oversight

Everest Institute's Lender Agreements

Published by the Department of Education, Office of Inspector General on 2010-08-04.

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

                               UNITED STATES DEPARTMENT OF EDUCATION
                                     OFFICE OF INSPECTOR GENERAL


                                                                                                                     Audit Services
                                                                                                     New York / Boston Audit Region



                                                              August 4, 2010

                                                                                                            Control Number
                                                                                                            ED-OIG/A02J0001

Steve Bonkowski
President
Everest Institute
1505 Commonwealth Avenue
Brighton, MA 02135

Dear Mr. Bonkowski:

This final audit report, entitled Everest Institute’s Lender Agreements, presents the results of
our audit. The purpose of the audit was to determine whether the agreements between the
institution and all lenders complied with the anti-inducement provisions of the Higher Education
Act of 1965, as amended (HEA). Our review covered the period July 1, 2007, through
September 30, 2008.



                                                    BACKGROUND 



Everest Institute (Everest), located in Brighton, Massachusetts, was known as Bryman when it
was acquired by Corinthian Colleges, Inc. (Corinthian) in December 1995. The school’s name
was changed to Bryman Institute in June 1996 and was changed again in April 2007 to its current
name, Everest Institute. Everest offers programs in Dental Assisting, Medical Assisting, and
Medical Administrative Assistant. For the 2007-2008 award year, Everest received a total of
$5,455,237 in Federal Family Education Loan Program (FFELP) funds.

Corinthian is a publicly traded corporation based in Santa Ana, California, that operates 89
for-profit colleges in the United States. Corinthian had private loan agreements with three
lenders: Student Loan Xpress, Inc. (SLX), Sallie Mae, Inc. (SLM), and College Loan
Corporation. These agreements provided private loans to Everest students who still needed
financial assistance after exhausting Federal financial aid.

According to Section 435(d)(5)(A) and (C) of the HEA,1 eligible lenders are prohibited from
offering or paying certain inducements in connection with FFELP loans:

1
 All citations to the HEA are to the requirements in effect during our audit period, from July 1, 2007 through
September 30, 2008.
         The Department of Education’s mission is to promote student achievement and preparation for global competitiveness by
                                     fostering educational excellence and ensuring equal access.
Final Report
ED-OIG/A02J0001                                                                                       Page 2 of 12


           The term “eligible lender” does not include any lender that . . .
                  (A) offered, directly or indirectly, points, premiums, payments, or other
           inducements, to any educational institution or individual in order to secure
           applicants for loans under this part; [or]
                                                  .......

                   (C) offered, directly or indirectly, loans under this part as an inducement
           to a prospective borrower to purchase a policy of insurance or other product. . . .

A violation of this prohibition may result in the lender’s disqualification from further program
participation and other sanctions.



                                              AUDIT RESULTS




We found that the agreements between Corinthian and two lenders were not in accordance with
the HEA. We determined that Corinthian had two agreements with SLX and one agreement with
SLM that included inducements prohibited by the HEA.2 The two agreements between
Corinthian and SLX included prohibited inducements in the form of Web site services by SLX
and provisions limiting Everest’s students’ access to private loans based in part on Everest’s
FFELP volume and Federal cohort default rate. The SLM agreement offered inducements to
parents of Corinthian students to borrow PLUS loans with SLM.

Section 435(d)(5) of the HEA prohibits offering or paying inducements to institutions to secure
loan applicants or offering FFELP loans as an inducement for a borrower to purchase another
product from a lender. We found that the lenders entering into the agreements did not comply
with the HEA’s requirements. We did not identify any noncompliance by Everest with
Section 435(d)(5)(A) and (C) of the HEA; however, the lenders offered inducements to the
school in the agreements. Since our audit was of the school and the noncompliance we identified
was attributable to the lenders, we present the details of the agreements between Corinthian and
the two lenders in the Other Matters section of this report.

Scope Limitation

In our Audit Notification Letter, sent to the president of Everest on October 10, 2008, we
requested the most recent and prior year’s internal audit reports for Everest since Government
Auditing Standards, paragraph 7.11(e), states, “[a]uditors should assess audit risk and
significance within the context of the audit objectives by gaining an understanding of . . . the
results of previous audits and attestation engagements that directly relate to the current audit
objectives.” Corinthian responded that the internal audit reports were not applicable to our audit.
While interviewing the president of Everest, he informed us that Corinthian’s Internal Audit
Department conducts an audit of the campus every year and if we wanted a copy we were to go


2
    The agreements between Corinthian and the lenders applied to all of Corinthian’s schools, which included Everest.
Final Report
ED-OIG/A02J0001                                                                           Page 3 of 12

through the Corinthian/Everest audit liaison. A second request for Everest’s internal audit
reports was made to Corinthian’s audit liaison.

On December 11, 2008, Corinthian’s audit liaison informed us, in an email, that:

       The candid self-appraisals contained in our internal audits can only be conducted
       because we understand they aren’t going to be disclosed to third parties. If these
       audits were freely available to third parties, we . . . would be hesitant to conduct
       robust internal audits for fear that the information contained in those reports could
       be used to our detriment. And in fact, no government agency has, to our
       knowledge, ever sought our internal audit reports. For that reason, we prefer to
       maintain our practice of keeping our internal audit reports confidential within the
       company.

       More to the point, however, our internal audits are not designed to identify
       “lender inducements,” so the Brighton reports would not be helpful in that regard
       anyway. I have personally reviewed the internal audits for the Brighton campus
       for the past three years and can confirm to you they contain no findings regarding
       lender inducements (or even inquiries into that subject matter). If the OIG’s
       [Office of Inspector General] audit is moving beyond lender inducements, we
       would appreciate the opportunity to discuss the revised scope.

On March 23, 2009, Corinthian and OIG agreed that Everest would produce the “index” of its
internal audits in an attempt to demonstrate to OIG’s satisfaction that the issue of prohibited
inducements was not covered by its internal audits. Corinthian’s legal counsel provided, via
email, three documents in Portable Document Format (PDF), entitled “Internal Compliance
Audit Audit Program – US Schools,” which consisted of a table of contents for each section of
Everest’s internal audit reports for fiscal years 2006, 2007, and 2008. Upon review of the table
of contents provided, we requested additional details on selected sections of these reports for
review. Our request for selected sections of Everest’s internal audit reports was denied.

We determined that the table of contents was insufficient to satisfy our requirement of obtaining
an understanding of internal controls within the context of our audit objective. Although the
stated subject areas did not indicate that the internal audits specifically examined the issue of
prohibited inducements, we could not determine whether the internal audits contained findings
relevant to our audit without examining the internal audits reports. Government Auditing
Standards, paragraph 8.11, states, “[a]uditors should also report any significant constraints imposed
on the audit approach by information limitations or scope impairments, including denials of access to
certain records or individuals.”

Corinthian Comments

Corinthian concurred with OIG’s Audit Results section that Everest was not in violation of Section
435(d)(5)(A) and (C) of the HEA. However, Corinthian expressed no view on OIG’s Other Matters
section and reserved the right to concur or disagree with the information at a later time. Additionally,
Corinthian disagreed with the scope limitation and requested that the scope limitation be removed
from the report. Corinthian stated that while it recognized the importance of auditors assessing audit
risk through gaining an understanding of the results of previous audits, such assessment should be
Final Report
ED-OIG/A02J0001                                                                            Page 4 of 12

performed within the context of the audit objectives and the results of previous audits that relate to
the current audit objectives as indicated in Government Auditing Standards, paragraph 7.11(e).
Corinthian further stated that its audit liaison made representation that the internal audit reports did
not address the issue of prohibited inducements and its outside counsel reviewed the internal audit
reports and informed OIG that such reports did not address the issue of prohibited inducements.
Corinthian argued that OIG’s request for the internal audit reports raised the issue of whether the
internal audit reports were protected under the “self-critical analysis privilege,” citing Bredice v.
Doctors Hosp., 50 F.R.D 249 (D.D.C. 1970). Corinthian stated that the “self-critical analysis
privilege” protects evaluative materials from disclosure in order to permit a business to engage in
candid self-assessment without fear that such materials will be used against it. Corinthian’s response
is included in its entirety as an Attachment to this report.

OIG Response

Corinthian’s comments did not cause us to change our scope limitation. Corinthian’s assertion
of a self-analysis privilege to withhold internal audit reports does not change our obligation to
report a scope limitation under Government Auditing Standards; that obligation applies
regardless of whether information is validly or improperly withheld. We routinely request and
receive without objection internal audits prepared by parties that we audit. We note that in
Bredice, the case cited by Corinthian, the district court applied the self-analysis privilege in the
context of private litigation. The Court of Appeals for the District of Columbia subsequently
concluded that “[c]ourts with apparent uniformity have refused its application where, as here, the
documents in question have been sought by a governmental agency." FTC v. TRW, Inc., 628
F.2d 207, 210 (D.C. Cir. 1980).



                                      OTHER MATTERS 



The agreements between Corinthian and SLX and SLM did not comply with the prohibitions on
inducements in Section 435(d)(5)(A) and (C) of the HEA, and they contained inducements that
were attributable to SLX and SLM. We found that two agreements between Corinthian and SLX
and one agreement between Corinthian and SLM included prohibited inducements. In general—

         		 SLX agreed to provide prohibited services to Corinthian, assisting it with the
             development of a Web site and administrative reports;

         		 SLX limited Everest students’ access to private loans based on Everest’s FFELP loan
             volume and Federal cohort default rate; and

         		 SLM agreed to offer students’ parents a $500 credit towards closing costs of a new
             SLM Home Loan, if the parents borrowed PLUS loans with SLM.

A March 30, 2007, agreement between Corinthian and SLX specifically stated that “SLX shall
assist Corinthian with the development of a [Web] site providing student loan information and
assist Corinthian in establishing a link to SLX’s [Web] site (including a splash page) for the
Final Report
ED-OIG/A02J0001                                                                                       Page 5 of 12

purpose of PLUS pre-approval, loan management, and Stafford loan applications.”3 SLX also
agreed to provide administrative reports for each campus Corinthian owned, upon Corinthian’s
request.

Another agreement between Corinthian and SLX offered Credit Risk Subsidy Program (CRSP)
loans to Everest’s high risk student borrowers but required Corinthian to pay a 10 to 40 percent
premium on those loans. The agreement limited Everest’s students’ access to CRSP loans based
on Everest’s FFELP loan volume and Federal cohort default rate.4 Under this agreement, SLX
could temporarily terminate the agreement if the CRSP loans exceeded 15 percent of all
educational loans made to Corinthian’s students, including loans made under the FFELP. In
addition, the agreement stated that it may be terminated immediately by SLX upon delivery of
written notice to the school if the school’s Federal cohort default rate exceeded 15 percent.

A program review report of “Fifth Third Bank as Eligible Lender Trustee (ELT)” issued by the
U. S. Department of Education’s (ED) Federal Student Aid (FSA) on February 23, 2009, also
reported the two concerns we identified with respect to SLX. The program review report
indicated that Fifth Third Bank, as ELT for SLX, provided Web site redesign services to a
particular educational institution with the sole purpose of securing FFELP volume. As set forth
in the report, such services are prohibited by Section 435(d)(5)(A) of the HEA.

The program review report also found that a termination clause present in many SLX agreements
tied private loans to overall education loan volume. The report stated that the application of the
clause to the overall education loan volume which included FFELP loans could appear to be
increasing the amount of private loan volume that a school may have available to its students.
The report recommended that SLX modify its agreements to clearly explain that the relationship
between a school's access to private loans and SLX's FFELP volume is to limit its financial risk.

Resolution of the above mentioned program review report was included in a Determination and
Voluntary Disposition (Settlement Agreement), dated March 23, 2009, between ED, Fifth Third
Bank, SLX and SLX’s parent company, CIT Group Inc. Fifth Third Bank and CIT Group Inc.
agreed to respectively pay ED the sum of $300,000 and $4,837,500. ED agreed to take no
further action against Fifth Third Bank or CIT Group Inc. on the issues raised in the program
review report.

On November 17, 2009, SLX was made aware of the results of our audit and given an
opportunity to respond. SLX’s response was provided to us on December 4, 2009, indicating
that SLX did not concur with our results. According to its response, SLX did not believe any
improper inducements occurred in its agreements with Corinthian since it had developed its loan
programs in consultation with experienced industry counsel and within the context of the
guidance that was available from ED at the time. In addition, SLX believes that the issues raised
by our audit are moot because SLX has ceased originating both government guaranteed and

3
  A “splash page” is the page of a Web site that the user sees first before being given the option to continue to the
main content of the site. Splash pages are used to promote a company, service, or product or are used to inform the
user of what kind of software or browser is necessary in order to view the rest of the site’s pages.
4
  In general, Federal cohort default rates, calculated under 34 C.F.R. Part 668, Subpart M (for Federal fiscal year
2008 and earlier) were the percentage of a school's borrowers who entered repayment on FFELP or William D. Ford
Federal Direct Loan Program loans during a Federal fiscal year and defaulted before the end of the following
Federal fiscal year.
Final Report
ED-OIG/A02J0001                                                                       Page 6 of 12

private student loans, and any actual or potential issues on inducements had been resolved by the
Settlement Agreement with ED.

SLX’s comments did not cause us to alter our conclusion that improper inducements were
offered. On July 9, 2010, we separately referred the SLX issues to FSA in an alert
memorandum, Lender Agreements between Sallie Mae and Student Loan Xpress and Corinthian
Colleges, Inc., Contained Inducements (Control Number ED-OIG/L02K0001), in which we
recommend FSA determine whether the issues were resolved by the Settlement Agreement, and
to take appropriate actions if the issues were not resolved.

Sallie Mae Offered Parents an Inducement to Borrow PLUS Loans

SLM’s agreement with Corinthian states that SLM would provide a $500 credit towards closing
costs on a new SLM Home Loan to parents who obtained a PLUS loan from SLM. A
March 21, 2007, “Letter of Understanding” between Corinthian and SLM summarized the
products and services that SLM would provide to Corinthian, its students, and their parents.
According to the letter, SLM would be Corinthian’s primary loan provider and would grant
Corinthian students access to both Federal and private education loans. Included in this
agreement was a provision for parents to obtain a one-time $500 credit towards their closing
costs of a new home loan from SLM if the parent obtained a PLUS loan from SLM. Through this
provision, parents of Corinthian students were offered an inducement to borrow PLUS loans in
order to qualify for a one-time $500 credit towards closing costs on a new SLM Home Loan.
According to Section 435(d)(5)(C) of the HEA, lenders cannot offer, directly or indirectly, loans
as an inducement to a prospective borrower to purchase other products.

On November 16, 2009, SLM was made aware of the results of our audit and given an
opportunity to respond. SLM provided a response on December 4, 2009, indicating that it did
not concur with our results. According to its response, SLM did not believe that the $500
closing cost credit was an inducement by SLM for Corinthian parents to apply or obtain PLUS
loans from SLM. SLM stated in its response that it did not violate Section 435 (d)(5)(A) and (C)
of the HEA in view of the facts that: 1) the $500 closing cost credit was not, in fact, marketed to
any prospective parent borrower, and 2) Corinthian parents were allowed to obtain PLUS loans
regardless of whether they agreed to apply for or obtain an SLM home loan. SLM stated that no
PLUS borrower at Everest obtained a mortgage from SLM during the timeframe.

As part of this audit, we did not examine how SLM marketed its mortgage loans or marketed the
FFELP loans to Everest students and parents and cannot corroborate the statements made by
SLM. However, whether or not the closing credit was in fact marketed to students or parents, the
fact remains that SLM offered the inducement through the agreement itself in violation of
Section 435 (d)(5)(A) and (C) of the HEA. While parents may have been allowed to obtain
PLUS loans regardless of whether they agreed to apply for or obtain an SLM home loan, the
$500 credit was an inducement to obtain PLUS loans, thus violating Section 435(d)(5)(C) of the
HEA. Therefore, we have not modified the Other Matters section based on SLM’s comments
and separately referred this matter to FSA in the memorandum we issued on July 9, 2010.
Final Report
ED-OIG/A02J0001                                                                      Page 7 of 12



                  OBJECTIVE, SCOPE, AND METHODOLOGY 



The objective of our audit was to determine whether the agreements between the institution and
all lenders for the period July 1, 2007, through September 30, 2008, complied with the anti-
inducement provisions of the HEA. We reviewed all agreements between lenders and the
school, including the corporation that owned the school.

To accomplish our objective, we:

   		 Obtained an understanding of Everest’s and Corinthian’s internal controls over prohibited
       lender inducements by conducting interviews with school and corporate officials.
    Reviewed requirements prohibiting lender inducements in the HEA and regulations.
    Reviewed Everest’s documents related to all lenders, including (but not limited to):
           o		 The list of lenders Everest and Corinthian had interacted with in the past 5 years;
           o		 Everest’s chart of accounts;
           o Individual student files for those who participated in the FFELP.
    Obtained and reviewed written policies and procedures regarding incentives that may be
       provided to Corinthian employees.
   		 Obtained and reviewed a list of charitable contributions made by Corinthian.
   		 Obtained and reviewed any agreements between the corporate entity, the school, and
       lenders to identify those with arrangements that warrant further review or indicated
       potential improper inducement activities.
   		 Obtained and examined Everest’s general ledger detailed accounts report.
   		 Obtained and reviewed Corinthian’s and Everest’s latest audited Financial Statements
       and Compliance Attestation Examination of the Title IV Student Financial Assistance
       Programs and the related audit documentation.
   		 Conducted interviews with the Independent Public Accountants (IPA) that performed the
       consolidated financial statements audit and Everest’s Compliance Attestation
       Examination of the Title IV Student Financial Assistance Programs.

We conducted audit fieldwork at Everest’s campus in Brighton, Massachusetts, from
October 27, 2008, through October 31, 2008. We conducted fieldwork at Corinthian’s corporate
headquarters, located in Santa Ana, California, from May 11, 2009, through May 15, 2009. In
addition, we went onsite at the IPA’s office in San Diego, California, to review the work of the
IPA that performed Everest’s compliance audit. We held our exit conference with Everest on
August 31, 2009.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Final Report
ED-OIG/A02J0001                                                                         Page 8 of 12

Scope Limitation

A request for Everest’s internal audit reports was made on two separate occasions. In response
to our first request, Corinthian responded that the internal audit reports were not applicable to our
audit. Upon our second request, we were informed that Everest’s internal audit reports did not
contain any findings related to lender inducements. On March 23, 2009, Corinthian and OIG
agreed that Everest would produce the table of contents of its internal audits in an attempt to
demonstrate to OIG’s satisfaction that the issue of prohibited inducements was not covered by its
internal audits. Upon review of the table of contents provided, we requested additional details on
selected sections of these reports for review. Our request for selected sections of Everest’s
internal audit reports was denied. Corinthian’s refusal to provide Everest’s internal audit reports
prevents us from obtaining a complete understanding of internal controls within the context of
our audit objective and causes us to qualify any conclusions we have drawn on the basis of the
data made available.



                             ADMINISTRATIVE MATTERS




If you have any additional comments or information that you believe may have a bearing on the
resolution of this audit, you should send them directly to the following Education Department
official, who will consider them before taking final Departmental action on this audit:

                               William J. Taggart
                               Chief Operating Officer
                               Federal Student Aid
                               U.S. Department of Education
                               Union Center Plaza, Room 112E1
                               830 First Street, N.E.
                               Washington, DC 20202

In accordance with the Freedom of Information Act (5 U.S.C. § 552), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation and assistance extended by your staff during the audit. If you
have any questions, please contact me at (646) 428-3888.

                                              Sincerely,

                                              /s/
                                              Daniel P. Schultz
                                              Regional Inspector General
                                                for Audit
Final Report
ED-OIG/A02J0001                                                       Page 9 of 12



                       Acronyms /Abbreviations Used in this Report


C.F.R.                     Code of Federal Regulations

Corinthian                 Corinthian Colleges, Inc.

CRSP                       Credit Risk Subsidy Program

ED                         U.S. Department of Education

ELT                        Eligible Lender Trustee

Everest                    Everest Institute – Brighton

FFELP                      Federal Family Education Loan Program

FSA                        Federal Student Aid

HEA                        Higher Education Act of 1965, as amended

IPA                        Independent Public Accountant

OIG                        Office of Inspector General

PDF                        Portable Document Format

Settlement Agreement       Determination and Voluntary Disposition

SLM                        Sallie Mae, Inc.

SLX                        Student Loan Xpress, Inc.
Final Report
ED-OIG/A02J0001                                                                                                      Page 10 of 12



                                                                    Attachment



                      CCi
                  CORINTHIAN
                 COLLEGES, INC.




           LEGAL DEPARTMENT

      6 Hutton Centre Drive, Suite 400

         Santa Ana, CA 927°7.5764

     tel 714.427.3°00 fax 714.751.36°5

                www.cci.edu


                        May 25,2010


                       Via e-mail and Overnight Mail
                       Daniel P. Schultz
                        Regional Inspector General for Audit
                        U. S. Department of Education
                       Office of Inspector General
                                               th
                       32 Old Slip, 26              Floor
                        Financial Square
                       New York, NY 10005


                                     Re:      Draft Reports: Everest Institute's Lender Agreements (Control Number
                                              ED-OIG/A02J0001) and National Aviation Academv - New England's
                                              Lender Agreements (Control Number ED-OIG/A02J0005)


                       Dear Mr. Schultz:


                       We are in receipt of your draft audit reports entitled Everest Institute's Lender
                       Agreements (Control Number ED-OIG/A02J0001) and National Aviation Academy­
                       New England's Lender Agreements (Control Number ED-OIG/A02J0005), both dated
                       April 26, 2010, and appreciate the opportunity to respond. As you are aware,Corinthian
                       Colleges, Inc. ("Corinthian") is the parent company of Everest Institute in Brighton,
                       Massachusetts ("Everest"). Additionally, prior to May 1, 2008 Corinthian was the parent
                       company of WyoTech Bedford ("WyoTech"), now known as National Aviation Academy
                       - New England ("NAA-NE").


                       Audit Results


                       Corinthian concurs that during the relevant periods Everest and WyoTech were not in
                       violation of Section 435(d)(5)(A) and (C) of the Higher Education Act of 1965, as
                       amended (the "HEA"). We express no view as to the compliance of lenders that are
                       described in the draft audit reports.

                       Other Matters


                       Corinthian has no comment regarding the findings with respect to NAA-NE after the




                                                                          1




    Member of the Corinthian Colleges. Inc.
 1m Global Network
Final Report
ED-OIG/A02J0001                                                                                     Page 11 of 12




        change of ownership on May 1, 2008. Additionally, Corinthian has no comment on the
        information contained in the "Other Matters" sections of the draft reports because they
        do not allege that Everest or WyoTech were in non-compliance with Section
        435(d)(5)(A) and (C) of the HEA. Rather, they address alleged non-compliance by
        lenders. Corinthian reserves the right to concur or disagree with the information in the
        future, if necessary.

        Scope Limitation


        Corinthian disagrees with the scope limitation described on pages 2-3 and 7 of the draft
        audit report for Everest, and pages 3-4 and 9-10 of the draft audit report for WyoTech.
        We recognize the importance of auditors assessing audit risk by gaining an
        understanding of the results of previous audits, but, as the draft audit reports note, such
        assessments are to be performed "within the context of the audit objectives," and the
        auditors are to review previous audits that "relate to the current audit objectives."
        Everest Draft Audit Report, at 2 (quoting Government Auditing Standards, at 1]7.11 (e)).


           Internal Audits were Unrelated to the Audit Objectives

        Corinthian's audit liaison made representations to the auditors that the internal audits in
        question did not address the issue of prohibited inducements and, therefore, did not
        "relate to the current audit objectives," i.e., the inducement prohibition. Further,
        Corinthian's outside counsel, Jonathan Vogel, reviewed the internal audit reports and
        explained 10 Ihe OIG's chief counsellhat the internal audits did not address lender
        inducements. Moreover, Mr. Vogel explained that Corinthian was reluctant to disclose
        evaluative materials, and that, considering that the internal audits did not at all address
        the issue of prohibited lender inducements, the auditors' examination of those
        evaluative materials would not be "within the context of the audit objectives."


        In order to enable the auditors to verify that the internal audits did not address
        prohibited lender inducements, Corinthian provided the auditors with relatively detailed
        indices of the compliance areas addressed in the internal audits for fiscal years 2006,
        2007, and 2008 that were requested. The indices showed that prohibited lender
        inducements were not addressed in the internal audits.


           The Self-Critical Analysis Prvilege Protects against Disclosure
                                         i




        In discussions with OIG's chief counsel, Mr. Vogel explained that the auditors' request
        for Everest's voluntary, internal audits raised the issue of whether those audits were
        protected under the self-critical analysis privilege, or the important public policy
        considerations that underlie it. The self-critical analysis privilege protects evaluative
        materials from disclosure in order to permit a business to engage in candid self­
        assessments without fear that such materials will be used against it. See, e.g., Bredice
        v. Doctors Hospita,
                          l Inc., 50 F.RD. 249 (D.C. 1970).



                                                      2
Final Report
ED-OIG/A02J0001                                                                                    Page 12 of 12




        The self-critical analysis privilege protects an organization from the dilemma of either (i)
        investigating possible regulatory violations, ascertaining whether they exist, and
        correcting any violations, but thereby creating a self-incriminating record that may be
        evidence of liability, or (ii) deliberately foregoing an internal evaluative review and
        making a record on the subject (and possibly leaving a regulatory violation uncorrected)
        in order to lessen the exposure of regulatory claims. The self-critical analysis privilege
        is similar to, and based on the same public policy considerations as, Rule 407, Federal
        Rules of Evidence, which excludes evidence of subsequent remedial measures.
        Without this privilege, organizations such as Corinthian would be chilled from such self­
        analysis. Indeed, in our experience, regulatory bodies have seemed to understand this
        concern, as this is the first time we have encountered a request from a regulatory body
        for our internal audits.


               Summary

        In summary, as demonstrated by the draft audit reports' "Other Malters" sections, the
        auditors obtained from Everest and WyoTech all of the schools' primary sources of
        information on the issue of prohibited lender inducements. As a result, the auditors did
        not experience "any significant constraints imposed on the audit approach." Everest
        Draft Audit Report, at 3 (quoting Government Auditing Standards, at 1]8.11). Despite
        the assertion in the draft audit reports to the contrary, the auditors did, in fact, obtain a
        "complete understanding" of the schools' information related to prohibited lender
        inducements. Everest Draft Audit Report, at 7. There is, therefore, no reason for the
        draft audit reports to qualify their conclusions on the basis of the information made
        available.


        Corinthian respectfully requests that the scope limitation be removed from both draft
        audit reports.

                                                           Sincerely,




                                                           gP!f
                                                            :e t :
                                                           Execu ti
                                                                            e
                                                                                eSident
                                                           and General Counsel


        cc:    Jonathan Vogel, Esq.
               Linda Buchanan




                                                       3