oversight

Indiana Wesleyan University, Adult and Professional Studies Administration of Title IV Programs, Marion, Indiana.

Published by the Department of Education, Office of Inspector General on 2001-09-28.

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

Finding N o.1. Institutions Participating in the Title IV Program s M ustN otProvide
Paym ents Based on Success in Securing Enrollm ents to A ny Person or Entity Engaged in
R ecruiting

Sections 487(a)and 487(a)(20)ofthe H EA require that:

       In orderto be an eligible institution forthe purposes ofany program authorized
       underthis title,an institution ...shall...enterinto a program participation
       agreem entw ith the Secretary. The agreem entshallcondition the initialand
       continuing eligibility ofan institution to participate in a program upon com pliance
       w ith the follow ing requirem ents:

        ...The institution w illnotprovide any com m ission,bonus,orotherincentive
       paym entbased directly orindirectly on success in securing enrollm ents orfinancial
       aid to any persons orentities engaged in any studentrecruiting oradm ission
       activities orin m aking decisions regarding the aw ard ofstudentfinancialassistance .
       ...

The regulations at34 CFR § 668.14(b)(22)codify the statutory prohibition on incentive paym ents
based on success in securing enrollm ent.

       By entering into this program participation agreem ent,an institution agrees that...
       [i]tw illnotprovide,norcontractw ith any entity thatprovides,any com m ission,
       bonus,orotherincentive paym entbased directly orindirectly on success in securing
       enrollm ents orfinancialaid to any persons orentities engaged in any student
       recruiting oradm ission activities orin m aking decisions regarding the aw arding of
       studentfinancialassistance.

IPD R ecruited Students and R eceived Paym ents Based on StudentEnrollm entin the
A PS Program s

W esleyan entered into a contractw ith IPD thatprovided forincentive paym ents to IPD
based on success in securing studentenrollm ents forits A PS program s. The contractstated
that“IPD is a recruiting service organization assisting Indiana W esleyan U niversity in
recruiting students forthe program s.” The contractincluded the follow ing specific
responsibilities forIPD :

•   IPD shallrecruitstudents to enrollin the courses ofstudy in the A PS program s.

•   IPD shallprovide representatives to recruitstudents forthe program s covered underthe
    agreem ent.

•   IPD shallcollect,on behalfofW esleyan,alltuition,application fees,book and m aterial
    fees,and otherfees applicable to the program s.

•   IPD shallm aintain the officialprogram accounting books and records.




                                                 2
IPD rem itted book,m aterial,and com puterfees in fullto W esleyan. Tuition fees w ere
divided betw een the parties on a w eekly basis. D uring the period ofouraudit,in accordance
w ith the contract,the division w as 75 percentto W esleyan and 25 percentto IPD . Refunds
w ere paid according to these percentages. In contracting w ith IPD to provide recruiting
services,W esleyan violated the statutory and regulatory provisions quoted above by paying
IPD a percentage oftuition foreach enrolled studentIPD recruited.

W esleyan V iolated the H EA by Paying IPD Based on Success in Securing Enrollm ents
for the A PS Program s W hich R esulted in $31,682,782 ofIm properly D isbursed Title
IV Funds

Because W esleyan did notcom ply w ith the H EA and regulations by paying incentives to
IPD based on success in securing enrollm ents forits A PS program s,W esleyan m ustreturn
allTitle IV funds thatw ere disbursed on behalfofstudents enrolled in the A PS program s
w ho w ere im properly recruited. Because W esleyan paid incentives foreach studentenrolled
in the A PS program s,allstudents in the A PS program s w ere im properly recruited. O ur
auditcovered the period July 1,1997,through June 30,2000. Forthatperiod,Title IV funds
totaling $31,682,782 w ere disbursed on behalfofstudents enrolled in the A PS program s,
consisting of$3,268 in FederalSupplem entalEducationalO pportunity G rants (FSEO G ),
$1,656,963 in PellG rant(Pell),and $30,022,551 in FederalFam ily Education Loan (FFEL)
funds.

IPD R ecruiters R eceived Salary and Bonuses Based on the N um ber ofStudents
Enrolled in the A PS Program s

O urreview ofIPD ’s com pensation plans forfiscalyears (FY )1997-1999 disclosed thatIPD
provided incentives to its recruiters through salary levels thatw ere based on the num berof
students recruited and enrolled in the program s. A ccording to the plan,IPD assigned
recruiters a salary w ithin the param eters ofperform ance guidelines (i.e.,know ledge ofbasic
policies and procedures,organization and com m unication skills,and w orking relationships).
IPD assessed recruiterperform ance on a regularbasis,com paring itto the established goals
forthe fiscalyear.The plan stated thatIPD w ould com plete form alevaluations biannually
and,afterthe first6 m onths ofem ploym ent,determ ine salary on an annualbasis. The plan
show ed thatrecruiter’s success in enrolling students determ ined w hetherIPD adjusted the
salary upw ard,dow nw ard,orkeptitthe sam e. In addition,the FY 1998 and 1999
com pensation plans called forthe paym entofbonuses to recruiters hired before Septem ber
1,1998. The bonuses increased as the num berofstudents increased,and ranged from
$1,344 for100-149 students to $29,600 forover200 students. The FY 1999 plan indicated
thatrecruiters hired on orafterSeptem ber1,1998,w ho achieved 100 orm ore starts by the
end ofthe fiscalyearw ere entitled to a one-tim e bonus of$1,500. In contracting w ith IPD ,
W esleyan w as notin com pliance w ith 34 CFR § 668.14(b)(22)because IPD paid its
recruiters incentive com pensation based on success in securing enrollm ents.




                                                  3
R ecom m endations

W e recom m end thatthe ChiefO perating O fficerforStudentFinancialA ssistance (SFA )require
W esleyan to:

1.1.   A m end and/orterm inate im m ediately its presentcontractualrelationship w ith IPD to
       elim inate incentive paym ents based on success in securing enrollm ents.

1.2.   Return to lenders $30,022,551 ofFFEL disbursed on behalfofstudents enrolled in the A PS
       program s during the period July 1,1997,through June 30,2000,and repay the D epartm ent
       forinterestand specialallow ance costs incurred on Federally subsidized loans.

1.3.   Return to the D epartm ent$3,268 ofFSEO G and $1,656,963 ofPelldisbursed to students
       enrolled in the A PS program s during the period July 1,1997,through June 30,2000.

1.4 . D eterm ine the am ountofFSEO G ,Pell,and FFEL funds im properly disbursed to oron
      behalfofstudents since the end ofourauditperiod and return the funds to the D epartm ent
      and lenders.

U niversity C om m ents and O IG R esponse

The U niversity did notagree w ith ourconclusions and recom m endations. The follow ing is a
sum m ary ofthe U niversity’s com m ents and ourresponse to the com m ents. The fulltextofthe
U niversity’s com m ents is enclosed.

U niversity Com m ents. The A llocation ofR evenue U nder the IPD C ontractD oes N otV iolate
the Incentive C om pensation R ule. The U niversity stated that:

•   The IPD contractcom pensates IPD based on the volum e ofa broad range ofprofessional
    services provided to Indiana W esleyan U niversity,m any ofw hich have variable costs dependent
    on the num berofstudents enrolled in the A PS program s.
•   The Incentive Com pensation Rule does notapply to the IPD contractbecause (1)the
    D epartm entis w ithoutlegalauthority to use the rule as a basis forregulating routine contracts
    forprofessional,non-enrollm entrelated services;and (2)the rule cannotapply to service
    contracts w here the costofproviding services necessarily varies depending on the num berof
    students.
•   The D epartm enthas published no regulation orotherpublic guidance supporting the
    interpretation ofrevenue-sharing arrangem ents advanced by the O IG in the draftauditreport.

The IPD C ontractC om pensates IPD Based on the V olum e ofa Broad R ange ofProfessional
Services Provided to Indiana W esleyan U niversity. The U niversity stated thatthe contract
com m its IPD to provide the follow ing listofservices,w hich itperform ed,w ith respectto the
operation ofthe A PS program s.

•   M anagem entconsultation and training,upon request,regarding:
    • Program adm inistration and evaluation.
    • A ssessm entcenterorganization and m anagem ent.


                                                 4
    • Studenttracking system s developm entand im plem entation.
    • M arketing research and m anagem ent.
    • Studenttuition and financialaid accounting.
    • N eeds analyses.
    • Com pliance w ith law s and regulations pertaining to adulteducation.
    • Resources available foruse in adultprogram s.
    • D iscountpurchasing agreem ents.
    • D evelopm entofresource distribution system s.
    • O rientation ofnew adm inistrative personnelto the A PS program s’form at.
    • M aintenance ofan exchange forum forinstitutions w ith sim ilarprogram s.
•   A cadem ic system design and developm entconsulting,including:
    • D evelopm entofsystem s forPriorLearning A ssessed Creditevaluation and aw ard.
    • System s forarticulation agreem ents w ith tw o-yearcollege program s and business
        training system s.
    • A cadem ic program design issues.
    • Regionalaccreditation com pliance issues and m easures.
    • Faculty recruitm ent,loading,and evaluation issues related to the A PS program s.
    • Com prehensive academ ic quality controlin adultprogram s.
    • A ssistance w ith actualinstructorevaluations in key courses.
    • A nalyses ofproposed program s ofstudy.
•   M aintenance ofaccounting records,and financialplanning and budgeting.

The U niversity stated thatthe O IG im plied thatIPD only provided recruiting and tuition
collection services and the O IG eitheroverlooked orignored otherservices provided by IPD
underthe agreem entw ith the U niversity.

O IG Response. The O IG did notoverlook orignore the factthatIPD provided otherservices to the
U niversity underthe term s ofthe agreem ent. In the draftauditreport,w e acknow ledged thatIPD
provided additionalservices,such as accounting. Because itw as notw ithin the scope ofouraudit,
w e did notdeterm ine the extentofadditionalservices underthe agreem entthatIPD actually
provided atthe requestofthe U niversity and atIPD ’s cost. W e did verify thatthe revenue to IPD
w as generated only by the success in securing enrollm ents forw hich IPD w as perform ing recruiting
services. This constitutes a statutory violation ofproviding a com m ission,bonus,orotherincentive
paym entbased directly orindirectly on the success in securing enrollm ents.

W hile w e recognize thatIPD logically had to incurexpenses to provide the program accounting
services and any additionalservices thatitm ay have provided,these expenses are irrelevantin
determ ining w hetherthe structure ofthe revenue allocation is a violation ofthe H EA . N o
com pensation w as to be provided to IPD unless IPD w as successfulin recruiting and securing
studentenrollm ents. The agreem entalso included a m inim um enrollm entguarantee that,ifnot
achieved,w ould resultin a reduction in revenue to be allocated to IPD ,despite otherservices that
m ighthave been provided. This furtherem phasizes thatthe revenue stream is com pletely generated
by,and dependenton,studentenrollm ent.




                                                  5
The U niversity does notdispute thatthe paym ents itm ade to IPD w ere based on a percentage ofthe
tuition and fees paid by students enrolled in the A PS. Likew ise,the U niversity does notdispute that
IPD w as responsible forrecruiting students. N ordoes the U niversity dispute thatsom e portion of
the am ountitpaid to IPD w as directly related to IPD ’s success in securing enrollm ents forthe
U niversity’s A PS. O urauditreportdid notfocus on w hatotherservices m ay have been provided
by IPD because once IPD becam e responsible forrecruiting students,even am ong otheractivities,
and received com pensation from the U niversity based on the num berofstudents enrolled in the
program ,the U niversity w as in violation ofthe H EA .

The H EA at§ 487(a)(20)states:

       The Institution w illnotprovide any com m ission,bonus,orotherincentive paym ent
       based directly orindirectly on success in securing enrollm ents orfinancialaid to any
       persons or entities engaged in any studentrecruiting ... [Em phasis added.]

O nce recruiting w as added to the services to be provided underthe contract,com pensation based on
enrollm entw as no longerperm itted. IPD had sole responsibility forrecruitm entand enrollm ent,
and w as paid underthe contractonly on the basis ofits success in securing studentenrollm ent
regardless ofw hatotherservices itm ay have been providing. W hetherornotthe revenue allocation
w as intended to provide com pensation forotherservices is irrelevantbecause the allocation violates
the law .

The U niversity’s response regarding the services perform ed by IPD does notalw ays agree w ith the
contract.

W here the U niversity puts forw ard thatIPD w as responsible forprogram adm inistration and
evaluation,the contractactually provided that“[the U niversity]retains fulland ultim ate
responsibility to third parties forthe educationalcontent,instruction,and presentation ofthe courses
ofstudy offered in the program s.” Section III.D .ofthe contractstated thatIPD shallprovide,at
IPD ’s expense,reasonable consulting services to train U niversity personnelin program
adm inistration and evaluation.

The U niversity,in its response,stated thatIPD is responsible forstudentservices and academ ic
services procedures. A s explained below ,these services w ere to be provided atthe U niversity’s
requestand IPD ’s expense,orunderseparate agreem ent.

The U niversity stated thatIPD w as involved w ith curriculum developm ent. The contractatSection
III.E.,Curriculum D elivery System actually stated that“IPD m ay advise Indiana W esleyan
U niversity in the preparation offulldescriptions ofcurricula ....” The contractstated thatall
faculty and studentcurriculum m aterials developed orrevised w ith funding provided solely by the
U niversity shallrem ain the sole property ofthe U niversity,butIPD m ay purchase the m aterials
w ith the consentofthe U niversity. A ny curriculum m aterials provided exclusively through funding
from IPD shallrem ain the property ofIPD butshallbe available to the U niversity. The U niversity
shallbe responsible forthe acquisition,printing,and distribution ofallcurricula and textbooks.




                                                  6
The U niversity’s response asserted thatIPD w as responsible forfaculty recruitm entand assessm ent.
The contractactually stated that“Indiana W esleyan U niversity shallexercise totalauthority forthe
services ofinstructionalpersonnelforthe program s including allcosts as determ ined and
approved."

A s provided forin the contract,Section III.G .,IPD m ay offersuggested class sites;how ever,the
U niversity w as to determ ine actualsites,and shallprocure and be responsible forthese sites.

W e had previously reported thatIPD m aintained the officialaccounting records ofthe program . In
its response,the U niversity stated thatIPD is also responsible forfinancialplanning and budgeting.
W e find no reference to these duties in the contract.

The contractdid require IPD to provide allprogram prom otion and advertising. Successfulprogram
prom otions,advertising and m arketresearch by IPD w ould have the effectofincreasing its success
in securing enrollm ents forw hich itw as com pensated. W e had previously included this in the
background section ofourreport.

The U niversity stated thatm any ofthe services offered by IPD w ere highly volum e sensitive. W e
could only identify three item s from the contractthatappearto be volum e sensitive:recruiting,
m arketing,and m aintenance ofaccounting records. The array ofconsulting services w ould not
necessarily be volum e sensitive.

U niversity Com m ents. The Incentive C om pensation R ule D oes N otA pply to the IPD C ontract
Because (a)the D epartm entH as N o LegalA uthority For U sing the Incentive C om pensation
R ule as a Basis for R egulating R outine C ontracts for Professional,N on-Enrollm entR elated
Services;and (b)the Incentive C om pensation R ule C annotA pply to Service C ontracts W here
the C ostofProviding Services N ecessarily V aries D epending on the N um ber ofStudents. The
U niversity stated thatthe Incentive Com pensation Rule w as intended to preventschools from using
com m issioned salespersons to recruitstudents,notto regulate business arrangem ents. W hen
Congress enacted the statute,and the D epartm entprom ulgated the im plem enting regulation,both
em phasized theirintention to haltthe use ofcom m issioned salespersons as recruiters.

O IG Response. The H EA does notexcuse orperm itincentive paym ents depending on the type of
contractualarrangem entthatcreates them . A ny incentive paym entbased directly orindirectly on
success in securing enrollm entis prohibited. The contractw ith IPD included recruiting activities
w ith com pensation determ ined by IPD ’s success in securing students forenrollm enton a per
studentbasis.

U niversity Com m ents. The D epartm entH as Published N o R egulations or O ther Public
G uidance Supporting the O IG ’s Interpretation ofthe Incentive C om pensation R ule to
R estrictR outine R evenue Sharing A rrangem ents.The U niversity stated thatthe draftreportcites
no regulatory guidance,case law ,norotherpublished guidance to supportthe proposition thatthe
revenue allocation form ula violates the Incentive Com pensation Rule. The U niversity did not
know ,and could nothave know n,thatthe revenue allocation form ula w ould be construed as a
violation ofthe Incentive Com pensation Rule,because no such pronouncem entorinterpretation had
everbeen published and dissem inated to Title IV participating institutions. The U niversity stated



                                                 7
thatrevenue received by IPD did notm eetthe definition ofcom m issions orbonuses,and w as not
paid to any individualagentorem ployee.

O IG Response. The H EA prohibition,§ 487(a)(20),on incentive paym ents is clear.

     The Institution w illnotprovide any com m ission,bonus,orotherincentive paym ent
     based directly orindirectly on success in securing enrollm ents orfinancialaid to any
     persons or entitiesengaged in any studentrecruiting....[Em phasis added.]

The U niversity signed a program participation agreem entcom m itting itto com ply w ith the H EA
and regulations. The contractclearly indicated thatIPD w as to be an entity engaged in student
recruiting on behalfofthe U niversity. The contractalso clearly show ed thatcom pensation to IPD
w as a percentage ofthe tuition revenue based on IPD ’s success in securing studentenrollm ents for
the U niversity.

U niversity Com m ents. The O IG ’s R ecom m ended Sanction – D isallow ance ofA llTitle IV
Funds R eceived by the U niversity for A llEnrollees – Is U nw arranted and InconsistentW ith
A pplicable Law and R egulations. The U niversity stated thatno basis exists to supportthata
violation ofany ofthe innum erable program participation agreem entrequirem ents w arrants a
w holesale disallow ance ofallTitle IV funds.

O IG Response. The U niversity incorrectly characterized ourrecom m endation form onetary
recovery as a sanction. W e are notproposing thatthe U niversity be fined. W e are recom m ending
thatthe D epartm entrecoverfunds disbursed in violation ofthe H EA .

U niversity Com m ents. IPD ’s R ecruiter Salaries D o N otV iolate the Incentive C om pensation
R ule Because (1)the Incentive C om pensation R ule D oes N otProhibitSalary Based on Success
in Securing Enrollm ents;(2)the Legislative H istory ofthe Incentive C om pensation R ule
M akes C lear ThatC ongress Intended to Perm itR ecruiter Salaries to be Based on M erit;and
(3)the Secretary has N otPublished A ny Interpretation ofthe Incentive C om pensation R ule
ThatW ould ProhibitR ecruiter Salaries Based on M erit. IPD stated thatits com pensation plans
based recruitersalaries on factors orqualities thatare notsolely related to success in securing
enrollm ents. Italso stated thatthe prohibition in § 487(a)(20)did notextend to salaries. Even if
salaries w ere included,IPD stated thatsalaries could be based on m eritorsuccess in securing
enrollm entas long as enrollm entw as notthe sole factor.

O IG ’s Response. Contrary to IPD ’s representation,the com pensation plan w e review ed did not
include factors otherthan enrollm entto adjustrecruitersalaries. A ccording to the com pensation
plan,recruiters’salary and bonuses w ere determ ined annually by how m any students they enrolled
in the program s. A nnualsalary and bonuses w ould increase,decrease,orrem ain the sam e in
accordance w ith predeterm ined tables thatdirectly tied students enrolled to particularsalary and
bonus am ounts. The salary and bonus tables did notinclude factors otherthan enrollm ent. The
requirem ents of§ 487(a)(20)cannotbe avoided by labeling im properincentive com pensation as
salary.




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Finding N o.2. N onterm Institutions M ustProvide a M inim um of360 H ours of
InstructionalTim e in an A cadem ic Y ear

Section 481(a)(2)ofthe H EA states thatthe term academ ic yearshall:

     [R]equire a m inim um of30 w eeks ofinstructionaltim e,and,w ith respectto an
     undergraduate course ofstudy,shallrequire thatduring such m inim um period of
     instructionaltim e a full-tim e studentis expected to com plete atleast24 sem esteror
     trim esterhours or36 quarterhours atan institution thatm easures program length in
     credithours ....

The regulations at34 CFR § 668.2(b)clarify w hatconstitutes a w eek ofinstructionaltim e:

     [T]he Secretary considers a w eek ofinstructionaltim e to be any w eek in w hich atleast
     one day ofregularly scheduled instruction,exam inations,orpreparation for
     exam inations occurs ... Foran educationalprogram using credithours butnotusing a
     sem ester,trim ester,orquartersystem ,the Secretary considers a w eek ofinstructional
     tim e to be any w eek in w hich atleast12 hours ofregularly scheduled instruction,
     exam inations,orpreparation forexam inations occurs ....

These regulations,com m only know n as the 12-H ourRule,require the equivalentof360
instructionalhours peracadem ic year(12 hours perw eek for30 w eeks). Institutions w ere required
to com ply w ith the 12-H ourRule as ofJuly 1,1995.

In the pream ble to the 12-H ourRule regulations published on N ovem ber29,1994,the Secretary
explained thatan institution w ith a program thatm eets less frequently than 12 hours perw eek
w ould have to m eetfora sufficientnum berofw eeks to resultin the required instructionalhours.
Forexam ple,ifan institution decided to establish an academ ic yearfora program w ith classes that
m etfor10 hours perw eek,the classes w ould need to be held for36 w eeks to resultin 360 hours.

W esleyan m easured its A PS educationalprogram s in credithours,using a non-traditionalacadem ic
calendar. The A PS program s consisted ofa series ofcourses forw hich a studentgenerally received
3 credithours percourse. W esleyan defined its academ ic yearas 24 credithours in 45 w eeks. To
com ply w ith the 12-H ourRule,W esleyan w ould need to provide 8 hours ofinstruction perw eek for
each w eek in its 45-w eek academ ic yearto equal360 hours peryear.

W esleyan D id N otM aintain D ocum entation to Show ThatStudy G roup M eetings W ere
Scheduled and O ccurred

M anagem entcontrols are the policies and procedures adopted and im plem ented by an organization
to ensure thatitm eets its goals w hich,as applicable to this situation,are com pliance w ith law s and
regulations. A ccording to the A PS studenthandbook and W esleyan officials,students w ere
required to m eetin class forfourhours perw eek,and w ere expected to m eetan additionalfour
hours perw eek in study groups. W esleyan counted the study group tim e forpurposes ofthe 12-
H ourRule. W e found thatW esleyan did notestablish and im plem entm anagem entcontrols to
ensure thatthe study groups w ere regularly scheduled and occurred.



                                                   9
W esleyan’s policy w as thatan instructorbe presentatregularclass,butitdid nothave a policy
regarding scheduling and tracking study group m eetings. In addition,itdid notrequire instructors
to be presentatstudy group m eetings. O urreview ofW esleyan’s w ritten policies and procedures,
and the lack ofstudy group records show ed thatW esleyan had no assurance thatstudy groups w ere
taking place to m eetthe requirem ents ofthe 12-H ourRule. W esleyan officials inform ed us that
beginning in Sum m er2000,W esleyan established the policy thatfaculty shallm onitorstudy group
attendance and turn in attendance form s to the adm inistrative office on a w eekly basis. The
adm inistrative centerinputs the attendance into a database,w hich is updated w eekly.

Failing to C om ply W ith the 12-H our R ule R esulted in W esleyan O veraw arding $5,642,000 of
Title IV Funds to Its A PS Students

Because W esleyan did notensure thatstudy group m eetings w ere scheduled and occurred as
required,once a w eek for4 hours,the m eetings do notqualify forinclusion in the 12-H ourRule
calculation. Consequently,W esleyan’s defined academ ic yearof45 w eeks only provided 180 hours
ofthe required m inim um of360 hours ofinstructionaltim e (4 hours ofinstruction perw eek for45
w eeks equals 180 hours ofclassroom hours). In orderto m eetthe 360-hourrequirem ent,
W esleyan’s academ ic yearw ould need to be 90 w eeks in length. By using an academ ic yearof45
w eeks ratherthan 90 w eeks foraw arding Title IV funds,W esleyan disbursed am ounts to students
thatexceeded the m axim um am ounts foran academ ic yearallow ed underthe FFEL and Pell
program s. W e estim ated thatW esleyan overaw arded $5,642,000 ofTitle IV funds to A PS students.
The students included in this am ounthad FFEL and Pellw ith loan/grantperiods from July 1,1997,
through June 30,2000.

•   FFEL Lim its. Title 34 CFR § 682.603(d)stipulates thatan institution m ay notcertify a
    loan application thatw ould resultin a borrow erexceeding the m axim um annualloan
    am ounts specified in 34 CFR § 682.204. W e estim ated that$4,814,000 in FFEL
    disbursem ents exceeded the annualloan lim its.

•   PellM axim um . Title 34 CFR § 690.62(a)specifies thatthe am ountofa student’s Pellfor
    an academ ic yearis based upon schedules published by the Secretary foreach aw ard year.
    The paym entschedule lists the m axim um am ounta studentcould receive during a full
    academ ic year. W e estim ated that$828,000 in Pelldisbursem ents exceeded the m axim um
    am ountallow ed.

Institutions w ere required to com ply w ith the 12-H ourRule as ofJuly 1,1995. Because W esleyan’s
academ ic yearforits A PS program s did notm eetthe requirem ents ofthe 12-H ourRule,W esleyan
im properly disbursed FFEL and Pellaw arded during the auditperiod.

R ecom m endation

W e recom m end thatthe ChiefO perating O fficerforSFA require W esleyan to:

2.1.   Im m ediately develop an academ ic yearforits undergraduate A PS program s thatsatisfies the
       12-H ourRule as a condition forcontinued participation in the Title IV program s.



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The dollars w e estim ated as overaw arded due to violating the statutory course length requirem ents
are duplicative ofthe dollars w e determ ined as overaw arded due to violating the statutory
prohibition againstthe use ofincentive paym ents forrecruiting activities. O nly those am ounts not
recovered in Finding N o.1 should be recovered by SFA as a resultofFinding N o.2.

U niversity C om m ents and O IG R esponse

The U niversity did notagree w ith ourconclusions and recom m endations. The follow ing is a
sum m ary ofthe U niversity’s com m ents and ourresponse to the com m ents. The fulltextofthe
U niversity’s com m ents is enclosed.

In sum m ary,the U niversity stated that:

     I. Indiana W esleyan U niversity’s A dultand ProfessionalStudies program s com ply
        w ith the 12-H ourRule,and the U niversity has adequately docum ented its
        com pliance w ith the 12-H ourRule.

               A . Study group m eetings constitute instructionalactivity.
               B. Study group m eetings w ere regularly scheduled.
               C. The U niversity adequately m onitored study group m eeting attendance.
               D . Study groups are partofan integrated curriculum m odule,and faculty
                   m em bers w ere aw are ofw hich students did notattend the study group
                   m eetings in a given w eek.
               E. A dditionalhours spentby students in preparation forexam inations is
                   includable underthe 12-H ourRule.
               F. There is no statutory orregulatory basis forthe O IG ’s requirem entthatthe
                   U niversity “ensure thatstudy group m eetings w ere taking place.”

     II.     The 12-H ourRule is w idely acknow ledged to be unw orkable and ill-suited for
             nontraditionaleducationalprogram s.

     III.    The recom m ended liability is based on an erroneous m ethodology and excludes
             significantam ounts oftim e thatcounttow ard com pliance w ith the 12-H our
             Rule.

U niversity Com m ents. Indiana W esleyan U niversity’s A dultand ProfessionalStudies
Program s C om ply W ith the 12-H our R ule,and the U niversity H as A dequately D ocum ented
Its C om pliance W ith the 12-H our R ule. The U niversity stated thatthe D epartm enthas already
concluded that“[t]here is no m eaningfulw ay to m easure 12 hours ofinstruction” fornontraditional
education program s like those questioned by the draftauditreport. The U niversity im plem ented
various policies and procedures to ensure thatthe A PS program s provided the requisite am ountof
regularly scheduled instruction,exam inations orpreparation forexam inations required by the 12-
H ourRule. The U niversity also stated thatthe O IG had established a docum entation rule that
exceeded statutory and regulatory requirem ents.




                                                  11
O IG Response. The Reportto Congress on the D istance Education D em onstration Program s
quoted by the U niversity refers to distance education classes thatallow students to m ove attheir
ow n pace. Students in the A PS program s w ere required to attend w eekly study group m eetings
w hich the U niversity did notconsideras hom ew ork. The follow ing excerptfrom the reportexpands
the quotation provided by the U niversity to include additionalclarifying inform ation.

     Itis difficultifnotim possible fordistance education program s offered in nonstandard
     term s and non-term s to com ply w ith the 12-hourrule. The regulation w ould seem to
     require thatfull-tim e distance education students spend 12 hours perw eek “receiving”
     instruction. There is no m eaningfulw ay to m easure 12 hours ofinstruction in a
     distance education class. D istance education courses are typically structured in m odules
     thatcom bine both w hat[sic]an on-site course m ightbe considered instruction and out-
     of-class w ork,so there is no distinction betw een instructionaltim e an[d]‘hom ew ork.’
     In addition,w hen they are given the flexibility to m ove attheirow n pace,som e students
     w illtake a shortertim e to m asterthe m aterial,w hile others m ighttake longer.

O n A ugust10,2000,the D epartm entissued a N otice ofProposed Rulem aking (N PRM )concerning,
am ong otheritem s,changes to the 12-H ourRule. In the N PRM ,the D epartm entstated,“[i]tw as
neverintended thathom ew ork should countas instructionaltim e in determ ining w hethera program
m eets the definition ofan academ ic year,since the 12-hourrule w as designed to quantify the in-
class com ponentofan academ ic program .”

W e have notestablished a docum entation rule. A n institution participating in the Title IV ,H EA
program s is required to establish and m aintain on a currentbasis records thatdocum entthe
eligibility ofits program s and its adm inistration ofthe Title IV program s in accordance w ith all
applicable requirem ents (34 CFR § 668.24(a)). O urauditprocedures included review ing any
docum entation thatdem onstrated the U niversity’s com pliance w ith the 12-H ourRule. W e did not
require any specific docum entation as partofouraudit. W e found thatthe available docum entation
and the U niversity’s internalcontrolsystem did notsupporta conclusion thatthe U niversity
com plied w ith the 12-H ourRule.

U niversity Com m ents. Study G roup M eetings C onstitute InstructionalA ctivity. The U niversity
stated thatstudy group m eetings fallw ithin the scope of “regularly scheduled instruction,
exam inations,orpreparation forexam inations.” The study group m eetings clearly relate to class
preparation,and the regulations im ply thatactivities relating to class preparation qualify as
instructionaltim e.

O IG Response. W e determ ined thatthe U niversity did notestablish and im plem entadequate
internalcontrols to ensure thatstudy group m eetings w ere actually scheduled and occurred as
required by the U niversity. O n A ugust10,2000,the D epartm entissued a N PRM concerning,
am ong otheritem s,changes to the 12-H ourRule. In the N PRM ,the D epartm entstated,“[i]tw as
neverintended thathom ew ork should countas instructionaltim e in determ ining w hethera program
m eets the definition ofan academ ic year,since the 12-hourrule w as designed to quantify the in-
class com ponentofan academ ic program .”




                                                 12
U niversity Com m ents. Study G roup M eetings W ere R egularly Scheduled. The U niversity
required thatstudy groups com plete a study group plan listing the nam es and addresses ofallgroup
m em bers,and stating the day,tim e,and location oftheirw eekly study group m eeting. O therfactors
thatindicated thatstudy team s w ere both regularand scheduled w ere: (i)w eekly tasks to be
com pleted w ere specified in the course m odule,(ii)allteam m em bers w ere required to participate in
team activities,(iii)assignm ents and projects w ere required to be com pleted betw een classes in
orderforstudents to progress academ ically in the course,and (iv)faculty review ed the team
assignm ents and projects.

O IG Response. D uring the on-site fieldw ork,the U niversity did notinform us thatthis docum ent
existed. In addition,the U niversity did notprovide us w ith any com pleted study group plans
applicable to ourauditperiod to accom pany its response to the draftauditreport. W e found no
reliable evidence to supportthe U niversity’s statem entthatm eetings w ere regularly scheduled for
allstudy groups.

U niversity Com m ents. The U niversity A dequately M onitored Study Team M eeting
A ttendance. The U niversity required students to com plete end-of-course surveys. These surveys
contained questions regarding the regularity and length ofstudy group m eetings. The O IG either
failed to review ,rejected,orignored them . The draftreportalso ignores the tim e faculty spent
responding to requests forassistance from the study groups. The O IG concluded that“the
U niversity did notensure thatstudy group m eetings w ere scheduled and occurred as required.”
There is no statutory orregulatory basis forthis claim . The regulation does notrequire the
m inim um 12 hourofstudy to occurunderdirectfaculty supervision. The course m odule indicates
thatstudy group m eetings are forthe developm entofgroup projects. The U niversity stated thatthe
focus ofthe rule is on w hetherinstructionaltim e is regularly scheduled and noton w hetheran
institution can docum entthatstudents actually com pleted 12 hours ofinstructionalactivity in any
given w eek.

O IG Response. W e are notattem pting to establish an attendance requirem ent.The regulations at34
CFR 668.24(a)(3)state:

       (a) A n institution shallestablish and m aintain on a currentbasis,any application for
           title IV ,H EA program funds and program records thatdocum ent–
       (3)Its adm inistration ofthe title IV ,H EA program s in accordance w ith allapplicable
           requirem ents;…

The U niversity’s assertion thatthere is no requirem entthatitensure thatthe study group m eetings
actually occurred is notaccurate. The U niversity is required to docum entcom pliance w ith the 12-
H ourRule. W e exam ined w hetherstudy group m eetings occurred in orderto corroborate w hether
those m eetings w ere regularly scheduled. W e review ed the studentand faculty handbooks,and w e
held discussions w ith U niversity officials to obtain an understanding ofthe U niversity’s policies and
procedures as they related to its attendance policy.D uring the on-site fieldw ork,the V ice President
forA PS inform ed us thatthe U niversity does nottrack the occurrence ofstudy group m eetings.
H ow ever,itdid begin tracking attendance afterthe auditperiod. The U niversity did notinform us
aboutthe existence ofthe end-of-course surveys during the on-site fieldw ork. N ordid itprovide us
w ith any com pleted surveys applicable to the auditperiod to accom pany its response to the draft



                                                  13
report. In the absence ofstudy group attendance reports thatreflected the occurrence ofstudy group
m eetings orsom e othereffective control,w e have no basis to conclude thatthe U niversity
adequately m onitored study group m eeting occurrence orcom pliance w ith the 12-H ourRule.

U niversity Com m ents. Study G roups A re Partofan Integrated C urriculum M odule,and
Faculty M em bers W ere A w are ofW hich Students D id N otA ttend the Study G roup M eetings
in A ny G iven W eek. The U niversity contends the O IG ’s position is thatan instructorm ustbe
presentatstudy group m eetings in orderforstudy groups to countas instructionaltim e underthe
12-H ourRule. The 12-H ourRule expressly states thattim e spentin preparation forexam inations is
included in the overallcalculation ofinstructionalactivity. Faculty presence is notrequired w hen
students prepare forexam inations,noris itrequired forthe faculty m em berto assess w hethera
studentadequately participated in the w eekly m eetings because the required w ork is review ed and
graded.

O IG Response. O urobjective w as to determ ine w hetherthe U niversity com plied w ith the
requirem ents ofthe 12-H ourRule. The U niversity defined its academ ic yearto com ply w ith the 12-
H ourRule,and this definition required thatstudents attend fourhours perw eek in study groups.
A ny tim e thatstudents spentin preparation forexam inations outside ofstudy groups w as not
applicable to ourreview . O urdeterm ination thatan instructorw as notpresentatstudy group
m eetings w as a resultofourreview ofthe U niversity’s overallinternalcontroloverstudy groups. If
an instructorhad been presentatstudy group m eetings,w e w ould have considered this as evidence
ofa strong control.

U niversity Com m ents. A dditionalH ours SpentBy Students in Preparation for Exam inations is
Includable U nder the 12-H our R ule. Som e A PS courses utilize traditionalexam inations,in
addition to the study group presentations and othergraded activities. The draftauditreportignores
the additionalhours spentby students in those courses preparing forexam inations,although the 12-
H ourRule explicitly perm its tim e spentin preparation forexam inations to be counted tow ards
com pliance.

O IG Response. The U niversity defined its academ ic yearas consisting ofeighthours ofinstruction
perw eek for45 w eeks. This definition provided the m inim um 360 hours ofinstruction as required
by the 12-H ourRule. U niversity policy required that4 hours perw eek be spentin classroom
w orkshops and 4 hours perw eek be spentin study team m eetings. W hetherornotstudents spent
additionaltim e preparing forexam s is notrelevantto the U niversity’s definition ofan academ ic
year. O n A ugust10,2000,the D epartm entissued a N PRM concerning,am ong otheritem s,changes
to the 12-H ourRule. The D epartm entstated that“the only tim e spentin ‘preparation forexam s’
thatcould countas instructionaltim e w as the preparation tim e thatsom e institutions schedule as
study days in lieu ofscheduled classes betw een the end ofform alclass w ork and the beginning of
finalexam s.” The A PS program had no study days scheduled in lieu ofscheduled classes.

U niversity Com m ents. There is N o Statutory or R egulatory R equirem entfor the O IG ’s
R equirem ents Thatthe U niversity “Ensure ThatStudy G roup M eetings W ere Taking Place.”
The U niversity stated thatthe A PS program s w ere nontraditional,lifelong learning program s that
have a m inim um am ountofregularly scheduled instruction. The U niversity im plied thatto som e
degree the A PS program s consisted ofinternships,cooperative education program s,orindependent



                                                14
study. There is no basis in statute,regulation,published guidance,orcase law thatestablishes a
requirem entthatthe U niversity m ustspecifically m onitoralleducationalactivity in orderto be
counted underthe 12-H ourRule.

O IG Response. D uring ourreview ,w e considered the U niversity’s m onitoring ofstudy group
attendance as one possible elem entofthe U niversity’s internalcontrolsystem ,and w e determ ined
thatthis controlw as w eak because the U niversity did notm aintain docum entation regarding
attendance. U niversity officials did notinform us during the on-site field w ork thatstudy groups
participated in any cooperative educational-type activities atem ployers w ithin the com m unity,and
did notprovide any evidence to supportthis im plication as partofits response to the draftreport. In
addition,the U niversity's catalog contained no indications thatthis w as partofthe students’
curriculum .

U niversity Com m ents. The 12-H our R ule is W idely A cknow ledged To Be U nw orkable and Ill-
Suited for N ontraditionalEducation Program s. The U niversity stated thatthe underlying basis
forthe 12-H ourRule and its continued applicability to the Title IV program s are presently in serious
doubt. The H EA requires a m inim um of30 w eeks ofinstructionaltim e;how ever,the 12-hourper
w eek requirem entw as added by regulation and therefore does nothave any statutory basis. The
appropriateness ofthe 12-H ourRule,and the im m easurable burden ithas created forinstitutions,
has recently com e underincreased scrutiny. D espite the due date ofM arch 31,2001,the
D epartm entdid notissue its reporton the 12-H ourRule untilJuly 2001. The D epartm enthas not
yetcom plied w ith a legislative m andate to reportto Congress on the 12-H ourRule. The recently
introduced InternetEquity and Education A ctof2001 effectively elim inates the 12-H ourRule.

O IG Response. The U niversity w as required to com ply w ith the H EA and the regulations in effect
during ourauditperiod. The 12-H ourRule w as a regulatory com plem entto the statutory definition
ofan academ ic year,and the U niversity acknow ledged itw as required to com ply w ith it. A s w ith
any otherregulation,the U niversity m ustbe able to docum entthatitis in com pliance. A ccordingly,
the U niversity m ustbe able to docum entthatits academ ic yearprovided 360 hours ofinstruction for
full-tim e students.

U niversity Com m ents. The R ecom m ended Liability is Based on an Erroneous M ethodology
and Excludes SignificantA m ounts ofTim e ThatC ountTow ard C om pliance W ith the 12-
H our R ule. The O IG fails to considerinstructionalactivity includable underthe 12-H ourRule
occurs outside ofthe classroom and study group m eetings. Students’grades are determ ined through
traditionalexam inations,graded individualpresentations and papers,graded group projects,ora
com bination thereof. N o legalauthority requires the tim e spenton these activities to be m onitored
orm easured underthe 12-H ourRule,butitm ustbe assum ed thatstudents spentadditionaltim e
preparing forthese exam inations and graded activities.

O IG Response. The U niversity defined its academ ic yearas consisting ofa m inim um offourhours
perw eek in classroom w orkshops,and fourhours perw eek in study group m eetings. Ifindividual
students spentadditionaltim e in preparation forexam inations orhom ew ork-type activities,itw ould
notbe relevantto the U niversity’s com pliance w ith the 12-H ourRule. Students w ere required to
spend fourhours perw eek in study group m eetings.A s previously noted,the D epartm enthas stated
that“[i]tw as neverintended thathom ew ork should countas instructionaltim e in determ ining



                                                 15
w hethera program m eets the definition ofan academ ic year,since the 12-hourrule w as designed to
quantify the in-class com ponentofan academ ic program .”

                                     BA C K G R O U N D

Founded in 1890,W esleyan is a liberalarts university w ith its m ain cam pus in M arion,Indiana.
The N orth CentralA ssociation ofColleges and Schools accredits itto offerA ssociate,
Baccalaureate,and M asters degrees. In 1985,W esleyan founded the Leadership Education for
A dultProfessionals (LEA P)program to m eetthe needs ofadultstudents. Since thattim e,it
com bined the LEA P program w ith otherprogram s to form the D ivision ofA dultand Professional
Studies.

In February 1985,W esleyan contracted w ith IPD ,a subsidiary ofthe A pollo G roup,Inc.,to help
im prove its D ivision ofA dultand ProfessionalStudies. W esleyan contracted w ith IPD for
m arketing,recruiting and accounting support,w hile itprovided the curriculum ,facilities,and
faculty. D uring the auditperiod,W esleyan and IPD splittuition revenue so thatW esleyan received
75 percentand IPD received 25 percent,butW esleyan received 100 percentofbook,m aterial,
com puter,and otherm iscellaneous fees.

D uring the period July 1,1997,through June 30,2000,W esleyan participated in the FSEO G ,Pell,
and FFEL program s. W esleyan orD epartm entrecords indicated that,during the period,W esleyan
orlenders disbursed $31,682,782 on behalfofstudents in the A PS program s. Specifically,
W esleyan’s records indicated thatitdisbursed FSEO G totaling $3,268. The D epartm ent’s records
(StudentPaym entSum m ary (SPS)and N ationalStudentLoan D ata System (N SLD S))indicated
W esleyan disbursed Pelltotaling $1,656,963 and lenders disbursed FFEL of$30,022,551. Title IV
ofthe H EA of1965,as am ended,authorizes these program s,and they are governed by regulations
contained in 34 CFR Parts 676,682,and 690,respectively. In addition,these program s are subject
to the provisions contained in the StudentA ssistance G eneralProvisions regulations (34 CFR Part
668),and W esleyan m ustcom ply w ith the InstitutionalEligibility regulations (34 CFR Part600)to
participate in these program s. Regulatory citations in the reportare to the codifications revised as
ofJuly 1,1997,1998,and 1999.




                                                 16
                        A U D IT SC O PE A N D M ETH O D O LO G Y
The objectives ofthe auditw ere to determ ine w hetherW esleyan com plied w ith the H EA and Title
IV regulations concerning the prohibition on m aking incentive paym ents based on success in
enrolling students and course length. W e specifically focused ourreview on W esleyan’s contract
w ith IPD and program s ofstudy related to thatcontract,and the area ofrequired hours ofinstruction
in an academ ic yearunderthe 12-H ourRule.

To accom plish ourobjectives,w e review ed W esleyan’s w ritten policies and procedures,accounting
and bank records,and studentfinancialassistance reports. W e review ed W esleyan’s program
participation agreem entw ith the D epartm ent,its contractw ith IPD ,and IPD ’s com pensation plan
forits recruiters. In addition,w e review ed single auditreports prepared by W esleyan’s Certified
Public A ccountants.

W e relied on com puter-processed data W esleyan extracted from its financialassistance database.
W e used aw ard and disbursem entdata from the D epartm ent’s SPS and N SLD S to corroborate
inform ation obtained from W esleyan. W e did this by com paring W esleyan data w ith Pelland loan
disbursem ents forallstudents in the D epartm ent’s records. W e held discussions w ith W esleyan
officials to gain an understanding ofthe processes forrequesting and draw ing dow n Federalfunds,
and forits accounting forrevenue from the A PS program s. Based on these tests and assessm ents,
w e concluded thatthe data W esleyan provided w ere sufficiently reliable to use in m eeting the
audit’s objectives.

The auditcovered the period July 1,1997,through June 30,2000. W e perform ed the on-site field
w ork in M arion,Indiana,during the period O ctober31 – N ovem ber8,2000. W e had ourexit
conference on N ovem ber7,2000. W e conducted the auditin accordance w ith governm entauditing
standards appropriate to the scope ofauditstated above.

M ethodology U sed to D eterm ine the Title IV Funds Im properly D isbursed for Finding 2

The U niversity’s academ ic yearw ould need to be 90 w eeks in length foritto m eetthe 360-hour
requirem entforan academ ic year. Therefore,the U niversity could not(1)disburse Title IV funds
to students during a 90-w eek academ ic period thatexceeded the m axim um annualam ounts foran
academ ic yearallow ed underthe FFEL and Pellprogram s and (2)disburse FFEL funds to students
w ho w ere enrolled less than half-tim e during a 90-w eek academ ic period.

FFEL D isbursem ents in Excess ofA nnualLim its. W e com pared the disbursem ents to the
applicable annualloan lim it. Students w ere noteligible to receive the am ounts thatexceeded the
lim it. Forthe tw o groups,as described below ,w e estim ated $ 4,814,000 ofdisbursem ents that
exceeded the annuallim its.

Forthe FFEL estim ates,w e analyzed disbursem ents fortw o separate groups ofstudents identified
from the U niversity-provided files. Forstudents in each group,w e analyzed loan period startdates
and the loan disbursem ents covering a 90-w eek academ ic period.




                                                 17
The firstgroup consisted ofstudents w ho received disbursem ents forloans with loan startdates in
the period July 1,1997,through June 30,1998,A N D disbursem ents forloans with loan startdates
in the period July 1,1998,through June 30,1999.

The second group,w hich excludes students included in the firstgroup,consisted ofstudents w ho
received disbursem ents forloans with loan startdates in the period July 1,1998,through June 30,
1999,A N D disbursem ents forloans with loan startdates in the period July 1,1999,through June
30,2000.

PellD isbursem ents in Excess ofA nnualLim its. W e identified the Pellfunds aw arded to students
w ho started betw een July 1,1997 and June 30,1998,and the Pellfunds aw arded to students w ho
started betw een July 1,1998 and June 30,1999. To determ ine the am ountofPellfunds thata
studentm ay receive in a paym entperiod,institutions w ithoutstandard term s m ultiply the m axim um
am ountshow n on schedules published by the Secretary by a specified fraction. The num eratorof
the fraction is the num berofcredithours in a paym entperiod and the denom inatoris the num berof
credithours in an academ ic year. Because the U niversity used the credithours fora 45-w eek
academ ic yearratherthan a 90-w eek academ ic yearas the denom inator,the Pellaw ard w as
overstated by one-half,or50 percent. W e estim ated $828,000 in Pelldisbursem ents exceeded the
m axim um am ountallow ed.

                  STA TEM EN T O N M A N A G EM EN T C O N TR O LS
A s partofourreview ,w e gained an understanding ofW esleyan’s m anagem entcontrolstructure,as
w ellas its policies,procedures,and practices applicable to the scope ofthe audit. W e identified
applicable significantcontrols related to institutionaleligibility,studentenrollm ent,and contract
paym ents. W e did nottestto determ ine the levelofcontrolrisk,butinstead,com pared Pelland
loan transactions forallstudents in the A PS program s.

D ue to inherentlim itations,a study and evaluation m ade forthe lim ited purpose stated above w ould
notnecessarily disclose allm aterialw eaknesses in the m anagem entcontrols. H ow ever,our
assessm entdisclosed significantm anagem entcontrolw eaknesses thatadversely affected
W esleyan’s ability to adm inisterthe Title IV program s. These w eaknesses include inadequate
controls overincentive-based paym ents forstudentenrollm entand the am ountoftim e spentin
instruction. The A uditResults section ofthis reportfully discusses these w eaknesses and their
effects.




                                                 18