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Finding 2024-005 LSC Financial Guide § 3.7.1 Cost Allocation Grantor: Legal Services Corporation Program Name: Legal Services Corporation Basic Field Grant CFDA No.: 09.952000 Award No.: Basic Field Grant Award Year: 2024 Repeat Finding From Prior Audit? No Finding Type: Significant deficiency Criteria: Per LSC Financial Guide § 3.7.1 Cost Allocation. The cost allocation policy must address the following: • Direct and indirect cost definitions • Direct cost allocation methodology(ies) • Indirect cost allocation methodology(ies) including allocation bases (e.g., total direct costs, direct salaries and wages, attorney hours, numbers of cases, numbers of employees) • Frequency of allocation • Who conducts the allocation and who performs the review • Documentation requirements to support the allocation • Reconciliation process related to salaries and wages directly charged to LSC grants and contracts Methodology to address “exception for certain indirect costs” Condition: Our testing and inquiries indicated that MLSC performs its cost allocations through year-end reclassifications rather than through a consistent, documented process during the year. Direct costs were reclassified at year-end to assign expenses to the appropriate funding source, and indirect costs were calculated and allocated only after multiple versions of the trial balance were prepared. MLSC provided only an Excel adjusting journal entry for the indirect cost allocation, with no supporting documentation, no calculation worksheets, no approval evidence, and no explanation of the allocation methodology. As a result, we were unable to verify the accuracy of the allocations or determine whether the methods used complied with LSC requirements. Finding 2024-005 LSC Financial Guide § 3.7.1 Cost Allocation, continued Cause : MLSC did not perform timely review or monitoring of direct and indirect cost allocations, and the allocation methodologies used were not clearly defined, consistently applied, or aligned with LSC guidance or MLSC’s internal policies. Effect: MLSC did not comply with LSC Financial Guide § 3.7.1. The lack of documented, consistent, and supportable allocation methodologies increases the risk of inaccurate cost allocations, misclassification of expenses, and questioned costs due to insufficient support for charges to the LSC grant. Recommendation: MLSC should follow the LSC Financial Guide § 3.7.1 Cost Allocation. Management’s Response and Corrective Action Plan: Management agrees. Responsible person: Executive Director Lee Pliscou Corrective action planned: This has been corrected as of October 2025. MLSC Board of Directors approved a revised MLSC Accounting Manual with updates intended to comply with LSC’s Financial Guide on cost allocation. In particular, our new cost allocation policy addresses: ● Direct and indirect cost definitions ● Direct cost allocation methodology ● Indirect cost allocation methodology including allocation bases (total direct costs) ● Frequency of allocation (annual) ● Who conducts the allocation and who performs the review (Chief Fiscal Officer, Executive Director) ● Documentation requirements to support the allocation (calculation work papers) ● Reconciliation process related to salaries and wages directly charged to LSC grants and contracts ● Methodology to address “exception for certain indirect costs.” Anticipated completion date: Completed.