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
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)