oversight

Internal Aviation and Travel Academy's Administration of Title IV Student Financial Assistance Programs.

Published by the Department of Education, Office of Inspector General on 2001-03-30.

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

  INTERNATIONAL AVIATION AND TRAVEL
 ACADEMY’S ADMINISTRATION OF TITLE IV
STUDENT FINANCIAL ASSISTANCE PROGRAMS



                                 FINAL AUDIT REPORT




                               Control Number ED-OIG/A06-90010
                                          March 2001



Our mission is to promote the efficient                          U.S Department of Education
and effective use of taxpayer dollars                              Office of Inspector General
in support of American education.                                                Dallas, Texas
                                NOTICE
Statements that management practices need improvement, as well as other
conclusions and recommendations in this report, represent the opinions of the
Office of Inspector General. Determination of corrective action to be taken
will be made by the appropriate Department of Education officials.

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.
                              TABLE OF CONTENTS
EXECUTIVE SUMMARY..............................................................................................................1

AUDIT RESULTS ...........................................................................................................................3

    FINDING NUMBER 1 – IATA DID NOT HAVE SUFFICIENT NON-TITLE IV
    REVENUE TO QUALIFY AS AN ELIGIBLE INSTITUTION ...............................................3
      • IATA DID NOT MEET THE 85 PERCENT RULE IN 1997 .........................................3
        • Proprietary Schools Are Required to Generate a Minimum of 15 Percent
            of Their Revenue from Non-Title IV Sources..........................................................3
        • Revenue from Ineligible Programs Included in the 85 Percent Rule Calculation.......4
        • Other Errors in the 85 Percent Rule Calculation.........................................................5
        •    IATA DID NOT MEET THE 90 PERCENT RULE IN 1998 .........................................5
            • Proprietary Schools Must Derive at Least 10 Percent of their Revenue from
                Non-Title IV Sources.................................................................................................6
            • Revenue from Ineligible Program Included in the 90 Percent Rule Calculation........6
        •    TITLE IV FUNDS RECEIVED BY IATA FROM JANUARY 1, 1998 THROUGH
             DECEMBER 31, 1999 ....................................................................................................7
        •    RECOMMENDATIONS .................................................................................................7
        •    IATA'S COMMENTS TO THE DRAFT REPORT AND OIG'S RESPONSE...............7
            • Airline Travel Industry and Residency Program.........................................................8
            • Intermediate Travel and Tourism Program..................................................................8

    FINDING NUMBER 2 – IATA DISBURSED TITLE IV FUNDS FOR UNALLOWABLE
    EXTERNSHIP HOURS ..............................................................................................................9
      • IATA’S EXTERNSHIP REQUIREMENTS ..................................................................10
        •    EXTERNSHIP EMPLOYERS AND STUDENTS ........................................................11
        •    ACCREDITING AGENCY STANDARDS...................................................................11
        •    STATE LICENSING AGENCY RULES ......................................................................12
        •    DISALLOWANCE OF THE EXTERNSHIP SEGMENT OF THE PROGRAM.........12
        •    RECOMMENDATIONS ...............................................................................................13
        •    IATA'S COMMENTS TO THE DRAFT REPORT AND OIG'S RESPONSE.............13
            • Section VII - IATA Did Not Overstate Externship Hours ........................................14
            • Section VIII - OIG Mischaracterized Comments Made by IATA Representatives ..17
            • Section IX - Documentation Refuting OIG's Conclusions........................................18
  FINDING NUMBER 3 – MANAGEMENT CONTROL WEAKNESSES LED TO NON-
  COMPLIANCE IN OTHER AREAS..........................................................................................20
     • RECOMMENDATIONS ...............................................................................................21
        •    IATA’S COMMENTS TO THE DRAFT REPORT AND OIG'S RESPONSE............21

BACKGROUND............................................................................................................................25

OBJECTIVE, SCOPE AND METHODOLOGY ..........................................................................25

STATEMENT ON MANAGEMENT CONTROLS .....................................................................26

APPENDIX A – Other Non-Compliance Issues
APPENDIX B – Table of Recommended Financial Adjustments
APPENDIX C - IATA's Comments to the Draft Audit Report
                           EXECUTIVE SUMMARY
International Aviation and Travel Academy (IATA) located in Arlington, Texas, did not qualify
as an eligible institution for participation in the Title IV, Student Financial Assistance (SFA)
programs authorized by the Higher Education Act (HEA) of 1965, as amended. IATA was
ineligible because it did not receive at least 1) 15 percent of its revenue from non-Title IV
sources during its fiscal year ended December 31, 1997, and 2) 10 percent of its revenue from
non-Title IV sources during its fiscal year ended December 31, 1998. As a result, the school was
ineligible to participate in the Title IV programs for the period January 1, 1998 through
December 31, 1999. During the ineligible period, IATA received approximately $6.4 million in
Title IV funds.

Under the HEA, proprietary institutions are required to derive at least 15 percent of their
revenues from non-Title IV sources to participate in the Title IV programs. The HEA
Amendments of 1998 lowered this requirement to 10 percent. Conversely, no more than 85
percent (or 90 percent currently) of total revenue may be derived from the Title IV programs.
This institutional eligibility requirement is hereafter referred to as either the 85 or 90 Percent
Rule. IATA reported in its audited financial statements for the fiscal years ended December 31,
1997 and 1998, that it met the 85 and 90 Percent Rule requirements. We determined that IATA
received approximately 95 and 91 percent of its revenue from Title IV sources for its fiscal years
ended December 31, 1997 and 1998, respectively. IATA’s reported percentages included cash
revenue from ineligible short-term programs and other errors.

IATA also inappropriately disbursed Title IV funds for students enrolled in its Advanced Travel
and Tourism with Externship Program by overstating the program’s total training hours. IATA
classified 300 hours of this 910-hour program as an externship. We concluded that the school
provided no instruction and was not otherwise involved in the students’ training program during
the 300 externship hours. IATA verified that the students were employed for 300 hours in travel
or tourism-related jobs but generally had no other contact with the students or the students’
employers. Thirty of the 31 employers we interviewed told us they were not participating in an
externship program with IATA. The one employer who said it was participating did not prepare
or submit any of the required student evaluations and had no contact with IATA officials
regarding students’ externship experience. The 300 externship hours also did not meet the
school’s accrediting agency or State licensing agency requirements. IATA disbursed an
additional $542,672 of Title IV funds to students based on 910 hours of training instead of the
610 hours that were actually provided.

As a result of management control weaknesses, IATA disbursed Title IV funds to ineligible
students, failed to calculate refunds correctly, and failed to maintain documentation of
professional judgment and entrance/exit counseling actions. IATA’s failure to comply with
HEA provisions and regulations resulted in $51,162 of unallowable Title IV disbursements.
We recommend that the Chief Operating Officer for Student Financial Assistance:

1. Require IATA to return $6,737,634 in Title IV funds to the Department or lenders. This
   amount includes: (a) $6,383,809 IATA disbursed while it was an ineligible institution from
   January 1, 1998 through December 31, 1999; (b) $332,649 of unallowable disbursements for
   students enrolled in the Advanced Travel and Tourism with Externship Program; and (c)
   $21,176 of unallowable disbursements for failure to comply with HEA provisions and
   regulations. 1

2. Take action to terminate IATA from participation in the Title IV programs unless IATA can
   demonstrate that it met the 90 Percent Rule for its fiscal year ended December 31, 1999.

3. Require IATA to calculate the correct Title IV awards and disbursements (based on 610
   hours) for students enrolled in the Advanced Travel and Tourism with Externship Program
   after December 31, 1999, provided IATA demonstrates that it met eligibility requirements for
   its 1999 fiscal year. Also, require IATA to strengthen management controls to ensure it
   adheres to HEA provisions and regulations regarding its administration of Title IV funds.

4. Initiate appropriate administrative action in accordance with Title 34 Code of Federal
   Regulation (CFR), Part 668, Subpart G.

IATA provided narrative comments and 50 exhibits containing over a thousand pages of
documentation in response to our draft report issued in August 2000. IATA’s narrative
comments are included in their entirety in Appendix C. We summarized IATA’s comments and
provided our response following each finding. The exhibits have been provided to the
Department of Education Action Official. Our analysis of IATA’s comments and the
documentation provided to support those comments did not persuade us to change our overall
conclusions or recommendations for any of the findings. Although we made some minor
changes based on our analysis, the changes did not impact the total unduplicated questioned
costs.




1
  These are unduplicated dollars. For example, the $332,649 of unallowable disbursements for
students enrolled in the Advanced Travel and Tourism with Externship Program (Finding
Number 2) were made before IATA became ineligible on January 1, 1998. The remaining
$210,023 ($542,672-$332,649) was disbursed after IATA became ineligible and is included in
Finding Number 1. Appendix B is a complete explanation of unallowable disbursements and
recommended financial adjustments for each finding.
Control Number: ED-OIG/A06-90010                                                                Page 3


                                   AUDIT RESULTS

                FINDING NUMBER 1
IATA DID NOT HAVE SUFFICIENT NON-TITLE IV REVENUE
      TO QUALIFY AS AN ELIGIBLE INSTITUTION

International Aviation and Travel Academy (IATA) did not qualify as an eligible institution for
participation in the Title IV, Student Financial Assistance programs because it received over 90
percent of its revenue from Title IV sources during its two fiscal years ended December 31, 1997
and 1998. As a result, the school was ineligible to participate in the Title IV programs for the
period January 1, 1998 through December 31, 1999. IATA should be required to return to the
Department or lenders $6,383,809 of Title IV funds disbursed during the ineligible period.


           IATA DID NOT MEET THE 85 PERCENT RULE IN 1997

IATA did not derive 15 percent of its revenues from non-Title IV sources during its fiscal year
ended December 31, 1997, and was not eligible to participate in the Title IV programs for the
period January 1 through December 31, 1998. IATA reported in its 1997 audited financial
statements that it met the 85 Percent Rule. IATA actually received 94.85 percent of its revenue
from Title IV sources for the period January 1 through December 31, 1997. During 1998, IATA
students received $3,375,750 in Federal Pell Grant and Federal Family Education Loan Program
(FFELP) funds.

Proprietary Schools Were Required to Generate a Minimum of 15 Percent of Their
Revenue from Non-Title IV Sources

Section 481(b) of the Higher Education Act (HEA) states “the term –‘proprietary institution of
higher education’ means a school . . . which has at least 15 percent of its revenues from sources
that are not derived from [HEA, Title IV] funds . . . .” 2 This institutional eligibility requirement
was codified in 34 CFR § 600.5(a)(8), and hereafter is called the 85 Percent Rule. The
regulations also provide the formula, at 34 CFR § 600.5(d)(1), for assessing whether an
institution has satisfied the requirement. 34 CFR § 600.5(d)(2)(i) specifies that amounts used in
the formula must be received by the institution during its fiscal year.




2
  The HEA Amendments of 1998 relocated this requirement to Section 102(b)(1)(F) and reduced
the percentage to 10 percent.
Control Number: ED-OIG/A06-90010                                                                                   Page 4

The formula is as follows:

                         Title IV, HEA program funds the institution used to satisfy tuition, fees,
                                       and other institutional charges to students

           The sum of revenues generated by the institution from: tuition, fees, and other institutional charges
                       for students enrolled in eligible programs as defined in 34 CFR 668.8; and
                  activities conducted by the institution, to the extent not included in tuition, fees, and
             other institutional charges, that are necessary for the education or training of its students who
                                          are enrolled in those eligible programs


Revenue from Ineligible Programs Included in the 85 Percent Rule Calculation

By definition in 34 CFR § 600.5(d)(i), only revenue from eligible Title IV programs or from
activities conducted by the institution necessary for the education or training of its students who
are enrolled in those eligible programs can be included in the calculation. IATA included non-
Title IV cash revenue from three ineligible programs in its 85 Percent Rule calculation. The
three programs were not listed as eligible programs on the Eligibility and Certification of
Approval Report that the Department issued to IATA. The programs could not have been found
to be eligible because they did not meet specific eligibility requirements.

1. The Airline Travel Industry and Resident Program is a certificate program consisting of
   137.5 hours of home study and 167 hours of residency study. According to 34 CFR § 600.2,
   the Secretary considers a combination home study and residency course to be a
   correspondence course. Title 34 CFR § 668.38(a) requires a correspondence course to be
   part of a program that leads to an associate, bachelor or graduate degree for the student to be
   eligible for Title IV funds. No part of the Airline Travel Industry and Resident Program led
   to an associate, bachelor or graduate degree. IATA inappropriately included $180,066 of
   non-Title IV cash revenue in its 85 Percent Rule calculation related to this ineligible
   program.

2. The Intermediate Travel and Tourism Program requires 300 clock hours to obtain a
   certificate of completion. According to 34 CFR § 668.8(e), an educational program of at
   least 300 clock hours but less than 600 clock hours of instruction qualifies as an eligible
   program only if, among other requirements, the program has a substantiated completion and
   placement rate of at least 70 percent. Originally, IATA was unable to provide any
   documentation related to the placement rate. IATA then initiated the process of obtaining
   placement documentation after we informed management of this requirement. IATA
   provided documentation that claimed the completion rate for this program exceeded 70
   percent. The documentation provided was insufficient to demonstrate that IATA had met the
   70 percent placement rate. IATA inappropriately included $187,085 of non-Title IV cash
   revenue related to this ineligible program in its 85 Percent Rule calculation.

3. The Dispatcher Program requires 225 clock hours to obtain a certificate of completion.
   IATA was correct to exclude cash revenue from this program since it is ineligible for Title IV
   funds. We calculated the correct amount to be subtracted from the gross receipts as $78,324
   instead of the $63,543 subtracted by the school. IATA inappropriately included $14,781 of
   non-Title IV cash revenue related to this ineligible program in its calculation.
Control Number: ED-OIG/A06-90010                                                             Page 5

Other Errors in the 85 Percent Rule Calculation

IATA’s calculation of the 85 Percent Rule also contained other errors. IATA subtracted
$272,311 in refunds from both the Title IV cash revenue and the total cash revenue. We
determined that $242,617 of the $272,311 was Title IV refunds. The remaining $29,694 was
non-Title IV refunds.

Books, tools and housing costs were an institutional cost at IATA. The school correctly
accounted for these costs as institutional costs in its refund calculations, but in its 85 Percent
Rule calculation the school deducted $227,671 of costs for books, tools and housing because it
considered these costs to be non-institutional costs. Table I details the school’s and the OIG’s 85
Percent Rule calculation.

                                          TABLE I
           85 Percent Rule Calculations for January 1 through December 31, 1997
                                                        IATA Calculation OIG Calculation
 Title IV Cash Revenue                                         $3,514,795       $3,514,795
   Less:     (Refunds)                                          (272,311)        (242,617)
            (Housing, Tools and Books)                          (227,671)                0
 Net Title IV                                                  $3,014,813       $3,272,178

 Total Cash Revenue                                                  $4,167,555           $4,167,555
    Less:
    (Airline Travel Industry and Residency Program)                            0           (180,066)
    (Intermediate Travel and Tourism Program)                                  0           (187,085)
    (Dispatcher Course)                                                 (63,543)             (78,324)
    (Housing, Tools and Books)                                        (227,671)                     0
 Net Total                                                           $3,604,030           $3,449,768
 Title IV Percentage = Net Title IV/Net Total                          83.65 %              94.85 %

           IATA DID NOT MEET THE 90 PERCENT RULE IN 1998

IATA did not derive 10 percent of its revenues from non-Title IV sources during its fiscal year
ended December 31, 1998, and was not eligible to participate in the Title IV programs for the
period January 1 through December 31, 1999. From January 1 through December 31, 1999,
IATA students received $3,008,059 in Federal Pell Grant and FFELP funds. IATA reported in
the notes to its 1998 audited financial statements that it met the 90 Percent Rule. We determined
the school’s calculation included cash from an ineligible program. Based on our analysis, after
disallowing the ineligible program, IATA received approximately 91 percent of its revenue from
Title IV sources for the period January 1 through December 31, 1998.
Control Number: ED-OIG/A06-90010                                                                 Page 6

Proprietary Schools Must Derive at Least 10 Percent of Their Revenue from
Non-Title IV Sources

The 1998 Amendments to the HEA modified and relocated the definition of proprietary
institution of higher education to include “a school that . . . has at least 10 percent of the school’s
revenue from sources that are not derived from funds provided under Title IV, as determined in
accordance with regulations prescribed by the Secretary.” This institutional eligibility
requirement was effective October 1, 1998, and is codified in 34 CFR § 600.5(a)(8) 3 . The
calculation principles that applied to the 85 Percent Rule apply to the 90 Percent Rule in
assessing whether an institution has satisfied the minimum non-Title IV revenue requirements.

Revenue from Ineligible Program Included in the 90 Percent Rule Calculation

Only cash revenue from programs that are Title IV eligible can be included in the 90 Percent
Rule calculation. IATA included $224,879 of non-Title IV cash revenue from the “short-term”
program, Intermediate Travel and Tourism. IATA included non-Title IV revenue from this same
ineligible short-term program in its 85 Percent Rule calculation for the prior fiscal year. Our
verification of the placement rate revealed that the rate was below the required 70 percent
threshold. Since the program did not meet this requirement, cash revenue derived from the
program cannot be included in the 90 Percent Rule calculation. Table II shows the school’s and
the OIG’s 90 Percent Rule calculation.

                                            TABLE II
              90 Percent Rule Calculations for January 1 through December 31, 1998
                                                       IATA Calculation OIG Calculation
    Title IV Cash Revenue                                     $3,507,837         $3,507,837
      Less:     (Refunds)                                      (286,309)          (286,309)
    Net Title IV                                              $3,221,528         $3,221,528

    Total Cash Revenue                                             $4,410,650             $4,410,650
     Less:     (Refunds)                                            (326,290)              (326,290)
               (Disallowed Courses)                                 (318,456)              (318,456)
               (Intermediate Travel and Tourism)                            0              (224,879)
    Net Total                                                      $3,765,904             $3,541,025
    Title IV Percentage = Net Title IV/Net Total                     85.55 %                90.98 %




3
 The codification of the change in the percentage from 85% to 90% was published in the Federal
Register, Volume 64, No. 209 on October 29, 1999. As noted in the report, the statutory 90
percent was effective on October 1, 1998.
Control Number: ED-OIG/A06-90010                                                                 Page 7

                 TITLE IV FUNDS RECEIVED BY IATA
          FROM JANUARY 1, 1998 THROUGH DECEMBER 31, 1999

Institutions that fail to satisfy the 85 Percent Rule or the 90 Percent Rule lose their eligibility to
participate in the Title IV programs on the last day of the fiscal year covering the period that the
institution failed to meet the requirement [34 CFR § 600.40(a)(2)]. As a result, IATA lost its
eligibility to participate as of December 31, 1997. IATA received $3,375,750 of Title IV funds
($676,985 in Federal Pell Grant funds and $2,698,765 in FFELP loans) for the year ended
December 31, 1998, and $3,008,059 in Title IV funds ($644,553 in Federal Pell Grant funds and
$2,363,506 in FFEL) for the period January 1, 1999 through December 31, 1999.


                                   RECOMMENDATIONS

We recommend that the Chief Operating Officer for Student Financial Assistance:

1.1    Take action to terminate IATA from participation in the Title IV programs unless IATA
       can demonstrate that it met the 90 Percent Rule for its fiscal year ended December 31,
       1999.

1.2    Require IATA return to the Department $1,321,538 of Federal Pell Grant funds and to
       lenders $5,062,271 of FFELP funds received from January 1, 1998 through December 31,
       1999.


IATA’S COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE

IATA’s comments did not persuade us to change our conclusions or recommendations.

IATA stated it had made errors by including non-Title IV revenue from the Airline Travel
Industry and Residency Program in the 85 Percent Rule calculation for 1997. IATA disagreed
with our conclusion that the Intermediate Travel and Tourism Program was an ineligible
program. IATA contended that it met the 85 and 90 Percent Rule requirements when non-Title
IV income from this program is included in the calculations.

The school did not address the non-Title IV revenue from the ineligible Dispatcher Program that
it included in the calculation for 1997. IATA’s comments regarding the following two ineligible
programs are summarized below followed by our response.

IATA stated that it met the 90 Percent Rule for FY 1999. Given the errors in the FY 1997 and
FY 1998 calculations, IATA did not provide sufficient documentation to support its contention.
Control Number: ED-OIG/A06-90010                                                               Page 8

Airline Travel Industry and Residency Program

IATA Comments. IATA agreed an oversight occurred, but stated that it considered our
recommendation for termination to be inappropriate and harsh. IATA said it had engaged a “pre-
eminent Title IV accounting firm” to perform the 85 Percent Rule calculation and that it relied on
that firm “to navigate the complicated accounting requirements associated with Title IV.” The
school cited its good faith efforts to comply with the Rule, the lack of Department guidance
provided to institutions, and the widespread level of confusion that existed after implementation
of the Rule. IATA said this confusion required significant after-the-fact clarification which the
OIG applied retroactively.

IATA said it had not misled the accountants or the Department and noted: “It is particularly
distressing . . . to find that an error occurred in its 85/15 calculation since (it) could have taken
some action to replace the shortfall caused by the exclusion of the cash revenue . . . .” IATA
explained that it had a portfolio of institutional loans valued at about $1 million, some of which it
could have factored in order to meet the 85 Percent Rule requirement had it been made aware
that the cash revenue from this program could not be included in the calculation.

OIG Response. While IATA asserted general confusion over application of the 85 Percent Rule,
it provided no support to suggest there was any confusion over inclusion of revenue from
ineligible programs in the denominator of the formula. Title 34 CFR § 600.5(d)(1), which
became effective July 1, 1995, makes it clear that the calculations should include only tuition,
fees, and other institutional charges for students enrolled in eligible programs. Clarification
provided by the Department in 1999 addressed an unrelated issue of institutional scholarships
and loans. IATA also agreed the Airline Travel Industry and Residency Program was not
eligible.

IATA did not provide any support that it had a portfolio of institutional loans valued at about $1
million or that it had factored any such loans during the two years. Since the calculations must
be on a cash basis, any cash that may have been realized from factoring institutional loans after
the fiscal years could not be retroactively applied to those years.

Intermediate Travel and Tourism Program

IATA Comments. IATA disagreed that this program was ineligible because it did not meet the
requirements of 34 CFR § 668.8(e) by having less than a 70 percent placement rate. IATA said
that the OIG ignored information provided to us during the audit that showed the school had
acceptable placement rates and instead focused on completion and placement data reported to the
Texas Workforce Commission (TWC). The school also noted that it reported completion and
placement rates to the Council on Occupational Education (COE) that showed the program had
satisfied the requirements of 34 CFR § 668.8(e).

IATA also stated that it had engaged an accounting firm (the same one mentioned previously that
performed the school’s 85 Percent Rule calculation) to audit the program’s placement rate and
respond to the draft report. IATA provided a letter from the accounting firm as Exhibit 45 that
the school said showed the firm was projecting placement rates of 77.5 percent for 1997 and
almost 67 percent for 1998. IATA explained that the firm had not completed its audit at the time
Control Number: ED-OIG/A06-90010                                                            Page 9

of the response but would provide the final results later. IATA asked that if the information
already provided was not acceptable, the issue be left open pending finalization of the accounting
firm’s work.

OIG Response. We did not ignore the data IATA provided to us during the audit. We used the
completion data IATA documented and reported to TWC in our calculations. We were unable to
use the placement data IATA reported to either TWC or COE because those agencies have
different methods of calculating placement rates than is contained in 34 CFR § 668.8(g). For our
placement rate calculations, we counted as placements those graduates who IATA could support
met the definition of a placement as defined in 34 CFR § 668.8(g). Based on our analysis of the
documentation provided by the school and contact with selected employers, we determined the
program was ineligible because the placement rates were less than the required 70 percent (the
rates were 55.4 and 42.4 percent for the award years ended June 30, 1997 and 1998,
respectively).

IATA also appears to have misinterpreted the projected results the accounting firm reported. We
determined that the projected placement rates (77.5 and 67 percent) cited by IATA were actually
expected positive response rates based on the firm’s follow-up efforts for only a portion of the
graduates in each award year. For example, IATA’s records supported 56 graduates during the
award year ended in 1997 (this amount was also reported to TWC). The accounting firm
estimated it would be able to confirm employment for 31 of 40 graduates and used these
numbers to calculate the 77.5 percent expected response rate. IATA did not explain why the
accounting firm was attempting to confirm employment for only a portion of the graduates.
Even if the expected positive response rates cited by the firm are obtained, IATA will not be able
to demonstrate that 70 percent of the program’s graduates were placed.



                  FINDING NUMBER 2
   IATA DISBURSED TITLE IV FUNDS FOR UNALLOWABLE
                 EXTERNSHIP HOURS

IATA inappropriately disbursed $542,672 of Title IV funds for students enrolled in its Advanced
Travel and Tourism with Externship Program by overstating the program’s total training hours.
IATA classified 300 hours of this 910-hour program as an externship. We concluded that the
school provided no instruction and was not otherwise involved in the students’ training program
during the 300 externship hours. IATA verified that the students were employed for 300 hours
in travel or tourism-related jobs but generally had no other contact with the students or the
students’ employers. Thirty of 31 employers we interviewed told us they were not participating
in an externship program with IATA. The one employer that indicated some level of
participation did not prepare or submit any of the required student evaluations and had no contact
with the school regarding the students’ externship experience. The 300 externship hours also did
not meet the school’s accrediting agency or State licensing agency requirements.
Control Number: ED-OIG/A06-90010                                                            Page 10

IATA offered an Advanced Travel and Tourism Program that was 610 clock hours in length and
an Advanced Travel and Tourism with Externship Program that was 910 hours in length.
According to the school’s catalog, the only difference in the two programs was the 910-hour
program required 300 hours of externship. From July 1, 1997 through June 30, 1998, IATA
disbursed Title IV funds for three students enrolled in the 610-hour program while it disbursed
Title IV funds for 335 students enrolled in the 910-hour program. Because the school provided
no instruction and was not otherwise involved in the 300 externship hours, all of the students
should have been disbursed Title IV aid based on enrollment in the 610-hour program.

The amount of Title IV funding an eligible student can receive is based, in part, on the length of
the educational program in which the student is enrolled [34 CFR § 682.204 and 690.63(e)]. By
claiming the students were enrolled in 910 hours of training, IATA was able to disburse more
Title IV funds than the students were eligible to receive.


                     IATA’S EXTERNSHIP REQUIREMENTS

IATA’s school catalog states the externship provides the student the opportunity to observe and
gain practical work experience in a supervised operational environment related to career goals.
Students are to be assigned to a staff sponsor (mentor) who coordinates this practical experience
with the academic support of the classroom training. Projects and assignments are to be
designed to enhance the externship experience and to assist the student in career planning and
goals. The school catalog, which states that the students are to attend 30 hours of theory classes
during the externship segment of the program, also states: “Periodic seminars assist in the
student’s personal and career growth.”

IATA did not provide any documentation that:

1. A staff sponsor had been assigned to each student;
2. A mentor had coordinated the practical experience obtained in the workplace with the
   academic support of the classroom training; or
3. Students attended periodic seminars or theory classes.

Both IATA’s former and current Externship Coordinator, as well as the Director of the Travel
and Tourism Program, stated that no seminars or theory classes were taught during the
externship segment of the program.

IATA’s written policy stated that the school would obtain a letter of intent to participate in the
externship program from the externship employer. The letters were to be signed by the employer
and a representative of the school. The school was able to provide only seven letters of intent for
the 138 externship employers it used from January 1, 1997 through September 9, 1999. The
letters were dated from October 15, 1993 through May 6, 1994. Although the number of
students to be placed at the employers was generally shown (usually one or two students), the
letters did not identify the students or specify a time period.
Control Number: ED-OIG/A06-90010                                                           Page 11

                  EXTERNSHIP EMPLOYERS AND STUDENTS

Both the former and current IATA Externship Coordinator, as well as the Director of the Travel
and Tourism Program, told us that the school’s placement office was available to help students
find employment in the travel and tourism industry in order for them to fulfill the externship
requirement. The officials stated that the students were responsible for contacting the employers
and obtaining the jobs. Based on our discussions with school officials and 31 employers
identified by the school, IATA did not always inform the employers that the students were
participating in an externship with IATA. School officials and employers also told us that IATA
staff did not routinely visit or otherwise contact the employers to discuss the students’
performance during the externship. The current Externship Coordinator stated, “[u]sually the
employer does not know it is an externship, the student is a regular employee who usually stays
long after the externship is over.”

Only one of the 31 employers we interviewed said they participated in an externship with IATA.
The one employer in a follow-up interview said the participation involved giving presentations at
the school and conducting tours of the company. Those activities do not constitute externship
participation. This one employer did not prepare or submit any of the required student
evaluations and had little or no contact with IATA regarding the students’ externship experience.

We also interviewed five students who were identified as participating in the externship segment
of the program, including one of our sample students and four current students. All five students
told us that IATA provided no additional training or educational assistance during the externship.


                      ACCREDITING AGENCY STANDARDS

IATA did not adhere to its accrediting agency’s standards as related to the externship program.
IATA’s accrediting agency, the Council on Occupational Education (COE), requires that
externships be a legitimate extension of the training. Two of the COE Handbook Standards
related to externships are:

1. Each externship must have a written training plan and goals specifying the particular
   applications, objectives and experiences that are to be acquired; and
2. The training plan designates the on-site employer representative responsible for guiding and
   overseeing the student’s learning objectives and participating in the student’s written
   evaluations.

IATA did not provide any documentation that it:

1. Had a written training plan and goals for each individual externship student; or
2. Designated the on-site employer representative responsible for guiding and overseeing each
   student’s learning objectives.
Control Number: ED-OIG/A06-90010                                                            Page 12

                        STATE LICENSING AGENCY RULES

IATA did not adhere to its State licensing agency’s requirements regarding externships. The
State licensing agency, the Texas Workforce Commission (TWC), requires that the:

1. Employer’s representative participate in the extern’s evaluation – listing the knowledge,
   skills and attitudes/qualities monitored; and,
2. Externship coordinator contact the extern’s supervisor by telephone and visit the work site to
   monitor each extern.

IATA did not provide any evidence that:

1. An employer’s representative participated in the evaluation of the students participating in
   the externship program;
2. An externship coordinator contacted the extern’s supervisor by telephone; or
3. An externship coordinator visited the work site to monitor each extern.


                     DISALLOWANCE OF THE EXTERNSHIP
                         SEGMENT OF THE PROGRAM

IATA extended the Advanced Travel and Tourism Program (610 hours) by inappropriately
adding 300 hours that it classified as an externship. The 300 hour addition to the program
allowed IATA to disburse the maximum allowable Federal loan and Pell Grant amounts to
students enrolled in the program. The 300 externship hours should not have been counted in
calculating Title IV aid for students. Since the externship portion of the program did not meet
the school’s accrediting agency or State licensing agency standards, the hours could not be
included as a part of an eligible program. For that reason, the Title IV aid disbursed should be
recalculated to reflect the amount for which the students were actually eligible.

Title 34 CFR § 682.204, dealing with FFELP, provides that a student who has not successfully
completed the first year of an educational program is eligible for the maximum of $2,625 and
$4,000 for a Federal Subsidized Stafford and Federal Unsubsidized Stafford loan, respectively,
for a program whose length is at least a full academic year (i.e., 900 clock hours). For a program
whose length is at least two-thirds but less than a full academic year (e.g., 610 clock hours), the
maximum Federal Subsidized Stafford and Federal Unsubsidized Stafford loan is $1,750 and
$2,500, respectively. Title 34 CFR § 690.63(e) also provides that for a program measured in
clock hours, the maximum Federal Pell Grant a student may receive is the annual award amount
multiplied by the number of weeks of instructional time in the term divided by the number of
weeks of instructional time in the program’s academic year. This result is then multiplied by the
fraction of the number of clock hours in a payment period divided by the number of clock hours
in a program’s academic year.
Control Number: ED-OIG/A06-90010                                                         Page 13

For a course consisting of 610 hours, the maximum loan amount is $4,250 ($1,750 Federal
Subsidized Stafford and $2,500 Federal Unsubsidized Stafford loan). The maximum Federal
Pell Grant for a 610-hour course in award year 1998 was $1,220 [(maximum annual award of
$2,700) X (20 weeks in program divided by 30 weeks in academic year) X (610 hours in course
divided by 900 hours in academic year)].

The results of our statistical sample revealed that 56 of the 100 students were disbursed an
additional $88,963 of Title IV funds ($49,855 of Federal Pell Grant and $39,108 of FFELP
funds) due to IATA inappropriately extending the Advanced Travel and Tourism Program from
610 hours to 910 hours. By projecting the sample results to the universe of 610 students, we
estimate that $542,672 of Title IV funds were incorrectly awarded during the award year ended
June 30, 1998. We are 90 percent confident that the unallowable Title IV disbursements would
not be less than $449,700 or more than $635,645. We estimate that the $542,672 includes
$304,116 of Federal Pell Grant and $238,556 of FFELP funds.

We further estimate that $186,418 of Federal Pell Grant and $146,231 of FFELP funds were
disbursed from July 1, 1997 through December 31, 1997. The remaining $210,023
($117,698+$92,325) is included in the amount we recommended be returned under Finding
Number 1.

                                   RECOMMENDATIONS

We recommend that the Chief Operating Officer for Student Financial Assistance require IATA
to:

2.1    Return Federal Pell Grant funds of $186,418 and FFELP funds of $146,231 disbursed
       from July 1, 1997 through December 31,1997 to the Department and lenders,
       respectively.

2.2    Calculate the correct Title IV awards and disbursements (based on 610 hours) for
       students enrolled in the Advanced Travel and Tourism with Externship Program after
       December 31, 1999, if IATA demonstrates that it met eligibility requirements for its 1999
       fiscal year. IATA should return to the Department and lenders any over awards of Title
       IV funds disbursed.

2.3    Initiate appropriate administrative action in accordance with 34 CFR § 668, Subpart G.


IATA’S COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE

Our analysis of IATA’s comments and the documents provided to support those comments did
not persuade us to change our conclusions and recommendations.
Control Number: ED-OIG/A06-90010                                                          Page 14

IATA disagreed that it overstated the total training hours for the Advanced Travel and Tourism
with Externship Program. IATA contended that it was adequately involved in administering the
externship portion of this program and that the program met COE and TWC requirements. The
school provided numerous documents that IATA said supported the school’s and employers’
involvement in the externship. Our analysis of the documents and follow-up discussions with 17
of the 31 identified externship employers confirmed our conclusion that the school did not have a
valid externship.

The school’s comments are summarized below and correspond to the specific sections in IATA’s
response. Our response follows each comment.

Section VII - IATA Did Not Overstate Externship Hours

IATA stated that our conclusions were inaccurate and unsupported for the following reasons:

1. IATA Comments. IATA met COE and TWC requirements with respect to the program.
   COE first accredited the program in June 1993. IATA submitted documents as a part of
   COE’s initial accreditation that are relevant to the externship portion of the program. IATA
   provided COE and the Texas Education Agency (the State licensing agency before TWC)
   letters approving the program in 1993 (Exhibit 7) and documents related to COE’s initial
   accreditation (Exhibit 8).

   OIG Response. We are not questioning COE or the Texas Education Agency’s approval of
   the program or how IATA implemented the externship portion of the program from 1993
   until our compliance audit period began (i.e., July 1, 1997). We are questioning IATA’s
   compliance with COE and TWC requirements during our audit period. Exhibit 8 clearly
   identifies the COE standards for externships and IATA’s procedures for complying with
   those standards. We agree with IATA’s statement that these standards are still relevant. We
   do not agree that IATA demonstrated compliance with the standards in the manner described
   on page 5190 of Exhibit 8, which stated:

       The student, employer, and IATA mentor work together as a team to complete the
       student’s on-the-job training and to ensure that the student has a complete
       understanding of how to successfully adjust to actual work situations. The
       externship employer supplies IATA information on a weekly basis regarding the
       progress of the student. This information is then used as a basis for counseling
       the student on a one-on-one basis by the student’s mentor. (emphasis added)

   IATA could not support, during our audit period or in the subsequent documentation it
   provided, that a mentor was assigned to each student, weekly information was provided by
   the externship employer for each student, or that one-on-one counseling of students occurred.

2. IATA Comments. IATA only had letters of intent to participate from externship employers
   for the early years of the program because the employers had become less and less willing to
   enter such formal agreements with the school due to concerns about liability issues.
Control Number: ED-OIG/A06-90010                                                           Page 15

   OIG Response. We agree with IATA’s statement that it only had letters of intent from
   externship employers for the early years (i.e., 1993 and 1994) of the program, but IATA’s
   current policy still contained procedures for obtaining letters of intent. IATA provided no
   documentation that it had notified COE or TWC of a policy change. Based on our review of
   documentation and interviews with identified externship employers, letters of intent were not
   obtained from the employers because the employers were not participating in an externship
   program with IATA.

3. IATA Comments. The required 30 hours of theory were eliminated due to the geographic
   diversity of the externships. Students were made aware that they could contact their mentor
   to receive additional instruction if they felt the need. Externship employers also provided
   additional instruction that generally exceeded the 30 hours. IATA has begun to monitor this
   additional instruction.

   OIG Response. Although IATA stated that the 30 hours of theory had been eliminated, the
   school’s catalog still contained the requirement that students complete 30 hours of theory
   during their externship. IATA also provided no documentation that it had notified COE or
   TWC that it had eliminated the requirement or that the 138 identified externship employers
   had provided additional instruction that generally exceeded the 30 hours.

4. IATA Comments. IATA identified three instructors who it said were primarily responsible
   for monitoring the externship during our audit period. None of the organizations that oversee
   the school require it to document the school mentor or staff sponsor assigned to each student.
   IATA said the documents contained in Exhibit 29, which includes examples of student
   externship information forms, confirmations of employment letters, pay stubs, student daily
   logs, student evaluations, and externship attendance records, support the Externship
   Coordinators’ contacts with employers.

   OIG Response. Two of the three officials IATA identified were Externship Coordinators
   during our audit period. The third official was named the Externship Coordinator in August
   1999, after we completed our work at the school. The two Externship Coordinators during
   our audit period told us that they verified students were working by contacting the students or
   employers and obtaining pay stubs from the students as proof of employment. The
   Externship Coordinator from April 1998 to April 1999 stated that she was the only contact
   the students had with the school during their externships and that it was not school policy to
   appoint a mentor for the students.

   Our report did not state that oversight organizations required IATA to document the mentor
   or staff sponsor assigned to each student. IATA’s own procedures required a mentor or staff
   sponsor be assigned to students to coordinate the practical experience with the academic
   support of the classroom. Although the Externship Coordinators may have verified that the
   students were employed, Exhibit 29 does not support that a mentor or staff sponsor was
   assigned to each student or that the Externship Coordinator or any other IATA official
   coordinated the work experience with the academic program.
Control Number: ED-OIG/A06-90010                                                          Page 16

   For example, none of the documents identify an IATA mentor or staff person or show how
   the Externship Coordinator was involved in the students’ externship. The evaluations for two
   students were not signed by the employers and do not show who prepared or submitted the
   evaluations. An employer for one of the students told us she had not prepared the
   evaluations (we were unable to contact the second employer because it is no longer in
   business). Daily logs for the same two students did not support any IATA involvement or
   coordination with the students’ training program.

5. IATA Comments. Given the substantial training provided by the employers, few students
   requested or required additional instruction from the school. IATA said it: “[a]lways
   monitors student progress . . .” and “. . . counseling occurred upon a periodic basis when
   students noted the need for additional instruction . . . .”

   OIG Response. It is not unusual for employers to provide training to their own new
   employees. In fact, most of the employers we interviewed stated that training was provided.
   IATA provided no evidence that the training was coordinated with IATA or that IATA was
   otherwise involved in the education and training of the students after they were employed.

   Based on enrollment contracts with students, IATA agreed to provide the students with 910
   hours of training. The students received Title IV aid based on enrollment in a 910- hour
   program and used that aid to pay IATA for the agreed upon training. IATA is now stating
   that the training provided by the employers, who had not agreed to participate with the
   school, should be considered a part of the 910-hour program. As a result, students incurred
   additional Title IV debt by enrolling in the 910-hour program although only 610 hours of
   instruction were provided. The school also benefited by receiving more Title IV revenue
   from the 910-hour program.

6. IATA Comments. IATA provided two documents which it said were available during our
   audit and provided evidence of externship monitoring. Exhibit 10 describes the procedures
   IATA used to track each student in the externship program. Exhibit 11 is a form used to
   document withdrawals and calculate refunds. IATA said we either ignored or did not
   evaluate these documents.

   OIG Response. We disagree that the procedures and various forms constitute evidence of
   IATA’s involvement in monitoring externships and that we had not considered procedures in
   use during our audit fieldwork. Pages 5220 through 5227 of Exhibit 10 were not available
   during our audit (the first page of these procedures is dated November 15, 1999, after our
   fieldwork was completed). We considered the remaining procedures related to externships
   during our review of student files and interviews with employers. We concluded that IATA
   had not followed the procedures.

   For example, IATA’s procedures specified that a letter of intent or other documents be
   obtained from the employers whereby they agreed to participate in the externship program
   with the school. No such letters of intent or other documents were obtained from any of the
   31 employers we interviewed or the other six employers where our sample students worked.
Control Number: ED-OIG/A06-90010                                                           Page 17

   The procedures also included instructions for employers that stated the externship employers
   were to submit weekly reports to the school on the student’s performance. None of our
   sample students’ files contained all of the required weekly performance evaluations to be
   submitted by the employer and most files contained no evaluations. For six student files
   containing an evaluation, we interviewed the respective employers and obtained signed
   statements from three of them attesting to the fact that they had not prepared the student
   evaluations and that they do not participate in an externship program with IATA. One
   employer interviewed said he completed the one weekly evaluation in the student’s file.
   Neither IATA nor the employer’s files contained evaluations for the remaining 11 weeks of
   externship the school claimed the student completed. Two other employers said they had
   signed the performance evaluations for the students as employment verification but had no
   direct contact with the school regarding the students. Both employers signed a statement that
   they did not participate in an externship program with IATA. The sixth employer
   approached the school about establishing an externship program and was told by the school
   that it was not interested in an externship program with the employer.

Section VIII - OIG Mischaracterized Comments Made by IATA Representatives

IATA said we mischaracterized and misinterpreted comments made to us by the former and
current Externship Coordinators and the Director of the Travel and Tourism Program. IATA
stated that these errors caused us to base our findings on erroneous conclusions.

1. IATA Comments. IATA said that confusion occurred at the time of our interview with the
   former Externship Coordinator and the Director of the Travel and Tourism Program with
   reference to the term “employment.” The terms “employment and job” are used
   interchangeably in reference to “externship placement for practical training.” The term
   “placement” has a limited meaning at IATA and is used only when a student has completed
   the program, including the externship.

   OIG Response. We disagree that any confusion occurred. Our interviews with the officials
   were specifically directed to gaining an understanding of IATA’s implementation of the
   externship program. We confirmed the accuracy of the IATA officials’ statements by
   interviewing the identified externship employers and students, and reviewing student files
   and other documents provided by the school. Our conclusions about the 300 externship
   hours are based on these employer and student interviews and file reviews.

2. IATA Comments. The OIG asserts that the students are solely responsible for identifying
   externship opportunities, which leaves the erroneous impression that IATA shirks its
   responsibilities in assisting students to identify suitable externship placements. IATA stated
   the “[e]xternship placement results from the combined efforts of the instructor, placement
   department, employer, and the student.”

   OIG Response. We did not assert that students were solely responsible for finding
   employment. In fact, the report does not dispute IATA officials’ statements to us that the
   school’s placement office assisted the students in finding suitable employment. Assisting
   students in finding employment is only the first step in an externship.
Control Number: ED-OIG/A06-90010                                                          Page 18

   COE requires externships to be a collaborative effort by the school and employer, with the
   employer “[g]uiding and overseeing the students’ learning experiences and participating in
   the students’ written evaluations.” Based on our employer interviews and student file
   reviews, we concluded that the employers did not actively participate with the school in the
   externship program. Of the 31 employers interviewed, 30 told us they did not participate in
   an externship with the school. One employer in a follow-up interview indicated some level
   of participation, but the employer did not prepare or submit any of the required student
   evaluations and had little or no contact with IATA officials regarding the students’
   externship experience. We changed our report to reflect the involvement of this employer.

3. IATA Comments. IATA disagreed with the statement in our report that “Usually the
   employer does not know it is an externship, the student is a regular employee . . . .” The
   school said the current Externship Coordinator who made the statement had not been in the
   position very long and was apparently unaware of how the initial phase of the externship
   placement is handled (i.e., by the Graduate Advisory Department).

  OIG Response. The statement is supported by our interviews with employers and students
  and the lack of any agreements by the employers to participate in the externship program. We
  do not agree with IATA’s statement that the official was unaware of employers’ knowledge of
  the externship. The IATA official who made the statement had been the Externship
  Coordinator for a full year. Although IATA’s Graduate Advisory Department may have
  handled the initial placement of students, the Externship Coordinator was responsible for
  maintaining and documenting contacts with employers during the externship period.
  Although records show the Externship Coordinator contacted employers periodically to verify
  employment, none of the contacts documented for our 35 sample students, who were
  identified as participating in the externship, support that the employers were participating in
  an externship with the school.

Section IX – Documentation Refuting OIG’s Conclusions

IATA stated that the documentation it provided in various exhibits showed our conclusions were
inaccurate. IATA had the following comments related to the documentation:

1. IATA Comments. Exhibits 18 and 26 contain documents that show dates of attendance,
   hours worked, and job performance which confirms each of the 31 employers participated in
   the externship program. Most of the documents contain a signature of the employer.

   OIG Response. Based on our analysis of the documents and follow-up interviews with 17
   employers, we determined the documents do not support that the employers participated in an
   externship.

2. IATA Comments. Exhibit 19 contains documentation that proves the OIG statement is
   inaccurate that six employers had never heard of IATA.
Control Number: ED-OIG/A06-90010                                                            Page 19

   OIG Response. We mistakenly counted one employer that did not have any externship
   students. Although the remaining five employers told us they had never heard of IATA, after
   further consideration we agree it is unlikely that the employers did not have some knowledge
   of the school. We have deleted this sentence from the final report.

3. IATA Comments. Exhibit 20 contains documentation that confirms the five students who we
   interviewed did, in fact, receive additional training or assistance or had it available to them.

   OIG Response. None of the documents support that IATA provided any training or
   assistance to the five students.

4. IATA Comments. Exhibit 21 contains 136 pages of documents, including 52 letters of intent
   from employers to participate in the externship program (IATA actually provided 54 letters
   of intent). The documents were previously provided to the OIG. IATA said it could not
   understand how the OIG erroneously concluded only seven letters of intent were identified
   and that it “[c]an only conclude that OIG failed to review the voluminous documents it
   subpoenaed . . . .”

   OIG Response. We considered the documents that IATA provided in response to both our
   subpoena and draft report and have not changed our conclusion that only seven letters of
   intent were provided for the 138 identified externship employers.

5. IATA Comments. Exhibit 22 is a list of employers that participate in IATA’s externship
   program. Exhibit 23 contains a list of students who participated in the externship program
   between 1997 and 1999.

   OIG Response. These documents do not support that employers and students participated in
   a valid externship program.

6. IATA Comments. Exhibit 24 is a sample of letters that IATA sends to employers to confirm
   the externship and IATA’s willingness to assist with additional training of the student.

   OIG Response. The 15 letters provided do not support that employers participated in the
   externship during our audit period.

7. IATA Comments. Exhibit 25 identifies IATA’s Advisory Board members from 1997
   through 1999. IATA noted that two employers we interviewed were Advisory Board
   members and that “[i]t is hard to imagine that Advisory Board members would be unaware of
   the institution . . . .” IATA said Exhibits 18 and 22 confirm that each was an externship
   employer.

   OIG Response. The two employers did not tell us they were unaware of the institution. We
   concluded that the employers did not participate in a valid externship with IATA because
   IATA had not obtained letters of intent or any other agreement from the employers to
   participate in the externship. Files of students who worked at the two employers did not
   contain student evaluations, daily logs, or any other documents supporting employer
   involvement in the externship. We disagree that Exhibits 18 and 22 confirm the employers
Control Number: ED-OIG/A06-90010                                                            Page 20

   participated in the externship. Exhibit 18 contains statements from the employers verifying
   periods of employment for students. Exhibit 22 is a list of 138 externship employers IATA
   said it used. Although one employer acknowledged externship participation in a follow-up
   interview, the employer described the participation as giving presentations to students at the
   school and tours of the company. These activities do not constitute externship participation.

8. IATA Comments. Exhibit 26 contains a sample of TWC completer follow-up forms that
   confirm IATA’s follow-up and placement of externship students.

   OIG Response. Only three of the 23 forms provided were completed for students who
   graduated from the Advanced Travel and Tourism with Externship Program. The remaining
   forms contained no employer information or were for students enrolled in other programs.
   We did not question IATA’s follow-up or placement of its graduates. TWC required IATA
   to use the forms to document the employment status of its graduates. Documenting the
   employment status of graduates does not support IATA or employer participation in the
   externship.

9. IATA Comments. Exhibit 29 is a sample of documentation for five students that shows
   IATA monitors the externship program and that students receive substantial training during
   their externship from IATA or their employers.

   OIG Response. We disagree with IATA. The documents do not support that IATA
   monitored the externships or that students received substantial training from IATA or their
   employers.


                  FINDING NUMBER 3
         MANAGMENT CONTROL WEAKNESSES LED TO
            NON-COMPLIANCE IN OTHER AREAS

As a result of management control weaknesses, IATA disbursed Title IV funds to ineligible
students, miscalculated refunds, and failed to provide documentation of entrance/exit counseling
and professional judgment actions. IATA’s lack of adequate management controls caused it to
not comply with HEA provisions and regulations resulting in $51,162 of unallowable Title IV
disbursements.

Table III summarizes the non-compliance issues, their frequency and the amount of questioned
costs per issue based on our sample review of 100 student files (Appendix A provides additional
details for each issue).
Control Number: ED-OIG/A06-90010                                                         Page 21

                                       TABLE III
                                 NON-COMPLIANCE ISSUES
                             Issue                               Frequency           Amount
 1.    Dependent students receiving unsubsidized loan                5               $ 15,228
 2.    Institutional Student Information Report missing              4                 15,553
 3.    Professional judgment undocumented                            1                  7,680
 4.    Student ineligible to receive Pell                            6                  5,944
 5.    Refund miscalculated or not made                              2                  2,262
 6.   PLUS borrower in default                                       1                  2,375
 7.    Over Award                                                    1                  2,120
 8.   Entrance counseling documentation missing                     14                      0
 9.   Exit counseling documentation missing                          7                      0
      SAMPLE TOTAL                                                  41                $51,162

The $51,162 consists of $5,944 of Federal Pell Grant and $45,218 in FFELP loan disbursements.
This amount includes unallowable disbursements that have been questioned in the previous two
findings. We are recommending only unduplicated unallowable disbursements ($1,535 in
Federal Pell Grant and $19,641 in FFELP) be returned to the Department and lenders,
respectively.



                                   RECOMMENDATIONS

We recommend that the Chief Operating Officer for Student Financial Assistance require IATA
to:

3.1      Return to the Department $1,535 of unallowable Federal Pell Grant disbursements and to
         lenders $19,641 of unallowable FFELP disbursements. The remaining $29,986 ($4,409 +
         $25,577) includes unallowable disbursements included in the previous findings.

3.2      Strengthen management controls to ensure it adheres to HEA provisions and regulations
         regarding administering Title IV funds if IATA demonstrates that it met eligibility
         requirements for its 1999 fiscal year.


IATA’S COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE

We reduced Title IV questioned costs for two students for whom IATA provided support that it
had refunded $916 of Federal Pell Grant funds. Our analysis of the school’s comments did not
convince us to make any other changes to the Title IV questioned costs.

IATA stated that it had consistently demonstrated administrative capability to oversight bodies,
including COE, TWC, Texas Guaranteed Student Loan Corporation (TGSLC), and the
Department. IATA acknowledged the accuracy of our findings for some students, but said that it
had proved the findings for other students were inaccurate and our recommendation
unwarranted.
Control Number: ED-OIG/A06-90010                                                            Page 22

IATA’s specific comments and our responses follow:

1. IATA Comments. COE’s most recent review occurred in March 1995 and resulted in
   reapproval of accreditation. TWC reviews in 1999 and 2000 identified minor issues that the
   school resolved. IATA did not elaborate on the TGSLC and Department reviews.

   OIG Response. We disagree with IATA’s assertion that it had demonstrated administrative
   capability to each of the oversight agencies. The TGSLC review report issued in August
   1998 disclosed several serious issues that point to a lack of administrative capability,
   including untimely and incorrect refunds, untimely return of loan proceeds, and cash
   management problems. TGSLC performed another review at IATA in September 2000, after
   our draft audit report was issued. TGSLC’s report, issued on November 13, 2000, identified
   several deficiencies, including a repeat finding regarding untimely payment of refunds. The
   report concluded that: “Based on the exceptions identified in this report with the 100 percent
   incidence rate for untimely payment of refunds, TG [TGSLC] has concerns regarding the
   ability of International Aviation and Travel Academy to appropriately administer the FFEL
   Program.” The Department review report issued in August 1995 contained 10 findings,
   including some of the same serious administrative capability issues as our audit found
   (untimely refunds, ineligible disbursements, and lack of entrance/exit counseling).

2. IATA Comments. IATA said that after receiving our draft report, it requested that we
   provide a list of student names related to the findings in Table III of the report. IATA said
   that the list of 21 student names we provided (Exhibit 27) did not contain sufficient
   information for IATA to provide a complete response.

   OIG Response. The list provided to IATA identified all but one of the 22 students with
   questioned Title IV disbursements under this finding and identified the reasons for our
   determinations. The one student not identified was a dependent student who had
   inappropriately received an unsubsidized loan. The list did not identify the students without
   documentation for entrance and/or exit counseling. We did not question any Title IV
   disbursements for these students.

3. IATA had the following comments regarding each of the nine administrative capability
   issues identified in Table III of our report. For ease in presentation, IATA’s comments
   regarding specific sample students and our responses are grouped by issue area:

       Issue No. 1. Dependent students receiving unsubsidized loans (sample student numbers
       25, 45, 50, 53, and 105)

               IATA Comments. IATA acknowledged the accuracy of our finding regarding the
               dependent students who received unsubsidized loans (in one place IATA
               mentioned it could only identify four students, but later listed five students).
               IATA stated that although it failed to retain the required documentation for the
               students, “[e]ach of the students was eligible for the unsubsidized loan they
               received.”
Control Number: ED-OIG/A06-90010                                                           Page 23

              OIG Response. No changes to the report. IATA did not provide the required
              documentation to support its statement that the students were eligible for the
              loans.

       Issue No. 2. ISIR missing (sample student numbers 19, 41, 72, and 127)

              IATA Comments. IATA agreed with our finding for student numbers 19 and 127
              and provided copies of refund checks for the amounts questioned. For student
              numbers 41 and 72, IATA disagreed and provided copies of signed FAFSAs for
              award year 1996-97.

              OIG Response. No changes to the report. We questioned Title IV disbursements
              for the 1997-98 award year (not 1996-97) for the two students. IATA did not
              produce an ISIR or a SAR for either student. Without either a valid ISIR or SAR,
              there is no basis for establishing final student eligibility for Title IV program
              funds.

       Issue No. 3. Professional judgment undocumented (sample student number 49)

              IATA Comments. No IATA comments provided.

              OIG Response. No changes to the report.

       Issue No. 4. Student ineligible to receive Pell (sample student numbers 9, 16, 23, 43, 79,
       and 123)

              IATA Comments. IATA agreed with our finding for four of the students and
              provided copies of refund checks. IATA disagreed with our finding for student
              numbers 43 and 79 and provided copies of valid ISIRs for the two students.

              OIG Response. No changes to the report. We questioned the Federal Pell Grant
              funds disbursed to the two students because both students had bachelor’s degrees
              making them ineligible for the funds. Copies of the bachelor degrees were
              contained in the students’ files.

       Issue No. 5. Refund miscalculated or not made (sample student numbers 38, 84, 106, and
       125)

              IATA Comments. IATA agreed with our finding for student number 106 and
              provided a copy of a refund check. IATA disagreed with our finding for the
              remaining three students. For students numbers 38 and 84, IATA provided copies
              of Federal Pell Grant refund checks. For student number 125, IATA stated the
              student had re-enrolled within 60 days after withdrawing and that a refund was
              not due.
Control Number: ED-OIG/A06-90010                                                         Page 24

              OIG Response. We agree IATA refunded the Federal Pell Grants for student
              numbers 38 and 84 and have changed our report. IATA still needs to report a
              downside adjustment to the Department to show the amounts were not disbursed.
              We disagree a refund is not due for student number 125. The student’s last day of
              attendance was January 12, 1998. On January 14, 1998, IATA cancelled the
              student’s enrollment and calculated but did not pay a $1,621 refund. The student
              completed 203 hours of training. On March 2, 1998, the student signed a new
              enrollment contract and attended seven hours before withdrawing. IATA
              performed another refund calculation but did not consider the new enrollment
              contract. By ignoring the new contract, IATA determined incorrectly that no
              refund was due and the student owed the school $463.

       Issue No. 6. PLUS borrower in default (sample student number 71)

              IATA Comments. IATA provided copies of the student’s ISIR and PLUS loan
              application which it said confirmed our conclusion is wrong.

              OIG Response. No changes to the report. The borrower checked the box on the
              loan application that she was in default on a federal education loan. We also
              confirmed from Department records that the borrower was in default.

       Issue No. 7. Over award (sample student number 57)

              IATA Comments. IATA asserted the student loans were proper and provided
              copies of the student enrollment agreement for the 910- hour program and loan
              application as support for its position.

              OIG Response. No changes to the report. Attendance records supported
              completion of the 610 hours of classroom training required for the Advanced
              Travel and Tourism Program. IATA did not provide any support that the student
              participated in the remaining 300 externship hours required for the Advanced
              Travel and Tourism with Externship Program. The student’s file did not identify
              an externship employer and did not contain an externship information card,
              externship attendance records, student evaluations, daily logs, pay stubs, or any
              other record showing the student participated in an externship. We calculated the
              $2,120 over award based on enrollment in the 610- hour program.

       Issue No. 8 and 9. Entrance/exit counseling not documented

              IATA Comments. IATA did not comment on these issues.

              OIG Response. No changes to the report.
Control Number: ED-OIG/A06-90010                                                           Page 25


                                    BACKGROUND
IATA began operations as Braniff Education Systems in 1971 and was purchased by Frontier
Services in 1982. KDW Schools, Inc. purchased IATA in 1986 and is the current owner of the
school. IATA is a proprietary institution headquartered in Arlington, Texas, with additional
locations in Dallas and Houston, Texas. IATA received initial approval to participate in Title IV
programs in July 1984 and is accredited by the Accrediting Commission of the Council on
Occupational Education. Among the vocational programs offered by the institution are travel
and tourism, professional pilot, and aviation maintenance training.

During January 1, 1997 through December 31, 1999, IATA received approximately $9.2 million
in Title IV funds ($2 million from the Federal Pell Grant Program and $7.2 million in FFELP
funds).


              OBJECTIVE, SCOPE AND METHODOLOGY
The objective of our audit was to determine whether IATA administered selected aspects of the
Title IV programs according to the HEA and regulations. We reviewed (1) institutional and
program eligibility and (2) selected administrative and compliance requirements including
student eligibility, Title IV disbursements, and refunds. To accomplish our objective, we:

q   Obtained background information about the school;
q   Reviewed IATA’s 1997 and 1998 audited financial statements and compliance audit reports;
q   Interviewed current and former IATA personnel, accrediting agency officials, current and
    former students, state licensing officials, externship employers, the independent public
    accountant who prepared the school’s audit reports, and Department officials;
q   Examined IATA’s administration of Title IV awards during the period of July l, 1997
    through June 30, 1998;
q   Applied statistical sampling techniques to 610 students receiving over $3 million by
    randomly selecting a sample of 100 students for the year ended June 30, 1998, to test
    compliance with specific Title IV regulations;
q   Reviewed student file folders (The reliability of computerized ledger cards was tested by
    verifying selected data with other sources such as institutional bank statements, canceled
    checks, other student records and data obtained from NSLDS. We concluded that the
    computerized information was sufficiently reliable for the purposes of our audit.); and
q   Obtained and reviewed data applicable to the school from the Department’s NSLDS,
    Payment Management System and Grants Administration and Payment System.

To determine the extent of IATA’s involvement in the externship segment of the program, we
interviewed 31 of the 138 employers IATA identified as participating in its externship program
during the period January 1, 1997, through September 3, 1999. We attempted to contact 39
employers but two employers were no longer in business and six declined to provide us any
information. The 31 employers interviewed included 23 of the 30 employers that were used by
our sample Title IV students during July 1, 1997 through June 30, 1998, and eight additional
employers that were used by students as of April 22, 1999.
Control Number: ED-OIG/A06-90010                                                            Page 26

All work pertaining to the 85 Percent Rule covered the school’s fiscal year ended December 31,
1997. All work pertaining to the 90 Percent Rule covered the school’s fiscal year ended
December 31, 1998. The audit period for the compliance review covered the July 1, 1997
through June 30, 1998 award period.

We performed fieldwork from March 29, 1999 through July 30, 1999 at the Arlington, Dallas,
and Houston, Texas campuses. We also interviewed 31 externship employers (10 by telephone
and 21 in person) in the Dallas and Houston areas. Our audit was performed in accordance with
generally accepted government auditing standards appropriate to the scope of the review
described above.

In addition to analyzing IATA’s narrative comments to the draft audit report, dated September
25, 2000, we:

q   Reviewed and analyzed the 50 exhibits containing over a thousand pages of documentation;
q   Re-interviewed, in person, 17 of the 31 original externship employers. Two other employers
    we attempted to contact were no longer in business;
q   Obtained signed statements from employers that they did not complete or provide student
    evaluations to the school; and
q   Obtained signed statements from employers that they did not participate in the externship.



            STATEMENT ON MANAGEMENT CONTROLS

As part of our review, we assessed the system of management controls, policies, procedures, and
practices applicable to the institution’s administration of the Title IV programs. We assessed the
level of control risk for determining the nature, extent, and timing of our substantive tests. For
the purpose of this report, we assessed and classified the significant controls into the following
categories: (1) institutional and program eligibility, (2) student eligibility, (3) Title IV
disbursements, and (4) calculation and payment of refunds.

Because of inherent limitations, a study and evaluation made for the limited purposes described
above would not necessarily disclose all material weaknesses in the control structure. However,
our assessment disclosed weaknesses in the school’s procedures used to calculate the 85 Percent
Rule and 90 Percent Rule, its adherence of eligibility requirements for the Advanced Travel and
Tourism with Externship program, and the school’s capability to adequately administer Title IV
programs. These weaknesses are discussed in the AUDIT RESULTS section of this report.
                                     APPENDIX A
                             OTHER NON-COMPLIANCE ISSUES


1. No documentation to support dependent students receiving unsubsidized loan. 34 CFR §
   682.201(a)(3) states that undergraduate dependent students shall be eligible to borrow funds
   under the Unsubsidized Stafford Loan Program if the financial aid administrator determines
   that exceptional circumstances will likely preclude the student’s parents from borrowing
   under the Federal PLUS loan program for purposes of the expected family contribution and
   that the student’s family is otherwise unable to provide such expected family contribution. If
   the financial aid administrator makes such a determination, appropriate documentation of
   such determination shall be maintained in the institution’s records to support such
   determination. IATA did not document its determination for five students.

2. Institutional Student Information Records (ISIR) missing. 34 CFR § 668.24(c)(1)(i) states
   under record retention that an institution must maintain the ISIR or Student Aid Report used
   to determine eligibility for Title IV, HEA program funds. Four students’ folders were
   missing ISIRs.

3. Professional judgment decisions undocumented. HEA, § 479A(a) provides for the use of a
   needs analysis system to determine eligibility for student financial aid. Financial aid
   administrators are allowed to use their discretion or professional judgment on a case-by-case
   basis due to special circumstances to increase or decrease one or more of the financial
   elements that impact the needs analysis system. Financial aid administrators must document
   the professional judgment used and the action must relate to each student’s special
   circumstances. The school did not document the professional judgement decision for one
   student.

4. Students received ineligible Pell disbursements. 34 CFR § 690.61(b) requires that a valid
   ISIR or student aid report be received by the school prior to the earlier of the last date that the
   student is still enrolled and eligible for payment at that institution or the established deadline
   as published in the Federal Register. The school disbursed Federal Pell Grant funds for four
   students who did not receive their ISIRs until after their last day of attendance. Title 34 CFR
   § 668.32(c)(1) states that a student is not eligible for a Federal Pell Grant if he or she has a
   baccalaureate or professional degree. IATA disbursed Federal Pell Grant funds to two
   students who had a baccalaureate degree.

5. Refunds were miscalculated or not paid. 34 CFR § 668.22(a) directs that an institution have
   a fair and equitable refund policy under which the institution makes a refund of unearned
   tuition, fees, room and board, and other charges to a borrower who received Title IV funds.
   According to 34 CFR § 668.22(d)(3)(iii), the institution may not delay its payment of the
   portion of a refund allocable under this section to a Title IV program, lender or borrower.
   The refund amount for two students was miscalculated.

6. PLUS loan disbursed to borrower in default. 34 CFR § 682.201(b) states that a parent
   borrower is eligible to receive a PLUS program loan if the parent meets the requirements
   pertaining to defaults that apply to the student. Title 34 CFR § 668.32(g)(1) states that a
   student is eligible if the student is not in default, and certifies that he or she is not in default,
   on a loan made under any Title IV loan program. IATA certified a PLUS loan for a parent
                                  APPENDIX A
                          OTHER NON-COMPLIANCE ISSUES

   who checked the box on the loan application that she was in default on a Title IV loan. We
   also confirmed from Department records that the borrower was in default.

7. Over awards made to students. 34 CFR § 682.204 provides the maximum annual loan limits.
   A Federal Stafford loan may not exceed $1,750 while a Federal Unsubsidized Stafford loan
   may not exceed $2,500 for a program whose length is at least two-thirds but less than a full
   academic year in length. The school awarded maximum annual loan amounts ($2,625 and
   $4,000, respectively) to a student enrolled in a 610-hour program that was subject to the
   above limits.

8. Entrance and exit counseling documentation missing. 34 CFR § 682.604(f) and 34 CFR §
   682.604(g) requires that entrance and exit counseling be performed emphasizing the
   importance of the repayment obligation the borrower is assuming and the likely
   consequences of default. The school is required to maintain documentation for each
   borrower’s entrance and exit counseling session. Fourteen student folders were missing such
   documentation.
                                                                                            APPENDIX B

                                        TABLE OF RECOMMENDED FINANCIAL ADJUSTMENTS


                                                       TOTAL PELL $1,509,491                                TOTAL FFELP $5,228,143                                              TOTAL
               Findings                                                                                                                                      Amount per Issue     Unduplicated Amount
                                            Prior to Jan . 1, 1998   Jan . 1 – Dec. 31, 1999       Prior to Jan . 1, 1998     Jan . 1 – Dec. 31, 1999
Finding #1
Title IV – 90 Percent Rule 1/1 – 9/30/99                                            644,553                                                2,363,506                 3,008,059               3,008,059
Title IV – 85 Percent Rule 1/1 – 12/31/98                                           676,985                                                2,698,765                 3,375,750               3,375,750
    Subtotal – Finding #1                                                         1,321,538                                                5,062,271                 6,383,809               6,383,809
Finding #2
                                                                                   A                                                         A
Invalid Externships                                       186,418                      117,698                   146,231                         92,325                542,672                332,649
                                                                                   A                                                         A
    Subtotal – Finding #2                                 186,418                      117,698                   146,231                         92,325                542,672                332,649
Finding #3
                                                                                                                  A                              A
Over Awarded                                                                                                          1,060                          1,060               2,120
                                                                                                                                                 A
Ineligible PLUS Loan                                                                                                                                 2,375               2,375
Incorrect Refund                                                                                                      2,262                                              2,262                  2,262
                                                                                                                                             A
Invalid ISIR                                                                                                          3,360                      12,193                 15,553                  3,360
                                                                                       A
Ineligible PELL Disbursements                               1,535                          4,409                                                                         5,944                  1,535
                                                                                                                                                 A
Professional Judgment                                                                                                 3,840                     3,840                    7,680                  3,840
                                                                                                                 B                               A
Unsubsidized Loan to Dependent Student                                                                               10,604                     4,624                   15,228                 10,179
                                                                                       A                                                     A
    Subtotal – Finding #3                                   1,535                          4,409                     21,126                    24,092                   51,162                 21,176
TOTAL UNALLOWABLE                                     $187,953                $1,443,645                     $167,357                  $5,178,688                 $6,977,643
TOTAL UNDUPLICATED                                    $187,953                $1,321,538                     $165,872                  $5,062,271                                         $6,737,634


     A
         Total amount questioned is included in other finding(s).
     B
         $425 of amount questioned is included in other finding.
                                 DISTRIBUTION SCHEDULE
                                 Control Number OIG/A06-90010
                                                                                 Copies

Auditee                                                                              1
      Mr. Kenneth D. Woods, Chief Executive Officer
      International Aviation and Travel Academy

Action Official                                                                      1
       Greg Woods, Chief Operating Officer
       Student Financial Assistance
       Department of Education
       ROB-3, Room 4004
       7th and D Streets, SW
       Washington, DC 20202-5132

Other ED Offices
      Chief of Staff, Office of the Secretary                                        1

         Director, Budget Service, Office of the Under Secretary                     1

         Director, Office of Public Affairs                                          1

         General Manager for Schools, Student Financial Assistance                   1

         Chief Financial Officer, Student Financial Assistance                       1

         Director, Case Management and Oversight, Student Financial Assistance       1

         Area Case Director, Dallas Case Management Team
          Case Management and Oversight, Student Financial Assistance                1

         General Counsel, Office of the General Counsel                              1

Office of Inspector General
       Inspector General                                                             1
       Deputy Inspector General                                                      1
       Assistant Inspector General for Analysis and Inspections                      1
       Assistant Inspector General for Investigation                                 1
       Assistant Inspector General for Audit                                         1
       Deputy Assistant Inspector General for Audit                                  1
       Director, Student Financial Assistance                                        1
       Regional Audit Offices                                                        6
       Dallas Regional Office                                                        6

Others
         Texas Workforce Commission                                                  1
         Texas Guaranteed Student Loan Corporation                                   1
         Accrediting Commission of the Council on Occupational Education             1