CENTRAL MINNESOTA LEGAL SERVICES AUDITED FINANCIAL STATEMENTS December 31, 2016 and 2015

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1 CENTRAL MINNESOTA LEGAL SERVICES AUDITED FINANCIAL STATEMENTS December 31, 2016 and 2015

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4 STATEMENTS OF FINANCIAL POSITION December 31, 2016 and ASSETS (Restated) CURRENT ASSETS Cash and cash equivalents $ 1,411,776 $ 1,471,388 Certificate of deposit 249, ,361 Grants receivable 1,733,962 1,737,410 Prepaid expenses 20,981 28,791 TOTAL CURRENT ASSETS 3,416,351 3,486,950 PROPERTY AND EQUIPMENT, at cost 56,479 55,551 Less: accumulated depreciation (31,364) (28,146) TOTAL PROPERTY AND EQUIPMENT, net 25,115 27,405 TOTAL ASSETS $ 3,441,466 $ 3,514,355 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 87,013 $ 85,207 Accrued expenses 60,754 63,436 Unearned grant revenue ,250 TOTAL CURRENT LIABILITIES 147, ,893 NET ASSETS Unrestricted 1,462,536 1,287,653 Temporarily restricted 1,831,013 2,063,809 TOTAL NET ASSETS 3,293,549 3,351,462 TOTAL LIABILITIES AND NET ASSETS $ 3,441,466 $ 3,514,355 See notes to financial statements 3

5 STATEMENT OF ACTIVITIES For the Year Ended December 31, 2016 (With Comparative Totals for 2015) Temporarily Total Total Unrestricted Restricted (Restated) SUPPORT AND REVENUE Grants and contributions $ 13,053 $ - $ 13,053 $ 13,579 Government grants 663,483 1,620,163 2,283,646 2,286,323 Donated services 326, , ,352 Interest - 1,738 1,738 1,819 Net assets released from restrictions 1,854,697 (1,854,697) - - TOTAL SUPPORT AND REVENUE 2,857,989 (232,796) 2,625,193 2,766,073 EXPENSES Program services 2,575,309-2,575,309 2,504,752 Management and general 107, , ,722 TOTAL EXPENSES 2,683,106-2,683,106 2,620,474 CHANGE IN NET ASSETS 174,883 (232,796) (57,913) 145,599 NET ASSETS, BEGINNING 1,287,653 2,063,809 3,351,462 3,205,863 NET ASSETS, ENDING $ 1,462,536 $ 1,831,013 $ 3,293,549 $ 3,351,462 See notes to financial statements 4

6 STATEMENT OF ACTIVITIES For the Year Ended December 31, 2015 (Restated) Temporarily Unrestricted Restricted Total SUPPORT AND REVENUE Grants and contributions $ 13,579 $ - $ 13,579 Government grants 644,735 1,641,588 2,286,323 Donated services 464, ,352 Interest - 1,819 1,819 Net assets released from restrictions 1,690,283 (1,690,283) - TOTAL SUPPORT AND REVENUE 2,812,949 (46,876) 2,766,073 EXPENSES Program services 2,504,752-2,504,752 Management and general 115, ,722 TOTAL EXPENSES 2,620,474-2,620,474 CHANGE IN NET ASSETS 192,475 (46,876) 145,599 NET ASSETS, BEGINNING, as originally stated 1,121,112 2,084,751 3,205,863 RECLASSIFICATIONS (25,934) 25,934 - NET ASSETS, BEGINNING, as restated 1,095,178 2,110,685 3,205,863 NET ASSETS, ENDING $ 1,287,653 $ 2,063,809 $ 3,351,462 See notes to financial statements 5

7 STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2016 and (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (57,913) $ 145,599 Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities: Depreciation 8,106 4,721 Interest reinvested (271) (361) Decrease (increase) in: Grants receivable 3,448 26,875 Prepaid expenses 7,810 3,250 Increase (decrease) in: Accounts payable 1,806 10,404 Accrued expenses (2,682) 2,280 Unearned grant revenue (14,100) 14,250 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (53,796) 207,018 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (5,816) (6,192) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59,612) 200,826 CASH AND CASH EQUIVALENTS, BEGINNING 1,471,388 1,270,562 CASH AND CASH EQUIVALENTS, ENDING $ 1,411,776 $ 1,471,388 See notes to financial statements 6

8 STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended December 31, 2016 (With Comparative Totals for 2015) Program Management Total Total Services and General EXPENSES (Restated) Personnel salaries Lawyers $ 868,307 $ 44,394 $ 912,701 $ 872,218 Non-lawyers 438,227 26, , ,113 1,306,534 71,332 1,377,866 1,276,331 Payroll taxes 104,371 12, , ,337 Employee benefits 308,751 12, , ,193 Total personnel costs 1,719,656 96,685 1,816,341 1,641,861 Donated services 326, , ,352 Equipment and library 69,997 1,013 71,010 60,541 Training 5, ,451 12,995 Insurance 11, ,709 8,242 Contract services 197,286 2, , ,483 Travel 22, ,682 38,822 Space and occupancy 150,394 3, , ,279 Office expenses 52,361 1,696 54,057 36,080 Litigation costs 7, ,681 12,591 Mandated license fees 2,756-2,756 3,196 Other direct expenses 690 1,435 2,125 1,311 Depreciation 8,106-8,106 4,721 TOTAL EXPENSES $ 2,575,309 $ 107,797 $ 2,683,106 $ 2,620,474 See notes to financial statements 7

9 STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended December 31, 2015 (Restated) EXPENSES Personnel salaries Program Management Services and General Total Lawyers $ 823,642 $ 48,576 $ 872,218 Non-lawyers 369,935 34, ,113 1,193,577 82,754 1,276,331 Payroll taxes 101,321 9, ,337 Employee benefits 238,969 16, ,193 Total personnel costs 1,533, ,994 1,641,861 Donated services 464, ,352 Equipment and library 59, ,541 Training 12, ,995 Insurance 7, ,242 Contract services 192,336 1, ,483 Travel 38, ,822 Space and occupancy 138,570 3, ,279 Office expenses 35, ,080 Litigation costs 12,591-12,591 Mandated license fees 3,196-3,196 Other direct expenses ,311 Depreciation 4,721-4,721 TOTAL EXPENSES $ 2,504,752 $ 115,722 $ 2,620,474 See notes to financial statements 8

10 NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities: Central Minnesota Legal Services (CMLS or the Organization) is a non-profit corporation organized for the purpose of providing civil legal assistance to low income persons who would otherwise be unable to afford legal counsel throughout Central Minnesota. Support and Expenses: Contributions received and unconditional promises to give are measured at their fair values and are reported as an increase in net assets. The Organization reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of donated assets, or if they are designated as support for future periods. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is satisfied, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met in the same reporting periods are reported as unrestricted support. The Organization reports gifts of goods and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of longlived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Expenses are recorded when incurred in accordance with the accrual basis of accounting. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents: For purposes of the statements of cash flows, the Organization considers cash and investment securities with an original maturity of three months or less to be cash and cash equivalents. Certificate of Deposit: Certificates of deposit are carried at cost plus accrued interest. Certificates with an original maturity of three months or less are included in cash and cash equivalents. 9

11 NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Client Trust Accounts: The Organization maintains a separate trust account for clients payments of fees or court-awarded settlements. These amounts are not available for general operating expenses. As of December 31, 2016 and 2015, the Organization held no funds in the client trust accounts. Allowance for Doubtful Accounts: Bad debts are recorded on the allowance method based on historical experience and management s evaluation of outstanding receivables. At December 31, 2016 and 2015, management considered all outstanding amounts to be fully collectible. Accordingly, there was no allowance for doubtful accounts. Property and Equipment: Property and equipment is recorded at cost and depreciation expense is recognized over the estimated useful lives of the assets from three to ten years using the straight-line method. Depreciation expense was $8,106 and $4,721, for the years ended December 31, 2016 and 2015, respectively. The Organization s property and equipment consisted entirely of furniture and equipment as of December 31, 2016 and Grants and Contracts: CMLS recognizes grant revenue from Legal Services Corporation (LSC) as temporarily restricted contributions. CMLS may retain unexpended funds for use in future periods provided expenses incurred are in compliance with the specified terms of the grant. LSC may reduce future support to the extent the current year s unexpended funds are in excess of 10% of current year support from LSC. As of December 31, 2016 and 2015, the Organization s unexpended LSC support exceeded 10% of the current year award. A waiver was received approving the 2015 carryover. Management expects to request a waiver to retain the 2016 excess carryover of LSC support. Expenditures under government contracts are subject to review by the granting authority. To the extent, if any, that such a review reduces expenditures allowable under these contracts, CMLS will record such disallowance at the time a final assessment is made. 10

12 NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Donated Services: Donated services represent services rendered by various attorneys in the CMLS service area at no charge to the Organization. The value of donated services for the years ended December 31, 2016 and 2015 is based on an estimated average fee of $200 per hour for lawyers, which is a representative charge of the professionals rendering the service. The value of the services provided is reported as donated services revenue and expense in the financial statements. Functional Allocation of Expenses: Salaries and related expenses are allocated based on time records, job descriptions and the best estimates of management. Expenses, other than salaries and related expenses, which are not directly identifiable by program or supporting service, are allocated based on the best estimates of management. Fundraising costs are immaterial and are included with management and general expenses. Income Taxes: The Organization has been granted tax exempt status under Section 501(c)(3) of the Internal Revenue Code and similar Minnesota statutes. It is classified as an organization that is not a private foundation and charitable contributions by donors are tax deductible. Federal and state tax authorities generally have the right to examine the current and three previous years of income tax returns. The Organization is not currently under examination by any taxing jurisdiction. Reclassifications: The 2015 financial statements have been restated reclassifying an amount previously recorded as temporarily restricted net assets to being unearned grant income. Subsequent Events: In preparing these financial statements, the Organization has evaluated events and transactions for potential recognition or disclosure through April 3, 2017, the date the financial statements were available to be issued. NOTE 2. SUMMARY OF FUNDING CMLS operations are funded primarily through grants from LSC, a private, non-profit corporation established by Congress in 1974 to assure equal access to justice under the law for all Americans. It is headed by a bipartisan Board of Directors appointed by the President and confirmed by the Senate. 11

13 NOTES TO FINANCIAL STATEMENTS NOTE 2. SUMMARY OF FUNDING (continued) CMLS grant and contract activity for the years ended December 31, 2016 and 2015 consisted of grant awards from LSC in the amount of $1,641,588 and $1,675,663, respectively. CMLS received notification of a 2017 award of $1,620,163 before December 31, 2016, which is included in grants receivable at December 31, 2016 and recognized as a temporarily restricted government grant. Additionally, CMLS had received notification of the 2016 award of $1,641,588 before December 31, 2015, which was included in grants receivable at December 31, 2015 and recognized as a temporarily restricted government grant. NOTE 3. CONCENTRATION OF CREDIT RISK The Organization maintains its cash balances at financial institutions located in Minneapolis, Minnesota. The balances are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 2016 and 2015, the Organization had no uninsured cash balances. NOTE 4. CERTIFICATE OF DEPOSIT At December 31, 2016 and 2015, the Organization had a certificate of deposit in the amount of $249,632 and $249,361, respectively. This certificate matures in May 2017 and earns interest at %. NOTE 5. CONTRACT SERVICES VOLUNTEER ATTORNEY PROGRAMS CMLS passes federal funds to subrecipients for the Private Bar Involvement Program. The funds are provided from the Volunteer Lawyer Network, the Minnesota State Bar Association, and the Minnesota Legal Services Coalition. Reimbursement expenses under these contracts during 2016 and 2015 consisted of the following: Volunteer Lawyer Network Minnesota State Bar Association 2016 Minnesota Legal Services Coalition Total Support and Revenue Grants and contracts $ 13,968 $ 12,454 $ 18,526 $ 44,948 Expenses Non-lawyers $ 13,968 $ 12,454 $ 18,526 $ 44,948 12

14 NOTES TO FINANCIAL STATEMENTS NOTE 5. CONTRACT SERVICES VOLUNTEER ATTORNEY PROGRAMS (continued) Volunteer Lawyer Network Minnesota State Bar Association 2015 Minnesota Legal Services Coalition Total Support and Revenue Grants and contracts $ 13,968 $ 12,454 $ 18,526 $ 44,948 Expenses Non-lawyers $ 13,968 $ 12,454 $ 18,526 $ 44,948 NOTE 6. LEASED FACILITIES CMLS leases office space at three locations that renew on an annual basis. The rental expense for the years ended December 31, 2016 and 2015 was $153,977 and $142,279, respectively. NOTE 7. NET ASSETS Temporarily restricted net assets as of December 31, 2016 and 2015 consisted of the following: Legal Services Corporation - grant $ 1,805,898 $ 2,036,404 Legal Services Corporation - property 25,115 27,405 $ 1,831,013 $ 2,063,809 Temporarily restricted net assets released from restrictions during the years ended December 31, 2016 and 2015 consisted of the following: Legal Services Corporation - grant $ 1,846,591 $ 1,599,637 Legal Services Corporation - property 8,106 4,721 Legal assistance to low income veterans - 85,925 $ 1,854,697 $ 1,690,283 13

15 NOTES TO FINANCIAL STATEMENTS NOTE 8. RETIREMENT PLAN The Organization participates in a Section 403(b) retirement savings plan (the Plan) covering all employees who meet eligibility requirements and elect to participate in the Plan. The Plan does have an employer only contribution component. To be eligible for the employer only contribution, an employee has to work one year, and if they work part-time, the contribution is prorated to the percentage of time worked. For 2016 and 2015, the employer only contribution was $1,000 per year. The Plan also provides that eligible employees receive matching contributions of 30% of their contribution, up to a maximum of 6% of compensation. Contributions for 2016 and 2015 were $56,377 and $49,967, respectively. NOTE 9. PRIVATE ATTORNEY INVOLVEMENT CMLS utilizes the volunteer attorney and contract methods to meet the Private Attorney Involvement condition of the LSC grant. This condition requires CMLS to utilize 12.5% of their annualized LSC grant to involve private attorneys in the delivery of legal services. During the years ended December 31, 2016 and 2015, the requirements of this condition were met. NOTE 10. PRIOR PERIOD ADJUSTMENTS During the year ended December 31, 2016, the Organization received notification from LSC that the unspent TIG grant funds at December 31, 2015 should be reported as unearned grant revenue rather than temporarily restricted net assets. As a result, the 2015 financial statements have been restated to reflect this change. This reclassification resulted in a decrease in temporarily restricted net assets of $14,250 and an increase in unearned grant revenue of $14,250 as of December 31, In addition, temporarily restricted government grant revenue was reduced by the same amount. These financial statements also reflect a reclassification to restrict the net book value of the property and equipment that was acquired with LSC funds. Although these funds were shown included in LSC net assets in the Supplemental Schedule of Support, Revenue and Expenses and Change in Net Assets for LSC funds for the year ended December 31, 2015, these amounts were not previously included in temporarily restricted net assets in the basic financial statements. As a result, the 2015 financial statements have been restated to reflect this change. This reclassification resulted in $25,934 of unrestricted net assets at the beginning of 2015 being reclassified as temporarily restricted net assets. This reclassification had no effect on previously reported total net assets. 14

16 SCHEDULE OF SUPPORT, REVENUE AND EXPENSES AND CHANGE IN NET ASSETS FOR LSC FUNDS For the Year Ended December 31, Award Legal Services 2016 Award Total 2016 Award Other Legal Services Corporation Legal Services Legal Services Private Legal Services Corporation Carryover Corporation Corporation Attorney Corporation Basic Field Basic Field Basic Field Basic Field Involvement Grants Equipment Total SUPPORT AND REVENUE Grants and Contracts Legal Services Corporation $ 1,620,163 $ - $ - $ 1,620,163 $ - $ 29,500 $ - $ 1,649,663 Interest income - - 1,738 1, ,738 Donated services , ,756 Net assets released from restrictions Legal Services Corporation - 394,816 1,293,847 1,688, ,928-8,106 1,854,697 TOTAL SUPPORT AND REVENUE 1,620, ,816 1,295,585 3,310, ,684 29,500 8,106 3,832,854 EXPENSES Personnel salaries Lawyers - 144, , ,197 29, ,868 Non-lawyers - 84, , ,560 20, , , , ,757 49, ,029,599 Payroll taxes - 26,076 85, ,529 5, ,203 Employee benefits - 55, , ,491 13, ,910 Total personnel costs - 311,141 1,019,636 1,330,777 68, ,399,712 Donated services , ,756 Equipment and library - 14,789 48,467 63,256 6, ,173 Training - 1,155 3,786 4, ,301 Insurance - 2,371 7,768 10,139 1, ,439 Contract services - 19,603 64,240 83,843 57,765 29, ,108 Travel - 3,075 10,079 13,154 4, ,681 Space and occupancy - 31, , ,629 10, ,210 Office expenses - 8,995 29,476 38,471 7, ,751 Litigation costs - 1,525 4,997 6, ,533 Mandated license fees ,919 2, ,504 Other direct expenses Depreciation ,106 8,106 TOTAL EXPENSES - 394,816 1,293,847 1,688, ,684 29,500 8,106 2,210,953 CHANGE IN UNRESTRICTED NET ASSETS 1,620,163-1,738 1,621, ,621,901 Less: equipment purchases - - (5,816) (5,816) - - 5,816 - NET ASSETS, BEGINNING (restated) - 394,816 1,641,588 2,036, ,405 2,063,809 NET ASSETS TRANSFERRED - - (157,928) (157,928) 157, NET ASSETS RELEASED - (394,816) (1,293,847) (1,688,663) (157,928) - (8,106) (1,854,697) NET ASSETS, ENDING $ 1,620,163 $ - $ 185,735 $ 1,805,898 $ - $ - $ 25,115 $ 1,831,013 See independent auditor's report regarding supplemental information 15

17 SCHEDULE OF SUPPORT, REVENUE AND EXPENSES AND CHANGE IN NET ASSETS FOR LSC FUNDS For the Year Ended December 31, 2015 (Restated) 2016 Award Legal Services 2015 Award Total 2015 Award Other Legal Services Corporation Legal Services Legal Services Private Legal Services Corporation Carryover Corporation Corporation Attorney Corporation Basic Field Basic Field Basic Field Basic Field Involvement Grants Equipment Total SUPPORT AND REVENUE Grants and Contracts Legal Services Corporation $ 1,641,588 $ - $ - $ 1,641,588 $ - $ 25,650 $ - $ 1,667,238 Interest income - - 1,819 1, ,819 Donated services , ,352 Net assets released from restrictions Legal Services Corporation - 323,163 1,123,625 1,446, ,849-4,721 1,604,358 TOTAL SUPPORT AND REVENUE 1,641, ,163 1,125,444 3,090, ,201 25,650 4,721 3,737,767 EXPENSES Personnel salaries Lawyers - 133, , ,894 31, ,990 Non-lawyers - 65, , ,985 20, , , , ,879 51, ,551 Payroll taxes - 23,299 81, ,307 6, ,337 Employee benefits - 32, , ,312 14, ,391 Total personnel costs - 255, ,303 1,142,498 71, ,214,279 Donated services , ,352 Equipment and library - 10,498 36,503 47,001 4, ,594 Training - 2,100 7,301 9,401 2, ,519 Insurance - 1,485 5,163 6,648 1, ,730 Contract services - 14,282 49,658 63,940 54,221 25, ,811 Travel - 5,648 19,638 25,286 2, ,761 Space and occupancy - 25,549 88, ,381 10, ,631 Office expenses - 5,015 17,438 22,453 4, ,447 Litigation costs - 2,508 8,724 11,232 1, ,443 Mandated license fees ,188 2, ,942 Other direct expenses , ,130 Depreciation ,721 4,721 TOTAL EXPENSES - 323,163 1,123,625 1,446, ,201 25,650 4,721 2,094,360 CHANGE IN UNRESTRICTED NET ASSETS 1,641,588-1,819 1,643, ,643,407 Less: equipment purchases - - (6,192) (6,192) - - 6,192 - NET ASSETS, BEGINNING - 323,163 1,675,663 1,998, ,934 2,024,760 NET ASSETS TRANSFERRED - - (152,849) (152,849) 152, NET ASSETS RELEASED - (323,163) (1,123,625) (1,446,788) (152,849) - (4,721) (1,604,358) NET ASSETS, ENDING $ 1,641,588 $ - $ 394,816 $ 2,036,404 $ - $ - $ 27,405 $ 2,063,809 See independent auditor's report regarding supplemental information 16

18 SCHEDULE OF EXCESS CARRYOVER FUND BALANCE LEGAL SERVICES CORPORATION For the Year Ended December 31, 2016 Legal Services Corporation Grant Support $ 1,641,588 Interest income 1,738 EXPENSES: Basic Field 1,688,663 Private Bar Involvement 157,929 Property acquisition 5,816 1,643,326 1,852,408 CHANGE IN NET ASSETS (209,082) NET ASSETS, BEGINNING 394,816 NET ASSETS TRANSFERRED - NET ASSETS, ENDING 185,734 10% of Legal Services Corporation support 164,159 Legal Services Corporation net assets subject to recapture $ 21,575 See independent auditor's report regarding supplemental information 17

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23 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended December 31, 2016 Pass-Through CFDA Entity Identifying 2016 Federal Agency / Program Number Number Subrecipients Expenditures Legal Services Corporation: 2015 Operating Grant Carryover $ - $ 394, Operating Grant ,948 1,457, Operating Grant Technology Initiative Grant TIG ,500 Total Legal Services Corporation 44,948 1,881,908 U.S. Department of Health and Human Services: Pass through programs from: Minnesota Department of Human Services Grants to States for Access and Visitation GRK% ,390 Total U.S. Department of Health and Human Services - 53,390 U.S. Department of Labor: Pass through programs from: Goodwill Industries, Inc. dba Goodwill/Easter Seals Minnesota Reintegration of Ex-Offenders Grant Unknown - 8,713 Total U.S. Department of Health and Human Services - 8,713 U.S. Department of Justice: Pass through programs from: Mid-Minnesota Legal Assistance Legal Assistance for Victims Program WL-AX ,818 Total Expenditures of Federal Awards $ 44,948 $ 1,991,829 See accompanying notes to schedule of expenditures of federal awards 22

24 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTE 1. BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the Schedule) includes the federal grant activity of Central Minnesota Legal Services under programs of the federal government for the year ended December 31, The information in this Schedule is presented in accordance with the requirements of Title 2 US Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of the operations of Central Minnesota Legal Services, it is not intended to and does not present the financial position, changes in net assets, or cash flows of Central Minnesota Legal Services. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Negative amounts shown on the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. Central Minnesota Legal Services has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. 23

25 SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year Ended December 31, 2016 Section I Summary of Auditor s Results Financial Statements Type of auditor s report issued: Unmodified Internal control over financial reporting: Material weakness(es) identified? yes X no Significant deficiency(ies) identified? X yes none reported Noncompliance material to financial statements noted? yes X no Federal Awards Internal Control over major programs: Material weakness(es) identified? yes X no Significant deficiency(ies) identified? yes X none reported Type of auditor s report issued on compliance for major programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR section (a)? Identification of major programs: yes X no CFDA Number(s): Name of Federal Program or Cluster: Legal Services Corporation Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? Yes X No 24

26 SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year Ended December 31, 2016 Section II Financial Statement Audit Finding Lack of Segregation of Duties Condition: Central Minnesota Legal Services has a limited number of office personnel and, accordingly, does not have adequate internal accounting controls in certain areas because of a lack of appropriate segregation of duties. Criteria: Internal controls should provide a good system of internal accounting controls that contemplate an adequate segregation of duties so that no one individual handles a transaction from its inception to its completion. Effect: The lack of segregation of duties may not provide an effective system of internal accounting control necessary to prevent and detect errors and irregularities. Recommendation: Management should provide close supervision and review of accounting policies and procedures and financial information. The Board of Directors should monitor the activities of the Organization by receiving interim financial statements and provide oversight to the financial reporting process. Management Response: Management will continue to implement segregation of duties to the extent possible. Management and the Board of Directors will continue to provide oversight to the financial reporting process Financial Reporting Process Condition: Like many similarly sized organizations, Central Minnesota Legal Services has requested assistance from us, the auditors, with drafting financial statements and the related notes. Criteria: Internal controls should provide a good system of internal accounting controls that includes the preparation of the financial statements and footnotes. Effect: This control deficiency increases the possibility that errors and irregularities in the presentation of the financial statements and footnotes may not be detected on a timely basis. Recommendation: The outsourcing of these services is not unusual to organizations of this size and is a result of management s cost-benefit decision to rely on our accounting expertise rather than incurring this internal resource cost. Management and the Board of Directors should continue to monitor the activities of the Organization by reviewing the financial statements and related notes and providing oversight to the financial reporting process. 25

27 Management Response: Management is aware of the situation, but a cost-benefit analysis of the issue does not currently support the allocation of additional employees or resources at this time. Certain other safeguards are currently maintained (management oversight and review of draft financial statements) which provide satisfactory mitigation of the issue. Section III Findings and Questioned Costs-Major Federal Award Programs Audit No matters were reported. Section IV Prior Year Findings and Questioned Costs No prior year audit findings. 26