Memphis Area Legal Services, Inc.

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.

MALS has sent an initial email to LSC for approval of revised Allocation Methodology which covers the Administrative Salaries using a 2 step method for allocating Administrative Salaries. First, using Direct Hours charged to each grant as a percentage of Total Administrative Salaries. Then, for those grants that don't cover Administrative Salaries, those will be split between LSC and TN Filing Fees based on # of Closed Cases. Time by Direct Hours charged will be done on a monthly basis. Then, for those grants that don't cover Administrative Salaries, a quarterly true-up based on # of Closed Cases will be done. In addition, in 2Q2024 MALS is redefining the role and responsibilities of the CFO position. The position will be redefined as a full-time Director of Finance and Grant Compliance with clearly articulated financial oversight and Internal Control Compliance and Reporting responsibilities and overall responsibility for grant tracking and compliance.

2023-002 – Timesheets Not Properly Reviewed and Approved by Supervisor Legal Services Corporation Basic Field Grant Assistance Listing No. – 09.643030 LSC Regulation Code – 45 C.F.R. Part 1635 Condition: During our audit, we noted several instances where timesheets were not being properly reviewed and approved by the employees’ supervisor. Criteria: LSC Financial Guide states: “Recipients must maintain time and attendance records for each employee that provide reasonable assurance that the recorded hours for payroll are authorized, complete and accurate. Further, recipients must maintain documentation that indicate employees’ time and attendance records have been reviewed and approved by supervisors (or alternative personnel in a managerial role).” Cause: MALS did not follow internal control policies in place. Effect: While employees were paid appropriately based on hours reported, internal control policies were not followed to review timesheets in order to verify employees’ attendance and number of hours worked for the related pay period. Context: A sample of 20 payroll transactions were selected for testing. 7 out of the 20 timesheets selected lacked documentation of approval by the employees’ supervisor. Recommendation: We recommend MALS follow the policies and procedures in place. Management’s Response: See management’s corrective action plan.

MALS will update SOPs to ensure that time sheets are timely reviewed and approved by the relevant Managing Attorney/Supervisor in the Kemps Timekeeping Software. At a bi-weekly minimum, each Managing Attorney/Supervisor will send to the Director of Finance and Grant Compliance or the COO, an email regarding the accuracy of the Kemps Timekeeping, confirming that the Managing Attorney/Supervisor has reviewed and approved the Time entered into the System.