation,
existence, and presentation and disclosure) that the controls are
intended to ensure and the risks that need to be addressed through
controls. LSC's Treasurer/Controller told us that LSC management has
not conducted its own formal assessment of internal controls. The
Treasurer does conduct ongoing, informal assessments of certain
financial processes on an ad hoc basis. However, these assessments are
not utilized as part of a comprehensive internal control evaluation.
Without comprehensive internal control assessment and monitoring, LSC
is at risk that it will not prevent or promptly detect internal control
failures, including unauthorized or improper use of federal funds or
violations of laws or regulations in its operations.
Code of Conduct and Ethics:
LSC currently does not have a code of conduct that establishes a
conflict-of-interest or ethics policy for its employees. A conflict-of-
interest policy is intended to help ensure that when actual or
potential conflicts of interest arise, the organization has a process
in place under which the affected individual will recognize the
potential conflict and advise management or the governing body about
the relevant facts so that potential conflicts of interest can be
resolved. Ethics provisions in the LSC Act[Footnote 86] and elaborated
on in the LSC bylaws (§ 3.05) pertain only to the outside interests of
the Board of Directors. LSC bylaws give the board authority to adopt
rules and regulations regarding the conduct of officers and employees
in matters of any adverse interest to LSC. At the time of our review,
the only conflict-of-interest policy affecting employees was a
prohibition against gifts, fees, and honoraria greater than $50. LSC
policy also states that officers of the corporation must have any
outside compensation approved by the board.
Federal employees are subject to various statutes and regulations that
govern ethical conduct, including public financial disclosure
requirements and outside earned income and activities limitations under
the Ethics in Government Act of 1978, as amended,[Footnote 87] and
restrictions on gifts to federal employees and acceptance of travel and
related expenses from nonfederal sources enacted by the Ethics Reform
Act of 1989.[Footnote 88] The Office of Government Ethics provides
leadership for executive branch agencies and departments to prevent
conflicts of interest on the part of government employees and to
resolve conflicts that do arise.
The NYSE and the other stock exchanges have adopted corporate
governance requirements to aid their listed companies in complying with
ethics requirements contained in the Sarbanes-Oxley Act of
2002.[Footnote 89] NYSE-listed companies must adopt codes of business
conduct and ethics for directors, officers, and employees, and post the
codes on their Web sites. Under the Sarbanes-Oxley Act and the related
implementation guidance, codes of conduct and ethics should address
conflicts of interest, confidentiality, protection and proper use of an
organization's assets, and compliance with laws and regulations, and
encourage reporting of illegal or unethical behavior. The American Bar
Association (ABA) encourages nonprofit organizations to adopt similar
policies.
During the LSC operations and regulations committee meeting in April
2007, a board member suggested that a future agenda item should be
development of a compliance program that includes a code of conduct.
Without such a program that includes conflict-of-interest and ethics
policies, LSC is at risk of personnel being unaware of their
responsibility in the area of ethics and conflicts of interest,
including incidents of illegal or unethical behavior occurring and not
being detected.
LSC Management Has Not Designed and Implemented a Comprehensive
Continuity of Operations Plan:
Although LSC does have a COOP, the plan is not complete or
comprehensive. It is the policy of the U.S. government for each agency
to have in place a comprehensive and effective program to ensure the
continuity of essential federal functions under all circumstances.
Today's changing threat environment and the potential for no-notice
emergencies, including localized acts of nature, accidents,
technological emergencies, and terrorist attacks, have increased the
need for COOP capabilities. In this environment, preparing for
disasters is an integral part of mitigating risk. Federal Preparedness
Circular No. 65 identifies the required characteristics of an effective
COOP program, which includes maintaining and testing plans for
responding to likely catastrophic events.
LSC's Office of Information Technology (OIT) does perform a full,
weekly backup of data and an incremental daily backup. At the end of
each month, the most recent full weekly backup is stored off site; the
most recent 12 months are retained. According to LSC's current COOP
description provided by LSC, OIT would need to relocate its systems to
a remote location should the LSC building not be accessible. Also, from
this description, it appears that system hardware first needs to be
retrieved from the LSC building and then transported and installed in
another location. However, there is no specific implementation plan or
remote location specified in the plan. LSC provided us with meeting
agendas from May 2006 and June 2006 regarding emergency responses, but
did not provide any additional COOP program information. Furthermore,
there is no indication that OIT conducted any simulations of
disruptions to test its established plans. An organization that does
not have a tested, comprehensive COOP is vulnerable to unexpected
incidents capable of causing great damage. Finally, because LSC does
not have a comprehensive risk assessment process, management and the
board have not assessed the risks or identified the acceptable levels
of risk associated with LSC's current COOP.
LSC Management Has Not Assessed the Propriety of Its Financial
Reporting Standards:
LSC's management has not conducted its own assessment or analysis to
determine which set of accounting standards--those promulgated by the
Financial Accounting Standards Board (FASB), Government Accounting
Standards Board (GASB), or Federal Accounting Standards Advisory Board-
-are most applicable for LSC to use. The accounting standards that an
entity uses determine how the entity records its financial transactions
and how the entity presents the financial statements. According to LSC
management, in the mid-1990s, the former IG determined that LSC's
financial reporting should follow the standards issued by GASB, which
establishes standards of financial accounting and reporting for state
and local governmental entities. However, management, not the OIG, is
responsible for the financial statements and for adopting the related
accounting policies and for maintaining an adequate and effective
system of accounts that will, among other things, help ensure the
production of proper financial statements.
In response to our inquiries about LSC's selection and use of those
standards in its accounting and preparation of its financial
statements, neither LSC management nor the current IG were able to
provide us with an analysis or the primary technical reasons why LSC is
currently using GASB standards, which are normally intended for use by
state and local governments. During the April 2007 meeting of the
finance committee, a discussion was held on whether the corporation
should be using GASB or FASB standards for its accounting. The
Treasurer informed the committee members that his current opinion was
that LSC should be using the FASB standard, instead of GASB. It was
agreed that further discussion would take place between the Treasurer
and OIG staff and that the committee would receive an update at the
next committee meeting in July 2007.
Conclusions:
In recent years, governance and accountability processes have received
increased scrutiny and emphasis in the nonprofit, federal agency, and
public company sectors as a result of governance and accountability
breakdowns, most notably in the public company financial scandals that
led to the enactment of the Sarbanes-Oxley Act of 2002. Public
companies now operate under strengthened governance and accountability
standards, including requirements for ethics policies and improved
internal controls. The federal government and nonprofit sectors have
followed this lead and established new standards and requirements for
improved internal control reporting and governance and accountability.
For nonprofit corporations using funding from taxpayers and donors,
effective governance, accountability, and internal control are key to
maintaining trust and credibility. Governance and accountability
breakdowns result in a lack of trust from donors, grantors, and
appropriators, which could ultimately put funding and the
organization's credibility at risk.
Since its inception over 30 years ago, LSC's governance and
accountability requirements, including its financial reporting and
internal control, have not changed significantly. Further, LSC's board
and management have not kept pace with evolving governance and
accountability practices. As a result, LSC's current practices have
fallen behind those of federal agencies, U.S. government corporations,
and other nonprofit corporations. The current accepted practices of
federal agencies, U.S. government corporations, and nonprofit
corporations provide a framework for identifying standards that can
most effectively be used for strengthening LSC's governance and
accountability. Effectively utilized, current, accepted governance and
accountability practices are necessary to provide strong board
oversight and effective day-to-day management of LSC's performance. In
addition, NYSE listing standards and the Conference Board provide
widely accepted governance standards that can be applied to public
companies and nonprofit corporations to improve governance structures
and practices. Because LSC's board and management have not kept pace
with the modernization of practices in federal entities and other
nonprofit corporations, many opportunities exist to improve and
modernize existing processes. By updating and strengthening its
governance and accountability structures, LSC can increase assurance
that federal funds are being properly spent and its operations are
effectively carried out to meet its mission.
Matter for Congressional Consideration:
Since the LSC Act was enacted in 1974 and last comprehensively amended
and reauthorized in 1977, new laws governing federal agencies, U.S.
government corporations, and public companies have been enacted to
strengthen governance and accountability requirements. Therefore,
Congress should consider whether LSC could benefit from additional
legislatively mandated governance and accountability requirements, such
as financial reporting and internal control requirements, modeled after
what has worked successfully at federal agencies or U.S. government
corporations. There are different options available to Congress for
such a mandate.
* Congress could maintain LSC's current organizational structure as a
federally chartered and federally funded, private, nonmembership, and
tax-exempt D.C. nonprofit corporation and enact permanent legislation
to require LSC to implement additional governance and accountability
requirements.
* Alternatively, Congress could enact legislation to convert LSC to a
federal entity (such as a U.S. government corporation subject to the
Government Corporation Control Act) or an independent federal agency
that is required to follow the same laws and regulations as executive
branch agencies. In the statute establishing LSC as a federal entity,
Congress could specifically exempt LSC from certain requirements that
would otherwise apply to that type of federal entity in order to
further special policy considerations particular to LSC.
Recommendations:
Through our evaluation of LSC's governance and accountability
practices, we identified opportunities for the LSC board and management
to improve their current governance and accountability practices.
Recommendations for Board Action:
In order to improve and modernize the governance processes and
structure of LSC, we recommend that the LSC Board of Directors take the
following eight actions:
* establish and implement a comprehensive orientation program for new
board members to include key topics such as fiduciary duties, IRS
requirements, and interpretation of the financial statements;
* develop a plan for providing a regular training program for board
members that includes providing updates or changes in LSC's operating
environment and relevant governance and accountability practices;
* establish an audit committee function to provide oversight to LSC's
financial reporting and audit processes either through creating a
separate audit committee or by rewriting the charter of its finance
committee;
* establish a compensation committee function to oversee compensation
matters involving LSC officers and overall compensation structure
either through creating a separate compensation committee or by
rewriting the charter of its annual performance review committee;
* establish charters for the Board of Directors and all existing and
any newly developed committees to clearly establish committees'
purposes, duties, and responsibilities;
* implement a periodic self-assessment of the board's, the committees',
and each individual member's performance for purposes of evaluating
whether improvements can be made to the board's structure and
processes;
* develop and implement procedures to periodically evaluate key
management processes, including at a minimum, processes for risk
assessment and mitigation, internal control, and financial reporting;
and:
* establish a shorter time frame (e.g., 60 days) for issuing LSC's
audited financial statements.
Recommendations for Executive Action:
In order to improve and modernize key management processes at LSC, the
president and executive committee should take the following four
actions:
* conduct and document a risk assessment and implement a corresponding
risk management program as part of a comprehensive evaluation of
internal control;
* with the board's oversight, evaluate and document relevant
requirements of the Sarbanes-Oxley Act of 2002 and practices of NYSE
and ABA that are used to establish a comprehensive code of conduct,
including ethics and conflict-of-interest policies and procedures for
employees and officers of the corporation;
* establish a comprehensive and effective COOP program, including
conducting a simulation to test the established program; and:
* conduct an evaluation to determine whether GASB should be adopted as
a financial reporting standard for LSC's annual financial statements.
Agency Comments and Our Evaluation:
We provided copies of the draft report to LSC's Board of Directors and
management for comment prior to finalizing the report. We received
written comment letters from the Chairman on behalf of LSC's Board of
Directors and LSC's President on behalf of LSC's management (see apps.
V and VI). Both the Chairman and President expressed their commitment
to achieving strong governance and accountability and outlined the
actions that LSC's board and management plan to take in response to our
recommendations. LSC management provided technical comments that were
incorporated into the report as appropriate.
The Chairman of LSC's board expressed the board's agreement to take
action to address each of the recommendations we made to the board.
LSC's president on behalf of management provided a comment letter where
management fully agreed with our recommendations dealing with financial
reporting standards, COOP, and code of conduct, and expressed
commitment to further action "in the spirit of" our recommendation
dealing with conducting and documenting a risk assessment and
implementing a corresponding risk management program as part of a
comprehensive evaluation of internal control.
LSC's President also included some clarifications to our draft report.
First, LSC management stated that "the draft report does not address
the existence of congressional oversight," and provided additional
context regarding LSC's congressional oversight. Our draft report
included a discussion of congressional oversight through LSC's budget
process and the appropriations process. In our final report, we
included a broader description of LSC's congressional oversight.
Second, LSC management points out that LSC provides certain
whistleblower protection statements in its employee handbook regarding
communicating with the OIG. We added language to our final report to
reflect the existence of such protection under the IG Act. Third, the
LSC President stated that the OIG did not find conflicts of interest
related to the acting special counsel and was troubled by the
references in our report to potential conflicts of interest. In our
report, we included information about the IG's finding that LSC's
hiring of acting special counsels from grantee organizations
represented a potential conflict of interest. Our report also noted
that the board currently does not have an ethics committee and there is
no code of conduct for LSC employees.
Both LSC's Chairman and President commented on the matter that we
presented for congressional consideration--that Congress should
consider whether LSC could benefit from additional legislatively
mandated governance and accountability requirements. In addition, in
their respective letters, LSC's Chairman and President both provided
their views that LSC's governing statutes are appropriate and have
worked well and stated that many of the governance recommendations
could be accomplished without changing the statutory framework of LSC.
As we noted, Congress chartered LSC over 30 years ago as a private
corporation for certain policy reasons with governance and
accountability requirements that existed at that time as a unique
private corporation in response to certain policy considerations. While
federal agencies and government corporations have been subject to
strengthened governance and accountability requirements over recent
years, LSC has not kept up with evolving reforms aimed at strengthening
internal control over an organization's financial reporting process and
systems, with LSC's board's practices falling short of modern board
practices and LSC not keeping up with current management practices.
Therefore, we presented the options of amending LSC's governing
statutes to improve governance and accountability requirements or
converting LSC to a federal entity, which would include compliance with
related governance and accountability requirements.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. We will then send copies to other appropriate
congressional committees, the president of LSC, and the LSC Board of
Directors. We will also make copies available to others upon request.
In addition, the report will be available at no charge on the GAO Web
site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-9471 or franzelj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made key contributions
to this report are listed in appendix VII.
Signed by:
Jeanette M. Franzel:
Director, Financial Management and Assurance:
List of Requesters:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael E. Enzi:
Ranking Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Chris Cannon:
Ranking Member:
Subcommittee on Commercial and Administrative Law:
Committee on the Judiciary:
House of Representatives:
The Honorable F. James Sensenbrenner, Jr.:
House of Representatives:
[End of section]
Appendix I: Origin and Creation of the Legal Services Corporation:
Although low-income people since the 19TH century had been turning to
local legal aid societies throughout the United States for assistance
with their civil legal problems, in the 1960s President Lyndon B.
Johnson declared poverty to be a national problem and initiated a "War
on Poverty" to make federal resources available to support local
antipoverty programs, such as the legal assistance provided by legal
aid societies. The first War on Poverty legislation, the Economic
Opportunity Act of 1964,[Footnote 90] established the now-defunct
Office of Economic Opportunity (OEO) within the Executive Office of the
President to administer the War on Poverty programs, including what
would become the Legal Services Program, the predecessor to the current
Legal Services Corporation (LSC).
The OEO's Legal Services Program activities soon generated political
controversy, and by the early 1970s there was a general consensus that
the OEO's Legal Services Program should be moved out of the Executive
Office of the President.[Footnote 91] A number of different structures
were proposed.[Footnote 92] For example, there were proposals to move
the Legal Services Program into an executive department, such as the
Department of Justice, the Department of Housing and Urban Development,
or the predecessor to the current Department of Health and Human
Services. In addition to raising concerns about political interference,
critics of placing the function in an executive department raised
concerns about decreased program visibility, reduced responsiveness to
client needs, and the objectives of the program being subordinated to
the department's mission. Another proposed organizational home was the
Judiciary, especially the Administrative Office of the United States
Courts, but critics argued that the Judiciary was already overburdened
with work and faced frequent funding problems.
Four alternative organizational structures were suggested that took
into consideration accountability to Congress and the public while
promoting political independence, permanence, program stability,
operational flexibility, and attorney independence to represent clients
consistent with high professional standards. The four alternative
organizational structures proposed were a federal block grant program,
an independent agency in the executive branch, a U.S. government
corporation, or a private nonprofit corporation. Examples of such
organizations today include, respectively, (1) the Temporary Assistance
for Needy Families Program and the Community Development Block Grant
Program, (2) the National Science Foundation and the National
Foundation on the Arts and the Humanities, (3) the Millennium Challenge
Corporation and the Corporation for National and Community Service
(Americorps), and (4) the Corporation for Public Broadcasting (CPB).
Ultimately, consensus in the early 1970s coalesced around an entity
modeled after the CPB, which was a private, nonmembership, nonprofit
corporation in the District of Columbia with federal funding that was
federally chartered by the Public Broadcasting Act of 1967[Footnote 93]
to "facilitate the development of public telecommunications and to
afford maximum protection from extraneous interference and control."
The CPB federal charter created a nine-member, bipartisan board of
directors that is appointed by the President of the United States with
the advice and consent of the U.S. Senate. The board manages[Footnote
94] CPB to accomplish its primary mission of providing federal funding
via grants and contracts to public telecommunications and production
entities in order to promote the expansion and development of public
telecommunications with high-quality, diverse programming responsive to
local needs and furthering instructional, educational, and cultural
purposes. CPB, which was last reauthorized in 1992,[Footnote 95] is
also funded through annual appropriations.
By transferring the Legal Services Program to a federally funded,
private nonprofit corporation modeled after CPB, supporters of this
type of organizational entity hoped to achieve the goal of greater
operational flexibility and protection from political pressure from all
levels of government while retaining accountability to Congress and the
public. Supporters also hoped to encourage private donations to LSC, so
unlike CPB's federal charter, the Legal Services Corporation Act of
1974 (LSC Act) provides that LSC shall be eligible to be treated as a
charitable corporation exempt from federal taxation.
Under the Internal Revenue Code, tax-exempt status basically means that
the corporation is operated and organized exclusively for charitable
purposes, does not attempt to influence legislation, does not campaign
on behalf of candidates for public office, and does not allow any of
its net inure earnings to inure to the benefit of any
individual.[Footnote 96] To maintain tax-exempt status, organizations
must annually file with the Internal Revenue Service (IRS) a Form 990,
Return of Organization Exempt From Income Tax, which is available for
public inspection and includes such information as the organization's
gross income, assets and liabilities, and compensation paid to high-
level managers.[Footnote 97] A number of the provisions in the LSC Act
are consistent with IRS's requirements for tax-exempt status. For
example, the LSC Act's purpose of providing civil legal assistance to
low-income people qualifies as charitable, and the LSC Act prohibits
LSC from engaging in certain political activities, such as activities
that would influence the passage or defeat of any legislation at the
local, state, or federal level or from making LSC resources available
to support any political party or campaign of any candidate for public
office. The LSC Act also states that LSC has no power to issue stocks
and prohibits any LSC income or assets from inuring to the benefit of
any director, officer, or employee, except as reasonable compensation
for services or reimbursement for expenses. By making and keeping LSC a
tax-exempt organization, the LSC Act prevents federal tax dollars from
being spent on paying federal taxes and thus permits LSC to use its
funds for the charitable purpose set out in the LSC Act.[Footnote 98]
Congress enacted the LSC Act in 1974 to transfer the functions of the
Legal Services Program from the Executive Office of the President into
a private, nonmembership, nonprofit corporation with tax-exempt status
that would be federally chartered in the District of Columbia and be
authorized to receive annual federal appropriations to fund its
operations supporting civil legal assistance to low-income people in
communities throughout the United States.
[End of section]
Appendix II: Examples of Corporate Governance Guidelines:
Table: Examples of Corporate Governance Guidelines:
Corporate practices: Board's fiduciary duties;
Corporate governance guidelines: In carrying out their functions,
corporate directors must fulfill fiduciary duties of care, loyalty, and
good faith. Boards may delegate the day-to-day management of the
company to the chief executive officer (CEO) and other senior
management, but board members retain responsibilities for oversight and
monitoring of any delegated functions;
Under state corporate law, directors owe fiduciary duties to the
corporation and its shareholders:
* the duty of care, which is the duty to exercise appropriate diligence
and make decisions that are informed;
* the duty of loyalty, which is the duty to act without conflict and
always put the interests of the corporation before those of the
individual director or other individuals or organizations the
individual director is affiliated with;
and:
* the duty to act in good faith, which is the duty to act with honesty
of purpose and in accordance with evolving corporate governance best
practices.
Corporate practices: Roles of board and management clearly defined;
Corporate governance guidelines: A strong and effective board of
directors should have a clear view of its role in relationship to
management. How the board organizes itself and structures its processes
will vary with the nature of the business, business strategy, the size
and maturity of the company, and the talents and personalities of the
CEO and directors. Circumstances particular to the corporate culture
may also influence the board's role. The board focuses principally on
guidance and strategic issues, the selection of the CEO and other
senior executives, risk oversight and performance assessment, and
adherence to legal requirements. Management implements the business
strategy and runs the company's day-to-day operations with the goal of
increasing shareholder value for the long term.
Corporate practices: Corporate governance guidelines in place;
Corporate governance guidelines: The board should have a set of written
guidelines in place to articulate corporate governance principles and
the roles and responsibilities of the board and management. These
guidelines should be reviewed at least annually. By elaborating on
directors' basic duties, the guidelines help the board and its
individual members understand their obligations as well as the general
boundaries within which they should operate.
Corporate practices: Board access to information and conduct of board
meetings;
Corporate governance guidelines: The effectiveness of the board
ultimately depends on the quality and timeliness of information
received by directors. Each board and management should agree on the
type of information the board needs to make informed decisions and
perform its oversight function. This should include material on
business and financial performance, strategic issues, and information
about material risks and other significant matter facing the company.
Information for board meetings should be distributed enough in advance
of the meetings to permit directors to read, absorb, and consider it.
Besides formal processes, board and management should develop informal
communication and reporting channels;
Boards should consider the following best practices to help ensure
effective decision making and exchange of information and ideas at
meetings of the full board or its committees:
* Independent directors should be able to place issues on the board
agenda, with time for adequate discussion and consideration, and
determine the type and quality of information flow required for
effective board action. Last minute add-ons to the agenda, especially
for weighty issues, should be discouraged;
* The lead/presiding director, if there is one, should take
responsibility to surfacing issues that impact the business and need to
be presented to the board for discussion and/or action, whether in
regular or executive sessions;
* Management should provide information that effectively explains the
company's operating and financial status, as well as other significant
issues facing the company and the board. Appropriate feedback
mechanisms between management and the board should be developed to
ensure that the materials are useful, timely, and of adequate depth.
Meeting materials should contain a cover letter highlighting the most
important issues for directors' consideration;
* Meetings should be structured to encourage participation and dialogue
among the directors;
* Directors have an obligation to ensure near- perfect attendance at
meetings and actively participate in the meetings, including asking the
hard questions;
* The CEO should expose directors to senior management team members and
operation (line) management at meetings and field trips so that
directors can, with knowledge informally acquired from management,
further delve into issues necessary to carry out their functions;
According to New York Stock Exchange (NYSE) rules, executive sessions
should:
1. be held without management present;
2. be regularly scheduled to prevent negative inferences;
3. disclose the name of the director presiding at the executive
sessions, if one is chosen, in the annual proxy statement or the
procedure by which the director presiding at meetings is selected; and:
4. disclose mechanisms for interested parties to make their concerns
known to the nonmanagement directors as a group. NASDAQ's rules require
regularly convened executive sessions of the independent directors;
In addition, according to best practices identified by the Conference
Board Directors' Institute, executive sessions should:
* promote open dialogue among the independent members and free exchange
of ideas, perspectives, and information;
* have a feedback mechanism to the CEO for important issues that may
surface (the lead or presiding director can take the lead in providing
the CEO feedback);
* be scheduled at regular intervals (most commonly following each full
board meeting, even though some boards may also hold a short pre-
meeting executive session) to eliminate any negative inferences from
convening these sessions; and:
* be supplemented by additional off-line informational channels (such
as dinners before board meetings) to help build trust and relationships
among the independent directors.
Corporate practices: Board independence;
Corporate governance guidelines: An independent, vigorous, and diligent
board of directors is crucial to good corporate governance. Boards must
move from their traditional advisory roles to become active fiduciaries
in the exercise of their oversight responsibilities. From this
standpoint, independence is essential. Although defined by legislative
and regulatory standards, a director's independence (in thought and
action) from management influence should always be evaluated
qualitatively and on a case-by- case basis;
For the past few years, issuers have been required to disclose
information in Securities and Exchange Commission filings regarding
director independence and other corporate governance matters. The
commission has recently consolidated these requirements under new Item
407 of Regulation S-K. Registrants must disclose information about
director independence; nominating, audit, and compensation committees;
and shareholder communications by the following means:
* Identifying each independent director of the company (and the
nominees for director when the information is being presented in a
proxy or information statements) as measured by the company's
definition of independence;
* Identifying any members of the compensation, nominating, and audit
committees whom the company has not identified as independent under
such definition;
* Describing, by specific category or type, any related party
transactions, relationships, or arrangements not disclosed pursuant to
Item 404 that were part of the board of directors' consideration in
determining that the independence standard has been met as to each
independent director or director nominee;
* Providing the number of board meetings during the fiscal year and
certain attendance information, including the board's policy on
attendance at annual shareholder meetings and attendance information
with respect to the last annual meeting;
* Identifying any standing audit, nominating, and compensation
committees; their membership composition; and the number of meetings,
together with certain descriptive information regarding such
committees;
* Disclosing information about the audit committee's independence and
expertise, and about the process for shareholders to send
communications to the registrant's board of directors. If there is no
process, the basis for the board's view that it is appropriate not to
have such a process and, if all shareholder communications are not sent
directly to board members, a description of the process for determining
which communications will be provided to board members.
Corporate practices: Board composition, size, and director
qualifications;
Corporate governance guidelines: The composition and skill set of a
board should be linked to the company's particular challenges and
strategic vision. As companies develop and experience changed
circumstances, the desired composition of the board may be different
and should be reviewed;
The composition of the board should be tailored to meet the needs of
the company and its stage of development. There should be a mix of
director knowledge and expertise in:
* accounting and finance;
* risk management;
* strategic and business planning;
* legal and compliance;
* human resources;
* marketing;
* technology;
* international markets and:
* industry knowledge.
Corporate governance guidelines: Corporate practices Board leadership:
As with any group working together, boardroom relationships are
difficult to predict, but an effective director;
* asks the hard questions;
* works well with others;
* possesses valuable input;
* is available when needed;
* is alert and inquisitive;
* has business knowledge;
* contributes to committee work;
* attends meetings;
* challenges management's assumptions when needed and speaks out
appropriately at board meeting;
* prepares for meetings;
* makes contributions to long-range planning, and:
* provides an overall contribution to the board and committees on which
he or she serves;
According to the 2006 edition of the annual Directors' Compensation and
Board Practices report by the Conference Board, the median board size,
depending on the industry, ranges from 9 to 11 members. The median
number for outside directors varies from 8 to 10. The 2007 edition of
Board Practices/Board Pay report noted that 72 percent of Standards &
Poor's 1,500 companies had 9-member boards in 2005, down from 12 in
2003. Boards need to be large enough to accommodate the necessary skill
sets, but still small enough to promote cohesion, flexibility, and
effective participation. "When you've got a 20-or 30-person corporate
board," argued one member of the Conference Board Directors' Institute,
"it's one way of ensuring that nothing is ever going to happen that the
CEO doesn't want to happen. If you've got a small board--8 to 10
people--people do get involved.";
The NYSE requires that a list of director qualification standards be
included in the company's corporate governance guidelines. These
standards should, at a minimum, reflect the NYSE independence
requirements. Companies may also address other substantive
qualifications requirements, including policies limiting the number of
boards on which a director may sit and specifying director tenure,
retirement, and succession criteria. All directors must devote the
proper amount of time and attention to develop the broad-based and
specific knowledge required to fulfill their obligations;
In order to ensure a high level of commitment, directors should;
* assess carefully and guard against potential entanglements, such as
service on an excessive number of boards;
* prepare for and attend all board and committee meetings and consider
travel requirements for these meetings (in particular for foreign-based
directors);
* participate actively and effectively at meetings;
* develop and maintain a high level of knowledge about the company's
business;
* keep current in the director's own specific field of expertise; and:
* develop broad knowledge about the role and responsibilities of
directors, including legal responsibilities.
Corporate practices: Board leadership;
Corporate governance guidelines: Boards should adopt a structure
providing nonmanagement directors with the leadership necessary for
them to act independently and perform effectively. This structure could
include separating the positions of chairman and CEO; creating a lead
independent director; or in case of a former employee acting as
chairman, appointing a presiding director from among the independent
directors; Any structural alternative a board wishes to adopt should;
* strengthen the independence and oversight role of the board;
* provide the nonmanagement directors with the ultimate authority over
information flow to the board, and:
* improve the relationship and flow of information between the board,
CEO, and senior management.
Corporate practices: Board committee structure;
Corporate governance guidelines: Boards should establish committees
(e.g., nominating/ governance, audit, compensation) that will enhance
the overall effectiveness of the board by ensuring focus on and
oversight of matters of particular concern. Statutory law, SEC rules,
and stock exchange listing standards require that committees must be
composed solely of directors who meet specified independence standards;
An effective committee structure should require that;
* each committee have a charter delineating the committee's
jurisdiction, duties, and responsibilities;
* each charter include only duties that can actually be accomplished;
and;
* each charter be reviewed at least annually.
Corporate practices: Succession planning and leadership development;
Corporate governance guidelines: Hiring the CEO and planning for CEO
succession are two of the most important responsibilities of the board.
The board should institute a CEO succession plan and selection process
overseen by one of its independent committees or by a designated
director or group of directors;
A successful succession planning process will;
* be continuous;
* be driven and controlled by the board;
* involve inputs from the CEO and other key employees;
* be easily executed in the event of a crisis;
* be tied to the corporate strategy;
* be geared toward finding the right leader at the right time;
* develop talent pools throughout the managerial ranks of the company,
and;
* avoid a "horse race" mentality that may lead to the loss of key
officers when the new CEO is chosen.
Source: Reproduced by permission from Matteo Tomello and Carolyn K.
Brancato, Corporate Governance Handbook, 2007: Legal Standards and
Board Practices (New York, N.Y.: 2007).
[End of table]
[End of section]
Appendix III: Comparison of Other Key LSC Requirements:
Grants Management:
LSC is subject to grants management requirements that are stronger than
those of other Washington, D.C., nonprofit corporations, but somewhat
less rigorous than those governing federal entities, including
requirements related to the grantor's audits of grant recipients,
administration of grants, and application of cost principles to grants.
(See table 6.) In 1996, Congress amended the LSC Act on a fiscal year
basis through certain administrative provisions included in the fiscal
year 1996 appropriations act for LSC (LSC 1996 Amendments).[Footnote
99] The LSC Act requires the LSC board to ensure that each grant
recipient is subject to an annual financial audit and to maintain a
copy of that audit report at its headquarters for at least 5 years. The
LSC 1996 Amendments added additional requirements related to grant
recipient audits.[Footnote 100] The LSC 1996 Amendments require the
grant recipient audit to be conducted in accordance with generally
accepted government auditing standards (GAGAS) and guidance established
by the LSC Office of Inspector General (OIG). The grant recipient audit
report must state whether (1) the grant recipient's financial
statements fairly present its financial position and results of
operations in accordance with generally accepted accounting principles
(GAAP); (2) the grant recipient has internal control systems that
provide reasonable assurance that it is managing its funds, LSC and
otherwise, in compliance with federal laws and regulations; and (3)
that the grant recipient has complied with federal laws and regulations
applicable to funds received from LSC or other sources.
Table 6: Key Statutory Provisions for Grants Management:
Audits of grant recipients;
LSC: 1996 LSC Amendments;
Independent federal agencies: Single Audit Act;
OMB Cir. No. A-133 on audits of grant recipients;
U.S. government corporations: Single Audit Act;
OMB Cir. No. A-133 on audits of grant recipients;
D.C. nonprofit corporations: None.
Grant management requirements;
LSC: 1996 LSC Amendments;
Independent federal agencies: OMB Cir. Nos. A-102 and A-110 on
administrative requirements for grant recipients;
U.S. government corporations: OMB Cir. Nos. A-102 and A-110 on
administrative requirements for grant recipients;
D.C. nonprofit corporations: None.
Cost principles for grant recipients;
LSC: None;
Independent federal agencies: OMB Cir. Nos. A-21, A-87, and A-122 on
cost principles for grant recipients;
U.S. government corporations: OMB Cir. Nos. A-21, A- 87, and A-122 on
cost principles for grant recipients;
D.C. nonprofit corporations: None.
Source: GAO.
[End of table]
The LSC 1996 Amendments include other grant management provisions. For
example, the LSC 1996 Amendments require the board to select LSC grant
recipients through the implementation of a system of competitive
awards, including such selection criteria as (1) the demonstration of
an understanding of client legal needs and capability of serving such
needs; (2) the quality, feasibility, and cost-effectiveness of the
proposed plan for delivery of legal assistance; and (3) LSC's past
experience with the applicant, including the record of past compliance
with LSC requirements. The LSC 1996 Amendments require the board to
ensure that no grant recipient uses LSC funds for any litigation
activity in providing client legal services unless certain
recordkeeping requirements are met. For all cases or matters, the LSC
1996 Amendments require the board to obtain the grant recipient's
agreement to maintain timekeeping records. Additionally, the LSC 1996
Amendments require the board, before providing funding to a grant
recipient, to ensure that the grant recipient enters into a contractual
agreement to be subject to all federal laws relating to the proper use
of federal funds (i.e., not using federal funds for fraud, waste, or
abuse) and that for such purposes LSC shall be considered a federal
agency and its grant funds shall be considered federal funds.[Footnote
101] Finally, LSC has issued regulations on its administration of
grants, including provisions establishing cost standards and
procedures.[Footnote 102]
Requirements for audits of grants provided by federal agencies and U.S.
government corporations are found in the Single Audit Act, as
amended,[Footnote 103] which established uniform audit requirements for
state and local governments and nonprofit organizations that receive
grants or other forms of federal financial assistance. In addition to
uniform audit requirements, the Single Audit Act is intended to
"promote sound financial management, including effective internal
controls, with respect to Federal awards administered by non-Federal
entities" and "promote the efficient and effective use of audit
resources."[Footnote 104] The Office of Management and Budget (OMB) has
issued implementing regulations on the Single Audit Act in OMB Circular
No. A-133, Audits of States, Local Governments, and Non-Profit
Organizations (rev. June 27, 2003).
Under the Single Audit Act and implementing regulations, generally
grant recipients must annually arrange for an independent auditor to
conduct an audit in accordance with GAGAS and prepare a report on the
grant recipient's financial statements and schedule of expenditures,
internal controls, and compliance with laws and regulations. The
auditor must report whether (1) the financial statements are presented
fairly in all material respects in conformity with GAAP and (2) the
schedule of expenditures of the grants is presented fairly in all
material respects in relation to the financial statements taken as a
whole. With respect to internal controls, the auditor must obtain an
understanding of each of the grant recipient's major programs, assess
control risk, and perform tests of the controls. The auditor must also
determine whether the grant recipient has complied with the provisions
of laws, regulations, and contracts or grants related to the grant that
have a direct and material effect on each major program. The Single
Audit Act requires each grantor federal entity to assess the quality of
such audits and monitor the grant recipient's use of the federal funds
received pursuant to the grant. The Single Audit Act also requires any
auditor of a grant recipient to provide access to the auditor's
workpapers in response to a request from the grantor federal entity or
the Comptroller General as part of either's activities in furthering
their oversight responsibilities.
In addition to providing guidance on audits of grant recipients of
federal entities, OMB uses the authority it possesses under a number of
statutes to issue guidance on uniform administrative requirements for
federal grants that each federal agency and U.S. government corporation
must implement by promulgating entity-specific regulations. OMB has
issued two different circulars for grants to different types of
entities: OMB Circular No. A-102 applies to grants to state and local
governments and OMB Circular No. A-110 applies to grants to
institutions of higher education, hospitals, and other nonprofit
organizations.[Footnote 105] These circulars provide for the use of
common forms, such as applications, and common standards, such as grant
recipient financial reporting, socioeconomic policies, and grantor
monitoring and oversight responsibilities. OMB has also issued guidance
providing cost principles for federal entities to use in administering
their grants. In three separate circulars, OMB sets out principles to
determine the applicability of costs incurred by three groups of
entities to federal grants. OMB Circular No. A-87 establishes cost
principles for state, local, and tribal governments; whereas OMB
Circular Nos. A-21 and A-122 establish such principles, respectively,
for institutions of higher education and nonprofit
organizations.[Footnote 106]
Acquisition and Management of Property and Services:
Unlike most independent federal agencies and wholly owned government
corporations, LSC is not subject to a wide range of federal laws and
regulations that govern the acquisition and management of property and
services, such as the Federal Acquisition Regulation (FAR) or the
Federal Travel Regulation (FTR). (See table 7.) As a D.C. nonprofit
corporation, LSC has few limitations on its acquisition, management,
disposition, and contract activities in relation to real and personal
property and services. Under the D.C. Nonprofit Corporation
Act,[Footnote 107] it can acquire any interest in real or personal
property by purchase, gift, lease, or contract and then "own, hold,
improve, use and otherwise deal in and with" such property. LSC can
also dispose of any property interest through sale, mortgage, lease,
exchange, transfer, or any other suitable method.[Footnote 108] LSC
also has the power to acquire services through making contracts and
incurring liabilities.
Table 7: Key Acquisition and Management of Property and Services
Requirements:
Property management;
LSC: None;
Independent federal agencies: Public Buildings Act of 1959;
Federal Property and Administrative Services Act of 1949;
Federal Management Regulation;
U.S. government corporations: Wholly owned U.S. government
corporations: Public Buildings Act of 1959;
Federal Property and Administrative Services Act of 1949;
Federal Management Regulation;
D.C. nonprofit corporations: None.
Procurements and acquisition management;
LSC: None;
Independent federal agencies: Federal Property and Administrative
Services Act of 1949;
Office of Federal Procurement Policy Act;
Federal Acquisition Regulation;
Competition in Contracting Act of 1984;
U.S. government corporations: Wholly owned U.S. government
corporations: Federal Property and Administrative Services Act of 1949;
Office of Federal Procurement Policy Act;
Federal Acquisition Regulation;
Competition in Contracting Act of 1984;
D.C. nonprofit corporations: None.
Information technology acquisition management;
LSC: None;
Independent federal agencies: Clinger-Cohen Act of 1996;
U.S. government corporations: Wholly owned U.S. government
corporations: Clinger-Cohen Act of 1996;
D.C. nonprofit corporations: None.
Travel management;
LSC: None;
Independent federal agencies: 5 U.S.C. ch. 57, travel statute;
Federal Travel Regulation;
U.S. government corporations: Wholly owned U.S. government
corporations: 5 U.S.C. ch. 57, travel statute;
Federal Travel Regulation;
D.C. nonprofit corporations: None.
[End of table]
Source: GAO.
In procuring property and services, most independent federal agencies
and wholly owned U.S. government corporations[Footnote 109] are subject
to a number of laws and regulations, including the Public Buildings Act
of 1959,[Footnote 110] the Federal Property and Administrative Services
Act of 1949,[Footnote 111] the Office of:
Federal Procurement Policy Act,[Footnote 112] the Competition in
Contracting Act of 1984,[Footnote 113] the FAR,[Footnote 114] and the
Federal Management Regulation (FMR).[Footnote 115] These laws and
regulations set out authorities, requirements, and standards for most
independent federal agencies and U.S. government corporations to manage
their acquisition and property systems.
Information technology and travel services are important types of
property and services that federal and nonprofit entities need to
acquire. Federal agencies and wholly owned U.S. government
corporations, but not LSC, are subject to federal governmentwide
management laws in these areas. The Clinger-Cohen Act of 1996,[Footnote
116] governs information technology acquisitions by federal agencies
and wholly owned U.S. government corporations, requiring, among other
things, the design and implementation of a process for maximizing the
value, and assessing and managing the risks of the entity's information
technology acquisitions, as well as the creation of a chief information
officer position to help manage this process.[Footnote 117] Federal
agencies and wholly owned U.S. government corporations, but not LSC,
are also subject to statutory requirements for travel by federal
civilian employees, as well as the implementing the FTR, promulgated by
the General Services Administration,[Footnote 118] which are intended
to regulate travel "in a manner that balances the need to assure that
official travel is conducted in a responsible manner with the need to
minimize administrative costs."[Footnote 119] For example, the FTR
provides rules on when government employees may use first-class or
business-class airline accommodations.[Footnote 120]
Human Resources Management:
Under the D.C. Nonprofit Corporation Act, the LSC board possesses broad
powers in relation to its officers, employees, and other agents with
only limited restrictions imposed on this power by the LSC Act and
other D.C. statutes.[Footnote 121] (See table 8.) Unlike federal
agencies, LSC is not subject to the laws in the U.S. Code relating to
the executive branch workforce.[Footnote 122] For example, like
directors of other private nonprofit, tax-exempt corporations, the LSC
directors have the power to determine the rates of compensation of
LSC's officers and employees so long as the compensation is not so high
that it might constitute prohibited personal inurement.[Footnote 123]
In one of its few human resources restrictions, however, the LSC Act
specifically makes LSC subject to certain laws governing pay and
benefits for civilian employees of federal agencies and wholly owned
U.S. government corporations. The LSC Act does so by imposing a ceiling
on compensation for any LSC officer or employee who is linked to a
federal pay schedule under federal law: level V of the Executive
Schedule, which in calendar year 2006 was $133,900.[Footnote 124] The
LSC Act also treats LSC as a federal entity for purposes of personnel
participation in specified federal employee benefits programs to which
LSC is required to make contributions at the same rates applicable to
federal employers.
Table 8: Key Human Resources Management Structures:
Employment;
LSC: D.C. Code, Title 32;
LSC Act;
Independent federal agencies: Title 5 of the U.S. Code;
U.S. government corporations: Title 5 of the U.S. Code (most provisions
apply to wholly owned U.S. government corporations, but only some
provisions apply to mixed- ownership U.S. government corporations);
D.C. nonprofit corporations: D.C. Code, Title 32.
Whistleblower Protection;
LSC: Inspector General Act (IG Act) for disclosures made to the IG. If
disclosure results in termination: Wrongful discharge cause of action
under D.C. law's public policy exception to at-will employment
doctrine;
Independent federal agencies: Whistleblower Protection Act;
U.S. government corporations: Whistleblower Protection Act (certain
provisions);
D.C. nonprofit corporations: If disclosure results in termination:
Wrongful discharge cause of action under D.C. law's public policy
exception to at-will employment doctrine;
CPB also subject to IG Act for disclosures made to the IG.
Source: GAO.
[End of table]
Unlike the employees of LSC and other Washington, D.C., nonprofit
corporations, employees of federal agencies and, to a limited extent,
U.S. government corporations, enjoy certain protections under the
Whistleblower Protection Act when they engage in "whistleblowing,"
which involves reporting evidence of illegal or improper federal
employer activities to the relevant authorities. For example, federal
agency and U.S. government corporation supervisors may not take
disciplinary action against an employee for disclosing information that
the employee reasonably believes evidences gross mismanagement, a gross
waste of funds, an abuse of authority, or a substantial and specific
danger to public health or safety. There is no equivalent statutory
provision for employees of Washington, D.C., nonprofit corporations,
such as LSC or CPB. Under Washington, D.C., law, however, if a D.C.
nonprofit corporation terminates an employee because he or she
disclosed information of employer misconduct, such as illegal
activities, then the terminated employee can sue the corporation for
wrongful discharge under D.C. law's public policy exception to the at-
will employment doctrine that at-will employees can be terminated at
any time for any reason. Furthermore, LSC employees, like those of CPB
and federal entities subject to the IG Act, enjoy additional
protections not available to employees of typical D.C. nonprofit
corporations. Under the IG Act the IG must not, without the employee's
consent, disclose the identity of an employee who informs the IG about
the possible existence of an activity at LSC constituting a violation
of law, rules, or regulations, or mismanagement, gross waste of funds,
abuse of authority, or a substantial and specific danger to the public
health and safety. The IG Act also prohibits the LSC employee's manager
from retaliating, or threatening to retaliate, against the employee for
this communication with the IG, unless the employee provided the
information to the IG with knowledge that it was false or with willful
disregard for its truth or falsity.:
Recordkeeping and Public Access to Information:
Large organizations such as LSC generate print and electronic records
and conduct executive meetings as part of their regular course of
business. LSC's statutory requirements for access to information are
similar to those of federal entities, but its recordkeeping
requirements are not as rigorous. However, LSC's requirements for
access to information and recordkeeping are stronger than those for
other Washington, D.C., nonprofit corporations. (See table 9.)
Table 9: Key Recordkeeping and Public Access to Information Structures:
Recordkeeping;
LSC: LSC Act: 3-year retention for records supporting financial audit;
Independent federal agencies: Federal Records Management laws and
regulations;
U.S. government corporations: Wholly owned U.S. government
corporations: Federal Records Management laws and regulations;
D.C. nonprofit corporations: D.C. Code § 29.301-26 (keeping of books,
accounts, and minutes of board meetings);
CPB required;
CPB subject to requirement of 3-year retention for records supporting
financial audit.
Public information;
LSC: Freedom of Information Act (FOIA);
Independent federal agencies: FOIA;
U.S. government corporations: FOIA;
D.C. nonprofit corporations: None;
CPB required to keep certain records in its offices available for
public inspection and copying.
Open meetings;
LSC: Government in the Sunshine Act;
Independent federal agencies: Government in the Sunshine Act (if headed
by a multiperson body);
U.S. government corporations: Government in the Sunshine Act;
D.C. nonprofit corporations: None;
CPB subject to open meetings requirement resembling Sunshine Act's.
Notice-and-comment rule making;
LSC: LSC Act: Administrative Procedures Act -like notice-and-comment
rule making;
Independent federal agencies: Administrative Procedures Act (APA);
U.S. government corporations: APA;
D.C. nonprofit corporations: None.
Source: GAO.
[End of table]
The LSC Act imposes some limited recordkeeping requirements on LSC,
such as a 3-year retention period for records that support its annual
financial audit and a requirement to keep copies of reports on
grantees. CPB is subject to a similar 3-year retention period for
records supporting its annual financial audit, but other Washington,
D.C., nonprofit corporations are subject to only minimal recordkeeping
requirements, including keeping correct and complete books and records
of account and minutes of board proceedings, which do not have to meet
any particular standard. Under the Federal Records Management laws,
however, the heads of independent federal agencies and wholly owned
U.S. government corporations have much broader recordkeeping duties:
the creation of records to document all "essential transactions" and
retention of these records for specified time periods depending on the
type of transaction documented.
For any records that LSC, federal agencies, and U.S. government
corporations retain, they must provide the public with access to these
records as required by the Freedom of Information Act (FOIA). FOIA
requires that federal entities make their records available for public
inspection and copying unless one of the listed FOIA exemptions apply,
such as the exemptions for records pertaining to medical files,
internal personnel practices, or trade secrets. This is one of the
handful of provisions in the LSC Act in which the LSC Act provides that
LSC shall be treated as a federal agency. There is no comparable public
right to access corporate records under the D.C. Nonprofit Corporation
Act. While CPB is not subject to FOIA, it does include a records access
provision requiring CPB to maintain certain records at its office and
to make them available for public inspection and copying.:
LSC is also subject to the Government in Sunshine Act (Sunshine Act),
which means that all board meetings, including meetings of any
executive committee of the board, must be open to public observation.
In following the Sunshine Act, the LSC board must follow the procedural
requirements for providing adequate notice of meetings, as well as for
closing all or a portion of a meeting based on discussion of exempted
subject matter, such as personnel matters or pending litigation. In
this respect, LSC is no different from other entities subject to the
Sunshine Act, which are U.S. government corporations and federal
agencies headed by a collegial body, and very different from most D.C.
nonprofit corporations that are subject to no similar requirement.
Although not subject to the Sunshine Act, the CPB board has an open
meetings requirement that resembles Sunshine Act requirements.:
While LSC is not subject to the "notice-and-comment rule making" under
the Administrative Procedures Act of 1946 (APA), LSC must provide
interested parties with "notice and a reasonable opportunity for
comment" on all proposed rules, regulations, and guidelines, and must
publish these requirements in the Federal Register at least 30 days
prior to their effective date. Federal agencies and U.S. government
corporations are subject to similar requirements in APA, whereas D.C.
nonprofit corporations have no similar rulemaking requirement for
public participation.
[End of section]
Appendix IV: Comparison of Key LSC Governance and Accountability
Requirements:
Table: Comparison of Key LSC Governance and Accountability
Requirements:
[See PDF for image]
Source: GAO.
[End of table]
[End of section]
Appendix V: Comments from the Legal Services Corporation Board of
Directors:
Legal Services Corporation:
America's Partner for Equal Justice:
August 2, 2007
Ms. Jeannette M. Franzel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
411 G Street, NW:
Washington, DC 20548:
Dear Ms. Franzel:
Thank you for giving the Legal Services Corporation Board the
opportunity to respond to the GAO Draft Report entitled Legal Services
Corporation Governance and Accountability Practices Need To Be
Modernized and Strengthened, GAO-07-993 (GAO Draft). At its meetings on
July 27 and 28 in Nashville, the Board took the opportunity to consider
the GAO Draft and its recommendations, and we offer the following
comments in response. We address only the GAO Draft's recommendations
to the Board and its recommendations to Congress. We understand that
LSC Management will be offering its own comments.
The Board was gratified that GAO identified no violations, by the Board
or the Legal Services Corporation, of applicable statutory governance
requirements. We understand that the practices that GAO recommends are
ones that GAO has identified as having become standard operating
procedures for many non-profit organizations or government entities
subsequent to LSC's creation. We appreciate that good governance
practices and enhanced accountability mechanisms can add value. Within
the constraints imposed by the limited resources Congress provides to
administer to LSC, the Board will make every effort to comply with the
spirit of GAO's recommendations. Specifically, with respect to your
recommendations to us, the Board will:
* attempt to insure that new members receive orientation to familiarize
them both with LSC's programmatic roles and on governance and
accountability;
* continue to receive updates from Management on issues having to do
with LSC's operating environment, governance, and accountability;
* decide whether to create a separate Audit Committee or assign the
function to the Finance Committee;
* determine how to assign responsibility within the Board for
compensation issues;
* formalize the functions of Board committees by adopting charters for
them;
* consider adopting a formal means by which the Board can evaluate its
collective performance and the performance of individual members;
* encourage the IG, who is charged with contracting with LSC's auditor,
to require that the auditor report within 45 days of the end of the
fiscal year; and:
* work with Management as appropriate on any risk management program,
internal controls, and financial reporting.
With regard to the GAO Draft's recommendations to Congress to make LSC
either a federal agency or a U.S. government corporation, we believe
that the current structure has historically worked well to achieve the
mission that Congress gave LSC. Fundamentally restructuring LSC as
proposed by the GAO Report is certain to be costly and may not be
totally productive. It should not be undertaken without thorough
Congressional study and consideration of the legislative history. The
Board is convinced that it is far from certain that restructuring the
organization will produce gains in LSC's ability to achieve its basic
mission of providing civil legal services to low-income people. Many of
the governance recommendations, if appropriate, can be accomplished by
amending the by-laws of the corporation (referred to as charters by the
GAO report) or by resolution of the board of directors. Therefore, the
Board cannot agree that Congress should act on your recommendations.
Again, we thank you for sharing the GAO Draft with us and giving us the
opportunity to comment on its recommendations. We reiterate our
commitment that, within the resources available to us, LSC should adopt
the best possible governance practices and accountability mechanisms.
Sincerely,
Signed by:
Frank B. Strickland:
Chairman:
[End of section]
Appendix VI: Comments from the Legal Services Corporation:
Legal Services Corporation:
America's Partner for Equal Justice:
July 31, 2007:
Jeanette M. Franzel:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Franzel:
Thank you for the opportunity to provide written comments on the
Government Accountability Office (GAO) draft report entitled Legal
Services Corporation — Governance and Accountability Practices Need To
Be Modernized and Strengthened. This is Management's response to your
draft report. The Board of Directors is responding separately.
We are pleased with your findings that LSC "has stronger federal
accountability requirements than many nonprofit corporations" and that
LSC Board members "demonstrated active involvement through their strong
board meeting attendance and participation in LSC oversight." We intend
to build on this strong base of accountability and oversight as we
respond to the recommendations for executive action which you have
made. We fully accept three of your recommendations and we are
committed to further action in the spirit of the fourth recommendation.
* Regarding the appropriate financial reporting standard for LSC, we
are reviewing the Government Accounting Standards Board standards, and
we expect to complete our evaluation by the end of October 2007.
* Regarding a Continuity of Operations Plan program, LSC has adopted
elements of a program, as noted in your draft report, and we expect to
complete our comprehensive program during 2008.
* Regarding a code of conduct, we have established a staff task force
to develop proposals for an LSC compliance program, which will include
a comprehensive code of conduct. Our goal is to have recommendations to
the Board of Directors by the January 2008 Board meeting.
* Regarding a risk management program, we are committed to improving
the risk management program at LSC. We note that LSC has managed its
risks well over the past 33 years. We will review and implement those
additional program elements that are desirable and appropriate for an
organization of our size.
We recommend that several clarifications be made to your draft report
narrative to insure its overall accuracy. In discussing the
accountability of LSC for the management of its federal appropriations,
the draft report does not address the existence of congressional
oversight. LSC has both authorizing and appropriations committees in
the House and the Senate, and LSC is subject to regular oversight from
these committees. LSC has been the subject of appropriations and
oversight hearings five times in the past three years. LSC staff meet
regularly with both Members and congressional staff to discuss ongoing
operations.
In discussing LSC's whistleblower protections, the draft report does
not acknowledge that LSC has a whistleblower protection statement in
its Employee Handbook. This protection for those who complain to the
Office of Inspector General (OIG) has been in place at LSC for almost
20 years.
The draft report references potential conflicts of interest with
respect to LSC's Acting Special Counsels. All of the relevant
information relating to the Acting Special Counsels was provided to the
01G. The OIG made no findings of any conflict of interest with respect
to the Acting Special Counsels, and no report of any potential
conflicts of interest exists. LSC has been and remains diligent in its
ethical obligation to avoid any conflicts of interest. Since the draft
report itself makes no finding by GAO of potential conflicts of
interest, the placement of this reference in the "What GAO Found"
section (see Highlights page) is particularly troublesome.
Finally, while we recognize that your recommendations of matters for
congressional consideration are not made to LSC, we feel compelled to
observe that LSC's existing statutory framework is appropriate and has
served very well the purposes which Congress intended, as described in
the appendices to the draft report which explain the rationale for
establishing LSC as a non-profit corporation. Should there be a desire
to apply some additional management requirements to LSC, that can be
accomplished without modifying the nonprofit corporation framework
which Congress enacted. To change the framework of LSC to that of a
government corporation or federal agency would subject the mission of
providing civil legal assistance to poor people to the kind of
political pressure and operational controls which Congress wisely
sought to avoid in 1974.
Thank you for the opportunity to comment upon the draft report. This
has been a helpful and constructive process for us. We welcome your
recommendations for executive action.
Sincerely,
Signed by:
Helaine M. Barnett:
President:
[End of section]
Appendix VII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jeanette M. Franzel (202) 512-9471 or franzelj@gao.gov:
Acknowledgments:
In addition to the person named above, F. Abe Dymond; Lauren S.
Fassler; Joel I. Grossman; Maxine L. Hattery; Stephen R. Lawrence;
Kimberley A. McGatlin; and Matthew P. Zaun made key contributions to
this report.
[End of section]
Footnotes:
[1] As used in this report, the term grant encompasses all of the
agreements LSC uses to distribute federal funding to providers of civil
legal assistance to low-income persons, and the term grant recipient
refers to those who enter into such agreements. Although LSC
distributes most financial assistance through grants, it sometimes uses
contracts.
[2] As used in this report, the term federal charter refers to a
congressional act, or the written instrument documenting this act as in
a statute, that establishes or authorizes the establishment of a
corporation and includes requirements governing the corporation's
operations.
[3] Legal Services Corporation Act of 1974, Pub. L. No. 93-355, 88
Stat. 378 (July 25, 1974), codified, as amended, at 42 U.S.C. §§ 2996 -
2996l (LSC Act).
[4] Revised Continuing Appropriations Resolution, Pub. L. No. 110-5,
121 Stat. 8, 44 (Feb. 15, 2007); see also the LSC appropriations act
for fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330 (Nov.
22, 2005).
[5] The highest standard of duty implied by law, a fiduciary duty is a
duty imposed by law on a person in a position of trust to act for
someone else's benefit and not to further one's personal interests. As
a corporate board member, this means a duty to use a high level of care
to manage the corporation to best promote the corporation's interests.
See, e.g., Friends of Tilden Park, Inc. v. District of Columbia, 806
A.2d 1201,1210 (App. D.C. 2002).
[6] Unless otherwise noted, we use the term U.S. government corporation
to refer to those corporations subject to Chapter 91 of the U.S. Code
(commonly known as the Government Corporation Control Act). See 31
U.S.C. § 9101 for the list, which includes both wholly owned and mixed-
ownership government corporations.
[7] Public company is a general term used to refer to a corporation
owned by shareholders whose securities are sold to the general public,
typically through the stock exchange, and governed by the requirements
of the securities laws.
[8] See, e.g., the LSC appropriations act for fiscal year 2006, Pub. L.
No. 109-108, 119 Stat. 2290, 2330 (Nov. 22, 2005); see also the LSC
Act, at 42 U.S.C. § 2996f(a)(3).
[9] The competitive award requirement was first enacted in
administrative provisions included in the LSC appropriations act for
fiscal year 1996 and has been annually reenacted since then. See, e.g.,
Department of State and Related Agencies Appropriations Act, 1996, Pub.
L. No. 104-134, tit. IV, § 503, 110 Stat. 1321, 1321-52 (Apr. 26,
1996). LSC has issued implementing regulations at 45 C.F.R. pt. 1634.
[10] For more information about the origin and creation of LSC, see
app. I.
[11] A nonmembership corporation is a corporation without shares and
shareholders, meaning that nobody owns a property interest in the
corporation.
[12] The LSC Act provides no similar conflict-of-interest provision for
its officers, employees, or other agents, such as outside consultants.
[13] Similarly, the D.C. Nonprofit Corporation Act calls for a
nonprofit corporation's board of directors to appoint a president,
secretary, treasurer, and any other necessary officers and assistant
officers, as provided in the corporation's bylaws. D.C. Code § 29-
301.24.
[14] At-will employment is a common term used in labor law to refer to
the relationship established when an employer hires an employee for an
indefinite term without a written employment contract that allows the
employer to terminate the employee for any reason, with or without
cause, so long as it is not an illegal reason, such as racial
discrimination prohibited under a state's wrongful termination laws or
retaliation for whistleblowing under state or federal whistleblower
laws, state employer retaliation laws, or both.
[15] An ex-officio board member is a member not by appointment but by
virtue of holding a certain corporate office, such as being the
president of the corporation.
[16] D.C. Code § 29-301.05.
[17] The LSC Act, 42 U.S.C. § 2996d(d), incorporates by reference 5
U.S.C. § 5316, which provides the pay cap provided for federal
employees paid at level V of the Executive Schedule. Each calendar
year, the Office of Personnel Management publishes the new amount of
the pay cap for level V, such as $133,900 for calendar year 2006.
[18] 5 U.S.C. appx.
[19] 5 U.S.C. appx. § 4(a).
[20] Revised Continuing Appropriations Resolution, Pub. L. No. 110-5, §
104, 121 Stat. 8, 9 (Feb. 15, 2007); see also the LSC appropriations
act for fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330
(Nov. 22, 2005).
[21] In their reports associated with the fiscal year 2007
appropriations for LSC, the House and Senate Committees on
Appropriations both directed LSC to allocate $2.97 million for the LSC
OIG. See H.R. Rep. No. 109-520, at 136 (June 22, 2006); S. Rep. No. 109-
280, at 137 (July 13, 2006).
[22] Legal Services Corporation Act Amendments of 1977, Pub. L. No. 95-
222, 91 Stat. 1619 (Dec. 28, 1977).
[23] D.C. Code, tit. 29, ch. 3.
[24] See, e.g., Legal Services Corporation, Financial Statements and
Independent Auditors' Report, September 30, 2006 and 2005 (Washington,
D.C.: June 6, 2007), which shows that about 99 percent of LSC's
revenues in fiscal year 2006 came from federal appropriations.
[25] The LSC Act also provides indirect federal support by providing
that LSC personnel are eligible to participate in federal employee
benefits programs related to the Civil Service Retirement System
(CSRS), group life insurance, health insurance, and work-related
injuries. A later-enacted statute, however, eliminated eligibility for
participation in the first three programs for all LSC personnel except
those hired before October 1, 1988. See Pub. L. No. 100-238, § 108, 101
Stat. 1744, 1747-48 (Jan. 8, 1988), codified, at 5 U.S.C. §§ 8347(o)
[retirement], 8713 [life insurance], 8914 [health insurance]. LSC
personnel eligible to participate in CSRS are also eligible to make
contributions to the Thrift Savings Plan, a federal employee defined-
contribution retirement plan. See 5 U.S.C. § 8351. According to an LSC
official, however, today all LSC personnel remain eligible for benefits
for work-related injuries under the Federal Employees' Compensation
Act, codified, as amended, at 5 U.S.C. ch. 81.
[26] Independent agencies are federal agencies separate from larger
agencies or departments and are labeled "independent" by law or are
controlled by a multiperson body. Thus, the Social Security
Administration (SSA) is an independent agency, but the Food and Drug
Administration, which is part of the Department of Health and Human
Services, is not an independent agency. Unlike the Securities and
Exchange Commission or the National Science Foundation, however, SSA is
not headed by a multiperson body, such as a commission or a board.
[27] Independent federal agencies headed by a multiperson body have
commissioners or directors, while LSC and U.S. government corporations
have only directors.
[28] See 12 U.S.C. § 1812(a); 29 U.S.C. § 1302(d).
[29] See 42 U.S.C. § 1863(a); 12 U.S.C. 1422a(b).
[30] See 15 U.S.C. § 78d(a); 42 U.S.C. § 5841(b).
[31] D.C. Code §§ 29-301.18, -301.19.
[32] D.C. Code § 29-301.22.
[33] 42 U.S.C. § 1863(i).
[34] The Inspector General Act Amendments of 1988, Pub. L. No. 100-504,
102 Stat. 2515 (Oct. 18, 1988), which amended the Inspector General Act
of 1978, Pub. L. No. 95-452, 92 Stat. 1101 (Oct. 12, 1978), which
together are codified, as amended, at 5 U.S.C. appx.
[35] 5 U.S.C. appx. § 8G(a)(2).
[36] 49 U.S.C. § 24301. Also known as the National Railroad Passenger
Corporation, Amtrak was established by the Railroad Passenger Act of
1970, Pub. L. No. 91-518, § 301, 84 Stat. 1327, 1330 (Oct. 30, 1970).
Amtrak depends on annual appropriations for some of its funding. See,
e.g., Department of Transportation Appropriations Act, 2006, Pub. L.
No. 109-115, 119 Stat. 2396, 2413-14, which appropriates $495 million
to the Secretary of Transportation to make quarterly operating subsidy
grants to Amtrak (Nov. 30, 2005).
[37] 5 U.S.C. appx. §§ 2, 6, 8G, 11.
[38] Revised Continuing Appropriations Resolution, Pub. L. No. 110-5, §
104, 121 Stat. 8, 9 (Feb. 15, 2007); see also the LSC appropriations
act for fiscal year 2006, Pub. L. No. 109-108, 119 Stat. 2290, 2330
(Nov. 22, 2005).
[39] In their reports associated with the fiscal year 2007
appropriations for LSC, the House and Senate Committees on
Appropriations both directed LSC to allocate $2.97 million for the LSC
OIG. See H.R. Rep. No. 109-520, at 136 (June 22, 2006); S. Rep. No. 109-
280, at 137 (July 13, 2006).
[40] For a discussion of the application of funds control laws to U.S.
government corporations, see GAO, Principles of Federal Appropriations
Law, vol. IV, 2d ed., GAO-01-179SP (Washington, D.C.: March 2001), 17-
130 to 17-152.
[41] 31 U.S.C. § 1341.
[42] 31 U.S.C. § 1301(a).
[43] 16 U.S.C. § 831h(c); 18 U.S.C § 1426(d).
[44] Accountable officers are government officials and employees who
are subject to personal pecuniary liability for the receipt,
possession, or use of federal funds. Examples of accountable officers
include (1) disbursing officers, who draw federal funds from the U.S.
Treasury to make payments, usually based on certified payment vouchers,
and account for those funds, and (2) certifying officers, who review
and certify payment vouchers for legality, propriety, and accuracy for
a disbursing officer. See GAO, Principles of Federal Appropriations
Law, vol. II, 3d ed, GAO-06-382SP (Washington, D.C.: February 2006), 9-
11 to 9-20, for a discussion of who is an accountable officer.
[45] 31 U.S.C. §§ 3325, 3528.
[46] See B-308037, Sept. 14, 2006; B-241591, Mar. 1, 1991; B-204886,
Oct. 21, 1981.
[47] LSC Act, at 42 U.S.C. §§ 2996e(c)(2), 2996e(d)(3).
[48] See 31 U.S.C. §§ 1105, 1108, 9103.
[49] See, e.g., Departments of Labor, Health and Human Services, and
Education, and Related Agencies Appropriations Act, 2006, Pub. L. No.
109-149, 1990 Stat. 2833, 2874 (Dec. 30, 2005). ("For payment to the
Corporation for Public Broadcasting, as authorized by the
Communications Act of 1934, an amount which shall be available within
limitations specified by that Act, for the fiscal year 2008,
$400,000,000….")
[50] 47 U.S.C. § 396(k).
[51] D.C. Code § 29-301.26.
[52] 47 U.S.C. § 396(l)(1)(B).
[53] 47 U.S.C. § 396(i), (1)(1)(B).
[54] Under the LSC Act, LSC had been required to publish an annual
report to be filed with the President and Congress. See 42 U.S.C. §
2996g(c). However, this reporting requirement was terminated on May 12,
2000, under the Federal Reports Elimination and Sunset Act of 1995,
Pub. L. No. 104-66, § 3003, 109 Stat. 707, 734-36 (Dec. 21, 1995)
(reprinted, as amended, in 31 U.S.C. § 1113 note).
[55] The current 24 CFO Act agencies are the Departments of
Agriculture, Commerce, Defense, Education, Energy, Health and Human
Services, Homeland Security, Housing and Urban Development, the
Interior, Justice, Labor, State, Transportation, the Treasury, and
Veterans Affairs as well as the Environmental Protection Agency,
National Aeronautics and Space Administration, Agency for International
Development, General Services Administration, National Science
Foundation, Nuclear Regulatory Commission, Office of Personnel
Management, Small Business Administration, and Social Security
Administration. 31 U.S.C. § 901(b).
[56] See 31 U.S.C. § 3515 (a). The Reports Consolidation Act of 2000,
Pub. L. No. 106-531, § 4(a), 114 Stat. 2537, 2539 (Nov. 22, 2000),
added a requirement that the audited financial statements shall also be
submitted to Congress.
[57] The requirement for submitting annual audited financial statements
to OMB and Congress under the CFO Act, GMRA, and ATDA has been
codified, as amended, at 31 U.S.C. § 3515.
[58] 31 U.S.C. § 3515(f). OMB specifically identified 76 agencies to
which ATDA expanded the annual financial reporting requirement in
Appendix A of M-04-22, a July 2004 memorandum titled "Amendments to OMB
Bulletin No. 01-02, Audit Requirements for Federal Financial
Statements." This bulletin and related memorandum have been superseded
by OMB Bulletin No. 06-03, Audit Requirements for Federal Financial
Statements (Aug. 23, 2006), which in Appendix C identifies 75 entities
to which the ATDA expanded the annual financial reporting requirement.
[59] Requirements for annual management reports for government
corporations have been codified, as amended, at 31 U.S.C. §§ 9105,
9106.
[60] OMB Circular No. A-136, Financial Reporting Requirements, pt. I.5
(rev. July 24, 2006).
[61] 31 U.S.C. § 9106(a)(2).
[62] The annual program performance report, required by 31 U.S.C. §
1116, shall reflect, among other things, the agency's or corporation's
progress in achieving the performance goals set out in its annual
performance plan, required by 31 U.S.C. § 1115, which implements a
mandatory longer-term strategic plan, required by 5 U.S.C. § 306.
[63] The Reports Consolidation Act of 2000 (Pub. L. No. 106-531, 114
Stat. 2537 (Nov. 22, 2000) (codified at 31 U.S.C. § 3516) permits
agencies to submit combined reports in implementing statutory
requirements for financial and performance management reporting to
improve the efficiency of executive branch performance. These reports
are combined in the PAR. In its guidance on financial reporting in OMB
Circular No. A-136, OMB converted the PAR option into a mandatory
requirement.
[64] 31 U.S.C. § 902(a).
[65] Federal Financial Management Improvement Act of 1996, Pub. L. No.
104-208, div. A., § 101(f), tit. VIII, 110 Stat. 3009, 3009-389 (Sept.
30, 1996) (reprinted in 31 U.S.C. § 3512 note).
[66] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[67] Pub. L. No. 107-347, tit. III, § 301(b)(1), 116 Stat. 2946, 2949
(Dec. 17, 2002), codified at 44 U.S.C. § 3544.
[68] 44 U.S.C. §§ 3545 (a), (b), 3544(c).
[69] Certain federal contractors, including nonprofit corporations, can
be required by statute to implement information security programs
consistent with FISMA standards in 44 U.S.C. § 3544. See, e.g., 42
U.S.C. § 1395kk-1(e), which imposes such requirements on Medicare
administrative contractors.
[70] The act provides for a board with 11 voting members, but currently
LSC has a vacancy on the board, leaving a current board of 10 members.
[71] Pub. L. No. 107-204, §§ 301, 407, 116 Stat. 745, 775, 790 (July
30, 2002), codified at 15 U.S.C. §§ 78j-1(m), 7265.
[72] American Institute of Certified Public Accountants, Statement on
Auditing Standard (SAS) No. 112, Communicating Internal Control Related
Matters Identified in an Audit, effective for financial statements
ending on or after December 15, 2006, and No. 114, The Auditor's
Communication With Those Charged With Governance, effective for
financial statements ending on or after December 15, 2006.
[73] Frederick D. Lipman and L. Keith Lipman, Corporate Governances
Best Practices - Strategies for Public, Private, and Not-for-Profit
Organizations (Hoboken, N.J.: John Wiley & Sons, 2006).
[74] In a September 2006 report to Congress on certain LSC fiscal
practices, the LSC IG stated that, after including locality pay, the
LSC president's compensation exceeded the compensation limitation and
the "authority to pay locality pay over the LSC pay cap" was unclear.
Legal Services Corporation, Office of the Inspector General, Report on
Certain Fiscal Practices at the Legal Services Corporation (Washington,
D.C.: Sept. 25, 2006), 26.
[75] According to LSC's general counsel, the outside counsel's legal
opinion relied on a Comptroller General opinion, B-279095, June 16,
1998, which dealt with the Washington, D.C., Financial Responsibility
and Management Assistance Authority and circumstances similar to those
of LSC.
[76] GAO/AIMD-00-21.3.1.
[77] Legal Services Corporation, Office of the Inspector General,
Report on Certain Fiscal Practices at the Legal Services Corporation
(Washington, D.C.: Sept. 25, 2006).
[78] Legal Services Corporation, Office of the Inspector General,
Report to the Subcommittee on Commercial and Administrative Law of the
House Committee on the Judiciary Regarding Activities of the California
Rural League Assistance, Inc. (Washington, D.C.: Sept. 14, 2006).
[79] GAO/AIMD-00-21.3.1.
[80] Pub. L. No. 107-204, § 404, 116 Stat. 745, 789 (July 30, 2002),
codified at 15 U.S.C. § 7262.
[81] OMB Circular No. A-123, Management's Responsibility for Internal
Control (rev. Dec. 21, 2004).
[82] GAO/AIMD-00-21.3.1.
[83] Committee of Sponsoring Organizations of the Treadway Commission,
Internal Control - Integrated Framework (1992 and 1994).
[84] American Institute of Certified Public Accountants, Statement of
Auditing Standards No. 112, Communicating Internal Control Related
Matters Identified in an Audit, and Statement of Auditing Standards No.
114, The Auditor's Communication with Those Charged with Governance.
[85] A cycle memorandum documents a significant accounting process,
such as revenue or purchasing, and includes the significant accounting
application, financial statements line items, general ledger accounts,
and the policies and procedures related to the cycle being documented.
[86] LSC Act, 42 U.S.C. § 2996d(c).
[87] 5 U.S.C. appx. §§ 101-111, 501-505.
[88] 5 U.S.C. § 7353; 31 U.S.C. § 1353.
[89] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 406, 116 Stat.
747, 789-90 (July 30, 2002).
[90] Economic Opportunity Act of 1964, Pub. L. No. 88-452, 78 Stat. 508
(Aug. 20, 1964).
[91] See, e.g., H. Rep. No. 93-247 (June 4, 1963), 1974 U.S.C.A.A.N.
3872, 3873-75 (report on H.R. 7824, a bill to establish an independent
corporation to replace the Legal Services Program).
[92] See, e.g., The Legal Services Corporation: Curtailing Political
Influence, 81 Yale L. J. 231, 261 n. 106 (1971-72), which cites
American Bar Association, Joint Information Report: The Corporation for
Legal Services (1971), and Edgar Cahn and Jean Cahn, Legal Services:
Alternative Organizational Models. Report to the President's Advisory
Council on Executive Organization (June 9, 1970).
[93] Public Broadcasting Act of 1967, Pub. L. No. 90-129, tit. II, 81
Stat. 365, 367-73 (Nov. 7, 1967), codified, as amended, at 52 U.S.C. §
396.
[94] The D.C. Nonprofit Corporation Act vests the board of directors
with responsibility for managing the affairs of the corporation, but
permits the board to delegate some of this responsibility to officers
or other agents. See D.C. Code §§ 29-301.18, 29-301.24(d). Many boards
delegate day-to-day duties but retain the oversight duties of the
management function.
[95] Public Telecommunications Act of 1992, Pub. L. No. 102-356, §
8106, 106 Stat. 949, 951 (Aug. 26, 1992), codified at 47 U.S.C. §
396(k)(1)(C). The 1992 act authorized funding levels through fiscal
year 1996. Since then, CPB has been funded in annual appropriations
acts, which have provided 2-year advanced funding. Thus, for example,
CPB was appropriated funding for fiscal year 2008 in the fiscal year
2006 appropriations act. See Departments of Labor, Health and Human
Services, and Education, and Related Agencies Appropriations Act, 2006,
Pub. L. No. 109-149, 119 Stat. 2833, 2874 (Dec. 30, 2005).
[96] See 26 U.S.C. §§ 170(c)(2), 501(a), 501(c)(3); 26 C.F.R. §§
1.501(a)-1, 1.501(c)(3)-1.
[97] See 26 U.S.C. §§ 6104, 6033.
[98] See, e.g., Warren E. George, Development of the Legal Services
Corporation, 61 Cornell L. Rev. 681 (1975-76).
[99] With only minor changes, the text of these amendments has been
reenacted in each subsequent fiscal year's LSC appropriations act.
[100] Department of State and Related Agencies Appropriations Act, 1996
(1996 Appropriations Act), Pub. L. No. 104-134, tit. IV, § 509(a), 110
Stat. 1321 (Apr. 26, 1996).
[101] See 1996 Appropriations Act, §§ 503, 504(a)(8), (a)(10)(A),
(a)(19).
[102] See 45 C.F.R. ch. 16.
[103] 31 U.S.C. §§ 7501-7507.
[104] Single Audit Act Amendments of 1996, Pub. L. No. 104-156, § 1(b),
110 Stat. 1396 (July 5, 1996) (reprinted in 31 U.S.C. § 7501 note).
[105] See OMB Circular No. A-102, Grants and Cooperative Agreements
With State and Local Governments (rev. Aug. 29, 1997), and OMB Circular
No. A-110, Institutions of Higher Education, Hospitals, and Other Non-
Profit Organizations, which is now codified at 2 C.F.R. pt. 215.
[106] The guidance in these circulars has now been codified at 2 C.F.R.
pt. 225 (A-87), pt. 220 (A-21), and pt. 230 (A-122).
[107] D.C. Code § 29-301.05.
[108] In B-308037, Sept. 12, 2006, GAO concluded that LSC, exercising
powers authorized by the D.C. Nonprofit Corporation Act related to real
property, had the legal authority to create a wholly owned subsidiary
nonprofit corporation to acquire, hold, and manage assets for LSC's use
and to lease property from that subsidiary.
[109] A limited number of mixed-ownership U.S. government corporations,
such as the Federal Deposit Insurance Corporation, are subject to the
Public Buildings Act of 1959 under its definition for "executive
agency." See 40 U.S.C. § 3301(a)(3).
[110] 40 U.S.C. ch. 33 (acquisition and management of real property).
[111] 40 U.S.C. subtit. I (acquisition of real and personal property
and services) and relevant portions of Title 41 of the U.S. Code.
[112] 41 U.S.C. ch. 7 (acquisition policies).
[113] Pub. L. No. 98-369, div. B, tit. VII, 98 Stat. 1175 (July 18,
1984) (standards and requirements for competitively awarding
contracts), which has been codified, in relevant part, in 10 U.S.C. §
2304 and 41 U.S.C. § 253.
[114] FAR, Title 48 of the U.S. Code of Federal Regulations.
[115] FMR, 41 C.F.R. ch. 102.
[116] 40 U.S.C. subtit. III (requirements and standards for acquiring
and managing information technology).
[117] 40 U.S.C. §§ 11312, 11315.
[118] See federal civilian travel statutes at 5 U.S.C. ch. 57; FTR, 41
C.F.R. ch. 300-304.
[119] FTR, 41 C.F.R. § 300-1.2(a).
[120] FTR, 41 C.F.R. §§ 301-10.123, - 10.124.
[121] Title 31 of the D.C. Code includes separate chapters that
regulate wages, occupational health and safety, parental leave, and
family and medical leave, among other matters.
[122] Title 5 of the U.S. Code includes a comprehensive statutory
framework for the relationship between federal agencies and their
officers and employees.
[123] Personal inurement would constitute an excess benefit transaction
subject to special excise taxes. See 26 U.S.C. § 4958, and implementing
regulations at 26 C.F.R. § 53.4958-1.
[124] See Office of Personnel and Management, 2006 Salary Tables and
Related Information, available at [hyperlink,
http://www.opm.gov/oca/06tables/index.asp] (last visited Apr. 19,
2007). For federal employees paid under the Executive Schedule, there
is no eligibility for a locality pay adjustment. See 42 U.S.C. §
5304(h).
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