Finding 2025-001 LSC Financial Guide § 3.6.2 Physical Inventory Grantor: Legal Services Corporation Program Name: Legal Services Corporation Basic Field Grant CFDA No.: 09.952000 Award No.: Basic Field Grant Award Year: 2025 Repeat Finding From Prior Audit? Yes Finding Type: Significant deficiency Criteria: Section 3.6.2 of the LSC Financial Guide requires recipients to perform and document a physical inventory of all capital assets recorded in the property subsidiary ledger at least once every two years. The inventory should include a physical count of assets, reconciliation of the physical count to the property subsidiary ledger, investigation and resolution of discrepancies, and appropriate approval and documentation for asset disposals or write-offs. Documentation should include the date of the inventory, personnel performing the count, evidence of supervisory review, and reconciliation of differences identified during the inventory process. Condition: During the 2025 audit, management represented that a physical inventory of capital assets was performed during 2024. However, MLSC was unable to provide sufficient documentation to support that the inventory was properly completed in accordance with the LSC Financial Guide. Specifically, we noted the following: • Documentation supporting the physical inventory performed in 2024 was incomplete and did not identify the personnel who performed the inventory, the date of the physical count, or evidence of supervisory review. • The results of the physical inventory were not reconciled to the property subsidiary ledger, and no documentation was available showing that discrepancies, if any, were investigated and resolved. Finding 2025-001 LSC Financial Guide § 3.6.2 Physical Inventory, continued • Documentation supporting asset disposals or write-offs, including management approval, was not available. • Several assets on the fixed asset listing were identified as damaged, inactive, or no longer in service; however, no supporting documentation was maintained to demonstrate that these assets had been evaluated for disposal or removed from the accounting records where appropriate. As a result, we were unable to determine whether the physical inventory performed in 2024 was complete or accurate, or whether the property records accurately reflected the capital assets owned by MLSC as of December 31, 2025. Cause : MLSC did not establish adequate procedures to document the physical inventory process or reconcile the results of the physical inventory to the property subsidiary ledger as required by the LSC Financial Guide. In addition, management did not maintain sufficient documentation to support asset disposals, write-offs, and supervisory review of the inventory process. Effect: Failure to properly perform, reconcile, and document the required physical inventory results in noncompliance with LSC Financial Guide § 3.6.2. Without a reliable and documented physical inventory, MLSC cannot adequately demonstrate the existence, completeness, and accuracy of its capital assets. This increases the risk that capital assets may be misstated, lost, stolen, damaged, or improperly disposed of without timely detection and appropriate accounting treatment. Recommendation: MLSC should strengthen its capital asset inventory procedures to ensure compliance with LSC Financial Guide § 3.6.2. At a minimum, management should: • Perform and document a complete physical inventory of capital assets at least once every two years. • Reconcile the physical inventory results to the property subsidiary ledger and investigate and resolve all differences. • Maintain documentation identifying the date of the inventory, personnel performing the count, evidence of supervisory review, and reconciliation procedures performed. • Maintain written approval and supporting documentation for all asset disposals and write-offs. Finding 2025-001 LSC Financial Guide § 3.6.2 Physical Inventory, continued Management’s Response and Corrective Action Plan: MLSC acknowledges the finding and concurs in part. In response to 2024 audit, MSLC committed to completing a future physical inventory in accordance with the corrective action plan with an expected completion date of June 30, 2026, to include the date of the count, signature of the personnel conducting the inventory, reviewer and proper documentation for any write-offs or disposals, and reconciliation with the subsidiary ledger. The physical inventory was initiated in accordance with the corrective action plan. However, implementation was significantly disrupted by two severe typhoons that impacted the island in April and early of July 2026. These events resulted in prolonged office closures, and the temporary suspension of normal operations, preventing completion of the inventory within the planned timeframe. To date, one office has completed its physical inventory, signed by the person who conducted the inventory and the reviewer, and reconciliation of the physical inventory results to the property subsidiary ledger is currently underway. Responsible person: Chief Fiscal Officer, Jocelyn Mallari Corrective action planned: Complete the physical inventory of all offices; reconcile inventory results to the property subsidiary ledger; investigate any discrepancies identified, resolved and ensure all required inventory documentation is complete, including supervisory review and approvals, is maintained. Assets determined to be missing, obsolete, or no longer in service will be processed in accordance with MLSC’s property management procedures and the Financial Guide. Anticipated completion date: August 31, 2026.
Finding 2025-002 LSC Compliance 45 C.F.R Part 1629 bond insurance Grantor: Legal Services Corporation Program Name: Legal Services Corporation Basic Field Grant CFDA No.: 09.952000 Award No.: Basic Field Grant Award Year: 2025 Repeat Finding From Prior Audit? No Finding Type: Significant deficiency Criteria: Pursuant to 45 C.F.R. Part 1629, recipients of Legal Services Corporation (LSC) funding are required to maintain a fidelity bond or similar insurance covering employees, officers, directors, agents, volunteers, and third-party contractors who handle LSC funds. The required coverage must protect against losses resulting from fraud, dishonesty, theft, embezzlement, forgery, misappropriation, wrongful conversion, willful misapplication, and other fraudulent or dishonest acts. In accordance with 45 C.F.R. § 1629.6, recipients are required to maintain fidelity bond or similar insurance coverage in an amount of not less than ten percent (10%) of the recipient's annualized LSC funding for the preceding year. The LSC Financial Guide also recommends that the Board of Directors annually review and ratify the organization's fidelity bond or similar insurance coverage. Condition: During our audit, we noted that MLSC's fidelity bond (or similar insurance coverage) expired during 2025 and was not renewed. As a result, MLSC was operating without the fidelity bond or similar insurance required under 45 C.F.R. Part 1629. Management informed us that it made numerous attempts to obtain replacement coverage by contacting multiple insurance providers within the Commonwealth of the Northern Mariana Islands. However, insurance carriers were either unwilling or unable to provide the required fidelity bond or similar insurance coverage. As of the date of our audit report, MLSC had not been able to secure the required coverage despite its documented efforts. Finding 2025-002 LSC Compliance 45 C.F.R Part 1629 bond insurance, continued Cause : The required fidelity bond or similar insurance was unavailable from insurance carriers contacted by MLSC. Although management made reasonable and documented efforts to obtain the required coverage, no insurer was willing or able to issue a policy meeting the requirements of 45 C.F.R. Part 1629. Effect: MLSC was not in compliance with the fidelity bond insurance requirements established by 45 C.F.R. Part 1629 during the period in which coverage was unavailable. Without the required fidelity bond or similar insurance, MLSC is exposed to an increased risk of financial loss resulting from fraudulent or dishonest acts involving individuals who handle LSC funds. In addition, continued noncompliance could result in findings by the Legal Services Corporation or other oversight agencies. Recommendation: MLSC should continue its efforts to obtain fidelity bond or similar insurance that complies with 45 C.F.R. Part 1629. Management should maintain documentation of all communications with insurance providers, including applications, quotations, declinations, and other correspondence demonstrating its efforts to obtain the required coverage. If coverage remains unavailable, MLSC should promptly notify the Legal Services Corporation in writing of the circumstances, provide documentation of its efforts to obtain coverage, and request guidance regarding acceptable alternative risk mitigation measures or other actions necessary to address the regulatory requirement. Finding 2025-002 LSC Compliance 45 C.F.R Part 1629 bond insurance, continued Management’s Response and Corrective Action Plan: MLSC concurs with the finding. The required commercial crime/fidelity bond insurance expired on November 27, 2024, after the insurance carrier declined to renew the policy due to a pending insurance claim. Since that time, MLSC has made continuous efforts to obtain replacement coverage by contacting multiple insurance providers in the CNMI and Guam. Although one insurer offered limited commercial crime coverage, the proposed policy did not satisfy the requirements of 45 C.F.R Part 1629 because it excluded one office and provided substantially lower coverage limits than required. MLSC continued to pursue alternative coverage, including submitting an application through Travelers Casualty and Surety Company for coverage that would meet LSC requirement. Effective July 1, 2026, MLSC obtained the only fidelity coverage reasonably available in the market, thereby resolving the finding. Corrective Action Taken - Secured a fidelity bond effective July 1, 2026 - Maintained documentation of all efforts to obtain replacement coverage during the period coverage was unavailable. - Continued reporting insurance procurement efforts to the Board of Directors. - Will continue to pursue broader fidelity coverage as market conditions permit. - Will monitor renewal date to ensure timely renewal before expiration and prevent future lapses in coverage. Responsible Persons: Executive Director, Lee Pliscou Completion Date: July 1, 2026