What the LSC Audit Guide Actually Requires — and How to Prepare

The Legal Services Corporation’s updated Audit Guide took effect on October 1, 2023, raising the bar for every LSC grantee. Organizations that prepared for audits under the old framework are now operating under different requirements, and the LSC OIG’s most recent quality control reviews make clear that many audits still aren’t meeting them.

What Changed With the Updated Audit Guide

The LSC OIG Audit Guide for Recipients and Auditors, effective for fiscal years ending September 30, 2023 and thereafter, introduced two structural changes that affect how every grantee audit is scoped and conducted.

First, all LSC funds are now treated as major programs regardless of spending threshold. Under the old framework, the Uniform Guidance’s risk-based threshold could determine whether LSC funds were audited as a major program. That flexibility is gone. Every LSC-funded organization is subject to the full compliance testing required for major program status, regardless of grant size.

Second, the requirement to designate all LSC recipients as not qualifying for Low-Risk Auditee status was eliminated. The prior LSC guidance effectively overrode the Uniform Guidance’s Low-Risk Auditee provisions for LSC recipients. The updated guide removes that contradiction while continuing to require a consistent level of compliance testing for LSC funds.

Second, the requirement to classify LSC recipients as High-Risk was eliminated. While that sounds like a reduction in scrutiny, it’s more of a recalibration. The audit scope for all recipients now defaults to the rigor previously reserved for High-Risk designations, applied uniformly.

These changes affect what the auditor tests, how deeply they test it and what documentation the organization needs to have in order.

The 120-Day Deadline and What It Requires

LSC grantees must submit completed audit reports to the OIG within 120 days of their fiscal year-end. Missing that deadline is itself a compliance finding and extension requests must be submitted in writing at least two weeks before the due date.

The 120-day window sounds generous until you account for what the auditor needs to complete the work. Financial statements need to be closed and reviewed. Supporting schedules need to be reconciled. Documentation on compliance with LSC regulations needs to be organized and accessible. Organizations that start preparing at year-end rather than throughout the year routinely run into delays that put the deadline at risk.

The audit also requires a Summary Report Form on noncompliance, questioned costs and control deficiencies. If the audit identifies findings, the organization must submit a corrective action plan to LSC within 30 days of the audit report submission. That’s a tight turnaround that requires the finance and program teams to be aligned well before the audit concludes.

Timekeeping Is Where Most Organizations Fall Short

The LSC OIG’s August 2025 quality control review findings, based on 34 reviews of fiscal year 2023 and 2024 grantee audits, identified timekeeping as one of the most common areas of deficiency. Inadequate sample sizes, missing employee certifications and timekeeping systems that don’t fully comply with LSC requirements all appeared in recent QCRs.

Under 45 CFR Part 1635, LSC grantees are required to maintain timekeeping systems that track how staff time is allocated across LSC and non-LSC funding sources. This includes tracking employee time by cases, matters and supporting activities, with sufficient detail to support cost allocations and demonstrate compliance with grant requirements. The LSC Financial Guide requires that timekeeping reports be reconciled with labor cost distribution reports at least annually before final fund allocation entries are made. When that reconciliation doesn’t happen or isn’t documented, the result is questioned costs and potential audit findings.

The practical implication is that timekeeping compliance isn’t an end-of-year exercise. The systems, policies and certifications need to be in place and functioning throughout the year so that the annual reconciliation reflects accurate data rather than reconstructed estimates.

Fund Balances Require Attention Before Year-End

LSC grantees may carry over up to 10% of their Basic Field Grant award to the following fiscal year without LSC approval. Carryover amounts exceeding 10% require a formal waiver request, which must be submitted within 30 days of the audit report submission. Organizations that miss the window must repay the excess to LSC.

The QCR findings noted fund balance deficiencies in 18% of reviews. In most cases, the issue wasn’t that organizations had excess carryovers. It was that auditors failed to calculate and document the grantee’s prior-year fund balance or confirm that controls were in place to identify excess amounts. From the grantee’s perspective, the risk is that an auditor who doesn’t catch the issue isn’t protecting the organization from LSC’s enforcement response if the carryover is later identified.

Monitoring fund balances against the 10% threshold throughout the year, rather than at year-end, gives organizations time to adjust spending or prepare a waiver request without the pressure of a deadline.

What to Have Ready Before the Auditor Arrives

Preparation for an LSC audit is most effective when it happens continuously rather than in the weeks before fieldwork begins. A few areas consistently determine how smoothly the process goes.

Internal controls over financial reporting need to be documented and functioning. The Audit Guide requires auditors to assess the effectiveness of the organization’s accounting system and internal controls as part of every engagement. Organizations that can demonstrate their controls are designed effectively and operating as designed spend significantly less time responding to auditor inquiries.

Compliance documentation should be organized by regulatory requirement, not by department or date. Auditors testing compliance with LSC regulations need to see evidence that the organization understood the requirement and followed it. Scattered documentation that takes days to compile introduces delays and signals to the auditor that controls may be informal.

For organizations also subject to single audit requirements under the Uniform Guidance, the LSC audit and the single audit can often be coordinated to reduce the burden on staff. The single audit process covers financial statements and federal award compliance, and when the LSC audit is conducted alongside it, organizations avoid duplicating the documentation and coordination work.

Build the Compliance Infrastructure Before You Need It

The LSC Audit Guide sets a clear standard. The organizations that meet it without significant disruption are the ones that treat compliance as an ongoing operational function rather than an annual event. Timekeeping systems, fund balance tracking and internal control documentation don’t produce clean audits when they’re assembled at year-end. They produce clean audits when they’re maintained throughout the year.

James Moore’s nonprofit team works with LSC-funded legal aid organizations on audit preparation, compliance systems and the documentation practices that support clean findings. Contact us when you want to get ahead of the next audit cycle.

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