oversight

Audit of Drake College of Business's Compliance with the Title IV, Higher Education Act Program Requirements.

Published by the Department of Education, Office of Inspector General on 2002-03-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Our mission is to promote efficiency, effectiveness, and integrity of the Department’s programs and operations.
Our mission is to promote efficiency, effectiveness, and integrity of the Department’s programs and operations.
                              U.S. DEPARTMENT OF EDUCATION
                                    OFFICE OF INSPECTOR GENERAL
                                          65 Court Street, 12th Floor
                                           Brooklyn, NY 11201
                                                      Telephone: 718-935-5803




March 5, 2002                                                                                          CONTROL NUMBER
                                                                                                        ED-OIG/A02-B0006

Mr. Ziad Fadel
President
Drake College of Business
125 Broad Street
Elizabeth, NJ 07201

Dear Mr. Fadel:

This Final Audit Report presents the results of our Audit of Drake College of Business’s
(Drake) Compliance with the Title IV, Higher Education Act (HEA) Program Requirements.
Our audit objectives included examining: (1) internal controls, (2) institutional and program
eligibility, and (3) selected administrative and compliance requirements including student
eligibility, refunds, and overpayments.

A draft of this report was provided to Drake. In its response, Drake generally agreed with our
audit findings and recommendations except for recommendations 2.1 and 2.5. Specifically,
Drake requested we reconsider the recommendations to place Drake on the reimbursement
payment method and to establish a letter of credit for untimely refunds. We summarized Drake’s
response in this report’s “Audit Results” section, under “Drake’s Reply.” A copy of Drake’s
response, without its attachments, is provided as an Attachment to this report.

                                                    AUDIT RESULTS

Drake did not adequately administer the Title IV, HEA Federal Pell Grant Program during the
period, July 1, 1997, through June 30, 2000. This occurred because Drake did not have adequate
management controls to monitor and ensure compliance with the Title IV program requirements.
As a result, Drake did not properly account for Pell Grant Program funds during this period and
ensure the timely return of Pell Grant refunds and overpayments.

Finding No. 1 – Drake did not maintain adequate records

Drake could not provide certain fiscal records needed for our audit. Other fiscal records
provided by Drake were deficient or were provided after a two-month delay. In addition, Drake
could not locate the files for three students out of 226 files requested for review during our audit.


            Our mission is to promote efficiency, effectiveness, and integrity of the Department’s programs and operations.
The regulations at 34 CFR § 668.24(b) state:

         (1)      An institution shall account for the receipt and expenditure of title IV,
                  HEA program funds in accordance with generally accepted accounting
                  principles.
         (2)      An institution shall establish and maintain on a current basis –
                  (i)     Financial records that reflect each HEA, title IV program
                          transaction . . . .

According to 34 CFR § 668.24(d)(1) and (2), “[a]n institution shall maintain required records in
a systematically organized manner [and] . . . make its records readily available for review by the
Secretary or the Secretary’s authorized representative . . . .”

Also, according to 34 CFR 668.24(c)(1)(iii), an institution must maintain “[d]ocumentation of
each student’s or parent borrower’s eligibility for title IV, HEA program funds.”

Drake could not locate many requested accounting records. Specifically, Drake did not provide:
the general ledger for 2000; cash disbursements journals or records for the months, July 1997
through December 1998 and October 1999; and cash receipts journals or records for the months,
July 1997 through December 1997 and December 1999.

Some accounting records that Drake provided were not sufficient. For example, Drake
maintained its “cash receipts journals” manually on stenographic spiral notepads that had several
illegible handwritten entries. Drake’s Director stated that he had very little confidence in the
reliability of the data in the cash receipts journals that were prepared prior to his direct
involvement with Drake in 2000.

Drake did not readily provide other requested accounting records and documentation. Two
months after our written request, Drake subsequently provided the following records: operational
checking account statements from July 1997 through December 1998, Federal account
statements for January and February 2000, and general ledgers for 1997 through 1999.

Drake could not locate three student files out of 226 files we requested for review during our
audit. Drake did not provide any documentation or information to support the eligibility of these
students to receive Pell Grant awards.

In addition, Drake could not identify the universe of Pell Grant recipients. Drake provided us
with a listing that showed it awarded Pell Grants to 246 students during our audit period.
However, Drake’s two servicers had information identifying a universe of 406 Pell Grant
recipients for this period.1 Nevertheless, Drake could not provide an accurate student universe
despite the availability of records from its servicers.


1
  Drake contracted with servicers to provide technical support in the administration of its Pell Grant Program
including the processing of student aid applications, determination of Pell awards, and the tracking and monitoring
of drawdowns of Title IV funds.

                                                         2
These record-keeping deficiencies occurred because Drake did not have a system to maintain
required records in an organized manner and ensure complete and accurate records for students
who received Pell Grants. The Director acknowledged that the requested accounting records were
provided late and were missing, and that the student listing was incorrect. He could not explain
why the accounting records or the three student files could not be located.

Without complete and accurate fiscal and student records, there is limited assurance that Drake
properly accounted for the Pell Grant Program funds during this period. Due to the three missing
student files, Drake had no documentation that the students were eligible for Pell Grant payments
of $5,790. See Exhibit A for the details regarding the three missing student files.

Recommendations

We recommend that the Chief Operating Officer for Student Financial Assistance require Drake
to:

1.1    Implement an accounting system that maintains required records in a systematically
       organized manner; and

1.2    Implement a system to properly account for all students and ensure the system produces
       reliable information regarding the students and that student files are properly secured and
       maintained.

Drake’s Reply:

Drake generally agreed with this audit finding and recommendations 1.1 and 1.2. Drake
indicated that they had conducted a comprehensive review of the school’s administrative
procedures and that they had implemented many of our recommendations. Specifically, they
said that they had accomplished the following: (1) all files are now stored in fireproof cabinets
and records are filed in three categories--active, terminated, and completed students; (2) all files
are fully documented to insure students’ entitlement to Federal funds; and (3) all students’
accounts have been computerized, all activities can be accounted for, and their records
conformed with Generally Accepted Accounting Principles. Drake also provided five examples
of computerized records of enrollment, class rosters, Financial Aid Applications and payments,
attendance, and student account cards.

OIG’s Response:

Although Drake agreed with recommendation 1.1, its response did not fully address the missing
accounting records identified in our audit report. These records include a general ledger, a cash
disbursements journal, and a cash receipts journal. The actions taken by Drake were subsequent
to our fieldwork, and we have not evaluated whether the actions are adequate or in place.




                                                  3
Finding No. 2 – Untimely return of Pell Grant refunds and overpayments

Drake returned Pell Grant refunds totaling $5,228 to the U.S. Department of Education (ED)
from 221 to 315 days late. Drake also returned $14,274 of Pell Grant overpayments from 29 to
285 days late.

According to 34 CFR § 668.22(h)(2)(iv), the amount of the Title IV, HEA program refund must
be returned to the program account by the institution within 30 days of the date that the student
officially withdraws, is expelled, or the institution determines that a student has unofficially
withdrawn.

According to 34 CFR § 668.21, if a student officially withdraws or drops out before the first day
of class, all funds paid to the student under the Federal Pell Grant are an overpayment.
Furthermore, if the institution is unable to document the student’s attendance at any class, the
Secretary considers the student to have dropped out before the first day of class.

The regulations at 34 CFR § 668.173(c) require that an institution that has not paid
refunds timely “. . . must submit an irrevocable letter of credit, acceptable and payable to
the Secretary, equal to 25 percent of the total amount of title IV, HEA program refunds the
institution made or should have made during its most recently completed fiscal year . . . .”

Drake paid Pell Grant refunds totaling $5,228, an average of 250 days late, for 6 students that
Drake identified on a Student Refund Due list. These six withdrew from Drake during 2000, but
Drake did not return the Pell Grant refunds within 30 days as required. In addition, Drake paid
Pell Grant overpayments totaling $14,274, an average of 184 days late, for 11 students who
enrolled but did not attend class. Although Drake returned 4 overpayments in May and June
2000, Drake was unaware that 7 overpayments existed until disclosed by our audit.

The Director informed us that the refunds were paid late because Drake did not have sufficient
cash flow to make timely refunds. He added that Drake’s daily operations were a higher priority
for available funds at the time. The late return of overpayments occurred because Drake lacked a
monitoring system to identify students who enroll but do not attend school. Drake returned both
the refunds and overpayments to ED but not within the required 30-day period. A complete
listing and calculation of the late refunds and overpayments, including related imputed interest,
can be found in Exhibits B and C, respectively.

Recommendations

We recommend that the Chief Operating Officer for Student Financial Assistance:

2.1    Place Drake on the reimbursement payment method due to the lack of an adequate
       accounting system, late return of overpayments, and late return of refunds.




                                                4
We also recommend that the Chief Operating Officer for Student Financial Assistance require
Drake to:

2.2    Implement a monitoring system to detect students who enroll but do not attend school;

2.3    Return $5,790 of Pell Grant payments to ED for the three students with missing student
       files;

2.4    Pay $557 in imputed interest ($371 due to overpayments and $186 due to late refunds);

2.5    Establish a letter of credit for untimely refunds equal to 25 percent of the refunds as
       required by 34 CFR § 668.173.

Drake’s Reply:

Drake generally agreed with this finding and recommendations 2.2, 2.3, and 2.4, but disagreed
with recommendations 2.1 and 2.5. Drake stated that:

       Our financial aid administrator, student services advisor, and the school director
       have created a system, which will insure that there will not be any overpayments
       made to students. At each class start, the roster of new students and their
       accounts will be reviewed to insure proper posting of funds. At “midpoint” all
       students’ accounts are being reviewed prior to payments requested.

Regarding the three missing student files, Drake indicated that they are assuming this liability
created by Drake’s prior owner. Drake said that they would make the payment based on our
directive.

Regarding refunds and overpayments to students, Drake stated that “ . . . effective June 1, 2001,
all refunds have been calculated accurately and refunds have been made and will continue to be
made on a timely basis.” Drake also provided examples of student account cards, which
document the dates and amounts of students’ Pell Grant awards and refunds. Drake also stated
that the school is financially stable and the proper administration of refunds or unearned funds is
their number one priority.

Drake disagreed with recommendations 2.1 and 2.5 and requested that we reconsider these
recommendations because they were new owners of the school with the objective of the success
of the school’s students and the security of its staff. Drake added that, at this point, they should
not be faced with the burden of being placed on the reimbursement payment method or being
required to establish a letter of credit. Drake contended that such requirements would involve
many hours of additional time which could be more productively spent in following through with
the recommendations which Drake is committed to follow.




                                                 5
OIG’s Response:

We reviewed Drake’s comments, but our recommendations remain unchanged. The actions
taken by Drake in response to this audit finding were subsequent to our fieldwork, and we have
not evaluated whether the actions are adequate or in place. The reimbursement payment method
will assist Student Financial Assistance (SFA) in ensuring that Drake’s accounting system
provides adequate information, overpayments do not occur, and refunds are made timely. The
regulations require a letter of credit when an institution is found out of compliance with the
requirement to make timely refunds and do not contain an exemption for situations involving a
change of ownership or administrative procedures.

                                       BACKGROUND

Drake is a private, for-profit institution located in Elizabeth, New Jersey. Drake is licensed by
the State of New Jersey, Department of Education, and accredited by the Accrediting Council for
Independent Colleges and Schools. During the award years July 1, 1997, through June 30, 2000,
it participated only in the Federal Pell Grant Program. Drake reported to ED that it disbursed
Pell Grant funds totaling $198,766 for award year 1997-98, $244,524 for award year 1998-99,
and $322,753 for award year 1999-2000. Drake offers its programs on a clock-hour basis. On
June 1, 2001, SFA approved a change of ownership of Drake.

Drake has a history of Title IV HEA Programs violations. The major violations noted are as
follows:

•   In an Agreement between ED and Drake, signed on May 2, 1997, Drake agreed to pay ED
    $162,814 in settlement of fines and liabilities. Drake signed the Agreement without
    conceding that it had offered fewer hours of instruction than it had represented to both ED
    and the State of New Jersey. In addition, Drake agreed to pay $24,602 in unpaid refunds as
    identified in the Final Program Review Determination dated June 19, 1996.

•   In a Settlement Agreement between ED and Drake, dated October 5, 1998, ED documented
    its intention to terminate Drake’s eligibility to participate in the Title IV, HEA programs
    because Drake’s Fiscal Year (FY) 1994 average cohort default rate was 56.1 percent, based
    on an average of three years (FYs 1992, 1993, and 1994). Drake agreed to pay a $10,000
    fine and was no longer allowed to participate in the Federal Family Education Loan Program
    or Direct Loan Program.

                          AUDIT SCOPE AND METHODOLOGY

The purpose of our audit was to determine whether Drake administered the Federal Pell Grant
Program for the award years July 1, 1997, through June 30, 2000, in accordance with applicable
laws and regulations authorized by Title IV of the HEA, as amended. Our specific objectives
included examining: (1) internal controls, (2) institutional and program eligibility, and (3)
selected administrative and compliance requirements including student eligibility, refunds, and
overpayments.


                                                6
The period of our audit was from July 1, 1997, through June 30, 2000. Since Drake could not
provide an accurate listing of its Pell Grant recipients during the audit period, we requested 215
student files for manual review to determine the true universe of 406 Pell Grant recipients. Of
this universe, we randomly selected 25 student files for eligibility testing. In total, we requested
226 student files for review. We also reviewed 12 Pell Grant refunds and overpayments from a
Student Refund Due list, which Drake provided per our request. We examined the three most
recent financial statements and compliance attestation examinations of the Title IV Student
Financial Assistance Programs, including the related working papers. In addition, we reviewed
the most recent case management team files, State licensing and accrediting agency documents,
school catalogs, bank records, ED’s eligibility files, accounting and administrative records, and
other documents.

Since Drake did not readily provide certain accounting records, we obtained trial balances from
Drake’s Certified Public Accountants (CPAs) in Illinois, Pell Disbursements Journals from
Drake’s two servicers, and National Student Loan Data System records to confirm Pell Grant
disbursements. We also interviewed Drake’s officials, ED regional personnel, and the CPAs
who performed the Student Financial Assistance audits and attestations.

We conducted the fieldwork at Drake located in Elizabeth, New Jersey and at the two CPA firms
in Niles and Darien, Illinois, during the period December 7, 2000, to April 18, 2001. We held
the exit conference with Drake’s officials on April 18, 2001. Drake responded to our draft audit
report on November 30, 2001. Our audit was conducted in accordance with government auditing
standards appropriate to the scope described above.

                      STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we assessed Drake’s management control structure, as well as its policies,
procedures, and practices applicable to the scope of the audit. Our assessment was performed to
determine the level of control risk for determining the nature, extent, and timing of substantive
tests to accomplish our audit objectives.

For the purpose of this report, we assessed and classified the significant controls into the
following categories:

       --      Institutional eligibility;
       --      Student eligibility;
       --      Program eligibility;
       --      Records management;
       --      Return of Title IV refunds and overpayments; and
       --      Management controls.

Because of inherent limitations, a study and evaluation made for the limited purpose described
above would not necessarily disclose all material weakness in the management controls.
However, we identified several deficiencies that adversely affected Drake’s ability to administer
the Title IV, HEA Federal Pell Grant Program. These deficiencies and their effects are fully
discussed in the AUDIT RESULTS section of this report.

                                                  7
Enclosures: Exhibits A, B, and C, and Attachment
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final           Exhibit A               ACN: ED-OIG/A02-B0006


                                   Missing Student Files at
                                  Drake College of Business

                  Student              Pell Disbursement Date       Pell Grant Amount

                       A                    12/22/98                             $1,440
                       B                    09/03/97                              1,350
                       C (1)                10/27/98                               1,500
                       C (1)                01/27/99                               1,500

                    Total                                                        $5,790




               Note:

               (1) - Drake awarded two Pell Grant disbursements to this same student.
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final           Exhibit B                 ACN: ED-OIG/A02-B0006


                                    Late Pell Refunds at
                                  Drake College of Business

                       Required                        Number        Imputed         Pell Grant
                      Refund Date        Actual        of Days       Interest        Refund
        Student           (1)          Refund Date       Late          (2)           Amount

          O             03/31/00         02/09/01        315               $ 67          $1,562
          P             06/21/00         02/26/01        250                    18          522
          Q             06/28/00         02/26/01        243                    29          882
          R             06/28/00         02/26/01        243                    28          832
          S             07/12/00         02/26/01        229                    27          870
          T             07/20/00         02/26/01        221                    17          560

        Totals                                          1,501              $186          $5,228
                                                         (3)


Notes:

(1) -     Required Refund Date is the withdrawal date as determined by Drake, plus 30 days.

(2) -     We used the Treasury Current Value of Funds Rate of 5 percent per annum during 1997
          through 2000, for the imputed interest calculation. We used a 365-day year to determine
          a daily rate that we applied to the Pell Grant Refund Amount for the number of days late.

(3) -     The average number of days late for Pell refund is 250 which is computed by using the
          total number of days late, 1,501, divided by 6 students.
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final             Exhibit C                ACN: ED-OIG/A02-B0006


                                   Pell Overpayments at
                                  Drake College of Business

                                                                     Imputed      Pell Grant
    Student          Refund Date         Actual          Number of   Interest    Overpayment
    Enrollee             (1)           Refund Date       Days Late     (2)         Amount

        D (3)          04/30/00         02/09/01           285             $59       $ 1,500
        E (4)          05/20/00         02/26/01           282              60         1,562
        F (4)          05/10/00         02/09/01           275              59         1,562
        G (4)          05/10/00         02/09/01           275              59         1,562
        H (5)          05/20/00         02/09/01           265              34           948
        I (4)          06/16/00         02/26/01           255              27           770
        J (4)          07/22/00         02/26/01           219              45         1,500
        K (5)          05/03/00         06/26/00            54              12         1,562
        L (5)          03/31/00         05/16/00            46               4           687
        M (5)          04/07/00         05/16/00            39               7         1,284
        N (5)          05/14/00         06/12/00            29               5         1,337

        Totals                                             2,024          $371       $14,274
                                                            (6)

Notes:

(1) -     The Refund Date is the date Pell was disbursed plus 30 days. We used the date Pell was
          disbursed to calculate when the overpayment was due because none of these students
          actually attended class at Drake based on attendance records.

(2) -     We used the Treasury Current Value of Funds Rate of 5 percent per annum during 1997
          through 2000, for the imputed interest calculation. We used a 365-day year to determine
          a daily rate that we applied to the Pell Grant Overpayment Amount for the number of
          days late.

(3) -     From the sample of 25 students.

(4) -     From the Student Refund Due list.

(5) -     Noted during review of student files to determine the student universe.

(6) -     The average number of days late for returning Pell overpayments is 184 which is
          computed by dividing the total number of days late, 2,024, by 11 students.
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final       Attachment   ACN: ED-OIG/A02-B0006
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final       Attachment   ACN: ED-OIG/A02-B0006
Audit of Drake College of Business’s
Compliance with the Title IV,
HEA Program Requirements - Final       Attachment   ACN: ED-OIG/A02-B0006
                                  Report Distribution List
                            Control Number ED-OIG/A02-B0006

                                                                                   No. of
Auditee                                                                            Copies

       Mr. Ziad Fadel                                                                  1
       President
       Drake College of Business
       125 Broad Street
       Elizabeth, NJ 07201

ED Action Official

       Mr. Greg Woods                                                                  1
       Chief Operating Officer
       Student Financial Assistance

Other ED Officials/Staff (electronic copy unless otherwise specified)

       Chief of Staff, Office of the Secretary                                         1
       Under Secretary, Office of the Under Secretary                                  1
       Deputy Secretary, Office of the Deputy Secretary                                1
       Director, Office of Public Affairs                                              1
       Press Secretary                                                                 1
       Assistant Secretary, Legislation and Congressional Affairs                      1
       Assistant Secretary, Intergovernmental and Interagency Affairs                  1
       Office of General Counsel (Correspondence Control)                              1
       General Operations Team                                                         1
       Post Audit Group, Office of Chief Financial Officer                             1
       Audit Liaison Officer, Postsecondary Education, Office of General Counsel       1
       Audit Liaison Officer, Student Financial Assistance                             1
       Audit Liaison Officer, Office of Postsecondary Education                        1
       Assistant Secretary, Office of Postsecondary Education                          1
       Chief Financial Officer, Student Financial Assistance                           1
       General Manager for Schools Channel, Student Financial Assistance               1
       Area Case Director for Case Management and Oversight, Student
              Financial Assistance                                                     1
       Headquarters and Regional Audit Managers                                        1