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entitled 'Legal Services Corporation: Governance and Accountability 
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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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