oversight

Commissioned Sales and Course Length at Benedictine University.

Published by the Department of Education, Office of Inspector General on 2001-12-13.

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

                                   UNITED STATES DEPARTMENT OF EDUCATION
                                              OFFICE OF INSPECTOR GENERAL




                                                                                                   CONTROL NUMBER
                                                                                                     ED-OIG/A05-B0003

                                                                                                         December 13, 2001

Dr. William J. Carroll, President
Benedictine University
5700 College Road
Lisle, Illinois 60532-0900

Dear Dr. Carroll:

This Final Audit Report presents the results of our Audit of Commissioned Sales and Course
Length at Benedictine University (University). Our objectives were to determine whether the
University complied with the Higher Education Act (HEA) and applicable regulations pertaining
to (1) the prohibition against the use of incentive payments for recruiting activities, and (2)
course length.

                                                 AUDIT RESULTS

We found the University was not in compliance with the statutory prohibition on the use of
incentive payments for recruiting based on success in securing student enrollments when it paid
the Institute for Professional Development (IPD) a percentage of revenues for all students
enrolled in the Associate of Arts in Business Administration (AABA) program. As a result of
incentive payments to IPD, the University is liable for $221,988 in Title IV funds awarded to
students in the AABA program who were improperly recruited.

We also found that the University’s documentation supporting the actual number of instructional
hours spent in study groups used in the definition of an academic year for its AABA program did
not provide the number of instructional hours required to meet the statutory definition of an
academic year. The statutory definition of an academic year is set forth in Title 34 C.F.R.
§ 668.2(b). The regulations in this section that apply to institutions not using semester, trimester,
or quarter systems are commonly known as the 12-Hour Rule. The 12-Hour Rule requires the
equivalent of at least 360 instructional hours per academic year. An institution’s academic year
and the credit hours that a student is enrolled in are used, in part, to determine the amount of
funds a student is eligible to receive from the Title IV programs. We estimated the University
overawarded and disbursed $12,700 in Pell Grant (Pell) funds to its AABA students. (This
amount is included in our finding on incentive compensation).




                               400 MARYLAND AVE., S.W. WASHINGTON, D.C 20202-1510
        Our mission is to promote the efficiency, effectiveness, and integrity of the Department’s programs and operations.
Finding No. 1. Institutions Participating in the Title IV Programs Must Not Provide
Payments Based on Success in Securing Enrollments to Any Person or Entity Engaged in
Recruiting

Sections 487(a) and 487(a)(20) of the HEA require that:

        In order to be an eligible institution for purposes of any program authorized under
        this title, an institution…shall…enter into a program participation agreement with
        the Secretary. The agreement shall condition the initial and continuing eligibility
        of an institution to participate in a program upon compliance with the following
        requirements:

        …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 C.F.R. § 668.14(b)(22) codify the statutory prohibition on incentive
payments based on success in securing enrollment.

        By entering into this program participation agreement, an institution agrees
        that…[i]t 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 Recruited Students and Received Payments Based on Student Enrollment in the
AABA Program

The University entered into a contract with IPD that provided for incentive payments to IPD
based on success in securing student enrollments for its AABA program. The contract included
the following specific responsibilities for IPD:

•   IPD shall recruit students to enroll in the AABA program, and any other program developed
    under the agreement.

•   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 AABA program to ensure a minimum of 50 and a maximum of 1,500 students are
    enrolled in the programs covered in the agreement during each academic year.




                                                     2
•   IPD shall collect, on behalf of the University, all tuition, application, registration, assessment
    and other applicable fees, including book and material fees applicable to the programs.

•   IPD shall maintain the official program accounting books and records.

IPD remitted tuition, registration, application, and deferred payment processing fees to the
University on a semimonthly 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 those percentages. In contracting with IPD to provide
recruiting services, the University violated the statutory and regulatory provisions quoted above
by paying IPD a percentage of tuition for each enrolled student IPD recruited.

The University Violated the HEA by Paying IPD Based on Success in Securing Enrollments
for the AABA Program Which Resulted in $221,988 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 AABA program, the University must return
all Title IV funds that were disbursed on behalf of students enrolled in the AABA program who
were improperly recruited. Because the University paid incentives for each student enrolled in
the AABA program, all students in the AABA program were improperly recruited. Our audit
covered the period July 1, 1999 through June 30, 2000. For that period, Title IV funds totaling
$221,988 were disbursed on behalf of students enrolled in the AABA program, consisting of
$13,060 in Federal Supplemental Educational Opportunity Grants (FSEOG), $25,521 in Pell, and
$183,407 in Federal Family Education Loan (FFEL) funds.

IPD’s Recruiters Received Salary Based on the Number of Students Enrolled in the AABA
Program

Our review of IPD’s compensation plan for fiscal year 2000 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. According to the plan, 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.
The plan stated that IPD would complete formal evaluations semiannually and, after the first 6
months of employment, determined salary on an annual basis. The plan showed that recruiter’s
success in enrolling students determined whether IPD adjusted the salary upward, downward, or
kept it the same.

Recommendations

We recommend that the Chief Operating Officer for Student Financial Assistance (SFA) require
the University to:




                                                       3
1.1.    Amend and/or terminate immediately its present contractual relationship with IPD to
        eliminate incentive payments based on success in securing enrollments.

1.2.    Return to lenders $183,407 of FFEL disbursed on behalf of students enrolled in the
        AABA program during the period July 1, 1999 through June 30, 2000, and repay the
        Department for interest and special allowance costs incurred on Federally subsidized
        loans.

1.3.    Return to the Department $13,060 of FSEOG and $25,521 of Pell disbursed on behalf of
        students enrolled in the AABA program during the period July 1, 1999 through June 30,
        2000.

1.4.    Determine the amount of 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 enclosed.

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 [the] University, many of which have variable costs dependant on the
    number of students enrolled in the AABA program.
•   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 AABA program (sic).
•   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 Audit
    Report.

The IPD Contract Compensates IPD Based on the Volume of a Broad Range of
Professional Services Provided to Benedictine 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 AABA programs.




                                                    4
•   Management consultation and training regarding:
    • Program administration and evaluation.
    • Faculty recruitment, assessment and development.
    • Ongoing curriculum review and revision.
    • Student admissions and advisement procedures.
    • Student record management.
    • Prior college-level learning assessment center organization and management.
    • Financial aid systems.
•   Program development, including:
    • Preparation of courses of study.
    • Establishing required student competencies of specified criterion levels.
    • Student performance evaluation mechanisms.
•   Maintenance of accounting records, and financial planning and budgeting; and
•   Comprehensive academic quality control, including instructor evaluations, student
    evaluations, and evaluations of courses of study related to the AABA program.

The University stated that 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 our scope of
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 a 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 of 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 dependent on, student enrollment.

The University does not dispute that the payments made to IPD were based on a percentage of
the tuition and fees paid by students enrolled in the AABA program. Likewise, the University
does not dispute that IPD was responsible for recruiting students. Nor does the University
dispute that some portion of the amount paid to IPD was directly related to IPD’s success in
securing enrollments for the University’s AABA program. 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



                                                    5
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 agree with the
contract. The University stated IPD agreed to provide program development services. However,
the contract stated IPD would assist the University in preparing objectives that support the
overall mission of the institution. This included providing information and consultation to the
Institution with respect to program development. Therefore, program development was the
responsibility of the University, and not IPD.

University Comments. The Incentive Compensation Rule Does Not Apply to the IPD
Contract Because (a) the Department Has No Legal Authority For Using the Incentive
Compensation Rule as a Basis for Regulating Routine Contracts for Professional, Non-
Enrollment Related Services; and (b) The Incentive Compensation 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 the AABA Program. The University
allocates to IPD a decreasing percentage of overall AABA revenues as the number of
enrollments increases. This contradicts the OIG’s claim that IPD’s compensation rights were
linked to increased enrollment. The declining payment percentages indicate the revenue
allocation is tied directly to IPD’s increased costs of providing various non-enrollment services,




                                                     6
which due to economy of scale, rise in smaller increments as the AABA student population
passes certain threshold levels. As the number of AABA students increases, IPD is able to
perform its responsibilities at a lower per-capita cost, enabling it to share such savings with the
University. Those savings are not attributable to the recruitment and marketing functions. If the
allocation of revenue were intended to pay IPD for recruiting and enrollment services, and for
nothing more, the IPD Contract would not have required a decreasing percentage share.

OIG Response. The reduction in the incentive percentage 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 Comment. 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,” Because (1) the Allocation of Revenue to IPD Does Not
Constitute Commissions or Bonuses Tied to Enrollments, and (2) the Allocation of Revenue
to IPD Does Not Constitute Incentive Payments. The University provided the definitions of
“bonus and “commission” from Blacks Law Dictionary (6th ed. 1990), and the definition of
“incentive” from Webster’s 3rd New International Dictionary (1981). It stated the allocation of
revenue between the University and IPD was not a bonus because those payments constitute sole
compensation to IPD for services performed pursuant to the IPD Contract. The revenue
allocation is not supplemental compensation. The allocations do not constitute commissions
because (a) IPD is compensated for the wide variety of services it performs in regard to the
AABA program in addition to marketing, (b) the allocation of revenues pays for the full scope of
services provided under the IPD contract and not any specific transaction, and (c) the revenue is
allocated to IPD as a corporate entity, not to any individual “agent or employee.” The University
also states there is no incentive because IPD’s percentage share of AABA revenues actually
decreases as enrollment increases. Thus, the revenue allocation does not motivate or incite
enrollments.

OIG Response. The audit report stated that the University paid IPD based on success in securing
enrollments. Because the prohibition extends to any “other incentive payment,” the definitions
of “bonus” and “commission” cited by the University are irrelevant. The HEA prohibits
institutions from providing incentive payments based directly or indirectly on success in securing
enrollments to any persons or entities [emphasis added] engaged in any student recruiting or
admission activities. Although the percentage of total revenues IPD was entitled to decreased
after specified recruitment thresholds were met, there is still the incentive to enroll students to
increase total revenues.

University Comment. 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




                                                     7
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.

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 Comment. The OIG’s Recommendation – Disallowance of All Title IV Funds
Received by the University for AABA Students – Is Unwarranted and is Inconsistent With
Applicable Law and Regulations. The University stated that no basis exists to support that a
violation of any of the innumerable requirements of the program participation agreement
warrants a wholesale disallowance of all Title IV funds. In the absence of any OIG statement of
reasons, or other detailed explanation for the extreme sanction, the University cannot presently
submit any comprehensive response to the draft audit report’s recommendations.

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 Comment. IPD’s Recruiter Salaries Do Not Violate the Incentive Compensation
Rule Because (1) the Incentive Compensation Rule Does Not Prohibit Salary Based on
Success in Securing Enrollments; (2) the Legislative History of the Incentive Compensation
Rule Makes Clear That Congress Intended to Permit Recruiter Salaries to be Based on
Merit; and (3) the Secretary has Not Published Any Interpretation of the Incentive
Compensation Rule That Would Prohibit Recruiter Salaries Based on Merit. The
University stated that IPD’s 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, the University 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 the University’s representation, the compensation plan we
reviewed did not include factors other than enrollment to adjust recruiter salaries. According to
the compensation plan, recruiters’ salaries were determined annually by how many students they
enrolled in the programs. Annual salaries would increase, decrease or remain the same in
accordance with predetermined tables that directly tied students enrolled to particular salary
amounts. The salary tables did not include factors other than enrollment. The requirements of
§487(a)(20) cannot be avoided by labeling improper incentive compensation as salary.




                                                     8
Finding No. 2. Nonterm Institutions Must Provide a Minimum of 360 Hours of
Instructional Time in an Academic Year

HEA Section 481(a)(2) states that the term academic year shall:

        [R]equire a minimum of 30 weeks of instructional time, and, with respect to an
        undergraduate course of study, shall require that during such minimum period of
        instructional time a full-time student is expected to complete at least 24 semester
        or trimester hours or 36 quarter hours at an institution that measures program
        length in credit hours….

The regulations at 34 C.F.R. § 668.2(b) clarify what constitutes a week of instructional time:

        [T]he Secretary considers a week of instructional time to be any week in which at
        least one day of regularly scheduled instruction, examination, or preparation for
        examination occurs...For an additional program using credit hours but not using a
        semester, trimester, or quarter system, the Secretary considers a week of
        instructional time to be any week in which at least 12 hours of regularly scheduled
        instruction, examinations, or preparation for examinations occurs....

These regulations, commonly known as the 12-Hour Rule, require the equivalent of 360
instructional hours per academic year (12 hours per week for 30 weeks). Institutions were
required to comply with the 12-Hour Rule as of July 1, 1995.

In the preamble to the 12-Hour Rule regulations published on November 29, 1994, the Secretary
explained that an institution with a program that meets less frequently than 12 hours per week
would have to meet for a sufficient number of weeks to result in the required instructional hours.
For example, if an institution decided to establish an academic year for a program with classes
that met for 10 hours per week, the classes would need to be held for 36 weeks to result in 360
hours.

The University measured its AABA program in credit hours, using a nontraditional academic
calendar. The AABA program consisted of a series of courses for which a student generally
received three credit hours per course. The University defined its academic year as 25 credit
hours in 45 weeks. To comply with the 12-Hour Rule, the University would need to provide
eight hours of instruction per week for each week in its 45-week academic year to equal 360
hours per year.

The University did not Maintain Documentation to Show That Study Group Meetings
Were Scheduled and Occurred

Management controls are the policies and procedures adopted and implemented by an
organization to ensure that it meets its goals which, as applicable to this situation, are in
compliance with laws and regulations. According to the AABA Student Handbook, students




                                                     9
were required to meet in class for four hours per week, and expected to meet an additional four
hours per week in study groups. The University counted the study group time for purposes of the
12-Hour Rule. We found the University did not establish and implement management controls
to ensure that the study group meetings were regularly scheduled and occurred.

The University’s policy was that an instructor be present at regular class, but it did not have a
policy regarding scheduling and tracking study group meetings. In addition, it did not require
instructors to be present at study group meetings. Our review of the University’s written policies
and procedures, and the lack of study group records showed that the University had no assurance
that study groups were scheduled to meet the requirements of the 12-Hour Rule.

Failing to Comply with the 12-Hour Rule Resulted in the University Overawarding $12,700
of Pell to its AABA Students

Because the University did not ensure that study group meetings were scheduled as required
once a week for four hours, the meetings do not qualify for inclusion in the 12-Hour Rule
calculation. Consequently, the University’s defined academic year of 45 weeks only provided
180 hours of the required minimum of 360 hours of instructional time (four hours of instruction
per week for 45 weeks equals 180 hours of classroom hours). In order to meet the 360-hour
requirement, the University’s academic year would need to be 90 weeks in length. By using an
academic year of 45 weeks rather than the 90 weeks for awarding Title IV funds, the University
disbursed amounts to students that exceeded the maximum amounts for an academic year
allowed under the Pell program. We estimated that the University overawarded $12,700 of Pell
to AABA students during the period July 1, 1999 through June 30, 2000.

Pursuant to Title 34 C.F.R. § 690.62(a) specifies that the amount of a student’s Pell Grant for an
academic year is based upon schedules published by the Secretary for each award year. The
payment schedule lists the maximum amount a student could receive during a full academic year.
We estimated that $12,700 in Pell Grant disbursements exceeded the maximum amount allowed.

Institutions were required to comply with the 12-Hour Rule as of July 1, 1995. Because the
University’s academic year for its AABA program did not meet the requirements of the 12-Hour
Rule, the University improperly disbursed Pell awarded during the audit period.

Recommendation

We recommend that the Chief Operating Officer for SFA require the University to:

2.1.    Immediately develop an academic year for its undergraduate AABA program that
        satisfies the 12-Hour Rule as a condition for continued participation in the Title IV
        programs.

The dollars we estimated as overawarded due to violating the statutory course length
requirements are duplicative of the dollars we determined as overawarded due to violating the
statutory prohibition against the use of incentive payments for recruiting activities. Only those




                                                    10
amounts not recovered in Finding No. 1 should be recovered by SFA as a result of Finding No.
2.

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 enclosed.

In summary, the University stated that:

        I.      The AABA program complies with the 12-Hour Rule, and the University has
                adequately documented its compliance with the 12-Hour Rule.

                A.      Study group meetings constitute instructional activity.
                B.      Study group meetings were regularly scheduled.
                C.      The University adequately monitored study group meeting attendance.
                D.      Study groups are part of an integrated curriculum module, and faculty
                        members were aware of which students did not attend the study group
                        meetings in any given week.
                E.      Additional hours spent by students in preparation for examinations are
                        includable under the 12-Hour Rule.
                F.      There is no statutory or regulatory basis for the OIG’s requirement that the
                        University “ensure that study group meetings were taking place.”

        II.     The 12-Hour Rule is widely acknowledged to be unworkable and ill-suited for
                nontraditional programs.

        III.    The recommended liability is based on erroneous methodology and excludes
                significant amounts of time that can count toward compliance with the 12-Hour
                Rule.

University Comments. The University’s AABA Program Complies With the 12-Hour Rule
and the University Has Adequately Documented Its Compliance with the 12-Hour Rule.
The University stated that the Department has already concluded that “[t]here is no meaningful
way to measure 12 hours of instruction” for nontraditional education programs like those
questioned by the draft audit report. The University implemented various policies and
procedures to ensure the AABA program provided the requisite amount of regularly scheduled
instruction, examinations, or preparation for examinations required by the 12-Hour Rule. The
University also stated that the OIG had established a documentation rule that exceeded statutory
and regulatory requirements.

OIG Response. The Report to Congress on the Distance Education Demonstration Programs
quoted by the University refers to distance education classes that allow students to move at their
own pace. Students in the AABA program were required to attend weekly study group meetings




                                                   11
which the University did not consider as homework. The following excerpt from the report
expands the quotation provided by the University to include additional clarifying information.

        It is difficult if not impossible for distance education programs offered in nonstandard
        terms and non-terms to comply with the 12-hour rule. The regulation would seem to
        require that full-time distance education students spend 12 hours per week “receiving”
        instruction. There is no meaningful way to measure 12 hours of instruction in a distance
        education class. Distance education courses are typically structured in modules that
        combine both what [sic] an on-site course might be considered instruction and out-of-
        class work, so there is no distinction between instructional time an[d] ‘homework.’ In
        addition, when they are given the flexibility to move at their own pace, some students
        will take a shorter time to master the material, while others might take longer.

On August 10, 2000, the Department issued a Notice of Proposed Rulemaking (NPRM)
concerning, among other items, changes to the 12-Hour Rule. In the NPRM, the Department
stated, “[i]t was never intended that homework should count as instructional time in determining
whether a program meets the definition of an academic year, since the 12-hour rule was designed
to quantify the in-class component of an academic program.”

We have not established a documentation rule. An institution participating in the Title IV, HEA
programs is required to establish and maintain on a current basis records that document the
eligibility of its programs and its administration of the Title IV programs in accordance with all
applicable requirement (34 C.F.R. § 668.24(a)). Our audit procedures included reviewing any
documentation that demonstrated the University’s compliance with the 12-Hour Rule. We did
not require any specific documentation as part of our audit. We found that the available
documentation and the University’s internal control system did not support a conclusion that the
University complied with the 12-Hour Rule.

University Comments. Study Group Meetings Constitute Instructional Activity. The
University stated that study group meetings fall within the scope of “regularly scheduled
instruction, examinations, or preparation for examinations.” The study group meetings clearly
relate to class preparation, and the regulations imply that activities relating to class preparation
qualify as instructional time.

OIG Response. We determined that the University did not establish and implement adequate
internal controls to ensure that study group meetings were actually scheduled and occurred as
required by the University. On August 10, 2000, the Department issued an NPRM concerning,
among other items, changes to the 12-Hour Rule. In the NPRM, the Department stated, “[i]t was
never intended that homework should count as instructional time in determining whether a
program meets the definition of an academic year, since the 12-hour rule was designed to
quantify the in-class component of an academic program.”

University Comments. Study Group Meetings Were Regularly Scheduled. The University
required students to attend study group meeting in order to discuss course material and prepare
graded assignments, and share learning resources. Each student was expected to contribute to
the completion of all study group assignments, which include oral and written presentations. The




                                                      12
University informed students that attendance in the study groups was mandatory and played a
critical role in the overall education program. The students, in the first week of the program,
completed a “Study Group Constitution” listing the names of all group members, and stating the
day, time, and location of their weekly study group meeting. Each study group submitted its
Constitution to a faculty member, who reviewed whether the proposed meeting location and time
was conducive to learning.

Several other factors indicate the study group meetings were “regular,” “scheduled,” and under
the supervision of University faculty. Specific tasks were specified in the course module, and all
students enrolled in the course were required to participate in study group activities. During
study group meetings, students completed rigorous team assignments, often preparing specified
projects that were presented during the next faculty-led workshop. The faculty exerted control
over the study group meetings by reviewing and grading the designated team assignments and
projects.

OIG Response. While the University stated that the Study Group Constitutions listed the day,
time and location of their weekly study group meetings, it did not provide us with these
constitutions during our fieldwork or with their response. We agree that the course modules
spelled out the requirements for study group assignments as the University has stated. However,
we disagree that a record of graded assignments supports a conclusion that group study meetings
were regularly scheduled for the required number of hours. . On August 10, 2000, the
Department issued an NPRM concerning, among other items, changes to the 12-Hour Rule. In
the NPRM, the Department stated, “[i]t was never intended that homework should count as
instructional time in determining whether a program meets the definition of an academic year,
since the 12-hour rule was designed to quantify the in-class component of an academic program.

University Comment. The University Adequately Monitored Study Group Meeting
Attendance. The University stated there is no legal authority for the statement in the draft audit
report that the University must “ensure” that study groups actually “occurred.” All the 12-Hour
Rule requires is that study group meetings were regularly scheduled. The more reasonable
interpretation, tracking actual text of the regulation, is consistent with the amendments to the 12-
Hour Rule that took effect July 1, 2001. The revised 12-Hour Rule requires an institution to
provide “[a]t least 12 hours of regularly scheduled instruction or examination” or “[a]fter the last
scheduled day of classes for a payment period, at least 12 hours of study for final examinations.”
34 C.F.R. § 668.2(b)(2) (2001). The regulation does not require the minimum 12 hours of study,
after the last day of classes, to occur under direct faculty supervision or for the University to
somehow document that each and every student actually studied at least 12 hours during the
period between classes and exams. This revision makes clear that the focus of the rule, both
before and after the regulatory change, is on whether instructional time is “regularly scheduled”
and not on whether an institution can document that students actually completed 12 hours of
instructional activity in any given week.

OIG Response. The University’s assertion that there is no requirement that it ensure the study
group meetings actually occurred is not correct. As a fiduciary, the University must exercise the
highest standard of care and diligence in administering the Title IV programs, including
compliance with the 12-Hour Rule. 34 C.F.R. § 668.82(a). In addition, the regulations at 34




                                                    13
C.F.R. § 668.24(a)(3) provide that the institution must “establish and maintain on a current basis
. . . program records that document . . .[i]ts administration of the Title IV, HEA programs in
accordance with all applicable requirements.” The University must ensure that the study groups
occur in order to confirm the validity of the schedule, the hours assigned, and the amounts of
Title IV disbursed for those meetings. If the study groups did not meet as supposedly scheduled,
then the University would be disbursing Title IV funds on the basis of instructional hours that it
does not in fact provide.

Contrary to the University’s assertion, we are not attempting to establish a requirement to
document every hour of student attendance. We examined whether the study group meetings
occurred in order to corroborate compliance with the 12-Hour Rule. Evidence of attendance, if it
existed, would help support a conclusion that the study group meetings were regularly scheduled
and that the study group hours supported the amount of Title IV aid disbursed. We reviewed the
student and faculty handbooks, and we held discussions with University officials to obtain an
understanding of the University’s policies and procedures as they related to its attendance policy.
The University’s own policy was that study group attendance was to be monitored. University
officials could not provide us with evidence to show this was actually done. In the absence of
study group attendance reports or some other effective control selected by the University, we
have no basis to conclude that the University adequately monitored study group meeting
occurrence or compliance with the 12-Hour Rule.

University Comment. Study Groups are Part of an Integrated Curriculum Module, and
Faculty Members Were Aware of Which Students Did Not Attend the Study Group
Meetings in Any Given Week. The University contends the OIG’s position is that an instructor
must be present at study group meetings in order for study groups to count as instructional time
under the 12-Hour Rule. The 12-Hour Rule expressly states that time spent in preparation for
examinations is included in the overall calculation of instructional activity. Faculty presence is
not required when students prepare for examinations, nor is it required for the faculty member to
assess whether a student adequately participated in the weekly meetings because the required
work is reviewed and graded.

OIG Response. Our objective was to determine whether the University complied with the
requirements of the 12-Hour Rule. The University defined its academic year to comply with the
12-Hour Rule, and this definition required that students attend four hours per week in study
groups. Any time that students spent in preparation for examinations outside of study groups
was not applicable to our review. Our determination that an instructor was not present at study
group meetings was a result of our review of the University’s overall internal control over study
groups. If an instructor had been present at study group meetings, we would have considered
this as evidence of strong control.

University Comment. Additional Hours Spent By Students in Preparation for Examinations
is Includable Under the 12-Hour Rule. Some AABA courses utilize traditional examinations,
in addition to study group presentations and other graded activities. The draft audit report
ignores the additional hours spent by students in those courses preparing for examinations,
although the 12-Hour Rule explicitly permits time spent in preparation for examinations to be
counted towards compliance.




                                                   14
OIG Response. The University defined its academic year as consisting of 8 hours of instruction
per week for 45 weeks. This definition provided the minimum 360 hours of instruction as
required by the 12-Hour Rule. University policy required that 4 hours per week be spent in
classroom workshops and 4 hours per week be spent in study team meetings. Whether or not
students spent additional time preparing for exams is not relevant to the University’s definition
of an academic year. On August 10, 2000, the Department issued an NPRM concerning, among
other items, changes to the 12-Hour Rule. The Department stated that “the only time spent in
‘preparation for exams’ that could count as instructional time was the preparation time that some
institutions schedule as study days in lieu of scheduled classes between the end of formal class
work and the beginning of final exams.” The AABA program had no study days scheduled in
lieu of scheduled classes.

University Comment. There is No Statutory or Regulatory Requirement for the OIG’s
Requirements That the University “Ensure That Study Group Meetings Were Taking
Place.” The University stated that the AABA program was a nontraditional, lifelong learning
program that had a minimum amount of regularly scheduled instruction.. There is no basis in
statute, regulation, published guidance, or case law that establishes a requirement that the
University must specifically monitor all educational activity in order to be counted under the 12-
Hour Rule.

OIG Response. During our review, we considered the University’s monitoring of study group
attendance as one possible element of the University’s internal control system, and we
determined that this control was weak. University officials did not inform us during the on-site
fieldwork that study groups participated in any cooperative educational-type activities at
employers within the community, and did not provide any evidence to support this implication as
part of its response to the draft report. In addition, none of the University’s publications
pertaining to the AABA program contained indications that this was part of the students’
curriculum.

University Comment. The 12-Hour Rule is Widely Acknowledged to be Unworkable and Ill-
Suited for Nontraditional Education Programs. The University stated that the underlying
basis for the 12-Hour Rule and its continued applicability to the Title IV programs are presently
in serious doubt. The HEA requires a minimum of 30 weeks of instructional time; however, the
12-hour per week requirement was added by regulation and therefore does not have any statutory
basis. The appropriateness of the 12-Hour Rule, and the immeasurable burden it has created for
institutions, has recently come under increased scrutiny. Despite the due date of March 31,
2001, the Department did not issue its report to Congress on the 12-Hour Rule until July 2001.
The Internet Equity and Education Act of 2001, adopted by the House of Representatives
Committee on Education and the Workforce, effectively eliminates the 12-Hour Rule.

OIG Response. The University was required to comply with the HEA and the regulations in
effect during our audit period. The 12-Hour Rule was a regulatory complement to the statutory
definition of an academic year, and the University acknowledged it was required to comply with
it. As with any other regulation, the University must be able to document that it is in




                                                    15
compliance. Accordingly, the University must be able to document that its academic year
provided 360 hours of instruction for full-time students.

University Comment. The Recommended Liability is Based on an Erroneous Methodology
and Excludes Significant Amounts of Time That Count Toward Compliance With the 12-
Hour Rule. The OIG fails to consider instructional activity includable under the 12-Hour Rule
occurs outside of the classroom and study group meetings. Students’ grades are determined
through traditional examinations, graded individual presentations and papers, graded group
projects, or a combination thereof. No legal authority requires the time spent on these activities
to be monitored or measured under the 12-Hour Rule, but it must be assumed that students spent
additional time preparing for these examinations and graded activities.

OIG Response. The University defined its academic year as consisting of a minimum of four
hours per week in classroom workshops, and four hours per week in study group meetings. If
individual students spent additional time in preparation for examinations or homework-type
activities, it would not be relevant to the University’s compliance with the 12-Hour Rule.
Students were required to spend four hours per week in study group meetings. As previously
noted, the Department has stated that “[i]t was never intended that homework should count as
instructional time in determining whether a program meets the definition of an academic year,
since the 12-hour rule was designed to quantify the in-class component of an academic
program.”

                                         BACKGROUND

Founded in 1887, the University is a non-public institution with its campus located in Lisle,
Illinois. It is accredited by the Commission on Institutions of Higher Education of the North
Central Association of Colleges and Schools, and is licensed by the Illinois State Board of
Education. It offers both undergraduate and graduate degrees.

On March 21, 1999, the University entered into an agreement with IPD, a subsidiary of the
Apollo Group, Inc., to expand its instructional programs for adult students. As a result, the
University developed its AABA 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, registration, application, and deferred payment-processing fees equally.

During the Pell award period of July 1, 1999 through June 30, 2000, the University participated
in the FSEOG, FFEL and Pell programs. The Department’s records (National Student Loan Data
System (NSDLS) for FFEL, and Student Payment Summary (SPS) for Pell) indicated that,
during the period, the University or lenders disbursed $208,928 on behalf of students enrolled in
the AABA program, consisting of $183,407 in FFEL, and $25,521 in Pell. The University’s
records indicated that it disbursed $13,060 in FSEOG and $23,223 in Pell, and lenders disbursed
$152,286 in FFEL. Title IV of the HEA of 1965, as amended, authorizes these programs, and
they are governed by regulations contained in 34 C.F.R. Parts 676, 682, and 690. In addition,
these programs are subject to the provisions contained in the Student Assistance General
Provisions regulations (34 C.F.R. Part 668), and the University must comply with the




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Institutional Eligibility regulations (34 C.F.R. Part 600) to participate in these programs.
Regulatory citations in this report are to the codification revised as of July 1, 1998.


                         AUDIT SCOPE AND METHODOLOGY
The audit’s objectives were to determine if the University complied with the HEA and applicable
regulations pertaining to (1) the prohibition against the use of incentive payments for recruiting
activities, and (2) course length. We specifically focused our review on the University’s contract
with IPD and the program of study related to that contract.

To accomplish our objectives, we reviewed the University’s written policies and procedures and
student financial assistance records. We reviewed the University’s program participation
agreement with the Department, its contract with IPD, and IPD’s compensation plan for its
recruiters.

We relied on computer-processed data the University extracted from its financial assistance
database. We used award and disbursement data from the Department’s SPS and NSLDS to
corroborate information obtained from the University. We did this by comparing University data
for AABA program students with Pell and FFEL disbursements for all students in the
Department’s records. We held discussions with University officials to gain an understanding of
the processes for administering SFA funds and for its accounting for revenue from the AABA
program. Based on these tests and assessments, we concluded that the data the University
provided were sufficiently reliable to use in meeting the audit’s objective.

The audit covered the period July 1, 1999 through June 30, 2000. We performed the on-site
fieldwork in Lisle, Illinois during the period February 12-16, 2001. We conducted the audit in
accordance with government auditing standards appropriate to the scope of audit 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. We did not test to determine the level of control risk, but
instead compared FFEL and Pell transactions for all students in the AABA program for the
period of July 1, 1999 through June 30, 2000.

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-based payments for student enrollment that
violated the statutory prohibition against commissioned sales, and a significant weakness
pertaining to course length that violated the 12-Hour Rule. The Audit Results section of this
report fully discusses these weaknesses and their effects.




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                              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

Office of Management and Budget Circular A-50 directs Federal agencies to expedite the
resolution of audits by initiating timely action on the findings and recommendations contained
therein. Therefore, receipt of your comments within 30 days would be greatly appreciated.

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

If you have any questions or wish to discuss the contents of this report, please call Mr. Richard J.
Dowd, Regional Inspector General for Audit, Chicago, Illinois at (312) 886-6503. Please refer to
the control number in all correspondence related to the report.

                                        Sincerely,


                                          /s/

                                        Lorraine Lewis

Enclosure




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