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)

        . . . 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.

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.


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

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.

•   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

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.

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.

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

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.


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.

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.


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

                                  Distribution Schedule

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


       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