����51

This Program Letter describes the most common compliance issues that ����51 (“����51”) Office of Compliance and Enforcement (“OCE”) staff has observed during compliance oversight visits in the past 12 months, or which have otherwise been brought to ����51 Management’s attention through referrals from ����51’s Office of Program Performance or Office of Inspector General. We highlight these issues so that you can avoid or mitigate compliance risks. More extensive guidance, including examples of how ����51 grantees have implemented the compliance requirements listed below, can be found in OCE Final Reports, which are available at .

I encourage you to share this guidance with your staff.

Fiscal Management Issues

45 C.F.R. Part 1630—Cost Standards and Procedures

Reasonable and Necessary Expenses: ����51 regulations require that only costs “reasonable and necessary for the performance of the grant or contract” be charged to the ����51 grant. 45 C.F.R. § 1630.3(a)(2).

Over the last year, the Office of Inspector General (“OIG”) has continued to refer and OCE on-site reviews have revealed instances in which ����51 grantees have used ����51 grant funds for unnecessary or unallowable expenses. In most instances, the noted expenditures were either flowers or other “get well” items or gifts purchased to commemorate staff anniversaries or retirements. In some instances, the expenditures were for alcoholic beverages.

• IT IS NOT PERMISSIBLE TO USE ����51 FUNDS FOR THE PURCHASE OF ALCOHOL, FLOWERS, OR GIFTS UNDER ANY CIRCUMSTANCES. SUCH EXPENDITURES WILL RESULT IN A QUESTIONED COST PROCEEDING.
  • As explained in 45 C.F.R. Part 1630, expenditures by a recipient are allowable under the recipient’s ����51 grant only if the recipient can demonstrate that the cost was, among other things, “reasonable and necessary for the performance of the grant” and “allocable to the grant.”See 45 C.F.R. § 1630.3(a)(2) and (3). In determining the reasonableness of a given cost, consideration is given to, among other factors, “whether the cost is of a type generally recognized as ordinary and necessary for the operation of the recipient or the performance of the grant.” 45 C.F.R. § 1630.3(b).
  • ����51 has determined that the use of ����51 grant funds for the purchase of flowers, gifts, or alcoholic beverages is not reasonable or necessary and is therefore unallowable under the ����51 grant. See Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 2 C.F.R. §§ 200.451, 200.423, 200.438, and 200.445. 78 Fed. Reg. 78590 (December 26, 2013).[fn]����51 recipients are encouraged to review former Office of Management Budget (“OMB”) Circular No. A-122, which contained a listing of both allowable and unallowable items and noted that unallowable items include “Goods or Services for Personal Use,” “Contributions and Donations,” and “Entertainment.”[/fn]

Salary and Benefits for Executive Directors and Senior Staff

• ����51 grantees should regularly evaluate their compensation policies to ensure that Executive Director and senior staff compensation—both salary and benefits—is reasonable. See 2 C.F.R. §§ 200.430, 200.431. 78 Fed. Reg. 78590, 78646 (December 26, 2013). Reasonableness is an objective standard, so compensation for Executive Directors and senior staff should be benchmarked against the compensation for comparable positions in comparable organizations. See also, 

Derivative Income

• Derivative income resulting from an activity supported in whole or in part with funds from ����51 must be allocated and recorded in the same proportion that the funds were expended. 45 C.F.R. § 1603.12(a). In order to ensure the proper allocation of these cash receipts, grantees should have formal written policies and procedures describing how each of its derivative income sources (i.e., interest, rental income, etc.) should be allocated between ����51 and non-����51 funds to ensure that the expenditure of these funds is in compliance with ����51 regulations.
  See ����51 Accounting Guide, §§ 1-8, 2-2.1, 2-2.6, 2-2.7, 3-4, 3-5.1, 3-5.4.
• ����51 management and the OIG encountered several instances in which the ����51 grantee failed to account for attorneys’ fees or other derivative income properly. When a grantee is awarded attorneys’ fees from a case funded in whole or in part with ����51 funds, the proper calculation is to allocate the attorneys’ fees to the fund in which the ����51 grant is recorded in the same proportion that the amount of ����51 funds expended to support the representation bears to the total amount expended by the recipient to support the representation. See C.F.R. § 1630.12, which requires proportional allocation of income derived from ����51-funded activities. See also the below discussion regarding 45 C.F.R. Part 1609, which contains specific requirements for attorneys’ fees and other reimbursements.

Responsibilities of Financial Oversight Committee or Committees

• Each recipient’s governing body has a fiduciary responsibility to the program and must establish a financial oversight committee or committees.
  • The duties and responsibilities of the financial oversight committee(s) should be defined in the recipient’s bylaws or a governing body resolution, or should be set forth in the recipient’s operating policies and procedures. 
    See ����51 Accounting Guide, § 1-7.
  • Each recipient’s governing body shall appoint/elect a financial oversight committee(s) and identify the duties of the committee(s) in writing. 
    See ����51 Accounting Guide, § 3-5.2(b).
• As a best practice, the financial oversight committee(s) should have at least one member who is a financial expert or for the Board to have access to a financial expert.
  • A financial expert has (1) an understanding of Generally Accepted Accounting Principles (GAAP) and financial statements, (2) the capacity to apply GAAP in connection with preparing and auditing financial statements, (3) familiarity with developing and implementing internal financial controls and procedures, and (4) the capacity to understand the implications of different interpretations of accounting rules. 
    See ����51 Accounting Guide, § 1-7.

Internal Controls and Accounting Guide Concerns

• To maintain sufficient internal controls, accounting duties should be segregated to ensure that no single employee has the authority to initiate, execute, and record financial transactions without the involvement of a second, independent individual in the process. See����51 Accounting Guide, § 3-4.3. For example, someone other than the initial preparer should be responsible for reviewing journal entries, and the review should be properly documented with a signature and date.See ����51 Accounting Guide, Appendix VII, § A.
• Approval should be required at an appropriate level of management before a commitment of resources is made. See ����51 Accounting Guide, § 3-5.4(a). ����51 recommends that each recipient’s governing body adopt and approve written policies to ensure adequate oversight of Executive Director expenses.
• Revenue and expenses relating to ����51’s Technology Initiative Grants and Pro Bono Innovation Fund grants must be reported separately in the recipient’s annual audited financial statements submitted to ����51. This may be accomplished by establishing a separate fund or providing a separate supplemental schedule of revenue and expenses in the audited financial statements. See ����51 Accounting Guide, § 2-2.1.

Bank Statement Reconciliations

• Bank statement reconciliations to the general ledger should be conducted monthly by an individual who has no access to cash, is not a check signer, and has no cash bookkeeping duties. See ����51 Accounting Guide, § 3-5.2(d).
• The reconciliation must be reviewed and approved by a responsible individual. The review must be appropriately documented by signature and date. See ����51 Accounting Guide, § 3-5.2(d).

Specific Regulatory Concerns

45 C.F.R. Part 1604—Outside Practice of Law

• A recipient must adopt written policies governing the outside practice of law by full-time attorneys that are consistent with the ����51 Act and regulations.

45 C.F.R. Part 1609—Fee-Generating Cases

• “[A]ttorneys’ fees received by a recipient for representation supported in whole or in part with funds provided by the Corporation shall be allocated to the fund in which the recipient’s ����51 grant is recorded in the same proportion that the amount of Corporation funds expended bears to the total amount expended by the recipient to support the representation.” 45 C.F.R. § 1609.4(a); see also §§ 1609.5, 1609.6.

45 C.F.R. Part 1610—Use of Non-����51 Funds, Transfers of ����51 Funds, Program Integrity

• Grantees may not accept funds in the amount of $250.00 or more from any source other than the Corporation unless the grantee provides written notification of the prohibitions and the conditions that apply to such funds. See 45 C.F.R. § 1610.5.
• Notification should be provided before the recipient accepts the funds. Thus, notice should be given during the course of soliciting funds or applying for a grant or contract. For unsolicited donations where advance notice is not feasible, notice should be given in the recipient’s letter acknowledging the contribution. See 62 Fed. Reg. 27695, 27696 (May 21, 1997).

45 C.F.R. Part 1611—Financial Eligibility

• ����51 continues to find that recipients’ financial eligibility policies do not reflect the current version of 45 C.F.R. Part 1611, which was last updated in 2005. Failure to update financial eligibility policies in a timely manner places recipients at risk of improperly using ����51 funds to serve clients who do not meet ����51’s income and asset guidelines. Pursuant to 45 C.F.R. § 1611.3, grantees must periodically review their Part 1611 policy and revise it as necessary to ensure continued compliance with ����51 regulatory requirements. Special attention should be paid to the exclusive list of allowable asset exceptions in 45 C.F.R. § 1611.3(d)(1). OCE staff are available to review proposed policy changes and provide comments.
• Grantees must screen applicants regarding income prospects and record the responses appropriately, regardless of intake method. 45 C.F.R. § 1611.7(a)(1); see also Office of Legal Affairs (“OLA”) Advisory Opinion #AO-2009-1006, available at .
• Grantees must sufficiently document the basis for financial eligibility under 45 C.F.R. Part 1611. Special attention should be paid to the requirement in 45 C.F.R. § 1611.5(b) that, “[i]n the event that a recipient determines that an applicant is financially eligible pursuant to this section and is provided legal assistance, the recipient shall document the basis for the financial eligibility determination [and] shall keep records as may be necessary to inform the Corporation of the specific facts and factors relied on to make such determination.”
• Grantees should ensure that intake staff make reasonable inquiry of a client’s assets, including cash on hand and household items that do not fall under a specific exception under 45 C.F.R. § 1611.3(d)(1).

45 C.F.R. Part 1626—Restrictions on Legal Assistance to Aliens

• Pursuant to 45 C.F.R. §§ 1626.6 & 1626.7, grantees must ensure that applicants and clients who are seen in person, as well as clients receiving extended services, execute a citizenship attestation or demonstrate alien eligibility and that all files contain the necessary documentation pursuant to CSR Handbook (2008 Ed., as amended 2011), § 5.5. This requirement also applies to clinics staffed by recipient staff and PAI clinics supported by a recipient where legal assistance is provided. Pursuant to Program Letter 16-2, issued on May 19, 2016, grantees may accept ����51-required signatures in electronic form when the grantee can document that the e-signature meets the three elements of ESIGN. Grantees must also comply with any other applicable laws regarding the use of e-signatures.
• The written policies that guide staff in complying with 45 C.F.R. Part 1626 must be updated to conform with revisions made to the regulation effective May 19, 2014.

Case Service Reporting Issues

����51’s ability to report reliable case data to Congress and the public depends on each grantee’s compliance with the requirements of the CSR Handbook (2008 Ed., as amended 2011). Based on recent on-site visits, we have identified the following areas as requiring increased attention:

• Citizenship status or alien eligibility must be documented in all cases. CSR Handbook (2008 Ed., as amended 2011), § 5.5.
• Recipients must report each case according to the type of case service that best reflects the level of legal assistance provided. CSR Handbook (2008 Ed., as amended 2011), § 6.1, Chapter VIII.
• Recipients must ensure that every case reported to ����51 in its CSR data submission contains sufficient documentation of legal assistance provided pursuant to the requirements of the CSR Handbook (2008 Ed., as amended 2011), § 5.6.

Property Acquisition and Management Manual

• Recipients owning ����51-funded real property are required to adhere to certain recordkeeping provisions under Section 8 of ����51’s Property Acquisition and Management Manual.  In most instances, recipients are also required through their property interest agreements with ����51 to maintain an accounting of ����51 funds paid into the property and to report that accounting to ����51 annually.  As a best practice, all recipients owning property in which ����51 has an interest should contemporaneously document property-related expenses and track the amount of ����51 funds used over the life of the investment.  

Additional Information

If you have a concern or a question regarding compliance with ����51 regulations or directives, particularly the compliance areas noted in this Letter, please contact Lora M. Rath, the OCE Director, at rathl@lsc.gov or 202-295-1524. In addition, OCE is available to provide Executive Director Orientation or CSR Handbook training upon request. In most cases, training will be done via webcast. Training requests should also be submitted to Ms. Rath.