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 16 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. 17 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 18
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)