. . . The institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance . . . . The regulations at 34 Code of Federal Regulations (CFR) § 668.14(b)(22) codify the statutory prohibition on incentive payments based on securing enrollment. By entering into this program participation agreement, an institution agrees that . . . it will not provide, nor contract with any entity that provides, any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the awarding of student financial assistance. IPD Received Payments Based on Student Enrollment in the SGAS Programs The University entered into a contract with IPD that provided for incentive payments to IPD based on success in securing student enrollments for its SGAS programs. The contract included the following specific responsibilities for IPD: ! IPD shall recruit students to enroll in the courses of study in the SGAS programs. ! IPD shall provide representatives to recruit students for the programs covered under the agreement. ! IPD will submit to the University a sufficient number of qualified applicants for admission to the programs such that a minimum of 100 and a maximum of 1,800 students are enrolled in courses of study during each academic year. ! IPD shall collect, on behalf of the University, all tuition, application fees, book and material fees, and other fees applicable to the programs. ! IPD shall maintain the official program accounting books and records. IPD remitted book, material, and computer fees in full to the University. Tuition fees were divided between the parties on a weekly basis. During the period of our audit, in accordance with the contract, the division was 50 percent to the University and 50 percent to IPD. Refunds were paid from the joint account according to these percentages. 2 The University Violated the HEA by Paying IPD Based on Success in Securing Enrollments for the SGAS Programs Which Resulted in $3,161,750 of Improperly Disbursed Title IV Funds Because the University did not comply with the HEA and regulations by paying incentives to IPD based on success in securing enrollments for its SGAS programs, the University must return all Title IV funds that were disbursed on behalf of students enrolled in the SGAS programs. Because the University paid incentives for each student enrolled in the SGAS programs, all students in the SGAS programs were improperly recruited. Our audit covered the period July 1, 1996, through June 30, 1999. For that period, Title IV funds totaling $3,299,891 were disbursed on behalf of students enrolled in the SGAS programs, consisting of $2,000 in Federal Perkins Loans (Perkins), $18,740 in Federal Supplemental Educational Opportunity Grants (FSEOG), $137,901 in Federal Pell Grants (Pell), and $3,141,250 in Federal Family Educational Loans (FFEL) funds. IPD’s Compensation Plan for Recruiters Based Salary and Bonuses on the Number of Students Enrolled in the SGAS Programs Our review of IPD’s compensation plans for fiscal years (FY) 1997-1999 disclosed that IPD provided incentives to its recruiters through salary levels that were based on the number of students recruited and enrolled in the programs. IPD assigned recruiters a salary within the parameters of performance guidelines (i.e., knowledge of basic policies and procedures, organization and communication skills, and working relationships). IPD assessed recruiter performance on a regular basis, comparing it to the established goals for the fiscal year. IPD completed formal evaluations biannually and, after the first 6 months of employment, determined salary on an annual basis. The recruiter’s success in enrolling students determined whether IPD adjusted the salary upward, downward, or kept it the same. In addition, the FY 1998 and 1999 compensation plans called for the payment of bonuses to recruiters hired before September 1, 1998. The bonuses increased as the number of students increased, and ranged from $1,344 for 100-149 students to $29,600 for over 200 students. The FY 1999 plan indicated that recruiters hired on or after September 1, 1998, who achieved 100 or more starts by the end of the fiscal year were entitled to a one-time bonus of $1,500. Recommendations We recommend that the Chief Operating Officer for Student Financial Assistance require the University to: 1. Amend and/or terminate immediately its present contractual relationship with IPD to eliminate incentive payments based on success in securing enrollments. 2. Return to lenders $3,141,250 of FFEL disbursed on behalf of students enrolled in the SGAS programs during the period July 1, 1996, through June 30, 1999, and repay the Department for interest and special allowance costs incurred on Federally subsidized loans. 3 3. Return to the Department $2,000 of Perkins, $18,740 of FSEOG, and $137,901 of Pell disbursed to students enrolled in the SGAS programs during the period July 1, 1996, through June 30, 1999. 4. Determine the amount of Perkins, FSEOG, Pell and FFEL funds improperly disbursed to or on behalf of students since the end of our audit period and return the funds to the Department and lenders. University Comments and OIG Response The University did not agree with our conclusions and recommendations. The following is a summary of the University’s comments and our response to the comments. The full text of the University’s comments is attached. University Comments. The Allocation of Revenue Under the IPD Contract Does Not Violate the Incentive Compensation Rule. The University stated that: • The IPD contract compensates IPD based on the volume of a broad range of professional services provided to Olivet Nazarene University, many of which have variable costs dependent on the number of students. • The Incentive Compensation Rule does not apply to the IPD contract because (1) the Department is without legal authority to use the rule as a basis for regulating routine contracts for professional, non-enrollment related services; and (2) the rule cannot apply to service contracts where the cost of providing services necessarily varies depending on the number of students. • The IPD contract provides that IPD receives decreasing percentages of revenues as more students enrolled in SGAS programs. • The University’s compensation to IPD does not constitute a “commission, bonus, or other incentive payment based directly or indirectly on success in securing student enrollments.” • The Department has published no regulation or other public guidance supporting the interpretation of revenue-sharing arrangements advanced by the OIG in the draft report. The IPD Contract Compensates IPD Based on the Volume of a Broad Range of Professional Services Provided to Olivet Nazarene University. The University stated that the contract commits IPD to provide the following list of services, which it performed, with respect to the operation of the SGAS programs. • Management consultation and training, upon request, regarding: • Program administration and evaluation. • Assessment center organization and management. • Student tracking systems development and implementation. • Marketing research and management. • Student tuition and financial aid accounting. • Faculty recruitment, assessment, and development. • Ongoing curriculum review and revision. • Curriculum delivery system development. 4 • Faculty and student curriculum material development. • Maintenance of accounting records, and financial planning and budgeting. • Recruitment and screening of potential SGAS faculty. • Administrative facilities lease management. The University stated that the OIG implied that IPD only provided recruiting and tuition collection services and the OIG either overlooked or ignored other services provided by IPD under the agreement with the University. OIG Response. The OIG did not overlook or ignore the fact that IPD provided other services to the University under the terms of the agreement. In the draft audit report, we acknowledged that IPD provided additional services, such as accounting. Because it was not within the scope of our audit, we did not determine the extent of additional services under the agreement that IPD actually provided at the request of the University and at IPD’s cost. We did verify that the revenue to IPD was generated only by the success in securing enrollments for which IPD was performing recruiting services. This constitutes the statutory violation of providing a commission, bonus, or other incentive payment based directly or indirectly on the success in securing enrollments. While we recognize that IPD logically had to incur expenses to provide the program accounting services and any additional services that it may have provided, these expenses are irrelevant in determining whether the structure of the revenue allocation is a violation of the HEA. No compensation was to be provided to IPD unless IPD was successful in recruiting and securing student enrollments. The agreement also included a minimum enrollment guarantee that, if not achieved, would result in a reduction in revenue to be allocated to IPD, despite other services that might have been provided. This further emphasizes that the revenue stream is completely generated by, and depended on, student enrollment. The University does not dispute that the payments it made to IPD were based on a percentage of the tuition and fees paid by students enrolled in the SGAS. Likewise, the University does not dispute that IPD was responsible for recruiting students. Nor does the University dispute that some portion of the amount it paid to IPD was directly related to IPD’s success in securing enrollments for the University’s SGAS. Our audit report did not focus on what other services may have been provided by IPD because once IPD became responsible for recruiting students, even among other activities, and received compensation from the University based on the number of students enrolled in the program, the University was in violation of the HEA. The HEA at § 487(a)(20) states: The Institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting . . . [Emphasis added.] Once recruiting was added to the services to be provided under the contract, compensation based on enrollment was no longer permitted. IPD had sole responsibility for recruitment and 5 enrollment, and was paid under the contract only on the basis of its success in securing student enrollment regardless of what other services it may have been providing. Whether or not the revenue allocation was intended to provide compensation for other services is irrelevant because the allocation violates the law. The University’s response regarding the services performed by IPD does not always agree with the contract. Where the University puts forward that IPD was responsible for program administration and evaluation, the contract actually provided that “[the University] retails full and ultimate responsibility to third parties for the educational content, instruction, and presentation of the courses of study offered in the programs.” Section III. D. of the contract stated that IPD shall provide, at IPD’s expense, reasonable consulting services to train University personnel in program administration and evaluation. The University, in its response, stated that IPD is responsible for student services and academic services procedures. As explained below, these services were to be provided at the University’s request and IPD’s expense, or under separate agreement. The University stated that IPD was responsible for curriculum development. The contract at Section III. E., Curriculum Delivery System actually stated that “IPD, in its role as consultant, shall assist Olivet Nazarene University in the preparation of full descriptions of curricula . . . .” The contract stated that all faculty and student curriculum materials developed by University faculty or IPD for delivery in the programs shall be paid for by IPD in accordance with preexisting payment schedules. The printing and distribution of the curriculum materials shall be the responsibility of the University. The University’s response asserted that IPD was responsible for faculty recruitment and assessment. The contract actually stated that “IPD shall, if requested by Olivet Nazarene University, assist Olivet Nazarene University to recruit, screen and recommend for Olivet Nazarene University consideration or approval and appointment, all instructors and faculty advisors required for participation in the programs.” As provided for in the contract, Section III. G., IPD may offer suggested class sites; however, the University was to determine actual sites, and shall procure and be responsible for these sites. We had previously reported that IPD maintained the official accounting records of the program. In its response, the University stated that IPD is also responsible for financial planning and budgeting. We find no reference to these duties in the contract. The contract did require IPD to provide all program promotion and advertising. Successful program promotions, advertising and market research by IPD would have the effect of increasing its success in securing enrollments for which it was compensated. We had previously included this in the background section of our report. 6 The University stated that all of the services offered by IPD were highly volume sensitive. We could only identify three items from the contract that appear to be volume sensitive: recruiting, marketing, and maintenance of accounting records. The array of consulting services would not necessarily be volume sensitive. University Comments. The Incentive Compensation Rule Does Not Apply to the IPD Contract Because (1) the Department is Without Legal Authority to Use the Rule as a Basis for Regulating Routine Contracts for Professional, Non-Enrollment Related Services; and (2) the Rule Cannot Apply to Service Contracts Where the Cost of Providing Services Necessarily Varies Depending on the Number of Students. The University stated that the Incentive Compensation Rule was intended to prevent schools from using commissioned salespersons to recruit students, not to regulate business arrangements. When Congress enacted the statute, and the Department promulgated the implementing regulation, both emphasized their intention to halt the use of commissioned salespersons as recruiters. OIG Response. The HEA does not excuse or permit incentive payments depending on the type of contractual arrangement that creates them. Any incentive payment based directly or indirectly on success in securing enrollment is prohibited. The contract with IPD included recruiting activities with compensation determined by IPD’s success in securing students for enrollment, on a per student basis. University Comments. The IPD Contract Provides That IPD Receives Decreasing Percentages of Revenues as More Students Enrolled in SGAS Programs . The University stated that even with the broad range of services to be performed by IPD, economies of scale justified allocation of a lesser percentage once the SGAS programs reached various participation thresholds. The University claimed that economies of scale enabled IPD to perform the wide- range of services at a lesser cost and pass these savings on to the University in the form of a reduced percentage of revenue at a larger volume of work performed. OIG Response. The reduction in the incentive package upon reaching certain enrollment levels does not negate the conclusion that the revenue allocation (at whatever percentage) is an improper incentive. The incentive does not become proper by being reduced below a certain percentage amount. Regardless of the percentage amount, IPD was paid additional compensation directly tied to each additional enrollment. University Comments. The University’s Compensation to IPD Does Not Constitute a Commission, Bonus, or Other Incentive Payment Based Directly or Indirectly on Success in Securing Student Enrollments. The Department Has Published No Regulation or Other Public Guidance Supporting the OIG’s Interpretation of the Incentive Compensation Rule to Restrict Routine Revenue-Sharing Arrangements. The University stated that the draft report cites no regulatory guidance, case law, nor other published guidance to support the proposition that the revenue allocation formula violates the Incentive Compensation Rule. The University did not know, and could not have known, that the revenue allocation formula would be construed as a violation of the Incentive Compensation Rule, because no such pronouncement or interpretation had ever been published and disseminated to Title IV-participating institutions. The University stated that revenue received by IPD did not meet the definition of commissions or bonuses, and was not paid to any individual agent or employee. 7 OIG Response. The HEA prohibition, § 487(a)(20), on incentive payments is clear. The Institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting. . . . [Emphasis added.] The University signed a program participation agreement committing it to comply with the HEA and regulations. The contract clearly indicated that IPD was to be an entity engaged in student recruiting on behalf of the University. The contract also clearly showed that compensation to IPD was a percentage of the tuition revenue based on IPD’s success in securing student enrollments for the University. University Comments. The OIG’s Recommended Sanction – Disallowance of All Title IV Funds Received by the University for SGAS Enrollees – Is Unwarrented [sic] and Inconsistent With Applicable Law and Regulations . The University stated that no basis exists to support that a violation of any of the innumerable program participation agreement requirements warrants a wholesale disallowance of all Title IV funds. OIG Response. The University incorrectly characterized our recommendation for monetary recovery as a sanction. We are not proposing that the University be fined. We are recommending that the Department recover funds disbursed in violation of the HEA. University Comments. IPD’s Recruiter Salaries Do Not Violate the Incentive Compensation Rule. IPD stated that its compensation plans based recruiter salaries on factors or qualities that are not solely related to success in securing enrollments. It also stated that the prohibition in § 487(a)(20) did not extend to salaries. Even if salaries were included, IPD stated that salaries could be based on merit or success in securing enrollment as long as enrollment was not the sole factor. OIG’s Response. Contrary to IPD’s representation, the compensation plan we reviewed did not include factors other than enrollment to adjust recruiter salaries. According to the compensation plan, recruiters’ salary and bonuses were determined annually by how many students they enrolled in the programs. Annual salary and bonuses would increase, decrease, or remain the same in accordance with predetermined tables that directly tied students enrolled to particular salary and bonus amounts. The salary and bonus tables did not include factors other than enrollment. The requirements of § 487(a)(20) cannot be avoided by labeling improper incentive compensation as salary. OTHER MATTERS During our audit work, we also identified an issue relating to the University’s definition of an academic year for its undergraduate SGAS programs under the 12 Hour-Rule, which will be addressed in a separate report. 8 BACKGROUND Founded in 1907, the University is a liberal arts university with its main campus in Bourbonnais, Illinois. The North Central Association of Colleges and Schools accredits it to offer Associate, Baccalaureate, and Masters degrees. In 1949, the University began to provide adult education when its North Central Association Studies Committee [sic] recommended that it place an increased emphasis on adult education and “the opportunities for lifelong learning.” On October 17, 1989, the University contracted with IPD, a subsidiary of the Apollo Corporation, to help improve its existing School of Graduate and Adult Studies. As a result, the University added Baccalaureate degree programs in Management, Nursing, and Business Administration to the SGAS, and revised its existing Masters of Business Administration program. The University contracted with IPD for marketing and accounting support, while it provided the curriculum, facilities, and faculty. The University and IPD split tuition revenue equally, but the University received 100 percent of book, material, computer, and other miscellaneous fees. During the period July 1, 1996, through June 30, 1999, the University participated in the Perkins, FSEOG, Pell, and FFEL programs. University or Department records indicated that, during the period, the University or lenders disbursed $3,299,891 on behalf of students in the SGAS programs. Specifically, the University's records indicated that it disbursed Perkins totaling $2,000 and FSEOG totaling $18,740. The Department's records (Student Payment Summary for Pell and National Student Loan Data System for FFEL) indicated the University disbursed Pell totaling $137,901 and lenders disbursed FFEL of $3,141,250. Title IV of the HEA of 1965, as amended, authorizes these programs, and they are governed by regulations contained in 34 CFR Parts 674, 676, 682, and 690, respectively. In addition, these programs are subject to the provisions contained in the Student Assistance General Provisions regulations (34 CFR Part 668), and the University must comply with the Institutional Eligibility regulations (34 CFR Part 600) to participate in these programs. Regulatory citations in the report are to the codifications revised as of July 1, 1996, 1997, and 1998. AUDIT SCOPE AND METHODOLOGY The audit’s objective was to determine whether the University complied with the HEA and Title IV regulations concerning the prohibition on making incentive payments based on success in enrolling students. We specifically focused our review on the University’s contract with IPD and the programs of study related to that contract. To accomplish our objective, we reviewed the University’s written policies and procedures, accounting and bank records, and student financial assistance reports. We reviewed the University’s program participation agreement with the Department, its contract with IPD, and IPD’s compensation plan for its recruiters. In addition, we reviewed single audit reports prepared by the University’s Certified Public Accountants. 9 We relied on computer-processed data the University extracted from its financial assistance database. We used award and disbursement data from the Department's Student Payment Summary and National Student Loan Data System to corroborate information obtained from the University. We did this by comparing Pell and loan disbursements for all students in the Department's records with University data. We held discussions with University officials to gain an understanding of the processes for requesting and drawing down Federal funds, and for its accounting for revenue from the SGAS programs. Based on these tests and assessments, we concluded that the data the University provided were sufficiently reliable to use in meeting the audit’s objectives. The audit covered the period July 1, 1996, through June 30, 1999. We performed the on-site field work in Bourbonnais, Illinois, during the periods August 15-25, September 6, and September 29, 2000. We conducted the audit in accordance with government auditing standards appropriate to the scope of review stated above. STATEMENT ON MANAGEMENT CONTROLS As a part of our review, we gained an understanding of the University’s management control structure, as well as its policies, procedures, and practices applicable to the scope of the audit. We identified applicable significant controls related to institutional eligibility, student enrollment, and contract payments. To determine the level of control risk, we initially tested disbursements to 55 Pell and 117 loan recipients. Subsequently, we decided to compare Pell and loan transactions for all students in the SGAS programs. Due to inherent limitations, a study and evaluation made for the limited purpose stated above would not necessarily disclose all material weaknesses in the management controls. However, we identified a significant weakness over incentive payments for student enrollment that violated the statutory prohibition against commissioned sales. The Audit Results section of this report fully discusses this weakness and its effect. 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 Department of Education official, who will consider them before taking final action on the audit: Greg Woods, Chief Operating Officer Student Financial Assistance Regional Office Building, 7th and D Streets, S.W. ROB Room 4004, Mail Stop 5132 Washington, DC 20202 10 Distribution Schedule Copies Auditee 1 Action Official 1 Greg Woods, Chief Operating Officer Student Financial Assistance Department of Education ROB-3, Room 4004 7th and D Streets, SW Washington, DC 20202-5132 Other ED Offices Chief of Staff, Terry Abbott 1 Supervisor Post Audit Group, Office of the Chief Financial Officer 1 General Manager for Schools, Student Financial Assistance 1 Chief Financial Officer, Student Financial Assistance 1 Director, Case Management & Oversight, Schools, Student Financial Assistance 1 Area Case Director, Chicago Case Team, Case Management & Oversight, Schools, Student Financial Assistance 1 Office of Public Affairs 2 Secretary’s Regional Representative, Region V 1 OIG Inspector General 1 Deputy Inspector General 1 Assistant Inspector General for Investigation 1 Assistant Inspector General for Audit 1 Assistant Inspector General for Audit, Analysis and Inspection 1 Deputy Assistant Inspector General for Audit 1 Director, Student Financial Assistance, Advisory and Assistance Team 1 Regional Inspectors General 1 each
Audit of the Title IV Programs Administered by Olivet Nazarene University's School of Graduate and Adult Studies, Bourbonnais, Illinois.
Published by the Department of Education, Office of Inspector General on 2001-05-21.
Below is a raw (and likely hideous) rendition of the original report. (PDF)