Finding 974413 (2023-001)

2023-001 – Improper Allocation Methodology for Administrative Personnel Salaries Legal Services Corporation Basic Field Grant Assistance Listing No. – 09.643030 LSC Regulation Code – 45 C.F.R. Part 1630 Condition: During our audit, we noted MALS’ methodology for allocating administrative personnel salary expenses to the grant did not align with the requirements in the LSC Financial Guide. Criteria: LSC Financial Guide states: “LSC requires recipients to maintain accounting systems sufficient to demonstrate the proper allocation of costs to each funding source. The cost allocation policy must address the following: 1) direct and indirect cost definitions: 2) direct cost allocation methodology(ies); 3) indirect cost allocation methodology(ies) including allocation bases (e.g., total direct costs, direct salaries and wages, attorney hours, number of cases, numbers of employees); 4) frequency of allocation; 5) who conducts the allocation and who performs the review; 6) documentation requirements to support the allocation (e.g., labor distribution report, personnel activity reports, calculation work papers); 7) reconciliation process related to salaries and wages directly charged to LSC grants and contracts; and 8) methodology to address “exception for certain indirect costs.” Cause: LSC released an updated Financial Guide for recipients effective January 1, 2023. MALS did not update the Organization’s Accounting Manual regarding the allocation of indirect costs to comply with the LSC Financial Guide. MALS current allocation of administrative salaries is to first charge other non- LSC funders for the amount of indirect costs allowed by the grant and any remainder is charged between LSC (unless the cost is prohibited by regulations or the LSC Act) and other unrestricted funds. Effect: While the Organization’s allocation methodology was acceptable in prior years under the previous guidance, the allocation base used to allocate administrative salaries was not cost-driven, as required by the updated Financial Guide. Context: A sample of 20 payroll transactions were selected for testing. 5 out of the 20 related to allocated administrative salaries, which were inaccurately charged to the grant. Recommendation: We recommend that management implement an appropriate allocation methodology that complies with the LSC Financial Guide, in addition to reviewing the Guide to ensure all of MALS policies relating to LSC comply with the guidance. Management’s Response: See management’s corrective action plan.