oversight

Interactive Learning Systems' Administration of the Title IV, Student Financial Assistance Programs.

Published by the Department of Education, Office of Inspector General on 2001-07-20.

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

    INTERACTIVE LEARNING SYSTEMS’
 ADMINISTRATION OF THE TITLE IV STUDENT
    FINANCIAL ASSISTANCE PROGRAMS



                                 FINAL AUDIT REPORT




                               Control Number ED-OIG/A06-A0001
                                           July 2001




Our mission is to promote the efficiency,                        U.S. Department of Education
effectiveness, and integrity of the                                Office of Inspector General
Department’s programs and operations.                                            Dallas, Texas
                                     TABLE OF CONTENTS


EXECUTIVE SUMMARY............................................................................................................. 1

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

          FINDING NUMBER 1 – ILS DISBURSED GRANTS FOR STUDENTS
           ATTENDING TWO LOCATIONS NOT ACCREDITED .............................................. 3
                 Requirements for Title IV Program Participation ................................................... 3
                 ILS Locations and Educational Programs............................................................... 4
                 Department Records Do Not Contain COE Notifications ...................................... 4
                 ILS Disbursed Federal Pell Grants for Students at the Pasadena and
                  Houston 6440 Hillcroft Locations without Accreditation..................................... 5
          RECOMMENDATIONS .................................................................................................... 5
          ILS’ COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE...................... 5
             Pasadena Location Not Accredited ................................................................................ 5
             Houston 6440 Hillcroft Avenue Location Not Accredited ............................................ 6
             Department Approval of Locations................................................................................ 7

          FINDING NUMBER 2 – MANAGEMENT CONTROL WEAKNESSES LED
           TO OTHER NON-COMPLIANCE .................................................................................. 8
          RECOMMENDATIONS .................................................................................................... 9
          ILS’ COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE.................... 10

OTHER MATTERS...................................................................................................................... 13

BACKGROUND........................................................................................................................... 14

OBJECTIVE, SCOPE AND METHODOLOGY ......................................................................... 14

STATEMENT ON MANAGEMENT CONTROLS .................................................................... 15

APPENDIX A – Correspondence between ILS, COE, and the Department
APPENDIX B – Other Non-Compliance Issues
APPENDIX C – ILS’ Comments to the Draft Audit Report
ED-OIG/A06-A0001                                                                             Page 1




                    EXECUTIVE SUMMARY
Interactive Learning Systems (ILS), a proprietary school headquartered in Dallas, Texas,
disbursed Federal Pell Grants for students attending two locations that did not qualify for
participation in the Title IV student financial assistance programs. To participate in the Title IV
programs, institutions must be accredited by a nationally recognized accrediting agency. Despite
being notified in writing by its accrediting agency that its Pasadena, Texas, location was not
accredited, ILS disbursed Federal Pell Grants for students at the location for over three years
prior to being accredited. ILS also disbursed Federal Pell Grants for students at a location in
Houston, Texas, that its accrediting agency was neither aware of nor accredited before it closed
in August 1997.

From July 1996, through December 8, 1999, ILS disbursed $871,815 in Federal Pell Grant funds
for students enrolled at the Pasadena location. ILS also disbursed an estimated $102,920 of
Federal Pell Grants for students who attended its unaccredited Houston location from August
1995 to August 1997.

As a result of management control weaknesses, ILS disbursed Title IV funds for ineligible
students, failed to determine the correct award amounts, failed to calculate refunds correctly, and
failed to make refunds timely. ILS’ failure to comply with the Title IV requirements resulted in
an additional $16,0931 of unallowable Title IV disbursements. ILS complied with the 90 Percent
Rule requirement.

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

1. Require ILS to return $990,828 in Title IV funds.

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

3. Require ILS to strengthen management controls to ensure it adheres to all Title IV
   requirements in administering the Title IV programs.




1
 The $16,093 is unduplicated dollars. Total unallowable disbursements for this audit finding are
$24,312, which includes $ 8,219 of unallowable disbursements included in our finding on
unaccredited locations.
ED-OIG/A06-A0001                                                                           Page 2

4. Require ILS to perform a 100 percent review of Title IV disbursements from July 1, 1998,
   forward; return to the Department of Education any additional inappropriate disbursements;
   and have its Independent Public Accountant verify ILS’ review of Title IV disbursements for
   accuracy.

5. Require ILS to post a letter of credit equal to 25 percent of the refunds that were made or
   should have been made during its most recently completed fiscal year due to the school’s
   failure to make timely refunds.

ILS provided narrative comments and exhibits containing over 400 pages of documentation in
response to our draft report issued in February 2001. ILS’ narrative comments are included in
their entirety in Appendix C. We summarized ILS’ comments and provided our response
following each finding. The exhibits have been provided to the Department of Education Action
Official. Based on our analysis of ILS’ comments and the documentation provided to support
those comments, we reduced the Title IV liability amount for Finding Number 2 by $6,150 to
$16,093 and changed our recommendation to reflect that reduction. Our analysis did not
persuade us to change our overall conclusions or any other recommendations contained in the
draft report. We have added a recommendation to the MANAGEMENT CONTROL
WEAKNESSES LED TO OTHER NON-COMPLIANCE section of the report.
ED-OIG/A06-A0001                                                                                 Page 3


                                    AUDIT RESULTS

                  FINDING NUMBER 1
    ILS DISBURSED GRANTS FOR STUDENTS ATTENDING
            TWO LOCATIONS NOT ACCREDITED

ILS disbursed Federal Pell Grants for students who attended two locations when those locations
were not accredited. A campus located in Pasadena, Texas, was not an eligible Title IV location
from its inception in July 1996 until it was accredited on April 13, 2000. ILS disbursed $871,815
in Federal Pell Grants for students enrolled at the location for over three years until the
Department instructed ILS on December 9, 1999, to cease awarding and disbursing Title IV funds
for students at that location. ILS also disbursed an estimated $102,920 of Federal Pell Grants for
students who attended an unaccredited Houston location from August 1995 to August 1997.

Requirements for Title IV Program Participation
Section 102(b)(1)(D) of the Higher Education Act of 1965, as amended (HEA), specifies that a
proprietary institution of higher education that is eligible to participate in the Title IV programs is
one that “is accredited by a nationally recognized accrediting agency . . . .”

This institutional eligibility requirement is codified in 34 CFR § 600.5(a), which states:
“A proprietary institution of higher education is an educational institution that . . . (6) Is
accredited . . . .”

Regarding the eligibility of additional locations, 34 CFR § 600.32(a) states: “to qualify as an
eligible location, an additional location of an eligible institution must satisfy the applicable
requirements of this section and . . . [§] 600.5 . . . .”

To begin participating in the Title IV programs, the Department must certify a school. After being
initially certified by the Department, schools must apply for recertification at intervals up to six
years apart. To apply for initial participation and recertification, a school must submit an
Application for Approval to Participate in the Federal Student Financial Aid Programs
(Application) to the Department. The school’s Application must identify the location of the main
campus and all additional locations and submit proof of accreditation by a nationally recognized
accrediting agency for each location identified. Based on its review of the Application and
documents submitted, the Department either sends the school copies of a Program Participation
Agreement (PPA) to sign or notifies the school that its Application is not approved. The school
must sign and return the PPA to the Department. The PPA must then be signed on behalf of the
Secretary and dated. That date is the date the school may begin participating in the Title IV
programs.
ED-OIG/A06-A0001                                                                             Page 4

ILS Locations and Educational Programs
In June 1996, ILS consisted of a main campus in Dallas and three additional locations – two in
Houston and one in Pasadena, Texas. The Commission of the Council on Occupational Education
(COE) accredited the Dallas main campus and one Houston location at 10200 Richmond Avenue
(Houston Richmond Avenue). These two locations offered various occupational training
programs. COE never accredited the other Houston location at 6440 Hillcroft Avenue (Houston
6440 Hillcroft Avenue), which offered only an English as a Second Language (ESL) program.
This location opened in August 1995 and closed in August 1997. COE did not accredit the
Pasadena location until ILS added occupational training at the location in April 2000. ILS had
previously offered only an ESL program at the location.

COE standards do not provide for accrediting institutions or locations that do not offer
occupational training. Prior to opening the Pasadena location in July 1996, ILS advised COE in a
June 1996 letter that it planned to offer occupational training at the location in 12 to 18 months. In
a July 1996 letter, COE notified ILS that: “Your PLAN to establish this branch campus has been
approved effective July 1, 1996. You are reminded that this approval applies only to the PLAN
for the branch campus, not to the branch campus itself.” After visiting the Pasadena location,
COE notified ILS in a June 1998 letter that: “The decision of the Commission Executive
Committee was to DEFER approval . . . ” of the Pasadena location until ILS began offering
occupational training there. See Appendix A for copies of these two COE letters.

Department Records Do Not Contain COE Notifications
In June 1996, ILS submitted to the Department an Application for recertification to participate in
the Title IV programs. The Application identified four locations in Texas – a main campus in
Dallas and three additional locations (Houston Richmond Avenue, Houston 6440 Hillcroft
Avenue, and Pasadena). ILS submitted proof of accreditation for the Dallas main campus and the
Houston Richmond Avenue location that offered occupational training, but did not submit proof of
accreditation for the Houston 6440 Hillcroft Avenue or the Pasadena locations which offered only
ESL. Department records did not contain a copy of COE’s July 1996 letter in which COE advised
ILS that the Pasadena location was not approved. The Department provisionally certified all four
locations to participate in the Title IV programs through September 30, 1999.

In June 1999, prior to the expiration of its provisional certification, ILS submitted to the
Department its Application for recertification to participate in the Title IV programs. The
Application identified three locations, the Dallas main campus, a Houston location at 6200
Hillcroft Avenue (formerly the Houston Richmond Avenue location), and the Pasadena location.
The Application noted that the Houston 6440 Hillcroft Avenue location closed in August 1997.
Our search of the Department’s records disclosed ILS had submitted proof of accreditation for the
Dallas main campus and the Houston 6200 Hillcroft location (formerly the Houston Richmond
Avenue location). The records did not contain the June 1998 COE letter that advised ILS that the
Pasadena location was not accredited. The Department certified all three locations identified in
the Application to participate in the Title IV programs.
ED-OIG/A06-A0001                                                                           Page 5

ILS Disbursed Federal Pell Grants for Students at the Pasadena and Houston
6440 Hillcroft Locations without Accreditation
ILS disbursed $871,815 of Federal Pell Grants for students enrolled at ILS’ Pasadena location
from July 1, 1996, through December 8, 1999. This occurred even though ILS had been notified
by its accrediting agency on two separate occasions that the location was not accredited.

Based on our analysis of ILS disbursement records and National Student Loan Data System
(NSLDS) records, we estimate that ILS disbursed $102,920 of Federal Pell Grants for 56 students
who attended the unaccredited Houston 6440 Hillcroft location from August 1995 until it closed in
August 1997.


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

1.1    Require ILS to return $974,735 of unallowable Federal Pell Grants.

1.2    Initiate appropriate administrative action against ILS in accordance with 34 CFR, Part 668,
       Subpart G, for disbursing Federal Pell Grants for students who attended the two locations
       without accreditation.


ILS’ COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE
ILS’ comments did not persuade us to change our conclusions or recommendations.

ILS disagreed with our conclusion that the two locations were not accredited. ILS stated that the
Department had duly approved the locations based on its review of all pertinent data and that we
had no basis for suggesting rescission or reversal of the longstanding approvals. ILS’ specific
comments are summarized below followed by our response.

Pasadena Location Not Accredited
ILS Comments. The OIG misinterpreted and ignored correspondence that demonstrated COE
approved the Pasadena location beginning in July 1996. The OIG relied on two prior COE letters
to support its contention that the location was not accredited. COE accreditation involves a two-
step approval process. The first step requires COE initial approval after its review of a school’s
business plan and supporting documentation for a location. The second step requires COE final
approval after a team visit and the school’s resolution of any problems noted by the team at the
location.
ED-OIG/A06-A0001                                                                             Page 6

ILS complied with these COE procedures. It received COE initial approval in July 1996 and final
approval in April 2000 after the school began offering occupational training at Pasadena. This
final COE approval completed the second step of the process and clarified that the location was
duly accredited at all relevant times (i.e., since the initial approval in July 1996).

The OIG erroneously contended that the initial approval in July 1996 did not constitute an
approval of the Pasadena location. COE Standards of Accreditation make it clear that “approval
of the plan does constitute an approval of the site – specifically, an initial approval.” ESL
programs also fall within the scope of COE accreditation and COE has accredited locations that
offer only ESL programs. The two letters the OIG relied on for its conclusion, when read in
context with COE Standards and the entire sequence of submissions to and from COE,
demonstrates that COE granted interim and ultimately final approval to the location beginning in
July 1996.

OIG Response. The two letters are clear that COE’s approval applied only to ILS’ plan for the
location and that the location itself was not accredited. The two letters are included in Appendix
A to this report. COE Standards of Accreditation do not support ILS’ contention that the initial
accreditation date for a location is the date COE approves a school’s business plan. The COE
Standards do not provide for interim or pre-accreditation or for accreditation of locations that offer
only ESL or non-occupational training.

COE had not accredited the Pasadena location before April 2000 because ILS had not complied
with the requirement in its approved plan to offer occupational training at the location. COE had
no reason to act sooner because it did not accredit locations at which no occupational training was
offered. COE’s April 2000 letter to ILS cited the effective date of its decision to accredit the
location as April 13, 2000. Although COE’s April 2000 letter also stated that the decision to grant
approval was effective July 1, 1996 (the date it received ILS’ application for the location), this
statement has no bearing on our finding. ILS should not have disbursed any Title IV aid to
students before the school complied with COE Standards and COE made its final decision to
accredit the location.

Houston 6440 Hillcroft Avenue Location Not Accredited

ILS Comments. Correspondence between COE and ILS support that ILS requested approval to
offer “a partial ESL stand-alone program” at this location and COE deemed the location to be an
extended classroom. (ILS referenced but did not provide a copy of a July 31, 1995, letter in which
ILS said it notified COE of its plan for the location.) The OIG misinterpreted a July 17, 1996,
COE letter advising ILS that it needed to submit a branch application for the location. This letter
did not affect the location’s status as an extended classroom site.

OIG Response. ILS did not provide any support that COE accredited the location. COE letters to
ILS dated October 11, 1995, and July 17, 1996, and our discussion with COE officials,
demonstrate that ILS had not complied with COE’s accreditation requirements and COE had not
accredited the location. The 1995 COE letter states that COE deferred action on ILS’ “request to
ED-OIG/A06-A0001                                                                           Page 7

offer ESL as an avocational program at various sites in Georgia and Texas.” The 1996 COE letter
responds to an ILS July 1, 1996, letter requesting that COE approve the location based on its plan
to add an occupational program in 12 months. The letter states that ILS must submit an
application for the location, the location must be designated as a branch of the main campus in
Dallas in accordance with COE policies, and submission of the application must be delayed until
COE has taken action on ILS’ application for the Pasadena location (COE policies limit an
institution to only one branch or extension application at a time). ILS never submitted an
application to COE for the location and the location was never accredited. Appendix A includes
copies of these letters.

Department Approval of Locations
ILS Comments. The Department approved the Pasadena and Houston 6440 Hillcroft Avenue
locations after thorough review and consideration of ILS’ application and with full knowledge of
their accreditation status. The OIG workpapers support that the Department had access to all
pertinent accreditation correspondence, followed its mandatory internal control procedures in
reviewing the documentation, and documented its review by completing a recertification
application checklist that indicated accreditation was affirmed. The draft report presents no
rationale for retroactively rescinding the Department’s approvals.

OIG Response. ILS provided no documentation to support that it provided the letters contained in
Appendix A to the Department. The Department’s files on ILS also did not contain the letters nor
any record that showed the Department considered those letters in its recertification application
reviews. The Department’s checklist for its 1996 application review included a note that it needed
accreditation data for the additional locations, but the checklist does not show any data was
received or considered. The Department did not follow its control procedures and erred when it
approved the two locations without receiving proof of their accreditation. However, the
Department’s failure to follow its procedures does not relieve ILS from its statutory and regulatory
responsibility to obtain accreditation for all locations that participated in the Title IV programs.
Furthermore, 34 CFR § 600.40(c)(1) provides that if the Department designates a location as
eligible on the basis of inaccurate information or documentation, the designation is void from the
date made, and the location never qualified as eligible.

ILS Comments. Rescission of the Department’s approvals of the Pasadena and Houston 6440
Hillcroft Avenue locations is barred by the presumption of regularity. The approvals are entitled
to a presumption of regularity in the absence of proof that they were arbitrary and capricious. The
OIG’s workpaper and other documentation “establish precisely the opposite – that the site
approvals were the product of a fully documented, properly executed recertification process.”

OIG Response. A presumption of regularity does not apply in this case. The regulations provide
that the Department is not bound by an erroneous designation of eligibility. The presumption is
also rebutted by the fact that the Department was not fully informed by ILS. ILS did not submit to
the Department the letters in Appendix A that demonstrate the two locations were not accredited.
ED-OIG/A06-A0001                                                                          Page 8

Without those letters, the Department was unable to properly review ILS’ applications and make
the correct approval determinations.

ILS Comments. Because only a partial program was offered at the Houston 6440 Hillcroft
Avenue location, 34 CFR § 600.10 placed the burden on the Department to seek an application
from ILS for that location. ILS notified the Department of the location, but the Department never
requested an application. The OIG finding is arbitrary and capricious because it seeks a
disallowance of funds based on purported inadequacies in the application process when in fact no
application was required.

OIG Response. Our finding is with ILS’ failure to obtain accreditation for the location, not with
the application process. The fact that ILS did not submit an application in 1995 when the location
was established did not relieve ILS of its responsibility to obtain accreditation for the location
before disbursing Title IV funds. ILS did submit an application in 1996 but did not submit proof
of accreditation for either the Pasadena or Houston 6440 Hillcroft Avenue locations because those
locations were not accredited.

ILS Comments. The finding ignored the fact that the Department and ILS were parties to a fully
executed PPA that included eligibility for the Pasadena and Houston 6440 Hillcroft Avenue
locations. Pursuant to this contract, ILS used Department funding to train numerous students.
Any attempt to disallow and collect from ILS Title IV funds that these students have long since
spent would constitute a breach of the contract agreed to by the Department and ILS five years
ago.

OIG Response. ILS agreed to comply with all applicable statutory and regulatory provisions when
it signed the PPA. ILS failed to comply with the basic statutory and regulatory requirement that
all of its locations be accredited.



                    FINDING NUMBER 2
           MANAGEMENT CONTROL WEAKNESSES LED
                TO OTHER NON-COMPLIANCE

As a result of management control weaknesses, ILS disbursed Title IV funds to ineligible students,
failed to make correct refunds, and did not pay refunds timely. ILS’ lack of management controls
caused it not to comply with HEA provisions and regulations resulting in $24,312 of unallowable
Title IV disbursements for the award year ended June 30, 1999. ILS disbursed $945,424 of total
Title IV funds for that award year.
ED-OIG/A06-A0001                                                                           Page 9

Table I summarizes the non-compliance issues, their frequency, and the amount of questioned
costs per issue based on our sample review of 100 students (Appendix B provides additional
details for each issue).
                                           TABLE I
                                 NON-COMPLIANCE ISSUES
                       See Appendix B for an Explanation of Each Issue
                              Issue                           Occurrences Amount
      1. Ineligible Ability To Benefit (ATB) Students                5        $8,445
      2. Student Did Not Meet Citizenship Requirements               4         6,821
      3. Refunds Miscalculated                                     15*         3,234
      4. Pell Overawards                                             5         4,187
      5. Verification Not Completed                                  1         1,625
      6. Reasonableness of Reported Information                      9           0
      7. Refunds Not Made Timely                                   23*           0
      TOTAL                                                         62       $24,312
        Note: We identified more than one issue for some students. The 62 occurrences
               involved 44 of our 100 sample students.
        *ILS calculated refunds were due for 30 students in our random sample.

The $24,312 consists of $23,342 of Federal Pell Grant and $970 of Federal Supplemental
Educational Opportunity Grant (FSEOG) disbursements. This amount includes unallowable
disbursements questioned in the previous finding.


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

2.1    Return $15,123 of Federal Pell Grant and $970 of FSEOG funds that were inappropriately
       disbursed. These amounts recommended to be recovered are unduplicated amounts, not
       included in Finding 1.

2.2    Strengthen management controls to ensure it adheres to all HEA provisions and regulations
       regarding administering Title IV funds.

2.3    Perform a 100 percent review of Title IV disbursements from July 1, 1998, forward and
       return to the Department any additional inappropriate disbursements.

2.4    Have its Independent Public Accountant verify ILS’ review of Title IV disbursements for
       accuracy.

2.5    Post a letter of credit equal to 25 percent of the refunds that were made or should have
       been made during its most recently completed fiscal year due to the school’s failure to
ED-OIG/A06-A0001                                                                           Page 10

       make timely refunds (ILS did not make timely refunds for 77 percent of 30 sample
       students who were due a refund).


ILS’ COMMENTS TO THE DRAFT REPORT AND OIG’S RESPONSE
Based on our review of ILS’ comments and documentation, we eliminated one issue (Missing
ISIR/Invalid SSN) that was included in Table 1 of the draft report, reduced the Title IV liability
amount that should be returned by $6,150 to $16,093, and renamed the finding to more clearly
identify the cause of the Title IV non-compliance. Our analysis of ILS’ comments did not
convince us to make other changes.

ILS had the following comments for each of the eight issue areas identified in Table 1 of the draft
report. Our response follows ILS’ comments for each issue.

1. Ineligible ATB Students

ILS Comments. ILS agreed that a liability of $2,773 existed for three of the five students because
the students had not received a passing score on an Ability-to-Benefit (ATB) test. For the fourth
student, ILS acknowledged that the student had not passed an ATB test but asked that the $4,200
liability be removed because the student graduated. For the fifth student, ILS said the $1,472
liability should not be required because the student passed an ATB test after Title IV aid was
disbursed.

OIG Response. We have not changed our finding. The regulations are clear that students without
a high school diploma or its equivalent must receive a passing score on an approved ATB test
before Title IV aid is disbursed.

2. Student Did Not Meet Citizenship Requirements

ILS Comments. The Immigration and Naturalization Service (INS) confirmed that various
documents presented by the students to establish their Title IV eligibility were valid. ILS relied on
the regulatory guidance available at the time.

OIG Response. We have not changed our finding. We agree that INS confirmed the documents
were valid but the documents do not support the students were eligible for Title IV aid. The
documents, which consist of INS employment authorizations effective for a one-year period,
demonstrate that the students were not eligible because they were not permanent residents or
otherwise eligible under § 484(a)(5) of the HEA.

3. Missing ISIR/Invalid SSN

ILS Comments. ILS provided a copy of the Individual Student Information Report (ISIR) that
was missing. For the student with an invalid social security number (SSN), ILS provided a copy
ED-OIG/A06-A0001                                                                            Page 11

of the ISIR showing the correct SSN and a copy of the student’s social security card, INS
registration card, and driver’s license.

OIG Response. Based on our review of these documents, we dropped this issue from the report.

4. Refunds Miscalculated

ILS Comments. ILS disagreed with our refund calculations. ILS said we should have used COE’s
refund policy rather than the Federal refund policy in calculating refunds for ESL students who
withdrew, did not correctly consider charges for books and administrative fees, and used hours or
partial weeks completed rather than the correct credit hour refund policy of whole weeks
completed.

ILS stated that: “Once these discrepancies are removed, it is obvious there are few errors,
involving very small dollar amounts . . . .” ILS calculated the refund liability to be $600.

OIG Response. We did not use the wrong refund policy in calculating refunds for ESL students.
Pursuant to 34 CFR § 668.22(b)(1), we used the pro rata refund policy for first time ESL students
and either the Federal refund policy or the school’s refund policy for all other ESL students
because those policies resulted in larger refunds to students. We did not use COE refund policies
because the Department had not approved any accrediting agency refund policies [34 CFR §
668.22(b)(1)(ii)]. We also did not use Texas Workforce Commission (TWC) refund policies for
ESL students because those policies did not apply (the ESL programs were exempt from TWC
licensing requirements).

Based on ILS’ comments about the administrative fee and book charges, we recalculated the
refund amounts due for the 24 students. We determined that there was no refund liability for nine
students. For the remaining 15 students, we determined the refund liability either decreased (11
students), increased (one student), or did not change (three students). We changed the finding to
reflect unpaid refunds of $3,234 for the 15 students.

Our recalculations are based on scheduled hours of instruction for non-ESL students and
scheduled whole weeks of instruction for ESL students in accordance with the required refund
policies for those students.

5. Pell Overawards

ILS Comments. ILS agreed that two students received $750 in Federal Pell Grant overawards.
ILS said it correctly calculated the Federal Pell Grant for one student based on a Financial Aid
Transcript from a previous school that showed the student received a $1,500 Federal Pell Grant
rather than basing the award on the student’s ISIR that showed a different amount (i.e., $2,500).
ILS did not agree that overawards occurred for the remaining three students and provided data
(hours enrolled, Expected Family Contribution, and awards by semester) as support that the
awards were correct.
ED-OIG/A06-A0001                                                                              Page 12

OIG Response. We reduced the total overaward amount by $862 for two students. For one
student, we determined the correct overaward was $375 rather than $750 (ILS agreed to the $375
overaward). For the second student, we determined from a review of the data provided by ILS
that the $487 overaward had not occurred (we removed the student and overaward from our
finding).

We did not make any changes for the remaining four students. The Financial Aid Transcript for
the one student was not from the previous school the student attended (it was actually one that ILS
had provided to another school). Based on the financial aid history on the student’s ISIR that
showed the student received a $2,500 Federal Pell Grant from another school, we determined that
ILS disbursed a $1,000 overaward to the student. Overawards occurred for the three students
because ILS based the awards on the total classroom hours it credited to the students’ accounts.
ILS did not provide any training for some of the hours because the students either tested out of the
hours or transferred the hours from another school.

6. Verification Not Completed

ILS Comments. Verification for one student was completed correctly. Verification of the other
student’s 1998-99 application was not required.

OIG Response. We did not change our finding for the first student because ILS did not obtain a
signed copy of the parent’s income tax return even though the student’s application indicated a
return had been filed. We dropped the second student and reduced the liability amount for this
issue by $3,000 because the student’s application was selected for verification on a subsequent
transaction that was after ILS disbursed Federal Pell Grant funds to the student.

7. Reasonableness of Reported Information

ILS Comments. ILS said it was unsure how to respond to this finding since there was no
regulatory basis for it. ILS commented that “foreign students bring with them some very unusual
situations . . . .” and asked the question “how far can the institution go in interrogating the student,
when there is no factual or documentable basis for doing so?”

OIG Response. Our report cited the regulatory requirement that is the basis for this finding. All
nine students reported zero income and zero assets on their 1998-99 applications. This should
have caused ILS to require the students to verify the reported information.

8. Refunds Not Made Timely

ILS Comments. The OIG calculations were not done according to school policy. The OIG used
an incorrect withdrawal date for ESL students. ILS said it used the correct withdrawal date to
determine that only seven refunds were late.
ED-OIG/A06-A0001                                                                             Page 13

OIG Response. We did not change our finding. Our calculations were based on ILS’ written
policy that required all students be terminated after consecutive absences of 10 classroom days.
After allowing for intervening weekends, we determined that ESL students should have been
terminated 14 days after their last day of attendance. ILS should have paid the required refunds no
later than 30 days after the date that it determined a student’s termination date, or 44 days after the
student’s last day of attendance.

ILS had an incorrect policy of establishing the “official withdrawal date” as the last date of
attendance plus either 30 or 21 days. ILS stated that during our audit period it had changed from
using 30 days to using 21 days. ILS contended that the 30 day limit for timely refunds begins on
its established “official withdrawal date.” Even if this contention was accepted by us, ILS would
still not meet the standard for timely refunds, with 23 percent of the refunds under ILS’
methodology as untimely.

The regulations require that refunds be made within 30 days after the earlier of: the date the
institution determines that the student dropped out, the expiration of the academic term in which
the student withdrew, or the expiration of the period of enrollment for which the student has been
charged. In order for ILS to determine its “official withdrawal date” (the last date of attendance
plus 21 or 30 days), it had to determine the student’s last date of attendance in advance of the
“official withdrawal date” in order to calculate the 21 or 30 day period. The last date of
attendance and the date that ILS determined the student dropped out were therefore known to ILS
prior to the “official withdrawal date.” ILS’ termination policy also required an earlier
determination of the last date of attendance. ILS, by this practice, gave itself an improper
extension on when refunds needed to be paid.


                                    OTHER MATTERS
The OIG notified the Department of the unaccredited Pasadena location. In response, the
Southwest Case Management Division, Student Financial Assistance, sent ILS a letter dated
December 14, 1999, that stated “it has been determined that an additional location in Pasadena,
TX is not and has never been accredited by the institution’s accrediting body, . . . therefore, [it]
does not meet the definition of an eligible location.” The letter also stated that a member of the
Southwest Case Management Division had informed ILS on December 9, 1999, to “immediately
cease awarding and disbursing Title IV funds to students enrolled . . . at the Pasadena location.”
ILS complied with the Department’s instructions and ceased awarding and disbursing Federal Pell
Grants to Pasadena students on December 9, 1999.

In April 2000, ILS began offering occupational training at the Pasadena location. COE notified
ILS that as of April 13, 2000, its Pasadena campus was approved with an effective date of July 1,
1996. A COE official stated that it was COE’s long standing practice to make the effective date of
accreditation for a campus retroactive to the date it approved a school’s plan for that campus.
Neither COE’s written standards nor its written policies and procedures include provisions for
retroactive accreditation.
ED-OIG/A06-A0001                                                                         Page 14

The Department was concerned with COE’s decision to grant retroactive approval of the Pasadena
location. On May 22, 2000, the Department’s Accreditation and State Liaison Division notified
COE that its decision to grant a nearly four-year retroactive approval of ILS’ Pasadena location
was unacceptable, since it granted approval to a time when the location was ineligible for
accreditation because it did not offer any vocational program.


                                     BACKGROUND
ILS is a proprietary institution with a main campus in Dallas, Texas, and additional locations in
Houston and Pasadena, Texas. Interactive Learning Systems, Inc., located in Chamblee, Georgia,
owns ILS as well as other schools in Kentucky and Georgia. In 1986, Interactive Learning
Systems, Inc., purchased Revisions Unlimited in Grand Prairie, Texas. Revisions Unlimited was
renamed ILS and the school moved to Dallas, Texas. ILS opened the Houston Richmond Avenue
location in 1987 (relocated to 6200 Hillcroft Avenue in 1998), the Houston 6440 Hillcroft Avenue
location in 1995 (which closed in 1997), and the Pasadena location in 1996.

ILS was initially approved to participate in the Title IV programs on September 30, 1987. ILS’
accrediting agency is the COE. Among the vocational programs offered by the institution are
Administrative Support Systems, Computer Application Specialist, Accounting and Automated
Office Systems, and Computer Programming and Operations. ILS also offers an ESL program.

From July 1, 1996, through December 31, 1999, ILS disbursed approximately $3 million in
Federal Pell Grant, Federal SEOG, and Federal Work Study program funds.


               OBJECTIVE, SCOPE AND METHODOLOGY
The objective of our audit was to determine whether ILS administered 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 obtained background information about the school. We reviewed
100 randomly selected student files and related records from the universe of 471 students for
whom ILS disbursed $945,424 of Title IV aid. The 471 students represent all students who were
disbursed Title IV aid for the award year ended June 30, 1999, at ILS’ main campus in Dallas, the
Houston 6200 Hillcroft location, and the Pasadena location. We reviewed ILS’ corporate financial
statements and the most recent Title IV compliance audit reports. We also conducted interviews
with ILS, COE, TWC, and Department officials.

We obtained information from ILS’ student files, which are maintained at the individual locations,
to review the eligibility of each student in the random sample. The reliability of the school’s
computerized records was tested by verifying selected data with other sources such as student files
ED-OIG/A06-A0001                                                                            Page 15

and data obtained from the NSLDS. We concluded that the data was sufficiently reliable for the
purposes of our audit. We also reviewed accreditation documentation provided by the school to
determine the eligibility of ILS’ four locations. We obtained and reviewed data applicable to the
school from the Department’s NSLDS, Payment Management System, and Grants Administration
and Payment System. We also reviewed ILS files maintained by Case Management and Oversight
in Dallas, Texas, and Washington, D.C.

Our review initially covered the period July 1, 1998, through June 30, 1999. The period was
expanded to August 18, 1995, through December 8, 1999, for our finding pertaining to the
unaccredited locations. All work pertaining to the 90 Percent Rule covered the school’s fiscal year
ended December 31, 1998. We performed fieldwork from November 30, 1999, through March 9,
2000, at ILS locations in Dallas, Houston 6200 Hillcroft, and Pasadena. A follow up visit was
made to the Houston 6200 Hillcroft location on October 30, 2000. Our audit was performed in
accordance with generally accepted government auditing standards appropriate to the scope of the
review described above.


             STATEMENT ON MANAGEMENT CONTROLS
As part of our review, we assessed the system of management controls, policies, procedures, and
practices applicable to ILS’ administration of the Title IV programs. Our assessment was
performed to determine the level of control risk for determining the nature, extent, and timing of
our substantive tests to accomplish the audit objectives. 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.

Due to inherent limitations, a study and evaluation made for the limited purpose described above
would not necessarily disclose all material weaknesses in the management controls. However, our
assessment disclosed weakness in the school’s procedures relating to institutional eligibility and
the school’s capability to adequately administer Title IV programs. These weaknesses are
discussed in the AUDIT RESULTS section of this report.
                                                                                APPENDIX B

                           Other Non-Compliance Issues
1. Ineligible ATB Students. Pursuant to 34 CFR § 668.32(e), students must have a high
   school diploma or its equivalent or obtain a passing score specified by the Secretary on an
   independently administered ability-to-benefit (ATB) test within 12 months before the date
   the student initially receives Title IV aid. According to 34 CFR § 668.154(c), an institution
   can be held accountable for Title IV funds if the institution is unable to document that the
   student received a passing score on an approved test. Five students who were disbursed Title
   IV funds did not have a high school diploma or its equivalent, and did not receive a passing
   score on an approved ATB test prior to receiving Title IV aid.

2. Students Did Not Meet Citizenship Requirements. To be eligible to receive Title IV aid,
   students must be a U.S. citizen, permanent resident of the U.S., or intend to become a
   permanent resident or a citizen [34 CFR § 668.33(a)]. Subpart I of 34 CFR Part 668
   addresses eligibility determinations of non-citizen applicants, including who must produce
   evidence from INS that they are permanent residents of the U. S., or are in the U. S. for other
   than a temporary purpose with the intention of becoming citizens or permanent residents.
   Documents in the files for four students consisted of temporary work permits that did not
   support that the students were eligible for Title IV aid.

3. Refunds Miscalculated. An institution is required to 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 student who received Title IV funds [34 CFR § 668.22(a)]. For 15
   students, ILS miscalculated the required refund amounts. The miscalculations occurred, in
   part, because ILS did not use the required refund policy that would have resulted in a larger
   refund to the students or calculated the refunds based on an entire program instead of only
   one semester.

4. Pell Overawards. Pursuant to 34 CFR § 690.65(a), when a student enrolls at a second
   institution during a single award year, the students may receive a Federal Pell Grant at the
   second institution if (1) the student submits a valid SAR to the second institution; or (2) the
   second institution obtains a valid ISIR. The second institution is required by 34 CFR §
   690.65(c) to adjust the Federal Pell Grant award to ensure that the award does not exceed the
   student’s Scheduled Federal Pell Grant for that award year. ILS disbursed a Federal Pell
   Grant overaward for one student because it did not adjust the award by the amount the
   student had already received at the other institution. For four students who were enrolled less
   than full time, ILS disbursed Federal Pell Grants over the maximum allowed for the students’
   enrollment status for the award year.

5. Verification Not Completed. According to 34 CFR § 668.54(a)(2)(i), an institution shall
   require each applicant whose application is selected for verification on the basis of edits
   specified by the Secretary, to verify all of the applicable items specified in 34 CFR § 668.56
   (i.e., adjusted gross income, U.S. income tax paid, number of family members in the
   household, number enrolled in college, social security benefits, child support, U. S. income
   tax deduction made for payments to individual retirement accounts, interest on tax-free
                                                                                 APPENDIX B

   bonds, and all other untaxed income). Of the 24 sample students who were required to verify
   their application data, we found ILS disbursed Federal Pell Grants for one student who did
   not complete the required verification process (the student’s file did not contain a copy of the
   tax return).

6. Reasonableness of Reported Information. Pursuant to 34 CFR §§ 668.54(a)(3) and (5), if
   an institution has reason to believe that any information on an application used to calculate
   an Expected Family Contribution is inaccurate, it shall require the applicant to verify the
   information that it has reason to believe is inaccurate. We identified nine students who
   reported zero total income and zero assets for the year. One of the nine students also
   reported 11 family members in the household. The remaining eight students reported a
   household size that ranged from one to five members. Although such information should
   have caused ILS to question the accuracy of the data reported by the students, ILS did not
   require the students to verify the reported income, assets or number of family members in the
   household.

7. Refunds Not Made Timely. According to 34 CFR § 668.22(j)(1), a student’s withdrawal
   date is the earlier of the date of withdrawal specified by the student, or the last recorded date
   of class attendance as documented by the institution if the student drops without notifying the
   institution. A timely refund payment for a student who drops out is defined by 34 CFR §
   668.22(j)(4)(ii) as a payment made within 30 days of the earliest of the “(A) Date on which
   the institution determines that the student dropped out; (B) Expiration of the academic term
   in which the student withdrew; or (C) Expiration of the period of enrollment for which the
   student has been charged . . . .” Title 34 CFR § 668.173(b)(1) provides that an institution has
   not made timely refunds when five percent or more of the students in the audit sample had
   late refunds. Title 34 CFR § 668.173(c) requires that the institution post a letter of credit
   equal to 25 percent of the refunds that were made or should have been made. ILS’ 1998-
   1999 Student Catalog states that when notification of withdrawal is not provided, refunds
   will be made 30 days from the date the school determines the student to be withdrawn. In
   evaluating refunds for students who did not officially withdraw, we considered the refunds to
   be untimely if not made within 44 days for ESL students, or 46 days for non-ESL students
   from a student’s last day of attendance (14 days for ESL students or 16 days for non-ESL
   students to allow for consecutive absences in accordance with the school’s policy for
   terminating students, plus 30 days to make the refund). The institution did not make timely
   refunds for 23 sample students out of 30 students in the sample requiring a refund or 77
   percent of the sample students. On average, the 23 refunds were 28 days late.
                            DISTRIBUTION SCHEDULE
                            Control Number OIG/A06-A0001
                                                                              Copies

Auditee                                                                           1
      Mr. Elmer R. Smith, President
      Interactive Learning Systems

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
      Deputy Secretary, Office of the Deputy 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
                                       DATA
                                       DATAINPUT
                                            INPUTSHEET
                                                 SHEET                                                                                  OIG
  OIG
                   OFFCODE:            06            AUDIT TYPE:               A               A C N:   A0001
                                Proj Audits of Selected Postsecondary
PROJ MGR#:      98077           Name: Institutions                              AWPI IASD      STATEGIC GOAL #:         2
                                                                                                                      (1, 2,3)
TITLE:           Interactive Learning Systems                           STATE    TX

                 FROM                           TO
PERIOD
                 7/1 /98                                                       AUD SCOPE:      4        PROGRAM OFFICE:
AUDITED:                                     6/30/99                                                                               3

 DIRECT TIME (Y/N):         Y            JOB STATUS CODE:               6           ENTITY CODE #:       63
     PLANNED START DATE:                                  DATE NEEDED BY
                                         1/2000
AUDIT PLAN BUDGET:           (STAFF DAYS)
                                                   AFTER
FY               1ST YR    INTIAL
                                                   SURVEY
                                                                            REVISED             2ND YR              TOTAL        350
                           SURVEY

LEAD AUDITOR:           Emp#:   2238             Name:    James Seeburger                  CFDA CODE:

                                                                                    FINAL REPORT (Check One)
                        Planned Date              Actual Date
1.   Assignment Start                              10/4/99                         ALTERNATIVE PRODUCT       Code = 5
2.   Planning Conf.        10/25/99                11/29/99                        NO REPORT                        Code = 0
3.   Entrance Conf.        11/30/00                 11/30/99                       ISSUED W/FINDING             X   Code = 1
4.   Survey Complete       1/21/00                  1/21/00
5.   Team Complete         5/12/00                  9/8/00                         ISSUED W/O FINDING               Code = 2
6.   Draft Report           6/19/00                 2/15/01                                                         Code = 4
                                                                                   REPORT CANCEL
7.   Comments Rec’d         7/11/00                 4/3/01
                                                                        PREPARER’S SIGNATURE                                     DATE
8.   Final Report           7/28/00                 7/20/01
                                                                            Approved By:                                          AWP.FRM 2/97